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a project work done in andhrabank regarding financing to msme units
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A STUDY ON FINANCING TO MSME’s IN THE PERSPECTIVE OF
BANKS AS WELL AS BORROWERS
WITH REFERENCE TO
ANDHRA BANK, ZONAL OFFICE, VISAKHAPATNAM
A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE AWARD OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
Submitted BY
RAVI KUMAR CH
REGD. NO PG111201084
Under the esteemed guidance of
Mrs. P.HIMAJAGATHI MBA, M.Phil
Asst. Professor
GAYATRI VIDYA PARISHAD COLLEGE FOR DEGREE & PG COURSES
(Autonomous)
ACCREDITED by NAAC with B++ Institution
Approved by AICTE, Affiliated to Andhra University
RISHI KONDA, Visakhapatnam- 530 045
Batch: 2011-13
DECLARATION
I hereby declare that the project work entitled “Financing to MSME’s in the
perspective of Banks as well as Borrowers” with reference to Andhra Bank, Zonal
Office, Visakhapatnam is a bonafide work submitted by me in partial fulfillment for
the award of Master of Business Administration, Andhra University, Visakhapatnam.
I also declare that this project is a result of my own effort and that it has not
been submitted to any other university for the award of any Degree or Diploma. The
empirical findings in the project report are based on the data collected by me.
RAVI KUMAR CH
Rg.No: PG111201084
CERTIFICATE
This is to certify that the project entitled a study on “FINANCING TO MSME’s
IN THE PERSPECTIVE OF BANKS AS WELL AS BORROWERS” is the
bonafide record for work done by Mr. RAVI KUMAR CH during the period 2011-2013
in partial fulfillment of the requirement for the award of the degree of MASTER OF
BUSINESS ADMINISTRATION in GAYATRI VIDYA PARISHAD COLLEGE FOR
DEGREE AND P.G COURSES, VISAKHAPATNAM, under my guidance and
supervision.
Visakhapatnam Mrs. P.HIMAJAGATHI
Date: Asst. Professor
School of Management Studies
GVP College for Degree and PG Courses
ACKNOWLEDGEMENTS
I express my sincere gratitude to Prof.S.RAJANI, the Director; School of
Management studies Gayatri Vidya Parishad College for Degree and P.G courses for
giving me opportunity to work on this Project.
I am grateful to Dr.K.V.V.MURALI SOMESWARA RAO Head of
Department; School of Management studies Gayatri Vidya Parishad College for Degree
and P.G courses for giving me opportunity to work on this Project and for valuable
advices.
I wish to take great Pleasure in recording my profound gratitude and sincere
thanks to Mrs.P.HIMAJAGATHI Assistant Professor in School of Management
studies Gayatri Vidya Parishad College for Degree and P.G courses for her inspiring
guidance and keen interest and critical evaluation of the work for the successful
completion of the project work.
It’s immense pleasure to thank Ms.K.VIMALA, Financial Analyst; Andhra
Bank, Zonal Office at Visakhapatnam, and her team for their co-operation in providing
the required information at each stage to complete my project successfully.
RAVI KUMAR CH
CONTENTS
CH NO. CHAPTERS PAGE NO.
I. INTRODUCTION 1
II. INDUSTRY PROFILE 5
III. PROFILE OF ANDHRA BANK 23
IV. CONCEPTUAL FRAME WORK 33
V. ANALYSIS AND INTERPRETATION 73
VI. FINDINGS AND SUGGESTIONS 94
VII. CONCLUSION 97
VIII. BIBLIOGRAPHY 99
IX. ANNEXURES 101
Page | 2
Introduction:
Micro, Small and Medium Enterprises (MSMEs) have played a significant role
world over in the economic development of various countries. India, certainly, is no exception.
Keeping in view its importance, the promotion and development of MSMEs has been
an important plank in our policy for industrial development and a well- structured programme
of support has been pursued in successive five-year plans for the promotion and development of
MSMEs in the country. There exists a well-developed network of financial institutions at
national and state level to channelize credit to MSMEs. SIDBI is the national level
principal financial institution for promotion, financing and development of MSMEs. It
provides direct assistance to the SSI sector through several schemes like direct discounting,
project finance, assistance for technological up gradation and modernization,
marketing, finance, resource support to institutions engaged in developing SSIs, venture
capital, factoring services, etc. It also provides indirect assistance comprising refinance, bills re-
discounting (equipment) and against inland supply of bills through an organized
network of 910 Primary Lending Institutions (PLIs) including banks and SFCs with more
than 65,000 outlets throughout the country.
