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APPRAISAL OF TRADE FINANCE CREDIT
Summer Project Report
Submitted in partial fulfillment of the requirements For
Master of Management Studies
(2011-13)
SUBMITTED BY
Vinisha Deepak Panchwani Roll No. (PG-11-036)
IES Management College and Research CentreBandra, Mumbai
At
Bank of Baroda
(Opera House)Mumbai
1
IES Management College and Research Centre
Bandra, Mumbai
MAY – JUNE 2012
Student’s DeclarationI hereby declare that this report, submitted in partial fulfillment of the requirement for the award for the Post
Graduate Diploma in Management, to IES Management College and Research Centre is my original work and
not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes.
I further certify that without any objection or condition subject to the permission of the company where I did my
summer project, I grant the rights to IES Management College and Research Centre to publish any part of the
project if they deem fit in journals/Magazines and newspapers etc without my permission.
Place : Mumbai
Date : ____________ Signature
----------------------------
Name : Vinisha Deepak Panchwani
Class : PGDM 2011-13
Roll No : PG-11-036
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ACKNOWLEDGEMENT
This project report is guidance and knowledge imparted to me by various mentors at Bank of
Baroda, Opera House Branch Mumbai during my summer internship. It was very valuable
learning experience for me.
I would like to thank
Mr. Chaudhuri Asst. General Manager
Mr. Atul Kumar Trivedi Asst. General Manager (New)
Mr. Manohar Jadhav Senior Manager Credit
Mr. Vikas Pathak Senior Manager Credit
Mr. Rahul Gamre Officer
Ms. Noorja Mam
Mr. Mayur Gadpade
Ms. Aarti Kabre
I was able to gain insights of credit department in Bank of Baroda within a short period of two
months. Last but not the least I would like to thank each and every staff member and entire
non-staff members of Bank of Baroda family for their support and help as and when required.
My special thanks and gratitude to CA. Pooja Gupta who was instrumental in granting this
project to me.
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Table of Contents
Chapter I: Executive Summary.............................................................................................................................1
1.1 Introduction to Banking Sector.......................................................................................................................2
1.2 Introduction to Bank of Baroda.......................................................................................................................4
1.3 Introduction to Trade Finance.........................................................................................................................8
Need for Trade Finance.....................................................................................................................................8
a) Pre – Shipment Finance...............................................................................................................................9
b) Post – Shipment Finance.................................................................................................................................10
Chapter II: Objective of the Study......................................................................................................................12
2.1 Methodology.................................................................................................................................................13
2.2 Limitations of the study................................................................................................................................14
Chapter III :Analysis and Findings.....................................................................................................................15
3.1 Overview of Loans........................................................................................................................................16
a) Fund based Credit Facility.....................................................................................................................16
b) Non Fund Based Credit Facility............................................................................................................20
3.2 UCP 600........................................................................................................................................................34
3.3 FEDAI Guidelines.........................................................................................................................................36
3.4 Credit Rating.................................................................................................................................................38
3.4 Proposals.......................................................................................................................................................44
3.5 Export Credit Guarantee Corporation (ECGC).............................................................................................50
3.6 CREDIT MONITORING..............................................................................................................................51
a) Monthly Monitoring Report (MMR).....................................................................................................51
b) Consortium Banking..............................................................................................................................52
c) Multiple Banking Arrangement.............................................................................................................53
3.6 CASE STUDY ANALYSIS.........................................................................................................................55
Recommendations...............................................................................................................................................68
References Bibliography.......................................................................................................................................69
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List of Abbreviations
AFS Annual Financial Statement ABS Asset Backed SecurityBPLR Benchmark Prime Lending RateBG Bank GuaranteeBP Bills PurchaseBD Bills DiscountingCMA Credit Monitoring ArrangementCRISIL Credit Rating Information Services of India LimitedCARE Credit Analysis and ResearchCIBIL Credit Information Bureau (India) LtdCA Current AccountCC Cash CreditCGFTMSE Credit Guarantee Fund Trust for Micro and Small
EnterprisesCAG Comptroller and Auditor General of IndiaDER Debt to Equity RatioDP Demand PromissoryDSCR Debt service Coverage RatioEMI Equated Monthly InstallmentECBs External Commercial BorrowingsECGC Export Credit and Guarantee CorporationFD Fixed DepositsFB Fund BasedFBP Foreign Bill PurchaseFBD Foreign Bill DiscountingICRA International Credit Rating AgencyLOC Letter of ComfortLC Letter of CreditMEA Ministry of External AffairsMSE’s Micro and Small EnterprisesMSME’s Micro, Small and Medium EnterprisesMBPF Maximum Permissible Bank FinanceNPA Non Performing AssetsNSC National Savings CertificateNFB Non Fund BasedOD Over DraftPC Packing CreditPAT Profit After TaxTEV Techno Economic Viability StudyTNW Tangible Net worthQMR Quarterly Monitoring ReportsQIS Quarterly Income Statement
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Chapter I: Executive Summary
Bank of Baroda has seen a phenomenal increase in their deposits and advances over the years.
The report highlights various norms and policies followed by the bank before granting bank
finance and monitoring of the account and also a study of banks credit Loan policy, Risk
management, Credit Appraisal and Monitoring of the same.
The project has been focused Appraisal of Trade Finance Credit which shows the overall
concept and mechanism of Trade Finance. It also includes the Fundamental Principles of
Credit Appraisal of Proposals. The Method of study was based on secondary data and various
information was provided by the staff members in Bank of Baroda.
Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit appraisals
for any organization basically follow these steps: Assessment of credit need, financial
statement analysis, financial ratios of the company, credit rating, working capital requirement,
term loan analysis, submission of documents, NPA classification and recovery.
Banks provide various services to the importer and exporter for carrying out International
Trade. Offering Credit is an operation fraught with risk. Before offering credit to an
organization, its financial health must be analyzed. 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 Bank of Baroda for
credit facilities. After analyzing the credit health, the credit rating is determined. On the basis
of credit rating, the interest rate guidelines circular is consulted to fix a price of credit
facilities i.e. determine interest rate.
1
1.1 Introduction to Banking Sector
A snapshot of the banking industry:
Section 6 of the Banking Regulation Act 1949 defines Bank as ‘accepting for the purpose of
lending or investment of deposits of money from public repayable on demand or
otherwise and withdrawable by cheque, drafts order or otherwise’.
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.
Recently, the RBI took a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high-performing sector.
If we look at 5 years historical performance of different types of players in the banking
industry, public sector bank has grown its deposits, advances and business per employee by
the highest rate – 21.7%, 23% and 21.1% respectively. As far as net interest income is
concerned, private banks are ahead in the race by reporting 24.2% growth, followed by pubic
banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per
employee and profit per employee has been the highest for public sector banks, in absolute
terms, foreign banks have the highest business per employee as well as profit per employee.
In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets as compared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend, private banks an increasing trend and Public banks have been more or less stagnant. The net NPA of public sector bank was also significantly higher than that of private and foreign banks at the end of FY11, which indicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also very high for private and foreign bank as compared to public banks.
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After looking at industry performance, let’s see how the different players in the Banking Industry have performed in the last five years
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1.2 Introduction to Bank of Baroda
Brief History:
Bank of Baroda is having a long, eventful and glorious history of more than 103
years. HH Sir. Maharaj Sayajirao-III founded the Bank.
The Bank made a humble beginning in 1908 in a small building in Baroda. On 20 th
July 1908 Bank of Baroda Limited was registered under the Baroda Companies Act
of 1897, with a paid up capital of Rs. 10 lacs. Soon after establishment, the Bank
extended its operations to three other commercial centers of Gujarat namely, Surat,
Mehsana and Navsari. In 1919, the Bank crossed the state frontiers by setting up
Mumbai Main Office.
In the year 1935 Bank became a scheduled Bank. RBI included the Bank in the second
schedule of RBI and brought under direct control of RBI. The first safe deposit lockers were
provided at Baroda in 1939. At the time of independence in 1947, Bank of Baroda was a
regional bank with 48 branches. However, it found a place in India’s ‘Fortune Five’ list of
Banks.
Board of Directors
1. Shri M.D. Mallya : Chairman & Managing Director
2. I) Shri Rajiv Kumar Bakshi : Executive Director
II) Shri N S Srinath : Executive Director
Mission Statement: “To be a top ranking National Bank of International Standards committed to
augmenting stake holders' value through concern, care and competence.”
4
Subsidiaries (Domestic):
Nainital Bank Ltd., BOBCARDS Ltd., BOB Capital Market Ltd.
Associates (Domestic):
Baroda Pioneer Asset Management Company Ltd
India First Life Insurance Company Limited
Baroda Uttar Pradesh Gramin Bank
Baroda Rajasthan Gramin Bank
Baroda Gujarat Gramin Bank
Nanital -Almora Kshetriya Gramin Bank
Jhabua-Dhar Kshetriya Gramin Bank
Subsidiaries (Overseas):
Bank of Baroda (Botswana) Ltd.
Bank of Baroda (Kenya) Ltd.
Bank of Baroda (Uganda) Ltd.
Bank of Baroda (Guyana) Ltd.
Bank of Baroda (UK) Ltd.
Bank of Baroda (Tanzania) Ltd
Bank of Baroda (Trinidad & Tobago) Ltd.
