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EXCECUTIVE SUMMARY

The project report is titled ‘’A study on credit appraisal mechanism of KSFC’’.

With the increase in social responsibility and shift from security to purpose oriented

lending it’s no! e"pected that the ban#s and financial institutions should assist

entrepreneurs during all phases of a project ie. identification selection appraisal

implementation and follo! up.

KSFC !as established by $o%ernment of Karnata#a in &arch '()( under the

SFC’s Act '()' for e"tending the financial assistance for setting up of tiny micro small

and medium scale industrial units in the state.

The small and medium scale sector in *ndia lac#s capital to run their business and

star%ing for funds in the earlier days. SFCs !ere started to pro%ide funds to small and

medium scale sector and encourage first generation entrepreneurs to start business

especially in bac#!ard area throughout the country

*ndustrial projects are appraised by different institutions for a %ariety of reasons.

State financial institutions and other financial institutions appraise projects to find out

!hether it is !orth to ma#e to in%estments in them and e"tend long term loans.

Since capital is a scarce resource it should be allocated carefully for the

de%elopment of industrial units and it should be helpful to the society KSFC has been

acting as regional de%elopment ban# by pro%iding assistance to needy entrepreneurs.

+efore gi%ing loans to any project the corporation chec#s the mar#eting financial

economical social and legal %iability of the project after this appraisal procedure the

KSFC !ill pro%ide term loans. All set norms are fulfilled as per the policy

Thus the basic objecti%e of this study is to assess the appraisal system of KSFC

and to chec# its ade,uacy to appraise a project and to find out relationship bet!een the

appraisal procedure and the -A percentage of the KSFC.

Thus this project gi%es the information about the dra!bac#s in the appraisal

procedure of the KSFC !hat are the changes to be done to ma#e it more effecti%e and

efficient and ho! the -A and the amount of loan sanctioned is correlated to each other.

Finally !e arri%e at a conclusion that the project appraisal mechanism of KSFC is

ade,uate enough to appraise a project !ith that it also re,uires some changes to be done.

CHAPTER 1

Introduction

Finance is the lifeblood of all types of economic acti%ity. *t is so indispensable

that no one can neglect nor ignore the importance of finance. Finance is defined as


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distribution of and purchase of liability and e,uity claims issued for the purpose of

generating re%enue producing assets its management of monetary affairs of the company

it includes determining !hat has to be made for raising money on best term a%ailable and

!hat has to be made for allocating a%ailable funds to the best use.

Finance is the administration of economic acti%ity it includes ban#ing money

and Credit for different type and classes. All major business decisions made ha%e

financial implications no matter !hether an organi/ation is small or big ne!ly started or

e"isting business needs finance. *f decision relating to money or funds fails it may result

in failure of the business organi/ation.

Financing is a comprehensi%e acti%ity !hich includes not only sources but also

cost associated !ith their resources duration of re,uirement and proper utili/ation of

funds.

Global Scenario of Finance

*n recent years the financial sector in most of the countries around the !orld has

undergone major changes. 0eregulation liberali/ation and technological inno%ations

allo! financial institution to a larger %ariety of products and ser%ices ma#ing the

traditional frontiers bet!een ban#ing securities and insurances sectors merge. *n practice

the financial sector is in a process of rapid transformation. 1eforms are continuing as part

of the o%erall structural reform aimed at impro%ing the producti%ity and efficiency of the

economy. The role of an integrated financial infrastructure is to stimulate and sustain

economic gro!th.

The 2S345 billion *ndian financial sector has gro!n at around ')

percent and displayed stability for the last se%eral years e%en !hen other mar#ets in the

Asian region !ere facing a crisis. This stability !as ensured through the resilience that

has been built into the system o%er time. The financial sector has #ept pace !ith the

gro!ing need of corporate and other borro!ers. +an#s capital mar#et participants and

insurers ha%e de%eloped a !ide range of product and ser%ice to suit %aried customer

re,uirements.

Indian Financial S!"te#

The !orld system stands for a set of bodily organs li#e composition or concurring

function a scheme of classification and a method of organi/ation. Finance holds the #ey

to all human acti%ity. Finance is the study of money its nature creation beha%iors

regulation and administration. So all those acti%ities dealing in finance are organi/ed is

#no!n as the financial system or financial sector.

The e%olution of the financial system in *ndia has been interlin#ed !ith the


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gro!th of the macro economics. The financial system has tra%elled up and do!n from

barter financial system greatly influenced by the spread of urban society and abo%e all the

ad%ent of large6scale industriali/ation in the second half of the nineteenth century altered

the e"pansions of the rail!ays and especially !ith the re%olutionalisation of information

technology.

*n *ndia the e%olution of financial system reflected its political social and

economic need and aspiration. $o%ernment has played a large role in the creation and

broad basing of the financial system in the country. The go%ernment has e"erted its

influence o%er the flo! of credit control and direction. *t is also big borro!er as !ell as

regulator of the financial system.

The gro!th path of financial system can be di%ided into three distinct phases

the first phases are characteri/ed by acti%e state inter%ention !ith a %ie! to build up the

institutional infrastructure. 0e%eloping countries are in a hurry to catch up !ith modern

ban#ing and de%elopment in money and capital mar#ets and they can’t afford to !ait for

the spontaneous and autonomous gro!th of the financial system to ta#e place.

The financial system is closely connected or interlin#ed !ith institutions

agents practices mar#et transactions claims and liabilities. *n a financial system it is

concerned about money audit and finance some of the terms are related but some are

different form each other.

7 &oney refers to current medium e"change.

7 Finance is monetary resources comprising debt and o!nership funds of state8

company.

7 Credit or loan is a sum of money to be returned normally !ith interest.

7 Currency and e"change form an essential part of financial system.

Sco$e of t%e Financial Function

a& E"ti#ation of t%e financial re'uire#ent"

9stimating the financial re,uirements is the first and the foremost tas#

and long term financial needs of the concern. This calls for preparation of the financial

plan for present as !ell as for future. The amount re,uired for purchasing fi"ed assets as

!ell as needs of funds for !or#ing capital ha%e to be estimated.

b& (ecidin) t%e ca$ital "tructure

The term capital structure refers to the #ind and proportion of different

securities for raising funds. After deciding the ,uantum of funds re,uired it should be


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decided as to !hich type of securities should be raised further !hile deciding about the

capital structure due consideration ::::::::::::::::::::::

c& Selectin) a "ource of finance

;nce the capital structure is decided an appropriate source of finance is

selected. The %arious sources of finance include share capital debenture loans from

financial institution commercial ban#s and public deposits etc.

d& Selection $attern of in*e"t#ent

;nce the funds ha%e been procured the decision about in%estment pattern that is

to be ta#en. A decision has to be ta#en as to type of assets that are to be purchased first

funds may be in%ested in fi"ed assets and an appropriate portion may be #ept for the

purpose of !or#ing capital.

e& Pro$er ca"% #ana)e#ent

1e,uirement of cash at different times and then ma#e arrangements for ac,uiring

cash.

f& I#$le#entin) financial control

An efficient system of financial management necessitates the %arious

control parameters generally such as 1;* +udgetary Control +rea# 9%en Analysis Cost

Control and 1atio Analysis.

)& Pro$er u"e of "ur$lu"e"

The utili/ation of profit or surpluses is also an important factor in financial

management. A judicious use of surplus is essential for e"pansion and di%ersification

plans and also in protecting the interest of share holders.

+b,ecti*e of t%e Financial Function

The primary objecti%e of the finance function is to arrange for re,uired

funds for the business from time to time

a& Ac'uirin) "ufficient fund"

The basic objecti%e of finance function is to asses or estimates the financial

re,uirements of an enterprises and then finding out suitable sources for recei%ing them.

b& Pro$er utili-ation of fund"

Though selecting the source and rising of funds is most important objecti%e of

the finance function. The proper utili/ation of such funds is e%en more critical the funds

should be utili/ed in such a !ay that ma"imum benefit is deri%ed from them.

c& Increa"in) $rofitabilit!


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The planning and control of finance function aims at increasing profitability

of the concern. *t is a fact that money generated money sufficient fund !ill ha%e to be

in%ested in order to increases profitability.

d& Ma.i#i-in) enter$ri"e *alue

Finance function also aims at ma"imi/ing the %alue of the firm usually a

enterprise %alue is lin#ed !ith profitability.

