Banking Industry In India

Presented by: Rajesh Kumar MBA(Finance), ACS, AIII

• Banking is defined as accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise

• The RBI, which commenced operations on April 1, 1935, is at the centre of India’s financial system. Hence it is called the Central Bank.

• It has a fundamental commitment to maintaining the nation’s monetary and financial stability. It started as a private share-holders’ bank – but was nationalized in 1949, under the Reserve Bank (Transfer of Public Ownership) Act, 1948.

• RBI is banker to the Central Government, State Governments and Banks. Key functions of RBI Include:

I. Monetary policyII. Supervision of Banking companies, Non-banking Finance companies and Financial Sector,

Primary Dealers and Credit Information BureausIII. Regulation of money market, government securities market, foreign exchange market and

derivatives linked to these markets.IV. Management of foreign currency reserves of the country and its current and capital

account.V. Issue and management of currencyVI. Oversight of payment and settlement systemsVII. Development of banking sectorVIII. Research and statistics

Banking Structure In India

• Retail banking is when a bank executes transactions directly with consumers, rather than corporations or other banks. Services offered include savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards.

• International Banking :Every country need to buy (import) certain goods and services from other countries in order to bridge the demand and supply in its economy ,the foreign exchange is the place where these payment are made banks are amongst the active members of the foreign exchange market and they provide certain types of services which come under International Banking.

Wholesale Banking• It refers to banking business with industrial and business

entities mostly corporates and trading houses ,including multinationals ,domestic business houses and prime public sector companies.

• The product offering under this is suitably structured taking into account a client’s risk profile and specific needs.

• Wholesale banking is the provision of services by banks to organisations such as Mortgage Brokers, large corporate clients, mid-sized companies, real estate developers and investors, international trade finance businesses, institutional customers (such as pension funds and government entities/agencies), and services offered to other banks or other financial institutions.

Licensing of Banks in Indiai) Eligible Promoters: Entities / groups in the private sector, public sector and Non-Banking Financial

Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).

(ii) ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years.

(iii) Minimum voting equity capital requirements for banks and shareholding by NOFHC: Initial minimum paid-up voting equity capital for a bank shall be `5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank for a period of five years and which shall be brought down to 15 per cent within 12 years. The bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.

(iv) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines issued by RBI and other regulators.

(v) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.

(vi) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be independent directors.

(vii) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.

(viii) Other conditions for the bank :

•The bank shall open at least 25 per cent of its branches in unbanked rural centres.

•The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.

•Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond `10 billion for every block of `5 billion.

•Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.

(ix) Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

Banking And Liquidity Control

• CRR 4%• SLR 23.0%• REPO – REVERSE REPO 9%-7%• OMO• EG –US QUANTITATIVE EASING

Banking Products - depositsDeposits are a key source of low cost funds for banks. The deposit accounts serve various

purposes of the account holders:

• A safe avenue to park surplus funds• Earn a return on surplus funds• Receive payments from others, and make payments to others

Kinds of Deposits

A. Demand Deposits :These are deposits which the customer can get back on demand or which are placed for very short time periods

I. Savings account depositsII. Current account depositsB. Term DepositsC. Hybrid Deposits / Flexi DepositsD. Non-Resident AccountsI. Foreign Currency Non-Resident Account (FCNR)II. Non-Resident External Rupee Account (NRE)III. Non-Resident Ordinary Account (NRO)

Other services Fund-based Services• Banks accept deposits and raise other debt and equity funds

with the intention of deploying the money for a profit. The income that a bank earns, as a percentage of its loans and investments, is its Gross Yield.

• The interest it pays as a percentage of the resources mobilised is its cost of funding.