Representative Offices (Overseas)
Bank of Baroda (Thailand)
Bank of Baroda (Australia)
Associate (Overseas)
Indo-Zambia Bank Ltd. (Lusaka)
Awards for the Bank
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Best Public Sector Bank (PSB) by CNBC-TV18 & MCX
Golden Peacock Award for Excellence in Corporate Governance by Institute of
Directors & World Forum for Corporate Governance received in London
Dainik Bhaskar India Pride Award for 2011
Most Efficient Bank in Kenya
Best Initiatives in Inclusive Banking – FIBC Banking Award
Dun & Bradstreet’s Leading PSB in “Global Business Development Category”
National Award for Performance under SME Business
Award for Best Utilisation of Intellectual Resources
Best Growing Large Bank by Business World-PWC
Business Leadership Award by NDTV- Best PSB in 2011
Award for Excellence in Financial Reporting by ICAI in PSB category
Strategies and Action Points
Resource Mobilization
Resource Deployment
Financial Inclusion
Non-interest Income
Wealth Management
Alternate Delivery Channels
Asset Quality Management
Organizational Restructuring & BPR
HR & Support Services
To Be Most Admired Bank
Particulars Mar'12 Mar'11 Mar'10 Mar'09 Mar'08
6
Liabilities 12 Months 12 Months 12 Months 12 Months 12 Months
Share Capital 412.38 392.81 365.53 365.53 365.53
Reserves & Surplus 27,064.47 20,600.30 14,740.86 12,470.01 10,678.40
Net Worth 27,476.85 20,993.11 15,106.38 12,835.54 11,043.93
Secured Loans 23,573.05 22,307.85 13,350.08 5,636.09 3,927.05
Unsecured Loans 384,871.11 305,439.48 241,044.26 192,396.95 152,034.13
TOTAL LIABILITIES 435,921.01 348,740.45 269,500.73 210,868.58 167,005.10
Assets
Gross Block 4,921.59 4,548.16 4,266.60 3,954.13 3,787.14
(-) Acc. Depreciation 2,580.09 2,248.44 1,981.84 1,644.41 1,360.14
Net Block 2,341.50 2,299.72 2,284.76 2,309.72 2,427.01
Capital Work in Progress. 0.00 0.00 0.00 0.00 0.00
Investments. 83,209.40 71,260.63 61,182.38 52,445.88 43,870.07
Inventories 0.00 0.00 0.00 0.00 0.00
Sundry Debtors 0.00 0.00 0.00 0.00 0.00
Cash And Bank 64,168.54 49,934.07 35,467.06 24,087.12 22,299.29
Loans And Advances 297,602.02 234,902.76 179,382.50 148,564.01 111,003.15
Total Current Assets 361,770.56 284,836.83 214,849.56 172,651.13 133,302.44
Current Liabilities 11,400.46 9,656.73 8,815.97 16,538.15 12,594.41
Provisions 0.00 0.00 0.00 0.00 0.00
Total Current Liabilities 11,400.46 9,656.73 8,815.97 16,538.15 12,594.41
NET CURRENT ASSETS 350,370.11 275,180.10 206,033.59 156,112.98 120,708.03
Misc. Expenses 0.00 0.00 0.00 0.00 0.00
TOTAL ASSETS
(A+B+C+D+E)435,921.01 348,740.45 269,500.73 210,868.58 167,005.10
PROGRESS AT A GLANCE OF BANK’S PERFORMANCE
1.3 Introduction to Trade Finance
7
Credit and Finance is the life blood of any business whether domestic or international. It is
more important in the case of Export transactions due to the prevalence of novel non- price
competitive techniques encountered by exporters in various nations to enlarge their share of
world markets. The selling techniques are no longer confined to mere, quality, price or
delivery schedules of the products but are extended to payment terms offered by exporters.
Liberal payment terms usually score over the competitors not only of capital equipment but
also of consumer goods. The payment terms however depends upon the availability of finance
to exporters in relation to its quantum, cost and the period at pre- shipment and post- shipment
stage.
Need for Trade Finance To cover commercial & Non-commercial or political risks attendant on granting credit to
a buyer.
To cover natural risks like an earthquake, floods etc.
An exporter may avail financial assistance from any bank which considers the ensuing
factors:-
Availability of funds at the required time to the exporter.
Affordability of the cost of funds.
Guidelines for Banks dealing in Trade Finance
When a commercial bank deals in export finance it is bound by the ensuing guidelines:
a. Exchange control regulations.
b. Trade control regulations.
c. Reserve Bank’s Directives.
d. Export Credit Guarantee Corporation Guidelines.
e. Guidelines of Foreign Exchange Dealers Association of India.
Bank now have a look at the different types of export finance. Basically the point separating
the two types of finances is related to whether the financial assistance is granted to an
exporter prior to or after the shipment of the goods. Thus, as indicated above the two types of
export finances are as follows:-
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Pre- Shipment Finance
Post- Shipment Finance
a) Pre – Shipment FinanceFinancial assistance extended to the exporter from the date of receipt of the export order till
the date of shipment is known as Pre-Shipment credit. Such finance is extended to an exporter
for the purpose of procuring raw materials, processing, packing, transporting, warehousing of
goods meant for exports. Pre- Shipment Finance is available in the form of packing credit and
advances against receivables from the government like duty drawback, etc.
Pre – Shipment Finance is essentially a working capital advance made available for specific
purpose of procuring or processing or manufacturing of goods meant for export.
Two essential features of packing credit advances are:-
a. There should be an export order or a letter of credit.
b. The advances to be liquidated from the relative export proceeds.
Importance of Finance at Pre-Shipment Stage:
To purchase raw material and other other inputs to manufacture goods.
To assemble the goods in the case of merchant bankers.
To store the goods in suitable warehouses till the goods are shipped.
To pay for packing, marking and labeling of goods.
To pay for pre-shipment inspection charges.
To import or purchase from the domestic market heavy machinery and other capital
goods to produce export goods.
To pay for consultancy services.
To pay for export documentation expenses.
b) Post – Shipment FinanceIt is the loan or credit given by an institution to the exporter from the date of extending the
credit (after the shipment of goods) to the date of realization of export proceeds.
9
Post- Shipment finance is available in the form of:
Duty export bills purchased/ negotiated/ discounted.
Advances against bills sent on collection basis.
Advances against export on consignments basis.
Advances against drawback.
Advances against undrawn balances.
It is essentially an advance against receivables which will be in the form of shipping
documents.
Credit facility extended to an exporter from the date of shipment of goods till the realization
of the export proceeds is called Post-Shipment Credit.
Importance of Finance at Post-Shipment Stage:
To pay to agents/ distributors and others for their services.
To pay for publicity and advertising in the overseas market.
To pay for port authorities, custom and shipping agents charges.
To pay towards export duty or tax, if any.
To pay towards ECGC premium.
To pay for freight and other shipping expenses.
To pay towards marine insurance premium, under CIF contracts.
To meet expenses in respect of after sale services.
To pay towards such expenses regarding participation in exhibitions and trade fairs in
India and abroad.
To pay for representatives abroad in connection with their stay board.
The following are the Salient Features of Post-Shipment Finance: -
1) In the case of bills purchased, discounted or negotiated, interest for transit period up to
notional due date would be charged at the time of negotiation, purchase or discount.
10
2) If in the above case, proceeds are credited to the ‘Nastro’ accounts of banks before the
expiry of normal transit period, in the case of demand or usance bills, interest is recovered
for actual number of working days for which finance is outstanding.
3) Interest is charged up to the date of reversal of rupee liability for advances against bills on
collection basis.
4) Where export bills are not realized within 180 days from transit period, they would not be
eligible for concessional interest and would attract overdue interest.
5) If the packing credit advances were not liquidated from the export proceeds they would
not be eligible for concessional interest but would attract commercial interest from the
date of availment of preshipment advances.
6) Post shipment advances not realized, but recovered by debit of exporter accounts would
also attract commercial rate of interest from the date of availment of post shipment
advance.
Chapter II: Objective of the Study
1. To find out the role of Trade finance and credit appraisal of Bank of Baroda.
2. To study procedure adopted in evaluating credit proposal by using case analysis.
11
3. To understand the rules laid down by bank for lending of money.
2.1 Methodology
12
Since the research carried out for this project is descriptive in nature, the various documents
and official files would require for understanding the methodology used by the banks. The
data collection can be done by personal interview or direct observations. At the same time,
related articles, newspapers, magazines, in-house journals of banks, etc were referred. The
information on the project under consideration can be obtained by the bank employees and
officials. Also I went through various files and the official correspondence of the bank for
better understanding the topic under the study. The methodology also include finding out the
financial ratio, understanding the credit rating and assessment of working capital and term
loan of the companies by making the fresh proposal for working capital and term
2.2 Limitations of the study
13
As the credit rating is one of the crucial areas for any bank, some of the technicalities
are not revealed which may have cause destruction to the information and our
exploration of the problem.
As some of the information is not revealed, whatever suggestions generated, are based
on certain assumptions.
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, our analysis was of limited areas only.
Chapter III :Analysis and Findings
14
Process for Credit appraisal
Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties
documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc.
|
Title clearance reports of the properties to be obtained from empanelled advocates
|
Valuation reports of the properties to be obtained from empanelled valuer/engineers
|
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of accounts, renew of
accounts, etc
3.1 Overview of Loans
15
Bank’s Credit Facilities
a) Fund based Credit Facility: Fund based functions of a bank are those in which banks
make deployment of their funds either by granting advances or by making investments for
meeting gaps in funds requirements of their customers/ borrowers. Fund-based functions of
a bank may be classified as follows:
Fund Based Credit Facilities
Working Capital Facility: Working Capital is the blood of business. No business can
survive without adequate working capital. Working Capital is that part of the capital required
to purchase raw materials, meet the salaries and wages of employees meet movement
expenses of goods and similar recurring expenses. It takes into account trade credit to
customers and from suppliers. The timing mismatch and the transfer to title of the product and
settlement of dues along with routine expenses (salaries, communication expenses, etc) give
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Fund Based Credit Facilities
Non-Fund Based Credit Facilities
Cash Credit
Overdraft Packing Credit
Bills Purchasing/Bills
Discounting
rise to the demand for short term funds, generally known as working capital funding
requirement.
1. Cash Credit: Cash Credit makes a provision by bank for loan by depositing the sanctioned
amount of the loan into new account from which borrower can withdraw as per requirement
within permissible amount fixed by bank for specific time or period.
Cash credit theory based on “Pay on Demand”. It is provided for a period of less than 12
months i.e. 1 year. Cash credit facilities fulfill the requirement of working capital which is
needed to run daily operation in a business concern. It is needed against local purchase of Raw
material, Book debts, Receivables, stocks etc. It is similar to loan but different from
conventional loan. In this system, Bank maintains a Cash Credit Account for their borrower.
