Dena Draft Report

8/12/2019 Dena Draft Report

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DENA BANK

The objective of this project is to study the working of DENA BANK for

prov iding l o a n s & a d v a n c e s , c r e d i t t r a n s a c t i o n a n d c r e d i t a p p r a i s a l t

o S m a l l a n d M e d i u m Enterprises. SME sector is critical to Indias economy

and potentially a key d river of growth, job creation, innovation and economicprosperity.After undert ak ing in the depth of theoret ica l study such as type of

advances, SME policy of DENA BANK, credit rating, CMA, Working Capital and

various financialunder SMEs, It was found that the several industries are growing under

banking financeand SMEs is a one of thefast growing Industries from all the sectors.As per

the 3

rd

census report, total output of the registered units in the year 2001-02

wases t imated to be Rs . 70 ,861 .73 crores . The SSI secto r employed

2, 49 ,3 2, 76 3 p e rs on s during that period.Thus SME plays a very significant role in

the socio-economic development of the country.The project was an attempt to

understand and perform the work in credit transactionand credit appraisal proposal which Ihave included is just an example of it.I ha v e wo rk ed on ma n y suc h pr op os al s ,

whic h ar e be yond t he s cope of t his pro jec t. Hence the whole experience of

working in such a renowned public sector unit was very good & made me learn a lot

out of it.

ACKNOWLEDGEMENT

The project Title Credit appraisal under SME segment in Dena Bank has

beenconducted by me during 15

th

June 2011 to 30

th

July 2011 at Dena Bank, Regional Office,Delhi. I have completed this project, based on the

primary and secondary research under the guidance of my bank guide Mr. J.D. Sinha, Sr.

Manager (SME).He h as hel ped me to lea rn abou t t he pro ces s o f gi vin g lo ans

& advances to SME sector by giving me a valuable insight into the role played by Banks

in SME sector. Myincre ased spec trum of knowledge in this field i s the resul t of

their constant supervisionand direction that have helped me to absorb relevant and highquality information.Last but not the least, I feel indebted to all those persons and

organizations who havehelped me directly or indirectly in the successful completion of this

study.

DECLARATION

I hereby declare that the p ro ject repor t en t i t led

Credit Appraisal Under SMEsS e g m e n t a t D e n a B a n k s

s u b m i t t e d f o r t h e D e g r e e O f M a s t e r O f B u s i n e s s Administration,is the record of authentic work carried by me during the period from15.06.2011 to


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30.07.2011 and the project report has not formed the basis for the award of an y degree ,

diploma, associate ship, f ellowship or s imilar other titles. It has not been submitted

to any other university or institution for the award of any degree or diploma

Table of Contents

Chapter No.Page No.

1. Company Profile

2.1 Overview of Dena Bank

2.2 Milestones

2.3 Vision and Mission Statement

2.4 Growth & Development of the Organization

2.5 Area of operation-Regional Office

2.6 Workflow model of R.O.

2 . R e s e a r c h M e t h o d o l o g y

2.1 Introduction Of Research

2.2 Statement of the research problem2.3Object ive of the research s tudy

2.4 Research Design & Methodology

2.5 Rationale for the study

2 . 6 L i m i t a t i o n o f t h e s t u d y

3.Introduct ion & Emergence of SMEs 4.

Theoretical Analysis

5.Data Process ing & Analys is

6. Case Study

7. Findings and Recommendations

8. Conclusions

9. Bibliography

Chapter-1Company Profile-

DENA BANK

1 . 1 O v e r v i e w o f D e n a B a n k

Dena Bank is one of the earliest nationalized banks in India. Since its inception,the bank has become a renowned name in the f ield of banking and financial

solutions. It istrusted all over the country by thousands of consumers. By being a

customer of DenaBank, one can easily enjoy financial stability and also get good

returns on the servicesand the financial solutions.Dena Bank was founded on 26th May,

1938 by the family of Devkaran Nanjee under the name Devkaran Nanjee Banking Company

Ltd

.It became a Public Ltd. Company inDecember 1939 and later the name was changed to Dena

Bank Ltd.In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and

isnow a Public Sector Bank constituted under the Banking Companie s

(Acquisition &Transfer of Undertakings) Act, 1970. Under the provisions of theBanking Regulations


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Act 1949, in addition to the business of banking, the Bank can undertake other

business as specified in Section 6 of the Banking Regulations Act, 1949.

Competitors:Top three competitors of Dena Bank.

Bank of Baroda

Bank of India

ICICI Bank Limited

Dena Bank has been the first Bank to introduce:

Minor Savings Scheme.

Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP).

Drive-in ATM counter of Juhu, Mumbai.

Smart card at selected branches in Mumbai.

Customer rating system for rating the Bank Services

1 . 2 M I L E S T O N E S

One among six Public Sector Banks selected by the World Bank for sanctioning

aloan of Rs.72.3 crores for augmentation of Tier-II Capital under Financial

Sector Developmental project in the year 1995.

One among the few Banks to receive the World Bank loan fo r

t ec hno logi cal u p gradation and training.

launched a Bond Issue of Rs.92.13 crores in November 1996.

Maiden Public Issue of Rs.180 Crores in November 1996.

Introduced Tele banking facility of selected metropolitan centers.

Dena Bank has been the first bank to introduce-

o

Minor Savings Scheme.

o

C r e d i t c a r d i n r u r a l I n d i a k n o w n a s " D E N A K R I S H I S A K H P A T R A

" (DKSP).

o

Drive-in ATM counters of Juhu, Mumbai.

oSmart card at selected branches in Mumbai.


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o

Customer rating system for rating the Bank Services

.