Lending norms of the banks has been changing from time to time. So it is
necessary to know the basis for the banks to provide credit to different sectors. In India
most of the business entities are in MSME sector. They need adequate funds to run and
expand their businesses. For getting loans from banks, they need to fulfill some
eligibility criteria and norms. So the main purpose of this study is to study the
availability of credit for Micro, Small and Medium scale enterprises.
Page | 3
Need for the study:
The MSME sector is a very vast area and contributing nearly 7% of GDP. This study is useful
for the MSME organizations as it contains RBI guidelines for raising funds for MSME
sector, eligibility criteria and norms. It helps new entrepreneurs to know whether they will get
the credit from the banks or not according to their business plan and how much they can get according
to their financial structure. The wide range of information regarding the lending norms and
conditions will help the business man to take decision about funding of long term,
working capital and other requirements of the organization.
Objectives of the study:
To learn the financing procedures for MSMEs i.e.,
To study the chain of events of processing a loan proposal- from receiving the application from the
borrower, doing credit rating of the borrower and the company, analyzing the financial statements,
sanctioning to disbursement and the post sanction reviews for MSMEs.
To study the borrowers opinion towards fund raising norms and other criteria.
To study the structure of MSMEs.
Scope of the study:
The study was intended to obtain the information about:
To study the Credit Appraisal Methods.
In understanding the commercial, financial & technical viability of the project
proposed & it’s funding pattern.
To know the knowledge of the borrowers and their responses on different criteria.
Page | 4
Research methodology:
The study is mainly relying up on both Primary and as well as Secondary Data. A sample of
limited number of customers (Borrowers) has been taken for the study. It includes various websites and
articles.
Tools used for analyzing the Secondary data:
For analyzing the Secondary data, the tools used are the Financial Ratios such as Current Ratio,
Debt equity Ratio, Debt Service Coverage Ratio (DSCR), TOL / TNW, and some Profitability Ratios,
capitalization ratios as well as Activity Ratios.
Tools used for analyzing the primary data:
Tool used: Percentage
Formula: Xi * 100 / N
Tool used: Weighted Average
Formula: n
∑ WiXi
i=1
-------------------------
n
∑ Wi
i=1
Limitations of the study:
This study is limited to only one zone of Andhra Bank, the geographical scope of
the project was limited to Andhra Bank circle and the loans studied were of solely
of businesses established majorly in Visakhapatnam.
There are the constraints of time and cost.
Banks are more confidential about their internal data.
RBI internal guidelines are not available.
Page | 6
INDUSTRY PROFILE:
Banking Industry:
The Webster’s dictionary defines Bank as “an establishment for the custody, loan,
exchange, or issue of money, for the extension of credit, and for facilitating the
transmission of funds: the table, counters, or place of business of a money changer.” A
Bank can also be defined as a financial institution that accepts deposits and channels
the money into lending activities.
History of Banking:
The first banks were probably the religious temples of the ancient world, and were
probably established sometime during the 3rd millennium B.C. Banks probably
predated the invention of money. Deposits initially consisted of grain and later other
goods including cattle, agricultural implements, and eventually precious metals such as
gold, in the form of easy-to-carry compressed plates. Temples and palaces were the
safest places to store gold as they were constantly attended and well built. As sacred
places, temples presented an extra deterrent to would-be thieves. There are extant
records of loans from the 18th century BC in Babylon that were made by temple priests
to merchants.
Modern western economic and financial history is usually traced back to the coffee
houses of London. The London Royal Exchange was established in 1565. At that time
moneychangers were already called bankers, though the term "bank" usually referred to
their offices, and did not carry the meaning it does today. There was also a hierarchical
order among professionals; at the top were the bankers who did business with heads of
state, next were the city exchanges, and at the bottom were the pawn shops or
Lombard’s. Global banking and capital market services proliferated during the 1980s
and 1990s as a result of a great increase in demand from companies, governments, and
financial institutions, but also because financial market conditions were buoyant and,
on the whole, bullish.