Cash credit makes a provision for credit by transferring the sanctioned amount into Cash Credit
Account from which borrower can withdraw as per their requirement. Borrower can withdraw
money within sanctioned “limit” & “daily limit”. Cash Credit Account almost similar to Current
Account but it’s not Current Account. In cash credit system, interest charged on amount
actually withdrawn in daily basic. Borrower can’t withdraw total sanctioned amount of loan at a
time.
Bank or holds Stock or Book Debt (as security) against advance sanctioned. The security or
guarantee remains accessible by Bank until Cash Credit repaid in full. Depending on the
security holds, Cash Credit facility is two types i.e. Pledge (where Bank holds physical control
of stock & book debt.) & Hypothecation (borrower holds total control of stock and submits
periodical statement of stock to the lender). Cash Credit-Hypothecation system is broadly used.
Cash credit amount is pre-approved and the repayment of loan is the same whether borrower is
using cash credit or not. If cash credit amount is paid off before term of loan is complete,
borrower is liable to pay penalty fee of 2 % based on of loan amount.
17
This is the process followed under Cash Credit Facility
Application form is accepted and acknowledged.
Personal interview /discussions are held with the customers by the bank’s officials.
Bank's Field Investigation team visits the business place/work place of the applicant.
(All the documents submitted are verified by the bank with the originals so as to ensure
the authenticity of the same.)
Bank verifies the track record of the applicant with the common information sharing
bureau (CIBIL).
In case of fresh projects the bank analyses the back ground of the
applicant/firm/company and the Technical feasibility/financial viability of the project
based on various parameters and also the existing market conditions.
Depending on the size of the project the file is put up for sanction to the appropriate
level of authority.
2. Overdraft: It can avail Loan against NSC/KVP/Relief bonds of RBI/LIC policies to meet any
expenses. All properly introduced individual customers, who have capacity to service the
loan and interest, are eligible for this facility.
This facility provided for a period of less than 12 months i.e. 1 Year which means that it is
reviewed every year. The security to be provided is Charge on securities of Govt. /PSUs,
Pledge of NSCs/IVP/ KVP/LICs etc or any other such security transferable/assignable to the
Bank. The Documents to be submitted are Salary Certificate / IT Return copy for assessing
the capacity to service the interest / installment and Original NSC / KVP/ RBI Relief Bond /
LIC Policy.
This is the process followed in overdraft facility:
Application form is accepted and acknowledged.
Personal interview /discussions are held with the customers by the bank’s officials.
18
Bank's Field Investigation team visits the business place/work place of the applicant. (All the
documents submitted are verified by the bank with the originals so as to ensure the
authenticity of the same.)
Bank verifies the track record of the applicant with the common information sharing bureau
(CIBIL).
In case of fresh projects the bank analyses the back ground of the applicant/firm/company
and the Technical feasibility/financial viability of the project based on various parameters
and also the existing market conditions.
Depending on the size of the project the file is put up for sanction to the appropriate level of
authority.
3. Packing Credit: Packing credit is a loan/ cash credit facility sanctioned to an exporter in the
Pre-Shipment stage. This loan facilitates the exporter to purchase raw materials at competitive
rates and manufacture or produce goods according to the requirement of the buyer and
organize to have it packed for onward export. The lending institutions seek a Letter of Credit
opened in favour of the exporter from the overseas buyer along with the irrevocable (cannot
be canceled once drawn) Purchase Order favoring the exporter.
Packing Credit facility will cover all the working capital needs of the exporter including raw
materials, wages, packing costs and all pre-shipment costs.
Packing credit is available for generally a period of 90 days and the exporter has to pay lower
rate of interest compared to traditional Overdraft or Cash Credit facility.
Exporters use this facility so they can bid the most competitive price for export thus gaining
more business opportunities for export.
The process followed for packing credit facility is as follows:
Discussions and Meetings are held with the customers by the bank’s officials.
Bank's Field Investigation team visits the business place/work place of the applicant.
This investigation is to be carried out by professionals or Experts wherever necessary.
19
(All the documents submitted are verified by the bank with the originals so as to
ensure the authenticity of the same.)
Bank verifies the track record of the applicant with the common information sharing
bureau (CIBIL) and RBI Caution list.
In case of fresh projects the bank analyses the back ground of the
applicant/firm/company and the Technical feasibility/financial viability of the project
based on various parameters and also the existing market conditions through TEV
(Techno Economic Viability) Study.
Depending on the size of the project the file is put up for sanction to the appropriate
level of authority.
4. Bills Purchasing (BP) / Foreign Bills Purchasing (FBP): Bill purchase facility is extended
against clean demand bills like Cheques/ drafts/ bills of exchange/ hundies and demand
documentary bills.
The following points to be considered while purchasing clean bills/ Cheques:-
Bills/ cheques should be purchased from account holders.
Cheques drawn on scheduled and other first class banks should only be purchased.
Stale cheques and post dated cheques should not be purchased.
Cheques drawn by the borrowers on themselves, on their branches and associate concerns
and/or on their close relatives should not be purchased.
Where clean bills are drawn in respect of goods already supplied, it should satisfy about
the bonafides of the transaction.
b) Non Fund Based Credit Facility: Credit facilities, which do not involve actual deployment
of funds by banks but help the obligations to obtain certain facilities from third parties, are termed as non-fund based facilities. These facilities include issuance of letter of credit, issuance of guarantees, which can be performance guarantee/financial guarantee/ deferred payment guarantee and Letter of Comfort. For its export financing purposes as well as for supplying and erection of transmission it mainly uses non fund based working capital.
20
Non Fund Based
Bank Guarantee
A contract of guarantee is defined as ‘a contract to perform the promise or discharge the
liability of the third person in case of the default’. There are three parties to the contract of
guarantees:
a) Principal debtor : person at whose request the guarantee is executed
b) Beneficiary : Person to whom the guarantee is given & who can enforce it in case of
default.
c) Surety : The person who undertakes to discharge the obligations of the applicant in
case of his default.
Thus, guarantee is a collateral contract, consequential to a main contract between the Principal
Debtor & the beneficiary.
For every issue of guarantee postage charges is charged in all the cases irrespective of bank
guarantee amount.
Guidelines on conduct of Bank Guarantee business
Branches, as a general rule, should limit themselves to the provision of financial guarantees &
exercise due caution with regards to performance guarantee business. The subtle difference
between the two types of guarantees is that under a financial guarantee, a bank guarantee’s a
customer financial worth, creditworthiness & his capacity to take up financial risks. In a
performance guarantee, the bank’s guarantee obligations relate to the performance related
obligations of the applicant (customer).
While issuing financial guarantees, it should be ensured that customers should be in a position
to reimburse the Bank in case the Bank is required to make the payment under the guarantee.
In case of performance guarantee, branches should exercise due caution & have sufficient
experience with the customer to satisfy themselves that the customer has the necessary
21
Bank Guarantee Letter of credit Letter of comfort
experience, capacity, expertise, & means to perform the obligations under the contract & any
default is not likely to occur.
Branches should not issue guarantees for a period more than 18 months without prior
reference to the controlling authority. Extant instructions stipulate an Administrative
Clearance for issue of Bank Guarantee’s for a period in excess of 18 months. However, in
cases where requests are received for extension of the period of BGs as long as the fresh
period of extension is within 18 months. No bank guarantee should normally have a maturity
of more than 10 years. Bank guarantee beyond maturity of 10 years may be considered
against 100% cash margin with prior approval of the controlling authority.
More than ordinary care is required to be executed while issuing guarantees on behalf of
customers who enjoy credit facilities with other banks. Unsecured guarantees, where
furnished by exception, should be for a short period & for relatively small amounts. All
deferred payment guarantee should ordinarily be secured.
Appraisal of Bank Guarantee Limit
Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base
limits. Branches may obtain adequate cover by way of margin & security so as to prevent
default on payments when guarantees are invoked. Whenever an application for the issue of
bank guarantee is received, branches should examine & satisfy themselves about the
following aspects:
a) The need of the bank guarantee & whether it is related to the applicant’s normal
trade/business.
b) Whether the requirement is one time or on the regular basis
c) The nature of bank guarantee i.e., financial or performance
d) Applicant’s financial strength/ capacity to meet the liability/ obligation under the bank
guarantee in case of invocation.
e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances
of invocation of bank guarantees, the reasons thereof, the customer’s response to the
invocation, etc.
f) Present o/s on account of bank guarantees already issued
22
g) Margin
h) Collateral security offered
Extension of Bank Guarantee
Once the validity period of guarantee gets over it can be extended further. There are some
charges for extension of guarantee so along with the processing charges this extension charges
which includes some amount which is to be added and with that service tax of 12.36% on the
clubbed amount.
General Guidelines For all public sector Banks
As regards the purpose of the guarantee, as a general rule, the banks should confine
themselves to the provision of financial guarantees and exercise due caution with regard to
performance guarantee business.
As regards maturity, as a rule, banks should guarantee shorter maturities and leave longer
maturities to be guaranteed by other institutions.
No bank guarantee should normally have a maturity of more than 10 years. However, in view
of the changed scenario of the banking industry where banks extend long term loans for
periods longer than 10 years for various projects, it has been decided to allow banks to also
issue guarantees for periods beyond 10 years. While issuing such guarantees, banks are
advised to take into account the impact of very long duration guarantees on their Asset
Liability Management. Further, banks may evolve a policy on issuance of guarantees beyond
10 years as considered appropriate with the approval of their Board of Directors.
Types of bank Guarantees
1. Financial Bank Guarantee: Financial Bank Guarantee is a bond which is not cancelable and
ensures the payment of the interest and repayment of the principal amount as per the
schedule agreed upon by both the borrower and the lender. A guarantor to this debt security
23
is liable to pay off the liability in case the first party or the issuer of the Financial Bank
Guarantee fails to make the payment.
In Bank of Baroda Financial Guarantees comes for Payment to Tax Authorities, Revenue
Authorities, Payment of Excise Duties, Job Disputed claims (Claim on Property).In case of
Financial Guarantees usually100% margin is taken. Comparatively the commission charges
are higher in this particular guarantee. The Commission rate as on date is 0.28% per month.
