ContentsChapter 121.1 INTRODUCTION TO MSMEs IN INDIA21.2 LITERATURE REVIEWError! Bookmark not defined.1.3 Role of SBI in Financing SMEs31.4 Definition of MSMEs21.5 Need for the Study31.6 OBJECTIVES OF THE STUDY31.7 METHODOLOGY ADOPTED3Chapter 232.1 How SBI is progressing in SME lending sector32.2 Difficulty in fund raising32.3 Procedural aspects of appraisal, sanction and disbursal of MSME loan proposals at SBI32.4 Organization structure32.5 Policy guidelines in financing SMEs32.6 TYPES OF CREDIT FACILITIES3Chapter -33Problems of financing MSME3Chapter 43Case study3Chapter-53Recommendation3Bibliography3

Chapter 1Introduction

1.1 Corporate Salary Account

Corporate Salary Account is one of the most popular retail products of a bank. A corporate salary account is convenience to both the employer who arranges the account and operates it for salary disbursement and the employee who uses it for his/her banking purposes. A corporate salary accounts advantages are many- Proficient and well-organized salary disbursal process. The facility of instant and online transfer of salary which helps in quick access to funds. It involves less man power and involves lesser amount of documents to maintain for office record Most of the banks and financial institutions maintain their dedicated staff to take care of the needs and requirements of their corporate clients.It is easy to maintain the documents for each e-transaction which is easy to retrieve on requirementAlthough Corporate Salary Account is introduced by the employers for the smooth processing of salary and wages, the many benefits that the employees enjoys are mentioned below.Corporate salary accounts are by default, Savings Accounts. Salary Accounts clearly reflect the net income of an individual. At times, these records also aid in availing loan products from the bank like home loan, car loan, mortgage loan, etc.In contrast to a regular savings account where the account holder is liable to maintain a minimum balance, corporate salary accounts are zero balance accounts which does not require the account holder to maintain a minimum balance in his/ her account.Corporate salary account holders are provided with benefits like ATM Card/ Debit card. Some of these Debit cards are can be used on international purchases as well!Apart from Debit card, the account holders are given cheque books free of cost. The cheque book renewal facility is available on request in case of holding a corporate salary account. A corporate salary account is advised for corporations who prefer a hassle free banking experience for their organisation and their employees.

1.2 Definition of MSMEsThe Micro, Small and Medium enterprises have been defined in the Micro, Small and Medium Enterprises Development (MSMED) Act which was enacted by the Government of India on June 16, 2006 and notified on October 2, 2006. With the enactment of MSMED Act, the paradigm shift that has taken place is the inclusion of the services sector in the definition of MSMEs apart extending the scope to medium enterprises. According to the MSMED Act, 2006, there are two categories of enterprises, namely, Industrial and Service enterprises. Industrial enterprises are engaged in manufacture or production, processing or preservation of goods and service enterprises are engaged in providing or rendering of services such as small road and water transport operators, small business, professional and self employed persons, etc. Industrial enterprises are further classified into Micro, Small and Medium on the basis of original investment in plant and machinery (excluding the cost of land and building and other items specified by the Ministry of Small Scale Industries). Service enterprises are also further classified into Micro, Small and Medium on the basis of investment in equipments (excluding the cost of land and buildings, furniture-fittings, and other items not directly related to the service rendered).

1.3 Need for the Study The recent economic crisis has seen a spate of defaults on loans across banks and one of the key reasons behind this seems to be inadequate credit appraisal process. There has been an increased focus on credit appraisal with an emphasis on acquiring a thorough understanding of all aspects of the customer and his business. Further, there is a growing realization that there is a need to go beyond just credit appraisal for proper monitoring of the account post the sanctioning of the loan.

Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialized countries, as well as in emerging and developing economies. Small scale industry in India is booming and contributing to 40% of GDP, many banks are focusing their attraction towards this sector. They are responsible for between 60-70% net job creations in developing countries. Small businesses are particularly important for bringing innovative products or techniques to the market.

SMEs are vital for economic growth and development in both industrialized and developing countries, by playing a key role in creating new jobs. Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That is where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, capital markets or other suppliers of credit.1.4 OBJECTIVES OF THE STUDY To gain a through insight about the SME segment and its relevance in the present context. To study and understand some of the products and services initiated by State Bank of India for the small and medium enterprises. To understand the credit appraisal procedure and process followed by State Bank of India. To gain insights on the norms and standards of credit appraisal for the SMEs at SBI. To understand the credit risk assessment model adopted by SBI by working on a project.

1.5 METHODOLOGY ADOPTEDIn the early phase of the project an attempt was made to know about the various products and services that the bank offers to their cliental which constitutes the small and medium enterprises. After having the knowledge about the various schemes that SBI offers to the small and medium enterprises, attention was drawn towards understanding the theoretical aspects of the SME business segment in India which includes the constituents of SMEs, their significance, growth opportunities, problems relating to SMEs and flow of credit to the SMEs. Having done the literature study on small and medium enterprises, it was now time to understand the credit appraisal process at SBI. During this period it was found that SBI follows an in depth credit appraisal process which consists of a sixteen step process. Then some insight was made on various credit facilities that the bank offers with their assessment methods. Now, after knowing about the credit facilities that SBI offers, an attempt was made to know about the various credit appraisal norms and standards for the SME business segment that SBI follows, which includes loan policy, quantitative and qualitative standards, documentation standards, delegation of power and sanctioning authorities and the pricing policy and pricing mechanism.So far a strong theoretical and conceptual base was required which helped me in understanding the drafted project proposals. For a couple of weeks, I then went through some of the drafted proposals, prepared the CMA document for each of them manually. Having gone through a number of proposals, working on an existing project was started by preparing a case study, working on the CMA, doing the financial projections and analysis, carrying out the risk assessment process and also drafted the project proposal. The CMA, financial projections and analysis, Credit Risk Assessment (CRA) was carried out on the software that was given by SBI. The project proposal was drafted in the S-Format as specified by the bank.Since the project carried out is descriptive and analytical in nature, the various documents and official files were required for understanding the methodology adopted by the bank. The data collection was done by personal interaction with the guide and other bank officials. At the same time related articles, magazines, in-house journals of the bank, SBI publications etc were referred.

Chapter 2LITERATURE REVIEW

Venkatesh (2011), in his article published by The Indian Banker, asserts that the importance of SMEs in the Indian economy cannot be underscored enough. They contribute to a significant proportion of the GDP (40% of manufacturing output, 35% of exports) and to overall employment creation. Banks have played and will play a major role in transforming these SMEs into the mid- and large corporates of tomorrow through various business models including simple financing to more complex structures, supply chain finance, private equity funding and trade. However, the recent credit crisis, revealed, albeit for a small period of time, the deficiencies in SME financing - India has a lot to learn from other emerging countries in innovative ways of serving the SME customers e.g. in Mexico where a central facilitating agency converts trade receivables claims of SMEs from large customers into electronic commercial paper and sells it to the market. Moreover, enhancement of existing credit information sharing backbone can help improve penetration of credit to this segment. Aligning organisation and value proposition for SME and affluent banking can significantly improve profitability of banks. Banks will need to think about the key challenges and issues, which concern this sector most, and the imperatives they will need to adhere to for unleashing the potential of the Indian entrepreneur.