Page | 7
Growing internationalization and opportunity in financial services entirely changed
the competitive landscape, and now many banks prefer the “universal banking” model.
Today universal banks are free to engage in all forms of financial services, make
investments in client companies, and function as much as possible as a “one-stop”
supplier of both retail and wholesale financial services.
The Indian Story:
Banking in India originated in the first decade of 18th century with The General
Bank of India coming into existence in 1786. This was followed by Bank of Hindustan.
Both these banks are now defunct. The oldest bank in existence in India is the State
Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A
couple of decades later, foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. At that point of time, Calcutta was the most active trading port,
mainly due to the trade of the British Empire, and due to which banking activity took
roots there and prospered. The first fully Indian owned bank was the Allahabad Bank,
which was established in 1865.
By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank in 1895 in Lahore and Bank of India in 1906 in Mumbai - both of which
were founded under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers.
Page | 8
Introduction to the Banking Sector in India:
Banks are the most significant players in the Indian financial market. They are the biggest
purveyor of credit, and they also attract most of the savings from the population. Dominated by
public sector, the banking industry has so far acted as an efficient partner in the growth
and the development of the country. Driven by the socialist ideologies and the welfare state
concept, public sector banks have long been the supporters of agriculture and other
priority sectors. They act as crucial channels of the government in its efforts to economic
development. The Indian banking can be broadly categorized into nationalized (government
owned), private banks and specialized banking institutions.
The Reserve Bank of India acts a centralized body monitoring any discrepancies and
shortcoming in the system. Since the nationalization of banks in 1969, the nationalized
banks have acquired a place of prominence and has since then seen tremendous progress. The
need to become highly customer focused has forced the slow-moving public sector banks to
adopt a fast track approach. In India the banks are being segregated in different groups.
Each group has their own benefits and limitations in operating in India. Each has their
own dedicated target market. Few of them only work in rural sector while others in both rural as
well as urban and many even only catering in cities.
The banks are of several types. Types of banks in India are (a) Public sector banks (b) Private
sector banks (c) Cooperative banks (d) Regional Rural banks and (e) Foreign banks.
Page | 9
Classification of Banks:
The Indian banking industry, which is governed by the Banking Regulation Act of India
1949 can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In
Terms of ownership, commercial banks can be further grouped into nationalized banks, the
State Bank of India and its group banks, regional rural banks and private sector banks
(domestic and foreign). These banks have over 67,000 branches spread across the county. The
Indian banking industry is a mix of the public sector, private sector and foreign banks. The
private sector banks are again spilt into Indian banks and foreign banks.
Page | 10
Competitive forces model in the banking industry:
(PORTER’S FIVE-FORCE MODEL)
Prof. Michael Porter’s competitive forces Model applies to each and every company as
well as industry. This model with regards to the Banking Industry is presented below.
(2)
Potential Entrants is high
as development financial
institutions as well as
private and foreign banks
have entered in a big way.
(5)
Organizing power of the
supplier is high. With the
new financial instruments
they are asking higher
return on the investments.
(1)
Rivalry among existing
firms has increased with
liberalization. New products
and improved customer
services is the focus.
(4)
Bargaining power of
buyers is high as
corporate can raise funds
easily due to high
competition.
(3)
Threat from substitute is
high due to competition
from NBFCs and insurance
companies as they offer a
high rate of interest than
banks.
Page | 11
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has
increased. Each bank is coming up with new products to attract the customers and tailor
made loans are provided. The quality of services provided by banks has improved
drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance
and development activities. But they now entered into retail banking which has resulted
into stiff competition among the exiting players.
3. Threats from Substitutes
Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher
rate of interest.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs,
FCCBs. As a result they have a higher bargaining power. Even in the case of personal
finance, the buyers have a high bargaining power. This is mainly because of
competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to
the investors, the investments in deposits is not growing in a phased manner. The
suppliers demand a higher return for the investments.
6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future.