For E.g.:- A bank guarantee for 116761/- was sanctioned for a period of 3 months i.e. from
12.06.2012 – 9.09.2012 against FD of 117000 from an XYZ company and beneficiary being
Federation of Indian Chambers of Commerce & industry. So the Commission will be
116761*0.28%*3 (months).
2. Performance Bank Guarantee: The seller issues a Performance Bank Guarantee to ensure
or give concrete commitment to the buyer through its bank. This method ensures the buyer
the timely execution of an agreement to have the goods exported or delivered or services
performed. In case the seller defaults on execution of the terms agreed upon the
Performance Bank Guarantee ensures the buyer the payment of the guarantee amount by the
issuing bank. Generally the performance Bank guarantee is 10 percent of the total
assignment or project value.
In Bank of Baroda Performance Guarantees usually takes 15 – 25 % margin is taken.
Comparatively the commission charges are lower in this particular guarantee. The
Commission rate as on date is 0.23% per month.
For E.g.:- Bank’s Performance guarantee of Rs 14660/- margin being 25% requested by
ABC Company and beneficiary being TATA Institute of Social Science. Performance based
on the word done for “Mini Modernization, DOL Control Panel, Landing Lock,
Complete Harnessing, COP & LPB Complete”.
24
3. Deferred Bank Guarantee: It is type of Financial Guarantee. Usually this is not used
Earlier this was used. The payment is to be made in terms of Installment. Every time Bank’s
Liability will be reduced to the extent of payment made.
For E.g.: If XYZ takes Machinery worth 24 Cr and payment is to be made in 2 years than
every month they need to pay 1 Cr with interest. If in case company defaults to pay in a
particular month the bank is liable to pay in a particular month the bank is liable to pay for
that particular month or else for all the remaining months depends on terms and conditions
of the contract.
Letter of credit
Definition
In simple terms, a letter of credit is a bank undertaking of payment separate from the sales or
other contracts on which it is based. It is a way of reducing the payment risks associated with
the movement of goods.
Expressed more fully, it is a written undertaking by a bank (issuing bank) given to the seller
(beneficiary) at the request, and in accordance with the buyer’s (applicant) instructions to
effect payment — that is by making a payment, or by accepting or negotiating bills of
exchange (drafts) — up to a stated amount, against stipulated documents and within a
prescribed time limit.
Why use a Letter of Credit?
The need for a letter of credit is a consideration in the course of negotiations between the
buyer and seller when the important matter of method of payment is being discussed. Payment
can be made in several different ways: by the buyer remitting cash with his order; by open
account whereby the buyer remits payment at an agreed time after receiving the goods; or by
documentary collection through a bank in which case the buyer pays the collecting bank for
25
account of the seller in exchange for shipping documents which would include, in most cases,
the document of title to the goods. In the aforementioned methods of payment, the seller relies
entirely on the willingness and ability of the buyer to effect payment. When the seller has
doubts about the credit-worthiness of the buyer and wishes to ensure prompt payment, the
seller can insist that the sales contract provides for payment by irrevocable letter of credit.
Furthermore, if the bank issuing the letter of credit (issuing bank) is unknown to the seller or
if the seller is shipping to a foreign country and is uncertain of the issuing bank’s ability to
honour its obligation, the seller can, with the approval of the issuing bank, request its own
bank to assume the risk of the issuing bank by confirming the letter of credit.
Typical Documents required includes:
Transport Documents:
Transport Document Covering at Least Two Different Modes of Transport
(multimodal or combined transport document)
Bill of Lading
Non-Negotiable Sea Waybill
Charter Party Bill of Lading
Air Transport Document
Road, Rail or Inland Waterway Transport Documents
Insurance Documents:
Insurance Policy
Insurance Certificate
Open Cover
Financial Documents:
Bill of exchange (Draft)
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Commercial Documents:
Commercial Invoice
Packing List; Weight List
Inspection Certificate
Certificate of Analysis
Official Documents:
Certificate of Origin
Health Certificate
Consular Invoice, Legalized Invoice
Parties Involved in Letter Of Credit
Applicant: The buyer or importer of goods.
Issuing Bank: Importer’s bank who issue the L/C.
Beneficiary: The party to whom the L/C is addressed. The seller or supplier of goods.
Advising Bank: Issuing Bank’s branch or correspondent bank in the exporter’s country to
whom the L/C is send for onward transmission to the beneficiary.
Confirming Bank: The Bank in beneficiary country, which guarantees the credit on the
request of the issuing bank.
Negotiating Bank: The bank to whom beneficiary presents his documents for payment of
L/C.
Types of Letter of Credit
Revolving Letter of Credit
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A Letter of Credit issued for a specific amount within which series of BP or BN are
purchased/ negotiated. The limit will be automatically reinstated on retirement of earlier bill
purchased or negotiated, is called Revolving Letter of Credit. Bank should recover the
commission on each reinstatement.
In case of Revolving L/C's aggregate turnover of bills under the L/C within the validity period
of L/C in addition to a suitable limit for single transaction should be specified.
Red Clause and Green Clause Letter of Credit
Red clause Letter of credit which authorize the bank to provides finance to exporter at the pre-
shipment stage which is known as packing credit finance. The credit facility granted under
such letter of credit is to be liquidated by purchase or negotiation of Bills under the L/C.
Green Clause letter of Credit is one which authorized the bank to grant further finance to
exporter for storage of goods in the name of bank, payment of dockyard, port and insurance
charges etc. Before the shipment is taking place.
Stand - By Letter of Credit
In certain countries where issuance of guarantee is prohibited, banks are issuing stand by L/C.
This L/C guaranteed the payment in the event of failure of the opener to perform the
contractual obligations.
Stand by credit is one which provides for tendering of documents relating to transactions
between the buyer and seller at the counter of the issuing bank for settlement of transactions
in case of failure of the buyer. The stand by L/C also provides for availing finance by the
seller or exporter from the bank, before the transactions are settled.
Back to Back Letter of Credit
28
On many occasion, it may happen that the beneficiary of letter of credit has to procure raw
materials or finished goods etc. from various suppliers. He will request his banker to issue
letter of credit in favour of these suppliers on the basis of letter of credit he is having.
The letter of credit issued in favour of the local or other suppliers as above is called back to
back letter of credit. The terms and conditions of such back to back L/C should be in
conformity with the original letter of credit.
Transferable Credit
When a letter of credit authorize to transfer the credit to the second beneficiary at the request
of first beneficiary to the extent of amount and quantity of goods. This is called transferable
credit. This credit can be transferred once only. This means that second beneficiary can not
transfer the portion allotted to him to next supplier. However, the first beneficiary has a right
to substitute the invoice etc.
Letter of Credit Process
29
1. The exporter and importer sign a bill of sale contract.
2. The importer applies to his bank, the issuing bank, to open a letter of credit.
3. The issuing bank sends the advice of the credit to the advising bank.
4. The exporter is advised of the credit.
5. Following shipment of the goods, the exporter presents the documents to the advising bank.
6. After checking the documents and confirming that they agree with the letter of credit terms,
payment is made to the exporter. At the same time, the advising bank sends the documents to
the issuing bank and requests reimbursement for the letter of credit amount plus the advising
bank's fees and expenses.
7. The issuing bank sends the documents to the importer and debits his account for the letter
of credit amount plus the fees and expenses of the banks involved.
Import and Export Letter of Credit
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Import Letter of Credit
Import letter of credit means a commercial letter of credit established in favor of an exporter.
It is usually issued by a domestic bank in favor of a foreign seller at an importer’s request.
Import letter of credit has several benefits such as:
a. It ensures control and security because payment is made only against the documents
specified;
b. It ensures the advantage of experience;
c. It enhances the bargaining position; and
d. It improves the competitive status particularly with suppliers who insist on payment by
letter of credit.
Import Process Involving a Letter of Credit
1. The importer first request a quote for the merchandise. This may or may not include
transportation and insurance costs.
2. The importer prepares a purchase order based on the offer received from the exporter.
3. The exporter creates a pro forma invoice and sends it to the importer.
4. The importer opens a letter of credit with the opening bank in the country.
This involves advising the bank of the documents required from the exporter. As an
importer, you not only need the documents required by customs, but also the
documents that are required by any other agency regulating your commodity. These
may include
Bills of lading
Commercial invoice
Export packing list
Certificate of Origin
Insurance certificates
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Licenses (when necessary)
Export Letter Of Credit
It all depends on your point of view. From the seller's (beneficiary's) perspective, a
commercial letter of credit from a foreign country is an export credit. To the buyer
(applicant), the same letter of credit is an import credit. An export credit is a conditional
payment mechanism whereby the issuing bank irrevocably promises to pay the seller, if
presented documents comply with all of the L/C's terms and conditions. As the issuing bank's
undertaking is conditional, a commercial letter of credit is not a guarantee of payment.
Export Process Involving a Letter of Credit
The importer requests a quotation for goods.
1. The exporter sends the importer a quotation for the goods.
2. The importer sends the exporter a purchase order based on quotation.
3. The exporter creates a sales order based on the purchase order and sends it to the
importer, together with the invoice.
4. Optional: Exporter notifies the importer of the exact delivery date and delivery
quantity of the goods in an inbound delivery.
5. The importer opens a letter of credit at the opening bank in the country of destination
(import country).
6. This letter of credit defines which documents are required by the customs authorities
and other parties involved in handling your goods traffic, for example:
1. Bill of lading
2. Commercial invoice
3. Export packing list
4. Certificate of origin
5. Insurance certificates
6. Licenses (if needed)
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7. An Exporter can create and print all the above documents for customs processing,
aside from the insurance certificates. The export documentary credit guarantees that
payment will be made as long as exporter deliver the goods within the defined time
frame and submit the documents defined in the letter of credit. This helps the exporter
reduce payment risk. An Exporter can also demand immediate payment within the
framework of the LC conditions (assuming the documents are correct), improving
cash flow.
