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Union Bank of India
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Analysis of Credit Appraisal
at Union Bank of India 18719103911
EXECUTIVE SUMMARY
In today’s scenario, it is very important to understand that every industry needs to support
itself and hedge itself against risks. No matter which industry or sector the company belongs,
it needs to update every day itself to the various things happening all over the world which
may directly or indirectly affect its business, growth and potential in the market. The credit
report is an important determinant of an individual's financial credibility. They are used by
lenders to judge a person's creditworthiness.
The project focused on the analysis of credit appraisal in Union Bank of India (UBI). It is one
of India's largest state-owned banks listed on the Forbes 2000. It has assets of USD 13.45
billion and all the bank's branches have been networked with its 1135 ATMs. It renders
credit ratings to their clients on the basis of their loan sanctioned amount, past records,
validity and feasibility of their projects, etc. Ratings can be assigned to short-term and long-
term debt obligations as well as securities, loans, preferred stock and insurance companies.
Union Bank of India follows a finely defined Credit Rating Model for assessing the
creditworthiness of the applicant. The credit rating model assess various aspects of the
projects and assigns scores against them thereby determining the risk level involved with the
project.
The project starts with the brief introduction to the industry profile related to banking sector
in India and introduction to the company, the mission and vision of the company along with a
brief introduction regarding the products offered by the company. Project also includes the
theoretical framework of the study, that is, credit report and credit rating, corporate credit
rating, term sheets, letter of credit and guarantee. The objective of the study was to know the
credit rating system and the methodologies applied and the way balance sheet and other
financial techniques are used in deciding whether or not to approve the loan. Both primary
and secondary sources were used in this project report.
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The analysis was made by various discussions with the staff members of the bank. The
analysis includes evaluation of the management, financial statements of M/S SHIV-VANI
OIL & GAS EXPLORATION SERVICES LTD., and its significant accounting policies. It
also includes analysis of audited balance sheet of M/S. SHIV-VANI OIL & GAS
EXPLORATION SERVICES LTD., its breakup and evaluation of key ratios by Union Bank
of India. It was concluded that in UBI, the process of credit appraisal includes a thorough
study of the project which involves evaluation of management, technical feasibility, financial
viability and risk analysis. Thus, Union Bank of India has sound system for credit appraisal.
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1.1 ABOUT UNION BANK OF INDIA
Union Bank of India (UBI) is one of India's largest state-owned banks (the government owns
55.43% of its share capital), is listed on the Forbes 2000. It has assets of USD 13.45 billion
and all the bank's branches have been networked with its 1135 ATMs. Its online Tele
banking facility is available to all its Core Banking Customers - individual as well as
corporate. It has representative offices in Abu Dhabi, United Arab Emirates, and Shanghai,
Peoples Republic of China, and a branch in Hong Kong
The Union Bank of India was built up in twentieth century and declared open by the Father
of the Nation, Mahatma Gandhi. The bank with its efficient value-added services, sustained
growth, consistent profitability and development of new technologies bank has ensured
complete customer delight, living up to its image of, “GOOD PEOPLE TO BANK WITH”.
Bank is offering credit cards, home loan, union de-mat, ATM, International debit card, online
tax payment facility, Railway e-ticketing kiosk, etc., services to its customers through core
banking solution.
The Union Bank of India has 2261 branches out which 1031 branches are under CBS. All the
ATMs are inter-connected through the Bank’s ATM Switch, thus facilitating on-line
operations in case of CBS customers. The Bank is a member of Cash Tree consortium and
also has bilateral arrangement with State Bank of India, enabling the Bank’s ATM cardholder
access to over 20000 ATMs across the country. UBI Net connects 65 Offices and 984
branches located in 323 centers, facilitating speedier transmission of MIS data (Network
Map). The network also facilitates the implementation of Core Banking Solution, apart from
DEMAT services, Cash Management services, fund transfers, messaging system, etc. The
Bank is using VSAT network for connecting branches and ATMs wherever leased line
connectivity is not feasible. We have 590 VSATs operational, connecting 194
branches/extension counters and 316 ATMs.
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1.1.1 The Vision Statement
To become the bank of first choice in our chosen area by building beneficial and
lasting relationship with the customers through a process of continuous process.
Technologically Strong
Financially Sound
All India presence
Personalized Services
Value Maximization
1.1.2 The Mission Statement
A logical extension of the Vision Statement is the Mission of the Bank, which is to gain
market recognition in the chosen areas.
To facilitate a process of restructuring of branches to support a greater efficiency in the retail
banking field.
To be premiere bank, responsive to the needs of our target market customers, recognized for
consistently superior service quality innovative products, thereby delivering superior value to our
shareholders.
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1.1.3 BOARD OF DIRECTORS
SHRI DEBABRATA SARKAR
Chairman & Managing Director
SHRI S.S.MUNDRA
Executive Director
SHRI SURESH KUMAR JAIN
Executive Director
SHRI CHANDAN SINHA
RBI Nominee Director
SHRI B.M.SHARMA
Chartered Accountant Director
SHRI N.SHANKAR
Director representing Workmen Employees
SHRI B N BHATTACHARJEE
Director representing Officer Employees
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1.2 OVERVIEW OF THE INDUSTRY
1.2.1 Introduction to the Banking Sector
The Banking industry comprises of segments that provide financial assistance and advisory
services to its customers by means of varied functions such as commercial banking,
wholesale banking, personal banking, internet banking, mobile banking, credit unions,
investment banking and the like. With years, banks are also adding services to their
customers. The Indian banking industry is passing through a phase of customers market. The
customers have more choices in choosing their banks. A competition has been established
within the banks operating in India. With stiff competition and advancement of technology,
the services provided by banks have become more easy and convenient. Banks are among the
main participants of the financial system in India. Banking offers several facilities and
Opportunities.
The Indian banking can be broadly categorized into nationalized (government owned),
private banks and specialized banking institutions. The Reserve Bank of India acts a
centralized body monitoring any discrepancies and shortcoming in the system. Since the
nationalization of banks in 1969, the nationalized banks have acquired a place of prominence
and has since then seen tremendous progress. The need to become highly customer focused
has forced the slow-moving public sector banks to adopt a fast track approach.
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1.2.1.1 Classification of the Banks
Public Sector Banks
Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are
still dominating the commercial banking system. Shares of the leading PSBs are already
listed on the stock exchanges. The PSBs will play an important role in the industry due to its
number of branches and foreign banks facing the constraint of limited number of branches.
Private Sector Banks
The RBI has given licenses to new private sector banks as part of the liberalization process.
The RBI has also been granting licenses to industrial houses. Many banks are successfully
running in the retail and consumer segments but are yet to deliver services to industrial
finance, retail trade, small business and agricultural finance.
Foreign Banks
The number of foreign bank branches in India has increased significantly in recent years
since RBI issued a number of licenses - well beyond the commitments made to the World
Trade Organization. The presence of foreign banks in India has benefited the financial
system by enhancing competition, resulting in higher efficiency. There has also been transfer
of technology and specialized skills which has had some "demonstration effect" as Indian
banks too have upgraded their skills, improved their scale of operations and diversified into
other activities.
At a time when access to foreign currency funds was a constraint for the Indian companies,
the presence of foreign banks in India enabled large Indian companies to access foreign
currency resources from the overseas branches of these banks. Also with the presence of
foreign banks, as borrowers in the money market and their operation in the foreign exchange
market has resulted in the creation and deepening of the inter-bank money market.
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Co-operative Banks
Co-operative banks are small-sized units organized in the co-operative sector which operate
both in urban and non-urban centers. Co-operative Banks in India are registered under the
Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are
governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies)
Act, 1965.
Co-operative banks function on the basis of 'no-profit no-loss'. Co-operative banks, as a
principle, do not pursue the goal of profit maximization. Therefore, these banks do not focus
on offering more than the basic banking services. So, co-operative banks finance small
borrowers in industrial and trade sectors, besides professional and salary classes.
1.2.2 Banking in India
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790;
both are now obsolete.
The oldest bank in existence in India is the State Bank of India, which originated in the Bank
of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India
Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India. In India the banks are being
segregated in different groups.
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Each group has their own benefits and limitations in operating in India. Each has their own
dedicated target market. Few of them only work in rural sector while others in both rural as
well as urban.
Many even are only catering in cities. Some are of Indian origin and some are foreign
players. All these details and many more are discussed over here.
The banks and its relation with the customers, their mode of operation, the names of banks
under different groups and other such useful information are talked about. One more section
has been taken note of is the upcoming foreign banks in India.
