A study on credit appraisal procedures at Karnataka State Financial

Corporation

In partial fulfilment of the Dissertation

In Semester - IV of the Master of Business Administration

Under the Guidance of Prof. Shivprasad G

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CONTENTS

CHAPTER

NO.

CHAPTER NAME PAGE NO.

1. INTRODUCTION 9

1.1 Industry profile 9-17

1.5 Objective of SFC’s 15-16

COMPANY PROFILE 18-29

2.2 Introduction to Co-operative Banks 29-31

2 LITERATURE REVIEW 32-40

3 RESEARCH METHODOLOGY 41

3.5 Sampling 41-42

3.7 Data Collection 42

3.9 Analysis 42-43

4 DATA Analysis 44-74

5 Findings 75

6 RECCOMENDATION 76-77

CONCLUSION 78

SCOPE OF FURTHER RESEARCH 79

BIBLOGRAPHY 80

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List of Table

SERIAL.

NO.

LIST OF Table PAGE NO.

4.3.1.1 ABC COMPANY 57

4.3.1.2 59

4.3.7.1 Profitability Statement of M/s. ABC Network

Technologies Pvt. ltd., Bangalore

63

4.3.8.1 Working Capital Estimate of M/s. ABC Network

Technologies Pvt. ltd., Bangalore

63-64

4.3.9.1 Debt Service Coverage Ratio of M/s. ABC Network

Technologies Pvt. ltd., Bangalore

65

4.3.9.2 Disposition of Funds of M/s. ABC Network

Technologies Pvt. ltd., Bangalore

65

4.3.12.1 Internal Rate of Return of M/s. ABC Network

Technologies Pvt. ltd., Bangalore

67-68

4.3.13.1 Credit Risk Analysis of M/s. ABC Network

Technologies Pvt. ltd., Bangalore

68-69

4.3.13.2 Business Risks of M/s. ABC Network Technologies

Pvt. ltd., Bangalore

69-70

4.4.1(a) KSFC sanctioned more loans to flowing sectors

within the Bangalore

72-73

4.4.1(b) Opinion of the respondents about the interest rate of

KSFC’s term loan

74

4.4.1(c) Opinion of the respondent about the EG cell takes

care in identifying competent entrepreneurs.

74-75

4.4.1(d) Opinion about credit appraisal system at KSFC with

in Bangalore city

75

4.4.1(e) Opinion about rate KSFC services to customers in

Bangalore City.

75-76

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I. INTRODUCTION

1.1 INDUSTRY PROFILE

India, the largest democracy of the world, is all set to become a major economic

power. India faced its worst ever financial crisis in 1991, when its foreign exchange reserves

fell below one billion dollars, the inflation rate was as high as 16.7 percent and the economy

was suffering from a high fiscal deficit, a high unemployment rate and several other

economic weaknesses and odds. India has successfully launched and handled its economic

reforms process of privatization and liberalization to bring about macroeconomic stabilization

despite the US sanctions. Fiscal deficit is within tolerable limits, the rupee is going strength

despite RBI intervention, banking and financial institutions have improved, and sensex has

crossed over 8500 points. The overall outlook of the economy is encouraging.

Finance is major element, which stimulates the overall growth of economy. Finance is

oxygen of economic activity. Healthy system directly contributes to the growth of country

.An efficient financial system calls for effective performance of financial institution, financial

instruments and financial market.

This would enable the country to have supply of funds to the industries, Agriculture

continuously. Economic problems of the nation can be solved comfortably, through which

self- sufficiency can be achieved.

A financial system plays a significant role in hoisting up the economy. Every enterprise big

medium or small needs finance to carry on its operation to achieve its target. Hence finance is

so indispensable today, that it is said to be breathe of an enterprise, and without adequate

finance no enterprise can possibly accomplish its objective.

1.2 ORIGIN OF THE INDUSTRY

Before independence one major constraint for the development of industries was the absence

of institutional arrangements for providing industrial finance on any significant scale. It was

therefore, very natural that after independence government took steps to fill this vacuum and

create a number of national and state level financial institutions one after another. These

financial institutions are not banking institutions in conventional sense, but development

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banks which serve as development agencies not only currency on lending operation, but also

developmental activities including promoting projects, building and advising the clients in

their problems and difficulties.

Modern industrial enterprises require various types of capital, initial capital, fixed capital,

working capital, operational capital, maintenance capital, developmental capital etc.

Government of India understood importance of industrial development in generating

employment and also economic development of the country. Government passed Industrial

policy to clearly demarcate areas of production under public sector, private sector, co-

operative sector and small-scale sector as well as large scale, medium scale and small-scale

units.

By the end of 1945, World Bank, International bank for reconstruction and development was

officially known and was made into groups with affiliates International Finance Corporation

(1986), and International Development Association (1960). Subsequently World Bank,

regional multinational banks were established in order to compensate scarcity of capital in

member countries, in their economic development.

1.3 GROWTH AND DEVELOPMENT OF THE INDUSTRY

The Industrial policy resolution 1948, for the first time government accepted the importance

of small -scale industries in overall industrial development of the country. It was well

realized that small -scale industries are particularly suited for the utilization of local resources

and for creation of employment opportunities. Small scale industries were facing the actual

problems of raw materials, capital, skilled labour, marketing etc.

Since there was no capital market to provide long -term funds to industries in the country.

The government understood the importance of financial institutions to meet the requirement

of funds by industries and it started many financial institutions.

1.3.1 Reasons for the Substantial Growth of Indian Development Banks

The economic crises of the thirties

Atrocities of world war I and II

Formation of World Bank in 1945.

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Liberation movement of world economy.

Worldwide campaign of development banking.

Time bound demand of Business and Industry.

Substantial support of liberated countries.

Inflow and out flow of capital on account of development in capital markets.

1.3.2 Development Banking in India

Development banks are those banks engaged in the promotion, development of industries,

agriculture and other key sectors. These banks differ from commercial bank in one sense, that

they do not mobilize saving of the people. But invest the resources in a productive manner.

Additionally these banks provide add the development services so as to accelerate the growth

of economy.

In wake of exigency emerging out of First World War, industrial commission (1916-1918)

was set up to study the problem of industrial evaluation. The commission found scarcity of

finance as a big hurdle in the way of industrial development and recommended setting up of a

development bank, Similar to industrial bank of Japan (1902), through effective interventions

by the government in economic affairs. The montage Chelmsford report on constitution

reform (1915) also expressed similar vices; hence certain provisional government passed

state aid to industries in 1922.

The Industrial Finance Corporation of India was then established on 1st July 1948. Since then,

a number of development financial institutions were set up to cater to the needs of industries,

Agriculture and service Sector. All these institutions were aimed at accelerating the growth of

economic development of the country. The number of development institutions was increased

to 100. As at the end of June 1995, as many as 480 financial institutions are in operation in

India.

1.4 A BRIEF PROFILE OF SOME DEVELOPMENT BANKS IN INDIA

1.4.1 Industrial Development Bank of India (IDBI)

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The Industrial development bank of India is the leader in the Indian capital market. The IDBI

was established in July 1964, as a wholly subsidiary of Reserve Bank of India, but was

transferred to the ownership of central government since in 1975. Its assistance has helped in

the development of wide range of industries in India.

The IDBI is co-ordinates and monitors the credit facilities by all India and state level

financial institutions and development corporations like Industrial Finance Corporation of

India, State level Finance Corporation, Industrial credit and Investment Corporation of India

etc., and also provide long term finance to Industries. IDBI has given a boost to capital

formation and has brought about directional changes in the flow of industrial credit.

1.4.2 Industrial Finance Corporation of India Ltd. (IFCI LTD)

The Industrial Finance Corporation of India was established under IFC Act in 1948. Since

July 1st 1993, it has a pioneer development bank in India. Its main objective is to provide long

and medium term requirements of capital to industrial sector and IFC also under write the

shares, direct subscription of shares and debentures. IFC encourages loans for setting up new

industries, projects and loans for expansion of existing unit’s diversification and

modernization renovation and also after other financial services for equipment procurement,

equipment finance, buyer and suppliers credit, equipment leasing and finance to leasing and

hire purchase companies.

1.4.3 Small Industries Development Bank of India (SIDBI)

The small industries development bank of India, a wholly owned subsidiary of IDBI, is the

principal financial institution for promotion financing and development of industry in small,

tiny and cottage sectors and coordinating the functions of other institutions engaged in similar

activities. SIDBI, which become operational in April 2nd 1990 after taking over IDBIS

operations in respect of small sector, has been playing concentrated attention to the small

sector with special emphasis on village, cottage and tiny sectors.

1.4.4 Unit Trust Of India (UTI)

The unit trust of India (UTI) was set up in 1964 with a major contribution from the RBI under

the unit trust of India Act 1964 subsequently, with the passing of Ownership of UTI to

government in 1976. The IDBI become its shareholder along with the LIC, SBI and other

8

financial institutions. Its main objectives are to mobilize savings. Particularly from the low

and middle-income groups, to canalize these savings into productive investment to provide

on assured income to savers. It can underwrite new issues, make direct subscription to public

issues or private placements, keep deposits with banks and companies and operate in the

money market by subscribing to Treasury bills, commercial bills etc., It can also partake in

the inter-bank market as a lender or borrower of short-term funds. It can borrow from the

RBI.

1.4.5 Life Insurance Corporation of India (LIC)

LIC was established under the LIC Act in 1956. The provision of life insurance in India is

monopoly of the LIC. It provides cover of risk of life, retirement disability etc., when it was

set up as a nationalized public body. It was acting, as a major financial institution in the

capital market for mobilizing savings through premium for life and endowment insurance and

using these funds for investment in government and corporate securities for economic

growth. The LIC operates in both the money and capital market although it is a long-term

financial institution.

1.4.6 Export Import Bank of India (EXIM)

The EXIM Bank of India, established in 1982 is the principal financial institution for

financing facilitating and promoting India’s foreign trade. The bank promotes India exports

through a variety of programs to meet the need of different customs groups, namely Indian

entities, overseas entities, and commercial banks. Some programs available to Indian

exporters are investment loans; export Product development loans for export marketing pre-

shipment credit, for exports of project and advisory services.

1.4.7 The Industrial Reconstruction Bank of India (IRBI)

The Industrial Reconstruction Bank of India was established in 1985 after reconstitution of

the erstwhile IRCI. It is the principal credit and reconstruction agency of rehabilitation of sick

and crossed concerns by granting loans, advances, underwriting shares, bonds, debentures

and guarantees for the loans deferred payments.

1.4.8 State Industrial Development Corporations (SIDC)

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The SIDCs were incorporated under the companies Act 1956 as wholly owned state

government. Undertakings for promotions and development of medium and large industries,

there are 28 SIDCs in the country, 11 of them sanctioning also as SFCs to provide assistance

to small-scale sector.