8. The opening bank sends the letter of credit to the advising bank in exporter’s country.
9. The advising bank notifies that a letter of credit has been opened in exporter’s favor.
10. Exporter dispatch the goods in accordance with the conditions defined in the letter of
credit.
11. Exporter provides the advising bank in your country with the appropriate documents
to document that the goods were dispatched in agreement with the letter of credit
conditions.
12. The advising bank pays an exporter for the goods, based on the received documents.
13. The advising bank sends the documents to the opening bank and receives payment
from the customer.
14. The importer receives the goods, submits a customs import declaration, and pays the
customs duties to the responsible authorities.
15. An Exporter submits a customs declaration for the exported goods.
Letter of Comfort
A label given to a document sent by a parent company to encourage a lender to make a loan to
its subsidiary. True comfort letter - not legally binding. Used in place of a guarantee, which
places specific and certain legal obligations on the guarantor. The issue at stake is determining
whether a document is a letter of comfort, which would be legally non-binding.
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3.2 UCP 600
UCP 600 is the latest version of the rules that govern letters of credit transactions worldwide.
UCP 600 is prepared by International Chamber of Commerce’s (ICC) Commission on Banking
Technique and Practice. Its full name is 2007 Revision of Uniform Customs and Practice for
Documentary Credits, UCP 600, and (ICC Publication No. 600). The ICC Commission on
Banking Technique and Practice approved UCP 600 on 25 October 2006. The rules have been
effective since 1 July 2007.
UCP 500 was the rules that had been in implementation before UCP 600. There are several
significant differences exist between UCP 600 and UCP 500. Some of these differences are as
follows;
The number of articles reduced from 49 to 39 in UCP 600;
In order to reach a standard meaning of terms used in the rules and prevent unnecessary
repetitions two new articles have been added to the UCP 600. These newly added articles
are Article 2 “Definitions” and Article 3 “Interpretations”. These articles bring more
clarity and precision in the rules;
A definitive description of negotiation as “purchase” of drafts of documents;
New provisions, which allow for the discounting of deferred payment credits;
The replacement of the phrase “reasonable time” for acceptance or refusal of documents
by a maximum period of five banking days.
History of UCP
First uniform rules published by ICC in 1933. Revised versions were issued in 1951, 1962, 1974,
1983 and 1993.
1933 – Uniform Customs and Practice for Commercial Documentary Credits
1951 Revision - Uniform Customs and Practice for Commercial Documentary Credits
1962 Revision - Uniform Customs and Practice for Documentary Credits
1974 Revision – Uniform Customs and Practice for Documentary Credits
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1983 Revision – Uniform Customs and Practice for Documentary Credits
1993 Revision – Uniform Customs and Practice for Documentary Credits
Currently majority of letters of credit issued everyday is subject to latest version of the UCP. This
widely acceptance is the key sign that shows the importance of the UCP, which are the most
successful private rules for trade ever developed.
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3.3 FEDAI Guidelines
Foreign Exchange Dealer's Association of India (FEDAI) was established in 1958 under the
Section 25 of the Companies Act (1956). It is an association of banks that deals in Indian
foreign exchange and work in coordination with the Reserve Bank of India, other
organizations like FIMMDA, the Forex Association of India and various market participants.
FEDAI has issued rules for import LCs which is one of the important area of foreign currency
exchanges. It has an advantage over that of the authorized dealers who are now allowed by the
RBI to issue stand by letter of credits towards import of goods.
As the issuance of standby of letter of Credit including imports of goods is susceptible to
some risk in the absence of evidence of shipment, therefore the importer should be advised
that documentary credit under UCP 500/600 should be the preferred route for importers of
goods.
Below mention are some of the necessary precaution that should be taken by authorized
dealers While issuing a stands by letter of credits:
1. The facility of issuing Commercial Standby shall be extended on a selective basis and
to the following category of importers
i. Where such standby are required by applicant who are independent power
producers/importers of crude oil and petroleum products
ii. Special category of importers namely export houses, trading houses, star
trading houses, super star trading houses or 100% Export Oriented Units.
2. Satisfactory credit report on the overseas supplier should be obtained by the issuing
banks before issuing Stands by Letter of Credit.
3. Invocation of the Commercial standby by the beneficiary is to be supported by proper
evidence. The beneficiary of the Credit should furnish a declaration to the effect that
the claim is made on account of failure of the importers to abide by his contractual
obligation along with the following documents.
i. A copy of invoice.
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ii. Nonnegotiable set of documents including a copy of non negotiable bill of
lading/transport document.
iii. A copy of Lloyds /SGS inspection certificate wherever provided for as per the
underlying contract.
4. Incorporation of suitable clauses to the effect that in the event of such invoice
/shipping documents has been paid by the authorized dealers earlier, Provisions to
dishonor the claim quoting the date / manner of earlier payments of such documents
may be considered.
5. The applicant of a commercial stand by letter of credit shall undertake to provide
evidence of imports in respect of all payments made under standby. (Bill of Entry)
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3.4 Credit Rating
Rating provides an easy way to understand the credit risk and being extensively used. Credit
Ratings are of two types- External and Internal ratings. While the former refer to the credit
rating conducted by an External agency such as CARE, CRISIL, Moody, S & P, ICRA, and
FITCH at the desire of the obligor to facilitate tapping of debt capital market, the internal
ratings are assigned by Banks to appropriately reflect the credit risk involved. An internal
Ratings system deployed by banks or other financial institutions varies across the board, but
the ultimate goal remains the same i.e. credit risk management. External Ratings are given
prominence in the standardized Approach; the Internal Ratings are the core of the advanced
approaches. Now we will look over both the ratings in detail.
Why is rating required?
For assessing the risk of the party
If the risk is more the rate of interest is also more
Sanctioning power (As per Bank’s guidelines Bank can consider the sanction upto the
rating of BOB6 in commercial proposal/ commercial activity in case of retail product upto
B+ and if it is below BOB6 he can utilize 75% of his powers.)
External Credit Rating
A credit rating is an assessment by a third party of the creditworthiness of an issuer of
financial securities. It tells investors the likelihood of default or nonpayment by the issuer, of
its financial obligations. In fact external rating agencies, wherever they exist have a
responsible role to play in the debt capital market of an economy. In Bank of Baroda CRISIL,
CARE, ICRA and FITCH for accounts with 5 crore and above. Usually companies that desire
to approach the public debt market should obtain ratings from at least two agencies.
Only if the rating agencies assign a minimum investment grade, can they go ahead with the
debt issue. The agencies are supposed to keep in touch with the development associated with
the debt issuer and revise ratings in the event of significant credit events. The ratings by these
firms are captured by alpha numeric letters, which are often stated to the shortest editorials
that could ever be written. The example of Rating System is the Rating Definition shown
below:
38
Highest quality….AAA
Very good quality…AA
Good quality…A
Medium quality…BBB
Lower medium quality…BB
Poor quality…B
Speculative quality…C
Default…D
While AAA represents the highest quality of credit exposure, the D represents the high credit
risk. Usually certain notions like ‘+’ or ‘-’ or numerals such as 1, 2, 3 are affixed to the
alphabets mentioned above to highlight the distinctions in credit risk under each grade.
However often question arises of how reliable are this external credit ratings? Can a bank skip
internal ratings and rely solely on external ratings? The answer to the question is no. The
collapse of Enron, which enjoyed investment grade rating just months before its bankruptcy
has eroded the faith in the three big credit rating agencies in the US. However, a comforting
factor such kind of fiascos is rare, and the rating agencies improve their rating methodology
with every such disaster. From a Bank’s point of view, unless it lacks resources, it ought to
put in place an internal credit rating system to evaluate the credit. This is because of the
certain inherent defects in external ratings, which are explained below:-
a. Most external ratings are done in times of debt issues by the obligors and to fulfill a
statutory requirement. In such cases, the ratings represent the quality of the particular debt
issue. External ratings need not always rate the issuer or the company in full. Accordingly
these ratings will not be the real reflection of the issuer rating. For instance, if a debt issue
enjoys sound collateral, the external rating of the debt issue would be better than that of
the issuer rating. External rating is debt issue oriented rather than borrower specific.
b. SEC, SEBI and similar regulatory bodies prescribe certain minimum condition to qualify
for debt issues, which screens out almost the entire middle or medium market and smaller
business segments. Ratings from external agencies exist only for large listed companies.
39
There are no external ratings available for obligors belonging to entities not in a position
to meet the eligibility criteria.
c. Conflict of interest: The agencies earn a substantial part of their income, in some cases as
high as 90%, from ratings assigned to the corporate sector and some point out this as a
conflict of interest. It is not unusual to have two agencies come out with different ratings
for the same obligor.
External Ratings to be held for accounts above 5 crore
CARE CRISIL FITCH ICRA Risk Weight
PR1+ P1+ F1+ A+ 20%
PR1 P1 F1 A1 30%
PR2 P2 F2 A2 50%
PR3 P3 F3 A3 100%
PR4 & 5 P4 & 5 F4 & 5 A4 & 5 150%
Unrated Unrated Unrated Unrated 100%
Internal credit rating
Management of Credit Risk determines the asset quality of the Bank. An effective way to
mitigate credit risk is to have robust credit rating system in place.
Bank has introduced Basel II compliant credit risk rating models of M/s CRISIL. The new
rating models are based on two-dimensional rating methodologies specified under Basel II
requirements wherein 4 types of risks viz. industry risk, business risk, financial risk and
management quality risk are assessed pertaining to characteristics on an obligor(borrower)
while facilities proposed/sanctioned to a borrower are assessed separately under second
dimension of rating i.e. Facility Rating
The Credit rating can (i) Identify potential risk in a particular asset.(ii) Allow a bank to
maintain healthy Asset Quality (iii) Impart flexibility in pricing assets to meet the required
risk return parameters as per the bank’s strategy and credit policy.
40
New CRISIL Rating Models for commercial advances are based on two dimensional rating
methodology specified under Basel II Accord requirements.
Eleven models for Credit Risk rating of all commercial advances i.e. existing as well as new
with exposure of Rs.25 lacs and above (FB+NFB) for implementation have been introduced
by our Bank.