Post-Independence:
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime of
the Laissez-faire for the Indian banking. The Government of India initiated measures to play
an active role in the economic life of the nation, and the Industrial Policy Resolution adopted
by the government in 1948 envisaged a mixed economy. This resulted into greater
involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was nationalized on January 1,
1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948
(RBI, 2005b). In 1949, the Banking Regulation Act was enacted which empowered the
Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
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The Banking Regulation Act also provided that no new bank or branch of an existing bank
could be opened without a license from the RBI, and no two banks could have common
directors. As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means
any company which transacts the business of banking in India.
As per Section 5(b) of Banking Regulation Act, 1949, banking means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdraw able by cheque, draft, order or otherwise.
As per Section 5(d) of Banking Regulation Act, 1949, company means any company as
defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the
meaning of Section 591 of that Act.
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1.2.3 A Brief about RESERVE BANK OF INDIA
Establishment:
The Reserve Bank of India was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934.The Central Office of the Reserve Bank
was initially established in Calcutta but was permanently moved to Mumbai in 1937.The
Central Office is where the Governor sits and where policies are formulated. Though
originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by
the Government of India.
Preamble:
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank
as:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage."
Acts governing Banking Operations:
Companies Act, 1956: Governs banks as companies
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates
to nationalization of banks
Bankers' Books Evidence Act
Banking Secrecy Act
Negotiable Instruments Act, 1881
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1.3 PRODUCTS AND SERVICES
UNION BANK OF INDIA provides various types of product and services .The wide range
of product and services consists of:
Banking
Accounts & Deposits – cumulative deposit scheme, deposit reinvestment certificate,
monthly income scheme, union flexi-deposit, senior citizens scheme, multi gain savings
account, no frills saving account, union super salary account, union classic current account
Retail Loans – union cash, union home, union health, union miles, union education, union
top up, EMI calculator, union smile.
Cards - Classic / Silver / Gold, Corporate Credit Cards, Add-On Cards
Insurance & Investment – mutual fund, union healthcare
Demit – demit accounts, online share trade
Payment
NRI Banking
Remittance - Union E-Remit, Details for Remittance
Savings & Deposits - NRO Non Resident Ordinary A/c Scheme, NRE Non Resident
External Rupee, Union Unfixed, Foreign Currency Deposit
Loan & Services – house loans, foreign currency loans, loans against deposit, immovable
property, and shares or debenture
Payments - Union Bill Pay
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Corporate Banking
CMS - Union Speed, Union Centralized Debits/Credits, Union Prompt
E-Tax - Customs and Direct taxes, Central Excise and Service Tax
Trade Finance – trade finance for exporters, trade finance for importers, foreign currency
loans, correspondent banking
Insurance - Non life Insurance – Corporate Agency, Insurance- Corporate Agency
Syndication of Loans
MSME Banking
Loans & Policies
Internet Banking
Account Information
Transfer of Funds
Bills
Requests
Mails
Trade
Limits
Currency
Uploads
Customization
Financial enquiries
Non-Financial enquiries
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2.1 INTRODUCTION
In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a
unit of the RBI. The entire supervisory mechanism was re-aligned to suit the changing needs
of a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly
extended to the entire financial system except for the capital market institutions and the
insurance sector. Its mandate is to strengthen supervision of the financial system by
integrating oversight of the activities of financial services firms. The BFS has also
established a sub-committee to routinely examine auditing practices, quality, and coverage.
In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site
surveillance which particularly focuses on the risk profile of the supervised entity. The Off-
site Monitoring and Surveillance System (OSMOS) were introduced in 1995 as an additional
tool for supervision of commercial banks. It was introduced with the aim to supplement the
on-site inspections. Under off-site system, 12 returns (called DSB returns) are called from the
financial institutions, which focus on supervisory concerns such as capital
adequacy, asset quality, large credits and concentrations, connected lending, earnings and
risk exposures (viz. currency, liquidity and interest rate risks).
In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to
review the banking supervision system. The Committee certain recommendations and based
on such suggestions: a rating system for domestic and foreign banks based on the
international CAMELS model combining financial management and systems; and control
elements was introduced for the inspection cycle commencing from July 1998. It
recommended that the banks should be rated on a five point scale (A to E) based on the lines
of international CAMELS rating model. CAMELS evaluate banks on the following six
parameters:
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(a) Capital Adequacy : Capital adequacy is measured by the ratio of capital to risk-
weighted assets (CRAR). A sound capital base strengthens confidence of depositors.
(b) Asset Quality: One of the indicators for asset quality is the ratio of non-performing loans
to total loans (GNPA). The gross non-performing loans to gross advances ratio is more
indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative
of poor credit decision-making.
(c) Management: The ratio of non-interest expenditures to total assets (MGNT) can be one
of the measures to assess the working of the management. . This variable, which includes a
variety of expenses, such as payroll, workers compensation and training investment, reflects
the management policy stance.
(d) Earnings: It can be measured as the return on asset ratio.
(e) Liquidity : Cash maintained by the banks and balances with central bank, to total asset
ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of
liquid assets are perceived safe, since these assets would allow banks to meet unexpected
withdrawals.
(f) Sensitivity to Risks : This parameter assesses the various risks to which the bank is
exposed. These risks can be market risks, forex risks, interest rate risk etc.
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Each of the above parameters is weighted on a scale of 1 to 100 and contains number of sub-
parameters with individual weightages.
TABLE NO.: 1
Rating
SymbolRating symbol indicates
A Bank is sound in every respect.
B Bank is fundamentally sound but with moderate weaknesses.
CFinancial, operational or compliance weaknesses that give cause for
supervisory concern.
DSerious or immoderate finance, operational and managerial weaknesses
that could impair future viability.
ECritical financial weaknesses and there is high possibility of failure in
the near future.
2.2 CREDIT DISBURSEMENT AT UNION BANK OF INDIA
Financial requirements for Project Finance and Working Capital purposes are taken care of at
the Credit Department of the bank. Companies that intend to seek credit facilities approach
the bank. Primarily, credit is required for following purposes:-
1. Working capital finance
2. Term loan for mega projects
3. Non fund based Limits like Letter of Guarantee, Letter of Credit
Companies present audited balance sheets of the current and previous years. These are used
to determine the financial health, turnover trends and rise and fall of profitability. Then credit
rating is done.
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The financial health and credit rating are the theoretical methods for determining the right
interest rate. However, in practice, banks consider other factors such as history with client,
market reputation and future benefits with clients.
2.2.1 Credit Risk Management
In today’s scenario, it is very important to understand that every industry needs to support
itself and hedge itself against risks. Risks are of various kinds and in different magnitude. No
matter which industry or sector the company belongs it needs to update every day itself to the
various things happening all over the world which may directly or indirectly affect its
business, growth and potential in the market.
Banks are directly related to people, industry and market. In the recent times, we have seen
that the retail loan section of the banks have come up as one of the important areas. All the
big industries, small and medium enterprises and individuals, avail loans for all their
purposes.
The important thing in this case is that, banks can’t give loans to everyone. They need to
check the credit worthiness of the borrower. To rate the worthiness of an individual, banks
have various methods like checking their market image, their past record, potential and
security provided. From this, it is decided that whether they are worthy enough or not. In
more financial terms, for corporate loans there are various methods like balance sheet
analysis, fund flow and cash flow analysis, working capital management, ratio analysis etc.
2.2.2 How does risk matter to the bank?
Banks and Financial Institutions perform the essential function of channelizing funds from
those with surplus funds to those with shortage of funds. Broadly, the risks by the banks
today can be classified as under:
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I. Credit Risk: It is one of the major risks faced by the banks on account of the nature of
their business activity, which includes dealing with or lending to a corporate, individual,
another bank, financial institution or a country. Credit risk includes borrowers risk and
portfolio risk. Borrower risk may be defined as the possibility that a borrower will fail to
meet his obligations in accordance with agreed terms. Portfolio risk arises due to credit
concentration/investment concentration etc.
II. Market Risk: Market risk is the potential of erosion in income or market value of an
asset arising due to changes in market variables, such as interest rate, foreign exchange rate,
equity prices and commodity prices.
Transaction Rate Risk: The risk in the erosion of earnings due to variation in interest
rate within a given time zone is referred to as interest rate risk. Interest rate risk may itself
arise on account of gap or mismatch risk, basis risk, embedded options risk, yield curve risk
etc.
Exchange Rate Risk: This risk is of two types viz. transaction risk and translation
risk. Transaction risk is observed when movements in price of a currency, upward or
downward, results in a loss of a particular transaction. In a situation of Translation risk, the
Balance Sheet of a Bank, when converted in home currency, undergoes a drastic change,
chiefly owing to exchange rate movements and changes in the level of investments or
borrowings in foreign currency even without having translation at a particular point of time.
Equity Price Risk: The risk arises from the potential of an institution to suffer losses on
its exposure to capital markets, from adverse movements in prices of equity.