• Gross Yield less the Cost of Funding represents its Gross Spread.• Gross Spread less Administrative and Other Costs is its Net

Spread. For BusinessI. Bank OverdraftII. Cash CreditIII. Bill Purchase / DiscountIV. Term Loan / Project Finance

For IndividualsI. Credit CardII. Personal LoanIII. Vehicle FinanceIV. Home Finance

Non-Fund-based Services These are services, where there is no outlay of funds by the bank when the commitment is

made. Since there is no fund outflow initially, it is not reflected in the balance sheet. Therefore, it is reflected as a contingent liability. Such exposures are called Off Balance Sheet Exposures.

For BusinessI. Letter of CreditII. GuaranteeIII. Loan Syndication

For IndividualsI. Sale of Financial ProductsII. Financial Planning and Wealth ManagementIII. Executors and TrusteesIV. Lockers

Money Remittance Services

I. Demand Draft / Banker’s Cheque / Pay OrderII. National Electronic Funds Transfer (NEFT)III. Real Time Gross Settlement (RTGS)IV. Society for Worldwide Interbank Financial

Telecommunications (SWIFT)

Priority Sector Lending• Priority Sector Lending is an important role given by the

Reserve Bank of India (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture or small scale industries. This is essentially meant for an all round development of the economy as opposed to focusing only on the financial sector.

• 40% of total lending should consist of priority sector lending.

CATEGORIES of Priority sector lending1. Agriculture – 17%2.Small Enterprises3. Retail Trade4. Micro Credit5. Education Loans 6. Housing Loans

23%

Nonperforming Assets • A debt obligation where the borrower has not paid any

previously agreed upon interest and principal repayments to the designated lender for an extended period of time.

• For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement.

• If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.

Performance Measurement The banking sector’s performance is seen as the replica of

economic activities of the nation as a healthy banking system acts as the bedrock of social, economic and industrial growth of a nation.

A framework for the evaluation of the current strength of the system, and of operations and the performance of the banks has been provided by Reserve Bank’s measuring rod of ‘CAMELS’ where

C - capital adequacy, A - assets quality, M-management efficiency, E -earning quality, L- liquidity and S - internal control systems.

CAMEL is, basically, a ratio-based model for evaluating the performance of banks. It is a model for ranking/rating of the banks.

Capital Adequacy• It is important for a bank to maintain depositors’

confidence and preventing the bank from going bankrupt.

• Capital Adequacy reflects the overall financial condition of the banks and also the ability of management to meet the need for additional capital.

• It also indicates whether the bank has enough capital to absorb unexpected losses.

• Capital Adequacy Ratio acts as an indicator of bank leverage.

1.Capital adequacy ratio (CAR)• As per the latest RBI norms, the banks in India should have a

CAR of 12%. It is arrived at by dividing the sum of Tier-I, Tier-II and Tier-III capital by aggregate of risk weighted assets (RWA). Symbolically,

CAR= (Tier-I + Tier-II + Tier-III)/RWA

• Tier-I capital includes equity capital and free reserves.

• Tier-II capital comprises of subordinate debt of 5-7 years tenure, revaluation reserves, hybrid debt capital instruments and undisclosed reserves and cumulative perpetual preference shares.

• Tier-III capital comprises of short-term subordinate debt. The higher the CAR, the stronger the bank.

2. Debt-Equity Ratio• This ratio indicates the degree of leverage of a

bank.• It indicates how much of the bank business is

financed through debt and how much through equity. Debt-Equity ratio is arrived at by dividing total borrowings and deposits by shareholders’ net worth, which includes equity capital, and reserves and surpluses.

• Higher ratio indicates less protection for the creditors and depositors in the banking system.

3. Advances to Assets This is a ratio of the Total Advances to Total Assets. This ratio

indicates a bank’s aggressiveness in lending which ultimately results in better profitability. Total advances also include receivables. The value of Total Assets excludes the revaluation of all the assets.

4. Government Securities to Total Investments

This ratio shows the risk involved in a bank’s investment. Government Securities, are generally, considered as the most safe debt instrument, which, as a result, carries the lowest return. Since government securities are risk-free, the higher the Government Securities to investment ratio, the lower the risk involved in a bank’s investment. It is arrived at by dividing the amount invested in government securities by total investment.