1.4.9 National Small Industries Corporations Ltd. (NSIC)

The National small industries corporation Ltd., on enterprise under the union ministry of

industries was set up in 1955 to promote, aid and faster the growth of small-scale industries

in the country.

1.4.10 State Small Industries Development Corporation (SSIDC)

The state small industries development corporations, incorporated under the companies Act

1956 as state government undertaking, are vested with the responsibility of catering to the

needs of small industries in the state union testimonies under their jurisdiction. SSIDC enjoy

operation flexibility and undertake variety of activities of the benefit of small-scale sector.

Fig 1.1 shows the Development banks in India.

1.4.11 State Financial Corporation’s (SFCs)

Introduction of State Financial Corporation’s (SFCs)

At the time of industrial finance corporation was set up. It was recognized that, essential to

establish similar institutions with a view to assist small industries in different states because it

was not possible for a single institution to satisfy the capital needs of the small concerns

spread all over the country. Accordingly, the SFC Act was passed in 1951, which authorized

each state to establish a SFC. The Punjab Govt., looks the lead in organizing a financial

corporation (under the above registration in 1953 when Punjab Financial corporation) was set

up. Gradually financial corporations were established in different states, these are 18 SFCs

functioning in the country. These institutions extend financial assistance to small-scale

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

1.5 OBJECTIVES OF SFC’S

10

The principal object of the SFCs is to provide medium and long term financial assistance to

small and medium enterprises. Particularly when normal ranking accommodation is not

available SFCs collectively sub serve broad national objective of economic growth with

accent on promotion of small enterprise, balanced regional growth and widening of the

entrepreneurial base through encouragement of new entrepreneurs.

Scope of Business

The SFCs have been established to help entrepreneurs to set up new industries and

undertake programs of modernization, renovation, expansion and diversification’s. The

definition of industrial concerns includes Public Ltd. Companies, Private Ltd. Companies,

Partnership and proprietary concerns.

According to section 2(1) of the SFCs Act 1951 as amended up to (1962) the SFCs can assist

industrial concern engaged or to be engaged in any of the following activities.

Manufacture preservation of Processing of goods.

Mining.

Hotel Industries

Road Transport.

Generation or destruction of electricity or any other form of power.

Development of any area of land as an industrial estate.

Fishing or providing shore facilities for fishing of the manufacture they’re off.

Providing special or technical knowledge or other services for the promotion of

industrial growth.

Function of SFCs

The function of SFCs is as follows

Granting loans or advances or subscribing to the debentures of industrial concern

loans to be repayable within 20 years.

Guaranteeing the loans raised by industrial concerns on such terms and conditions as

may be mutually agreed open and repayable within 20 years.

11

Guaranteeing deferred payments of any industrial concern, which purchase capital

goods with in India.

Underwriting the issue of stocks, Bonds or Debentures of Industrial concerns subject

to their being disposed of in the market with in 7 years.

Providing for discounting of bills of exchange beside the SFCs Act, as agent of the

central Govt, State Govt. and other national level development financial institutions.

1.6 PRESENT STATUS OF THE INDUSTRY

At present there are 18 SFC’s in the country, which were set up under the SFC’s Act 1951.

The SFC’s in different states are

Andhra Pradesh State Financial Corporation.

Assam Financial Corporation.

Bihar State Financial Corporation.

Gujarat State financial Corporation.

Delhi Financial Corporation.

Haryana Financial Corporation

Himachal Pradesh Financial Corporation.

Jammu and Kashmir SFC.

Karnataka State Financial Corporation.

Kerala State Financial Corporation.

Madhya Pradesh Financial Corporation.

Maharashtra State Financial Corporation.

Orissa State Financial Corporation.

Punjab Financial Corporation.

Tamil Nadu Industrial Investment Corporation Ltd.,

Rajasthan Financial Corporation.

Uttar Pradesh Financial Corporation.

West Bengal Financial Corporation.

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II. COMPANY PROFILE

Profile of Karnataka State Financial Corporation

This chapter will give insight about the company and bring out the important thing that

makes a company with the help of the Mckinsey 7-S model.

2.1 GENERAL INTRODUCTION

KSFC has been playing a pivotal role in the development of small and medium scale

enterprises (SMEs) in the state of Karnataka for the last 46 years of its existence. Since

inception, KSFC has assisted more than 1.55 lakh units with cumulative sanction of more

than Rs 7,427.65 cores out of which about 50% is towards SSIs.

Amendments to SFCs Act provide wide ranging scope in financial assistance and operational

flexibility keeping this in view, KSFC has re-engineered itself to ensure almost customer

satisfaction with new energy, thrust and speed. In line with this the corporation has put in

place comprehensive, client friendly, need – based policies in the areas of credits recoveries

and one – time settlement.

Apart from setting standards of performance, these policies would also achieve the objective

of transparent governance.

2.2 INTRODUCTION

Karnataka state financial corporation is a state level financial institution established by the

state government in the year 1959 under the state financial corporation’s Act 1951. To meet

mainly the long term financial needs of small and medium enterprises (SMEs) in the state of

Karnataka. In the 46 years of existence, KSFC has contributed most significantly for the

growth of SSIs; backward area development in these areas is unparalleled.

13

KSFC, an ISO 9001-2000 certified organization is proud to have played a major role in the

industrial development of the state. It is also the proud privilege of KSFC to have assisted

many industries that are internationally recognized like the INFOSYS and BIOCON.

2.3 ORIGIN OF THE COMPANY

Karnataka state financial corporation (KSFC) was established on March 30, 1959 under the

state financial corporation’s Act 1951. The Main Objective of establishing KSFC was to

provide term loan assistance to tiny, small and medium enterprises mainly for the purpose of

acquisition of fixed assets. As the commercial banks were selective in providing working

capital facilities to newly set up units, the corporation took active role to provide working

capital term loan to curtail initial sickness for want of working capital.

The Karnataka State Financial Corporation, which prior to November 1, 1973, was known as

the Mysore State Financial Corporation. Then the Government of Mysore established the

KSFC by notification No. FD 28 BIS 59 dated 30th March 1959.The Mysore Government

fixed the Authority Share capital, at Rs 2 crores. As compared to this, today’s authorized

share capital is Rs. 500 crores with a provision that the state government of Karnataka, on the

recommendation of the small industries development bank of India increased the authorized

capital up to Rs. 1000 cores.

2.4 GROWTH AND DEVELOPMENT OF THE COMPANY

KSFC in order to improve its operational efficiency towards enhancing customer satisfaction

had standardized most of its operations and obtained ISO 9002:94 certification during May

1998. The ISO certification was renewed during May 2001 for a further period of 3 years,

which was to conclude during December 2003. In order to continue and up-grade the quality

management system conforming to ISO 9001-2000, on completion of all formalities, the

corporation is successful in up-grading the quality management system to the revised

standards of ISO 9001-2000. And is certified as an ISO 9001-2000 company with effect form

9-03-2004.

The corporation has been acting as regional development bank by focusing its attention for

development of first generation entrepreneurs, tiny and small-scale industries with more

14

thrust on development in the hinterland of backward areas. Development of weaker section of

the society like SC/ST, Minority, Women entrepreneurs, physically handicapped, etc., was

among the prime objectives.

2.5 LEADING PLAYERS

Small Industry Service Institution (SISI)

Technical Constancy Organizations (TCOs)

Karnataka State Small Industries Development Corporation limited (KSSIDC)

Small Industrial Development Bank of India (SIDBI)

Khadi and Village Industrial Board (KVIC)

Commercial Banks

Co-operative Banks etc.

DICs

Some foreign lending banks.

2.6 KSFC’s TURNAROUND

In line with the committed performance, the corporation accomplished a notable feat of

turnaround during the current fiscal. The corporation registered an operating profit of Rs.

14.11 crores and a net profit of Rs. 0.87 cores in the year under review. Thus, the not too

encouraging financial results witnessed by the corporation in the last six years were halted

during 2003-04 with this turnaround, the resilience displayed, by the corporation will go a

long way in further consolidating the corporations performance in the coming years.

2.7 COMPANY PROFILE WITH REFERENCE TO MCKINSEY 7-S

FRAMEWORK

The 7-S framework was developed by the consultant at the Mckinsey to a very well known

management constancy firm in United States towards the end at the 70s to diagnose the

causes of organizational problems and to formulate programs for improvement.

15

2.7.1 Strategy

A set of decisions and actions aimed at gaining a sustainable competitive advantage. It

includes purposes, missions, objectives and major action plans.

Goals of the KSFC

Goals refers to “a set of values and aspirations that goes beyond the conventional formal

statement of corporation objectives goals are missions and fundamental ideas around which a

business is built”

Main Objectives of the KSFC

To provide financial assistance mainly to meet the long term financial needs of small

and medium enterprises (SMEs)

Contribution to the growth of small-scale industries, backward area development and

promotion of first generation entrepreneurs.

To provide for wide ranging scope of assistance and operational flexibility.

Setting standards of performance to achieve transparent governance.

To diversify it’s business in equipment leasing, working capital assistance to select

unit and to support research and development activities.

To identify new projects for investment and assist the local people to setup industrial

unit’s in backward area by offering them project feasibility reports, marketing

assistance and technical input required.

Extend special concession to entrepreneurs belonging to SC/STs welcome

entrepreneurs and physically handicapped.

Accord preference to local, tiny, ancillary entrepreneurs.

To meet financial assistance for creation of fixed asset.

To meet the urgent working capital requirement of existing units by way of corporate

loans.

Quality Policy

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Karnataka state financial corporation endeavours to create satisfied customer through

adequate and timely financial assistance and guidance. This shall be achieved through

professional management and teamwork.

Quality Objectives

To effectively identify and assist the entrepreneurs in establishing successful business

enterprises.

To provide quality financial and related services on a continuous basis.

To continually up-grade our products and services.

To motivate and involve employees to achieve the set organizational growth targets.

To encourage the employees to upgrade and enhance the knowledge and skills

through effective training and development.

To transform the organization to a customer centric institution.

Mission

“KSFC is committed to nurture, develop and service the SME sector through need

based product and services”.

Scope of KSFC

The scope of operation of Karnataka state financial corporation is confined essentially to

small and medium scale enterprises and it is constricted from granting loans to concern

whose paid up capital and reserves together exceed Rs. 12 Cores. Their aggregate

contingent liabilities arising from guarantee and underwriting arrangement should not

ordinarily exceed twice their paid up capital and reserves, which can extend up to Rs. 12

cores with the prior approval of the government. Moreover a KSFC holding company’s

share capital should not exceed 30% of the subscribed capital of their company or 10 %

of its own paid capital and reserves whichever is less. It is also prohibited from financing

a concern in which its directors have interest.

Karnataka state financial corporation is authorized to provide different types of

assistance such as

Granting loans and advances for period not exceeding 20 years.

Subscribing to debenture payable written 20 years.

17

Karnataka state financial corporation is also authorized to act as the agent of

government both a central and state level, with any financial institution like IDBI,

IFCI etc., In matter connected with grant of loan or advises or subscription.