Commodity Price Risk: The risk arises from the potential of movements in prices of
physical products, which are or can be traded in the secondary market. These products
include agricultural products, minerals, oils and precious metals.
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III. Liquidity Risk: It arises due out of the possibility that a bank maybe unable to meet its
liabilities as they become due for payment or may be to find the liabilities at a cost much
higher than normal cost. The risk arises due to mismatch in the timing of inflows and
outflows of funds, and from funding of long term assets by short- term liabilities. Surplus
liquidity could also represent a loss to the bank in terms of earnings missed and hence an
earning risk.
IV. Operational Risk: It arises out of malfunctioning of information systems or service
delivery process or internal sabotage. In all these cases, the losses are similar and even can
generate losses of unknown magnitude.
V. Systemic Risk: Banks are highly inter-related with mutual commitments. Hence the
failure of one institution generates a risk of failure for those other banks which have
committed funds with defaulting bank.
VI. Solvency Risk: It occurs when the bank is landed in a chronic situation of not able to
meet its obligation. This type of risk gives the ultimate impression that the bank has failed.
Lending involves a number of risks. In relation to the risks related to credit worthiness of the
counter party, the banks are also exposed to interest rate, forex and country risks.
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2.2.3 Credit Risk
Credit Risk is the possibility of losses associated with changes in the credit profile of the
borrowers or counter parties. These losses could take the form of outright default or
alternatively, losses from changes in portfolio value arising from actual or perceived
deterioration in credit quality, short of default. Credit Risk of a bank has two distinct facts i.e.
risk inherent to the individual business unit/loan account and risk from macro credit portfolio
perspective. Credit Risk emanates from banks dealings with an individual, corporate, bank,
financial institution or a sovereign. Credit Risk may take the following forms:
In the case of direct lending : Principal/and or interest amount may not be repaid;
In the case of guarantees or letters of credit : Funds may not be forth coming from the
constituents upon crystallization of the liability;
In the case of treasury operations : The payments or series of payments due from the
counter parties under the respective contracts may not be forthcoming or cease;
In the case of securities trading business : Funds/securities settlement may not be
effected;
In the case of cross – border exposure: The availability and free transfer of foreign
currency funds may either cease or restrictions may be imposed by the sovereign.
Credit Risk has got two components: ‘Quantity of risk’ which is nothing but the outstanding
loan balance as on the date of default and the ‘Quality of risk’ i.e. “severity of losses” which
is defined by both default probability and the receivers that could be effected in the event of
default. Credit Risk is therefore, a combined outcome of:
Default Risk: It is the probability of the event of default, i.e., missing a payment
obligation. In today’s parlance, payment default is declared when a scheduled payment has
not been made within regulatory time from laid down.
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Exposure Risk: The outstanding balances at the time of default are not known in
advances particularly under facilities like committed lines of credit, ODs, project financing,
off balance sheet items like guarantees/LC facilities etc. this uncertainty prevailing with
future amounts at risk, generates exposure risk.
Recovery Risk: The losses in case of default are the amount outstanding at default time
less recovery. Normally, once a borrower defaults, banks resort to enforcement of security. It
thus involves great amount of uncertainties. These uncertainties can be traced to :
Value of Collateral Security: Recovery risk depends on the nature of charged assets,
their location and possession, marketability/appeal, legal status etc. At times, the economic
value of assets charged may erode over a period and may even go below the value of
outstanding debt. Contrarily, where collaterals are of high value and are capable of
generating buyer’s interest may even cancel the loss.
Guarantor’s Value: The net worth of guarantors and in turn their ability to discharge
liabilities upon invocation of guarantee may undergo changes affecting the ultimate
realization amount.
Enforceability of Securities: The ability of a bank to access the securities/collaterals
charged to a bank in order to dispose them off may itself be doubtful. Secondly, enforcement
of securities/contracts is also defined by the prevailing legal system.
In view of this, it becomes difficult to predict the recoverable amount in advance. The
combine outcome of all three elements ultimately defines the credit risk of a bank. Once
these estimates are made, the loss in case of default can be measured by using the formula:
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EL= PD × EAR × LGD
Where, EL= Expected Loss
PD= Probability of Default
EAR= Exposure at Risk
LGD= Loss Given Default i.e. (1-Recovery Rate)
2.2.4Credit Report and Credit Rating
The credit report is an important determinant of an individual's financial credibility. They are
used by lenders to judge a person's creditworthiness. They also help the person concerned to
narrow down on the financial problem areas. Credit report is a document, which comprises
detailed information about the credit payment history of an applicant. It is mostly used by the
lenders to determine the credit worthiness of an applicant. The business credit reports provide
information on the background of a company. This assists one to take crucial business related
decisions. People can also assess the amount of business risk associated with a company and
then decide whether they would be comfortable in providing them with credit facilities.
The degree of interest that would be shown by investors in their company can also be
gauged from the business credit reports as they can get an idea of the conception of their
customers regarding themselves. Since these records are updated at regular intervals of time
they enable people to identify the risk levels associated with a business as well as its future.
These reports also allow businesses to get detailed information about the financial status of
business partners and suppliers.
2.2.4.1 Corporate Credit Rating
Ratings can be assigned to short-term and long-term debt obligations as well as securities,
loans, preferred stock and insurance companies. Long-term credit ratings tend to be more
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indicative of a country's investment surroundings and/or a company's ability to honor its debt
responsibilities. The ratings therefore assess an entity's ability to pay debts.
Union Bank of India follows a finely defined Credit Rating Model for assessing the
creditworthiness of the applicant. The credit rating model assess various aspects of the
projects and assigns scores against them thereby determining the risk level involved with the
project. It is divided in Four Sections:
1. Rating of the Borrower
Financial Risk
Management Risk
2. Market Condition/ Demand Situation
3. Rating of the Facility
4. Business Consideration
1) Rating of the Borrower
It deals with assessing the financial and managerial ability of the borrower. The financial
ability of the firm is derived by calculating ratios that determine the short term and long term
financial position of the firm. Short term ratios include Current Ratio, which determines the
liquidity position of the company over a period of one year. The current ratio is an indication
of a firm's market liquidity and ability to meet creditor's demands. It is excess of current
assets over current liability. If current liabilities exceed current assets (the current ratio is
below 1), then the company may have problems meeting its short-term obligations. If the
current ratio is too high, then the company may not be efficiently using its current assets.
According to the guidelines given to UBI, the ideal level is at 1.33:1. However the acceptable
level is at 1.17:1.At times, current ratio may not be a true indicator. Hence, it is important for
the evaluator to understand the nature of the industry.
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Long term ratio includes 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.
It is also important for the lender bank to assess the firm’s debt paying capacity over a
period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio
minimum acceptable level is 1.50.It also necessary for the lender to determine the ability of
the firm to achieve the projected growth by evaluating the projected sales with actual.
However such parameter remains non applicable if the business is new.
Financial risk evaluation is only one of the parameter and not the only parameter for
determining the risk level. It is important to evaluate the Management Risk also while
evaluating the risk relating to borrower. It is the management of the company that acts as
guiding force for the firm. The key managerial personnel should bear the capacity to bail out
the company from crisis situation. In order to remain competitiveness, it is essential to take
initiatives.
2) Market potential / Demand Situation
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A Company does not operate in isolation, there are various market forces that acts in either
favorable or unfavorable manner towards its performance. Thus, the rating would not give
true picture if does take market or demand situation in consideration. The demand supply
situation / market potential play an important role in determining the growth level of the
company like:
Level of Competition: monopoly , favorable , unfavorable
Seasonality in Demand: affected by short term seasonality, long term seasonality or may
not be affected by seasonality in demand.
Raw Material Availability
Location Issues like proximity to market, inputs, and infrastructure: Favorable, neutral,
unfavorable.
Technology, i.e., proven technology- not to be changed in immediate future, technology
undergoes change, outdated technology.
Capacity Utilization
3) Rating of the Facility
The company can start functioning only after completing statutory obligations laid down by
the governing authority. Such statutory obligation involves obtaining licenses, permits for
ensuring smooth operations, preparation and submission of financial statements, stock
statements in the standard format within the given time schedule.
4) Business Consideration
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The length of relationship with the bank enables the lender to assess the previous
performance of the account holder. A good track record acts in the favor of the applicant,
however underperformance make the lender more vigilant.
Thus, the Credit rating of the business takes into consideration various aspects that directly or
indirectly bear an effect the performance of the business.
2.2.5 Lending Interest Rate
After evaluating the risk level involved, the lender bank decided on lending Interest Rate. In
UBI, these are categorized into 9 segments:
1. Lowest Risk CR-1
2. Low Risk CR-2
3. Medium Risk CR- 3
4. Moderate/ Satisfactory Risk CR- 4
5. Fair Risk CR- 5
6. High Risk CR- 6
7. Higher Risk CR- 7
8. Highest risk CR- 8
9. NPA CR- 9
In UBI, a business receiving Credit Rating above level 6 are not considered good from point
of investment and thus are avoided.