Banks are still the single largest supplier of debt funds to SMEs in most developed economies, says Hall (2010), in his article published by the International Journal of Entrepreneurship and Small Business. He shows, on the basis of publicly available data for APEC economies, that the real growth of bank lending to SMEs appears to be negative or to have declined in almost all economies over the decade from 1997. Prior to 1997, the real rate of growth of bank finance to SMEs was positive. By contrast, throughout the period 1994-2007, the growth of real lending to large firms has usually been positive and growing. His study explores these trends in detail and reaches the conclusion that there has been a decline in the availability of bank finance to SMEs in the developed economies in absolute and real terms. It also examines some possible reasons for this phenomenon and discusses the implications. It concludes that the problems banks face meeting BIS Basle II requirements, in accounting for intangibles, and thus assessing collateral, is a possible contributor. Finally, it suggests ways that the World Bank and Bank of International Settlements (BIS) could make more effective use of available data from banks to better understand the phenomenon.

Tagoe, et. al (2008) report that their study which examined the relationship between information management practices of small and medium size enterprises (SMEs) and their access to bank finance found that SMEs that keep records and present certain types of information improve their access to bank finance. Other factors, such as the age of the SME and the context within which it operates, play very minor roles in determining access to finance. In their research, Javalgi and Todd (2011) report that research concerning the internationalization of SMEs is available in the context of developed economies but less can be found dealing specifically with the entrepreneurial behaviour and international expansion of SMEs in emerging markets such as India. Their research extends the literature addressing the relationships surrounding the internationalization of SMEs in India as related to entrepreneurial behaviour, firm resources, and commitment to internationalization. It shows that Entrepreneurial orientation, a commitment to internationalization, and the ability to leverage human capital influence the international success of Indian SMEs.Beck & Kunt (2006) present a research on access to finance by small and medium-size enterprises (SMEs). SMEs form a large part of private sector in many developed and developing countries. While cross-country research sheds doubt on a causal link between SMEs and economic development, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance, potentially explaining the lack of SMEs contribution to growth. Financial and institutional development helps alleviate SMEs growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes. Specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well-developed institutions, as can systems of credit information sharing and a more competitive banking structure. Thampy (2010) emphasizes on the fact that a major bottleneck to the growth of the vital Indian small and medium enterprises (SME) sector is its lack of adequate access to finance. His paper examines the major issues in the financing of SMEs in the Indian context, such as the information asymmetry facing banks and the efficacy of measures such as credit scoring for SMEs; whether transaction lending would be adequate to address the information issues or would lending have to be based on a relationship with the SME, using both hard and soft information; and whether the size and origin of the bank affect the availability of credit to SMEs. de la Torre, et. al, (2010) say it is conventional wisdom that small and niche banks have an advantage in serving SMEs because they can overcome SME opaqueness through relationship lending. But their paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well-positioned to expand their links with SMEs. The intensification of bank involvement with SMEs in various emerging markets is neither led by small or niche banks nor highly dependent on relationship lending. Rather, all types of banks are catering to SMEs and large, multiple-service banks have a comparative advantage in offering a wide range of products and services on a large scale, through the use of new technologies, business models, and risk management systems.

Javalgi, et. al, (2012), through their article, contribute to the understanding of entrepreneurship in SMEs in emerging markets such as India. They say that advancements in internet technology are enabling Indian entrepreneurs to engage in entrepreneurial activities and innovations using new business models to achieve scale and scope as they begin to compete in a global marketplace. An understanding of how these Indian entrepreneurs are successfully growing and rapidly expanding their businesses is critical, not only from research perspective, but also from a practitioner view.

Chapter 3Financing MSMEs by SBI3.1 Role of SBI in Financing SMEs State Bank of India has been playing a vital role in the development of small scale industries since 1956. The Bank has developed a wide array of products to meet the changing needs of the industry. It provides end -to -end solutions for the financial needs of the industry. To service the specific credit needs of small and medium enterprise (SME) the Bank established the Small & Medium Enterprise business unit in 2004. Apart from the general working capital requirements (like Cash credit, Bill Discounting limits, LC, BG etc) to meet the day to day requirements and term loans to take care of investment needs for acquiring fixed assets, Bank has an array of products/schemes to cater to the enterprise specific requirements of SME Units both in Manufacturing and Trade and services sectors. Brief details of some of the schemes are as under:

ProductEligibilityQuantum of finance Margin Repayment

SME CREDIT CARDCustomers of the following segments with a satisfactorytrack record for the last two years :- Small industrial units Small retail traders Professionals self employed persons Small business enterprises Transport operatorsMaximum - Rs. 10lacs20%a) The working capital component should be reviewed every year provided the credit summation is not less than 50% of the projected turnover. If the credit summation is less than 50%, then a repayment schedule should be fixed for the outstandings in suitable monthly instalments. b) The Term Loan component should be repayable in a maximum of 5years in suitable instalments.

SME SMART SCOREThe chief promoter /chief executive should be below 66 years of age The applicant must obtain a minimum score of 60% with a minimum of 50% under each sub-head of Business and Personal details and a minimum of 10% under collateral details.SSI UNITSRs.5lacs to below Rs.50lacs20% of annual turnover for WC loan and 67% of project cost for TLTRADE & SERVICESRs.5lacs to Rs.25lacs15% of annual turnover for WC and 67% of project cost for TL.25% for working capital component and 33% for TL component.WC loan to be reviewed annually and renewed once in twoyears. TL not more than 5years excluding moratorium notexceeding 6months

STANDBY LINE OF CREDIT

Rated SB3 or its equivalent under the new CRA andabove. Selectively for SB4 (or its equivalent under newCRA)rated unitsFund based limits and Non-fund based limits15% of working capital facilities subject to a maximum ofRs.5 crs. The facility may be made available as fundbased and/or non fund based limits subject to the overallexposure being within the SLC.(WC)In the case of consortium advances, only our share inthe consortium should be reckoned for arriving at thequantum.As per the terms of the original limitsOne per cent higher than that applicable to the CashCredit limit. Discretion to waive the additional cost restswith the controller.

TRADERS EASY LOAN (TEL)Existing customers with a satisfactory track record.New connections including take - over can be consideredsubject to take- over norms.Rs.0.25 lac to Rs.500 lacs.loan component shall not exceed 20% of the projected annual turnover or 75% of the capital costs to beincurred for business or 65% of realizable value of propertywhichever is less.