Since the availability of funds is more and deployment of funds is less, banks should
evolve new products and services to the customers. There should be a rational thinking
in sanctioning loans, which will bring down the NPAs. As there is a expected revival in
the Indian economy Banks have a major role to play. Funding corporate at a low cost of
capital is a special requisite.
Page | 12
INTRODUCTION TO MSMEs:
Micro, Small and Medium Enterprises (MSMEs) have played a significant role
world over in the economic development of various countries. Over a period of time, it
has been proved that MSMEs are dynamic, innovative and most importantly, the
employer of first resort to millions of people in the country. The sector is a breeding
ground for entrepreneurship.
The importance of MSME sector is well-recognized world over owing to its
significant contribution in achieving various socio-economic objectives, such as
employment generation, contribution to national output and exports, fostering new
entrepreneurship and to provide depth to the industrial base of the economy. Micro,
Small and medium-sized enterprises (MSMEs) 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. MSMEs
constitute the dominant form of business organization, accounting for over 95% and up
to 99% of enterprises depending on the country. 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. Microsoft may be a software giant today, but it started off in
typical MSME fashion, as a dream developed by a young student with the help of
family and friends. Only when Bill Gates and his colleagues had a saleable product
were they able to take it to the marketplace and look for investment from more
traditional sources. MSMEs 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.
Page | 13
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
MSMEs 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.
Common Characteristics of MSMEs:
(a) Born out of individual initiatives & skills
MSME startups tend to evolve along a single entrepreneur or a small group of
entrepreneurs; in many cases; leveraging on a skill set. There are other MSMEs being
set up purely as a means of earning livelihood. These includes many trading and retail
establishments while most countries continue MSMEs to manufacturing services,
others adopt a broader definition and include retailing as well.
(b) Greater operational flexibility
The direct involvement of owner(s), coupled with flat hierarchical structures and
less number of people ensure that there is greater operational flexibility. Decision
making such as changes in price mix or product mix in response to market conditions is
faster.
(c) Low cost of production
MSMEs have lower overheads. This translates to lower cost of production, least
upto limited volumes.
(d) High propensity to adopt technology
Traditionally MSMEs have shown a propensity of being able to adopt and
internalize the technology being used by them.
(e) High capacity to innovate export:
MSMEs skill in innovation, improvisation and reverse engineering are legendary.
By being able to meet niche requirements, they are also able to capture export markets
where volumes are not huge.
Page | 14
(f) High employment orientation:
MSMEs are usually the prime drives of jobs, in some cases creating up to 80%.
Jobs MSMEs tend to be labour intensive per se and are able to generate more jobs for
every unit of investment, compared to their bigger counterparts.
(g) Reduction of regional imbalances
Unlike large industries where divisibility of operations is more difficult, MSMEs
enjoy the flexibility of location. Thus, any country, MSMEs can be found spread
virtually right across, even through some specific location s emerge as ‘clusters’.
MSMEs in India:
India has a vibrant MSME sector that plays an important role in sustaining
economic growth, increasing trade, generating employment and creating new
entrepreneurship in India. In keeping in view its importance, the promotion and
development of MSMEs has been an important plank in our policy for industrial
development and a well-structured programme of support has been pursued in
successive five-year plans for. MSMEs in India have recorded a sustained growth
during last five decades. The number of MSMEs in India is estimated to be around 13
million while the estimated employment provided by this sector is over 31 million. The
MSME sector accounts for about 45 per cent of the manufacturing output and over 40
per cent of the national exports of the country.
India embarked on the path of opening up its economy and integrating it with the
global economy in 1991. The liberalization of economy, while offering tremendous
opportunities for the growth and development of Indian industry including MSMEs, has
also thrown up new challenges in terms of fierce competition. The very rules which
provide increased access for our products in the global markets also put domestic
industry under increased competition from other countries. In today’s world, access on
a global basis to modern technology, capital resources and markets have become the
most critical determinants of international competitiveness.
Page | 15
Defining MSMEs:
In India, the enterprises have been classified broadly into two categories:
(i) Manufacturing; and
(ii) Those engaged in providing/rendering of services.
Both categories of enterprises have been further classified into micro, small and
medium enterprises based on their investment in plant and machinery (for
manufacturing enterprises) or on equipments (in case of enterprises providing or
rendering services).