Achievements

Sanctions of loans to small scale and tiny sector up to 31.03-2005, since its inception

aggregating 1,55,000 lakh units through its various lending schemes.

Computerization of head office and branch offices for better customer service.

Establishing of women entrepreneurs’ guidance cell for guidance and escort services

of women entrepreneurs.

Introduction of loan assistance scheme for getting ISO (9000) certification.

Premier position among all SFCs of the country with regard to sanctions

disbursements and recovery.

Commendation from IDBI as one of the best financial institution.

Functions of KSFC

Granting loans and advances or subscribing to debentures of industrial concerns,

Subscribing to stocks / shares of industrial concerns,

Under writing of issue of shares, bonds and debentures by industrial concerns,

Guaranteeing the loans raised by industrial concerns,

Providing hire purchase assistance for acquisition of industrial equipment / Machinery

and transport vehicles,

Providing merchant banking facilities viz., portfolio management, broke-ship of issue

of shares, organization of bridge appraisal reports, syndication of loans etc.

Providing bill discounting facility for industrial concerns, and

Acting as agents of central / state government and financial institutions.

On the Fast Track to the Future

In the fast changing economic scenario of the emerging global village, a corporate has

to be on its toes. Karnataka state financial corporation is fully geared up to meet the

18

challenges of global competition. It has embarked on a restructuring process that will see the

corporation turn into focused corporate ready to able on all challenges. For Karnataka state

financial corporation it has a clear vision of its future to diversify into new areas of operation

while maintaining its leadership position as the number one SFC in the country.

A beginning has been made in this direction the corporation has entered into an agreement

with IFFCO -TOKIO, a joint venture of IFFCO, to distribution of their general insurance

products in Karnataka.

2.7.2 Structure

The management of the KSFC is carried out by the board of directors consisted as per the

SFC Act 1951, assisted by managing director and executive committees. The state

government appoints the chairman and he will be chaining the board. The managing director

appointed by the state government. He is responsible to take stock of day to day operations

and the developmental work.

Composition of the Directors

The board has 12 directors. Out of them 4 directors are nominated by the state government. 1

by the RBI, 2 by the IDBI, and 4 by the SFC Act 1951. Apart from this, the state government

in consultation with SIDBI and its state government appoint the managing director.

KSFC has spread wings across provenance starting just one office in 1959-60. Today KSFC

has 30-branch office. 7 zones offices and 2 field office. The branch office has been

categorized as super ‘A’ grade and ‘B’ grade depending upon their authority to sanction the

loan. Zone office will look after 4 to 5-branch office. This structure has helped the

organization to provide customer service effective monitoring and business throughout the

state.

The corporation has effective system and practice of organization planning and control.

Adequate power has been delegated to branch managers. Branches have the authority to

sanction the loan up to Rs. 25 lakh. The zone manager is given sufficient freedom to take

decision regarding operation of branch and their client. The head office along with annual

business plan and resources forecast will prepare the 5-year plan.

19

Special committee has been set up for project implementation review and default review in

all branches; policies making and management committees of top executives take strategic

planning decision.

2.7.3 Systems

System in the 7-s framework refers to all the rules regulation and procedure both formal and

informal that complements the organization structure. (Systems are more powerful than they

are given credit)

The corporation follows a systematic procedure at all the levels. The corporation has very

good performance appraisal system, training and development system, and resource

allocation system, distribution and recovery system. There is well laid down set of guidelines,

manuals, circulars are in KSFC.

Recruitment and Selection System

The Administration and Establishment department in KSFC follows the written roles for the

purpose of recruitment and selection. It follows the government obligation in case of

reservation to the backward class people, Women for the purpose of recruitment.

Advertisement will be given for newspapers as per the government guidelines. For higher

post minimum 60% (only graduates) required to eligibility for applying. Written test will be

conducting after the scrutinizing the application. Personnel department will be maintaining

the recruitment and selection systems. It takes the people as and when needed.

Training and Development Systems in KSF

The personnel joining the organization are given induction training by the heads of

department and are made aware of the quality policy etc., The skill set required for each

function is given in detailed C and R rules. The same is reviewed once in a year by the

personnel department and changes if any are made offer approval from competent authority.

The competencies of personnel are assessed continuously and any requirements for training

identified and provided either internally or externally.

2.7.4 Style

20

The KSFC has good culture and leadership at each and every level in the organization. The

orders flow from top management to lower levels. The employees of KSFC are friendly and

customer oriented. KSFC follows management by fact style. The employees of KSFC have

high moral and ethical values.

Style of KSFC Involve

To Motivate and involve everyone for achieving organization growth through implementation

of the document quality of marketing system.

To encourage everyone in the organization to upgrade and enhance their skill and knowledge

with appropriated training for improving the quality of service to the entrepreneur.

The employees are well delegated each and everyone. They have discharged utmost interest

for the organization. They conduct periodical meeting, reviews i.e., in fortnightly monthly,

weekly, quarterly conduct zone meetings and entrepreneurs and board meetings once in 15

days they conduct the special meeting with General Manager and Managing Director –

formal as well as informal meetings. Every week screening committee for screening the loan

application received are held with customer in head office.

2.7.5 Staff

Staffing is the process of acquiring human resources for the organization and assuring that

they have the potential to contribute to the achievement of the organization goals.

Recruitment System in KSFC

Recruitment and selection will be done according to the guidelines issued by the government.

It follows the government Obligations in case of reservation to the backward community and

women’s also. Advertisement will be given to the newspapers, collecting the application from

the candidates. After scrutinizing the application test will be conducted. For the higher post

graduation must be required, 60% of standard is fixed by KSFC for eligible to apply.

Career Development Program in KSFC

Each and every employee will be trained twice in a year. Promotion will be given to the

eligible employee to the higher post. KSFC has a professional team of experts drawn from

21

various disciplines led by illustrious leadership of senior Indian Administrative Service

Officers. The Personnel of KSFC are top rated managers, engineers, financial analysts,

market researchers, economists, statisticians and information technologists. It is this

professional team of wizards, which is the backbone of this mighty organization. Staffs are

important source of any organization. KSFC has 1309 employees at present. KSFC has

strong personnel department, which takes care of its employees and workers. The

corporation recruits employees directly from open market with required qualifications.

KSFC has good training and development department to give training to its employees on

regular basis depending on the changes in work environment.

2.7.6 Skill

In the Mckinsey 7- S framework, Watermen consider skills as one of the most crucial

attribute or capabilities of an organization. The term skill includes those characteristics,

which most people are to describe a company. In other words skill refers to dominant skills

or distinctive competence of an organization.

The Employees of KSFC have competent skills to serve people and the community. The

employees are innovative in nature and upgrade knowledge continuously to service the

people in better manner. As KSFC is an ISO 9001 – 2000 certified company; the employees

are continuously striving to upgrade their skills to satisfy customers’ needs.

The employees of KSFC are from different educational backgrounds like Charted

Accountants, MBA, Master of Commerce, BE, Bachelor of Law, etc.

2.7.7 Shared Values

On the Mc Kinsey 7-S framework shared values refers to commonly held beliefs mindsets

and assumptions that shape how an organization behaves its corporate culture.

Shared Values of KSFC

Earning of profits and reviving of cases is the main aim.

Team work and development of people

Mutual respect and trust in working relationship

Providing required services in the main motto.

22

Honest towards customers, vendors and employees

Appreciation in all business relations and dealings.

Expand equal opportunities and respect to all human beings.

Financing of small and medium enterprises.

2.2 INTRODUCTION TO CO-OPERATIVE BANKS

The corporation in its fruitful existence of 46 years has extended assistance to more than

155000 units with cumulated sanction of over Rs.7427.65 cores. KSFC has been awarded for

excellence outstanding performance for selling general insurance products of M/s IFFCO-

TOKIYO general insurance co. ltd. for the year 2004-05.

KSFC an ISO-9001-2000 certified organization is proud to have played a major role in the

industrial development of the state.

Statement of Problem

KSFC being one of the various financial institutions lends its services to all the sectors of

business. Extending financial assistance to the small-scale sector, rural artisans, tiny

industries and disadvantaged groups of the society has been the area of focus of the

corporation.

However the financial assistance provided by KSFC is declining over the years because of

prevailing competition. Some important problem facing by KSFC.

Internal problems

Problem of credit appraisal

Problem of growth of NPAs

Problem of effective fund management

Problem of effective recovery

Problem of effective training and development

Problem of performance appraisal system

Problem of effective promotional activities

External Problems

High competition

23

Problem of restriction from the Government

One major problem identified was “problem of credit appraisal.” Hence the need to

study and examine the working of KSFC with regard to its management, policies and

regulations framed for project appraisal, financing various schemes and other functions to

improve its competitiveness. Therefore, the study deals with analyzing the problems faced by

the business organizations in approval of their projects and customer satisfaction with credit

appraisal procedure at KSFC and offer suitable suggestions wherever necessary.

Need for the Study

As the institutional lenders all over the world have realized from their experience that they

cannot expect to recover the loan on the basis of security alone. Hence there is a need and

importance of project appraisal. The credit financed by them has to be viable as well. A

wrong decision may lead to industrial sickness and wastage of scarce resources.

To overcome this problem there is a need to appraise the credit proposals and examine the

viability of project and securities available for the loan. This could be done through by

understanding the credit appraisal procedures of financial institutions like KSFC and also by

suggesting the remedies if any after conducting the research.

Scope of the Study

The study will help the researcher to analyze the credit appraisal system at KSFC. This study

will help to know the benefits and problems faced by the organizations with respect to credit

appraisal and financing in KSFC.

The main objective of any service-oriented organization is to provide excellent customer

service there by giving customer satisfaction. The study can provide a piece of information in

developing an effective project appraisal and financing system in KSFC.

The Study Covers the Operations of KSFC Head Office

Different loan schemes of KSFC

KSFC services towards customers

Procedures followed to sanction loan

24

Projects eligible for assistance from KSFC

Customers opinion about loan procedure

Terms and condition maintained by KSFC about credit appraisal procedure

Objective of the Study

To study the credit appraisal procedures at KSFC

To know the terms and conditions maintained by the KSFC about the credit appraisal

procedure.

Case study to know the credit appraisal procedures followed by KSFC

To know the customer opinion about credit appraisal procedure at KSFC in the

Bangalore City.

Chapter-2

LITERATURE REVIEW

The literature pertaining to the study on “credit appraisal procedures at KSFC” has

been presented in this chapter

2.1 WHAT IS FOLLOW – UP

The traditional concept of follow- up has been geared to ensuring the integrity of the

collateral security placed with the institutions in consonance with the volume of outstanding

25

loan as also the repayment of outstanding as scheduled. Hence one has been accustomed to

come across terms such as assets evaluation, inspection, lack- and key arrangements, among

others. In the altered situation, development banks realise the importance of the project

appraisal. Follow up brings a bear to a deeper diversified and enduring interest and

involvement in assisted project. [C Shetty, 1998].