If the company’s 3 years average turnover is above 50 crores than the company falls under
large corporate.
Risk Assessment Models (BOBRAM)
Under this model 3 ratings are worked out.
1. Obligor Rating (Borrower rating): Rating for credit worthiness indicating the
Probability of Default (PD). The obligor rating is indicative of creditworthiness of an
obligor or the Probability of Default (PD) and it is based on the assessment of past;
and projected cash flows of the company.
2. Facility Rating: It represents the loss given Default.
3. Composite Rating: It is a rating in which company is indicative of expected loss & it
is worked out as the matrix of obligor Rating & Facility rating.
For assessment of an obligor, the rating structure consists of evaluation by way of four models
viz.:-
Industry Risk:- The assessment of this module which is external to borrower and is done by
assessment of industry related macroeconomic parameters like demand supply gap/capacity
utilization level/financial ratios like ROCE/OPM etc. applicable to the specific industry and
having different risk weights.
Parameters to be looked in Industry Risk:
1. Stage in life cycle of industry
2. Demand Supply Scenario
3. Competition
4. Impact of Government Policies
41
5. Environmental Issues
6. Impact of change in technology
7. Length of operating cycle
Business Risk: - The assessment of this module is based on internal working of the Borrower
and relates to parameters such as after sales service, distribution set up, capacity utilization
etc.
Parameters to be looked in Business Risk:
1. Position of the Entity in its target market
2. Assessment of immediate buyers
3. Nature of economy of export country
4. Marketing and selling arrangement
5. Operating efficiency
6. Availability of skilled manpower
7. Environment Risk
8. Nature of technology employed
9. Availability of power and other utilities.
Financial Risk: - The assessment of this module is based on internal working of the
Borrower and relates to parameters; such as past and projected financials.
Parameters to be looked in Financial Risk:
1. Financial Flexibility
2. Ability to raise debt from Banks/ Financial Institutions
3. Ability to raise equity from own sources
4. Ability to raise equity from cap markets
5. Past Financials
6. Accounting quality past
7. Future Financials
42
Management Quality: - The assessment of this module is based on internal working of the
Borrower’s management and relates to parameters such as past repayment record, quality of
information submitted, group support, etc.
Parameters to be looked in Management Risk:
1. Credentials and Background of Promoters
2. Competence or technical skills of management
3. Management succession Plans
4. Constitution of borrower
5. Years of experience in same line of business
6. Payment Record.
Obligor rating grades range from BOB 1 to BOB 10
Facility Rating:-It involves assessment of the security coverage for a given facility and
indicates the Loss Given Default (LGD) for a particular facility.
Facility Rating is dependent upon the type of facility and securities charged to the bank
against the facility.
Facility rating grade ranges from FR 1 to FR 8
Composite Rating (CR 1 to CR 10) It is matrix of PD and LGD and indicates the Expected
Loss in case the facility is defaulted. The composite rating is worked out automatically by
software based on the matrix of Obligor Grade and Facility Rating Grade
Composite rating grade ranges from CR 1 to CR 10. Bank has accepted BOB 6 as the cut off
point for the acceptance of an obligor based on obligor rating carried out as the applicable
model
Inspection of securities based on Credit rating
Credit Rating for BOB1, 2, 3 – Half Yearly Basis
Credit Rating for BOB4,5- Quarterly Basis
Credit Rating for BOB 6 & below- Bi monthly Basis
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3.4 Proposals
Kinds of Proposal
1. Proposal for Fresh Limits : - For every facility to be sanctioned we need to make a
proposal which shows the companies background and its operations. When a fresh
limit comes in case of textiles, constructions or any other sector apart from those
which require activity clearance we need to prepare proposal for fresh limit.
The fresh proposal includes:
Basic data
Issue for consideration
Facilities demanded
Background of the firm
Security coverage
Justification
Recommendations
Financial parameters and assessment
Details of fund flow statement
Comments on performance
Calculation of MPBF Limit. It is to be calculated as under
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2. A
c
t
i
v
i
ty Clearance Proposal :- In the case of following activities/ industries in exposure, as
Compiled by Risk Management Dept, BCC, Mumbai, would be subject to Activity
Clearance from Corporate Centre even though proposals fall under the powers of
Branch/ Regional/ Zonal Heads:-
Leasing, Hire-Purchase, Non-Banking Finance Companies (other than Central / State
Govt. NBFCs),
Capital Market (other than advances against shares to individuals),
Financing of Film Making – (Sanctioning authority rests with CMD / ED only within
their delegated powers)
Bridge Loan.
Securitization / Through Deed of Assignment.
Real Estate for Commercial Activities but excluding Retail Loans, Priority Sector
Advances
Fresh / incremental exposure to Diamond industry.
Advances to Co-operative Banks.
45
Actuals
( 2010)
Actual
( 2011)
Estimated
(2012)
1 Total Current Assets Xxx Xxx Xxx
2 Less: Current Liabilities (Other
than Bank Borrowings)
Xxx Xxx Xxx
3 Working Capital Gap (1-2) Xxx Xxx Xxx
4 Actual/projected Bank Borrowings Xxx Xxx Xxx
5 Total Current Liabilities (2+4) Xxx Xxx Xxx
6 Actual/projected NWC (1-5) Xxx Xxx Xxx
7 Minimum stipulated margin 25%
of C/A (Excl. Export receivables)
Xxx Xxx Xxx
8 Item 3-6 Xxx Xxx Xxx
9 Item 3-7 Xxx Xxx Xxx
10 MPBF (8 or 9 whichever is low) Xxx Xxx Xxx
In our Bank of Baroda Branch most of the Activity Clearance Proposals are due to
major Exposure in Diamond Industry.
The Following are the information required for Activity Clearance Proposal:-
Issue for Consideration: - It includes the main purpose for approving the
proposal.
Basic Data Of Company:- It includes basic data like
a. Name of the company
b. Constitutions and its partners or directors
c. RBI Cautioned list
d. Date of commencement of business and date since Banking with that
particular bank
e. Nature of Business
f. Location of office
g. Present credit request
h. Security provided
i. Credit rating (Internal & External)
Structure of Proposed Borrowing
Background of the firm
Financials for the last 3 years and based on that projection and estimation of next
2 years.
Profitability ratios and Comments on the same.
SWOT Analysis of that particular sector
Justification (Based on the reasons for providing them the above said loan)
Recommendation
3. Concession/ Modification Proposal : In case of accounts who are in context from past
many years and deal with us efficiently might grant for a discount and they pass an
application for concession proposal. For those purpose we need to make concession
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proposal to make a note to our higher authority so that he/she can actually take a
particular action on it so as to give concession or not.
If an account needs a change in terms of payment i.e. interest or principle or change in
pattern as such monthly or quarterly etc. than such changes can be made by passing a
proposal which is approved by higher authority.
4. Review Proposal: Credit facilities sanctioned to borrowers are subject to annual
review as per the prevailing guidelines. However in case of borrowal accounts
enjoying credit facilities of Rs 100 Crores and above where the credit rating is BOB-6
or below, the account should be reviewed on half- yearly basis.
The accounts are required to be reviewed on or before the due date. The review makes
a comprehensive study of borrowal account on various issues covering financial
health, borrower’s performance and prospects, quality of management, conduct of the
account, compliance, etc. The review will also evaluate the impact of deficiencies
observed during inspection/ Concurrent/ statutory/ credit audit/ RBI Inspection and
rectification thereof.
The review can also be done if in case there is an increment in credit facilities from the
existing one which is known as “review with enhance limit”.
The following are some of the important factors to look over while reviewing a
company’s account:
a. Satisfactory conduct and turnover in the account.
b. Fulfillment of repayment obligations (Interest & Installments)
c. Adequacy of securities, drawing power, security coverage etc.
d. Rectification of inspection irregularities (other than non submission of financial
statements)
e. Compliance of all terms and conditions of previous sanction.
f. Satisfactory trend in production and sales as per projections
g. Documentations and mortgages in the account being complete, valid and
enforceable
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h. Prompt payment of bills under L/Cs, realization of BP/BDs, Guarantee
Commission
i. Submission of Income Tax/ Sales tax returns filed with Statutory Authority as per
time schedule prescribed, wherever applicable (which will also indicate about the
sales and profitability of the operations).
While the objective of the above system/ procedure is to ensure timely review of
advances accounts so that the slippage of the accounts to NPA category on
technical grounds may be avoided. However Bank should nevertheless obtain
latest Financial Statements within a reasonable time after the review is conducted
and satisfy themselves as to the financial parameters emerging out of the Balance
Sheet/ Profit & Loss a/c. In case any advances features are observed in the
financials of the borrower, Bank should immediately initiate appropriate action as
warranted.
Review is not applicable to:-
Irregular Account
Account under restructuring / rephasement / rehabilitation
Retail Loans
NPA account
Suit filed account
Staff loans
Loan against shares
Loan against future rent receivables
5. Adhoc Proposal: This kind of proposal is for companies who are already enjoying
credit facilities with banks. In Adhoc the company can further take loan for a short
period of term say 2 to 3 months which means they take loan to fulfill their short term
needs.
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The following things are to be noted for sanctioning Adhoc facilities: Details of
which are mentioned in the annexure attached below
Issue for Consideration
Brief History of company
Present Position of account which includes Present credit facility
Financial Performance of the company
Security Coverage
Present Request
Recommendation
6. Short Review: The bank has a practice of short review which is done when it is not
possible to carry out a comprehensive Regular review of the account within the
stipulated period pending receipt of certain particulars/ information or where the
account is placed under special monitoring, etc.
Bank continues to deal with the matter as under:-
Consecutive short reviews shall be restricted to two with a maximum period of six
months for each short review. But in exceptional cases. The nest higher authority may
do more consecutive Short reviews after satisfying himself about the need for the same
and reasons duly recorded. Relaxation is also provided to restructure and accounts
under reh abilitation where for a variety of reasons only, Short Reviews may have to
be done till such time the unit/account becomes normal and healthy.