1 . 3 V I S I O N & M I S S I O N

Mission and Vision Statement of Dena Bank

Mission Statement-

DENA BANK will provide its

Customers

-

premier financial services of great value,

Staff-

pos i t ive work env i ronment and oppor tun i ty fo r g rowth and ach ievement ,Shareholders

- superior financial returns,

Community

- economic growth.

Vision Statement-

DENA BANK will emerge as the

most preferred Bank of customer choicein its areaof operations, by its

reputation and performance.

Logo

The logo o f

Dena Bankrepresents

Lakshmi,the Goddess of wealth, according toHindu mythology. It was the des ire of the

founding fathers of the Bank that the Bank should be a symbol of prosperity for all itsclients, and the logo represents this promise.

The contemporary

'D'in the logo ref lec ts the

dynamism,

dedication

and the

drive


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towards customer satisfaction.

1.4Growth and Deve lopment of the Organizat ion To evolve and position the bank as a world class, progressive, cost-effective

andcustomer friendly institution providing comprehensive financial and related se

rvices:integrating frontiers of technology and serving various segment of society especially

theweaker section of the society: committed to exce llence in serving the publicand alsoexcelling in the corporate values. Corporate excellence emanate from

good

corporateg o v e r n a n c e e x e r c i s e d b y a d o p t i n g s t a n d a r d o f t r a n s p a

r e n c y , a c c o u n t a b i l i t y , professionalism, social responsiveness, and ethical

business practices with this in view,the has been making ef fo r t s for adop t ing the

bes t pract ices . The bank commitment towards corporate governance is to

bestow grea ter transparency and openness in themanagement and to ensure best

perfo rmance by staf f at all the level s to maximize theopera tional eff ic iency.

Adopting the corporate governance as a work ethos, the bank iscommitted to

enhancing the stakeholders value.

1.8 WORKFLOW MODEL

Here is the workflow model of Dena Banks regional office-

Chapter-2ResearchMethodology

2 . 1 I N T R O D U C T I O

N

RESEARCH-Research

is the search for and retrieval of existing, discovery or creation of newinformation or

knowledge for a specific purpose.

METHODOLOGY-Methodologymean s b od y o f meth o d u sed in a p a r t i cu la r ac t ivi ty . T o p ro ceed w i t h

s t u d y i n t h e r i g h t d i r e c t i o n , i t i s e s s e n t i a l t o s e l e c t a n

a p p r o p r i a t e m e t h o d . S e l e c t i on o f m e t ho d i s a g ai n a v e r y c a u t i o us

w o r k a n d h a s t o b e d o n e w i t h p r o p e r u n de rs ta nd in g.

RESEARCH METHODOLOGY-Research methodology is a way to sys temat ica l l y so lve the research

p roblem. It ma y be unders tood as a s c i ence o f s tud y how resea rch i s done

scien t i f ica l l y . In i t ,var ious s teps are s tud ied that are used fo r s t udy ing

the research p rob lem along wi th the log ic beh ind them.Researc h

meth od o lo g y, th e re fo re h as man y d imen s io ns . I t h as a w id er sco pe .T h e

p u r p o s e o f t h e m e t h o d o l o g y s e c t i o n i s t o d e s c r i b e t h e

r e s e a r c h p r o c e d u r e s . T h er e f or e r e s e a r c h m e t ho d o lo g y n o t o n l y

i n c l u d e s t h e r e s e a r c h m e t h o d s b u t a l s o c o n s i d e r s t h e l o g i c b e h i n d

t h e m e t h o d s i n t h e c o n t e x t o f r e s e a r c h s t u d y . I t h e l p s i n e xpl ai ni ng

why a par t icu lar method or techn ique i s being used and why no t o thers


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, so the research resu l t s are capab le o f bei ng evaluated h imsel f o r by

o thers .

2.2STATEMENT OF THE RESEARCH PROBLEM

The factors beyond Credit Appraisal in financial Institute have widely investigated at

theaggregate level and at the Government level. The main reason is Credit appraisal

under SMEs is new fieldof research.Due to the limitations of knowledge about problems and

challenges faced by the CreditAppraisal SMEs and the factors responsible for their sickness are summarized as

under:

Increased competition from cheap imports

Infrastructural constraints/bottlenecks

Delayed realization of receivables

Delayed/inadequate credit

High cost of funds

Insistence on collateral/margin

Complication and cumbersome procedures of banks

Limited financial resources

Non availability of adequatepromoters contribution / equity

Obsolete technology. Low R & D and technology up gradation effort

Inadequate managerial competence

Lack of marketing skills / Poor marketing

Inadequacy of inputs and skills

Government policies

Financial problems

Low quality image (Low ability perceived)

Difficulty in dealing with Govt. buying systemThe choice of this subject was based on many reasons;

there has not been much researchabout credit appraisal under SMEs and also, itis a highly actual

subject availability of dataand also personal interest that influenced our choice of topic.

2 . 3 O B J E C T I V E O F T H E R E S E A R C H S T U D Y


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T h e o b j e c t i v e o f t h i s p r o j e c t r e p o r t i s t o s t u d y t h e w o r k i n g

o f D E N A B A N K

f o r p r o v i d i n g l o a n s a n d a d v a n c e s t o S m a l l a n d M e d i u m E n t e

r p r i s e s . S M E s e c t o r i s c r i t i c a l t o I n d i a s e c o n o m y a n d

p o t e n t i a l l y a k e y d r i v e r o f g r o w t h , j o b c r e a t i o n , i n n o v a t i o n a n d

e c o n o m i c p r o s p e r i t y . S M E s c o n t r i b u t e a b o u t 4 0 % o f I n d i a sv a l u e a d d i t i o n m a n u f a c t u r i n g , a l m o s t 5 0 % o f I n d i a s t o t a l e x p o r t s

a n d 4 5 % o f

I nd us t r i a l u n i t s . T h e y p r o d u c e d i f f e r e n t p r o d u c t s , r a n g i n g f r o

m s i m p l e i t e m s t o h i g h -

t e c h p r o d u c t s u s i n g s o p h i s t i c a t e d s t a t e - o f - a r t -

t e c h n o l o g y f o r b o t h d o m e s t i c a n d i n t e r na t io n a lm ar k e t .