2.2 PROJECT ANALYSIS

There is an essential difference between the operating entity (enterprise) and the project

activity. Projects, as vehicles for change and growth of the enterprise, and measured in terms

of their incremental impact, or net additional contribution to the enterprise. The financial

analysis of projects then is focused on the anticipated incremental benefit from the project,

coupled with an analysis of the parent enterprise. Because for project all are concerned

almost exclusively with the future, the application of forecasting techniques and the process

of projecting the flow of resources (represented by funds) are analytic tools which are critical

for the decision- making process. As any investment project, will be measured from a variety

of perspectives in terms of credit worthiness, efficient use of resources and incentives. [Jack

Stockard, 1998]

2.3 THE WORKING OF THE CREDIT AUTHORIZATION SCHEME

Credit authorization scheme is to be locked up on as a more regulatory measure confined to

large borrowers. Its basic purpose is to ensure orderly credit management and to improve

quality of bank lending. So that all borrowings, whether large or small, are in conformity with

the policies and priorities laid down by the central banking authority. The continued

surveillance by RBI over the lending operations of banks through credit authorization scheme

has still an important role to play. The present credit authorization scheme may be redesigned

as “credit monitoring scheme”. So as to reflect the important change in broad approach and

emphasis. [Anon, 1998]

2.4 CAUSES FOR PROJECT FAILURES

The best way to appreciate the concerns of lenders to a project is to review causes for project

failures, which are:

26

Delays in completion with consequent delay lender contemplated revenue flow.

Capital cost over run

Financial failure of the contractor

Technical failure

Government interference

Uninsured casually losses

Increased price or shortages of raw materials

Technical obsolescence of the plant.

Loss of competitive position in the market place

Expropriation

Poor Management.

In order for a project financing to be viable, these risks must be properly addressed and

avoided. [Peter K Nevitt, 1998]

2.5 DEMAND AND MARKET ANALYSIS ON “PROJECT APPRAISAL”

Effective demand represents the total quantity of a specific product purchased at a given price

in a particular market over a given period. A market can be viewed in narrow terms as a set of

consumers, existing and potential, or in broad terms, as the consumers plus such influences as

the government policies obtaining in a particular country or region. For analyzing the new

product demand is more difficult task to the financial institutions. Demand and market

analysis is very important because of the financial institutions wants to know the future value

of that units, there position will be representing the future repayment of the term loans and

they want to invest in good way, make use of financial resources. Demand and market

analysis like size and composition of present effective demand, demand projection (domestic

and export). Forecasting techniques, market surveys, competition from domestic and foreign

suppliers, total demand, market penetration, sensitivity analysis, statistical analysis are done

by the financial institutions, while appearing a project of a unit. [Anon, 1999]

2.6 COST OF CAPITAL

The cost of capital represents the cost of total funds for a project. It should be defined and

treated as all other costs in capital budgeting decisions viz., as an opportunity cost. Resources

for project financing can be had from several sources as loans. These sources generally are:

27

Commercial Banks for working capital

Specialized institutions- medium and long-term loans.

For acquiring fixed assets

General public fixed deposits of varying duration

Capital market Bonds and debentures.

2.7 INFORMATION REQUIREMENTS FOR MONITORING MEDIUM

TERM FACILITIES TO INDUSTRIAL UNITS

Information Available for Monitoring

Projects under implementation

Enterprises under operation.

An Effective Follows – Up Tools

Periodic reports to be submitted by the assisted units.

Plant visits / Inspections

Discussions with representatives of enterprises.

Reviews- industry review and Inter - Company Studies

Feed – back from other departments: from sister- institutions, industrial trade and

financial community.

Institution’s nominees in the Board of Assisted enterprises. [C. Shetty, 1999]

2.8 INTEGRATION OF MONITORING, COUNSELLING AND RECOVERY

IN FINANCING SMALL ENTERPRISES

The most critical aspects of operation of institutions financing small and tiny enterprises are;

excessive financing risks and higher operational costs to which these are exposed. The later,

the operational costs, arise partly as a result of the write-offs for losses incurred in defaulted

payments, or loss of income on account of delayed payments and overdue; partly the staff in

collecting primary information, the additional effects needed to verify market opportunities,

assess Entrepreneurial capabilities and so on, so,. In the performance and operation of the

unit, the institution through its monitoring counselling activities, is closely informed and to a

certain extent perhaps. Indirectly has had a hand. Thus, the level of performance as also the

28

ability or lack of it to repay dues is closely monitored, and hence, known to the institution

well in advance. [C Shetty, 1999]

2.9 FOLLOW-UP OF BANK CREDIT

In the light of the foregoing, time is now opportune to review the existing system and effect

changes in such a way that under the new system the borrower would plan his credit needs

and the banker also would be able to plan, having known the borrower’s business. Since the

introduction of the Credit Authorization Scheme and the qualitative improvement in the

lending skills of commercial banks. Each bank should conduct banker- borrower seminars to

create an understanding between the operating officials in the respective banks and their

customers. [Anon, 2000]

2.10 A TWO – STAGE APPRAISAL MODEL FOR PUBLIC FINANCIAL

INSTITUTIONS

A public financial institution, through the appraisal process, tries to select projects for

financing that are bankable and also meet certain development objectives. In real life most

decision situations do not have a clear- cut single objective that needs to be minimized or

maximized goals programming provides a simple and practical method of combining many

objectives in the decision framework. If needed although objectives like “encouraging

investment in backward areas” or “encouraging employment generating investments” can

help in channelling the flow of investment, the absence of a frame work can lead to biases in

the decision process. The two-stage model suggested here can provide such a framework

without compromising the viability of the investment proposal appraised in the first stage.

[P.K. Bhaumik, 2001]

2.11 PROJECT APPRAISAL

There are mainly 5 different types of appraisal can be done while in credit appraisal

procedure, they are:

Technical appraisal: like manufacturing process/technology, size of plant, product

mix, plant layout etc.,

Commercial Appraisal marketing: Like demand techniques of forecasting, supply

depth of competition, Brand name for the product etc.,

29

Financial Appraisal: like capital cost projects, sources of finance, ratio analysis,

Breakeven point etc.,

Economic Appraisal/social cost Benefit Analysis: like ratios for economic appraisal,

economic rate of return. Etc.

Management appraisal: Like qualities of an entrepreneur organizational set up,

management problems. [SPS Deol, 2001]

2.12 PREVENTION OF SICKNESS

Following are the few suggestions can be considered for avoiding the sickness

Proper appraisal of the project

Implementation of the project according to the time schedule

Disbursement of funds should be done according to the requirements of the project.

Modernization/Expansion/diversification when needed.

Detection of sickness and taking corrective steps at the incipient stage.[Joseph, 2001]

2.13 COST OF PROJECT AND MEANS OF FINANCING

Project appraisal aims mainly at ensuring that scarce resources are put to most economic use.

This involves an examination of project to find out whether the project is technically feasible,

financially sound and economically viable. In a developing country like India, it is also

necessary to ensure that the project promotes the national economic and social development

objectives. The essential factor in the project evaluation is to arrive at an independent

assessment of the viability of the project and on this basis to arrive at an investment decision.

Such an independent assessment is called for right form the estimation of the cost of the

project. As per the amended securities contract Regulations Act., not less than 60% of the

issued capital should be offered to public for subscription central / state Government public

financial institutions, development agencies of government can together subscribe up to 11%

of public issue in which case only 49% need to be offered to public. In case where Indian

promoter’s subscription can go up to 66.67 %. [David A. Tallman, 2002]

2.14 TECHNICAL EVALUATION AND ITS ROLE IN PROJECT APPRAISAL

30

The development of a project from project idea till the project goes into operation comprise

three distinct stages viz., pre-investment stage, investment stage and operational stage. The

technical feasibility of projects is examined from the angle of technology and engineering. In

reviewing the variety of aspects such as size, scope and nature of the projects, many other

aspects is required to be considered. As no formal education and training is yet available in

our colleges and universities in these fields one has to necessary learn this job by process of

exposure. But those mistakes in appraisal are likely to be costly and therefore, can’t be

afforded. Most important quality expected of an appraiser is his ability to ask the right

question and to recognize the right answer at the appropriate moment. [C. S. Pani, 2003]

2.15 CREDIT APPRAISAL FOR SICK UNITS

Before sanction the finance, the financial institutions have to consider some problems. In

those units, like

Problem relating to project implementation

Problem relating to production

Problem relating to marketing

Management problems

Problems relating to finance

Problem relating to Administration and personnel [Matthew S. Yoon, 2003]

2.16 POLICIES AND PROCEDURES RELATING TO GENERAL TERM LOAN AT

HSIDC

After a proposal is accepted for appraisal, the detailed appraisal is carried out by the officer

(s) of the Corporation to assess the technical feasibility and financial viability of the proposal.

Among other things, the appraising officer(s) focus on the following points. Background of

promoters relevant experience, their resource position; performance of the unit if existing;

performance of sister units; suitability and adequacy of land, location etc;. Adequacy of

proposed building; suitability and adequacy of proposed machinery’ Background and

reputation of the machinery suppliers; sources and availability of raw material, price data for

the last 1-2 years; Adequacy of utilities like water, skilled manpower etc. Technical/Financial

tie-ups; adequacy of Equipment’s for pollution control; opinion of the banker on the

31

promoters and conduct with them; and marketing tie-ups, market overview. [http:// www. fin-

ser.hsidc.com]

2.17 CREDIT APPRAISAL AND MANAGEMENT

The software solution enables a bank to standardize the proceedings across banks and enables

installing certain financial uniformity amongst the borrowers.

Appraisal Tools

Sensitivity analysis and projections for working capital and term loans. Comparison of

previous, Credit Management Appraisal’s. Industry and peer group comparisons, linkage to

financial database of service providers such as CRISIL, CMIE and C – on line Credit Risk

Rating Incorporation. Term Loans, Interest Workouts, Moratoriums, Repayment Schedules,

Sensitivity, Computation of MPBF, Facility wise Maximum Limits, and Proposal

Preparation.

Post – Appraisal Stage

Ensures the sanctions are adequately covered by the policy guided terms and conditions,

Accepted securities and documents linked to various facilities, sanctions and follow – up

methodologies, compliance of terms and conditions of charging of securities completed and

sanctioning facilities as per set authority, Auto generation of sanction letter with facility wise

limits, terms and conditions.

2.18 FINANCIAL ASSISTANCE FOR PROMOTION OF ENERGY EFFICIENCY

INVESTMENTS IN THE REPUBLIC OF KOREA

The KEMCO pre-investment appraisal determines the eligibility of the project; and the

amount of funds to be loaned-KEMCO sends the applicant a copy of recommendation letter

with an application form attached. And at the same time KEMCO sends the original letter of

recommendation to the financial institution. For the projects with long implementation and

repayment periods, KEMCO provides the loan only for the initial 3-year project period. The

banks assess the size of loan required to carry out the investment plan through a field survey.