Pattern of Fund Re'uire#ent

A firm basically needs three types of funds they are<

7 Short term finance

7 &edium term finance

/ =ong term finance

Cla""ification of Variou" Source" of Finance

S%ort Ter# In*e"t#ent

a& Call #one!0 call notice

This is the barro!ing and lending money for short term ranging from ' to '>

days if the money is lent for a day is called call money. *t is called because of the money

that is lent is to repaid the ne"t day together !ith agreed interest. *f it is for a period of

more than a day and less than '> days it is called as notice money.

b& Co##ercial $a$er

*t is another short term instrument introduced in a domestic money

mar#et. This !as aimed to!ards disintermediation. *t is an unsecured promissory note

issued by the company either directly or through ban# or merchant ban#.

c& Trea"ur! bill"

*t !as introduced in the year of '(5?. This is the most li,uid

instrument a%ailable in *ndian mar#et. Treasury +ills are issued by the central go%t. to

meet its short term needs.

d& Co##ercial bill"

;ne of the !ays of raising !or#ing capital finance is by !ay of

discounting bills by the supplier on his customer in course of his routine trade acti%ities.


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The uni,ue feature of these commercial bills is that could be subjected to further rounds

of discounting by ban# holding their bills.

e& Certificate of de$o"it"

1+* introduced this in '(5( !ith the objecti%e of broad basing the money

mar#et. *t is the mar#etable receipt of funds deposited in ban# for a period at a specified

rate of interest.

Mediu# and lon) ter# finance

a& E'uit! "%are"

9,uity shares are commonly referred to common stoc# or ordinary share. *t

is an instrument issued by the company to mobili/e the capital. Companies issues them in

ne! capital issue mar#et. The e,uity shareholders enjoy special po!ers of %oting and can

become director of a company.

b& Preference "%are"

The characteristics of preference shares are hybrid in nature li#e bonds their

claims on the company income are ltd. and they recei%e the fi"ed di%idend in e%ent of

li,uidation of company their claims on assets of firms are also fi"ed.

c& (ebenture"

The pri%ate sector companies generally issue debentures as a long term

promissory note for raising capital. The company promises to pay interest and principal

as stipulated bond is an alternati%e form of debentures in *ndia.

d& Retained earnin)"

1etained earnings refer to creation of reser%es out of profit and the

utili/ation of accumulated profit or reser%es for meeting the financial re,uirements of

business. *t is also called as internal source of finance.

e& Public de$o"it"

*t is usually raised by a company from general public as means of

borro!ings assuring them a fi"ed @ interest for a specific period of time.


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Recent trend" in Indian financial "!"te#

With a %ie! to bringing the interest rates nearer to the free mar#ets rates the

go%ernment has ta#en the follo!ing steps<

7 The interest rate on company deposits is freed.

7 The interest rate on ?) days treasury bills determined by auctions and they are

e"pected to reflect the free mar#ets rates.

7 The coupon rate on go%ernment loans been re%ised updates so as to be mar#et

oriented.

7 The interest rate on debentures is allo!ed to be fi"ed by companies depending

upon the mar#et rate.

7 The ma"imum rate of interest payable on ban# deposits abo%e one year.

Ma,or $la!er" in Financial Sector

a& Indu"trial (e*elo$#ent an2 of India 3I(I&

The *0+* !hich !as established in '(?> under the act of parliament is the

principal financial institution for pro%iding credit and other facilities for de%elopment of

industry co6ordinate !or#ing of institutions engaged in financing promoting or

de%eloping industrial units and assisting de%elopment of such institutions. *0+* has been

pro%iding direct financial assistance to large and medium industrial units and helping

small and medium industrial concerns through ban#s and state le%el financial

corporations. -o! it is con%erted into a ban#.

b& Indu"trial Finance Cor$oration of India 3IFCI&

The go%ernment of *ndia has set up the *FC* in '(>5 under the special act.

At the time of independence in '(>B *ndias capital mar#et !as relati%ely under6

de%eloped. Although there !as significant demand for ne! capital there !as a dearth of

pro%iders. &erchant ban#ers and under!riting firms !ere almost non6e"istent. And

commercial ban#s !ere not e,uipped to pro%ide long6term industrial finance in any

significant manner.

*t is against this bac#drop that the go%ernment established The *ndustrial Finance

Corporation of *ndia D*FC*E on uly ' '(>5 as the first 0e%elopment Financial

*nstitution in the country to cater to the long6term finance needs of the industrial sector.

The ne!ly established 0F* !as pro%ided access to lo!6cost funds through the central


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ban#s Statutory =i,uidity 1atio !hich in turn enabled it to pro%ide loans and ad%ances to

corporate borro!ers at concessional rates.

c& S#all Indu"trie" (e*elo$#ent an2 of India 3SI(I&

S*0+* has been established in '(5( to function as an ape" ban# for tiny

and small scale industries. *t is an independent financial institution aimed to aid the

gro!th and de%elopment of micro small and medium scale enterprises in *ndia. *t !as

incorporated initially as a !holly o!ned subsidiary of *ndustrial 0e%elopment +an# of

*ndia. Current shareholding is !idely spread among %arious state o!ned ban#s insurance

companies and financial institutions. +eginning as a refinancing agency to ban#s and

state le%el financial institutions for their credit to small industries it has e"panded its

acti%ities including direct credit to the S&9 through 'GG branches in all major industrial

clusters in *ndia. +esides it has been playing the de%elopment role in se%eral !ays such

as support to micro6finance institutions for capacity building and on lending. 1ecently it

has opened B branches christened as &icro Finance branches aimed especially at

dispensing loans up to 1s. ).GG la#h.

d& Indu"trial Credit and In*e"t#ent Cor$oration of India 3ICICI&

The *ndustrial Credit and *n%estment Corporation of *ndia !as sponsored by

a mission from the !orld ban# for the purpose of de%eloping small and medium

industries in the pri%ate sector. *t !as registered in january'(() under the *ndian

companies act. *ts issued capital has been subscribed by *ndian ban#s insurance

companies and indi%iduals and corporations of the *ndian ban#s insurance companies

and indi%iduals and corporations of the 2nited States the +ritish eastern e"change ban#s

and general public in *ndia.

The *ndustrial Credit and *n%estment Corporation of *ndia =imited D*C*C*E

!as incorporated at the initiati%e of World +an# the $o%ernment of *ndia and

representati%es of *ndian industry !ith the objecti%e of creating a de%elopment financial

institution for pro%iding medium6term and long6term project financing to *ndian

businesses. *n '((> *C*C* established +an#ing Corporation as a ban#ing subsidiary.

Formerly #no!n as *ndustrial Credit and *n%estment Corporation of *ndia *C*C* +an#ing

Corporation !as later renamed as *C*C* +an# =imited. *C*C* founded a separate legal

entity *C*C* +an# to underta#e normal ban#ing operations 6 ta#ing deposits credit

cards car loans etc.

e& State Financial Cor$oration4" 3SFC"&


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SFC s form a uni,ue set of institutions established to assist and‟

de%elop industriali/ation in the state of *ndia. For the purpose of assisting the financial

help to small and medium si/ed industries the go%ernment of *ndia desired to set up state

financial corporations.

E*olution of State Financial Cor$oration 3SFC&

The *ndian Financial sector today comprises an impressi%e net!or# of

financial institutions and !ide range of financial instruments. Functionally there are t!o

types of financial institutions in the *ndian mar#et namely de%elopmental institutions and

in%estment institutions.

7 0e%elopmental institutions include industrial finance corporation of *ndia D*FC*E

*ndustrial 1econstruction +an# of *ndia D*1+*E State Finance and 0e%elopment

Corporation.

7 *n the category of in%estment institutions comes the 2nit Trust of *ndia D2T*E

=ife *nsurance Corporation D=*CE State =e%el bodies li#e State *ndustrial

*n%estment Corporation.

The *dea of de%elopmental ban#s has its origin in the urge in the bac#!ard and under

de%eloped countries to achie%e ,uic# economic gro!th. 2nder this urge a de%elopmental

ban# !as concei%ed as an instrument for promoting all round de%elopment since they

underta#e both ban#ing function as !ell as de%elopmental functions.

The establishment of *ndustrial Finance Corporation of *ndia D*FC*E though

bridged serious gap in institutional finance for large6scale industrial units the problem of

term finance for medium and small6scale units !as left unsol%ed. The need for

establishing a similar institution at the state le%el !as left unsol%ed. The need for

establishing a similar institution at the state le%el !as initially felt as de%ice to bridge the

gap. Hence the SFC s came into e"istence to loo# into this problem as regional‟

de%elopment ban#s o%er a period of years.