2.2.5.1 Determination of Interest Rate
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The interest rate is determined from the interest rate guidelines circular. This circular is
regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on
BPLR and the foreign exchange loans are based on LIBOR. The guidelines define how much
interest rate is to be assigned for a particular credit rating and credit duration. However,
credit rating and its use in determining interest rate is a theoretical concept and the bank may
allow a reduction in interest rate under the following conditions:
Good Client: The organization is a long term client and brings good business to the
bank. The organization’s actions show that it intends to become a long term customer of the
bank.
Banking Consortium: The organization is seeking credit from a consortium of banks. In
some cases like this, the lead bank might decide the interest rate and all the member banks of
the consortium follow this interest rate.
2.2.6 Term Sheet
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Following a favorable feasibility check, the next step is preparing term sheet. A Term Sheet
is brief document that provides details on aspects like:
Account Details
Financial highlights for immediate previous two audited years and projection for
proceeding year
Nature of Project
Cost of Project
Means of finance
Purpose
Tenure of Term Loan
Interest rate Reset
Margin
Interest Rate, Commission
Door to Door Tenor, i.e., the period within which the entire amount is to be disbursed.
Repayment Terms
Prime Security
Collateral Security
Upfront fees, i.e., the charges levied by the bank for processing the documents.
2.2.7 Proposal
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An approved term sheet leads to preparation proposal. A proposal is prepared in standard
format; this enables the bank to keep a proper track record and also facilitates proper
comparison. A proposal with full-fledged document providing details on project has to be
submitted for requesting finance from bank. A proposal contains information on following
aspects:
Details of Account: It includes name of the Account Holder, Date of incorporation, Line
of Activity, Internal Credit Rating level, Address of the Registered Office, Name of
Directors, Share Holding Pattern, Asset Classification, and Purpose of the Loan.
Securities: Lenders often feel more confident about a loan if they are given a security
interest in the assets of a business. Then, if the borrower does not repay the loan as promised,
the lender can take the property the borrower pledged, sell it and use the proceeds to repay
(or partially repay) the borrowed amount. It provides detailed information on nature of
securities given in lieu of the Loan. They are of two types Prime securities, Collateral
Securities.
Prime Securities: Pari Passu is a term used in banking transactions which means that the
charge to be created is in continuation of an earlier charge which might be held by the same
institution or by any other institution.
Collateral Securities: In lending agreements, collateral is a borrower's asset that is forfeited by
the lender if the borrower is insolvent - that is, unable to pay back the principal and interest on
the loan. When insolvent, the borrower is said to default on the loan, in which the lender
becomes the owner of the collateral.
It includes details on: nature / description of collateral security indicating area & location of
property, value in Rupees, date of valuation along with name of assessor, insurance amount
&date of expiry, personal guarantee / corporate guarantee if any, includes name of the
guarantor, value of guarantee.
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Financial Highlights: It provides details of important financial elements over a period of
years. It includes details on paid capital, tangible net worth, net-working capital, current
assets, current liabilities, net profit, net sales, reserves and surplus, intangible assets, long
term liabilities, fixed assets, investments, non-current assets like guarantees, cash accruals,
and capital employed. It also includes ratios like Debt Equity Ratio, Current Ratio, Debt
Service Coverage Ratio and so.
Status of the project: In this part of proposal, a brief about the project is explained; it
includes information on nature, type of project, purpose of the project, commencement
details, the promoters and related details of the project. If it is an on-going project, it also
gives details on progress and status of progress.
Evaluation of Industry :This Section gives brief details on:
Scope of the industry
Growth level and overall performance of the industry
Recent Developments and Trend Evaluation
Conduct of the Account: This section provides details on regularity in Submission of:
Stock Statements / Book Debt Statement
QPR Statements / Half Yearly Statement
Financial Statements
CMA Data
Compliance to Terms of Sanction: It furnishes information on following aspect:
Completion of Mortgage formalities
Registration of Charges with ROC
Whether documents valid and in force
Compliance of RBI guidelines
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Exposure details from banking system: The sharing pattern of the banks is mentioned
in this section of proposal. It includes:
Name of the bank
Percentage of share for the fund based and non-fund based Limits
Amount in Rs.
Non Fund based credits are in form of guarantees like Letter of Credit (L/C), Letter of
Guarantee (L/G).
Letter of Credit: A ‘Letter of credit’ also known as documentary credit is the most
commonly accepted instrument of settling international trade payments. A letter of credit is
an arrangement whereby a bank, acting at the request of a customer, undertakes to pay a third
party by a given date, on documents being presented in compliance with the conditions laid
down.
Letter of Guarantee: A letter from a bank stating that a customer owns a particular
security and that the bank will guarantee delivery of the security. A letter of guarantee is used
by an investor who is writing call options when the underlying stock is not in his or her
brokerage account. A Call Option is an agreement that gives an investor the right (but not the
obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a
specific time period.
Assessment of Non Fund Based Limit: Non Fund Based Limits are normally to be
sanctioned for existing customer only who already enjoys fund based limits. If there comes a
new borrower, full processing as applicable to Fund Based Limits are to be carried out.
Borrower’s background and experience of meeting commitments to be examined in details.
L/C limit to be considered as per terms of Purchase or contract, lead period and minimum
economical quantity of supply of stocks. Non Fund based Limits are to be supported by
necessary fund based limits.
Past experience of payment of bills under L/C needs to be verified before considering new
request. Any request for financial Guarantee to be critically examined before taking decision.
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Details of Allied Concerns: This section provides information about the allied concerns
aspects like the performance, promoters, share holding pattern, operation exposure and
experience from various banks.
Terms and Condition: It is important both for the bank and the applicant to safeguard
their interest. This could be achieved by settling at mutually acceptable terms and condition
in order to ensure that both the parties; the lender and borrower perform their part of
obligation, thereby not putting other party at loss. All loans are subject to regulations and
conditions. The legal information relating to these regulations and conditions can be viewed
in this section. It is advisable for both the parties to read the information carefully before
approval.
3.1 OVERVIEW
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Research is formal work undertaken systematically to increase the stock of knowledge and
the use of this stock of knowledge to devise new applications. This chapter deals with
objectives of the study, the objectives are an end that can be reasonably achieved within an
expected timeframe and with available resources. In general, an objective is broader
in scope than a goal, and may consist of several individual goals. It also deals with the
sources from which the data was collected. The research and methodology adopted for the
present study has been systematic and was done in accordance to the objectives.
3.2 RESEARCH DESIGN
The study is analytical in nature as it aims at analyzing the various sources and schemes of
funding. Two types of data are collected, one is primary data and another one is secondary
data.
Primary Data:
Discussion with managers and other staff members at Union Bank of India.
Secondary Data:
Books Database from Banks
Internal reports of the Bank
Websites
E-circulars of the Bank and RBI.
3.3 SCOPE OF THE STUDY
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Offering credit is an operation burdened with risk. Before offering credit to an organization,
its financial health must be analyzed. Credit should be disbursed only after ascertaining
satisfactory financial performance. Based on the financial health of an organization, banks
assign credit ratings. These credit ratings are used to fix the interest rate and quantum of
installment. This study aims to analyze the credit health of organizations that approach Union
Bank of India for foreign exchange credit facilities. After analyzing credit health, the credit
rating is determined. On the basis of credit rating, the interest rate guidelines circular is
consulted to fix a price for the credit facilities i.e. determine the interest rate.
3.4 OBJECTIVES OF THE STUDY
The following are the objectives of the study:
To know the credit rating system and the methodologies applied in the bank.
To assess the financial health of organizations that comes to Union Bank of India for
credit sanctioning regarding import export purposes.
To know the way balance sheet and other financial techniques are used in deciding
whether or not to approve the loan.
To know the other important aspects apart from the financial techniques which are of
equal importance for credit rating and appraisal.
3.5 LIMITATIONS OF THE STUDY
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All research studies also have limitations and a finite scope. Limitations are often imposed by
time and budget constraints. We precisely list the limitations of the study. It describes the
extent to which we believe the limitations degrade the quality of the research.
The limitations specific to this project are as follows:
All the factors affecting the financial health of the bank could not be taken into
consideration as it would have become very complicated
The data for the past years was collected from various secondary sources where some
figures were not exactly mentioned and were rounded off due to which there is the possibility
of minimal error.
Though attempt has been made to collect as much data as possible but for some factors
very less but relevant data was available.
RBI internal guidelines are not available.