In the case of rice mills, the quantum of finance can beassessed based on pucca records of the unit and can befixed anything between 20% to 40% of the projected annual turnover.For existing borrowers who have been sanctioned otherlimits the Loan can be sanctioned subject to :-i) the existing loan accounts have conductedsatisfactorily for the last three years;ii) the eligible amount ie., the outstandings in theexisting accounts and the proposed loan shouldbe within 65% of realizable value of the propertymortgaged to the Bank without resorting torevaluation of the property.35% of the realizable value of the property to bemortgaged or 25% of the costs to be incurred for thebusiness if TEL is availed for capital expenditureCash Credit - On demandDemand Loan - 36 monthsTerm Loan - Upto a maximum of 60 months based oncash flows in monthly / quarterly / half yearly installments

Doctor plusIndividuals, partnerships, corporates, trusts withpowers to borrow Promoters should be registered practitioners andshould possess minimum qualification to practice in adiscipline such as MBBS/ BDS/ BAMS/ GAMS/ BHMSMaximum of Rs.5 crores of which a sub ceiling forworking capital limits at 10% of total loan amount for upto Rs.1 crore 5% % of total loan amount for above Rs.1 croreminimum Rs.10lacsMinimum DSCR 1:1.5Upto Rs. 5lacs : 10%Above Rs.5 lacs : 15% (can be reduced by 5% oneauthority higher than the sanctioning authority)Maximum upto 7 years - Max. moratorium 12 months

Rent plusIndividuals /partnership firms/ corporateMinimum Rs.50,000/-MaximumMetro & urban Centres - Rs.10 crs.Subject to 60% of the gross rental income for theresidual lease period less (advance rent received+property tax + income tax + other statutory dues of thelessor) or 85% of the market value of the propertywhichever is less40% (CGMs of Circles have discretion to reduce themargin to 30%In equated instalments at the same frequency at whichrent is received in a maximum period of 7 years or theresidual lease period whichever is less.

3.2 SBIs contribution in MSME Role of Government and Banking Regulator in SME LendingAs is apparent, the above factors are only idealistic solutions and may not be practical for SMEs to follow because they are faced with several problems such as weak financial strength, inability to provide adequate collateral and other factors. Hence, the Government and banking supervisors should take a holisticview of the SME Sector while considering SME financing,taking into account the risks faced by banks and the problemsfaced by SMEs. In this regard, the initiatives takenup by the Government and Banking Regulators acrossvarious countries and in India are as follows:(a) Cross-country perspectives:Increased competition in financial markets in developed countries has led several Governments and Banking Regulators to encourage banks and other financial institutions to launch a number of initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with necessary government and regulatory support) include the promotion of venture capital; receivables financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up of special financing companies with state participation; micro-finance programmes, etc. For instance, New Zealand has introduced a scheme called BIZ Investment Ready, which targets innovative businesses and entrepreneurs seeking funds to expand, diversify or commercialise a new concept. The European Union has devised a scheme to facilitate contacts between SMEs and banks and other financial institutions, by developing a code of good practice for SME lending. The Philippines has instituted a financing programme called SME Force (SME Financing for Organisationally Competent and Excellent Franchise Businesses), which is a franchisedevelopment financing facility that will be implemented with the participation of franchiser organisations.

It is a known fact that the smaller the business, the more significant the switching costs are likely to be and, therefore, it is less likely that the benefits of switching outweigh thecosts involved 438 The Chartered Accountant September 2005 (b) Indian scenario Governmentinitiatives: Even in India, the financing of the SME sector has received some attention since independence. Some of the initiatives taken by the Government in this regard are as follows:_ Setting up of the Small Industries Development Bank of India (SIDBI), as the apex refinance institutionin India for the purpose of channelling of finance to Small Scale Industries (SSIs) and SMEs in an organised manner. In line with the announcement made in the Interim Budget for 2004-2005, SIDBI has proposed two fund based initiatives for improving credit flow to the SME sector as follows:_ A contribution of Rs. 100 crore to the Rs. 500 crore corpus of the SME Growth Fund (SGF), which shall make primarily equity/equity related capital investments in accordance with SEBI guidelines, in SMEs operating in various growth sectors such as the life sciences, biotechnology, etc._ The SME Fund of Rs. 10,000 crore to give an impetus to the flow of funds to the SME sector. This fund has begun operations with effect from April 2004. Under the Fund, assistance is provided to SMEs at affordable rates of interest, and direct finance is extended to SMEs through SIDBIs network of branches. Further, refinance to State Financial Corporations (SFCs) has also been made attractive in terms of low rates of interest. The Government of India has launched the Credit Linked Capital Subsidy Scheme (CLCSS), which aims at facilitating technology upgradation of SMEs in specified products/sub-sectors.Existence of collateral that can be offered to banks by SMEs could be one effective wayof mitigating risk. Banks could, therefore, look at collateral when pursuing the question ofSME lending September 2005 The Chartered Accountant 439_ SIDBI has recently negotiated a line of credit with the World Bank for financing and development of SMEs in India, with a view to upscale the credit flow to the sector and raising resources for the SME Fund.(c) Indian scenario RBI initiatives:The RBI, from time to time, has formed several committees and working groups to study the flow of credit to the SME sector in a comprehensive manner, and has issued detailed guidelines in this regard. Recently it has constituted an Internal Group under the Chairmanship of Shri C. S. Murthy to, interalia, consider the relaxation and liberalisation of credit lending norms that are applicable to the SME sector. The Group has submitted its report on June 6, 2005. The Internal Group, with reference to financing of SMEs, has recommended:_ Constitution of empowered committees at the regional offices of the Reserve Bank to periodically review the progress in SME financing and also to coordinate with other banks/financial institutions and the state governments in removing bottlenecks, if any, to ensure smooth flow of credit to the sector._ Opening of specialised SME branches in identified clusters/centres with preponderance of SME units to enable entrepreneurs to have easy access to bank credit and to equip bank personnel to develop the equisite expertise._ Empowerment of the boards of banks to formulate policies relating to restructuringof accounts of SME units subject to certain guidelines._ Restructuring of accounts of corporate SME borrowers having credit limits aggregating Rs. 10 crore or more under multiple banking arrangements to be covered under the revised CDR mechanism. Appropriate authorities are currently examining the above recommendations of the Internal Group.

2.2 General aprehensions in lending to msmes Lack of collateral Lack of financial Discipline Lack of marketing Lack of cash flows

Chapter 4Project Appraisal, Loan Sanction and Disbursement Procedures at SBI4.1 Procedural aspects of appraisal, sanction and disbursement of MSME loan proposals at SBI

Receipt of application for loan from the client

Submission of project report, various documents & financial details

Thorough study of the documents submitted by the client

Collecting information about the company & the promoters

Field visit and site inspection

Preparation of Credit Monitoring Arrangement (CMA)

Financial Projections and Analysis

Credit Risk Assessment (CRA)

Drafting of final project proposal

Proposal is submitted to concerned authorities for sanction

Conveying sanction of credit limits & acceptance of terms and conditions sanction.