SFC s form a uni,ue set of institutions established to assist and de%elop‟

industriali/ation in *ndia. The acti%ities of *FC* !ere statutorily restricted to large scale6

sector. The *ndian socio6economic en%ironment !ith certain under6de%eloped feature

constantly stressed the urgent need for the de%elopment of medium and small scale

industries. 9stablishment of regional de%elopment ban#s has been important means to

meet this end.

Their sources of funds are issue of bonds and debentures in the mar#et fi"ed

deposits from the public borro!ing from 1+* *0+* state go%ernments etc. These funds

are deployed mostly as loans and ad%ances to the %arious medium and small enterprises


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in%estment in go%ernment securities corporate share debentures etc. These bodies are to

assist in particular small6scale industries units in bac#!ard areas. There are '5 SFCs

operating in *ndia they are

7 Assam financial corporation

7 +ihar state financial corporation

7 0elhi financial corporation

7 $ujarat financial corporation

7 Haryana financial corporation

7 Himachal financial corporation

7 ammu Kashmir financial corporation

7 Karnata#a state financial corporation

7 Kerala financial corporation

7 &adhya radesh financial corporation

7 &aharashtra state financial corporation

7 ;rissa state financial corporation

7 unjab financial corporation

7 1ajasthan financial corporation

7 Tamil nadu industrial in%estment corporation limited

+b,ecti*e" of SFC4"

The SFC s ha%e been authori/ed under section 4) of the SFC s Act to‟ ‟

carry on the follo!ing #inds of business.

7 $ranting of loans or ad%ances to or the subscribing to debentures of industrial

concern repayable !ithin a period not e"ceeding 4G years from the date on !hich

they are granted or subscribed as the case may be.

7 2nder !riting of the issues of stoc#s shares bonds or debentures by industrial

concerns.

7 $uaranteeing on such terms and conditions as may be agreed upon raised by

industrial concerns that are repayable !ithin a period not e"ceeding 4G years

capital are floated in the public mar#et.

7 $enerally doing of all such acts and things as may be incidental to or

conse,uential upon the e"ercises of their po!ers or the discharge of their duties

under the act.

(EFI5ITI+5 of 6A$$rai"al6


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The %aluation of property Di.e. real estate a business an anti,ueE by the

estimation by an authori/ed person. *n order to be a %alid appraisal the authori/ed person

!ill ha%e a designation from a regulatory body go%erning the jurisdiction the appraiser

operates !ithin.

7HAT IS CRE(IT APPRISA89

/ Credit appraisal means an in%estigation8assessment done by the ban# prior to

pro%iding any loans I ad%ances8project finance I also chec#s the commercial

financial I technical %iability of the project proposed.

/ roper e%aluation of the customer is preferred !hich measures the financial

condition I ability to repay bac# the loan in future

/ Credit appraisal is the process of appraising the credit !orthiness of the loan

applicantFactors li#e


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eligibility of loan procedure %i/ tenor eligibility 9.&.*. De,uated monthly installmentE

The credit appraisal is done for different purpose they are as follo!s

7 To #no! the mar#et for business.

7 To #no!s the customers financial re,uirement I his e"perience.

7 To #no! that !hether he is ta#ing the loan from other ban# or non6ban#ing

financial institution and !hether he is able to pay timely to pay installment to

satisfy their loan amount.

Thus the appraisal of credit appraisal is %ery much important for the disbursement of

loan and ad%ances.

Appraisal also helps to find out his integrity in this project for !hich customers

ta#es loan. His aims and intensions in ta#ing this loan and the purpose for !hich he is

ta#ing loan for !hich its o%erall capacity is chec#ed.

*n short credit appraisal system is %ery important for the purpose of ban# and

-+FC Dnon6ban#ing financial companyE and it !ould not be able to collect the money

!hich is lending to their customers. *f that -+FC is not able to collect their installments

then that loan account !ill become -A Jnon performing asset and the good!ill and

reputation of the -+FC !ill be do!n. The officer !ho !ill be gi%ing sanction to that

particular proposal !ill also be ,uestioned.

He must do the proper chec# I analysis of the documents after studying all this

aspects.

CRE(IT APPRAISA8

The process by !hich a lender appraises the credit!orthiness of the

prospecti%e borro!er is #no!s as credit appraisal. This normally in%ol%es appraising

the borro!er’s payment history and establishing the ,uality and sustainability of his

income. The lender satisfies himself of the good intentions of the borro!er usually

through an inter%ie!.

Credit Scorin)Credit scoring is the statistical system used by lenders to determine your

credit!orthiness. *nformation about you and your credit e"periences is collected from

your loan application and your credit report. 2sing a statistical program lenders compare

this information to the credit performance of consumers !ith similar profiles.

A credit scoring system a!ards points for each factor that helps predict !ho

is most li#ely to repay a debt. A total number of points La credit scoreL helps predict ho!


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credit!orthy you are that is ho! li#ely it is that you !ill repay a loan and ma#e the

payments !hen due

The points are distributed in %arious aspects of your profile such as <

6 personal information< age educational ,ualifications number of dependent8children

spouse’s income

6 employment information < organi/ation designation length of ser%ice etc.

6 income information < net income installment of other loans other liabilities.

6 net !orth information < o!ning a house %ehicle credit cards telephone etc.

6 pre%ious relations !ith the lender < ban#ing account credit card any other loan etc

from the same lender

Mour le%el of education can gi%e an indication to the lenders !hether it is a

good ris# to e"tend credit to you. Higher the education better is the credit score. A person

!ith professional ,ualifications is gi%en more points than a simple graduate.

=enders prefer people !ho are stable. So lenders assign more points to people

!ho’%e li%ed in a particular location or ha%e !or#ed for a single employer for many

years. *f you’%e mo%ed around a lot you lose precious points. *f you’%e mo%ed because

of a better6paying job you can recoup some of those points if your salary has increased

for e"ample.

=enders rate your profession and your employers too. &ost of the lenders ha%e a

list of appro%ed companies. Credit points are allotted based on the type of company you

!or# for or the type of profession you are in. The rating from most fa%ored to least

fa%ored profession 8 organi/ation may %ary from lender to lender ho!e%er an indicati%e

list is presented here under<

aE go%ernment 8 public sector underta#ings 8 &-Cs.

bE teaching 8 educational institutions.

cE Scientists 8 engineers.

dE +an#s 8 financial institutions.

eE chartered accountants 8 company secretaries.

fE Hotels 8 tra%el organi/ations.gE &edia 8 ad%ertising agencies

you get additional points based on !hether you o!n a house or ha%e a %ehicle or

hold a %alid credit card. Some lenders insist that all prospecti%e customers must ha%e a

phone at residence. These factors play an important role in determining your credit

eligibility.


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7%! i" credit "corin) u"ed9

Credit scoring is based on real data and statistics so it usually is more reliable

than subjecti%e or judgmental methods. *t treats all applicants objecti%ely. udgmental

methods typically rely on criteria that are not systematically tested and can %ary !hen

applied by different indi%iduals.

Credit scoring models are comple" and often %ary among creditors and for

different types of credit. *f one factor changes your score may change. The tric# here is

you can’t find out your score.

Companies pro%iding loans and credit do not disclose their credit appraisal

criteria. +oth the score and the statistics that go into it are top secret. The reason being

that if people understood their appraisal criteria and scorings they could cheat by altering

their profile thereby artificially jac#ing6up their o%erall credit score. +ut of course !e!ill try to impro%e our credit scores !on’t !e:

*n short credit appraisal system is a conclusi%e report !hich enables

decision according to the norms and policies of the organi/ation. *t is the first tool in the

hands of credit appraisal officer. *n short credit appraisal system is a %ital and important

tas# to be done at loan and sanctioning time.

I5TR+(UCTI+5 T+ A5


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segments of the population etc. has thus largely been successful in meeting the objecti%e

of nationali/ation and natural.

+an#s are bac# bone of society. A ban# must meet the financial needs of a

customer by acting as a custodian of his asset. ro%iding credit facilities and assisting

him to speedily through out financial transaction of one type or another. +an#ing !hen

you come to thin# of it is about people it is not figure files and ledger.

+an# ser%ices need considerable impro%ement on an emergent basis. And the time

has come for ban# to loo# in!ard to find out !hat is the nature and ,uality of the product

they sell !hat is the product is been demanded by the customer.