4.1 OVERVIEW
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Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with the
goal of highlighting useful information, suggesting, conclusions, and supporting decision
making. In this chapter, the data that was gathered with help of internal reports of bank was
analyzed to reach at the conclusion. Complete process is analyzed with the help of a case study.
Taking M/S SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD. and its balance
sheet as used by the bank.
4.2 M/S. SHIV-VANI OIL & GAS EXPLORATION SERVICES
LTD.
4.2.1 History
Shiv-Vani Oil & Gas Exploration Services Limited (SVOGESL), headquartered in New Delhi,
was incorporated in December 1989, and rapidly evolved to emerge as a key player in the
upstream sector of the oil industry. SVOGESL offers a wide spectrum of services in the field of
oil and natural gas exploration and production. These include shot hole drilling, seismic
surveying, directional drilling, well development, down hole operations, engineering and
logistics, natural gas compression and allied services across 36 sites in India and the Middle
East. Shiv-Vani has expanded its considerable capabilities through the acquisition of cutting
edge technologies, latest equipment and the forging of new partnerships.
4.2.2 Group Companies
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Shiv-Vani Oil & Gas Exploration Services Ltd. (INDIA)
Shiv-Vani Oil & Gas Co. LLC (OMAN)
SV Oil & Nature Gas Limited (MAURITIUS)
SV Videsh Limited (Cyprus)
SV Oil & Natural Gas Limited (MAURITIUS)
Oil Block Holding Limited (Cyprus)
Shiv-Vani Oil Services Limited (India)
Shiv-Vani Singapore PTE Limited (Singapore)
TNG Shiv Geo Oil Services Limited (India)
4.3 EVALUATION OF MANAGEMENT
Market reputation of the promoter / management of the company: Satisfactory
Business managed by qualified personnel: The qualified professionals & experienced
persons are proposed to be appointed for managing the overall operation of the company.
Details of key management personnel of Shiv-Vani Oil & Gas Exploration Services Ltd. are
as under:
Mr. Prem Singhee is the Chairman and Managing Director of the Company since its
inception. He holds a Bachelor’s degree in commerce from Osmania University, and has
more than twenty six years’ of experience in the oil and gas industry. Mr. Singhee is a
brother of Mr. Padam Singhee. He is also a son-in-law of Mr. Dwarka Das Daga.
Mr. Padam Singhee is a Joint Managing Director of the Company. He has been
working with the Company since 1990. He is a graduate in commerce from Osmania
University, and has more than twenty two years’ of experience in the oil and gas industry.
Mr. Prateep Kumar Lahiri has been a Director of the Company since 1995. Mr. Lahiri
holds a Master degree in history from Allahabad University (Uttar Pradesh) and is a
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retired Indian Administrative Service (IAS). He has experience of working in senior
positions with various administrative departments of the State and Central Government.
He served as Executive Director on the resident Board of Directors of Asian
Development Bank, Manila. He was Secretary to the Government of India, Ministry of
Finance, and Department of Revenue. Prior to that he was Secretary to Government of
India in the Ministry of Mines. At present, he is also Director of Vishwakriya Housing
Finance Limited and Bharat Seats Limited. He is also a Chairman, Governing Council &
Executive Board of ISM University, Dhanbad.
Captain Hiteshi Chander Malik has been a Director of the Company since October
2007. He has rich aviation experience with the Ministry of Defense, the Department of
Civil Aviation. He has also worked with the Directorate General of Civil Aviation and
worked in the capacity of Advisor to the Ministry of Civil Aviation and continued to
advise four Honorable Ministers till August 2004.
Mr. Dwarka Das Daga has been a Director of the Company since 1990. He holds a
Bachelor’s degree in commerce from Calcutta University and is currently also working as
a director of Daga Shipping Agents Pvt. Ltd. Mr. Dwarka Das Daga is the father-in-law
of Mr. Prem Singhee.
Mr. Rajneesh Gupta joined the Board on 30 January 2009. He holds a B.Sc degree
from Allahabad University and completed his Engineering in Electrical (Hon.) from
Punjab Engineering College in 1969. He was selected for the All India Engineering
Services Examination 1970 and joined the Indian Telecom Services (ITS) in January
1972 in the Department of Telecommunications of the Government of India.
He has rich experience of 35 years, worked as Chairman & Managing Director of
Mineral Exploration Corporation Ltd. under the Ministry of Mines and worked as
Managing Director of Bharat Gold Mines Ltd.
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Mr. Om Prakash Garg was appointed as a Director of the Company in 1992. He is a
graduate in commerce from Maharishi Dayanand University (Haryana) and has
experience in various industries. He is a Managing Director of Overseas Carpets Ltd. and
a Director of Dwaresh Overseas Construction Pvt. Ltd, New link Overseas Finance Ltd.
and various other organizations/ companies.
Mr. Sachikanta Mishra was appointed as a nominee Director of the Company on 13
February, 2012. He is Post Graduate in Mathematical Economic with about 12
years’ experience macro modeling, strategy, research, financial and management
consulting etc. Currently working as Vice president in IFCI, Managing the Corporate
Advisory Group
Decision making – Is it concentrated? : A committee of directors comprising of
qualified & experienced personnel will professionally manage the company.
Organization structure / Succession planning / Labor relations: The Company will
be a professionally managed company hence, any threat of succession planning is not
perceived.
4.4 Forming Part of financial statements of SHIV-VANI OIL &
GAS EXPLORATION SERVICES LTD.
4.4.1 Significant Accounting Policies
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Basis of preparation of financial statements: These financial statements have been
prepared on an accrual basis and under historical cost convention and in compliance, in
all material aspects, with the applicable accounting principles in India, the applicable
accounting standards notified under section 211 (3C)and the other relevant provisions of the
Companies Act, 1956. All the assets and liabilities have been classified as current or non-
current as per the Company’s normal operating cycle and other criteria set out in Schedule VI
to the Companies Act, 1956. Based on the nature of the products and the time between the
acquisition of assets for processing and their realization in cash and cash equivalent, the
company has ascertained its operating cycle to be less than 12 months.
Use of estimates: The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported balances of
assets & liabilities and disclosure relating to contingent liabilities as at the date of financial
statements and reported amounts of income and expenses during the period. Accounting
estimates could change from period to period. Actual results could differ from those
estimates. Appropriate changes in estimates are made as the Management becomes
aware of change in circumstances surrounding the estimates. Changes in estimates are
reflected in the financial statements in the period in which changes are made, if material,
their effects are disclosed in the notes to the financial statements. The management
periodically assesses using, external and internal sources, whether there is an indication that
an asset may be impaired. An impairment loss is recognized wherever the carrying value of
an asset exceeds its recoverable amount.
An impairment loss for an asset is reversed if, and only if, the reversal can be related
objectively to an event occurring after the impairment loss was recognized. The carrying
amount of an asset is increased to its revised recoverable amount, provided that this amount
does not exceeds the carrying amount that would have been determined (net of any
accumulated amortization).
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Revenue Recognition: Revenue is primarily derived from oil & gas exploitation and
other allied services. The same is accounted for by the Company on the basis of Gross value
of work done. Profit on sale of fixed assets / investments are recorded on transfer of title
from the company and are determined as the difference between the sale price and carrying
value of the fixed asset / investments. Interest is recognized using the time-proportion
method based on rates implicit in the transaction.
Provisions and Contingent liabilities: A provision is recognized if, as a result of a past
event, the company has a present legal obligation that can be estimated reliably, and it is
probable that an outflow of economic benefits will be required to settle obligation. Provisions
are determined by the best estimate of the outflow benefits required to settle the obligation at
the reporting date. Where no reliable estimate can be made, a disclosure is made as
contingent liability. A disclosure for a contingent liability is also made when there is a
possible obligation or a present obligation that may, but probably will not, require an outflow
of resources. Where there is a possible obligation or a present obligation in respect of which
the likelihood of outflow of resources is remote, no provision or disclosure is made.
Provision for onerous contracts, i.e. contracts where the expected unavoidable costs of
meeting the obligations under the contract exceed the economic benefits expected to be
received under it, are recognized when it is probable that an outflow of resources embodying
economic benefits will be required to settle a present obligation as a result of an obligating
event, based on a reliable estimate of such obligation.
Fixed Assets and Capital work-in-progress: Fixed assets are stated at cost, less
accumulated depreciation and impairments, if any. Direct costs are capitalized until fixed
assets are ready for use. Borrowing costs directly attributable to acquisition or construction of
fixed assets, which necessarily take a substantial period of time to get ready for their intended
use, are capitalized. Capital work-in-progress comprises outstanding advance paid to acquire
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fixed assets, and the cost of fixed assets that are not yet ready for their intended use at the
reporting date.
Depreciation and amortization: Depreciation on fixed assets is provided on the
straight-line method at the rate prescribed under Schedule XIV to the Companies Act, 1956.