SCOPE OF THE STUDY

Get an insight of the banking industry.

Understand the interface of the banks with their clients, customer service expenses in banks.

Using the theoretical knowledge in application and understandingthing practically.

Serve the organization.

2.5 Research Design and MethodologyResearch Design

Research des ign i s a concep tual s t ructu re wi th in which resear ch i s conducted the blueprint for the collection and measurement and analysis of data .Research

design can be categorized as exploratory and conclusive design. Exploratory seeks

to discover new relationships while conclusive research is design to take decisions.In

exp lora to ry the main a im is to come to hypothes is . I t means ten ta t ive

an s we rs to questions that serve as guide for most research projects. This type of

research defineshypotheses which are then tested by conclusive research .Conclusive

research design can be of two types viz. the case method and the statistical method.In my

case I have opted for conclusive research design by opting case study method.

In my case I have opted for conclusive research design by opting case studymethod.

This research contains secondary data. A little bit primary source of datacollection is also

used to get an insight of case study.

All analysis and conclusion is derived on the basis of the case study data.

To select this case study random sample technique is used.

Sampling technique:


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As it is a conclusive research , therefore this research contains secondary data. A little bit

p rimar y source o f data co l lec t ion i s a ls o used to get an ins igh t o f case

s tud y. Al l analysis and conclusion is derived on the basis of the case study data. To select

this casestudy random sample technique is used.

Data collection method:

As far as the study is concerned, sound information base is needed in order to classifythe problem quickly .Basically data i s collected from two sources viz . primary

source andsecondary source.

Sources of data:Primary dataI t consis ts o f o r ig inal in format ion co l lec ted fo r speci f ic purpose .Data i s

collectedthrough a direct source like survey to obtain the first hand information. Others

resourcesare written below:

Discussion with my project guide

Discussion with other members of the credit department.

Secondary data:I t consis ts o f in format ion that a l r eady ex is ts somewhere and has been

col l ec ted fo r specific purpose in the study. The secondary data for this study is collected

from varioussources like

Websites

Books

Newspaper

Financial magazine(weekly , business world, etc)The reasons for using these sources for collecting

data are:

It provides more reliable results.

It is easier to tabulate and interpret data gathered in this way.

2 . 6 R A T I O N A L E F O R T H E S T U D YOffering credit is an operation fraught with risk. Before offering credit to an organization,its

financial health must be analyzed. Credit should be disbursed only after

ascertainingsatisfactory financial performance. Based on the financial health

of an organizat ion, banks assi gn cr edit rat in gs. The se c redit rat in gs ar e

used to f ix the i nt e res t ra t e and quantum of installment.This study aims to analyze

the credit health of organizations that approach Dena Bank for foreign exchange credit

faci lit ies. After analyzing credi t health, the credi t rating is determined. On the basis

of credit rating, the interest rate guidelines circular is consultedto fix a price for the credit

facilities i.e. determine the interest rate.


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2.7

LIMITATION OF THE STUDYLimitations of this Study are as follows:-

Time:The short time duration of one & half months is very inadequate.

Vast topic:The subject credit appraisal under SME is too vast to study.

Data gathering:Gathering of data relating to various products of Dena bank was a little difficult task.

Scrutinizing of information:

Data mining was a time consuming task. Useful information had to be extractedaf ter careful scrutinizing from the large data gathered.

T h e i n v e s t m e n t l i m i t o f R s . 1 c r o r e f o r c l a s s i f i c a t i o n a s S S I h a s

b e e n e n h a n c e d

t o R s . 5 c r o r e i n r e s p e c t o f c e r t a i n s p e c i f i e d i t e m s u n d e r

h o s i e r y , h a n d t o o l s , d r u g s pharmaceu t i ca ls and s t a t ionary i t ems

and spor ts goods by the Government o f Ind ia .

YEAR 2006T h e G o v e r n m e n t o f I n d i a h a s e n a c t e d t h e M i c r o , S m a l l a n d

M e d i u m E n t e r p r i s e s D e v e l o p m e n t ( M S M E D ) A c t , 2 0 0 6 o n J u n e

1 6 , 2 0 0 6 w h i c h w a s n o t i f i e d o n O c t o b e r 2 , 2 0 0 6 . C o n s i s t e n t w i t h

t h e n o t i f i c a t i o n o f t h e M i c r o , S m a l l a n d M e d i u m

E n t e r p r i s e s D e v e l o p m e n t ( M S M E D ) A c t 2 0 0 6 , t h e d e f i n i t i

o n o f m i c r o , s m a l l a n d m e d i u m e n t e r p r i s e s e n g a g e d i n m a n

u f a c t u r i n g o r p r o d u c t i o n a n d p r o v i d i n g o r r e n d e r i n g o f s erv ic

es has been modif ied .