+an#s ha%e a social purpose. +an#s ha%e been interested !ith a !orthy

cause.+an#s belongs to the nation only through people ban#s future prosperity and the

e"tent for its participation in the country’s economic ad%ancement rest ultimate in

customer hands.

A ban#er is a dealer in money and credit. The business of ban#ing consist of

borro!ing and lending. +an#s acts as an financial intermediary bet!een sa%er DlenderE

and in%estor Dborro!erE by accepting deposits of money from a large number of

customers and #ey factor !ill al!ays remain customer. *t !ould be unrealistic today to

belie%e that ban#s are mere financial institutions. Wor#ing for profit ban#s essentially are

no! social organi/ation rendering financial ser%ices to sub ser%ing the social economic

objecti%e of the society.

Ser%ices to the society means ser%ile to customers present and future from the

point of %ie! the prime functions of ban#s of %ie! the prime functions of ban#s can be

defined as the creation and deli%ery of customers needed ser%ices in satisfying manner.

Therefore a ban#ers ban# is to identify this customer and these needs.

=ending a major portion of a accumulated NpoolO of money to those !ho !ish to

barro!.

The *ndian companies act defines the term ban#ing as N accepting for the sa#e of

lending or in%estment of deposits of money from the public repayable on demand or

other!ise !ithdra! and able by che,ue draft or other!iseO.

FU5CTI+5S +F A5


16/42

7 The dra!ing ma#ing accepting discounting buying and selling collecting and

dealing in bills of e"change promissory notes coupons drafts bill of lading

rail!ay receipts !arrents debentures certificates securities both negotiable and

non negotiable.

7 The granting and issuing of credit tra%eler’s che,ue etc.

7 The ac,uiring holding issuing on commission under!riting. 0ealing in stoc#

funds shares debentures bonds securities of all #inds.

7 The purchasing and selling of bond scrip’s and other forms of securities on behalf

or others negotiations of loans and ad%ances. The recei%ing of all #inds of bonds

or %aluables on deposit or for safe custody or other!ise.

7 ro%iding safe deposits of %aluable.

7 Collecting transmitting of money and securities.

7 +uying and selling of foreign e"change including foreign notes.

IMP+RTA5CE +F A5


17/42

place to another ban#s drafts and demand draft are commonly used for remittance

of fundsP mail transfer and telegraphic transfer are also used for transfer of funds.

HIST+RY +F M+(ER5 A5 major ban#s

on uly '(?( later on April '(5G si" more ban#s !ere nationali/ed to achie%e the

objecti%es.

resent scenario of ban#ing industry< The *ndian ban#ing can be broadly categori/ed into

nationali/ed Dgo%ernment orientedE pri%ate ban#s and speciali/ed ban#ing institution. The 1+* acts as a centrali/ed body monitoring any discrepancies and short

coming is the system. Since the nationali/ation of the ban#s in '(?( the public sector

ban# ha%e ac,uired a place of prominence and has then seen tremendous progress.

The need to become highly customer focused the slo! mo%ing public sector ban#s

to adopt a fast trac# approach.

5E7 GE5ERATI+5 A5


18/42

configurations of benefits and a !ide portfolio of production and ser%ices. The population

of these ban#s can be gauged by the fact that is a short span of time these ban#s gained

considerable customer confidence.

Re*ie= of literature > re"earc% de"i)n

Introduction about t%e intern"%i$

The project report entitled ‘’A study on feasibility of project appraisal

mechanism of KSFC has been underta#en at Karnata#a State Financial Corporation for a

duration !hich starts from 56'464G'> to '>6G464G') to find out !hether the project

appraisal procedure of the KSFC is feasible enough to appraise a project and to find out

the dra!bac#s of the appraisal procedure.

KSFC !as established by $o%ernment of Karnata#a in &arch '()( under the

SFC’s Act '()' for e"tending the financial assistance for setting up of tiny micro small

and medium industrial units in the state.

Si)nificance of conductin) "tud!

Capital is a scarce resource hence it should be optimally utili/ed and there of rational allocation of this resource is %ery important. The a%ailable capital should be used

to achie%e o%erall social economic objecti%es. Credit is the life line of business. Small

businesses fail to get access to capital and money mar#ets. Hence it is necessary for any

financial institute to #no! the feasibility of the project before lending the money. The

main objecti%e of establishing KSFC !as to pro%ide term loan assistance to tiny small

and medium scale enterprise mainly for purpose of ac,uisition of fi"ed assets !or#ing

capital etc. hence and project should be appraised using different appraisal techni,ues to

#no! the project’s !orth before pro%iding financial assistance.

Introduction

*ndustrial projects are appraised by different institutions for a %ariety of reasons.

State financial institutions and other financial institutions appraise projects !hether it is

!orth to ma#e to in%estments in them and e"tend long term loans. $o%ernment allied

agencies appraise projects !ith a %ie! to find out !hether they should be gi%en any ta"


19/42

e"emptions subsidies guaranties or other incenti%e. The purpose of appraisal thus %aries

from one appraising agency to another !hile the objects of appraisal may differP the

general principles of appraisal are almost al!ays the same. +asically project is

technically feasible and financial %iable. 9,ually important are the mar#etability of the

products produced and the competence of the promoters to implement the project and

successfully sell the goods produced. This combined co6ordinate e"amination of a project

is familiarly #no!n as project appraisal.

Since SFC are set up mainly to pro%ide financial assistance on a long term basis

their approach ha%e to be necessarily different from those of commercial ban#s !ho

pro%ide short

term !or#ing capital facilities. eople !ho lend money should be prepared to lose some

of it

may be a cliche but it is a pointer to the essentially ris#y nature of transaction. The

purpose of appraisal ho!e%er is not to set do!n a categorical statement of long range

prospects of an industrial unit but only broad guidance of the financial institutions in

forming its o!n judgment regarding the future prospects of the project en%isaged by the

borro!ing unit and the !or# out the term of loan to safeguard the interest of the

institution to the ma"imum e"tent .

The factors are ta#en in to consideration in the security of indi%idual

applications the !eight age gi%en to indi%idual factors %aries from case to case bais

important among those are type of organi/ational acti%ity of the borro!ing unit its si/e

nature of the product the mar#et potential managerial competence resourcefulness of

promoters the financial soundness of the project the ,uantum of the loan its profitability

etc.

While e"tending term loans it is not only sufficient to concentrate only on

commercial profitability of a project as determined by the le%el of profits but also

e,ually necessary to determine the economic significance or importance of the project to

the de%elopment of the economy.

Therefore ban#s and financial institutions play an important role in the

de%elopment of country. They pro%ide not only financial assistance to %iable projects but

also assist the entrepreneurs during all phases of project %i/ identification selection

appraisal implementation and follo! up. All the phases are inter6related and the

e"perience gained during appraisal of %arious projects and their constant super%ision

helps the financial institutions and ban#s in guiding the entrepreneurs !hile identification

and selection of ne! projects.


20/42

Title of t%e "tud!

‘’A Study on Feasibility of roject Appraisal mechanism of KSFC’’

5eed for t%e "tud!

*n%estment decision forms part of de%elopment process. Amongst %arious

methods of ma#ing in%estment decisions project appraisal occupies the most leading

position. *t helps rationali/e the guidelines for in%estment criteria at the project le%el.

roduction is a function of specific use of inputs to deri%e outputs. Ho! to decide about

the specific use of inputs !hich ha%e alternati%e uses is an in%estment’s dilemma. *n a

free mar#et economy prices of inputs determine their most efficient allocation. +ut the

mar#et forces may not lead to achie%e desirable social economic objecti%es such as

e,uitable distribution of income. *n case of public sector in%estment serious attention

should be gi%en to its economic and social effects. *n the case of pri%ate sector

in%estment project usually centers on around financial !orth ignoring the social and

economic aspect. +ut any in%estment decision be in the public sector or pri%ate sector

the project appraisal and its techni,ues play a %ery significant role

State#ent of t%e $roble#

roject financing is %ery critical in light of the fact that e%en potentially non

%iable projects may lead to mounting industrial sic#ness !astage of scarce resources and

loss for the KSFC. Credit appraisal is about determining the financial %iability of a

project. Study !ould focus on terms and techni,ues of appraisal procedures.

Sco$e of t%e "tud!