The classification on basis of investment is as under:
For the Manufacturing Sector, the MSMED Act 2010 defines micro, small and
medium enterprises (MSMEs) as mentioned below:
A micro enterprise is an enterprise where investment in plant and machinery
does not exceed Rs 25 lakh.
The investment in plant and machinery in a small enterprise is more than Rs 25
lakh, but does not exceed Rs 5 crore.
A medium enterprise is one where the investment in plant and machinery is
more than Rs 5 crore, but does not exceed Rs 10 crore.
Enterprises engaged in providing or rendering of services and whose investment in
equipment under MSMED Act, 2010 are specified below:
A micro enterprise is an enterprise where the investment in equipment doesn’t
exceed 10 lakh.
A small enterprise is an enterprise where the investment in equipment is more
than Rs.10 lakh but not exceed Rs.2crore.
A medium enterprise is an enterprise where the investment in equipment is
more than Rs.2crore but not exceed Rs.5crore.
Page | 16
While calculating the investment in plant and machinery/equipment referred to
above, the original price thereof shall be taken into account, irrespective of whether the
plant and machinery/equipment are new or second hand. In case of imported
machinery/equipment, the following duty/charges/costs shall be included in calculating
their value:
Import Duty (not to include miscellaneous expenses such as transportation from
the port to the site of the factory, demurrage paid at the port);
Shipping Charges;
Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the
following plant & machinery/equipments etc would be excluded:;
Equipments such as tools, jigs, dies, moulds, and spare parts for maintenance
and the cost of consumable stores;
Installation of plant &machinery;
Research and development and pollution control equipments;
Power generation set and extra transformer installed by the enterprises as per
the Regulations of the State Electricity Board;
Bank charges and Service Charges paid to the National Small Industries
Corporation or the State Small Industries Corporation;
Procurement or Installation of cables, wiring bus bars, electrical control panels
(not mounted on individual machines)
Oil circuit breakers or miniature circuit breakers which are necessarily to be
used for providing electrical power to the plant and machinery or for safety
measures;
Gas producer plants;
Transportation charges (other than sales tax or value-added tax and excise duty)
for indigenous machinery from the place of their manufacture to the site of the
enterprise);
Charges paid for technical know-how for erection of plant machinery;
Page | 17
Such storage tanks which store raw materials and finished products only and are
not linked with the manufacturing process;
Fire-fighting equipment; and
Such other items as may be specified, by notification from time to time.
In case of Service Enterprises, the original cost to exclude furniture, fittings and
other items not directly related to the services rendered. Land and Building
would also not be included while computing the machinery/equipments cost.
MSME would be meant to include Micro Small and Medium Enterprises
(MSMEs). The above definitions of Micro, Small and Medium Enterprises would be in
place of the existing definitions of Small & Medium Industries and SSSBEs/Tiny
Enterprises.
Micro Enterprises would include Tiny Industries also.
Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs).
Medium Enterprises (Manufacturing) would mean Medium Industries (MIs).
Small Enterprises (Services) and Medium Enterprises (Services) would mean
other Small & Medium Enterprises. Thus, MSME Advances would be
categorized as under:
All advances to segments viz. Micro, Small and Medium Enterprises in the
Manufacturing sector irrespective of sanctioned limits, (including advances
against TDRs/Govt. Securities etc for business purposes to these categories of
Borrowers), and
Advances to Services Sectors such as Professional & Self-Employed, Small
Business Enterprises, and Small Road/Water Transport Operators and other
enterprises, engaged in providing/rendering of services, conforming to the
above investment criteria and enjoying borrowing/non-borrowing facilities with
the Bank (including advances against TDRs/Govt. Securities etc for business
purposes to these categories of Borrowers).
Those enterprises exceeding the investment ceilings would be categorized as
Large Enterprises and be outside the purview of MSME.
Page | 18
The sanctioned limits would no longer be the criteria determining the status as
micro or small or medium enterprises in these cases.
Development of MSMEs in India:
Making the best use of the material resources by employing higher order of skill
and artistic talents through traditional handicrafts, India has occupied a permanent place
of pride in the world before industrial resolution. However, the advent of modern large
scale mechanized industry, the imposition of restrictions on Indian trade by the British
rulers and deteriorating socio-economic conditions lead to the decline of Small Scale
Industry. But with the provisions of permanent place in the nation's policy of economic
development after the attainment of the Independence, it has staged a grand recovery
and is now well entrenched on the path of progress towards great expansion.