Documentation Process

Disbursement of loan

Follow-up

Supervision and Monitoring & Control

The above chart shows the whole process of credit delivery carried out at SBI; however, this flow varies from banks to banks. Different banks have their own formats and may differ marginally in credit delivery. SBI which is countrys largest lender, this is the normal flow which is followed. The process may vary marginally for the type of facilities involved, but more or less this is the standard set for credit delivery. Receipt of application of loan from the client This is the initial step in the process of credit appraisal and credit delivery. In the application all the fundamental details regarding the borrower, nature of business, group concerns if any, other banking relations, purpose of taking the loan, loan amount and other important facets are obtained.

Submission of project report, various documents and financial details - In this stage all the required documents are obtained from the applicant in order to have an assessment of the proposed request. The borrower needs to submit the audited financial statements for the past three years, details of existing borrowing arrangements, reports of existing bankers on the applicant copy, financial statements and reports of associate firms and groups if any and a detailed report for the purpose of taking a loan.

Through study of the documents submitted by the clients Having received all the relevant documents from the client, the banker now thoroughly assesses all the documents with much care. If he feels necessary he can ask the client to produce some more documents which would help the banker in better assessment of the proposed loan. Collecting information about the company and promoters The banker then tries to find out all the details regarding the business in which the client is engaged. He tries to understand all the facts like line of business, area of operations, production process, nature of business, promoters of the company, their qualification and experience etc.

Field visit and site inspection After collecting the details regarding the company and its promoters the banker then along with the client proposes to visit the location or site where the company or particular plant is located. This is done to check whether the details provided by the client are in alignment with the actual facts provided. A through site inspection is done. During the site inspection all the documents and certificates such as statutory clearances from various govt departments and agencies, licenses/ permits/ approvals and clearances are verified.

Preparing the Credit Monitoring Arrangement Before preparing the credit monitoring arrangement the banks lending policy/RBI guidelines, prudential exposure norms, industry exposure restrictions, industry related risk factors and defaulters in that industry, government regulations/legislations impacting that industry, acceptability of the promoters, financial status in broad terms and whether it is acceptable is checked and verified. The banker also examines whether the project cost is prima face acceptable, critical aspects of the project like demand, product cost, profitability etc are prima face in order or not. The banker also analyzes the past trends in sales past deviations in sales and profits if any, production capacity and also checks the compliance with lending norms and other mandatory guidelines as applicable. Having thoroughly studied all the above parameters if the banker is satisfied he then prepares the credit monitoring arrangement as prescribed by RBI guidelines.

Financial Projections and Analysis After all the above process the banker then does the financial analysis which includes the examination and analysis of cost of project and source of finance, project cost with reference to estimates and quotations, arrangements proposed for raising debt/equity, capital structure of the firm, feasibility of the projections/estimates of sales, cost of production and profits covering the period of repayment, BEP in terms of sales value and % of installed capacity under a normal production year and cash flows and fund flows. The banker also checks whether the profitability is adequate to meet stipulated repayments with reference to DSCR and ROI, industry profile and prospects, technical feasibility with reference to report of technical consultants if available, companys structure and systems and applicants strength on inter firm comparison.

Credit Risk Assessment Having done a through and a detailed financial analysis and if the banker is satisfied with all the financial requirements of the borrower, he then goes in for carrying out a credit risk assessment which includes both borrower rating as well as facility rating. The CRA model of the bank is unique and one of the most effective rating models. The credit rating model accounts for all types of risk ranging from financial risk, business risk, industry risk, management risk and various qualitative factors.

Drafting the project proposal Once the borrower is rated then the draft proposal is prepared in the prescribed format of the bank with required back up details and with recommendations for sanction. Once the draft proposal is ready it is sent to the appropriate sanctioning authority. The sanctioning authority is to ensure that the sanction is within the powers delegated to the authority.

Conveying sanction of credit limits and acceptance of terms and conditions Once the proposal is sanctioned by the appropriate sanctioning authority the information is then conveyed to the client regarding the sanction and the credit limits being sanctioned. Having done this the client and the banker have a meeting where in the banker decide upon the terms and conditions which may basically include proposed pricing based on rating, tenor of repayment, installment amounts, security primary and collateral, margins for the facility, ECGC cover where applicable and other standard covenants.

Documentation Process The systems and procedures for documentation have been laid down keeping in view the ultimate objective of documentation which is to serve as primary evidence in any dispute between the bank and the borrower and for enforcing the bank's right to recover the loan amount together with interest thereon, in the event of all other recourses proving to be of no avail After the client has accepted all the terms and conditions ha is required to file all the documents required as per the banks norms and standards.

Disbursement of loan Once all the documentation process is completed and verified the bank then disburses the loan as per the orders of the sanctioning authority.

Follow-Up The credit appraisal process does not end at the disbursement of loan. SBI has a well defined post sanction process which it follows in three steps i.e. follow-up, supervision and monitoring and control. The follow-up function will cover ensuring on an ongoing basis compliance with terms and conditions of sanction through the system of control measures/ feedback viz inspection visits, prescribed financial and operating statements from the borrower, interaction with borrowers etc. It also involves tracking performance of the borrower ensuring safety and recoverability of the advances

Supervision This stage involves ensuring proper follow-up of advances and observance at the operating level of system laid down by the bank. Ensuring that security documents are kept current and that all related documentation formalities are observed by the officials responsible. The supervisor looks out for early warning signals, identify incipient sickness and initiate proactive remedial actions. Maintaining ongoing contact with the borrower and co-lenders and keeping abreast of developments in the borrowers entity and business environment. The supervisor also needs to check from time to time the quality of the assets that are being maintained.

Monitoring and Control Monitoring and Control function ensures that effective supervision is maintained on advances and appropriate responses are initiated whenever early warning signals are seen. This function also tracks customer satisfaction and provides responses where necessary. This function basically includes ongoing monitoring of asset portfolio by tracking changes from time to time, chalks out and arrange for carrying out specific actions to ensure high standard asset content, examination of NPAs with a view in recognizing the problem assets and drawing up recovery up gradation path for these and monitoring the recovery process. This function also includes the redressal of customers complaints.

4.2 Organization structure

Maintenance wing

Processing Wing

4.3 Policy guidelines in financing SMEs

Loan Policy

State Bank of Indias (SBI) loan policy is aimed at accomplishing its mission of retaining the banks position as a premier financial services group, with world class standards & significant global business, committed to excellence in customer, shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector, while continuing emphasis on its development banking role. The policy establishes a commonality of approach regarding credit basics, appraisal skills, documentation standards and awareness of institutional concerns and strategies, while at the same time leaving enough room for flexibility and innovation. The objective is to maintain banks undisputed leadership in the Indian banking scene.