Depreciation for assets purchased / sold, impaired or discarded during a period is
proportionately charged. Individual low cost assets (acquired for less than Rs. 5000/-) are
depreciated fully in the year of purchase.
Retirement & Other benefits to employees
Gratuity: In accordance with the Payment of Gratuity Act, 1972, the company provides
for gratuity, a defined benefit retirement plan covering eligible employees. The plan
provides a lump-sum payment to vested employees at retirement, death, incapacitation or
termination of employment, of an amount based on the respective employee’s salary and
the tenure of employment with the company subject to conditions specified in aforesaid
act.
Provident Fund: Eligible employees receive benefits of provident fund, which is a
defined benefit plan. Both the employee and the Company makes monthly contribution to
the provident fund plan equal to a specified percentage of the covered employee’s salary.
The rate at which the annual interest is payable to the beneficiaries is being administered
by the government.
Compensated Absence: The employees of the Company are entitled to
compensate absences which are both accumulating and non-accumulating in nature.
The expected cost of accumulating compensated absence is measured based on the
additional amount expected to be paid as a result of the unused entitlement that has
accumulated at the Balance Sheet date. Expenses on non-accumulating compensated
absences are recognized in the period in which the absences occur.
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Foreign Currency Transactions: Investments in foreign entities are recorded at the
exchange rate prevailing on the date of making the investment. Transactions in foreign
currencies are recorded at the rates prevailing on the date of transaction. Monetary items
denominated in foreign currency are restated at the rate prevailing on the balance sheet date.
Exchange difference arising on the settlement of monetary items or on reporting company’s
monetary items at rates different from those at which they were initially recorded during the
year or reported in the previous financial statements, are recognized as income or expense in
the year in which they arise except in case of long term liabilities, where they related to
acquisition of fixed assets, in which case they are adjusted to the carrying cost of such assets.
Taxes: Tax expense comprises of current tax related to earlier years & deferred tax.
Income tax is accrued in the same period when the related revenue and expenses arise. A
provision is made for income tax annually, based on the tax liability computed, after
considering tax allowances & exemption. Provisions are recorded when it is estimated that a
liability due to disallowances or other reason is probable. The difference that result between
the profit considered for Income Taxes and the profit as per the financial statements are
identified, and thereafter a deferred tax asset or deferred tax liability is recorded for timing
differences, namely the differences that originate in one accounting period and reverse in
another, based on the tax effect of aggregate amount of timing difference.
The tax effect is calculated on the accumulated timing difference at the end of an accounting
period based on enacted or substantively enacted regulations. Deferred tax assets are
recognized only to the extent that there is reasonable certainty that sufficient future taxable
income will be available against which such deferred tax assets can be realized. Tax credit is
recognized in respect of Minimum Alternate Tax (‘MAT’) as per the provisions of Section
115JAA of the Income Tax Act, 1961 based on convincing evidence that the Company will
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pay normal income tax within statutory time frame and is reviewed at each Balance Sheet
date. The MAT credit is recognized as an asset in accordance with the recommendation
provided in the Guidance Note issued by the Institute of Chartered Accountants of India.
Earnings per Share: Basic earnings per share are calculated by dividing the net profit or
loss for the period attributable to equity shareholders by the weighted average number of
equity shares outstanding during the period. For the purpose of calculating diluted earnings
per share, the net profit or loss for the period attributable to equity shareholders and the
weighted average number of shares outstanding during the period adjusted for the effects of
all dilutive potential equity shares.
Investments: Investments are classified as long term based on Management’s intention
at the time of purchase. Cost for overseas investment comprises the Indian Rupee value of
the consideration paid for the investment translated at the exchange rate prevalent at the date
of investment. Long-term investments are carried at cost less provisions recorded to
recognize any decline, other than temporary, in the carrying value of each investment.
Impairment of assets: The Company assesses at each balance sheet date whether there is
any indication that an asset may be impaired. If any such indication exists, the Company
estimates the recoverable amount of the asset. If such recoverable amount of the asset or the
recoverable amount of the cash generating unit to which the asset belongs is less than its
carrying amount, the carrying amount is reduced to recoverable amount.
The reduction is treated as an impairment loss and is recognized in the profit & loss account.
If at the balance sheet date there is an indication that if a previously assessed impaired loss
no longer exists, the recoverable amount is reassessed and the asset is reflected at the
recoverable amount subject to a maximum of depreciated historic cost.
Cash Flow Statement : Cash flows are reported using the indirect method, whereby net
profit before tax and extra ordinary items are adjusted for the effects of transactions of a non-
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cash nature, any deferrals or accruals of present or future operating cash receipt or payments
and item of income or expenses associated with investing or financing cash flows. The cash
flows from operating, investing and financing activities of the company are segregated.
Inventories: Stores, spares (consumable & capital) parts & other consumables are valued
at cost on First-in-first-out basis.
Segment Data: The Company considers its principal activity of providing oil and natural
gas exploitation services to be a complete segment and all revenues for the year ended 31
March 2011 have been derived from this segment.
Borrowing Costs: Borrowing Cost that are directly attributable to the acquisition,
construction or production of a qualifying asset, is capitalized as part of the cost of that asset
in accordance with the Accounting Standard 16 on “Borrowing Costs”. Other borrowing
costs are charged to revenue.
Events occurring after the Balance sheet date: Where material, events occurring after
the date of the Balance Sheet are considered up to the date of approval of accounts by the
Board of Directors.
4.4.2 Audited Balance-Sheet of SHIV-VANI OIL & GAS EXPLORATION
SERVICES LTD.
TABLE NO.: 2 (Rs. In Crore)
As At As At
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S.No. Particulars 31.03. 2011 31.03. 2010
(A) SOURCES OF
FUNDS
1. SHAREHOLDER
S' FUNDS
(a) Share Capital 46.36 46.36
(b)Reserves and
Surplus
908.14 954.50 878.26 924.63
2. DEFERRED TAX
LIABILITY
133.80 97.45
3. LOAN FUNDS
(a) Secured Loans 1868.46 1677.70
(b)Unsecured
Loans
458.26 2326.73 51.07 1728.77
Total 3415.03 2750.85
(B) APPLICATION
OF FUNDS
1. FIXED ASSETS
(a) Gross Block 2313.95 2084.74
Less: Depreciation 344.19 244.25
(b) Net Block 1969.76 1840.49
(c) Capital Work-
in-progress
138.25 2108.02 224.33 2064.82
2. INVESTMENTS 56.83 56.78
3. CURRENT
ASSETS, LOANS
& ADVANCES
(a) Inventories 199.08 73.00
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(b) Sundry Debtors 641.05 268.96
(c) Cash & Bank
Balances
245.42 43.02
(d) Loans &
Advances
591.70 629.97
Total 1677.24 1014.95
4. LESS: CURRENT
LIABILITIES &
PROVISIONS
(a) Current
Liabilities
370.47 344.87
(b) Provisions 75.49 57.53
Total 445.95 402.40
1231.28 612.55
(C) MISCELLANEOUS
EXPENDITURE
1. Deferred Revenue
Expenditure
18.90 18.90 16.69 16.69
TOTAL 3415.03 2750.85
4.4.3 Analysis of M/S. SHIV-VANI OIL & GAS EXPLORATION
SERVICES LTD. By Union Bank of India
TABLE NO.: 3
BREAK UP OF BALANCE SHEET (Rs. In Crore)
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S.No. Particulars 31.03.2010 (Aud.)
31.03.2011 (Aud.)
(A) CURRENT ASSETS
1. Cash & Bank Balance 15.59 18.81
2. Investments
a) Govt./Other Trustee Securities
b) Fixed Deposits with banks/ MMMF/ .