Where there is impairment of borrower’s quality indicated through various adverse
features like default, diminution in value of security etc., suitable communication and
if need be a Short Review should be placed before competent authority for perusal,
direction and necessary action.
7. Status Note: Accounts showing the signals of irregularity in repayment, deteriorations
in value and condition of securities, status note may be submitted to the higher
authority. This note shows the current position of the firm which is making the firm
default in terms of its credit facility.
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3.5 Export Credit Guarantee Corporation (ECGC)
It is an organization, which assures the banks that, in the event of an exporter failing to
discharge his liabilities to the bank, and thereby making the bank incur a loss, it would make
good the major portion of the bank's loss. The bank is required to be co-insurer to the extent
of remaining loss
To support and strengthen export promotion drive by providing range of credit risk insurance.
In case of Pre-Shipment facilities the cover is 50% from ECGC and in case of Post-Shipment
facilities the cover is 75% of the credit facility.
Ways in which ECGC helps:
Provides a range of credit risk insurance covers to exporters against loss in export of
goods and services.
Offers guarantees to banks and financial institutions to enable exporters to obtain better
facilities from them.
Provides Overseas Investment Insurance to Indian companies investing in joint ventures
abroad in the form of equity or loan.
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3.6 CREDIT MONITORING
1. In - depth monthly analysis of your credit report. It means that you will be aware of how
your credit score is influenced.
2. Email notification. If your credit report is modified in a manner that can influence your
credit score, you will find this out at once through email.
3. Insurance against identity theft. You will be provided with financial protection that is
needed in cases the identity is stolen.
Credit Monitoring is an important part of credit department as it includes:
Monthly Monitoring Report
Consortium Banking
Multiple Banking
a) Monthly Monitoring Report (MMR)
For the purpose of monitoring of large borrowal accounts, to prevent asset quality
slippage, to take timely corrective steps and to improve the quality of credit portfolio,
bank has the system of monthly monitoring. Under the system, advance accounts with
exposure (FB+NFB) are to be monitored at Regional/Zonal/Baroda Corporate Centre
levels based on monthly monitoring reports submitted by branches within 5 days of
reporting date (i.e. 15th of each month) of MMR to Regional Office, as under:-
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• Advance accounts with exposure (FB+NFB) of above Rs.10 crores, Monthly
Monitoring Reports to be submitted to BCC through Zonal Office within 10 days of
reporting date (i.e. by 25th of each month).
• Zonal Manager to monitor all advance accounts with exposure (FB+NFB) of above
Rs.5 crore to Rs.10 crore based on the monthly monitoring reports in respect of these
accounts received through Regional Office. The Zones will also submit copies of the
MMRs of these accounts to BCC for further monitoring.
• Regional Manager to monitor all accounts with exposure (FB+NFB) of above Rs.1
crore to Rs.5 crores based on the monthly monitoring reports in respect of these
accounts received from branches. The Regional Office will also submit copies of the
MMRs of these accounts to Zonal Office for further monitoring.
• Branch Manager to monitor accounts of exposure (FB+NFB) of Rs.1 crore and below.
In addition to above at BCC level advance accounts of high risk borrowers (with credit
rating BOB6 & below) with exposure (FB+NFB) of above Rs. 1 Crore up to Rs. 5
Crore, are to be monitored based on the Summary Reports of these accounts submitted
by Regional Office on monthly basis.
b) Consortium Banking
When one borrower avails loans from several banks under an arrangement among all the
lending bankers, this leads to a consortium lending arrangements. In consortium lending,
several banks pool banking resources & expertise in credit management together & finance a
single borrower with a common appraisal, common documentation & joint supervision &
follow up. The borrower enjoys the advantage similar to single window availing of credit
facilities from several banks. The arrangement continues until any one of the bank moves out
of the consortium. The bank taking the highest share of the credit will usually be the leader of
consortium. There is no ceiling on the number of banks in a consortium.
A term generally used in banking when a group of banks associating for the purpose of
meeting the financial requirements of a borrower, such as Working Capital or a Term Loan. In
52
business, the term applies to a group of companies, national or international, working together
as a joint venture, sharing resources and having interlocking financial agreements. Bank
finances under a Consortium arrangement is where one bank acts as a leader for the purpose
of assessment of limits, documentation, creation of charge etc., on mutually acceptable terms
and conditions.
In case of consortium lending, the assets classification with all the member banks should be
standard.
When a company has availed credit facilities from more than one bank on the same
security / ies with a condition that the charge on the security will be on equal footing
(right basis) in proportion to the amount they have advanced. The charge is called pari-
pasu charge. In case of consortium finance or multiple banking facilities, a charge on the
same security is given to more than one lender this is called the pari-pasu charge.
In case of consortium account where we are leader and account falling under any of the above
criteria, a joint decision is to be taken by the consortium banks. Where we are not leader,
impress upon the lead bank and members to introduce the concurrent audit.
In the cases of working capital finance through consortium or multiple banking, increasing
our share, and joining a consortium (or when a member bank exits consortium and we join the
consortium in its place), are not reckoned as take-over of advances from other banks.
c) Multiple Banking Arrangement
Multiple Banking Arrangement is one where the rules of consortium do not apply & no inter
se agreement among banks exists. The borrower avails credit facility from various banks
providing separate securities on different terms & conditions. There is no such arrangement
called ‘Multiple Banking Arrangement’ & the term is used only to denote the existence of
banking arrangement with more than one bank.
Multiple Banking Arrangement has come to stay as it has some advantages for the borrower
& the banks have the freedom to price their credit products & non-fund based facility
according to their commercial judgment. Consortium arrangement occasioned delays in credit
decisions & the borrower has found his way around this difficulty by the multiple banking
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arrangements. Additionally, when units were not doing well, consensus was rarely prevalent
among the consortium members. If one bank wanted to call up the advance & protect the
security, another bank was interested in continuing the facility on account of group
considerations.
Points to be noted in case of multiple banking arrangements
Though no formal arrangement exists among the financing banks, it is preferable to
have informal exchange of information to ensure financial discipline
Charges on the security given to the bank should be created with utmost care to guard
against dilution in our security offered & to avoid double financing
Certificates on the outstandings with the other banks should be obtained on the periodical
basis & also verified from the Balance sheet of the unit to avoid excess financing
In case of sole banking or multiple banking, concurrent audit should be introduced
immediately.
In the cases of working capital finance through consortium or multiple banking, increasing
our share, and joining a consortium (or when a member bank exits consortium and we join the
consortium in its place), are not reckoned as take-over of advances from other banks.
The advantages to the bank in a multiple banking arrangement/ consortium arrangement are
that the exposure to an individual customer is limited & risk is proportionate. The bank is also
able to spread its portfolio. In the case of borrowing business entity, it is able to meet its funds
requirement without being constrained by the limited resource of its own banker. Besides this,
consortium arrangement enables participating banks to save manpower & resources through
common appraisal & inspection & sharing credit information.
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3.6 CASE STUDY ANALYSIS
Credit Department as a whole is very vast so analysis of one segment or part is
not sufficient to understand the entire department.
Therefore I have done the analysis of almost the entire credit department of how
it works when a company asks us for loan.
To start with I would say that I was majorly exposed to companies in diamond
industry which is involved in importing and exporting of diamonds. Here is the
case when a diamond trading company comes for a credit facility of 6.00 crores.
Firstly it would be understood from the above that for a fresh proposal in a
diamond industry an “Activity Clearance Proposal” is to be made.
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Activity Clearance Proposal (For a fresh limit from a diamond industry)
Bank of Baroda
OPERA HOUSE BRANCH
MMSR, Mumbai
FORMAT FOR SEEKING – PRINCIPLE APPROVALS FOR NEW BUSINESS
NOTE TO THE GENERAL MANAGER, MMSR, MUMBAI.
Zone Region Branch
Greater Mumbai Zone Mumbai Metro South
Region
Opera House Branch
Name of the account: M/s Riya Exports
ISSUE FOR CONSIDERATION:
1. To accord activity clearance for Fresh Diamond Exposure of Rs. 6.00 Crores to
M/s. Riya Exports.
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2. Basic Data Of The Company
1 Name of the Entity Riya Exports
2. Constitution Partnership Firm
3. Partners :
Key Persons
Ashwinbhai L Kanabar
Dineshbhai M Kanabar
Laxmanbhai M Kanabar
Ashwinbhai L Kanabar
Dineshbhai M Kanabar
4. RBI Caution Listed (Yes/No) No
5. Date of commencement of
business.
05/11/2000.
6 Banking with us since New Account
5. Nature of Business Manufacturing & Exports of cut and polished Diamonds
6. Registered Office: Office : Panchratna Building, Opera House, Mumbai
400004
7. Present Credit Request Nature Of
facility
Existing
Limit
Proposed
Limit
(Rs. In lacs)
FBP/
FCBD/
0.00 600.00
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General Information to understand the activity in which business is involved and the background of the particular company
Bill Purchasing and Bill Discounting
PSDL
(Sub-Limit
for
PC/PCFC)
0.00 (50.00)
Forward
Contract
Limit
0.00 600.00
8. Security (Type and Value)
Primary:
Collateral:
Hypothecation of stock and Book
-debts.
1. Land at Katagam,, Surat
Value at Rs. 2.65 crores which is expected to go up at
around Rs. 475.00 lacs
2.Plant and Machinery
Value at Rs. 78.30 lacs
3.Other Assets
Value at Rs. 15.00 lacs
9. Credit Rating (External ) Not Applicable.
10 Zone’s Experience to the
Industry
11 Zone’s NPA in the Industry
12 Bank Credit Rating (Internal) New Account. (BOB1-BOB10)
The Structure of proposed Burrowing
Facility Working Capital facility (Export Facility)
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Sublimit is for Packing Credit in Foreign Currency
Underlying stock or the stock to be purchased from this loan amount is hypothecated.
Purpose Manufacturing & Exports of cut and polished
Diamonds
Tenor 12 Months subject to review
Interest rate As per extant guidelines of the bank
Upfront &other charges As per extant guidelines of the bank
BACKGROUND OF THE FIRM
M/S Riya Exports established in 2000 is in the business of manufacturing and Exports of cut
and Polished Diamonds is promoted by Ashwinbhai L Kanabar and Dineshbhai M Kanabar.