The policy aims at continued growth of assets while endeavoring to ensure that these remain performing & standard, as a matter of policy the bank does not take over any Non-Performing Asset (NPA) from other banks.

The Central Board of the bank is the apex authority in formulating all matters of policy in the bank. The board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the top management are members, to deal with issues relating to credit policy & procedures on a bank-wide basis. The CPPC sets broad policies for managing credit risk including industrial rehabilitation, sets parameters for credit portfolio in terms of exposure limits, reviews credit appraisal systems, approves policies for compromises, write offs, etc. & general management of NPAs besides dealing with the issues relating to delegation of powers.

Based on the present indicators the following exposures have been prescribed by the Credit Policy and Procedures Committee which says that the maximum aggregate credit facilities (fund based and non fund based) should not exceed Rs.20 crores for individuals as borrowers, maximum aggregate credit facility should not exceed Rs. 80 crores for non corporates like partnership, HUF and associations and maximum aggregate credit facility to the corporate entities should be as per prudential norms of RBI on exposures.Some of the other loan policy as set up by the apex authority of the bank are as follows. The policy applies to all domestic lending. Foreign branches have their own policies Optimum exposure levels are set out in the policy to different sectors in order to ensure growth of assets in an orderly manner. Term Loans (loans with residual maturity of over 3 years) should not in the aggregate exceed 35% of the total advances of SBI. The bank shall endeavour to restrict fund based exposure to a particular industry to 15% of the banks total fund based exposure. The bank shall restrict the term loan exposure to infrastructure projects to 10% of banks total advances. The bank shall endeavour to restrict exposure to sensitive sectors (i.e. to capital market, real estate, and sensitive commodities listed by RBI) to 10% of banks total advances. The banks aggregate exposure to the capital markets shall not exceed 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.

(annexure 1) TYPES OF CREDIT FACILITIESThere are basically two heads under which a loan sanctioned to any corporate entity can be classified as shown below:

1. Fund Based Working Capital loan Term Loan Stand By Line of Credit

2. Non-Fund Based Letter of Credit Bank Guarantee Stand By Line of Credit

Fund based requirements supports the industry/corporate to meet their funding requirements for working capital finance or towards acquiring fixed assets etc. Hence, funds deployed in a business enterprise can be broadly classified into two components viz. fixed capital and working capital.

Fixed capital is invested in fixed assets (capital assets), through which enterprises engages for manufacturing of goods/products for sale/acquire assets for providing services and generate profits. To meet such requirement banks offer the product called Term Loans, which are available for a period not less than 3 years whereas the loans provided for a period of one to three years, are classified as Demand Loans.

On the other hand, working capital is deployed in purchasing the items, which are transformed into saleable goods by the production process so to meet this day to day requirement banks offer working capital loan which is considered to be a short-term loan and has to be renewed every year. Besides meeting the credit requirement of the borrowing enterprise by way of fund based credit facilities, banks also cater to the non-fund based requirements of their clients. The fund based facilities provided by banks require immediate outlay of funds which must be provided beforehand whereas the non-fund based facilities are essentially in the nature of promise made by banks in favor of a third party to provide funds on behalf of their clients if certain situations emerge or certain conditions are fulfilled. These non-fund based facilities may be in the nature of bank guarantee or letter of credit issued by banks.

Working Capital Loan Working capital refers to the source of financing required by businesses on a continual basis for meeting the short term needs. Working capital purpose may be defined as the funds required in carrying the required level of current assets to enable the unit to run its operations at the expected levels without any liquidity constraints.

Operating Cycle Concept of Working Capital The operating cycle concept of working capital envisages measurement of the average time taken by an enterprise in manufacturing the goods and selling them for cash so that the funds can be deployed for starting other batch of production. Cash is required to purchase the raw materials, a manufacturing enterprise ensures that there should always be a minimum level of stock of raw material, which takes care of regular demand as well as any abrupt discontinuity in demand or supply; these raw materials are then pressed into production. The processing time depends on the nature and specification of the final product. In the course of processing, the enterprise may generate stock of semi-finished goods in the course of production now, when semi finished goods finally rolled out as finished goods these are stored till sale of goods as well as the process of delivery takes some time. The enterprise may have to ensure that a minimum level of finished goods always remains available to meet the unforeseen demand. A portion of sale proceeds may remain locked for sometime in form of receivables and on expiry of credit period they are realized. Thus, every rupee invested in current assets at the beginning of the cycle comes back to the promoter with the profit element added after a lapse of specific time period and this length is known as working capital cycle.

Hence, as the funds are locked in the cycle the enterprise requires funding from banks for smooth functioning of their day to day activities.

The figure below shows the operating cycle or working capital cycle

Assessment of Working Capital Loan - The figure below shows the block diagram of balance sheet where the left hand side represents the liabilities/sources of funds and right hand side represents assets/application of funds. Long-term liabilities include equity capital, retained profits, term loans and unsecured loans while current liabilities include creditors, working capital bank finance and other current liabilities.

All the short-term sources are used to fund the current assets and the difference between current assets and current liabilities known as net working capital is funded by long-term sources which can be through internal cash accruals etc. as depicted clearly from the figure below.

It is believed that bank credit should be the last resort which should be tapped only after all internal and external sources of funding working capital requirements of the enterprise are exhausted. Hence, banks lend only a portion of working capital gap (WCG), which is the value of the acceptable level of current assets after netting off the other sources of funding working capital requirements.

Long Term LiabilitiesFixed Assets

Current Assets

Current Liabilities

Hence, method of computation of Assessed Bank Finance (ABF) is adopted by the bank, there are various methods for the computation of the same as proposed by Tandom and Nayak committee out of which the method adopted by State Bank of India is given asABF = WCG (actual/projected) NWCWhere, ABF= Assessed Bank Finance WCG= Working Capital Gap = Current Assets - Other Current Liabilities NWC= Net Working Capital = Current Assets - Current Liabilities

The financing of working capital also depends upon some set benchmark for the ratios that is current ratio should at least be 1.2 for trading companies and 1.33 for rest and gearing ratio (TOL/TNW) should not exceed 5 for trading and 3 for others.

Term Loan Financing A term loan is provided for acquisition of long term assets such as fixed assets, long term working capital margin as well as to acquire capital goods, which are required to be repaid out of cash generations from operations over a period of time. Repayment of term loans is, therefore, required as per schedule planned beforehand. The scope and approach in providing term credit by lending bankers are, thus different from working capital credit or other conventional form of advances. Term loan is a form of a participation loan as the lending institution has a stake in the unit covering a fairly long period of time and longer the period of repayment, the riskier is the proposition. Hence, any appraisal of term loan has an inbuilt method of assessment of the risk contained therein.