Loans are approved within 30 days following the receipt of the loan application. Loans for

non- electric cooling systems or insulation retrofit for housing are supposed to be handled by

the financial institutions without KEMCO’s recommendation. The loans may be approved

within 45 days. Lending conditions of the respective financial institutions apply.

32

Chapter-3

RESEARCH METHODOLOGY

In this chapter the details regarding the methodology used to conduct the study and the

location in which study has been conducted and its design are briefly explained.

3.1 RESEARCH DESIGN

33

The topic credit appraisal procedure has been taken and studies how credit appraisal

procedure will be maintained in KSFC. A census survey has been conducted to find out the

problems relating to credit appraisal.

3.2 LOCATION OF THE STUDY

The study was conducted in Bangalore in the state of Karnataka.

3.3 DURATION OF THE STUDY

The study has been conducted for a period of 6 weeks.

3.4 STATISTICAL TOOLS

The different statistical tools used here are percentage, tables, and bar charts, they have been

used to make the data as clear as possible.

3.5 SAMPLING

3.5.1 Sampling Technique

Due to time constraint random sampling technique was used. The entrepreneur who seeks

financial assistance from KSFC was surveyed.

3.5.2 Sampling Size

For conducting research the sample size of 20 entrepreneurs who availed loan for various

purposes are selected.

3.5.3 Tools for Data Collection

The study dwells on primary and secondary data for attaining the specified.

3.5.4 Sampling Design

Non–probabilistic method of sampling is adopted. A case study was undertaken to understand

credit appraisal procedures at KSFC.

3.6 FIELD WORK

34

For conducting research, fieldwork has been undertaken in and around Bangalore and

questionnaire has been filled.

3.7 DATA COLLECTION

SECONDARY DATA

Secondary data are those which have been already collected by some one else and which

have already been passed through statistical process for the purpose of the study the

secondary data was collected form

Operational statistics

Annual report of the KSFC

Product and service profile (Brochures)

Project appraisal manual of KSFC

Various books maintained by KSFC

Monthly magazine called KSFC news.

PRIMARY DATA

Primary data are first hand information collected a fresh and for the first time. For the

purpose of the study, primary data was collected through questionnaire.

3.9 ANALYSIS

Data for the study was collected both from primary and secondary sources. Data Collected

through questionnaire within the Bangalore City was analysed properly to get the required

information, table, and graphs are used to depict the data more clearly.

LIMITATONS OF THE STUDY

The sample size selected is too small to generalize the findings of survey

The results of the study are based on the assumption that all the information provided

by the respondents was correct.

In depth analysis could not be done due to time constraint

Survey is mainly focused on KSFC customers

Survey is limited to Bangalore City only.

35

Chapter-4

DATA ANALYSIS

A long-standing experience has enabled KSFC to have its own methods and standards

for appraising a project. The appraisal department has been divided into two groups. Each

group has been further divided in to two groups. Each group has been allotted certain

industries, which enables them to have in depth knowledge and specialization in those

industries. The efficiency with projects of different industries has been appraised by the result

of this arrangement. KSFC mainly focus on small-scale industries, to develop the SSI.

4.1 OBJECTIVE 1

36

To study the credit appraisal procedure at KSFC

4.1.1 Method of Appraisal in KSFC

The process of appraisal carried out in phased manner as explained in following paragraphs.

Entrepreneur Approaches the Entrepreneur Guidance Cell

Entrepreneur guidance (EG) cell is the link between KSFC and entrepreneurs. It guides the

entrepreneur who approaches it. Entrepreneur comes to know about different schemes and

clauses that are suitable for him or entrepreneur may have an idea about the project already in

his mind. In either case EG Cell issue form, which should be filled up by the entrepreneurs

and returned back to EG cell, this form contains the basic details of the project like the

product, the amount applied for the organization and like. The EG cell than checks the EG

form. If found correct and complete with all the enclosures, it will forward the same to the

Screening committee.

Approval of the Project by Screening Committee

Screening committee consists of top officers including Executive Directors. The screening

committee also will give their opinion about the project in the meeting, which should be

attended by the entrepreneur; all these conditions are conveyed to the entrepreneur in the

meeting. Once the project clearance committee is convinced that entrepreneur have a viable

project plan, entrepreneur will be asked to submit a formal loan application in the prescribed

loan application form, which will be given to entrepreneur at the end of the meeting. This

means entrepreneur proposal is likely to be considered favourably subject to a detailed

appraisal by the credits department.

Appraising the Project by ADM Department

The project Appraisal provides an all-round assessment that a successful project requires. In

the process, weak links in entrepreneur project plan can be rectified. The credit department at

head office has its own team of experts - a financial officer, a technical officer, marketing

Officer, and a Legal officer. A copy of entrepreneur application form and project report will

be given to each member of the appraisal team who is handling entrepreneur case, for

detailed scrutiny and further processing.

37

The concerned team of ADM Department will appraise the project, As already mentioned,

the project is appraised on following factors.

Background of Entrepreneur

Technical Appraisal

Commercial appraisal /Marketing appraisal

Financial Appraisal

Legal Appraisal

Management appraisal

Economic appraisal / Social cost benefit analysis.

4.1.2 Background of Entrepreneur

If the entrepreneur has a sound experience in the field, preference is given by KSFC, but first

generation entrepreneur is also given preference if they have sound technical knowledge or

when the product has got high demand. The following particulars of the entrepreneur are

examined in details name, age, educational qualification, experience, net wroth, stake in other

firms by the entrepreneur, special and technical qualifications of the entrepreneur etc.,

4.1.3 Technical Appraisal

Technical appraisal of a project is essential to ensure that necessary physical facilities for

production will be available and the best possible alternative is selected to procure them, it

includes the study of following items.

Manufacturing Process / Technology

Arrangements for Technical Know-how

Size of plant

Product mix / Product range

Selection of plant and machinery

Procurement of plant and machinery

Plant layout

Location of the project

Schedule of project Implementation The Project Evaluation and Review Technique

(PERT) of Critical Path Method (CMP) help the promoter in proper planning

38

scheduling and controlling various activities essential for the execution of project all

possible activities from the project identification to commencement of production

should be listed. The appraising officer should verify whether all the activities have

been included and the time scheduling given by the promoter is reasonable.

The team of technical expert will visit the unit for inspection of building if it already

exists. It will also examine the area and location of the unit, type of building, facilities

like water, power, road, etc.

KSFC has got a list of registered suppliers of machinery. It insists the unit to purchase

required machinery’s form these suppliers. If the supplier chosen buy the entrepreneur

is reputed one then there is no problem. This is to make sure that the estimated

producing with this machinery will materialize.

The entrepreneur should get permission from municipality or any other concerned

legal authority for constructing the building.

The KPTCL letter for power supply should be obtained.

The technical team will also verify other factors to make sure that the project is

technically perfect.

4.1.4 Financial Appraisal

The financial appraisal helps to find out the risk associated with financing the project. The

team visits the unit and collects the information about financial aspects. The entrepreneur will

be asked to give details about profit expected along with probable sales, the cost of raw

materials, cost of Labour, and such other aspects. Department upon the information given by

the entrepreneur and information collected on their own, financial experts will prepare

several financial statements to be included in the project report.

39

Estimation of the Cost of Project

Estimation of the cost of project includes Land and development expenses, Building and

civil works, Plant and machinery, Miscellaneous assets, Margin for contingencies,

Preliminary and per operative expenses, Interest during implementation, Start-up expenses,

Deposits, Working capital margin, Technical know-how and engineering of expenses paid to

foreign technicians

Financing Pattern with Reference to

Capital structure

Promoter’s contribution

Seed capital

Soft capital

Soft loan

Subsidy development loan

Deferred payment guarantee and

Unsecured loan etc.

Examination of Profitability Statement

Examination of Cash Flow Statements

Examination of Financial Ratios, such as

Debt Equity Ratio

It is the relationship between loan capital and the capital raised by way of equity. The

requirement of debt equity ratio for amount less than Rs. 10 lakhs is 3:1 and above is 2:1 (as

per IDBI/SIDBI)

Debt Service Coverage Ratio

This ratio indicates the capacity of the unit to repay term loan and interest thereon. It is

calculated during the entire repayment period, separately for each year and also as an average

for the entire repayment period. This ratio should generally in the range of 1.5 to 2. The

repayment period of loan is fixed by the Corporation with due regard to the cash generation

and profitability of the project.

Return on Capital Employed

40

It indicates how the management has used the funds supplied by creditors and owners. The

higher the ratio, the more efficient is the firm in using the funds entrusted.

Breakeven Point

It is calculated to know the level of production at which the industrial concern breakeven,

identification, neither make profits nor incurs losses.

Examination of Production Capacity

Internal rate of return, payback period, net present value and profitability index or benefit

cost ratio etc.

SensitivityAnalysis It is

impossible to have the actual results exactly according to projections. Although actual results

will be different than the figures shown in projections, proper verification of various

assumptions will ensure that variation between actual results and projections is minimum and

a project which is considered viable may not become unviable. Projected profit may change

owing to changes in the cost of project, cost of production, volume of production or selling

price.

4.1.5 Commercial / Marketing Appraisal

Generally the appraising team has the knowledge about demand, supply, competition, project

margin etc, of particular industry. Hence it can easily judge the market potential for the

proposed product. If the product to be manufactured is new or unique, then special market

survey is carried out. The report of the same is included in project report.

Demand Forecasting Techniques

Many entrepreneurs come to the banks and financial institutions with a proposal to

produce whatever they can without giving due consideration to the marketability of the

proposed product. Even if they provide the information, it may not be sufficient and reliable.

In order to have proper appraisal of the demand forecast made by borrowers, the term lending

institutions would require information regarding demand, supply distribution, pricing and

external forces like government policies, import, exports, foreign collaborations etc.

41

The following techniques may be used for demand forecasting

Import substitution

Past trend method

End use method

Correlation and Regression

- Export use method

- Supply depth of competition

- Pricing policy

- Life Cycle of product

- Brand name for the product

- Packaging and Transportation

- Distribution Channels

- Sales promotion

- Servicing for consumer durable and industrial goods.

4.1.6 Management Appraisal

Every business has different requirement form the management. Business, which are complex

require significant experience on part of top management to run it management expertise is

not only technical know-how, but also in understanding market dynamics ability to distribute

product effectively, manage manpower and environment.

Qualities of an Entrepreneur

Man behind the project is very important. The entrepreneur should have the qualities like,

honesty and integrity, involvement in the project, competence, risk taking, initiation,

intelligence, drive and energy, self confidence, frankness, patience etc,

Management Problems

The following are the few management problems found during management appraisal

Conflict among the promoters

Conflict among executives

Autocratic style of management

Misuse of financial resource

42

Lack of expertise etc.,

The appraisal team should thoroughly study the management before sanctioning the

loan. A close watch should be kept on the performance of the management and also should

provide necessary help and guidance at the appropriate time.