(Rs. In lacs)
Nature of facility Existing limits Proposed limit
FBP/FCBD/PSDL 0.00 600.00
(Sub-Limit for PC/PCFC) 0.00 (50.00)
Forward contract Limit 0.00 600.00
Following are major suppliers of raw materials and clients of the firm.
Name of the suppliers Name of the clients
Shine Gems Oval diamond Traders
Sakina Gems Rani Blue
Janki Gems Star Diamond Traders
Names of Guarantees: N.A.
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This structure shows the overall gist of the facility they are demanding
Financial for last three years and projections for next year:
(Rupees in Lacs)
P A R T I C U L A R S
Audited Audited Estimated Projected
31.03.10 31.03.11 31.03.12 31.03.13a) Balance Sheet Data / Capital Structurea) Equity Share Capital 91.43 95.93 163.00 198.00Reserves & Surplus (Excl. Revaluation reserves and net of intangible assets)
Tangible Net-worth 91.43 95.93 163.00 198.00
Term Liabilities -- 19.50 80.00 90.00
Capital Employed 91.43 115.43 243.00 288.00
Net Block 12.40 37.00 33.20 29.60
Current Assets 542.03 372.37 1050.00 1279.65
Current Liabilities 463.00 293.94 840.20 1021.25
Net Current Assets 175.97 275.11 734.80 1008.4
Net Sales 490.23 1155.48 7500.00 10000.00Adm. & Selling Expenses 11.52 35.17 65.00 75.00
Depreciation -- 4.01 3.80 3.60
Interest 10.62 12.36 26.00 50.00
Profit before Tax 2.26 3.35 28.68 34.30Less: Provision for Tax -- 0.07 1.00 1.50
Profit After Tax 2.26 3.28 27.68 32.80
c) Profitability Ratios
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NP / Sales - % 0.46 0.28 0.37 0.33Net Profit / Capital Employed 2.47 2.84 11.39
11.39
PAT / TNW 2.47 3.41 16.98 16.57
Current Ratio 1.17 1.27 1.25 1.25
DE Ratio (TOL/TNW) 5.06 3.26 5.65 5.61
Sales / Receipts: The Firm has achieved sales turn over of Rs. 490.23 lacs during FY 2009-10
and Rs.1155.48 Lacs in FY 2010-11.The company has estimated sales turnover of Rs. 7500
lacs for the year current FY 2011-12 and Projected sales of Rs.10000 Lacs for 2012-2013.
Net Profit: The firm has earned the profit of Rs2.26 lacs during the FY 2009-10 .The firm has
earned net profit after tax of Rs.3.28 lacs during FY 2010-11 with increase of 45.13%. The
firm has estimated PAT of Rs. 27.68 lacs for year 2011-12 and Rs. 32.80 lacs for FY 2012-13.
Tangible Net Worth: Net worth of the firm has improved from Rs.91.43 lacs as on 31-03-
2010 to Rs. 95.93 lacs as on 31-03-2011 and further rise to Rs. 163 lacs as on 31-03-2012.
In the same way the firm has estimated net worth of Rs.198 lacs as on 31-03-2013.
Current Ratio: The Current Ratio of the firm was 1.17 as on 31-03-2010, 1.27 as on 31-03-
2011 and estimated at 1.25 as on 31-03-2012 and 1.25 as on 31-03-2013.
Debt Equity Ratio (Total Term Liabilities / Tangible Net Worth):
Debt Equity Ratio of the firm 5.06 as on 31./03/2010 and 3.267 as on 31-03-2011. The firm
has estimated it as 5.65 as on 31-03-2012 and projected 5.61 as on 31-03-2013.The firm needs
to improve its equity.
SWOT Matrix:
61
Helps to record company’s financial position
Strength The firm and its partners are well experienced.
The Location ally in the heart of the diamond market of Mumbai.
Enjoying good reputation for their specialized products of fancy
diamonds.
Weakness Low Diversity of products and customer base.
Demand in fancy varies as per fashion and trend.
Opportunities Industry growing at reasonable pace.
A Good festive season can change the whole scenario.
Threats Slow down in economy internationally particularly Diamond
Industry in USA.
Low technology barriers would result in the increased
competition at local levels.
Justifications for the proposed Demand Loan/Term Loan/Non-Fund based limits:
It is an Export oriented manufacturing firm.
They are new accounts with satisfactorily conducted current account since
2001.
The firm performance and financials is satisfactory
Satisfactory Financials.
This will improve our export finance portfolio and augment commission
Income
Recommendations:
In view of the above we recommend the firm’s request for fresh facilities and arrange to
accord your approval.
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Helps us understand diamond industry as a whole
This are the things which catched our attention to provide credit facility of 6 Crores to this Company and proposal with this justification is forwarded to AGM
Submitted for Consideration:
(S.Chaudhuri)
Asst. Gen. Manager.
Recommendations /comments of Zonal office (Please confirm that the proposal complies
with applicable norms such as take over norm, real estate policy, prudential exposure
cap. Etc.)
Date Zonal Head
Recommendations /comments of Region (Please confirm that the proposal complies with
applicable norms such as take over norm, real estate policy, prudential exposure cap.
Etc.)
General Manager
Greater Mumbai Zone.
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Analysis
The firm is into Manufacturing & Exports of cut and polished Diamonds.
The promoters have sufficient experience in the line of activity. The promoters had
already made negotiations of the some of the company and have deal into huge
number of orders. Below is the list of the same:
• Parineeta Gems
• Star Diamond Traders
• Rani Blue
• Gokani Traders
The orders worth Rs.3.00 crores are expected to be finalized by end of October, 2012
and other orders to be finalized by March 2013.
Projected financials are in line with the financials of the some of the unit in similar
line of activity and production level.
The promoters are having experience of more than 10 years in the line of the activity.
The affairs of the firm are expected to be managed on professional lines based on their
past experience.
The conduct of accounts of associate with the existing bankers has been satisfactory.
The short and medium term outlook for the industry is stable
Availability of collateral security reflected in collateral coverage of 70.27%.
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The company has adequate management skills and production/marketing infrastructure in
place to achieve the projected trajectory. There is steady demand for the diamonds and gems
even locally and globally.
Findings
Credit appraisal is done to check the commercial, financial & technical viability of the
project proposed its funding pattern & further checks the primary or collateral security
cover available for the recovery of such funds
Credit is core activity of the banks and important source of their earnings which go to
pay interest to depositors, salaries to employees and dividend to shareholders
Credit and risk go hand in hand
In the business world risk arises out of:-
Deficiencies /lapses on the part of the management
Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position
Bank of Baroda loan policy contains various norms for sanction of different types of
loans
These all norms does not apply to each & every case
Bank Of Baroda norms for providing loans are flexible & it may differ from case to
case
Bank’s main function is to lend funds/ provide finance but it appears that norms are
taken as guidelines not as a decision making
A banker’s task is to identify/ assess the risk factors/ parameters and manage/ mitigate
them on continuous basis
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The CRA models adopted by the bank take into account all possible factors which go
into appraising the risk associated with a loan
These have been categorized broadly into financial, business, industrial, management
risks & are rated separately
The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators
After case study, we found that in some cases, loan is sanctioned due to strong
financial parameters
From the case study analysis it was also found that in some cases, financial
performance of the firm was poor, even though loan was sanctioned due to some other
strong parameters such as the firm is dealing with bank since many years, the firm is
assured with a confirm order etc.
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Chapter IV: Conclusions
Appraising of credit is a process of appraising the credit worthiness of loan applicants. The
funds of depositors are mobilized by means of such advance. Thus, it is extremely important
for the lender bank to assess the risk associated with credit; thereby ensure the security of the
for the funds deposited by the depositors.
This project revolves around Trade Finance Credit and its appraisal.
In Bank of Baroda the study for a credit proposal is done by the following:
a) Evaluation of Management: A thorough study about the promoters is carried out in order
to ensure promoters are experienced in that particular Industry and are capable to run the
business in an efficient manner.
b) Techno Economic Viability (TEV) Study: A detailed study about the Technical Aspects is
done to determine the technical soundness of the company.
c) Financial Viability: A detailed study relating to Financials of the company so that we
could know whether the company is sustainable enough to stand in the market and the
company’s efficiency to pay installments and interest.
d) Risk Analysis: It determines the risk associated with the company which is done by
sensitivity analysis and Credit Rating.
e) Securities offered: The collateral securities given by borrower should be determined.
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Post the recent crisis, there has been an increased focus on credit appraisal with an emphasis
on acquiring a thorough understanding of all aspects of the customer and his business. So the
project gives an overall view legal and technical aspects of trade finance and relates economic
and financial conditions in practical aspects. This document helps in analyzing different issues
related to trade finance and applying the same in real life situations.
Recommendations
After being a part of credit department there are some things which even we would like to make them work on. Below are certain things laid down for Bank to improve further:
1. Instead of working haphazardly it is better to minimize the number of documents needed and concentrate on the one which can actually help knowing the company better or proving the company’s condition.
2. The customers may be benefited if the focus is on reducing the number of days required for the processing of loan.
3. Every bank should have one Financial Analyst who looks upon each and every company’s Financials.
4. Interaction with the clients should be made more frequent.
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References Bibliography
(n.d.). Retrieved from RBI: www.rbi.org.in
(2012, May 22). Retrieved May 22, 2012, from BankofBaroda: www.bankofbaroda.com
(2012, June 20). Retrieved from http://lawcrux.org/data4T/it/itbank/itwrie_manage_finance_26.htm
(2012, June). Retrieved from http://www.eximguru.com
Economic Times. (2012, July 3). Retrieved July 3, 2012, from http://economictimes.indiatimes.com/bank-of-baroda/balancesheet/companyid-12040.cms
Macmillan. (n.d.). International Trade Finance.
Menon, J. (2012). Trade Finance. Mumbai: Taxmann.
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