The basic purpose of appraisal of proposal for providing term credit requirements is to ensure that the borrower acquires the proposed fixed assets, puts them to use in producing merchandise which would have a market, and generate enough cash from operations to repay the term loan and service the interest commitments thereon over the stipulated period of repayment. The appraisal process, therefore, visualize a meticulous examination of all the relevant aspects of the economics of the project.

Appraisal of Term Loan - Prima facie Acceptability The analyzer should inspect the Memorandum of Association & Articles of Association of the borrower organization, should check the RBI and SBI policy guidelines, government regulations, exposure norms, the credit history of the borrower is checked with the help of CIBIL, ECGC etc and finally the debt to equity ratio of the borrower organization. Once these all are under the satisfactory level the credit analyst will move further with the appraisal process. Technical Feasibility - The examination of this dimension consists of an assessment of the various requirement of the actual production process. It is in short a study of the availability, costs, quality & accessibility of all the goods & services needed. Location - The location of the project is highly relevant to its technical feasibility & hence special attention will have to be paid to this feature. Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. The accessibility to the various resources has meaning only with reference to location. Inadequate transport facilities or lack of sufficient power or water for instance, can adversely affect an otherwise sound industrial project. Size of the plant - One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. The size of the plant will be such that it will give an economic product, which will be competitive when compared to the alternative product available in the market. A smaller plant than the optimum size may result in increased production costs & may not be able to sell its products at competitive prices. Type of technology - An important feature of the feasibility relates to the type of technology to be adopted for a project. A new technology will have to be fully examined & tired before it is adopted. It is equally important to avoid adopting equipment or processes which are absolute or likely to become outdated soon. Labour The labour requirements of a project need to be assessed with special care. Though labour in terms of unemployed persons is abundant in the country, there is shortage of trained personnel. The quality of labour required & the training facilities made available to the unit will have to be taken into account.

Having looked at all the above parameters a technical report is to be prepared using the banks consultancy cell, external consultants etc., should be obtained with specific comments on the feasibility of scheme, its profitability, whether machinery proposed to be acquired by the unit under the scheme will be sufficient for all stages of production, the extent of competition prevailing, marketability of the products etc.

Economic Viability An economic viability has reference to the earning capacity of the project. Since earnings depend on the volume of sales, it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices.

Market Study - A thorough market analysis is one of the most essential parts of project investigation. This involves getting answers to three questions.a) How big is the market?b) How much it is likely to grow?c) How much of it can the project capture? The first step in this direction is to consider the current situation, taking account of the total output of the product concerned & the existing demand for it with a view of finding whether there is unsatisfied demand for the product. Care should be taken to see that there is no idle capacity in the existing industries. Future Possible future changes in the volume & patterns of supply & demand will have to be estimated in order to assess the long term prospects of the industry. Forecasting of demand is a complicated matter but one of the vital importance. It is complicated because a variety of factors affect the demand for product e.g. technological advances could bring substitutes into market while changes in tastes & consumer preference might cause sizable shifts in demand. Intermediate product The demand for Intermediate product will depend upon the demand & supply of the ultimate product. The market analysis in this case should cover the market for the ultimate product.

Financial Analysis - Data from the borrower should be analyzed to ensure that the project meets the minimum financial criteria. Thus the data can be broadly grouped as: Cost of the project including working capital margin-A comprehensive and critical review of the project cost is necessary to ascertain, the reasonability and flexibility of estimates of cost, arrangement for raising funds for financing of the project, acceptability of the project and the modifications required Cost of Production and Estimates of Profitability -A complete and vital assessment of the production cost is necessary to determine, the quality of product, the true production cost, demand gap-reasonableness of price in competition, Break-Even analysis to ascertain profit margin. The estimate of profitability enables the banker to draw up the repayment programme, start-up time, etc. Break Even Point: In a manufacturing unit, if at a particular level of production, the total manufacturing cost equals the sales revenue, this point of no profit/no loss is known as the break-even point The Break-even point is worked out as under: Fixed Cost Unit Sale Price Unit Variable Cost

Where, contribution is give as unit selling price minus variable cost per unit. Break even point is expressed as a percentage of full capacity. A good project should have break-even point of at least 75%. Cash Flow estimates and Sources of Finance- The cash flow estimates will help to decide the disbursal of the term loan, ensure when the cash is needed, sources of cash, repayment of loans and interest from cash accruals. Apart from it cash flow estimates will help in calculation of debt service coverage ratio (DSCR) which is the most important single factor in all the term credit analysis. Debt/ Service Coverage Ratio The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. This is calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/ unit & is, therefore, appropriately included in the cash flow statements. The ratio may vary from industry to industry but one has to view it with circumspection when it is lower than the benchmark of 1.75. The repayment programme should be so stipulated that the ratio is comfortable.

Managerial Competency In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors depends to a large extent, on the relative strength of its management. Hence, an appraisal of management is the touchstone of term credit analysis. This aspect is often not given the importance it warrants. It should not be overlooked since the management impacts overall performance of the company and hence its ability to repay loans. It deals with the study of individual and the related aspects. It helps to find out the visionary concepts through the analysis and also helps the lender to focus on the ability and willingness to pay the debts. It basically involves the examining of Quality and depth of management Experience, qualifications and capabilities. Management style i.e. conservative, centralized, decentralized Business and Industrial experience Business attitude and aptitude Business foresight etcCommercial Viability - Once all other aspects of project success has been analyzed, for a lending bank most important part is to check the implementation period of the project, moratorium required , check the projected profitability, breakeven analysis, Debt Service coverage Ratio (DSCR) etc. All this is done to examine in how many years the borrower would be able to pay back the debt.

For term loan appraisal some cut-off of ratios should be achieved i.e. Gross DSCR should be at least 1.75, gearing ratio(TOL/TNW) should not be more than 3 and repayment schedule should not be more than 8 years this will also include the moratorium. In absence of the same deviation has to be approved by the appropriate authority

All the points covered so far are very core points and is not the core competency of a credit analyst and hence, for such kind of sensitive analysis for term loans especially for green field projects bank has to employ experts from external agencies or technically reputed consultants who have a sound knowledge about the industry or products as discussed in this section and the report submitted by such consultants is known as TEV (Techno Economic Viability) report.

Chapter -5Problems of financing MSME(annx) 2There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below:InformationAsymmetry:Accurate information about the borrower is a critical input for decisionmaking by banks in the lending process. Where information asymmetry (a situation where business owners or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require. However, the sheer ticket size of SME lending makes it inviable for banks to invest in development of information systems about SME borrowers.In such situations, banks may also curtail the extent of lending even when SMEs are willing to pay a fair riskadjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case.Collateral: Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It can also be stated that a borrowers willingness to accept a collateralised loan contract offering lower interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI) allows banks, with a good track record and fi nancial position on SSI units, to dispense with collateral requirements for loans up to Rs. 25 lakhs.