Assets Quality• The prime motto behind measuring the assets

quality is to ascertain the component of Non-Performing Assets (NPAs) as a percentage of the total assets.

• This indicates what types of advances the bank has made to generate interest income.

• Thus, assets quality indicates the type of the debtors the bank is having. The following ratios are necessary to assess assets quality:

1. Gross NPAs to Net Advance• It is a measure of the quality of assets in a situation,

where the management has not provided for loss on NPAs. The Gross NPAs are measured as a percentage of Net Advances. The lower the ratio, the better is the quality of advances

2. Net NPAs to Net AdvancesIt is a measure of the quality of assets in a situation where the management has not provided for loss on NPAs. Net NPAs are Gross NPAs net of provisions on NPAs and interest in suspense account. In this ratio, Net NPAs are measured as a percentage of net advances.

3. Total Investments to Total Assets Ratio

• Total investments to total assets indicate the extent of deployment of assets in investment as against advances.

• This ratio is used as a tool to measure the percentage of total assets locked up in investments, which, by conventional definition, does not form part of the core income of a bank.

• It is arrived at by dividing total investments by total assets.

• A higher ratio means that the bank has conservatively kept a high cushion of investments to guard against NPAs.

4. Net NPAs to Total Assets• It is a measure of the quality of assets in a situation where

the management has not provided for loss on NPAs. Here, the Net NPAs are measured as a percentage of Total Assets.

• The lower the ratio, the better is the quality of advances.

5.Percentage Change in Net NPAsThis measure gives the movement in Net NPAs in relation to Net NPAs in the previous year. The higher the reduction in Net NPAs levels, the better is for the bank. It is given by the formula: %Change in Net NPAs = (Net NPAs at the end of the year – Net NPAs at the beginning of the year)/Net NPAs at the beginning of the year.

Management Efficiency

• Management efficiency is another vital component of the CAMEL Model that ensures the survival and growth of a bank.

• The ratios in this segment involve subjective analysis and efficiency of management.

• The management of the bank takes crucial decisions depending on the risk perception. It sets vision and goals for the organization and sees that it achieves them.

• This parameter is used to evaluate management efficiency as to assign premium to better quality banks and discount poorly managed ones. The ratios used to evaluate management efficiency are described as under:

1. Total advances to Total Deposits• The ratio measures the efficiency of management in

converting the deposits available with the bank (excluding other funds like equity capital, etc.) into high earning advances. Total deposits include demand deposits, savings deposits, term deposits and deposits of other banks. Total advances also include the receivables.

2. Business per Employee•This tool measures the efficiency of all the employees of a bank in generating business for the bank. It is arrived at by dividing the total business by total number of employees.• By business, we mean the sum of total deposits and total advances in a particular year.

3. Profit per Employee

• This ratio measures the efficiency of employees at the branch level. It also gives valuable inputs to assess the real strength of a bank’s branch network.

• It is arrived at by dividing the Profit after Tax (PAT) earned by the bank by the total number of employees. The higher the ratio, higher is the efficiency of the management.

4. Return on Net Worth

It is a measure of the profitability of a bank. Here, PAT is expressed as a percentage of Average Net Worth.

Earning Quality• Earning quality reflects quality of a bank’s profitability

and its ability to earn consistently. • It basically determines the profitability of the bank. It

also explains the sustainability and growth in earnings in the future.

• This parameter gains importance in the light of the argument that much of bank’s income is earned through non-core activities like investments, treasury operation, and corporate advisory service and so on.

• The following ratios try to assess the quality of income in terms of income generated by core activity-income from lending operation.

1. Operating Profit to Average Working Funds Ratio

• This ratio indicates how much a bank can earn from its operations net of the operating expenses for every rupee spent on working funds.

