SYMBIOSIS SCHOOL OF BANKING & FINANCEConstituent of Symbiosis International UniversityAccredited by NAAC with A GradeEstablished under Section 3 of the UGC Act, 1956, vide notification No: F.9.12/2001-U-3of the Government of India.

Credit Appraisal and Monitoring of SMEs

Internship Report submitted to SIU in partial completion of the requirement of MBA Banking Management at Symbiosis School of Banking & FinancePune - 412115.

SIDDHANT DIPAYAN SHILPA BHATNAGAR ROY RANE19 APRIL 6th 2015 TO MAY 30th 2015ACKNOWLEDGEMENT

I feel a deep sense of gratitude in thanking all those who helped me to carry out this project to its eventual accomplishment.

I sincerely thank Axis Bank group for giving me this opportunity. It has been a wonderful experience to work in this esteemed organization and with the people of amazing caliber. I would like to thank Mr. Rajesh Dewangan, Vice President, SME, Axis Bank for his guidance and support throughout the duration of the project. I would also like to thank Mrs. Shipla Rane and Mr. Madhav Moramkar without whose help and support it would not have been such a learning experience.

Last but not the least, this acknowledgement would not be complete without Mr. Aman Maheswari who has not only given valuable suggestions but also motivated me to take up the project with a varied perspective.

I also extend my gratitude to my parents and all those who have helped me in some way or the other in the completion of this project.

SIDDHANT BHATNAGAR 19SYMBIOSIS SCHOOL OF BANKING AND FINANCESUMMARY

Axis Bank is one of the well-renowned financial institution of India in outcome of talented minds of Shikha Sharma and Axis & Company. Today it offers wide range of services that encompass every sphere of life. From life insurance, to commercial banking, to investment banking, to mutual funds, the group caters to the diverse financial needs of individuals and corporate.In every business there is difference between the time period when the funds are raised and when they can be utilized so every entity needs to make a match between these two times. This is called working capital management. Working capital is defined as the funds required to carry out the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. So the main objective of this project is to do credit appraisal and monitoring for the SMEs lending. Firstly, an introduction about the Bank and what all areas is bank involved in and initiatives taken. An introduction to the SME sector, structure of Axis bank in SMEs Then the study of different products offered by SME. Then the study of working capital finance is done. Both fund based and non-fund based products are studied under it. The methods followed by Axis Bank to grant loans. Thus followed by Credit Appraisal process followed in Axis Bank. The process includes discussion of various ratios. This is done before sanctioning any loan to check commercial, financial and technical viability of the project. Lastly monitoring process has been analyzed whereby bank ensures that the funds are utilized for the sanctioned purposes and at the same time complying with all the sanction terms and conditions.

TABLE OF CONTENTS

LIST OF CHARTS.....6LIST OF TABLES..7ABBREVIATIONS....8BRIEF PROFILE OF STUDENT9NATURE OF THE PROJECT10OBJECTIVES & RESPONSIBILITIES....111. INTRODUCTION TO AXIS BANK......12i. Introduction..12ii. History..13iii. Area of business...14iv. Initiatives..14v. Awards and recognition15vi. Capital Structure15vii. Shareholders Pattern..16

2. INTRODUCTION TO SME17i. Small Scale Industry17ii. From SSI to Small and Medium Enterprises (SME)...17iii. SME in Axis Bank...18iv. Organization Structure.20v. Customer Segmentation...20vi. Products23vii. Working Capital...25viii. Methods29ix. Exposures not handled by SME...313. CREDIT APPRAISAL32i. Introduction...32ii. Parameters.33iii. Ratios.33iv. Process...40

4. MONITORING41i. Credit Monitoring & Supervision.41ii. Rating Scales.41iii. Review in respect of SME exposure.41iv. Sub-categories...42v. Control Return...............42vi. Monitoring function...42