Granularity:This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of credit terms, or an increase in prices, or both. From the borrowers perspective, this leads to an outcome where the bank is overpricing good risks and underpricing bad risks. The fact that most banks in India have not developed adequate expertise in SME lending risk assessment exercises leads to the problem of granularity when it comes to SME lending.Pecking Order Theory:Pecking order theory flows from the above two issues,which makes SME lending highly difficult for banks. Under this hypothesis, SMEs,which face a cost of lending that is above the true risk adjusted cost,will have incentives to seek out alternative sources of funding. Evidence suggests that in such situations SMEs prefer to utilise retained earnings instead of raising loans from banks.Moral Hazard:Even when loans are made to SMEs,it may so happen that the owners of these SMEs take higher risks than they otherwise would without lending support from the banks. One reason for this situation is that the owner of the firm benefits fully from any additional returns but does not suffer disproportionately if the firm is liquidated.This is referred to as the moral hazard problem, which can be viewed as creating a situation of overinvestment. The moral hazard problem may, thus, result in SME lending turning bad in a short period of time, a situation that all banks would like to avoid.Switching Costs:SMEs may find it harder to switch banks,when countered with any issue. It is a known fact that the smaller the business, the more significant the switching costs are likely to be and,therefore, it is less likely that the benefits of switching outweigh the costs involved. This situation results in SME lending becoming a sellers market,which may not be attractive to SME borrowers. Steps for Smooth SME LendingIn order to ensure that the Small and Medium Enterprises (SMEs) play a very significant role in the economy in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. However, despite their importance to the economy, most SMEs are not able to stand up to the challenges of globalisation, mainly because of difficulties in the area of financing. With the opening up of the Indian economy, it has become necessary to consider measures for smoothening the flow of credit to this sector.

The Remedies :Following are the remedial measure to be takenCollateral:Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It can also be stated that a borrowers willingness to accept a collateralised loan contract offering lower interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI) allows banks, with a good track record and financial position on SSI units, to dispense with collateral requirements for loans up to Rs. 25 lakhs.Relationships:The length of the relationship between a bank and its SME customers is also an important factor in reducing information asymmetry, as an established relationship helps to create economies of scale in information production. A relationship between a SME and a bank of considerable duration allows the bank to build up a good picture of the SME, the industry within which it operates and the calibre of the people running the business.Quality of Information:SMEs are required to provide accurate and qualitative information to the banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding the SME and its prospects.Hence, it is suggested that banks should make efforts to encourage SMEs to improve the quality of information provided.Customer Consideration:The SME market is somewhat different to the corporate market in that corporate customers generally have a wide range of financing options to choose from and are not as dependent on bank financing as is the case with SMEs. The extent to which SMEs can take necessary steps, with the aid of public initiatives, to easily switch to another bank is another factor that can influence the level of competitive pressure on banks in the case of SME lending.Role of Government and Banking Regulator in SME Lending, As is apparent, the above factors are only idealistic solutions and may not be practical for SMEs to follow because they are faced with several problems such as weak financial strength, inability to provide adequate collateral and other factors.Hence, the Government and banking suIt is a known fact that the smaller the business, the more significant the switching costs are likely to be and, therefore, it is less likely that the benefits of switching outweigh the costs involved pervisors should take a holistic view of the SME Sector while considering SME financing, taking into account the risks faced by banks and the problems faced by SMEs. In this regard, the initiatives taken up by the Government and Banking Regulators across various countries and in India are as follows.Crosscountry Perspectives:Increased competition in financial markets in developed countries has led several Governments and Banking Regulators to encourage banks and other financial institutions to launch a number of initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with necessary government and regulatory support) include the promotion of venture capital; receivables financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up of special financing companies with state participation; microfinance programmes, etc.Global Scenario:For instance, country like New Zealand had introduced a scheme called BIZ Investment Ready, which targeted innovative businesses and entrepreneurs seeking funds to expand, diversify or commercialise a new concept. The European Union had devised a scheme to facilitate contacts between SMEs and banks and other financial institutions, by developing a code of good practice for SME lending. The Philippines had instituted a financing programme called SME Force (SME Financing for Organisationally Competent and Excellent Franchise Businesses), which is a franchise development financing facility that will be implemented with the participation of franchiser organisations.

Chapter 4Case studyHaving studied the procedural aspects of msme lending by sbi a case study is presented below incorporating the findingsNAME: M/s XYZ Biosciences Private LimitedBUSINESS SEGMENT: SERVICES/REGULATORYREGION: APSECTION 1 : DETAILS OF THE PROPOSAL Case study on Financing XYZ Bioscience ltd.Name and location of the bankLength of relationshipFacilities availedType of facilityLoan amount(In Rs. Lakhs)Rate( % )

State Bank of Hyderabad13 yearsCash CreditFund based limit20.0013.00

Stand by line of creditFund based limit5.0013.50

Letter of creditNon-fund based limit60.00-

Bank GuaranteeNon-fund based limit0.50-

Term loan IFund based limit80.0013.25

Term loan IIFund based limit50.2513.25

Key Project Parameters

Project cost 121.84

Debt80.00

Equity41.84

D/E Ratio1.91:1.00

Tenor of the loan84 months

Gross avg DSCR8.71

Minimum security margin53.87%

Promoters contribution34.34%

movement of long term fundsColumn1Column2

Fund flowsEstimated(Current Yr) 2012Projected(Next Yr) 2013

Long term Sources274.8176.76

a) Cash Accruals50.8176.76

b) Equity Funds69

c) Loans80

d)Others(SAM)75

Long Term Uses209.86125.76

a)CAPEX209.8677.31

b)Others48.45

Long term surplus/Deficit64.95-49

Constitution: pvt.ltdSector: TeluIndustry and nature of activity: Services, company started Telugu news channelROI : Term Loan: 5.00% above base rate i.e15.00% p.a. Overdraft: 4.25% above base rate i.e14.25% p.a.