MSME has emerged into prominent sector in Indian economy in general and
industry in particular. SSI sector in India has posted impressive growth in 1990's from
15% in 1991-92 to 55% in 2001-02.The growth in employment generation has been
equally impressive from 3% to 45% during the same period. Employment in MSME
touched 19 million, just behind agriculture. Share of SSI exports crosses 40% of total
exports.
Growth by itself in MSME sector is impressive enough indicating a positive
response to the Economic Reform process initiated in the country since 1991.
Development of infrastructure
Assured supply of Raw Materials
Availability of Cheap Credit
Concessionary Taxes and Tariffs.
Financial subsidies
Equity contributions are all the protective measures for the sector
Page | 19
Role of MSME sector in Nation Development:
The Small and Medium sector plays an important role in the Indian economy in
terms of employment and growth has recorded a high rate of growth after
independence. MSMEs play a vital role for the growth of Indian economy by
contributing 45% of the industrial output, 40% of exports, 42 million in employment,
create one million jobs every year and produces more than 8000 quality products for
the Indian and international markets. As a result, MSMEs are today exposed to greater
opportunities for expansion and diversification across the sectors.
The root cause for unemployment in India is the over growing population which
has outpaced the development of industry and agriculture. For a country like ours, with
limited financial resources and huge reservoir of human resources, Small and Medium
industry is the only means for solving the unemployment problem. Small and Medium
industry is providing employment at an increased rate.
The Indian market is growing rapidly and Indian industry is making remarkable
progress in various Industries like Manufacturing, Precision Engineering, Food
Processing, Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors.
MSMEs are finding increasing opportunities to enhance their business activities in core
sectors. The good performance of the small scale units is evident from their number,
production, employment and foreign exchange earnings.
Page | 20
Problems of MSMEs
Despite its commendable contribution to the Nation's economy, MSME Sector
does not get the required support from the concerned Government Departments,
Banking Sector, Financial Institutions and Corporate Sector, which is a handicap in
becoming more competitive in the National and International Markets and which needs
to be taken up for immediate and proper redressal. MSME sector faces a number of
problems - absence of adequate and timely banking finance, limited knowledge and
non-availability of suitable technology, low production capacity, follow up with various
agencies in solving regular activities and lack of interaction with government agencies
on various matters.
Some of the major problems are briefly as follows:
a) Financial problems of MSMEs:
The financial problem of MSMEs is the Root Cause for all the other problems
faced by the MSME sector. The small and medium industrialists are generally poor and
there are no facilities for cheap credit. They fall into the clutches of money lender who
charges very high rates of interest, or else they borrow from the dealers of their goods,
who exploit them by completing them to sell their products at very low price. After the
nationalization of 14 major Indian Banks in July, 1969, the Commercial banks were
providing only a small proportion of MSMEs financial requirements. Credit to the
MSME sector continues to be non-commensurate with its contribution to the total
industrial output. As against the share of the village and MSME at 40% in the industrial
output, its share in total credit to the industrial sector is only about 30%.
b) Raw Material problem of MSMEs:
This difficulty is experienced in a very pronounced form. The quantity, quality and
regularity of the supply of raw materials are not satisfactory. There are no quantity
discounts, since they are purchased in small quantities and hence charged, higher prices
by suppliers. Difficulty is also experienced in procuring semi-manufactured materials.
Page | 21
Financial weakness stands in the way of securing raw materials in bulk in a competitive
market.
c) Production problem of MSMEs:
MSME units suffer from inadequate work space, power, lighting and ventilation,
and safety measures etc. These short comings have tended to endanger the health of
workmen and have adversely affected the rate of production. Many units are following
primitive methods of production. Adoption of modern techniques is either disliked by
the entrepreneurs is not feasible. Wage rates and service conditions of small industries
are not attractive to skilled labor.
d) Technological problem of MSMEs:
Today technology is changing at a very fast phase; it becomes difficult for MSMEs
to cope up with changing technology. Technology up gradation and the frequent need
to renew the equipment has emerged as a big problem.
e) Marketing problem of MSMEs:
As marketing is not properly organized, the helpless artisans are completely at the
mercy of middle man. The potential demand for their goods remains under developed.