5. METHODOLOGY..476. OBSERVATIONS487. CONCLUSIONS..498. BIBLIOGRAPHY50

LIST OF CHARTS

Figure NumberDescriptionPage Number

1Shareholders Pattern16

2SME Business18

3PAN India SME network19

4Organization Structure20

5SME Structure22

6Products23

7Classification of loans26

8Letter of Credit29

9Process40

10Flowchart for Churning report43

11Flowchart to keep check on Interest44

12Flowchart to keep up on stock statement45

13Flowchart of stock auditing46

LIST OF TABLES

Table NumberDescriptionPage Number

1SME Definition17

2Industry wise Distribution19

3Customer Segmentation20

4Parameters33

5Format of operating cash flow35

6Rating of Foreign Exchange Risk36

7Monitoring and Supervision41

8Rating score41

9Sub-categories42

ABBREVIATIONS

CMACredit Monitoring Assessment

SMESmall and Medium Enterprises

CIBILCredit Information Bureau India Limited

DIFCDubai International Financial Centre

EBTElectronic Benefit Transfer

eKYCelectronic Know your customer

SSISmall Scale Industry

LCLetter of Credit

SEGSmall Enterprises Group

MEGMedium Enterprise Group

SCFSupply Chain Financing

MSMEMicro Small and Medium Enterprises

MSEMicro and Small Enterprises

ODOverdraft

LCBNLetter of Credit Backed by Negotiation

ZCLZero Collateral Loans

CGTMSECredit Guarantee Fund Trust for Micro and Small Enterprises

EPCGExport Promotion Capital Goods

AACBAdvance Against Collection Bills

LTVLoan-To-Value

MDABMinimum Daily Average Balance

NPANon-Performing Assets

RMRelationship Manager

DPDrawing power

RBIReserve Bank of India

EPCExport Packing Credit

CCCash credit

MPBFMaximum Permissible Bank Finance

BGBank Guarantee

WCWorking Capital

BRIEF PROFILE OF STUDENT

My name is Siddhant Bhatnagar. I live in . I have done my 10th from Swami Vivekanand High School (Maharashtra Board) scoring 73.84%. I have done my commerce from Swami Vivekanand Junioir College (Maharashtra Board) scoring 67.33%. Following the commerce background I pursued my Bcom in Banking and Insurance from K.J. Somaiya (Mumbai University) scoring 6.36 CGPA. Currently pursuing MBA from Symbiosis School of Banking & Finance.I like to invest in equity market. I have being investing in shares from past one and half years and keen to pursue my carrier in equity market. I have been pursuing certifications too related to equity markets.I am a member of Cultural Committee. Enjoy organizing events. I am also proficient in roller skating.My greatest achievement is to be appointed as a Class Representative for 2 years in my graduation. I got experience of how to manage things with different types of people.My hobbies are listing music, watching movies, keeping myself updated on mobile technology playing badminton, cricket and table tennis.

NATURE OF THE PROJECT

Credit analysts, also known as financial analysts in the business world, play a very important role in the health of the economy. Credit analysts makes the entire modern economy function from day to day. Without the recommendations of credit analysts, banks are not able to extend lines of credit to businesses seeking loans. Credit analysts follows a method by which one calculates the creditworthiness of a business. In other words, it is evaluation of the ability of a company to honor its financial obligations. The objective of this method is to look at both the borrower and the lending facility being proposed and to assign a risk rating. The risk rating is derived by estimating the probability of default by the borrower at a given confidence level over the life of the facility, and by estimating the amount of loss that the lender would suffer in the event of default.Credit analysis involves a wide variety of financial analysis techniques Analysis of the Business and the Industry Category Financial Statement Analysis for Strengths and Weaknesses Cash Flow Analysis and Projections for Loan Repayment Collateral Analysis Calculating Ratios Ram / Systematic rating Analysis of Credit Risk Adequate Loan Structure and Pricing Analysis of Loan Documentation for CompletenessBefore approving a commercial loan, bank looks at all of the above factors.

OBJECTIVES & RESPONSIBILITIES

Objectives To study the credit appraisal process. To understand technical, commercial and financial of the proposed project and also the funding pattern. To understand the process of rating a company. To understand the pattern for primary & collateral security cover available for recovery of such funds. To study various reports and understanding the process.

Responsibilities Studying the credit policy of SME department in Axis Bank. Studying about the credit and rating tools used by SME department in Axis Bank. Preparation of Credit Monitoring Analysis (CMA) for various companies. Rating companies. Preparation of sanction letter. Studying the appraisal notes. Preparation of control return letter (monetary mechanism). CIBIL report of consumer and commercial. Preparation of proposal.

CH 1: INTRODUCTION TO AXIS BANK

IntroductionAxis Bank is the third largest private sector bank in India. Axis Bank offers the entire spectrum of financial services to customer segments covering Large and Mid-Corporates, MSME, Agriculture and Retail Businesses.The Bank has a large footprint of 2589 domestic branches (including extension counters) and 12,355 ATMs spread across the country as on 31st March 2015. The overseas operations of the Bank are spread over its seven international offices with branches at Singapore, Hong Kong, DIFC (Dubai International Financial Centre), Colombo and Shanghai and representative offices at Dubai and Abu Dhabi. During the year, the Bank has upgraded its representative office in Shanghai, China to a branch to become the first Indian private sector bank to set up a branch in China. During the year, the Banks overseas subsidiary namely Axis Bank UK Ltd. commenced banking operations. Axis Bank is one of the first new generation private sector banks to have begun operations in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI) (then known as Unit Trust of India),Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The shareholding of Unit Trust of India was subsequently transferred to SUUTI, an entity established in 2003.With a balance sheet size of Rs. 4,61,932 crores as on 31st March 2015, Axis Bank has achieved consistent growth and stable asset quality with a 5 year CAGR (2010-14) of 21% in Total Assets, 19% in Total Deposits, 23% in Total Advances