• This is arrived at by dividing the operating profit by average working funds. Average Working Funds (AWF) are the total resources (total assets or liabilities) employed by a bank. It is daily average of total assets / liabilities during a year.

• The better utilization of funds will result in higher operating profit. Thus, this ratio will indicate how a bank has employed its working funds in generating profit.

2. Spread or Net Interest Margin (NIM) to Total Assets

• NIM, being the difference between the interest income and the interest expended as a percentage of total assets.

• A higher spread indicates the better earnings given the total assets. Interest income includes dividend income and interest expended included interest paid on deposits, loan from the RBI, and other short-term and long term

loans

3. Net Profit to Average Assets / Return on Average Capital Employed

• This ratio measures return on assets employed or the efficiency in utilization of assets.

• It is arrived at by dividing the net profit by average assets, which is the average of total assets in the current year and previous year. Thus, this ratio measures the return on assets employed.

• Higher ratio indicates better earning potential in the future.

4. Interest Income to Total Income

• Interest income is a basic source of revenue for banks. The interest income to total income indicates the ability of the bank in generating income from its lending.

• This ratio measures the income from lending operations as a percentage of the total income generated by the bank in a year. Interest income includes income on advances, interest on deposits with the RBI, and dividend income.

5. Non- interest Income to Total Income• This measures the income from operations other

than lending as a percentage of the total income. • A fee-based income account for a major portion of

a bank’s other incomes. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels.

• Non-interest income is the income earned by the banks excluding income on advances and deposits with the RBI.

Liquidity

• Liquidity is very important for any organization dealing with money. For a bank, liquidity is a crucial aspect which represents its ability to meet its financial obligations.

• Banks have to take proper care in hedging liquidity risk, while at the same time ensuring that a good percentage of funds are invested in higher return generating investments, so that banks can generate profit while at the same time provide liquidity to the depositors.

• Among a bank’s assets, cash investments are the most liquid. A high liquidity ratio indicates that the bank is more affluent.

• The ratios suggested to measure liquidity under CAMEL Model are as follows:

1. Liquid Assets to Total Assets

• Liquid Assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice.

• This ratio is arrived by dividing liquid assets by total assets.

• The proportion of liquid assets to total assets indicates the overall liquidity position of the bank.

2. Government Securities to Total Assets

• Government securities are the most liquid and safe investment. This ratio measures the proportion of risk-free liquid assets invested in government securities as a percentage of the assets held by the bank and is arrived by dividing investment in government securities by the total assets.

• This ratio measures the risk involved in the assets held by a bank.

3. Liquid Assets to Demand Deposits

• This ratio measures the ability of a bank to meet the demand from demand deposits in a particular year.

• It is arrived at by dividing the liquid assets by total demand deposits. The liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice.

4. Liquid Assets to Total Deposits

• This ratio measures the liquidity available to the depositors of a bank.

• Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice.

• Total deposits include demand deposits, savings deposits, term deposits and deposits of other financial institutions.

5. Approved Securities to Total Assets

• This is arrived at by dividing the total amount invested in approved securities by total assets. Approved securities are investments made in the state-associated bodies like electricity boards, housing boards, corporation bonds, share of regional rural banks

Basel III• Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords. These

accords deal with risk management aspects for the banking sector.

• Basel 3 measures aim to:→ improve the banking sector's ability to absorb shocks arising from financial and economic stress,

whatever the source→ improve risk management and governance→ strengthen banks' transparency and disclosures.

• The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for GOI. It is estimated that Indian banks will be required to raise Rs 6,00,000 crores in external capital in next nine years or so i.e. by 2020.

• The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.

Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas.

Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face.

Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks

Requirements Under Basel II Under Basel III

Minimum Ratio of Total Capital To RWAs 8% 10.50%Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00%Tier I capital to RWAs 4% 6.00%Core Tier I capital to RWAs 2% 5.00%

Capital Conservation Buffers to RWAs None 2.50%

Leverage Ratio None 3.00%

Countercyclical Buffer None 0% to 2.50%

Minimum Liquidity Coverage Ratio None TBD (2015)

Minimum Net Stable Funding Ratio None TBD (2018)

Systemically important Financial Institutions Charge None TBD (2011)

Comparison of Capital Requirements under Basel II and Basel III

Performance Of Banking Sector In India• India’s banking sector is currently valued at Rs 81 trillion (US$ 1.31

trillion). It has the potential to become the fifth largest banking industry in the world by 2020 and the third largest by 2025, according to an industry report

• The revenue of Indian banks grew four-fold from US$ 11.8 billion to US$ 46.9 billion over 2001-10.

• Main reasons : Foreign Direct Investment (FDI) of up to 74 per cent with certain restrictions & conservative policies of the Reserve Bank of India (RBI), which have shielded Indian banks from recession and global economic turmoil

• The Bankex is an index tracking the performance of important banking sector stocks, and has grown at a compounded annual growth rate (CAGR) of approximately 20 per cent over 2003-12

Bank assets as a percentage of gross domestic product (GDP) rose from 60 per cent in 2000-01 to 93 per cent by 2008-09, but there after it has plateaued. Bank credit to GDP ratio more than doubled from 24 per cent to 53 per cent during this period but has remained around that level in the following years

While the financial expansion has slowed down in the post-crisis period, the Indian banking sector has shown remarkable resilience and stability.

During the global financial crisis, the timely recourse to counter-cyclical prudential and monetary policy measures helped the banking sector in transiting through this challenging period largely unscathed

Most of the indicators of soundness bear out the stability of the Indian banking sector. The capital to risk-weighted assets ratio (CRAR) at the aggregate and bank group-levels have remained above the statutory minimum requirement of 9 per cent and international norm of minimum 8 per cent since 2001

There was a steady improvement in the asset quality through the 2000s. For instance the gross non-performing assets (NPAs) as per cent of gross advances had declined from 12.0 per cent in 2000-01 to 2.4 per cent in 2007-08.

Thereafter it has increased to 3.7 per cent by December 2012, first with higher NPAs in foreign and private sector banks and more recently in public sector banks

Table 1: Indicators of financial soundness, 2012Sr. No. Country Gross NPAs as %

of gross advances CRAR (%)

  Select advanced countries    1 Germany 3.0* 17.92 Japan 2.4 14.23 UK 4.0 15.74 USA 3.9 15.3  BRICS    5 Brazil 3.5 16.76 Russia 6.0 13.77 India 3.6 13.68 China 1.0 12.99 South Africa 4.0 15.8  EMEs    

10 Indonesia 1.8 17.311 Korea 1.6 14.112 Mexico 2.4 16.013 Turkey 2.7 17.9

CRAR: Capital to risk-weighted assets ratio.*: Data pertains to 2011.

Source: IMF, Financial Soundness Indicators.

While Indian banks compare well with many other advanced and emerging economies including BRICS in terms of NPA and CRAR, there is considerable scope for improvement

Table 2: Select parameters of banking sector efficiency

Year-ended March

Return on assets (%)

Net Interest Margin (%)

Cost-income ratio (%)

Business per employee (Rs. lakh)*

Business per branch (Rs. lakh)*

2001 0.54 3.1 25.9 2.1 34.72002 0.82 2.8 22.3 2.5 39.52003 1.05 2.9 22.1 2.8 43.02004 1.21 3.1 23.7 3.1 47.72005 0.97 3.1 26.1 3.5 53.62006 0.96 3.0 26.8 4.1 62.62007 1.00 2.9 24.0 4.6 68.62008 1.10 2.6 21.0 5.6 79.82009 1.10 2.6 19.2 6.5 90.12010 1.01 2.5 20.2 7.1 92.12011 1.06 2.9 21.6 7.7 99.52012 1.05 2.9 18.5 8.3 99.3

*  At 2004-05 pricesNote: NIM refers to net interest income as per cent of average total assets. RoA refers to net profits as per cent of average total

assets. Cost to income ratio is worked out as operating costs as per cent of total income.Source: Statistical Tables relating to Banks in India, various issues; Basic Statistical Returns of Scheduled Commercial Banks in

India, RBI.