The MSMEs have to face the competitions from large scale units in marketing their
products. It causes damage to the growth and stability of MSMEs. MSMEs cannot
afford to spend lavishly for advertisement to promote their sales.
f) Managerial problem of MSMEs:
Small scale industries in our country have suffered from the lack of entrepreneurial
ability to develop initiative and undertake risks in the unexplored industrial fields. The
in efficiency in management comes first among managerial problems. The
entrepreneurial ability of promoters of cottage industries and MSMEs are handicapped
by technical knowhow in the areas of production, finance, accounting and marketing
management.
Page | 22
g) Sickness of MSMEs:
A serious problem which is hampering small and medium sector has been sickness.
Many small units have fallen sick due to one problem or the other. Sickness is caused
by two sets of factors, Internal and external factors. From among the various internal
and external causes of sickness the important ones are bud management, high rate of
capital gearing, inadequacy of finance, short of raw materials, outdated plant and
machinery, low labor productivity etc.
Page | 24
COMPANY PROFILE:
Andhra Bank is a medium-sized public sector bank (PSB), with a network of
1,712 branches, 15 extension counters, 38 satellite offices and 1056 automated teller
machines (ATMs) as on march 31, 2012. Andhra Bank was founded by the eminent
freedom fighter, Dr. Bhogaraju Pattabhi Sitaramayya. The Government of India owns
51.55% of its share capital and is going to increase it to 58% by infusing 1100 crore.
The state owned Life Insurance Corporation of India holds 10% of the shares.
The bank has done a total business of Rs. 1,90,535 crore as on 31.03.2012. The
bank's operations are mostly concentrated in southern India, the region accounts for
over 60% of the bank’s advances and deposits.
Bank is migrating to "Centralized Core Banking Solution"118 Branches have
already migrated to CBS. It is proposed to cover 550 branches by September 2009. This
will benefit the customers, who will have access to banking and financial services
anytime, anywhere through multiple delivery channels. Andhra Bank is a pioneer in
introducing Credit Cards in the country in 1981.
The Bank introduced Internet Banking Facility (AB INFI-net) to all customers of
cluster linked branches. Rail Ticket Booking Facility is made available to all debit card
holders through IRCTC Website through a separate gateway. Corporate Website is
available in English, Hindi and Telugu Languages communicating Bank's image and
information. Bank has been given 'BEST BANK AWARD' a banking technology award
by IDRBT, Hyderabad for extensive use of IT in Semi Urban and Rural Areas on
02.09.2010. IBA Jointly with TFCI has conferred the Joint Runner-up Award to the
Bank in the Bet Payments initiative in recognition of outstanding achievement of the
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Bank in promoting ATM Channel. Bank successfully conducted " Bancon 2010", a two
day event at Hyderabad, deliberating on Inclusive Growth - A New Challenge. Kiddy
Bank Scheme, with insurance benefits, was re-launched to inculcate savings habit
among the children. Bank has mobilized nearly 90000 new accounts during 2011-08.
As a part of "Financial Inclusion", Bank adopted two districts, namely,
Srikakulam in Andhra Pradesh and Ganjam in Orissa and achieved 100% coverage.
Bank has introduced Smart Card Scheme Pilot project in Warangal District and the
same will be extended to other Lead Districts in due course. Bank has opened 2.11 lakh
accounts under "No-frill accounts" category till 30.06.2008.
Andhra Bank, along with A P State Government, NABARD, Canara Bank, Indian
Bank, IOB and SBH sponsored the Andhra Pradesh Banker's Institute of
Entrepreneurship Development, which will offer training to unemployed youth for
improving their skills in Andhra Pradesh.
Bank adopted Gundugolanu village, West Godavari District, Andhra Pradesh -
birth place of Dr. Bhogaraju Pattabhi Sitaramayya for all-round development. A
comprehensive budget with an outlay of Rs.5.50 Crore is finalized for improving
health, sanitation, education and social service facilities in the village.