HistoryAxis Bank began its operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted in 1993 jointly by the Administrator of the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United India Insurance Company. The Unit Trust of India holds a special position in the Indian capital markets and has promoted many leading financial institutions in the country.Axis Bank (erstwhile UTI Bank) opened its registered office in Ahmedabad and corporate office in Mumbai in December 1993. The first branch was inaugurated on 2 April 1994 in Ahmedabad by Dr. Manmohan Singh, then Finance Minister of India.In 2001 UTI Bank agreed to merge with and amalgamate Global Trust Bank, but the Reserve Bank of India (RBI) withheld approval and nothing came of this. In 2004 the RBI put Global Trust into moratorium and supervised its merger into Oriental Bank of Commerce.UTI Bank opened its first overseas branch in 2006 Singapore. That same year it opened a representative office in Shanghai, China.UTI Bank opened a branch in the Dubai International Financial Centre in 2007. That same year it began branch operations in Hong Kong. The next year it opened a representative office in Dubai.Axis Bank opened a branch in Colombo in October 2011, as a Licensed Commercial Bank supervised by the Central Bank of Sri Lanka. Also in 2011, Axis Bank opened a representative offices in Abu Dhabi.In 2013, Axis Bank's subsidiary, Axis Bank UK commenced banking operations. Axis Bank UK has a branch in London.In 2014, Axis Bank upgraded its representative office in Shanghai to a branch.

Area of BusinessAxis Bank has following subsidiaries: Axis Capital Ltd. Axis Private Equity Ltd. Axis Trustee Services Ltd. Axis Asset Management Company Ltd. Axis Mutual Fund Trustee Ltd. Axis Bank UK Ltd. Axis Securities Ltd. Axis Finance Ltd.

Initiatives The Business Gaurav SME Awards:In 201112, Axis Bank set up 6 SME centres and SME cells each across the country, taking the total number to 32 SME centres. The Bank also organised the 'Business Gaurav SME Awards' in association with Dun & Bradstreet to recognise and award achievements in the SME space. Financial inclusion:Till March 2012, the Bank had opened over 4.4 million No Frills accounts in over 7607 villages through a network of 15 Business Correspondents and nearly 6000 customer service points. Axis Bank has a strong presence in Electronic Benefit Transfer (EBT) and has covered 6800 villages across 19 districts and 9 states till date with over 3.7 million beneficiaries. Industry First Initiatives: Axis Bank launched Mobile Banking App 2.0 for its retail resident Indian customers the first of its kind in India, which offers a high level of personalization. The App has been launched in partnership with Tagit, a leading Singapore mobile solutions company. The new application uses Tagit's mobility solution platform that enables Banking on-the-go. 'Axis Bank - ISIC Forex Card' for students, is the first photo Travel Currency Card available in USD, Euro, GBP and AUD currencies. It can be used across 34 million merchant locations and at over 2 million MasterCard ATMs globally. Axis Bank has partnered with Visa to launch 'eKYC' (electronic Know your customer) facility, first organization in India to introduce Biometrics based KYC, offering convenience, speed and ease to Aadhaar-registered individuals to open bank accounts.

Awards and Recognition Axis bank has been awarded the title of Superbrand 2014-2015, by Superbrands No. 1 Promising Banking Brand of 2015, ET Best Brands 2015 Best Corporate Payment Project- The Asian Banker Technology Implementation Award 2015 Best HR System Project -The Asian Banker Technology Implementation Award 2015 The Compliance Risk Technology Implementation of the Year -The Asian Banker Risk Management Awards 2015 Axis Bank felicitated at CNBC Awaaz Act for Good Governance Summit 2015 Winner in the 'Best Payment Initiatives' category amongst Private Sector Banks, IBA Banking Technology Awards 2015 Runners up in the 'Technology Bank of the Year' category amongst the Private sector Banks, IBA Banking Technology Awards 2015

Capital StructureThe Bank has authorized share capital of Rs. 850 crores comprising 850,000,000 equity shares of Rs.10/- each. As on 31st March 2014, the Bank has issued, subscribed and paid-up equity capital of Rs. 469.84 crores, constituting 469,844,553 equity shares of Rs. 10/- each. The Banks shares are listed on the National Stock Exchange and the Bombay Stock Exchange. The GDRs issued by the Bank are listed on the London Stock Exchange (LSE).

Shareholders Pattern

Figure 1: Shareholders Pattern

Share Capital: 474.10 crores Shareholders Fund: 44,677 crores Book Value per share: 188.47 Diluted EPS (annualized): 30.85 Market Capitalization: 1, 26,974 crores (as on 28thApril, 2015)As on 31st March, 2015 against GDR* issuance of 62.7 mn, outstanding GDRs stood at 17.6 mn.*1GDR = 5 shares

CH2: INTRODUCTION TO SME

Small Scale IndustrySmall Scale Industry (SSI) plays a crucial role in the industry sector. It helps in generating income, employment etc. Thus these industry play an important role in the growth of economy. These industries are labor intensive creating employment opportunities. Small Scale Industries enjoy lots of support from government in form of tax reliefs and subsidies.