3 . 3 M S M E D

Introduction:MICRO:-Micro (manufacturing) EnterprisesEnterprises engaged in the manufacturing/production or preservation of goods and

whoseinvestment in plant and machinery (original cost excluding land and building and such

itemsas in 1.1.1

) 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

inequipment (original cost excluding land and building and furniture, fitting and such itemsasin 1.1.2)


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does not exceed Rs. 10 lakh.SMALL:-Small (manufacturing) Enterprises:Enterprises engaged in the manufacture/production or preservation of goods &

whoseinvestment in plant and machinery (original cost excluding land and

bu ild ing & the it emsspecified 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 se rvices and whose investment

inequ ipment (o r ig inal cos t exclud ing land and bu i ld ing & furn i tu re ,

fi tt in gs an d ot he r not directly related to the service rendered or as may be under

the micro, Small and MediumEnterprises development, (MSMED), Act 2006)

does not exceed Rs. 2 crore.MEDIUM:-Medium (manufacturing) EnterprisesEnterprises engaged in the manufacture/production or preservation of goods

and whoseinvestment in plant and machinery (original cost excluding land and

bu ild ing and the it emsspecifi ed by the Mini st ry of Smal l Indust rie s vide it s

notification No.S.O. 1722(E) datedOctober 5, 2006) is

more than Rs. 5 crorebut

does not exceed Rs. 10 crore.Medium (service) EnterprisesEnterprises engaged in the providing/rendering of services and whose investment

inequipment (original cost excluding land and building and furniture, fittings as such items

asin 1.1.2) is

more than Rs. 2 crorebut

does not exceed Rs. 5 crore.Banks lending to medium enterprises will not be included for the purpose

of reckoningunder priority sector.

T

INY

U

NIT

WOULD

BE

M

ICRO

E

NTERPRISES

.SSI

WOULD

BE

S

MALL

E


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NTERPRISES

.

3.4 NEW NOMENCLATURE & CLASSIFICATION OF MSMED

SMEs have been established in almost all-major sectorsin the Indian industry

such as:1 . A g r i c u l t u r e i n p u t s 2 . Ch e m ic a l & Ph a rm a c e ut i c a l s3 . E le c t r i c a l ,

E l e c t r o n i c s 4 . B i o -

e n g i n e e r i n g 5 . E n g i n e e r i n g 6 . F o o d P r o c e s s i n g 7 . E l e c t r o -

m e di c al eq u i p me n t8 . T e x t i l e s a n d Ga r me n t s 9 . S p o r t s

g o o d s 10.Plastics products11.Me at P rod uct s12.Computer software13.Leather

and Leather goods etc.As a result of globalization and liberalization, coupled with WTO

regime, IndianSMEs have been passing through a transitional period. Those SMEs who have

international business outlook, competitive spirit, strong technological base, and willingnessto restructurethemselves they withstand the present challenges and comes out with

shining colures byadding up to contribution to the Indian economy

SWOT

6 . 0 T E R M L O A N S : Tern loans are sanct ioned fo r acqu is i t ion o f f ixed asse t s l ike land ,

bui ld in g, p l ant &machinery, office equipments, furniture & fixture, etc for purchase of

transport vehicles, for purchase of agriculture equipments, machinery & other movable

assets like tractors, pumpssets, cattle, etc.The term loan would be a loan, which is not a

demand loan and is repayab le 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 exceptionalcases beyond 7 yrs.7.0

CASH CREDIT ADVANCES:Cash cred i t account i s a d r awing account agains t cred i t g ran ted by the

Bank and i sopera ted in exact ly the same way as a curren t a ccount on

which an overdraf t hasbeensanc t ioned . The var ious t ypes o f s ecur i t i es agains t which CC i s a l lo

wed are p ledge,hypothecat ion o f goods o r p roduce, p ledge o f 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

whenrequired.8.0

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 tothe

amount stated in the LC subject to fulfillment of the conditions stipulated therein.


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T h e r e f o r e , w h e n b a n k i s s u e s L C , i t a s s u m e s r e s p o n s i b i l i t y t o pa y

i t s b e n e f i c i a r y o n production of bills drawn in accordance with the terms and

conditions of the LC.Whenever the bills drawn under LC are not paid by the party from its

own resources or out of available DP in the CC account on its due date, the LC is said to have

devolved.9 . 0 G U A R A N T E E : I ssu ing o f guaran tees on the behal f o f the i r cus tomers to th i rd par t i es i s

one o f

theserv ices rendered by commercia l banks . Such guaran tees are co n t rac ts

to per fo rm the promise or discharge the liability of the constituent on whose behalf they

are given, in case of his defau lt or f ailure to perform the contracts undertaken by

him. The party in whose favor the g uar ant ee is giv en is cal led the

ben ef i c i ar y, whereas the i ssuin g bank i s ca l led the guarantor and the third

party on whose behalf of guarantee is given is ca lled the pr incipaldebtor. Every

guarantee must specify the amount and period of the liability to be undertaken by the bank.

1 0 . 0 D E M A N D L O A N : A Demand loan account is an advance for a fixed amount and no debits to the

accounts aremade subsequent to initial advance except for interest, insurance premium and

other sundrycharges.Demand loan would be loan, which is repayable on demand in one shot

i.e. bullet repayment. Normal l y, demand loans a re a l lowed agains t the Banks

own deposits, govt. securities,approved shares or debentures of companies,

life insurance policies, pledge of gold/silver ornaments, and mortgage

of immovable property. A separate account for each demand loanshould be kept in

the appropriate demand loan ledger.

4 . 6 C R E D I T R A T I N G S C H E M E A credit rating scheme has been introduced to encourage the SSI units to get their

creditrating done by the reputed credit rating agencies, with a view to facilitate credit flow to

themand enhancing the comfort-l evel of l ending banks. The scheme, being

implemented by the NSIC, envisages that 75 percent of the cost of the credit

rating exercise , with a maximumlimit of Rs.40,000 per SSI unit, would be

reimbursed to the SSI units availing of thi s one-time facility. Six credit rating agencies

namely, CRISIL, ICRA, Dun and Bradstreet, Onicra,Care and Fitch, which have agreed to

credit, rate SSI units through NSIC.

4.7CIBIL (CREDIT INFORMATION BUREAU (I ) LTD) In terms of RBI guidelines, all banks have been advised to submit credit informationin

respect of their borrowings accounts to cibil, to create a database to be used by the

member banks fo r ex traction of credi t informat ion reports (CIRS) on prospective

of submission of credit inform ation to C IBIL, R BI had advis ed ban ks th at

t i l l suc h t ime the app ro pr ia te legislation is passed by the Govt, consents of borrowers

are to be obtained.