The scope of studying the credit appraisal co%ers the system and operations

at KSFC. The study aims to co%er ho! the credit are appraised by KSFC for ne!

business %enture as !ell as e"isting enterprises and the !ay they assess the %iability of

the project by studying the project.

+b,ecti*e" of t%e "tud!

7 To study the %arious aspects of project appraisal

7 To study !hether the project appraisal procedure of KSFC is sufficient enough to

appraise a project

7 To study the relationship bet!een the changes in the project appraisal procedure


21/42

and -A

7 A Study on Feasibility of roject Appraisal &echanism of KSFC

7 To study %arious loans schemes and procedure of a%ailing loans

7 To offer suggestions and recommendations.

Met%odolo)!

The proposed methodology is a descripti%e research study to portray

accurately the characteristics of a particular situation in%ol%ing fact6finding en,uiries in

to the state of affairs as it e"ists at present. The report documents !hat are the current

methods I practices. Hence one time research confined to current methods I practices.

0ata has been collected from follo!ing source

7 Pri#ar! data


22/42

the SFCs !ere started to pro%ide funds to small and medium scale and encourage first

generation entrepreneurs to start business especially in bac#!ard areas

KSFC is sanctioning loans to industrial units under different schemes. KSFC is

also pro%iding ser%ices li#e hire purchase leasing and merchant ban#ing acti%ities etc.

KSFC is recogni/ed as best merchant ban#er. KSFC is an *S; certified organi/ation and

stri%ing to pro%ide better ser%ices to its customers through professional management and

team!or#. The management is ta#ing effecti%e measures to transform the organi/ation to

a customer centric institution.

According to William Samuel Nroject appraisal procedure of KSFC64G'4O the

project appraisal is efficient only !hen there is a proper tools and techni,ues are used

other!ise it !ill be of no use and it !ill be impossible to find out %iability of the project

accurately.

Since capital is scarce resource it should be allocated carefully for the

de%elopment of industrial units. KSFC has been acting as regional de%elopment ban# by

pro%iding assistance to needy entrepreneurs. +efore gi%ing loans to any projects the

corporation chec#s the %iability of the project. KSFC appraises projects to test the

%iability from the technical financial mar#eting and managerial angles.

Thus the basic objecti%e of this study is to assess the appraisal system of KSFC

and to #no! ho! the projects are being e%aluated at KSFC before they finance them and

to ma#e necessary recommendations for modifying the appraisal mechanism so as to

meet their mission statement.

8i#itation" of t%e "tud!

7 The collection of data for analysis is restricted to KSFC only

7 The comparati%e study is not done due to the project constraints.

7 ;ne of the limitations !as the time factor. The a%ailable time is utili/ed to

ma"imum e"tent to bring ,uality and accuracy in this report

7 There is a possibility of biased information from respondents

7 Findings cannot be generali/ed !ith other reports.

Profile of t%e indu"tr! Indu"tr! $rofile Introduction

The gro!th and de%elopment of an economy is one of the main objecti%es

of e%ery country. These calls for a structure of industries agriculture and ban#ing system

and only through this a country can gain economic status internationally to establish

strong economic system. 0e%elopment ban#s play an important role in the economic

de%elopment of a de%eloping nation. These ban#s are comparati%ely of recent origin


23/42

though they did e"ist prior to !orld !ar **. The gro!th of de%elopment ban#ing is no! a

!orld6!ide phenomenon.

+ri)in of de*elo$#ent ban2

The first de%elopment ban# as started in '544 in +elgium to finance commercial and

industrial %entures. =ater France $ermany Australia -etherlands S!it/erland etc all

sa! the emergence of similar institutions in their countries At the end of the '(th

century these institutions !ere set up under both pri%ate and go%ernment o!nership to

cater to the needs of economies in different countries. +y the end of '(>) !orld ban# or

international ban# for reconstruction and de%elopment as officially #no!n came in to

being !ith such affiliates as international finance corporation D'()?E and international

de%elopment association D'(?GE. Subse,uent to World +an# se%eral regional

multinational ban#s !ere established in order to compensate scarcity of capital in

member countries in their economic de%elopment programs.

(e*elo$#ent ban2in) in India

0e%elopment ban# is defined as a Npromotional agency !hich promises

encourages and stimulates entrepreneurs or process to usher fastest entrepreneurial and

de%elopmental process along the dormant entrepreneurs’’ 0e%elopment ban#s are those

ban#s engaged in promotion and de%elopment of industries agriculture and other #ey

sectors. These ban#s differ from commercial ban#s in one sense< they do not mobili/e

sa%ings of the people but in%est the resources in a producti%e manner. Additionally these

ban#s pro%ide other de%elopmental ser%ices so as to accelerate the gro!th of the

economy.

*n the !a#e of e"igencies emerging out of the First World War industrial

commission D'('?6 '('5E !as set up to study the problem of industrial sector. The

commission found scarcity of finance as a big hurdle in the !ay of industrial

de%elopment and recommended setting up a de%elopment ban# similar to industrial ban#

of apan D'(G4E. Through electi%e inter%ention by the go%ernment in economic affairs.

The montage Chelmsford report on constitutional reforms resulted in certain pro%isional

go%ernments passing state aid to industries legislations in '(44. The industrial finance

corporation of *ndia !as then established on 'st uly '(>5. Since then good number of

de%elopment financial institutions !ere set up to cater to the needs of industries

agriculture and ser%ice sector. All these institutions !ere aimed at accelerating the gro!th

of economic de%elopment of the country as at the end of une '(() as many as >5G

de%elopment financial institutions !ere in operation in *ndia.


24/42

Co#$onent" of Indian financial in"titution"

7 +an#ing *nstitutions

7 -on ban#ing *nstitutions

7 Commercial ban#s

7 ;rgani/ed sector 0e%elopment finances

Financial entities

Q ublic

Q ri%ate

Q 11+s

Q &oney lenders

Q *ndigenous ban#ers

State financial cor$oration4" 3SFC"& ? An introduction

At the time the industrial finance corporation !as set up it !as recogni/ed

that it !as essential to establish similar institutions !ith a %ie! to assist small industries

in different states because it !as not possible for a single institution to satisfy the capital

needs of the small concerns spread all o%er the country.

Accordingly the SFCs Act !as enacted in '()'by go%ernment of *ndia !hich

gi%es authori/ation to each state to establish a SFC. The unjab go%ernment too# the lead

in organi/ing a financial corporation in '() !hen unjab financial corporation !as set

up.

$radually financial corporations !ere established in different states. There is '5

SFCs functioning in the country as of no!. These institutions e"tend financial assistance

to small6scale industries. The area of operation is confined to one state.

+b,ecti*e" of SFC4"

The principal objecti%e of the SFC’s is to pro%ide medium and long term

financial assistance to small and medium enterprises particularly !hen there is lac# of

normal ban#ing facilities. SFCs collecti%ely sub ser%e broad national objecti%es of

economic gro!th !ith accent on promotion of small enterprise balanced regional gro!th

and !idening of the entrepreneurial base through encouragement of ne! entrepreneurs.

Function" of SFC"

The functions of SFC’s are as follo!s<

7 $ranting loans or ad%ances or subscribing to the debentures of industrial


25/42

concerns Dloans to be repayable !ithin 4G yearsE

7 $uaranteeing the loans raised by industrial concerns on such conditions as may be

mutually agreed upon but they should be repayable !ithin 4G years.

7 $uaranteeing deferred payments of any industrial concern !hich purchases

capital goods !ithin *ndia.

7 2nder!riting the issue of stoc#s. 0ebenture or bonds of industrial concerns

subject to their being disposed off in the mar#et !ithin B years.

7 ro%iding for discounting of bills of e"change. +eside the SFCs can act as agents

of the central go%ernment state go%ernment and other national le%el de%elopment

financial institutions.

Co#$an! $rofile

ac2)round and ince$tion of t%e co#$an!

Financing to the industries is an important aspect !hich has been

considered by the central go%ernment from %ery early days. To enable this %arious

industrial policy resolutions !ere passed !hich had a number of pro%isions under !hich

the go%ernment could gi%e financial assistance to small. &edium and large scale

industries to aid the industries an Act !as passed this Act pro%ides pro%ision to state

go%ernment to gi%e industrial credit. ;ne season that ga%e birth to this SFC Act '()'

!as prior to this Act the go%ernment or states !ere directly gi%ing loans to start ne!

industries or for e"pansion. This method !as not effecti%e and an alternati%e distinct

!hich could dispense credit to industries e"peditiously imperati%e. Karnata#a state !as

prior to start the State Financial Corporation KSFC D!hich !as #no!n as &ysore state

financial corporation &SFCE prior to '(B4 !as establishedP on )th march '()( on the last

but one day or financial year '()(6'(?G though 1+* ga%e an indication in the year '())6

)? to start financial corporation in Karnata#a and SFC Act !as also passed long bac# in

'()'.