From SSI to Small and Medium Enterprises (SME)Government policy and credit policy are all concentrated on manufacturing and small-scale sector. As the trading barriers are reducing the competition is increasing in the world where technology also plays an important role. Thus the concept needed an upgradation from SSI to SME.The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 which was notified on October 2, 2006. The definition of the small and medium enterprises as provided in the Act (Annex VII) will have immediate effect.SME can be defined as:Micro EnterprisesSmall EnterprisesMedium Enterprises

Manufacturing UnitsInvestment in plant and machinery upto 25 lakh.Investment more than 25 lakh but less than 5 crore.Investment more than 5 crore but less than 10 crore.

Service SectorInvestment in equipment upto 10 lakh.Investment more than 10 lakh but less than 2 crore.Investment more than 2 lakh but less than 5 crore.

Table 1: SME Definition

Banks may set targets for SME so as to show higher disbursement over the immediately preceding year. RBI guidelines says that 60% of the banks MSE lending should constitute to Tiny and Micro enterprises. Banks should also get year on year growth of 20%.SME in Axis BankThe SME business is a focus for the bank as it generates higher yields and helps disperse risk. SME accounts with turnover above 5 crores and upto 150 crores. Project stage companies with net worth upto 25 crores. Shipping, Logistics, Media and hotel are classified as SME if their net worth less than or equal to 50 crores and turnover is less than or equal to 100 crores. Commercial Real Estate borrowers, other than LRD, with Project cost upto 200 crores and less than or equal to 75 crores. Lease rental discounting borrowers with less than or equal to 75 crores exposure. Hospitals, Educational Institutions with turnover upto 150 crores or project stage companies with net worth upto 25 crores. SME segment comprises of MSME. All entities which are part of top 50 groups funded by bank and identified from time to time shall be assigned to LC/Infra segments and the processing of these proposals shall be done at LC/Infra.Figure 2: SME Banking

Table 2: Industry-wise Distribution

Figure 3: PAN India SME network>20,000 customer relationshipsSME advances at 43,000 crores as on March 15Operates through 51 Centers and 17 CentersServicing through 1000 branches across country SME BUSINESSEmployee strength of about 700 employees

Customer SegmentationSME department is responsible for business of Small and Medium Enterprises segment and Corporate Agriculture customers. To optimize the utilization of resources following segmentation is done: ParticularsSegmentation

Small Enterprises Group (SEG)Owner of exposure in template/non-templated segment upto 5 crores including funding to Micro enterprises.

Medium Enterprise Group (MEG)Owner with exposure more than 5 crores.

Supply Chain Financing (SCF)Channel Financing and Vendor Financing exposures.

Table 3: Customer Segmentation

SME includes Micro Small and Medium Enterprises (MSME) and also Supply Chain Financing (SCF).

Organization Structure

Figure 4: Organization Structure

Corporate OfficeIt is the uppermost in the hierarchy. It has the major decision taking power. Axis Bank has its corporate office in Worli. Geography OfficeAny sanction of loan is done by the geography department. The center reports to the geography department. SME CentersSME Centers cover the different areas. They report to the geography department. Axis Bank has 38 centers out of which Mumbai has 3 SME centers.SME 1 covering CST to Sion SME 2 covering Bandra to VirarSME 3 covering Sion to Karjat, Navi Mumbai SME CellsSME cells are formed to cover areas which are difficult to cover by SME centers.SME cells report to SME centers. Axis bank has 2 cells in Mumbai i.e in Thane and Vashi.

Geography Head

Figure 5: SME StructureBranch 1Branch 2Branch 3ASL ExecutivesCredit AnalystSEG Credit ManagerSEG SM/RMSCF RMMEG RMCredit HeadsCredit AnalystsCenter HeadMEG HeadSCF HeadSEG Credit HeadSEG Sales Head

ProductsTypes of Working CapitalProducts

Non-templatedTemplated

Figure 6: Products

Axis Bank divides there products in templated and non-templated products. Templated products are products that are defined in nature. These are products designed by the bank to suit different needs of customers. Non- template products are not defined i.e. the products are made as per the demand of customer. It is flexible in nature as per customer needs.Following are the templated products provided by Axis Bank: Micro and Small Enterprises (MSE) Power Scheme This facility is provided for manufacturing activity only. Limit / exposure from 5 lakhs to 500 lakhs Under MSE Power Scheme the working capital products are:a) Cash Creditb) Pre-shipment Financec) Post-shipment Financed) Letter of Credite) Bank Guaranteef) Discounting

Business MPower OD It is an overdraft facility provided for general business, takeover of existing facility, Schools and Educational Institutions for financing. Limit / Exposure from 5 lakhs to 500 lakhs.

Service Power This facility is provided for service industry only. It is a part of MSE Power. Limit / Exposure from 5 lakhs to 200 lakhs. Under MSE Power Scheme the working capital products are:g) Cash Credith) Pre-shipment Financei) Post-shipment Financej) Letter of Creditk) Bank Guaranteel) Discounting

Business Mpower Term Loan It is a term loan facility provided for general business, takeover of existing facility, Schools and Educational Institutions for financing. The Business Mpower Term Loan aims to provide an opportunity to customers to borrow against fixed asset at short notice with operational ease. Limit / Exposure from 5 lakhs to 500 lakhs.