The profitability of the Indian banking sector has been maintained at about 1.0 per cent in terms of Return on Assets (RoA), even in the post-crisis period. The banks have also shown significant improvement in other efficiency indicators such as cost to income ratio, business per employee and business per branch. However, net interest margin (NIM) has gone up indicating deterioration in allocative efficiency

Challenges Ahead1. Weakening asset quality is an immediate concern for the banking sector. This is more so as the banks’

credit composition in the recent years has changed towards longer term assets such as infrastructure and housing.

2. The net interest margin (NIM) remains relatively high. The banks need to further enhance their productivity so that the intermediation cost between depositors and borrowers is minimised. This, coupled with containment of NPAs, will help improve monetary transmission.

3. Banks need to design appropriate strategies for meeting the capital norms. As per the broad estimates from the Reserve Bank, public sector banks would require a common equity of Rs1.4-1.5 trillion in addition to Rs 2.65-2.75 trillion as non-equity capital to meet the full Basel III norms by 2018.

4. A key factor that accentuated the global financial crisis was excessive leverage. While the Indian banking system is currently moderately leveraged, according to the guidelines issued by the Reserve Bank, banks should strive to maintain a minimum Tier I leverage ratio of 4.5 per cent pending the final proposal of the Basel Committee. It would be prudent for banks not to dilute their leverage position in the interim period

5. There are proposals for expansion of the banking sector with new entrants. The Reserve Bank has already invited applications for new banks. Further, as indicated in the annual policy statement of May 2013, the Reserve Bank is preparing a policy discussion paper on banking structure in India which would be placed in the public domain. The expansion of the banking sector commensurate with the growth of the economy would not only enhance competition but also facilitate financial inclusion.

Project

Green-Field Project

Brown-Field Project

Project Finance

1

•Receipt of information & Documents

2

•Pre – Sanction Visit, Interview & Scrutiny

3

•Promoter’s / Company Assessment

4

•Technical Assessment

5

•Market Assessment

6

•Financial Assessment

7

•Socio-Economic Impact Assessment

Detailed Appraisal

• MOA & AOA of Company

• Copy of Licensees Required for the project (State or Central)

• Name of Directors & Designation

• Management Profile

• Details of Group Companies

• Financial Data Regarding Project

• Details of credit limit enjoyed with other banks.

Receipt of Information & Documents• Details of collateral Securities that may

be offered

• IT returns, Wealth tax returns, assets & liabilities of Company & promoters & guarantors.

• Shareholding Pattern

• Status report pertaining to land related matters, appointment of consultants, facilitation of construction, selection of contractors and ordering status.

• A pre sanction visit is done by bank official, to the proposed project site, Promoters office.

• After the inspection bank scrutinizes the past record of the company, its promoters, & its subsidiaries.

• Bank scrutinizes the documents with the help of CIBIL and RBI’s Defaulters List.

Pre-Sanction Visit & Scrutiny

• Credit Information Bureau (India) Ltd; CIBIL is India’s first Credit Information Company, also commonly referred as a Credit Bureau. It collects and maintain the records of payments pertaining to loans and credit cards of individuals and non-individuals. using this information a Credit Information Report (CIR) and Credit Score is developed, enabling lenders to evaluate applications. CIBIL gives credit score using Trans union score, The score is derived by using the details found in the “Accounts” and “Enquiries”. It ranges between 300 to 900.

CIBIL

Continued…….