4 . 8 C R E D I T M O N I T O R I N G A R R A NG E M E N T ( C M A )


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Effective from October 10,1988, RBI replaced the CAS by new scheme known

asCredit Monitoring Arrangement (CMA).Under the scheme RBI would carry post

sanction scrutiny o f p roposals relating to sanction of term loans as well as

working capital limits beyond stipulated level.When CMA was introduced banks were

required to report to RBI for post sanction scrutinyall sanctions of working capital

limi ts Beyond Rs. 5 crores and term loan exceeding RS. 2crores from the bankingsystem.Since Decem ber1992, the s t ipul ated level for pos t

sanct ion scru t iny by RBI fo r work ing cap i ta l fac i l i t ies ( fund based) has

been ra is ed to Rs .10 c ro res an d above. An y sanct ion of term cred it inc luding

deferred payment guarantees in which the share of the banking system is Rs. 5 crores

is required to be reported

Chapter-5DataProcessing&

AnalysisRATIO ANALYSISThe performance of a unit is judged in the following parameters:-

a ) G r o w t h i n s a l e s b) Ma rg in o f pr o f i t c)Uti li zation (i .e. turnover) of

assetsd)Financial strength/healthe) R e tu r n o n i n v es t m e n t Financial 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 foundand the ratios interpreted accordingly.

1 . G r o w t h i n S a l e s :

Growth in sales is an important indicator of progress of a unit. The growth may

be ei ther interms 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) *100Previous years salesThis ratios can be calculated in terms of

amount or in terms of number of unit sold.

2 . M a r g i n o f p r o f i t : Every concern would like to make a profit. However, t he margin of profit and the

quantumhave to be compared over the years. There are four ratios through which this can be

done.

a ) G r o s s m a r g i n r a t i o = G r o s s P r o f i t

* 1 0 0 Net Sales

b ) O p e r a t i n g p r o f i t m a r g i n r a t i o = O p e r a t i n g p r

o f i t * 1 0 0 Net Sales

c ) P B I T r a t i o = P r o f i t b e f o r e i n t e r e s t &

t a x * 1 0 0 Net Sales


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d ) N e t p r o f i t m a r g i n r a t i o = N e t

p r o f i t * 1 0 0 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

assetsare not fully utilized, it would mean that the money invested in these assets is lying idle

andthis 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

themaximum towards the profits of the firm. For a manufacturing concern, the use of assets

isfor 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 Excise dutyTotal Tangible Assets

b ) C u r r e n t a s s e t s t u r n o v e r = G r o s s S a l e s E x c i s e d u t y Current Assets

c) Fixed assets turnover ratio =Gross Sales Excise dutyFixed 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

levelsof activity-in other words, over trading.

Another set of ratio is the number of monthsratios. There are:-

a) Number of months of raw material = Raw material stock Monthly consumption of raw

material

(where monthly consumption = annual consumption12

b) Number of months finished goods =Stock of semi-f in ished goodsMonthly cost of

production

c) Number of months finished goods =Stock of finished goods Monthly cost of sales

d) Number of months debtors = Debtors Monthly gross sales(i.e. period of creditallowed by the concern)Or Turnover of receivables. The higher the number of months ratio,

the greater is the investment needed for a given level of production and sales. Usually, lower

ratios indicate better utilization of current assets.

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 conversionof assets into cast through

sales.

Current Ratio

= Current AssetsCurrent Liabilities


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According to the guidelines given to DENA BANK the ideal l evel is at 1.33:1

however theacceptable level is at 1.17:1.Liquidity can also be measured through,

Net Working Capital= Current assetsCurrent liabilities

The higher these ratios, the higher the liquidity.Solvency is the ability of the firm to repay all its borrowings (i.e. current) as

well as te rmliabilities. This question will of course arise only when the firm will be

liquidated and all itsassets disposed off. The solvency is therefore measured thus:

Quick Ratio

= total tangible assets total outside liabilities. Where,

Tangible assets = total assets intangible assets (like goodwill, patents,

preliminary andformation expenses etc.)

Outside Liabilities = all liabilities except owners capital, reserves and

surplus/deficit in Profit and Loss account.

Solvency (which also means tangible assets minus total tangible net worth) can also be

determined by the formula, total tangible assets total outside liabilities.

The higher the proportion of tangible assets to outside liabilities, the better is the solvency.

There are

two other measures of solvency, both based on debt/equity ratios. They are:a . O u t s i d e l i a b i l i t i e s

Tangible net worth

b . T e r m l i a b i l i t i e s

Tangible net worth

The second measure is used by term lending institutions. The lower these ratios are, the better

is the financial strength of the concern.In or de r to ju d ge wh et h er th e bo r ro we r

wi ll ab le to pa y l oa n in st al lm en ts an d in te re st periodically, the Debt Service

Coverage (D.S.C.) ratio is used. It is calculated thus:

D.S.C. Ratio= Net profit (after tax) and interest on long term debts & depreciation

Installment of long term debt & deferred payments & interestIt is also important for the

lender bank to assess the firms debt paying capacity over a period.Such capaci ty is

derived by calculating ratio like

Debt Service Coverage RatioMinimum acceptable level is 1.50.

DebtEquity Ratio

= It is afinancial ratio indicating the relative proportion of equity anddebt used to finance acompany's assets. This ratio is also known as Risk, Gearing or Leverage. A high debt equity
http://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Shareholders'_equityhttp://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Financial_ratio


16/24

ratio is not preferable by an investor as the company alreadyhas 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

theinterest 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 meangross interest payable by the borrower and profit would mean the gross profit

before interest.