LCBN Power Scheme Letter of Credit Backed by Negotiation (LCBN) is provided for bills backed by LC provides bill finance facility to constituent borrowers and non-constituent borrowers. It gives an opportunity to provide with required liquidity and also better credit terms. Limit / exposure from 5 lakhs to 500 lakhs. LCBN facility can be combined with any other product of SME.

ZCL collateral Loans to MSE Zero Collateral Loans (ZCL) is a scheme for financing Micro and Small Enterprises under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a trust formed under MSME. It is a credit facility available for term loan as well as for working capital requirements without any collateral security. Limit / Exposure from 5 lakhs to 100 lakhs. It is available for both manufacturing and service sector.

Working CapitalWorking Capital means that the fund required by organization to carry on their operations without any interruption. It is considered as part of operating capital. Working capital is a common measure of a company's efficiency, liquidity and overall health. Working capital represents the liquidity in business i.e how the current liabilities are backed by current assets. It includes accounts receivable, inventory, accounts payable, the portion of debt due within one year, cash and other short-term accounts. A company's working capital reflects the results of the company's activities, including inventory management, revenue collection, debt management and payments to suppliers.One of the most significant uses of working capital is to know the conversion time of inventory. The longer inventory sits with company the longer the company's working capital is tied up.

Working Capital = Current Assets Current Liabilities

If working capital is positive it means company is able to pay off its short-term liabilities otherwise there is deficiency in working capital and it is required to raise money through loans to carry out its operations. This situation usually occurs when a company has used all its cash to pay for everything, rather than seeking financing that would make payments smooth and make cash available for other uses. As a result, working capital shortages cause many businesses to fail even though they may actually turn a profit.Following are the products offered by Axis Bank under working capital:

Loans/Advances

Non-fund BasedFund Based

Letter of CreditExport FinancingTerm loanBank GuaranteesCash CreditncingPre-Shipment FinancingImport financing

Buyers Credit

Suppliers CreditPost-Shipment Financing

Discounting

Advance against Collection Bills

Figure 7: Classification of loans

Working capital consists of fund based and non-fund based products. Fund based activity is where cash is directly involved whereas non-fund activity means there is an assurance given by bank for borrower. Following are the products under fund based and non-fund based: Term LoanTerm loan is a loan given by Axis bank towards infrastructure, project financing, upgradation, expansion and other corporate purposes for both long and short term. The interest rate charged depends on the risk, financials and security.

Export FinancingExport financing is financial services provided by banks for shipping products. The assistance is extended to various stages of export. These assistance products are discussed below Pre-Shipment Financing:Finance is provided by bank to exports for purchase of raw materials, processing and packaging of good to be exported. This type of finance is also called as packaging credit. Post-Shipment Financing:Finance provided by bank after the exporter has exported the goods. These funds help the exporter to concentrate on other orders and gives a competitive edge. Discounting:The banks buys the exporters bills before the expiry at a lesser value as bank charges and credit the remaining amount to the exporter. Later on the fully amount is recovered from the importer who had imported goods. Advance Against Collection Bills (AACB):Banks offers loans to bridge the gap between working capital and before the export proceeds. The loan amount is deducted by the bank when the export proceeds are debited to the exporters account.

Import FinancingImport financing is a facility offered by bank for short and long term loans and advances against shipping documents of import.

Buyers Credit:Buyers credit is available for importer of goods. An overseas bank offer credit against the bank guarantee provided by importers bank. It is a short term credit against which bank charges a fees. Suppliers Credit:Suppliers Credit is a financial arrangement where an exporter gives credit to a foreign importer to finance his purchases. Financing is carried on under L/C to banks.

Cash CreditCash Credit is a type of loan account which helps to fulfill working capital requirement. It is a continuous overdrawn limit which can be used again and again upto the limit sanctioned by bank.

Letter of CreditIt is a document given by the bank of the importer to the exporter making the exporter assuring of receiving payment from importer and on default bank pays. Letter of credit ensures the payment of the products exported. Axis bank offers various services related to letter of credit like Opening, Advising, Confirming, Negotiating or Discounting, Standby LC, Reimbursement and Foreign Exchange services. Axis bank provides with a important offering of advisory services to the exporter.

Figure 8: Letter of Credit

Bank GuaranteesBank guarantee is a guarantee given by the bank of performance under the contract to beneficiary on behalf of its client. Axis Bank provides performance guarantees, financial guarantees, Export Promotion Capital Goods (EPCG) etc for a tenure of 1 years to 10 years.

MethodsFollowing are the methods followed by Axis Bank to sanction loan:

MPBFMPBF stands for Maximum Permissible Banking Finance. Like many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon. This study group was called as Tandon Committee. As per the recommendations of Tandon Committee, the corporate are discouraged from accumulating too much of stocks of current assets and are recommended to move towards very inclined inventories and receivable levels.Depending on the size of credit required, two methods are in practice to fund the working capital needs of the corporate. Method 1This method is used when the credit requirement is less than 5 lakhs.