Mi""ion@ Vi"ion@ and ualit! $olic!

Mi""ion "tate#ent

NKSFC is committed to continually nurture de%elop and ser%ice the S&9 sector through

need based product and ser%ice.O

Vi"ion "tate#ent


26/42

NRision of KSFC is to be a premier financial institution in the country by pro%iding

effecti%e and efficient ser%ice to all sectors of people under one roof. *ts %ision is all for

one and one for all.O

Goal" N;%erall de%elopment of small scale and medium scale industries.O

ualit! $olic!

Customer satisfaction and Continual *mpro%ement through professional

management and team !or#.

UA8ITY +BECTIVES

7 To effecti%ely identify and assist the entrepreneurs in establishing successful

business enterprises.

7 To pro%ide ,uality financial and related ser%ices on a continuous basis.

7 To continually upgrade our products and ser%ices.

7 To moti%ate and in%ol%e employees to achie%e the set organi/ational gro!th

targets.

7 To encourage the employees to upgrade and enhance the #no!ledge and s#ills

through effecti%e Training and 0e%elopment.

7 To transform the organi/ation to a customer centric *nstitution.

7

+=ner"%i$ $attern+b,ecti*e" of


27/42

7 To pro%ide special concessions to entrepreneurs belonging in scheduled castes and

tribes !omen entrepreneurs and physically challenged.

7 To pro%ide preference to local tiny ancillary industries.

7 To meet the urgent !or#ing capital needs of e"isting units by !ay of corporate

loan.

7 To meet financial re,uirements for creation of fi"ed assets.

Product and "er*ice $rofile

7 Credit lin2ed ca$ital "ub"id! "c%e#e 3C8CSS&

The objecti%e of the scheme is to facilitate technology up gradation of

micro and small enterprises D&S9sE in specified products8 sub sectors by

appro%ed under the scheme.

7 Tec%nolo)! u$ )radation for te.tile indu"trie"

To pro%ide encouragement to te"tile industrial units Dincluding units in the

cotton ginning and pressing sectorsE in ta#ing up technology up gradation and to

merchandise their production facilities.

7 Intere"t "ub"id! "c%e#e for "c%eduled ca"te 0 tribe entre$reneur"

*nterest subsidy in respect of loans a%ailed by SC 8 ST entrepreneurs.

7 Pri*ile)ed entre$reneur4" "c%e#e

To meet short term funds re,uirements of the e"isting units !hich

are under thrust 8 normal sofa sectors of lending policy of the corporation.

7 A""i"tance to con"truction acti*it! 3ter# loan"&

To pro%ide assistance to the construction acti%ity sector. The

follo!ing are co%ered under the scheme<

7 Construction of commercial comple"

7 Construction 8 buying of ready built sho! rooms and sales outlets

7 Constructions of residential apartments 8 group housing

7 Creation of infrastructure for professional educational institutions

7 Construction of industrial estates

7 9stablishment of soft!are pac#s

7 Formation of residential layouts


28/42

7 A""i"tance to con"truction acti*it! 3cor$orate loan&

To pro%ide financial assistance to property de%elopers construction

companies and firms for construction of group housing commercial comple"es

soft!are par#s and infrastructure projects li#e roads flyo%ers bridges etc.

7 cor$orate loan "c%e#e

The objecti%e of the scheme is to e"tend short term loans to the

e"isting successful units !ho re,uire urgent !or#ing capital funds either to meet

the gap in the !or#ing capital re,uirements or funds re,uired for e"ecuting the

rush of the orders. This loan is also considered for de%eloping 8 e"panding ne!

mar#ets and opening =C for purchase of ne! e,uipment till a term loan is

sanctioned and released by financial institutions. The corporation also e"tends

corporate loan for meeting the statutory dues to the corporation also e"tends

corporate loan for meeting the statutory dues to the go%ernment li#e payment of

income ta" e"cise duty etc

7 A""i"tance for con"truction of road"

For ac,uiring capital goods e,uipment including road rollers

asphalting units concrete mi"tures tippers e"ca%ators sur%eying and other

supporting e,uipment to!ards de%elopment maintenance and construction of

roads.

7 Sin)le =indo= "c%e#e

The objecti%e of the scheme is to pro%ide timely and ade,uate !or#ing

capital assistance to micro small and medium enterprises D&S&9E along !ith

term loan for fi"ed assets for entrepreneurs setting up ne! projects by KSFC.

7 7or2in) ca$ital ter# loan ? for e.i"tin) unit"

The objecti%e of the scheme is to pro%ide timely and ade,uate

!or#ing capital assistance to the e"isting micro small and medium enterprises

D&S&9E !ho ha%e a%ailed term loans earlier from corporation ha%ing pro%en

trac# record.

7 8ine of credit for $urc%a"e of ra= #aterial"

To pro%ide timely and ade,uate !or#ing capital assistance in the form of


29/42

WCT= to &S&9s for purchase of ra! materials from KSS*0C.

7 A""i"tance for #ar2etin) related acti*itie"

To pro%ide financial assistance to small and medium scale units to

underta#e %arious acti%ities necessary

7 Ac'ui"ition of e.i"tin) a""et" and enter$ri"e"

To e"tend financial assistance for ta#ing o%er of e"isting assets 8

enterprises.

7 A""i"tance to entertain#ent indu"tr!

The objecti%e of the scheme is to pro%ide financial assistance for the

construction 8 purchase of cinema halls multiple"es production of short TR

serials soft!are for %isual media publicity and feature films.

7 A""i"tance to touri"# related acti*itie"

To pro%ide financial assistance for setting up of amusement par#s

con%ention centers restaurants tra%el and transport and tourist ser%ices agencies.

/ A""i"tance to %ealt% care "er*ice"

7 Assistance to doctors 8 ,ualified medical practitioners<

7 For purchase of the premises 8 reno%ation of the e"isting premises ac,uiring fi"ed

assets li#e furniture computers office automation ambulance car 8 %an interiors

and &edicare related e,uipment re,uired for a clinic.

7 Assistance to nursing home 8 hospitals<

7 For establishment of ne! and e"pansion 8 moderni/ation of e"isting nursing

homes and hospitals. =oan a%ailable for land building and e,uipment for

diagnostic monitoring the therapeutic use air conditioners ambulance etc.

7 Assistance for ac,uiring electro medical e,uipment<

7 A Study on Feasibility of roject Appraisal &echanism of KSFC

7 0epartment of &+A 9S*T age '5

7 For procurement of ne! electro medical and related e,uipment !ith accessories

li#e

7 CT scanners endoscopy gastro copy 6ray etc.. loan is also a%ailable for

establishing diagnosis laboratories.


30/42

Area" of o$eration"

KSFCs area of operation co%ers the entire state of Karnata#a. KSFC has branch

offices in each district head,uarters that is total 4 branches categori/ed as super A grade

A grade and + grade branches monitored by four circles offices. *t e"tends loans to

industrial underta#ings established or to be established in the state of Karnata#a. 9ach

branch office in the district has ade,uate po!er relating to sanctions and disbursements.

Term loan up to 1s. 4G crs are sanctioned at branch offices !ith the appro%al of

competent authorities as per the delegation made by the board of KSFC are sanctioned at

head office. *ndustrial underta#ing !hich are ha%ing registered office outside the state of

Karnata#a can also a%ail financial assistance pro%ided the place of business is in

Karnata#a and they agree to shift their registered office to the state to Karnata#a.

ranc% +ffice"

Super A $rade +ranch ;ffices

'. +angalore & $ 1oad

4. +angalore ayanagar

. 0har!ad

A $rade +ranches

'. +allari

4. +angalore 1ajajinagar

. +angalore 1ural

>. +elaga%i

). Hassan

?. Kalaburagi

B. Kolar

5. &andya

(. &angalore

'G. &ysuru

''. 1amanagar

'4. Tum#ur

'. 2dupi

+ $rade +ranches

'. +agal#ot

4. +idar

. Chamarajnagar


31/42

>. Chic#ballapur

). Chitradurga

?. Chi##amagalore

B. 0a%angere

5. $adag

(. Ha%eri

'G. Kar!ar

''. Koppal

'4. 1aichur

'. &adi#eri

'>. Shi%amogga

'). Rijayapura

'?. Madgir

Infra"tructural facilitie"

*nfrastructural facilities mean the basic re,uirements the company should loo# after in

order to ensure free flo! of acti%ities. The company contains good infrastructure !ith all

basic facilities as !ell as the !elfare of employees.