4.1.7 Economic Appraisal / Social Cost Benefit Analysis

Scarcities of capital and foreign exchange are the most serious constraints for the planners in

developing consulted. They wish to constraints for the planners in developing countries. They

wish to utilize the limited stocks of capital and foreign exchange according to the best

possible use, simultaneously maximizing the growth of the employment. Redistribution of

project income in favor of economically weaker sections and backward areas is also one of

the important objective. The Social cost benefit analysis is done using following methods.

Ratios for economic appraisal

- Organization for Economic Co-operation and development (OECD) method.

- United Nations Industrial development Organization (UNIDO) method.

Exchange rate of the project or domestic resources cost.

Comparative study of financial rate of return and economic rate of return.

4.1.8 Legal Appraisal

KSFC works to make sure that the loan is secured and the documents are authenticate. For

this, it needs various legal documents form the entrepreneur. The entrepreneur gives a list of

documents of at the time of submitting the application form. In legal appraisal the documents

pertaining to the constitution, the properties offered as security are scrutinized to ascertain if

it meet the requirements of various provisions of law applicable in entrepreneur case.

Thus the appraisal is carried out in a detailed manner. The stringent procedure is to make sure

that entrepreneur has real interest in the project and the loan is given to the good purpose. The

primary objective of industrial development is always kept in focus while appraising the

project.

43

The methods of project appraisal at KSFC is evolved out of its experience over the years and

it is always be scrutinized for improvement.

4.2 OBJECTIVE 2

To know the terms and conditions maintained by the KSFC about the credit appraisal

procedure

Terms and Conditions

The borrower should given an undertaking that any shortfall in finance in

implementing the project will be made good out of their his own source to the

satisfaction of the corporation.

Not with standing any other conditions the borrower shall pay to the corporation,

interest at such other rates as may be fixed by the corporation form time to time and

intimated to the borrower. On such intimation the rate of interest payable by the

borrower shall be that rate of interest. So communicated provided that in the event of

an increase in the rate of interest the borrower shall have the option to prepay to the

corporation forthwith on receipt of such intimation, the entire outstanding of the loan

together with outstanding interest thereon.

Not withstanding the period of repayment allowed stipulated here in the, corporation

is a liberty either at its absolute discretion or at the instance of the SID. IDI/IDBI, to

revise vary postpone advance or refix the repayment of the said loan and of balance

outstanding for the time being. If any instalment of repayment of the said term loan

and / of interest or any part thereof, as the case may be such reification shall

conclusively binging on the borrower on written intimation of the same by the

corporation.

The properties offered as security should be insured for their full value by you in the

join names of yourself and the corporation against the risks for fire, riot and strike at

your cost.

The borrower shall keep the corporation informed of the legal action if any instituted

against the proprietor/partners/firm/directors/company guarantors in any court of law

under criminal/civil/winding up proceeding once in every quarter during the currency

of the term loan.

44

The borrower shall furnish to the corporation annual statements of accounts duly

audited by a chartered accounting regularly during the currency of the loan (including

the audit’s Report, Director’s Report copy of the Meeting Notice and agenda for the

Annual General Meeting in her case of a company)

The borrower shall agree for the additional terms and conditions/modifications, if any

suggested by SIDBI/IDBI at the time of sanction of refinance.

The company shall not declare dividend so long as the company is in default payment

of interest or principal instalments of the loan, in case the company is regular in

repayment of loan prior approval of the corporation shall be obtained for declaring

dividend in excess of 10%

The borrower shall not undertake any further expansion or any new project during the

currency of the loan without the prior approval of the corporation

The borrower shall undertake not to transfer/divert the funds of this unit in however

manner to any other concerns, business, etc., without the prior approval of the

corporation.

The borrower shall affix aboard in a prominent place indicating the building and /

or plant and machinery, which are mortgaged/hypothecated to the corporation.

The borrower shall also affix the nameplate on each item of plant and machinery

stating that it is hypothecated to the corporation.

The borrower shall not allot shares to any individual or body corporate for

consideration other than cash (applicable to companies only) without the prior

permission of the corporation.

The corporation reserves the right to release part or full amount earmarked towards

contingency depending upon the security created and after inspection valuation and

verification of proofs thereof.

The borrower shall take prior approval of the corporation before placing orders for

jigs/fixture/moulds/dies etc., if any the releases towards these items will he made only

after inspection and valuation by the officials of the corporation.

The corporation reserves the right to nominate directors on the board of the company

(applicable to companies only).

45

No personnel on a remuneration exceeding Rs. 50,000/- per month shall be appointed

without the prior approval of the corporation.

Prior approval of the corporation shall be obtained to the terms and conditions of

appointment / reappointment or the key personnel.

The corporation shall have lien over title deeds documents and other papers submitted

by the borrower until any charges/liabilities/instalments remaining unpaid are cleared

in full.

The repayment of interest and principal instalments stipulate here in is subject of the

power of the corporation to recall and demand the loan at once prematurely. If there is

any default in payment of any instalments or any breach of the terms and conditions

of the loan or otherwise to safeguard the interest of the corporation.

The corporation reserves the right to limit the loan amount any time to the extent of

the loan amount disbursed and to cancel the balance loan amount, if there is any

undue delay in availing the loan and / or implementing the project.

The borrower shall not allow any of the directors on the board of the corporation

(KSFC) to have any beneficiary interest in their industrial concern without prior

permission of the corporation in writing. The corporation is entitled to enforce its

right to recall the loan (and any other accommodations provided) in the event of

breach of this condition.

All payments exceeding Rs. 20,000/- to the building contractors or suppliers of plant

and machinery shall be made through crossed account, payee cheque, pay order or

DD only.

The loan amount earmarked towards self-fabricated items of second hand machinery

if any shall be released only after inspection, valuation and performance of such items

to the satisfaction of the corporation. The borrower shall also submit chartered

engineers certificate as to the valuation in respect of self fabricated machinery and

further life valuation, condition, etc. in respect of second hand machinery.

If there is any shortfall in the availability (or non availability) of subsidy/soft loan

/seed capital which form part of the means of finance and if applicable the same

should be made good by way of additional capital/unsecured loans to the satisfaction

of the corporation.

46

The building construction shall be as approved by the corporation. If there is any

deviation, prior approval of the corporation shall be taken. The amount earmarked for

the construction of building shall be released in suitable instalments depending on the

progress achieved, security created and margin brought in by the borrower towards

building.

The plant and machinery should acquired as per the list approved by the corporation.

The amount earmarked for the purchase of machinery shall be paid directly to the

supplier on receipt of dispatch documents in case they are registered with corporation.

In case of unregistered supplier, the amount will be released only after inspection of

the machinery at site and performance seen if necessary.

The borrower shall strictly adhere to the provisions of the child labour (prohibition

and regulation) Act 1986 in the matter of employment. Any violation of this Act shall

result in the corporation recalling the loan.

The unsecured loan if any shall not be with/draw during the currency of the loan and

they shall not bear interest in excess of 15 % p.a. Payment of the interest towards

unsecured loan shall be subordinate to the payment of instalments of both principal

and interest in respect of term loan(s) of the corporation.

Foreign letter of credit for imported machinery if any shall be opened through HP and

FS department of the corporation.

The corporation will not be responsible for the original documents submitted by the

borrower for availing the loan if the same are not taken back within a period of three

months from the date of closing the accounts i.e., date on which the loan(s) is/ are

repaid in full.

The borrower if its is a company shall undertake to amend its Articles of Association

to provide for nominee directors clause to the satisfaction of the corporation if no

provision is made already.

4.3 OBJECTIVE 3

Case study to know the credit appraisal procedures at FSFC.

ABC Company

4.3.1 Executive Summary

47

“M/S ABC Pvt. Ltd.,” has approached the corporation for a term loan of RS. 232.00 lakhs for

expansion of their software development and network solutions business at M.G Road,

Bangalore. The company has started its business from May 2002. The company is involved

mainly in network solutions and customised software development. The performance of the

company during last 3 years as below

(RS. In lakhs)

31-03-2003 31-03-2004 31-03-2005(Prov)

Turnover 30.64 122.93 190.87

Net Profit/Loss -0.20 2.02 31.99

Depreciation 0.42 2.01 3.07

Cash generated 0.22 4.03 35.06

Table: 4.3.1.1

The company is projecting Rs.360.00 lakhs turnover during 2005-06 and Rs.600.00 lakhs

during FY 2007. At present, the company is having orders from various customers.

Project at Glance

a. Unit Code: XXXXX

b. Unit Name: M/s. ABC Pvt. Ltd.,

a. Office address: M.G. Road, Bangalore 1

b. Factory Address: M.G Road Bangalore. 2

Constitution: Private Sector private company

Promoters/Directors

a. Type of Industry: Computer and computer services

b . Size of Industry: Non-SSI

48

Existing: I.T Service

Proposed: I.T. Services

Capacity:-

Installed: Rs.1200 Lakhs

Maximum operating

Capacity envisaged: 80%

Main Raw Material: -

End use of finished product: Software and Network Solutions

Sales Turnover in Normal year: RS. 960 lakhs

Financial and Profitability of M/s. ABC Network Technologies Pvt. ltd., Bangalore.

Indicators

Minimum

Prescribed

Actually

Provided

a) Promoter’s contribution: 22.50 41.91

b)Debt equity ratio project 2.00:1.00 1.39:1.00

c) Debt equity ratio overall 2.00:1.00 1.7:1.00

d) Debt service coverage ratio 1.50:1.00 2.35:1.00

e) Overall security margin retained 25.00 39.00

g) Return on capital after taxation in normal year of

maximum operating capacity

28.56

Table2: 4.3.1.2

Repayment period: 4 year excluding a moratorium period of 18 months.

49

Implementation period: 18 months

Loan amount applied: Rs.2, 55,00,000

Loan amount Recommended for sanction: RS. 2,55,00,000

4.3.2 Swot Analysis

Strengths

The company is headed by experienced technocrats with wide contracts in India and

abroad.

The company is already in the international and national business in the development of

software products.

The company is professionally managed and has unemployed friendly professional

atmosphere including strong technical base and environment.

The company has already taken steps for expansion project including investment in the

land at prestigious zone.

The company has focus on international customers besides domestic. The company is

typing to have a mix of market like domestic and international customers, which will help

in taking care of business fluctuations in suture.

Weaknesses

The company is having two technocrat directors and it needs a person who looks into

marketing.

The company is having development centre at Bangalore and it does not have its

branches in other parts of India and abroad to enhance its capability in multifold.

Opportunities

The software industry is booming and lots of business opportunities are available

worldwide.

The Bangalore being it destination in India, the company can leverage this opportunity.

The remote infrastructure management business is poised for a major thrust. There are

lots of business opportunities to manage networks in advance countries where manpower

cost is very high. Highly skilled manpower available at Bangalore.