• Cibil Report.pdf

• Pursuant to the instruction of Central vigilance Commission for collection of information on wilful defaults of Rs.25 lakhs and above by RBI and dissemination to the reporting banks and Financial Institutions, a scheme was framed by RBI with effect from 1st April 1999 under which the banks and notified.

RBI’s Defaulter List

• 1. Company & promoter background:

• In which constitution the applicant company belongs i.e. (Whether the company is a public enterprise, private company or registered society). What is the objective of the company?

• If the company is going for new project then in how many phases the project will be completed?

• Who are the promoters of the company, and what is their credit worthiness?• What is the estimated cost of project, how it is going to be financed, what will be the

debt equity ratio?• What amount has already been brought by the promoter in the project at the date of

application of loan?• The credit track record of the company, if the company is previously assisted by

the bank. If the company is not earlier assisted by the bank however took financial assistance from other bank, then banker’s opinion report to be obtained.

• Working and financial position of the company, whether the company has any contingent liability or not, if company have then what extent it will affect the financial position of the company in the future?

Promoter’s or Company Assessment

2. Management & Shareholding Pattern:

• As per the constitution/MOA/AOA, How many board members are required and the company has been complying with the same or not?

• Who are the members of the board, their age, background, and the position held in the company?

• Whether the company is broad based or not?• Shareholding pattern of the company?

Continued…..

3. Compliance with Corporate governance Norms.

4. Affiliated/ Group Company:

• Background review of the group companies and the promoters of the group companies?

• Their nature of business, what kind of business they are doing?• Detailed analysis of the financial position of the group

companies?• Previously they have taken any financial assistance or not, if

taken then banker’s report on it?

Continued…….

• Compliance with exposure norms / credit policy:

• What is the proposed amount for finance, and whether the proposed amount are coming within the exposure norms (capital in absolute terms, % of total capital fund, exposure to individual industry, substantial exposure norms, client selection norms, take over norms) of the bank.

Continued…….

1. Project Scope

2. Technical Assessment

• What are the technical arrangements made by the company?

• If company is a manufacturing concern, then the manufacturing process?

• If technical experts are hired for the project, then their previous track record?

• What kind of plant & machinery is required and from where the same will be procured?

• Whether the technology used is updated or not?

Technical Assessment

3. Location and site:

• What is the location of the project, whether there is any location advantage to set up the project in the said location?

• Whether the site of the project have good infrastructure facility, like

– Which is the nearest Railway station– From which roads the project site is connected with the other parts

of the country– Which is the nearest port

Continued……..

4. Input of production:

• What kind of raw material is required, and from where it will be acquired, whether it is available locally or imported, whether the price of raw material is cheap or not?

• Whether continuous power supply is available or not for production purpose?

• Water facility is available or not?

Continued……

5.Implementation schedule & visit report:

• What is the proposed implementation schedule?• Whether the work is going on as per envisaged schedule?• Site development work is in progress or not?• What amount of capital expenditure has been incurred by the

company?• Whether order for plant & machinery has been placed or not?• Which company is engaged in construction process, their

previous projects and background is reviewed?• From when the project will be fully operative?

Continued…….

1.Demand outlook:

• End use application• Historic Demand and growth• Factors affecting demand

2. Supply Outlook:

• Domestic & International Supply• Factors affecting supply

Market Assessment

3. Government Policy:

• Government policy, whether positive or negative for the respective sector

• If the policy of government will change in future, then what impact it will have on project?

4. Market Potential:

• Demand Supply Position

Continued……

1. Project Cost:

• What is the total project cost?• In how many phases the project will be

completed and project cost breakdown of every phases?

• Cost comparison with similar kind of project that has been completed to see whether the cost is high or low in comparison?

Financial Assessment

2. Means of Finance:

• From which source the project will be financed?• Whether it is financed through promoter’s

contribution, internal accruals, Equity share capital, unsecured loan or financial assistance from bank.