7 *t is being e,uipped !ith all #inds of modern facilities that are re,uired.

7 The KSFC office is being redesigned according to the modern re,uirement !ith

cabinets office furniture systems fans air conditions and stationeries etc.

7 *t maintains a %ery good communication system internal and e"ternal as it is

facilitated or e,uipped !ith telephones computers and the internet ser%ices.

7 KSFC also has a %ery good canteen ser%ice for its employees !here they are

ser%ed !ith good and nutritious food.

7 KSFC has also got a %ery good library facility for its employees.

Co#$etitor4" infor#ation

KSFC has been playing a pi%otal role in the de%elopment of small and medium scale

enterprise DS&9sE in the state of Karnata#a

Follo=in) are t%e #ain co#$etitor" of


32/42

Public "ector ban2" and financial in"titution"

'. State ban# of *ndia and its B associate’s ban#s

4. Canara ban#

. Syndicate ban#

>. Rijaya ban#

). Corporation ban#

?. *0+* ban#

B. S*0+*

Pri*ate "ector ban2" and financial in"titution"

'. *C*C* ban#

4. A"is ban#

. *-$6Rysya ban#

>. City financial ban#

). Federal ban#

Future )ro=t% and $ro"$ect"

KSFC is one of the fast trac# term lending financial institutions in the country

!hich has assisted more than '??>) units amounting to nearly 1s.'G>?) cr o%er the

last )) years in the state of Karnata#a. *t is one of the robust and professionally managed

financial corporations.

KSFC has got branches all o%er the Karnata#a and due to this it is in opposition

to pro%ide ser%ice to all micro small medium scale industries and other ser%ice li#e

hotel hospitals etc. Karnata#a has become one of the fastest industrial gro!ing states and

KSFC played a crucial role in pro%iding finance to industries

KSFC is supported by go%ernment of Karnata#a along !ith S*0+* KSFC

entered in to tri party agreement !ith go%ernment S*0+* KSFC has planned to reduce

interest rate in future to meet the competition and to attract firms to a%ail their financial

assistance. The corporation has many priorities for the coming years. The foremost is to

be more competiti%e by offering attracti%e interest rates tac#ling -A’s by setting up

appropriate mechanism a%oiding slippage of assets thereby impro%ing the corporation is

of great importance.

The S&9 sector is sho!ing great potential in the global mar#et and !ith the

ad%antage of competiti%e interest’s rates the corporation is e"pected to garner si/eable

business in the coming years.

The corporation is proposing to impro%e its income from fee6based acti%ities


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apart from increasing business from insurance acti%ity !ith its tie6up !ith united *ndia

insurance company. *t is has entered into a &;2 !ith 2nit trust of *ndia for mar#eting of

their products. Concerned efforts !ill be made to achie%e the targets and to impro%e the

!or#ing results of the corporation.

MEA5I5G +F FI5A5CIA8 A5A8YSIS

Financial Statements Analysis is an analysis !hich critically e"amines the

relationship bet!een %arious elements of the Financial Statements. *t focuses on the

e%aluation of past operations as re%ealed by the analysis of basic statements. *t is a

process of scanning Financial Statements for e%aluating the relationship bet!een the

items as disclosed in these. *t is an important means of assessing past performance and

forecasting and planning future performance. The analysis simplifies summari/es and

systemati/es the monotonous figures.

MEA5I5G +F RATI+ A5A8YSIS

Analysis of Financial Statements !ith the help of ‘1atio’ is termed as ‘1atio

Analysis’. 1atio Analysis is a !idely used tool of Financial Analysis. *t can be used to

compare the ris# and return relationships of firms of different si/es. *t is defined as the

systematic use of ratio to interpret the Financial Statements so that the strengths and

!ea#nesses of a firm as !ell as its historical performance and current financial condition

can be determined.

+BECTIVES +F RATI+ A5A8YSIS

Follo!ing are the important objecti%es of 1atio Analysis

7 To pro%ide the necessary basis for *nter6period and *nter6firm Comparison.

7 To help in pro%iding a part of information needed in the process of decision6ma#ing.

7 To focus on facts on a comparati%e basis and facilitate dra!ing of conclusions

relating to the performance of a firm.

7 To e%aluate the performance of a firm in determining the important aspects of a

business such as li,uidity sol%ency operational efficiency o%erall profitability

capital gearing etc.


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7 To thro! light on the degree of efficiency in the management and the effecti%eness

in the utili/ation of its assets.

7 To pro%ide the !ay for effecti%e control of the enterprise in the matter of achie%ing

the physical and monetary targets.

7 To help management in discharging its basic functions li#e forecasting planning co6

ordination communication control etc.

7 To promote co6ordination among the departments and the staff by the study of

performance and efficiency of each department.

7 To point out the financial condition of business !hether it is strong ,uestionable or

poor and enables the management to ta#e necessary steps.

7 To act as an inde" of the efficiency of an enterprise.

C8ASSIFICATI+5 +F RATI+S

Accounting 1atios may be classified as under

7Traditional 1atios

7Functional 1atios

Traditional Ratio"

Traditional Accounting 1atios are classified on the basis of the origin of the

figures used in the accounting ratios i.e. on the basis of the Financial Statements from

!hich ratios are deri%ed. The follo!ing ratios are usually included in this type of

classification.

alance S%eet Ratio" or Financial Ratio"

1atios calculated from the different items as appearing in the +alance Sheet of a

concern are called +alance Sheet 1atios e.g. Current 1atio =i,uid 1atio 0ebt6e,uity

1atio and so on.

Profit > 8o"" Account Ratio" or +$eratin) Ratio"


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1atios calculated from the different items as appearing in the rofit I =oss Account

of a concern are called rofit I =oss Account 1atios or operating 1atio e.g. $ross rofit

1atio -et rofit 1atio ;perating 1atio.

Mi.ed Ratio" or Co#$o"ite Ratio"

1atios calculated ta#ing some items as appearing in the +alance Sheet and ta#ing

some items as appearing in rofit I =oss Account are called &i"ed 1atios or Composite

1atios e.g. 1eturn on -et Worth 1eturn on *n%estment D1;*E Capital Turno%er 1atio

etc.

FU5CTI+5A8 RATI+S

The other !ay of classifying the ratios in on the basis of functions they perform

!hat they indicate symptoms or characteristics namely li,uidity profitability financial

stability and turno%er relationship etc. This classification assumes greater significance

because it distinctly the different aspects of business performance and helps the %arious

users of Financial Statements to ta#e guard of their interest. For instance short6term

creditors are interested to e%aluate the li,uidity position by analy/ing the li,uidity ratios

!hile long6term creditors and in%estors are interested in the sol%ency and profitability

position of the organi/ation and as such they study the sol%ency and profitability ratios.

The follo!ing ratios are included in this classification.

7 =i,uidity 1atios

7 =e%erage 1atios

7 rofitability 1atios

7 Acti%ity89fficiency 1atios

8i'uidit! Ratio"

=i,uidity 1atios are those ratios !hich are computed to e%aluate the capacity of the

company to pay off its short6term liabilities. These ratios indicate the short6term financial

position of the company by relating short6term resources !ith short6term obligations.

These ratios are basically used by the short6term creditors %i/. suppliers ban#ers

lenders employees and all others !ho are interested in the reco%ery of money due to


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them. Short6term creditors focus their attention on the li,uidity of the company.

The most common ratios !hich indicate the e"tent of li,uidity or lac# of it are as follo!s<

Current Ratio

This ratio is also called ‘Wor#ing Capital 1atio’. *t is used to assess the short6term

financial position of the business concern. *n other !ords it is a measure of the

company’s short6term sol%ency i.e. its ability to meet its short6term obligations. *t

matches the total current assets of the company against its current liabilities.