Interest Coverage Ratio= Net profit + depreciation + interest

Gross interest payable

The more the number of times of coverage of interest the better it would be for thefinancialstrength of the company. Interest coverage should be minimum of 2.25 times.

5. Return On Investment:Return on any amount invested in a business have to be taken into account whenwe talk of

profitability. The following are the ratios:

a) Return on total assets = Profit before interest & tax * 100

Total tangible assets

b)Return on net wo r th = Net P rof i t * 100

Tangible net worth

Chapter-6Case Study

After printscreens

Total Debt Equity Ratio (TDER):T h e T D E R o f t h e C o m p a n y s t o o d

a t 2 . 1 7 a s o f 3 1 . 0 3 . 0 9 , w h i c h i s u n d e r t h e n o r m s considering Banks

desirable/benchmark TDER of 4:1 (in case of SSI units). The estimatedand projected TDER

for the financial year 2009-10 and 2010-11 is found to be 3.03 and 2.40which is again

under the banks desirable/benchmark. The same indicates satisfactory long term

solvency of the Borrower.

Current Ratio :


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The Firm projects Export sales of Rs. 360.00 Lacs for the year 2009-10 & Rs.

381.50 Lacsfor the FY 2010-

11. The Firm has already achieved sales of Rs. 184.01 lacs till 30-11-

09h a v i n g a c h i e v e m e n t i n d e x 7 6 . 6 7 % & h a v e c o n f i r m e d o r d e r s f o r

R s . 8 5 . 8 7 l a c s a s o n 10.01.2010 to be shipped out by end of January, L/C of

which already been received. Wehave further been informed that they are in finalstages of negotiation for further orders

of a p p r o x . R s . 5 0 . 0 0 l a c s . T h u s t h e F i r m i s o p t i m i s t i c t o w a r d s a c h

iev ing the es t imatedTurnover .

PrintScreen 20, 21

D . C O M M E N T S O N A S S E S S M E N T O F W O R K I N G C A P I

T A L W I T H JUSTIFICATION:

The working capital cycle stood at 1.19 months during FY 2008-09 comprisinginventoryholdin g of 0 .83 mo nths a nd rec eivab les a t 0 .36 months s a l es .

The borrower has nowestimated working capital cycle of 2.83 months during

FY 2009-10, comprising inventoryholding of 2.18 months and receivables at 0.65

months.

Nature of business of the borrower is seasonal considering the fact that most of the

garmentexports to UK and US for Spring-Summer Season takes place during the

period between November to March.

Receivables :In Balance Sheet Analysis, receivables have been taken as Rs 8.72 lacs as Rs 102.85 lacs

outo f t h e m h a v e b e e n e x c l u d e d s i n c e t h e s e b i l l s h a v e b e e n n e g o t i a t

e d u n d e r F L C a n d accordingly FLC outstanding is also excluded from Bank

Borrowings. The Firm exports onL/C-90 days DA/DP basis.Receivables have been estimated

at 0.65 months (Rs 18.00 lacs) and projected at 0.69 months(Rs 20.00 lacs), as Rs 50.00 lacs

have been excluded from Bank Borrowings towards export bills negotiated under FL/C. The

estimated and projected holding of receivables is consideredneed based and reasonable to

achieve the estimated/projected sales turnover.

Sundry Creditors:

The creditors for goods during FY 2008-09 stood at 1.43 monthspurchases (Rs 17.89lacs)which is estimated at 0.56 months (Rs 9.00 lacs) during FY 2009 -10. The

main reason for low creditors level during FY 2009-10 is as under : The Fi rm has

represen ted that they had received cer t a in goods dur ing the las t week

of March09 for their suppliers , which were under checking as on the Audited

date (31.03.09)and hence remained unpaid as on that date . The same was paid

during 1

st

week of April outof available PCH limit. The creditors level is projected at 0.67 months (Rs

8.50 lacs) duringFY 2010-11, which is almost in line with the creditors holding level during

FY 2009-10. Inview of the above, the estimated and projected creditors holding

period is cons idered need based and reasonable.


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Based on the accepted level of holding and receivables, the working capital limit

works outto Rs 70.00 lacs under Modified MPBF Method during FY 2009-10 and FY 2010-

11. However, the Drawing Power, as of 31.03.10, based on the accepted holding levels as

above,works out as under:

Printscreen 22

The D.P. works out to Rs 62.00 lacs during FY 2009-10 and Rs 65.00 lacs during FY 2010-

11. Since only around tow and half months is left before the end of the current financial

year,the limits , based on the accepted projections of FY 2010 -11 works out to Rs

65.00 lacs.Accordingly and in line with the Branch recommendation,

we recommend for enhancementin working capital limits by way of PCH-cum-FBP limit

from Rs 55.00 lacs to Rs 65.00 lacs.However, the operative limit would be capped at Rs.62.00 lacs during FY 2009-10. The fulllimits i.e. upto Rs. 65.00 lacs may be released only

during FY 2010-11, subject to availabilityof D.P.

Renewal of Negotiation of Bills under L/C Limit:The borrower is presently enjoying Bills Negotiation (under L/C) limit of Rs

50.00 lacs ,outside the overall MPBF, which it has requested for continuation. The borrower

utilizes PClimits basically for stocking purpose, which is evident from the month -

wise position of stocks is as under

Printscreen 23

In view of the above, the borrower is unable to utilize the FBP limit. The borrower

requiresseparate Bills Negoti ation Limit for negotiation of the Bills under L/C,

which is outs ideoverall MPBF.The overall record has been satisfactory and no bills have

been returned unpaid. Accordingly,Branch has recommended for renewal of the Bi ll s

Negotiat ion under L/C limit of Rs 50 .00lacs and we endorse the Branch

recommendation.