• What will be the Debt- Equity ratio? • Whether proper security margin is available for taking

financial assistance.

Continued……

3. Performance Indicators:

• What profit will be generated from the project, what will be the future profitability?

• Following important ratios are checked,• Debt-equity ratio (DER)• Current Ratio (CR)• Fixed assets coverage ratio (FACR)• Debt service coverage ratio (DSCR)• Cash flow debt service coverage ratio (CFDSCR)• Interest coverage ratio (ICR)• Cash Flow interest coverage ratio (CFICR)• Internal rate of Return (IRR)

Continued…….

4. Risk and Sensitivity analysis:

• What are the different risk associated with the projects like, operational risk, financial risk, management risk, market risk, currency risk etc. and what steps to be taken to mitigate them.

• During the appraisal the sensitivity analysis is also done to ascertain the effect of adverse change f

• parameters (Sales, raw material price, capacity, cost of power % utilities) on the project. Any

• negative change on profitability vis-à-vis the projected level may affect the debt service capacity of

• the project. What will be the profit, and ratios at different level of operation?

Continued…..

1. Economic Considerations:

• The proposed project will have what kind of impact on overall economic condition.

• Whether it will help in the development of the area as well as the local people.

• Any scope of foreign exchange earnings.

Socio Economic Impact Assessment

2. Envoirment Considerations:

• What kind of impact it will have on the enjoinment, if any negative impact will have then what measures are taken for the same?

3. Status of Government Consent:

• All the necessary permission are taken or not from the appropriate authorities?

• Envoirment clearance has taken or not

Continued…..

• Here bank looks for the total profit generated by the bank by providing finance to a particular project.

• XYZ company.xls

Bank’s Profitability

• After going through the whole appraisal process bank decide about the means of finance.

Means of Financing

Means of Finance

Fund- Based Limit

Term loan Short Term Loan

Non-Fund Based Limit

Capex LC Bank Guarantee

• If the amount required for loan is huge then in that case, as per the company arrangement lending arrangement is decided. As per RBI various lending arrangement are,

– Sole Banking Arrangement– Multiple Banking Arrangement (MBA)– Consortium Banking Arrangement.

Lending Arrangement

Assessment of Non-Fund Based limit

Particular Amount (Rs)

Projected annual purchase of Raw material (A) *****

Projected annual purchase under LC (B) *****

Projected annual purchase under LC C= (A)*(B) *****

Monthly raw material being purchase through LC [(C) /12] = (D)

*****

Usance Period (month) (E) *****

Lead Period (month) (F) *****

Amount of LC required G= (D)*(F+F) *****

• Computation Showing assessment of Letter of Credit

• Some Generalized terms & conditions that are stipulated by the banks are,

– Bank asks its applicant borrower to take insurance of its assets through banks insurance channel.– Agree that the loan should not be utilised for any purpose other than for which it is

sanctioned in particular and shall not for any of the following purposes viz. repayment of dues of promoter’s/ association concern/ inter corporate deposit.

– The borrower shall undertake to provide all relevant data/ information to be furnished and disclosed to Credit information Bureau (India) Limited (CIBIL) authorities and to other statutory bodies as may be required by bank from time to time.

– The borrower shall not escrow its future cash flow or create any other charge or lien or interest of what so ever nature thereon without the prior approval of the bank.

– Borrower shall submit the audited/ unaudited financial statements as specified below:• Provisional- Within 3 months form the close of the accounting year• Audited- Within 6 months from the accounting years

– Bank reserve the right to withdraw the facilities in the event of any change in circumstances including but not limited to a material change in the ownership / Shareholding pattern / management of the firm.

– If the proposed finance is in consortium or multiple banking arrangements then NOC/Pari passu letters from other lenders.

Terms of Sanction

• working capital finance is the fund required to meet the cost involved the working capital cycle or operating cycle.

• ABC Company.xls

Working Capital Finance

THANK YOU