50

Threats

As software business is knowledge based industry, there may be people turnover, which

may affect the company.

Competition from other software development organizations.

4.3.3 Recommendations

In light of the all, it is recommended that M/s ABC Pvt., Ltd., may sanctioned a Term Loan or

Rs.255.00 lakhs (Two Core Fifty Five Lakh only) for the expansion of their existing service

engaged in the IT SERVICES at M.G. Road, Bangalore. Subject to the terms and conditions

stipulated in the sanction order in addition to the other usual terms and conditions.

4.3.4 Technical Report

The proposed location of the unit is at MG Road Bangalore. The plot measures 4067

sq.mtr allotted by KIADB during December 2004. In the vicinity most of the MNCs

/reputed software companies are located and the location is ideally suited for software

development units.

The building measuring area 2800 sq.mtr at basement for vehicle parking, ground, first,

second and third for office block and software requirements of software development

centres. The company has applied for approval of building plan with KIADB Authorities

and expects getting the approved building plan before legal documentation. The building

and civil works is estimated at Rs.223.00 lakhs. The proposed building is as per the

requirement to software units.

The plant and machinery and furniture’s proposed are from reputed suppliers and

essential to the software development activity. The rates quoted are comparable and

satisfactory for the software development activities. The plant and machinery and

furniture and fixtures are estimated at Rs. 102.00 lakhs and Rs. 22.00 lakhs respectively.

There will be high obsolescence in plant and machinery and to cover the risk the 100%

collateral security towards plant and machinery and furniture/fixture loan component is

insisted i.e. industrial land and FD of Rs. 15.00 lakhs.

51

The installed capacity of the unit has been arrived at Rs. 1200.00 lakhs by taking revenue

from the various projects based on existing software projects on hand and future business

plans. The company is expected to utilize 50% of its capacity during first year, 70%

during second year and 80% from third year onwards. Based on the present business and

future business, the company can generate good profits and service the liabilities. The

DSCR works out at 2.35:1.00. Based on the above satisfactory parameters, the project is

technically viable.

4.3.5 Financial Appraisal

The project DER is at 1.44: 1.00 and overall DER is at 1.73:1.00 as against the

requirement of 2:1.

The security margin retained on primary assets works out at 25.07% as against minimum

requirement of 25% and overall security margin retained works out to 36.94% which is

satisfactory.

The DSCR works out at 2.35:1.00, return on capital after taxation in normal year of

maximum operating capacity works out at 43.86%, margin on profit on sales before

taxation in normal year of maximum operating capacity works out at 28.81%. IRR at

55.65% and breakeven point at 46.09%, which are considered satisfactory.

The SWOT and credit risk analysis has been carried out. As per the analysis the project is

at Moderate Risk category. The detailed credit risk analysis and SWOT analysis are

available in the memorandum. The 100% security is insisted towards the loan component

towards plant and machinery and furniture/fixtures to take care of obsolescence of plant

and machinery.

Based on the above satisfactory parameters, the project is considered financially viable.

4.3.7 Profitability Statement of M/s. ABC Network Technologies Pvt. ltd., Bangalore.

(Rs. In Lakhs)

52

YEARS I II III IV

CAP UTILISATION % 50 70 80 80

SALES 600.00 840.00 960.00 960.00

CONSUMABLES 24.00 33.60 38.40 38.40

POWER , FUEL 10.10 13.42 15.08 15.08

SALARY and WAGES 200.00 260.00 338.00 439.40

ADMIN and MISC. EXP 80.00 96.00 115.20 138.24

DEPRECIATION 74.03 51.11 36.69 27.43

REPAIRS 15.00 16.50 18.15 19.97

INT. ON T.L 34.43 29.03 20.93 11.21

SELLING EXPENSES 60.00 84.00 96.00 96.00

INT. ON W.C. 4.74 6.11 7.34 7.34

COST OF PROD 502.30 589.77 685.79 793.07

PROFIT BEF. TAX 97.70 250.23 274.21 166.93

TAX 31.75 81.32 89.09 112.68

PROFIT AFT TAX 65.95 168.91 185.09 112.68

Table 3:4.3.7.1

4.3.8 Working Capital Estimate of M/s. ABC Network Technologies Pvt. ltd., Bangalore,

YEARS I II III

53

RAW MATERIALS .25 0.50 0.70 0.80

WORK IN PROGRESS .25 9.20 10.52 12.26

WORKING EXPENSES 1.00 30.43 39.16 48.54

BILLS RECEIVABLES .25 12.50 17.50 20.00

TOTAL CURRENT ASSETS 52.63 67.88 81.60

W.C. MARGIN 13.16 16.97 20.40

BALANCE CURRENT ASSETS 39.47 50.91 61.20

LESS CREDITORS .50 0.00 0.00 0.00

W.C. FACILITY FROM BANK 39.47 50.91 61.20

Table 4:4.3.8.1

The company is enjoying working capital limits from M/s bank of Baroda, Palace

orchards Branch, Bangalore to the extent of Rs. 7.00 lakhs. Now the bank is processing the

working capital to the company to the extent of Rs. 25.00 lakhs.

4.3.9 Debt Service Coverage Ratio of M/s. ABC Network Technologies Pvt. ltd., Bangalore.

(Rs in lakhs)

Years I II III IV

Depreciation 74.03 51.11 36.69 27.43

Int. On T.L 34.43 29.03 20.93 11.21

Profit aft Tax 65.95 168.91 185.09 112.68

Loans repaid 174.41 249.05 242.71 151.32

Term loan 40.00 60.00 72.00 83.00

54

Int. on T.L 34.43 29.03 20.93 11.21

Total 74.43 89.03 92.93 94.21

DSCR 2.34 2.80 2.61 1.61

Table5:4.3.9.1

Combined DSCR 2.35

Disposition of Funds of M/s. ABC Network Technologies Pvt. ltd., Bangalore

Prel, Pre-op 29.00

Exp. Int

During imp

Capital Exp. 397.00

Current assets 39.47 11.44 10.29

Loans repaid term loan 40.00 60.00 72.00 83.00

Taxation 31.75 31.32 89.12 54.25

Div/Drawings 0.00 0.00 0.00 0.00

Total 426.00 111.22 152.76 171.41 137.25

Op. Balance 0.00 13.00 112.98 273.00 422.78

Net surplus 13.00 99.98 160.02 149.73 57.11

OL. Balance 13.00 112.98 273.00 422.78 479.89

Table 6: 4.3.9.2

55

4.3.10 Assumptions to Profitability of M/s. ABC Network Technologies Pvt. ltd.,

Bangalore

The company is already in the line of telecom software development and IT infrastructure

management services and systems integration. The company is expecting to achieve Rs. 1200.00

lakhs turnover at installed capacity. The turnover of the company has been estimated at Rs.

1200.00 lakhs as below.

(Rs in lakhs)

a. Wireless project : 200.00

b. Software services : 400.00

c. Consultancy services : 200.00

d. Projects and Consultancy : 400.00

(Including BW sales and allied services)

Total : 1200.00

The company is expected to utilise 50% of capacity in the year and 70% in the second year

and about 80% in the III year and onwards based on the present projections and contracts.

The consumables are estimated at 4% on sale turnover.

Salary and wages are estimated at Rs. 200.00 lakhs and are increased by 30% p.a.

Power, fuel and water charges are calculated at Rs. 10.10 lakhs during I year and Rs.

13.42 lakhs during II year and Rs. 15.08 lakhs from third year onwards.

Administrative expenses is estimated at Rs. 80.00 lakhs and increased by 20% p.a.

Expenses on repairs and maintenance have been provided at Rs. 15.00 lakhs during the I

year and increased by 10% during every subsequent year.

Interest on term loan has been calculated at 13.50% p.a.

Marketing expenses is estimated to cost 10% p.a. on sale turnover.

56

Income tax is calculated as applicable.

4.3.12 Internal Rate of Return of M/s. ABC Network Technologies Pvt. ltd., Bangalore

YRS

Gross

fixed

assets

Inventori

es Total

Profit

before

tax

Interes

t on

T.L,

U.S.L

&

W.C

Depre

ciation Total

Net

cash

flow

0 430.0 430.00 -

430.00

1 39.47 39.47 97.70 39.17 74.03 210.90 171.43

2 11.44 11.44 250.23 35.14 51.11 336.48 325.04

3 10.29 10.29 274.21 28.27 36.69 339.17 328.88

4 0.00 166.93 18.55 27.43 212.91 212.91

5 0.00 166.93 7.34 21.34 195.61 195.61

6 0.00 166.93 7.34 17.19 191.46 191.46

7 0.00 166.93 7.34 14.26 188.53 188.53

8 0.00 166.93 7.34 12.11 186.38 186.38

9 0.00 166.93 7.34 10.47 184.74 184.74

10 0.00 166.93 7.34 9.16 183.43 183.43

11 0.00 166.93 7.34 8.09 182.36 182.36

12 0.00 166.93 7.34 7.19 181.46 181.46

57

13 0.00 166.93 7.34 6.41 180.68 180.68

14 0.00 166.93 7.34 5.74 180.01 180.01

15 0.00 166.93 7.34 5.14 179.41 179.41

Table7: 4.3.12.1

Internal rate of return 55.09%

4.3.13 Credit Risk Analysis of M/s. ABC Network Technologies Pvt. ltd., Bangalore

Financial Risks

Sl. No Particulars Range Score

1 Current ratio 1.37:1 >1.25 1

2 Profit after tax/ Net sales (15.91%) >7.5 5

3 Profit before interest, depreciation and tax/

interest 4.21%

>4% 3

4 Return on capital employed 71.45% >12.5% 3

5 All 3 years positive net worth and no

accounting loss

1 5

6 Debt equity ratio – scheme 1.44:1 <2 2

7 Debt equity ratio- overall 1.73:1 <2 2

8 Repayment period 4 years < 5 years 2

9 Average DSCR ( unit as a whole) 2.35:1 >1.75:1.00 3

10 Security margin on primary security-

33.51%

>30% 3

11 Ratio of overall security to overall > 1.50% 2

58

outstanding 1.58 times

12 Worth of guarantee < 100% i.e. Rs 44.00

lakhs

<100% 0

Total 31

Table8: 4.3.13.1

Business Risks of M/s. ABC Network Technologies Pvt. ltd., Bangalore

SI. No Particulars Range Score

1 Technology Latest technology already

prevailing in the market

2

2 Location Unit is located in well developed

industrial area (EPIPzone)

3

3 Class of machinery Special purpose machinery with

limited prospects of reselling

1

4 Product

obsolescence

Product not prone to obsolescence

in next 5-7 years

2

5 Machinery

obsolescence

machineries not prone to

obsolescence in next 3-5 years

1

6 Competition Competition exist and but there is

still gap between demand and

supply

1

7 Sector based on

lending policy

Thrust sector 3

8 Customer profile More than 5 customers with

concentration of nor more than

3

59

40% to a single customer

9 Seasonality Working days > = 300 days 3

10 Product profile Product enjoying distinctive

advantages like high quality, and

no substitutes

1

11 Patent rights Others 0

Total 20

Table9: 4.3.13.2

Management Risks of M/s. ABC Network Technologies Pvt. ltd., Bangalore

Sl. No Particulars Range Score

1 Background Experienced entrepreneurs/existing

unit working

profitably/expansion/modernization

5

2 Track Record Timely repayment with no single

default (the company has availed

working capital facilities from bank

of Baroda and the transactions are

satisfactory and account is standard)

5

3 Length of

relationship

New customer to KSFC 0

4 Qualification

and experience

Technically qualified and business

experience more than 5 years

2

5 Systems, Very good 3

60

procedures etc

6 Certifications The company is in competition with

international customers and is having

setup/ procedures of international

acceptable standards to do the

software business

2

Total 17

Legal risks of M/s. ABC Network Technologies Pvt. ltd., Bangalore

Sl. No Particulars Range Score

1 Legal risks Building and machinery financed

and furniture’s are financed with

land, building, machinery and

furniture’s as security with a

additional security to make 100%

security towards plant and

machinery

6

2 Ownership of

collateral security

Owned by borrowers/promoters 2

Total 8

Score Risk perception

80 and

above

Least risk

60-80 Moderate

61

40-60 High risk

Below 40 Most risky, not worth financing

Based on the marks secured at 76, which is less than 80%, the unit comes under moderate risk

category.