17. ASSESSMENT OF TERM LOAN/ DEFERRED PAYMENT GUARANTEE:N.A.

18. ASSESSMENT OF NON-FUND BASED LIMITS

Printscreen 24, 25, 26, 27, 28

20. COMPLIANCE OF RBI / BANK LOAN POLICY GUIDELINES :The Proposal is as per RBI/ Banks Loan Policy Guidelines.

21. MODIFICATION IN EXISTING TERMS OF SANCTION IF ANY:N.A.

22.VIEWS/RECOMMENDATIONS OF THE CREDIT COMMITTEE:


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In terms of HO circular No.DCC/GM-Cr/CAD/1249/08 dated 02.06.08, a meeting

of theCredit Committee was held on 07.01.10 at Regional Office, New Delhi.The

Committee cleared the proposal and suggested as under :

i.

As per the estimates in CMA data submitted by the Borrower the D.P. stood at thelevel of

Rs. 62.10 lacs during FY2009-10 and Rs.64.30 thereafter. Accordinglytheoperative limit can be capped at Rs. 62.00 lacs during FY 2009-10. The full

limitsi.e. upto Rs. 65.00 lacs may be released during FY 2010-11 subject to the availabilityof

the Drawing Power.

ii.

I t i s a lso being observed that a t the t ime of las t sanct ion / renewal

Ca pi ta l wa sestimated at the level of Rs. 22.50 lacs for FY 2008-09, whereas as

per the Audi ted B/S of 31.03.2009 Capital stood at the level of Rs. 19.17 lacs.Therefore

i t i s be ing s t ipu la ted that the F i rm has

to in t rod u ce f resh Capi t a l o r Unsecured Loan of Rs. 3.00 lacs before release of the

enhanced limits.

2 3 . D I S C R E T I O N A R Y P O W E R F O R S A N C T I O N A N D F O R A P P R

O V A L O F DEVIATION, IF ANY:The credit proposal falls within the overall discretionary powers of Asst. Gen.

Manager- NDR.

24. RECOMMENDATION:

It is an Export Credit Account falling under SME sector.

Though the Firm was established in April 2008, however the Proprietor, Sh.

MohitGupta i s as socia ted wi th the Bank s ince 1999 by v i r tue o f being a

Pa rt ne r in M/ s x yz Apparels Inc.

Overal l conduct o f the a /c i s Sat i s fac to ry , as repor ted by the

Br an ch . On e Ti me Additional FBNLC limit of Rs. 100.00 lacs sanctioned by

DGM, NDR on 02.02.2009 and liquidated on time.

The family members of the Proprietor are maintaining substantial deposit in the Branch.(O/s

as on Nov. 2009 Current A/c 0.50 lacs, Saving A/c 1.50 lacs, Term Deposits 20.00 lacs).

Though the borrower has no t o f fered any f resh co l la tera l , however , ex ten

si on of Equitable Mortgage over the existing property would result in the

coverage of 527.99%,which is satisfactory.

Overal l f inancia l ind icato rs o f the borrower are sa t i s fac to ry as per Bank

s Policy Norms.

Branch has recommended the proposal, as requested by the borrower.

In view of the foregoing and based on Branch recommendation, we recommendfollowingsubject to the terms and conditions enclosed as per Annexure IIRelease of the


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limits would be as under

:i . T h e o p e r a t i v e l i m i t c a n b e c a p p e d a t R s . 6 2 . 0 0 l a c s d

u r i n g F Y 2 0 0 9 - 1 0 . T h e f u l l l i m i t s i.e. upto Rs. 65.00 lacs may be

released during FY 2010 -11 subject to the availability of theDrawing

Power.i i . I t i s a l s o b e i n g o b s e r v e d t h a t a t

t h e t i m e o f l a s t s a n c t i o n / r e n e w a l C a p i t a l w a s e s t i m a t e d a t thelevel of Rs. 22.50 lacs for FY 2008-09, whereas as per the Audited B/S of 31.03.2009

Capitalstood at the level of Rs. 19.17 lacs. Therefore it is being stipulated that the Firm has to

introducefresh Capital or Unsecured Loan of Rs. 3.00 lacs before release of the enhanced

limits

Printscreen Application 1-10

Capital/ Net Worth as per CMA projections.25. The documents to be vetted by Advocate on

Banks Panel (at the borrowers cost)to ensure that the documents are as per terms ofsanction, val id and enforceable . Acopy of the Vetting Certificate should be kept on

Branch record.26. As per HO circular No.346/42/99 dated 22.11.1999 the following clause

should beincorporated in the sanction let ter addressed to the borrower: In case

you commitdefault in repayment of the CC/Loan/Overdraft facilities/additional

interest or anyother dues that may aris e out of t he lo an am ount

/financial assistance, the bank reserves the right to disclose or publish the

names of the directors of the company asdefaulters, in such a manner and through such

media as the Bank/RBI in their absolutediscretion may think

fit.27 . As per HO ci rcu l ar No .346 /42 /99 dated 22 .11 .1999 , 54 /1 /2004 d t .

22 /5 /2004 ,consen t le t ter to be ob ta ined f rom the borrower fo r d isc los ing

or pub l ish ing thei r names in theevent of bor rower becom ing de fault ers . The s aid cl ause should beincorpora

ted as last clause of the respective document: I/We hereby agree as pre-condition of

the loan/advance( fund based and non -fund based ) given to me/us by the Bank that in

case I/We commit default in the repaymentof loan/advance or in the repayment of interest

thereon or any of the agreed installmentof the loan on due dates the Bank and/or RBI will

have an unqualified right to

discloseo r p u b l i s h m y / o u r n a m e o r t h e n a m e o f t h e c o m p a n

y / f i r m / u n i t a n d i t s directors/partners/proprietor as defaulter in such manner and

through such media as thebank or RBI in their absolute discretion may think fit.28.