27.43 226.61
3. Receivables
a) Inland up to 6 months 197.50 293.05
b) Exports
4. Inventory 73.00 199.08
a) Raw Materials
- Indigenous 52.56
- Imported
b) Stores & Spares
- Indigenous 61.96 117.68
- Imported
c) Stock-in-Process 10.34 28.18
d) Finished Goods
e) Others (Scrap) 0.70 0.66
6. Advances to Suppliers of Raw Materials / Stores/Spares
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7. Advance Tax Payment 47.76 102.71
8. Other Current Assets 225.00 485.45
TOTAL CURRENT ASSETS 586.28 1325.71
(B) CURRENT LIABILITIES
1. Short Term borrowings from bank 139.25 203.00
2. Unsecured Borrowings (include. ICDS etc.)
3. Sundry Creditors 239.33 252.50
4. Advances / Progress payment from Customers/Dep. From dealers
5. Unsecured borrowings from others
6. Installments of TL/DPG/Deb./R.P.Share/ADR/GDR due within one year
176.87 243.23
7. Int. & Other charges accrued & due for payment.
Int. & Other charges accrued but not due
8. Provision for Taxation 48.14 65.71
9. Dividend Payable 4.67 9.34
10. Other statutory liabilities 4.75 0.51
11. Other Current Liabilities / ACCEPTANCES
105.50 117.91
TOTAL CURRENT LIABILITIES 718.52 892.18
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(C) FIXED ASSETS (Net of Depreciation)
1. Land & Building 20.95 20.60
2. Plant & Machinery 1804.60 1935.09
3. Other Fixed Assets 11.78 10.72
4. Furniture & Fixture 3.16 3.36
5. Capital Work in Progress 224.33 138.25
Less: Revaluation Reserves
TOTAL FIXED ASSETS 2064.82 2108.02
(D) LONG TERM LIABILITIES
1. Debentures 250.00
2. Term Deposits
3. Term Loans from Banks/ FIs 1412.01 1273.29
4. Deferred Tax Liability 97.44 133.80
5. Other Term Liabilities (include. ECB/ADR/GDR/Loans etc.
0.65 357.20
TOTAL LONG TERM LIABILITIES
1510.10 2014.29
(E) MISCELLANEOUS ASSETS
Investments 56.78 56.83
1. Amounts due from Associates/ Subsidiaries
316.11 159.04
2. Other Loans & Advances
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3. Bals/Dep. with Government Departments/Statutory Bodies
4. Adv. to Suppliers of Capital Goods
5. INTEREST & OTHER RECEIVABLES
DEFERRED TAX ASSET
6. Security Deposits 1.66 12.15
Book Debts Older than 6 Months 110.91 180.33
7. Other Miscellaneous Assets/ ICD etc.
TOTAL MISCELLANEOUS ASSETS
485.45 408.35
(F) NET WORTH
1. Ordinary Share Capital (Paid up) 46.36 46.36
2. General Reserves 31.00 41.00
3. Revaluation Reserves
4. Share Premium 458.02 458.02
5. Other Reserves 44.60 39.60
6. Balance of Profit 344.64165 369.52
TOTAL NET WORTH 924.63 954.50
(G) INTANGIBLE ASSETS
1. Goodwill
2. Adverse P & L A/c
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3. Other Intangible Assets 16.69 18.90
TOTAL INTANGIBLE ASSETS 16.69 18.90
TOTAL ASSETS 3153.24 3860.98
TOTAL LIABILITIES 3153.24 3860.98
4.4.4 Key Ratios evaluated by Union Bank of India
TABLE NO.: 4
S.No. Particulars 31.03.2010 (Aud.) 31.03.2011 (Aud.)
1. Paid up Capital 46.36 46.36
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2. Reserves & Surpluses 878.26 908.14
3. Intangible Assets 16.69 18.90
4. Tangible Net Worth 907.93 935.60
5. Long Term Liabilities 1510.10 2014.29
6. Capital Employed 2418.03 2949.89
7. Net Block 2064.82 2108.02
8. Investments 56.78 56.83
9. Other Non-Current Assets 428.67 351.53
10. Net Working Capital -132.24 433.52
11. Current Assets 586.28 1325.71
12. Current Liabilities 718.52 892.18
13. Current Ratio 0.82 1.49
14. Debt Equity Ratio 1.66 2.15
15. DER (TOL/TNW) 2.45 3.11
16. SALES & SERVICE
17. - Domestic 1071.80 1222.13
18. - Exports
19. - Job WorkLess: Excise Duty
20. Net Sales & Job Work 1071.80 1222.13
21. Other Income 17.00 11.49
22. Net Profit Before Tax 150.46 84.65
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23. Net Profit After Tax 92.0058 40.65
24. Depreciation 81.72 106.40
25. Cash Accruals 173.73 147.05
26. Percentage(%) of Net Profit to Sales
14.04 6.93
27. ROCE 6.22 0.00
5.1 MAJOR FINDINGS
Capital : Against the authorized share capital of Rs.70 Crore, the paid up capital for
March 2011 is Rs 46.36 Crore. During the year the company has allocated 2457895 equity
share of Rs.10/- each at a premium of Rs.370/- per share to “Templeton Strategic Emerging
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Market Funds III L.D.C on preference basis so there is no increase/decrease of paid up
capital.
Reserve & Surplus : No premium collected for current year. The reserve & surplus
increased by Rs.29.88 Crore over previous year balance of R&S of Rs.878.26 Crore resulting
the net R&S as on 31.03.2011 at Rs.908.14 Crore.
Tangible Net Worth : The TNW increased from Rs.907.93 Crore as of 31.03.2011 to
Rs.935.60 Crore as of 31.03.2011.
Long Term Liabilities : The Term Liabilities increased by Rs.504.19 Crore from
31.03.2010 to 31.03.2011 mainly on account of increase in Deferred Tax liability by
Rs.36.36 Crore & increase in Debentures by Rs.250 Crore & increase in Foreign currency
convertible bonds by Rs.356.55.
Net Block : The Net Block increased by Rs.43.20 Crore from 31.03.2010 to 31.03.2011
mainly due to increase of Rs.130.49 Crore in P&M and Rs0.20 Crore in Furniture & Fixture
but also decrease of Rs.86.08 Crore in Capital work in progress & Rs.0.35 Crore in L&B.
NON Current Assets : On account of decrease in the Loans & Advances, this has been
taken as NCA, the total NCA decreased by Rs.77.10 Crore during 2010-2011.
NWC : Due to increase in the Net Block & decrease in NCA,the NWC increased from
negative(-)Rs.132.24 Crore as of 31.03.2010 to Rs.433.52 Crore as on 31.03.2011.
Current Assets : The CA increased from Rs.586.28 Crore on 31.03.2010 to Rs.1325.71
Crore on 31.03.2011 mainly due to increase in the Sundry debtors and other Current assets.
Current Liabilities : We have considered the Term Loan installments due for payment
during 2011-12 as CL for 31.03.2011. The company has to repay the TL installment of
Rs.243.23 Crore during 2011-2012.WC outstanding also increased from Rs.139.25 Crore
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(31.03.2010 Aud B/s) to Rs.203 Crore(31.03.2011 Aud B/s).The level of Sundry Creditors
also increased by Rs.13.17 Crore which has altogether resulted as increase of Rs.173.66
Crore in total Current liabilities resulting the CL increased from Rs.718.52 Crore as on
31.03.2010 to Rs.892.18 Crore as on 31.03.2011.
Current Ratio & DER : Due to increase in CA, the CR has increased from 0.82 to 1.49
respectively from March2010 to March2011.Though the CR is below than the minimum
prescribed by our bank, however the TOL/TNW for March2011 charge 1% additional
interest for no compliance of the financial covenants including Min. Current Ratio of 1.7:1
and TOL/TNW of 3.50:1. Accordingly we are charging 1% additional interest over the
prescribed ROI of BPLR+0.50%.
Net Income & Profitability : The Company is working as service provider to Oil
Exploration companies such as ONGC Oil India ltd etc. Despite of increase in the Net
Income from Rs.1071.80 Crore during 2009-2010 to Rs.1222.13 during 2010-2011, the Net
Profit after Tax declined from Rs.92.01 Crore to Rs.40.65 Crore during the same period. This
has happened mainly due to increase in the borrowing cost (Interest paid) on Term Loan &
other direct expenses including consumption of Stores and spares. As the total outstanding of
Secured Term Loans declined by Rs.122.99 Crore, the interest and financial charges paid
increses by approx Rs.46.88 Crore.
5.2 DISCUSSION
With the help of secondary data and reports provided by the bank, the findings of the study
are as follows:
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The banks have their own credit rating system and that they try to update it with the latest
method available.
The ratios have a very important role to play; a thorough understanding of them leads one
to the future prospects of the borrower and also tells a lot about its financial soundness.
Another important thing is the balance sheet, its break up and the study of it, tells a lot
about any organization.
Retail loan sector in India has a long way to go; a steady growth is projected in the
coming years.
VI.1 CONCLUSION
Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds
of depositor’s i.e. general public are mobilized by means of such advance / investment. Thus,
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it extremely important for the lender bank to assess the risk associated with credit; thereby
ensure the security for the funds deposited by the depositors. In Union Bank of India, the
credit appraisal is done by thorough study of the project which involves: evaluation of
management, technical feasibility, financial viability and risk analysis.
The credit report is an important determinant of an individual's financial credibility. These
are used by lenders to judge a person's creditworthiness. It renders credit ratings to their
clients on the basis of their loan sanctioned amount, past records, validity and feasibility of
their projects, etc. Every bank has its own credit rating system and it tries to update the
system with the latest method available. In credit rating systems, the ratios have a very
important role to play; a thorough understanding of them leads one to the future prospects of
the borrower and also tells a lot about its financial soundness. Another important thing is the
balance sheet, its break up and the study of it, tells a lot about any organization.