Method 2This method is used when the credit requirement is more than 5 lakhs.

Axis Bank generally prefers 2nd method of MPBF

Cash BudgetingCash budgeting method was recommended by Kannan Committee. Bank finance is sanctioned in the form of short term loan which may be repaid in suitable installments. This is well suited particularly when SME units are dealing in seasonal products (Sugar/ Rice Mills/Textiles/Tea/Tobacco/Fertilizers)/ construction activities / Educational Institutions/order based activities. The customer is assured of bank finance which is based on projected cash flows which are estimated by him and approved by the bank. Hence, the Cash Flow Based Lending method is popular in developed countries.

TurnoverThe credit requirements of Micro Small and Medium Enterprises having aggregate fund based working capital limits upto 5 crores from bank, will be computed on the basis of a minimum of 20 % of their acceptable projected annual turnover for new as well as existing units as per Nayak Committee recommendations.

Exposures not handled by SMEFollowing sectors proposals is referred to LC department Roads (Infra) Power (Infra) Ports (Infra) Metro and Urban Development (Infra) Airports (Infra) SEZ (Infra) Telecom (Infra)

CH 3: CREDIT APPRAISAL

IntroductionCredit Appraisal is an assessment carried on by bank to assess the credit worthiness, risk, financials, commercial and technical viability of the project, collateral security to recover dues before sanction of any loan and advances. Credit Risk is the risk associated with non-payment of installments towards the credit provided by bank. Thus a proper evaluation has to conducted regarding the credibility of the borrower before bank sanctioning the loan. Though the loans are provided against a collateral security, bank prefer the borrower to repay the loan amount and interest. Thus there high importance given to the financials.It is the process of appraising the credit worthiness of a loan applicant factors like repayment capacity, nature of employment, income, age, continuity of employment, previous loans, defaulters list, credit cards, etc. are taken into account while appraising the credit worthiness of a person.Thus these 5 Cs are very important to analysis Character Capital Conditions Capacity CollateralAll the 5 Cs being present in a proposal makes the bank confident of sanction of loan as there is safety in providing loan as well as a surety of principal and interest amount being paid by the borrower. Every bank has different norms to check before sanctioning of loan. One of the major norm being Loan-To-Value (LTV). LTV is a determining factor to know the value of the collateral against which loan is provided. Bank compares this LTV to the banks fixed defined LTV above which only the bank sanctions loan.

ParametersThese parameters are used to reduce the risk of failure as it checks the risk, exposure etc. These parameters use the audited data provided by borrower, trend analysis, subjective and objective parameters etc.ParametersWeightage (%)

Financial Performance40

Operating Performance of Business22.5

Quality of Management22.5

Industry Outlook15

Table 4: Parameters

Ratios Net Sales Growth RateIt is Compounded Annual Growth Rate (CAGR) of net sales over a period.If the growth rate is high compared to the industry, then it will enable us to justify giving loan.

PBDIT Growth RateIt is Compounded Annual Growth Rate (CAGR) of profits before depreciation, interest and tax over a period. A constant growth shows improved performance of the company.

It shows profits before depreciation, interest and tax as a percentage of net salesIf the ratio is high it shows that the company is efficient and has high capacity to earn profits and payoff the debts.

It represents total outside liabilities in relation to tangible net worth of company. It shows the capacity of business to pay both principal as well as interest to its creditors.It indicates the extent to which the creditors are covered by asset.

Current RatioCurrent Ratio tells the easiness of liquidation of the current assets of the company. It measures the short term liquidity and ability to meet companies short term obligations.Higher ratio is preferable by bank. Ideal ratio is 1.33

Debt Service Coverage Ratio (DSCR)This ratio measures the capacity of the company to service its debt. This ratio will help to evaluate if adequate cash flow will be available to meet debt obligation. This ratio is a good indicator of the long-Term solvency of a company.

Operating Cash flowOperating Cash flow measures the companys inflows and outflow. It helps to calculate the companys ability generate cash and repay the debts, interest and dividend. Operating cash flow indicates the companys need for external financing.This indicator tries to capture the capability of the firm to be able to meet its business obligations.Operating cash flow is computed in the following manner:

HeadAmount

Net SalesX

Other incomeX

Total receiptsXX

Less: COGS(X)

Gross ProfitXX

Less: SGA/Operating expenses(X)

PBDITXX

- Increase / + decrease in non-cash current assetsX

+ Increase / - decrease in current liabilitiesX

Operating cashX

Less: Income tax paid(X)

Post tax operating cashXX

Less: Interest paid on LT & ST(X)

Less: Dividend paid(X)

Cash from operationsXXX

Table 9: Format of operating cash flow

Foreign Exchange Risk Movement in the exchange rate can affect the import and export activity. The rater needs to know how the likely fluctuation in exchange rate that will be affecting the profits of the company. Only the un-hedged part of the foreign exchange exposure should be taken into account.DescriptionScore