SECTION A2

PERFORMANCE DETAILS a) Performance and financial indicators:

Last two years actualsCurrentNext year

Year

AuditedAuditedEstimatesProjectio

(Estimates(Estimates)ns

)@2012@201320142015

Gross Sales (value)250367.5454.5561.5

Net Sales ( value)250367.5454.5561.5

(Exports sales)

[225][330][412.5][511.5]

Net Sales (Quantity)8 FTEs + FFS15 FTEs + FFS20 FTEs + FFS25 FTEs + FFS

(Exports Sales)8 FTEs 15 FTEs20 FTEs 25 FTEs

Raw Materials42.2562.1176.8194.89

Power and Fuel6.8010.0012.3615.28

Direct labour82.50110.25136.35168.45

SG & A costs

33.2747.6258.9072.81

Interest5.4716.5014.6213.02

Operating Profit(OP)19.3638.0966.8190.09

after interest

OPM% ( OP/ NS%)9.93%14.85%17.92%18.36%

PBT18.5337.2665.9889.26

PBT / Net Sales7.41%10.14%14.52%15.90%

PAT13.5326.0847.4862.48

Cash Accruals50.8176.7696.05119.73

PBDIT60.45103.61128.34158.70

Interest Coverage11.056.288.7812.19

Ratio *

Paid Up Capital (PUC)69.0069.00144.00144.00

TNW154.19181.11224.36275.76

Adj. TNW154.19181.11224.36275.76

TOL/TNW0.680.590.420.30

TOL / Adj.TNW0.680.590.420.30

Current Ratio3.251.212.302.23

NWC55.786.7948.146.18

DSCR3.724.646.137.82

ROE%23.05%35.70%40.01%44.07%

@ figures in brackets denote estimates at the time of last renewal * Interest Coverage ratio: Calculation method EBITDA / Interest.

a)Feasibility reportTechnicalRaw Materials is an essential ccomponent in the process of execution of R&D projects. The raw materials are sourced in advance after the project gets awarded in case of FFS projects or on regular basis in case of FTE projects. Of this 90% of the chemicals are sourced locally from Hyderabad. Sigma Aldrich/ Alfa Aesar, AVRA Labs and other standard vendors are registered as preferred suppliers as they are stated to be having international reputation and an excellent database of chemicals. Approximately 10% of the chemicals are imported from various parts of the world and the lead time for getting these chemicals is usually 10-12 days.Manpower/labour: the company has already hired 35 employees and will be hiring around 20 more shortly in its rolls. As stated the chemists recruited into the company have an M.Sc(Chemistry) and PhD with varied experiences in the industry.MarketingMarketing and selling Arrangements:The company has a registered US entity XYZ Biosciences Inc. As stated the presence of the US company is primarily for the purpose of ensuring that the intellectual property of the client is maintained. Foreign companies tend to sign projects with US company to ensure that their intellectual property is protected. As stated XYZ Bioscience also has a tie up with Seven Hills Research Inc for marketing purposes. The projects are generally signed by these organisations and executed by the Indian company, XYZ Biosciences pvt ltd.Financiali) Commercial viability(Company as a whole) 31.03.201231.03.2013

1. Net Sales250367.50

2. OP24.8354.59

3. PBT18.5337.26

4. PAT13.5326.08

5. Cash Accruals50.8176.76

6. PBDIT60.45103.61

20122013201420152016201720182019

Sales250367.50454.50561.50668.80800.70951.241167.63

Net Profit13.5326.0847.4862.4887.97112.83146.89188.26

Cash Accruals50.8176.7696.05119.73140.88169.25198.97244.15

Interest4.6413.2011.129.026.914.822.720.66

Total55.4589.96107.17128.75147.79174.07201.69244.81

TL repayments0.001112121212129

Interest4.6413.2011.129.026.914.822.720.66

Total4.6424.2023.1221.0218.9116.8214.729.66

Gross DSCR0.003.724.646.137.8210.3513.7025.34

Net DSCR0.006.9889.9811.7414.1016.5827.13

Average Gross DSCR8.63

Average Net DSCR13.71

Comments on DSCR(in brief):The position of DSCR can be considered satisfactory, the unit is capable of meeting the repayment obligations in respect of proposed term loan

Security Margin: Particulars20122013201420152016201720182019

WDV of Fixed Assets173.41237.32227.26268.58247.92268.58247.92266.11

Aggregate Term Loan80685644322080.00

Security Margin Available93.41169.32171.26224.58215.92248.58239.92266.11

% of Margin53.87%71.35%75.35%83.62%87.09%92.55%96.77%100%

Minimum security Margin is 53.87%Basewd on the detailed analysis of the proposal the sbi have approved sanction of a loan of ... amount subject to the compliance by borrower in terms of collaterals, and loan document requirements.

Chapter-5Recommendation Without adequate bank finance, SMEs cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger firms. Similarly, banks cannot consider the financing of SMEs as a viable option unless their priorities are addressed by SMEs. In this regard, SMEs should be assisted largely by public initiatives involving participation of the banking industry. In India, however, the various public initiatives for promoting finance to SMEs have not been as successful as envisaged because there has been some overlapping of regional and national initiatives. Efforts to harmonise the standards and practices, therefore, need to be properly coordinated to facilitate SME finance further.

SMEs are increasingly using products such as derivatives to manage their FOREX flows. Bank needs to offer sophisticated products to the SMEs in a simplified manner. They need to innovate their delivery platforms by using Internet banking, mobile banking and card-based platforms for delivery of transaction-banking as well as credit products, and enhance the service element. SMEs look for convenience and simplicity in their banking requirements and banks should deliver these through an effective use of technology. The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies Banks have to grant the loans for the establishment of business at a moderate rate of interest. Because of this, the people can repay the loan amount to bank regularly and promptly. Bank should not issue entire amount of loan to agriculture sector at a time, it should release the loan in installments. If the climatic conditions are good then they have to release remaining amount. SBI has to reduce the Interest Rate. SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.

BibliographyBooks - Credit Appraisal, Risk Analysis and Decision Making, by D.D Mukherjee, 2010, Snow White Publications Pvt Ltd. Projects, by Prasanna Chandra, Tata McGraw Hill Education Private Limited (2009) Business World, 2009, The SME White book 2009-2010. New Delhi: ABP Pvt. Ltd.

SBI Mannuals and Print Material

Loan Policy and SBI Norms for Credit Appraisal SME Products and Services of State Bank of India CRA Models for Trading and Non-Trading Sectors (Value Statements and Scoring Boards) Research Documents

Banking Opportunities Entry strategy and the Road Ahead, Destination India, Price Water House Coopers. India Banking 2010- Towards a High Performing Sector, McKinsey & Company The Indian Banking Sector- On the Road to Progress, G.H. Deolalkar Indian Banking System- The Current State & Road Ahead, FICCI Annual Survey, February 2010. The World and the Indian Banking Industry- Munich Personal Repec Archive, IIM Ahmadabad.

Websites - www.statebankofindia.com www.investopedia.com www.rbi.org.in www.banknetindia.com www.msme.gov.in www.msmehyd.ap.nic.in www.sme.in www.smechamberofindia.com www.dsir.gov.in/reports/mitcon/chap2.pdf Oxford Journals/World Bank Review/ Small manufacturing enterprises in developing countries/ I.M.D. Little/ volume 1/ no. 2/ Pg. No. 203-235 www.crisil.com/Strategies for increasing credit flow/Prabal Dutta www.zunia.org/Micro small and medium enterprises in India: An appraisal/December 1, 2009/ Ghatak