Bank takes the audited balance sheets of their borrowers and breaks it according to their
prescribed Performa, calculates the key ratios and then evaluates the creditworthiness of its
borrowers. From the above analysis, the important or key aspects that Union Bank of India
emphasizes in rating any organization are: organization’s capital, its reserve and surplus,
tangible net worth, its long term liabilities, net block, non - current assets, organization’s net
working capital, its current assets and current liabilities, its current ratio and debt – equity
ratio and organization’s net income and profitability.
VI.2 RECOMMENDATIONS
After carrying on the study, the following recommendations have been made:
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The appraisal system is to be made more realistic and transparent. The applicant and, if
required, his consultant should be briefed on the objective procedures which bank applies
to arrive at decisions so as to educate them to understand the requirements of bank and to
prepare credit proposals in a scientific manner .
The process followed in sanctioning the loan and documentation required is cumbersome;
hence it is suggested to make the process easier.
Bank should develop flexible systems and procedures for dealing with customers and
modify their role to be a facilitator. It may either provide software to these customers to
prepare stock and financial statements or help and guide them in preparation of renewal
proposal / statements.
A few changes and improvements in the policies could help infuse credit appraisal.
The bank should expand its presence in international markets.
Having such a strong technological base, the bank must use these capabilities to
differentiate its products and services from those of its competitors.
Union bank of India should take care that fresh generation of NPA’s should not take
place. It needs more efficient system to assess the quality of assets.
Bank should focus on reducing the expenses as the increase in expenses has badly
affected the growth in net profit.
Bank should increase the number of branches only if they are profitable enough.
REFERENCES
BOOKS:
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Srivastava, R.M & Nigam, Divya (2010): Management of Indian Financial Institution
(10th edition), Himalya Publishing House.
Bhole, L.M (2009): Financial Institution and Markets (5th edition), Tata Mc Graw- Hills.
M.Y.Khan’s, Corporate Finance and Its Basic Usage.
Credit Appraisal, Risk Analysis and Decision Making book, by DD Mukherjee.
Banking Strategy, Credit Appraisal and Lending Decisions: A Risk-Return Framework.
By Bhattacharya, Hrishikesh.
WEBSITES
http://www.rbi.org.in/ , last accessed on 8 August July, 2012
http://www.unionbankofindia.co.in/ , last accessed on 14 August, 2012
http://www.unionbankofindia.co.in/about_us.aspx , last accessed on 18 August, 2012
http://www.unionbankofindia.co.in/PER_retailloans.aspx , last accessed on 25 August,
2012
http://economictimes.indiatimes.com/shiv-vani-oil-&-gas-exploration-services-ltd/
balancesheet/companyid-10432.cms, last accessed on 27 August, 2012
http://www.shiv-vani.co.in/pdf/Annual%20report/AnnualReport2010-11.pdf , last
accessed on 5 September, 2012
http://www.shiv-vani.co.in/pdf/Annual%20report/Annual_Rreport_2012.pdf , last
accessed on 10 September, 2012
http://www.shiv-vani.co.in/pdf/notice/shivani-notice-2011.pdf ,last accessed on 19
September, 2012
http://en.wikipedia.org/wiki/Union_Bank_of_India,last ,accessed on 27 September,2012
Inter – Office And Intra- Office Circulars.
ANNEXURE
Format of Term Sheet
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Union Bank of IndiaIndustrial Finance Branch, New Delhi
APPROVAL OF BROAD TERMS OF THE PROPOSAL
IFB: ADV: Dated:
Name of the account
Account with
Group
Existing connection or
new connection
Credit Rating
Background of promoters
(Rs. In Crores)
Brief Financials
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Year (Aud.) Year (Aud.) Year (Prov.)
Net Sales
PAT(Loss)
TNW*
Current Ratio
TOL/TNW
RATIO
(Rs. In Crores)
Nature of Project
Cost of Project
MEANS OF FINANCE
Nature of Facility
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Amount Rs. (In Crores)
Margin
Interest/Commission
Interest reset
Purpose
Period of the facility
Moratorium
Door To Door Tenor
Repayment terms
Security – Prime
Collateral security
Upfront fees
Prepayment terms
Whether conforms to Loan
Policy
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Customer profitability, (in
case of existing accounts)
1. Commission earned on
bills
purchased/discounted.
2. Processing charges
3. Commission on LC/LG
4. Credit balances in
a. SB
b. CD
5. Term deposits
a. Through own sources
b. Through third party
UNION BANK OF INDIA
Break Up of Balance Sheet
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ACCOUNT:
BRANCH: Industrial Finance Branch, New Delhi
(Rs. In Crore)
S.No. Particulars 31.03.2010 (Aud.)
31.03.2011 (Aud.)
(A) CURRENT ASSETS
1. Cash & Bank Balance
2. Investments
a) Govt./Other Trustee Securities
b) Fixed Deposits with banks/ MMMF/ .
3. Receivables
a) Inland up to 6 months
b) Exports
4. Inventory
a) Raw Materials
- Indigenous
- Imported
b) Stores & Spares
- Indigenous
- Imported
c) Stock-in-Process
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d) Finished Goods
e) Others (Scrap)
6. Advances to Suppliers of Raw Materials / Stores/Spares
7. Advance Tax Payment8. Other Current Assets
TOTAL CURRENT ASSETS
(B) CURRENT LIABILITIES
1. Short Term borrowings from bank
2. Unsecured Borrowings (include. ICDS etc.)
3. Sundry Creditors
4. Advances / Progress payment from Customers/Dep. From dealers
5. Unsecured borrowings from others
6. Installments of TL/DPG/Deb./R.P.Share/ADR/GDR due within one year
7. Int. & Other charges accrued & due for payment.
Int. & Other charges accrued but not due
8. Provision for Taxation
9. Dividend Payable
10. Other statutory liabilities
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11. Other Current Liabilities / ACCEPTANCES
TOTAL CURRENT LIABILITIES
(C) FIXED ASSETS (Net of Depreciation)
1. Land & Building
2. Plant & Machinery
3. Other Fixed Assets
4. Furniture & Fixture
5. Capital Work in Progress
Less: Revaluation Reserves
TOTAL FIXED ASSETS
(D) LONG TERM LIABILITIES
1. Debentures
2. Term Deposits
3. Term Loans from Banks/ FIs
4. Deferred Tax Liability
5. Other Term Liabilities (include. ECB/ADR/GDR/Loans etc.
TOTAL LONG TERM LIABILITIES
(E) MISCELLANEOUS ASSETS
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Investments
1. Amounts due from Associates/ Subsidiaries
2. Other Loans & Advances
3. Bals/Dep. with Government Departments/Statutory Bodies
4. Adv. to Suppliers of Capital Goods
5. INTEREST & OTHER RECEIVABLES
DEFERRED TAX ASSET
6. Security Deposits
Book Debts Older than 6 Months
7. Other Miscellaneous Assets/ ICD etc.
TOTAL MISCELLANEOUS ASSETS
(F) NET WORTH
1. Ordinary Share Capital (Paid up)
2. General Reserves
3. Revaluation Reserves
4. Share Premium
5. Other Reserves
6. Balance of Profit
TOTAL NET WORTH
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(G) INTANGIBLE ASSETS
1. Goodwill
2. Adverse P & L A/c
3. Other Intangible Assets
TOTAL INTANGIBLE ASSETS
TOTAL ASSETS
TOTAL LIABILITIES
ABBREVIATIONS USED
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BOPP Biaxially Oriented Film
CBS Core Banking Solution
VSAT Very Small Aperture Terminal
EMI Equated Monthly Installment
NRO Non Resident Ordinary
NRE Non-resident Indian
CMS Cash Management Services
E-TAX Electronic tax
UBI Union Bank of India
USD Union States Dollar
ATM Automated Teller Machine
CBS Core Banking System
PSBs Public Sector Banks
RBI Reserve Bank of India
BFS Board of Financial Supervision
OSMOS Off-site Monitoring and Surveillance System
CAMELS Capital Adequacy, Asset, Quality, Management, Earning, Liquidity
CRAR Capital to Risk (Weighted) Assets Ratio
GNPA Gross Non Performing Asset
MGNT Management
EL Expected Loss
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PD Probability of Default
EAR Exposure at Risk
LGD Loss Given Default
ROC Registration of Charges
L/C Letter of Credit
L/G Letter of Guarantee
IAS Indian Administrative Service
ITS Indian Telecom Services
GAAP Generally Accepted Accounting Principles
MAT Minimum Alternate Tax
NCA National Credit Act
NWC Net Working Capital
CL Current Liability
CA Current Asset
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