Declaration about no pending court cases (as per H.O. circular no. 351/02/2003) to be

obtained and kept on Branch records.29. An undertaking to be obtained from the borrower,that the Directors/Guarantors arenot, in any way, connected with any senior official (Scale-IV

and above) of the Bank.

30. Commitment Charges:The u t i l iza t ion o f l imi t shou ld be made wi th in 3 to 6months o f date o f

communi cat i on of sa nction t o the pa rty for w orking c apita l . I f average

utilization is less than 75% in case of working capital facilities, commitmentcharges will be

levied @ 0.50% p.a. at quarterly rests on the sanctioned amount.31. Further an

undertaking is to be obtained from the borrower tha t it will not effectany change

in neither management nor declare/pay dividend nor encumber any of the


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securities charged to the Bank, without the express consent of the

Bank.3 2 . B r a n c h t o s u b m i t c e r t i f i c a t e o f c o m p l i a n c e o f t e r m s a n d c

o n d i t i o n s , a s p e r prescribed format, to Regional

Office.33. Gene ral Undert aking as pe r H.O. Circ ular No. 54/ 1/2004 dated

22.05.04 to besubmitted by the borrower.34. Branch Official should visit the site/propertyoffered as collateral and cross-check its Valuation/Title/Marketability etc. through

discrete / market enquiries and ensurethat the valuation done by the valuer is

jus ti fied . Signifi cant divergence observed, if an y, vi s--vis Reports submitted by

Banks Approved Valuer and Panel Advocate should be immediately brought to the

notice of the sanctioning

authority.35. All lega l expens es/ot her expens es incl uding incid ental char ge

s to be in cu rr ed during the course of operation in the account and for completion

of documenta tionformalities will be borne by the borrower 36. Declarat ion to the effect

that no court cases are pending agains t the company, it sdirectors and the group

concerns (as per H.O. circular no. 351/02/2003) to be obtainedand kept on Branch record.37.

Compliance of terms and conditions should be sent to RO in terms of H.O.circular no.253/41/2002 dated 30.11.2002.38. The borrower to furnish an undertaking that,

where it transpires that the borrower has given a false declaration, the Bank shall forthwith

recall the loan.39. The Company to submit full detail s of all the it ems of Sta tutory

Dues along wi thCA Certificate of latest date and Branch to ensure that there are no

over dues.40. Consent clause to be submitted by the borrower & guarantor

permi tting the Bank for submission of credit information to Credit Information Bureau

(India) Ltd.41. The Branch to ensure that all the suggestions as suggested by the advocate in

NonEncumbrance Report / Legal Search Report ought to be complied before

disbursement.The Branch Head should personally ensure that if the proposed mortgagor

acquired thetitle from Government then Non Encumbrance Report / Legal Search Report

should beat least 30 years and if the proposed mortgagor acquired the tit l e from

sources other than the Government then Non Encumbrance Report / Legal Search Report

should be

The sa id p roper ty i s a lso mor tgaged to t he Bank fo r Mortgage Loan of

Rs . 10 .8 5 La cs sanctioned to Sh.. Mahesh C. Gupta, Smt. Shashi Khandelwal,

Sh. Vikas Gupta, Sh. MohitGupta O/S as on 10.01.2010 being Rs. 7.95 Lacs and

Machinery Term Loan sanctioned toM/s xyz Apparels Inc-O/S as on

10 .01 .2010 being Rs . 5 .89 Lacs . The conduct o f theaforesaid accounts

are sa t i s fac to r y as repor ted by the Branch and bo th the accounts

areclassified as Standard

Printscreen application 11-18


23/24

Chapter-7FindingsAfter undertaking the in depth theoretical study such as types of advances, SME policy

of DENA BANK, credit rating, CMA, working capital and various financial under SMEs, it

wasfound that the several Industries a re growing through credit/advances grantedby banks andSMEs 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 overallindustrial

economy of the country. It is estimated that in terms of value, the sector accountsfo r about

for 39% of the manufacturing output and around 33% of the total export of

thecountry. Further, in recent years the MSE sector has consistently registered

higher growthrate compar ed to the overa l l indus tr i al sec tor . T he majo r

advan tages o f the secto r i s i t s

employment potential at low capital cost. As per available statistics, this sector employs

anestimated 31 million persons spread over 12.8 million enterprises and the labour intensityinthe MSE sector is estimated to be almost 4 times higher than the large enterprises.As per

the 3

rd

census report, total output of the registered units in the year 2001-02

wasestimated to be Rs. 70,861.73 crores. The SSI sector employed 2,49,32,763

persons during that pe r iod . There were 50606 ex por t ing uni t s account ing

for ex po rt s to th e tu ne of Rs .14,199.56 crores.Th us SM E

p la ys a ver y s igni f i can t ro le in th e socio -

eco nomi c dev elop men t of the country.

Chapter- 8Conclusion

The project entitled CREDIT APPRAISAL UNDER SME gives the detailed knowledgeof thewhole process of loans and advances which DENA BANK performs. Starting from theloan

application from the borrower and compilation of confidential reports on him and

theguarantor, the process continues till the disbursement of loan and after it the close

monitoringtill the adjustment of Banks loan.The project was an attempt to understand and

perform the work in credit transaction andcredit appraisal proposal which I have included is

just an example of it.

I have worked on many such p roposals , which are beyond the scope o f

th is pr oj ec t. Hence the whole experience of working in such renowned public

sector uni t was very goodand made me a learn a lot out of it.Chapter-9Bibliography

Magazines1 . B u s i n e s s w e e k 2 . F r o n t l i n e 3 . B u s i n e s s W o r l d

News Papers

1.Business standard

2.Financial Express

3.Economics Times


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Documents

Dena Draft Report