4.4 OBJECTIVE -04

To Know the Customer Opinion About credit Appraisal Procedure With in the Bangalore

City

Analysis and Interpretation of Questionnaire

Purpose for which term loan is sanctioned by KSFC at Bangalore

From the survey, it is clear that 75% of entrepreneurs obtained loans from KSFC to start new

projects, 25% of expansion and another for modernization of the existing units. It is clear that

KSFC will be encouraging the new entrepreneurs to start new projects other than expansion and

modernization of the existing units.

Constitution of the firm who taken loan from KSFC with in Bangalore city

It is clear that the 45% of firms are partnership firms, 20% are proprietary firms, 35% private

limited and no public limited and co-operative firms taken loan. It is clear that KSFC had given

more loans to partnership firms and private limited companies. But the loans obtained by co-

operative and joint Hindu family constitutions are limited in number.

KSFC sanctioned more loans to flowing sectors within the Bangalore city.

Size of Firm No. of respondents %

Large Scale - -

Medium Scale 4 20

Small Scale 10 50

62

Tiny Sector / Non SSI 6 30

Total 20 100%

Table10: 4.4.1(a)

From the Table 4.1, it is clear that KSFC sanctioned 20 % of loans to medium scale sector, 50%

to the small scale sector and 30% to the tiny sector/ Non SSI. So its shows that KSFC sanctioned

more loans to small-scale sectors.

Opinion of the respondents about the interest rate of KSFC’s term loan at Bangalore City

Opinion No of respondents %

High 6 30

Reasonable 14 70

Low - -

Total 20 100%

Table10: 4.4.1(b)

From the table it is clear that 70% of the respondents are feeling that the interest rate of KSFC’s

term loan is reasonable and 30% feel that the interest rate high compared to other term loan

lending organization and nobody feels that interest rate is low in KSFC. So, the interest rates

charged are high compared to other term loan lending organizations.

Opinion of the respondent about the EG cell takes care in identifying competent

entrepreneurs.

Opinion No of respondents %

Yes 11 55

No 4 20

63

Sometimes 5 25

Total 20 100%

Table10: 4.4.1(c)

From the table it is clear that majority of respondent feels that EG Cell at head office takes care

in identifying competent entrepreneurs. EG Cell is doing good job in identifying competent

entrepreneurs to grant loans.

Opinion about credit appraisal system at KSFC with in Bangalore city

Opinion No of respondents %

Excellent 3 15

Good 5 25

Satisfactory 8 40

Needs change 4 20

Total 20 100%

Table10: 4.4.1(d)

Form the above table it is clear that 15% of respondents agree that project appraisal system at

KSFC is excellent, 25% of respondents feel good, 40% respondents feel satisfactory and 20% of

respondents feel that project appraisal system at KSFC needs change. So its shows, many

respondents feel satisfactory, but there is a need to change and adopt new methods and

techniques to appraise the projects in changing marketing conditions.

Opinion about rate KSFC services to customers in Bangalore City.

Opinion No of respondents %

Excellent 2 10

64

Good 10 50

Satisfactory 8 40

Not satisfactory - -

Total 20 100%

Table10: 4.4.1(e)

It is clear that 10% of respondents agree that KSFC service to customers is excellent, 50% of

respondents feel good and 40% of respondents feel satisfactory and no one feel that not

satisfactory. It is clear that majority of respondents feel that KSFC service to customers are good

and some feel excellent and satisfactory. So its shows those customers are getting good service

from KSFC employees and management.

65

Chapter-5

FINDINGS

Karnataka State Financial Corporation (KSFC) is one among the 18 state financial corporations

(SFCs) in India. KSFC was established by government of Karnataka in March 1959 under the

SFCs Act 1951 for extending the financial assistance for setting up of tiny, small, medium and

large scale industrial units in the state.

By the study it is clear that the KSFC appraises projects to test the viability from the marketing,

financial, technical, economic and managerial angles, KSFC conducting good credit appraisal

system. But after the survey it is clear that although good credit appraisal procedure, there is a

need to change in the appraisal procedure. KSFC maintaining good terms and conditions about

the credit appraisal procedure. Every business needs adequate liquid resources in order to

maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due

and to pay creditors if it is to keep its work force and ensure its supplies. Maintaining adequate

working capital is not just important in the short-term but sufficient liquidity must be maintained

in order to ensure the survival of the business in the long-term as well.

66

Chapter-6

RECOMMENDATION

KSFC has a very large organizational structure having nearly 13 departments. Since there are

many departments the working becomes more complicated. So the corporation can merge

some departments whose natures of jobs are similar and cut down the cost and can increase

the efficiency of work.

In KSFC management appraisal is done purely on the basis of bio-data furnished by the

entrepreneurs and it having formal discussions and the conciliation are drown. It is necessary

that effective assessment can be done to know and the think over it.

The interest rates of KSFC compared to the prevailing rates of the other financial institutions

and banks are much higher. So, there is a possibility that the industrialists or firms may shift

to the competitor. KSFC already taken steps to reduce interest but still it is more. So, KSFC

have to take some steps towards lowering the prevailing interest rates and much and flexible

in order to stay tuned with the competitors.

They have to improve their competitiveness by reviewing their management policy

regulations framed for project appraisal procedures and financing various schemes.

The documentation procedure have to be made as simple and shorter as possible.

KSFC have to conduct entrepreneurs program at least once in a month, it will help to attract

more new customers.

Quarterly interest have to be changed and monthly interest has to be introduced because

repayment of interest every quarterly is huge burden.

KSFC has to maintain quality clients so that it can maintain quality portfolio. The

corporation has to take measures to sanction financial assistance by taking less processing

time to give better services and to retain good clientele base.

Targets have to be set to the recovery officers and special incentives should be provided to

those officers who achieve their objective.

The activities of KSFC though manifold, are not Known to the large number of people

willing to establish industrial units. So to overcome this, it is suggested that regular

awareness programmes about the functions and different schemes of the KSFC to be

67

undertaken in throughout the state and also outside the state through audio visuals,

workshops, seminars, etc,. So that KSFC can function more effectively catering to the

diversified needs of the economy.

In order to fight the market competition the corporation has to enter into various businesses

as it has done by entering into insurance field with IFFCO -TOKIO.

The appraisal department has to identify very sensitive variable in the project by sensitivity

analysis and precautions should be taken to control that variable in order to avoid losses.

The officers of appraisal department are trained regularly as per the need of the changing

conditions.

Legal department has to carefully appraise the documents provided by prospective

entrepreneurs to avoid defaulters.

KSFC has to focus its attention on innovative projects to cope with the changing business

conditions.

The Corporation has to keep track of activities in its asserted units and provided managerial

guidance to them. The recovery department at KSFC should follow strict policies and

procedures to recover loans. It has to be consciously in touch with customers and has to take

stringent actions against defaulters. A frequent policy review regarding quantum of loan and

terms of repayment is necessary. The corporation has to take server legal actions on

defaulters in order to prevent or reduce such cases in future. They have to speed up release of

funds after appraisal. The corporation has to help the entrepreneurs to market their products

and service during initial years of operation.

The corporation has to take steps to see that funds are utilized for the purpose for which it is

sanctioned. Many times the entrepreneurs utilize funds sanctioned for other purposes. This

leads to sickness.

68

CONCLUSION

KSFC in its fruitful existence of 46 years has extended assistance to more than 155000 units with

a accumulated sanction and disbursement of over Rs. 7427.65 cores. The corporation has taken

an active role in providing single window loan to curtail initial sickness for want of working

capital. The corporation is also acting as regional development financial Institution focusing its

attention for development of first generation entrepreneurs, tiny and small-scale industry with

more thrust on development of weaker sections of the society like SC/ST, minority, women

entrepreneurs physically handicapped etc, various special incentives.

For the purpose of credit appraisal, KSFC has a separate department. The major work of this

department is to scrutinize the applications received. From the entrepreneurs and appraise the

project for its viability/non-viability. This department consists of efficient, intelligent and

technical personnel. These personnel are specialized in their areas like finance, engineering and

other technical field etc.

KSFC has been awarded for excellence outstanding performance for selling general Insurance

products of M/S IFFCO-TOKIYO general insurance co, Ltd. for the year 2004-2005 .

69

SCOPE OF FURTHER RESEARCH

Its aim is to assess the financial position, liquidity position, solvency and profitability of the

organization. They are also useful in identifying areas where more focus is required and provide

with the opportunity to the benchmark successful banking practise. The study will be useful for

the improvement in the performance of the bank.

Descriptive research is used in this study in order to identify the lending practices of bank and

determining customer’s level of satisfaction.

Bank must try to maintain its short term liquidity position, by investing only in those

investments, which are easily convertible into cash.

Moreover, the network of cooperatives was not broad based in the north-eastern region of the

country. This suggests that efforts need to be taken to improve banking penetration in the north-

eastern part of the country along with improving the financial health of the ground level

cooperative institutions. Increased Inter-linkages between UCBs and Commercial

70

BIBLIOGRAPHY

Books:

Financial Management-IFM(Vyuptakesh Sharan )

Introduction to Banking- (Vijayaragavan Iyengar)

Financial Management-(IM Pandey)

Newspaper:

Economic Times

Business Line

Magazine:

India Today

Times of India

Websites:

http://www.karnatakaapex.com

http://www.ijsrp.org

http://www.investopedia.com

http://academia.edu