The risk involved is > 10% of TNW 0

The risk involved is between 8% and 10% of TNW1

The risk involved is between 5% and 8% of TNW2

The risk involved is less than 5% of TNW3

Table 10: Rating of Foreign Exchange Risk

Debt Equity RatioThis indicator gives us an idea about the future expected debt equity structure and financial stability in an extreme situation. This is quite a good comforting factor for the bank to sanction the loan.Debt Equity Ratio = Long term + 50% of companys + Margin up for itsDebt non-fund based non-fund basedlimits limits

Realisability of DebtorsThis indicates the quality of the debtors of the company and if money can be recovered from them quickly and easily. Higher the score means better recovery.

Inventory Turnover (trading)This ratio shows that how fast the company is able to convert its inventory into sales. Higher ratio states that the company has high liquidity i.e the inventory is converted into sales fast. It show the efficiency of the company.

State of the export country economyThe economy of the country to which is being exported, will have a significant impact on the exporters business. A slowdown in the economic growth might even have a great impact on the exports profitability.

Credit Period AllowedThis indicates the period of realization of sales proceeds. It is the average time that customers take to pay their dues. It indicates the efficiency of management in debt collection. A lower value of this ratio indicates a speedy payment from customers who buy the goods on credit.

Credit Period AvailedThis ratio measures the average time taken by the company to pay its suppliers for purchases made on credit. A stronger company will avail a longer credit period from its suppliers. A longer credit period offered by suppliers also indicates that the suppliers are confident of the ability of the company to pay them.

Working Capital Cycle (manufacturing, trading)Working capital represents an important part of the employed capital. It also tells about the good performance of the company and also about the management of the company.

Tax IncentivesTax incentives can be a major factor of profitability for many companies. Tax holiday are helpful for company to take advantage to improve profitability of the company. Thus higher the tax incentives by government improve profitability of the company.

Production Related RiskThis measure the risk related to production of goods. It evaluates the companys capabilities to reduce risk. The lesser the risk involved in production improves the efficiency, profitability of the company. The technology used in production activity is also a determining factor.

Price Related RiskThis indicates the companys ability to decide the price of the product in the market. The price competitiveness of a company is an important indicator of the company's position. A company that is in a position to charge a premium to its customers over competitors is better placed in the industry.

Sustainability of sales An important driver of the success of a trading company, is the level of sales the company is able to generate. Therefore, the risk associated with a trading company is very much linked to the sustainability of its sales. A company with strong portfolio of core products shows sustainability.

Fixed asset turnover (Manufacturing)Fixed assets represent an important part of the capital employed in a manufacturing companies. A good performing company should get maximum out of the machines installed.

Product/service related riskThis measures the risk related to products manufactured / services provided by the company. The risks associated with the product can be those related to substitution, decrease in demand etc. A product should be of a consistent high quality; otherwise its market reputation will suffer. The companys ability to standardize product quality, getting ISI benchmarks or ISO certificates will add to its advantage. The expected product life cycle will also contribute to the overall product risk. The shorter the expected life of the product, the riskier the companys business performanceFigure 10: ProcessPROCESS

CH 4: MONITORING

Credit Monitoring & SupervisionBroadly, the objectives of post-sanction follow up, supervision and monitoring are as under:Follow-upSupervisionMonitoring

Ensuring compliance with terms and conditions of sanction on an ongoing basis. Ensuring performance safety and recoverability of assets Ensuring effective follow-up to maintain asset quality. Looking out for any early warning signs. Effective supervision Customer Satisfaction Responding to any early warning signs.

Table11: Monitoring and Supervision

Rating ScalesThe rating tool for SME has an 8-point rating scale, which ranges from SME 1 to SME 4. Generally a company with rating SME1 to SME3 is approved. SME4 is not preferred specially for a new proposal. RatingRange of ScoreLevel of Risk

SME 1Above 85Lowest Risk

SME 276-85Lower Risk

SME 369-75Low Risk

SME 458-68Moderate Risk

Table 12: Rating score

Review in respect of SME exposureReview of companies on annual basis with rating from SME1 to SME 4 on annual basis. The sanctioning authority can increase the frequency of reviewSub-categoriesRBI has issued guidelines in preparing a sub-asset category. Bank will have 3 sub-categories as followingSMA Sub-categoryClassification

SMA 0Principal or interest overdue not for more than 30 days

SMA 1Principal or interest overdue between 31 60 days

SMA 2Principal or interest overdue between 61 90 days

Table 13: Classification of SMA

This is applicable for accounts with aggregate fund based and non-fund based exposure more than 5 crores.

Control ReturnControl return is a note prepared for monitoring purpose. This note is given to higher authorities for monitoring over credit analyst. Control return is a note prepared after sanction of loan. This note is prepared on the bases of appraisal notes. Control return is a note which gives summary of the appraisal notes. It is of 3-4 pages note giving all the necessary information regarding the proposal.