As a measure of short6term sol%ency it indicates each rupees of current assets

a%ailable for each rupee of current liability. Apparently the higher the current ratio the

more protected are the short6term creditors and %ice 6%ersa. Con%entionally a current

ratio of 4


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8e*era)e0Sol*enc!0Ca$ital Structure Ratio"

The second category of financial ratios is =e%erage or Capital Structure 1atios. The

long6term lenders8creditors !ould judge the soundness of a firm on the basis of the long6

term financial strength measured in terms of its ability to assure the long6term lenders

!ith regard to a& periodic payment of interest during the period of the loan and

b& repayment of principal on maturity or in predetermined installments at due dates.

There are thus t!o aspects of the long6term sol%ency of a firm<

a& Ability to repay the principal !hen due and

b& 1egular payment of the interest. Accordingly there are t!o different but mutually

dependent and interrelated types of le%erage ratios. First ratios are based on the

relationship bet!een borro!ed funds and o!ner’s capital. These ratios are computed

from the +alance Sheet and reflect the relati%e 8 sta#e of o!ners and creditors infinancing the assets of the firm. *n other !ords such ratios reflect the safety margin to the

long6term creditors. The second category of such ratios is based on the *ncome Statement

and sho!s the number of times the fi"ed obligations are co%ered by earnings before

interest and ta"es. *n other !ords they indicate the e"tent to !hich a fall in operating

profits is tolerable in that the ability to repay !ould not be ad%ersely affected.

Follo!ing are some important le%erage ratios

(ebt to E'uit! Ratio

The relationship bet!een borro!ed funds and o!ners capital is a popular measure

of the long6term financial sol%ency of a firm. This relationship is sho!n by the 0ebt6

9,uity 1atio. This ratio indicates the relati%e proportions of debt and e,uity in financing

the assets of a firm. *t re%eals the e"tent to !hich debt financing has been used in the

business. *t discloses to the creditors the e"tent of their in interest being co%ered by the

net !orth by the company. *t can be computed by using the follo!ing formula.

(ebtE'uit! Ratio

Where

Total 0ebt 0ebentures U Term =oans U =oans on &ortgage U =oans from Financial

*nstitutions U ;ther =ong6Term =oans U 1edeemable reference Share

Capital U All Current =iabilities.


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Shareholders’ Funds 9,uity Share Capital U *rredeemable reference Share Capital U

Capital 1eser%es U 1etained 9arnings U Any 9armar#ed Surplus

=i#e ro%ision for Contingencies etc. Fictitious Assets

D$ood!ill reliminary 9"pensesE.

(ebt to Total Tan)ible A""et" Ratio

The 0ebt6Total Tangible Assets 1atio indicates the proportion of total tangible

assets financed by total debt. Symbolically it is e,ual to<

(ebtTotal A""et" Ratio

Where

Total Tangible Assets Total Assets D$ood!ill U reliminary 9"penses U

Accumulated =ossesE

Pro$rietar! Ratio

This ratio is called ‘9,uity 1atio’ or ‘;!ners Fund 1atio’ or ‘Shareholders

9,uity 1atio’. This ratio points out the relationship bet!een the shareholders’ funds and

total tangible assets. *n other !ords it indicates the proportion of total assets financed by

o!ners. The formula for this ratio may be !ritten as follo!s<

Fi.ed A""et" to Pro$rietor"4 Fund" Ratio

This is also #no!n as Fi"ed Assets to -et Worth 1atio. *t establishes the

relationship bet!een fi"ed assets and shareholders’ funds. The main object of calculating

this ratio is to ascertain the percentage of o!ners’ funds in%ested in fi"ed assets. This is

an indicator of the efficiency of the management regarding formulation of financial

planning. *t can be calculated as follo!s<

Fi.ed A""et" to Pro$rietor"4 fund" Ratio

Where

Fi"ed Assets Total Fi"ed Assets 6 0epreciation

Ca$ital Gearin) Ratio


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This ratio is also #no!n as NCapital Structure 1atioO or =e%erage 1atioO. *t is used to

analy/e capital structure of the company. *t establishes the relationship bet!een fi"ed

interest di%idend bearing securities and e,uity shareholders’ funds. *t is an indicator of

the degree of ris# in%ol%ed in the total capital employed in the business. *t can be

calculated as follo!s<

Ca$ital Gearin) Ratio D

Where

Fi"ed *nterest and 0i%idend bearing Funds reference Share Capital U 0ebentures U

=ong6Term =oans

9,uity Shareholders’ Funds 9,uity Share Capital U 1eser%es and Surplus X$ood!ill

U reliminary 9"penses U rofit and =oss A8c D0r.EY.

Intere"t Co*era)e Ratio

This ratio establishes the relationship bet!een the amount of net profits or

earnings before the deduction of interest ta"es and fi"ed interest charges. This ratio is

used as a yardstic# for the lenders to #no! !hether the business concern is able to pay its

fi"ed interest charges on long6term loans periodically. *nterest Co%erage 1atio is

calculated !ith the help of the follo!ing formula<

Intere"t Co*era)e Ratio D

Where

9+*T or +*T 9arnings or rofits before *nterest and Ta"es

PR+FITAI8ITY RATI+S

rofit is the difference bet!een re%enue and e"penditure o%er a period of time. *t

refers to the absolute ,uantum of profits !hereas profitability refers to the ability to earn

profits. rofitability ratios are the ratios !hich are computed to e%aluate the performance

and efficiency of the business concern. rofitability 1atios are used by the management

o!ners creditors and employees. 9,uity shareholders employ these ratios because they

are %ery much interested in #no!ing capital appreciation of their in%estment and di%idend

per share. &anagement employs profitability ratios to assess the operational performance


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of the business concern. They are used by the creditors to ascertain the margin of safety

a%ailable to them. rofitability ratios are the test of !ages and fringe benefits to the

employees. Follo!ing are the important profitability ratios<

Return on A""et" 3R+A&

Here the profitability ratio is measured in terms of the relationship of bet!een

net profits and assets. The 1;A may also be called ‘profit to assets ratio’. *t is calculated

to measure the producti%ity of total assets. *t is calculated using the follo!ing formula<

1eturn on Assets

The term fictitious assets include preliminary e"penses deferred re%enue e"penditure

discount on issue of shares and debentures debit balance of rofit and =oss Account and

other losses sho!n on the assets side of the +alance Sheet.

Return on In*e"t#ent

1eturn on *n%estment is also #no!n as ‘1eturn on Capital 9mployed’ or ‘;%erall

rofitability 1atio’. *t is calculated by establishing the relationship bet!een the operating

profit earned and capital employed. *t is an indicator of the earning capacity of the capital

in%ested in the business. *t sho!s efficiency of the business as a !hole. This ratio is

calculated by using the follo!ing formula<

1eturn on *n%estment

Where

Capital 9mployed 9,uity Share Capital U reference Share Capital U 1eser%es and

Surplus U 0ebentures and =ong6Term =oans DFictitious Assets U

*ntangible Assets U *n%estments outside the +usinessE.

D;rE

Capital 9mployed roprietors Funds U long6Term =oans.


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Return on +rdinar! S%are%older"4 E'uit!

While there is no doubt that the preference shareholders are also o!ners of a firm thereal o!ners are the ordinary shareholders !ho bear all the ris# participate in

management and are entitled to all the profits remaining after all outside claims including

preference di%idends are met in full. The profitability of a firm from the o!ners’ point of

%ie! should therefore be assessed in fitness of things in terms of the return to the

ordinary shareholders. The ratio under reference ser%es this purpose. *t relates net profit

finally a%ailable to e,uity shareholders to the capital employed by them. *t is calculated

as follo!s<

1eturn on ;rdinary Shareholders’ 9,uity

;rdinary Shareholders’ 9,uity 9,uity Share Capital U 1eser%es and Surplus

D&iscellaneous 9"penses U 0ebit +alance of rofit and

=oss AccountE.

Earnin)" Per S%are 3EPS&

9arnings per Share D9SE measures the profit a%ailable to the e,uity shareholders on a

per share basis that is the amount they can get on e%ery share held. *t is calculated by

di%iding the profits a%ailable to the e,uity shareholders by number of outstanding shares.

The profits a%ailable to the ordinary shareholders are represented by net profits after ta"

and preference di%idend. Thus

9S

Acti*it!0Efficienc! Ratio"


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Acti%ity ratios ma#e use of purchases and sales !hile calculating %arious ratios. +ut

KSFC is neither a trading company nor a manufacturing company. Hence the ,uestion of

purchases and sales does not arise in the case of KSFC. Therefore the acti%ity8efficiency

ratios cannot be calculated for KSFC.

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