Monitoring functionThere are various types of monitoring activities carried on for working capital as mentioned below: Churning ReportChurning Report is conducted on a monthly basis to check the running of the account and on finding any discrepancy to inform the Relationship Manager (RM).

Reason for Discrepancy

Existing Account with another Bank

DuesFraud Book Entry

Follow-up in next monthPossible to close that account

Take necessary actions

No

Received or not receivedYes

Close the account and open a new account with Axis BankRemittance to be sent to Axis Bank

Yes

No

OKTake necessary actions

Figure 11: Flowchart for Churning report

Portfolio ReportPortfolio Report is prepared on monthly basis until specified. Following are the reasons for preparation of report Check interest service. Check submission of insurance policy being submitted on time. Check renewal of existing insurance policy. Renewal of limit every month on 11th. NoPrevious Month Interest received or notTerm Loan

YesNoOkInform RM

Check for EMI bounces

Yes

Inform RM

Figure 12: Flowchart to keep check on Interest

Stock and Book Debt StatementThe customer is supposed to send the stock statement every subsequent month. On delay of submission on stock statement a penalty is charged and on delay of same in next moth too would attract additional penalty.

Drawing Power Working ReportDrawing power (DP) is the limit the borrower is allowed to withdraw from the limit sanctioned for working capital. The limit sanctioned by bank depends on the stock statement and book debt. Drawing power = total value of stocks + total value of book debt Margin(Margin are the funds raised from long term sources)Thus the borrower has to submit his stock and book debt statements of trade creditors regularly. It is calculated every month based on statements given by borrower.In Axis Bank the margin on stocks in 25% and no such margin of creditors.NoStock Statement Submission on 15th of every month

Informing CustomerSend intimation letter to RMUpdate system with new limitDP < Sanction limitDP > Sanction LimitFigure 13: Flowchart to keep up on stock statementOKComparing with sanction limitCalculate Drawing PowerApply approved marginYesPenalty charges

Stock AuditStock Audit is conducted on quarterly/ half yearly/ yearly depending on the requirement. The audit is conducted by internal or external auditors.

Visit by Internal/External auditors

NoYesMatch as per bookIntimidation to RMOKDeviation reasonable or notCalculation of Drawing Power

Figure 14: Flowchart of stock auditing

CH 5: METHODOLOGY

Research DesignTo study the Credit Appraisal and Monitoring System in SME sector, at Axis Bank, Mumbai.

Primary Data: This data is practically used in analysis of a company and deciding on the approval of proposal by Axis Bank. Observations and discussions with the manager.

Secondary Data Books Database of Axis Bank Websites Old and New sanction papers

Limitation of the Study As the credit rating is one of the crucial areas for any bank, some of the technicalities are not revealed which may have cause destruction to the information and exploration of the problem. As some of the information is not revealed, whatever suggestions generated, are based on certain assumptions. Credit appraisal system includes various types of detail studies for different areas of analysis, but due to time constraint, below done analysis was of limited areas only.

PeriodPeriod of study is 8 weeks.

CH 6: OBSERVATIONS

Credit Risk Assessment (Credit Appraisal) is done to examine the companys financial, commercial and technical viability for the project for which funding is sanctioned.

Examining the security kept against the loan and whether the amount is recoverable through security.

Banks task is to identify the risk related to loan and manage the risks on regular basis.

Credit and Risk goes hand in hand.

The credit appraisal process takes into account all the possible risks towards the loan.

Bank considers the norms as guiding tools and not as decision making tool.

Axis Bank provides various schemes to cover the requirements of all SME units.

CH 7: CONCLUSION The financial sector is at boom where the SMEs will play an important role as it constitutes largely to economy. As financial sector being the backbone of economy generates large opportunities of employment

From studying the credit appraisal process of SMEs, the major factors considered in appraisal process are: Business Performance Financial Performance Industry Outlook Quality of Management Conduct of Account Axis Bank has different types of loans and contains different norms for each type of loan. These all norms may not apply to each and every case. Norms of loans given by Axis Bank are flexible in nature depending on case to case. Initially it was seen that credit appraisal is basically done on the basis of fundamental soundness. But after analyzing various case studies, our conclusion was such that credit appraisal system is not only looking for financial wealth but also other parameters are taken into consideration in analyzing credit worthiness of the company. Overall the viability of the project is analyzed on various aspects of business like type of business, industry, past records, promoters, experience, goals, long term plans, projected data and estimates plays crucial role in increasing the chances of getting project approved for loan.

CH 8: BIBILOGRAPHY http://www.axisbank.com/ http://en.wikipedia.org/wiki/Small_and_medium-sized_enterprises http://www.axisbank.com/business-banking/credit-financing/solutions-smes/sme-fast-track/sme-fast-track.aspx http://www.banknetindia.com/banking/loans.htm www.investopedia.com www.indianbankassociation.com www.bankersindia.com

15Credit Appraisal and Monitoring of SMEs