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History:
Andhra Bank was founded by Dr. Bhogaraju Pattabhi Sitaramayya in 1923 in
Machilipatnam, Andhra Pradesh. The founder Dr. Bhogaraju Pattabhi Sitaramayya was
an eminent freedom fighter and a multifaceted genius. The Bank was registered on
November 20, 1923 and commenced business on 28 November 1923 with a paid up
capital of Rs 1.00 lakh and an authorised capital of Rs 10.00 lakhs. In 1956, linguistic
division of States was promulgated and Hyderabad was made the capital of Andhra
Pradesh. The registered office of the Bank was subsequently shifted to Andhra Bank
Buildings, Sultan Bazaar, Hyderabad, and Andhra Pradesh. In the second phase of
nationalization of commercial banks commenced in April 1980, the bank became a
wholly owned Government bank. In 1964, the bank merged with Bharat Lakshmi Bank
and further consolidated its position in Andhra Pradesh.
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Corporate Identity:
“TOGETHERNESS IS THE THEME”
The Symbol of Infinity denotes a Bank that is prepared to do anything, to go to
any lengths, for the customer
The Blue pointer on the top represents the philosophy of a Bank that is always
looking for growth and newer directions.
The Key hole represents Safety and Security
The Chain indicates togetherness
The colours Red and Blue denote dynamism and solidity
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VISION AND MISSION:
Vision:
“Andhra Bank is committed to create a customer centric organization with a deep
sense of social responsibility and to continuously leverage technology to attain world
class standards of performance.”
Mission:
“Beside the core activity of banking, Andhra Bank will venture into a spectrum of
Financial Services. Utmost concern will be accorded to customer satisfaction by
offering innovative and need-based financial products and services using state of the art
technology.”
Products and Services:
The products and services provided by the bank are mainly categorized into
businesses of Retail, Corporate, NRI, MSME, and Agricultural industries. Under the
Retail Business, the bank offers Deposits, Loans, Cards, DMAT Services, Payment
Services, Insurance, and Mutual Funds to individual customers. Under the Corporate
Business, the bank offers Loans & Advances, Project Appraisal services, and
Syndication of Loans to the business entities. Under the NRI business segment, the
bank offers Deposit schemes, Loans, Remittance services, and Investment services to
the Non Resident Indians.
Under the MSME business segment, the bank offers different schemes that
aimed at providing loan and transaction services to Micro Small and Medium
Enterprises (MSME). Some of the MSME schemes available are OTS Scheme,
Composite loan scheme, Open cash credit (OCC), Artisans Credit Card (ACC), AB
Laghu Udhyami Credit Card (LUCC), AB Power Tools (Shakti), Technology
upgradation fund scheme (TUFs), Credit guarantee fund trust for small industries
(CGTSI), AB Doctor Plus...etc. Under the Agriculture business segment, bank provides
different credit schemes to farmers, Women Empowerment schemes, and Andhra Bank
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Rural Development Trust (ABRDT) helps Rural Self Employment Training Institutes
(RSETIs).
Deposit Schemes
o AB Savings Accounts
o AB Current Accounts
o AB Term Deposits
o AB Arogyadaan Scheme
o AB Bancassurance Life
o AB Bancassurance (Non Life)
Retail Loans
Agricultural Loans
Corporate Banking
NRI Banking
o NRI Products and Services
o NOSTOR details for remittance
o Western Union Money Transfer
Technology Products
o Multi City Cheque Facility
o On-Line Tax Accounting System (OLTAS)
o Real Time Gross Settlement (RTGS)
o Instant Funds Transfer
o ATM Services
o Any Branch Banking
o Electronic Clearing Service (ECS)
o National Electronic Funds Transfer
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Value added services:
Introduced 8 a.m. to 8 p.m. and 7 day banking in select branches to extend the
Service hours to clientele.
Opened a Representative Office in Dubai to coordinate with NRIs for increasing
our NRI customer base.
Imparting training to Agriculturists, Rural Un- employed youth on vocational
courses by our 9 Rural Development Institutes.
Mobile Banking – Connected branches improved to 453, registered users 4175
Daily ATM hits crossed 1 lakh per day.
Mobile Recharging facility
Tech savvy products such as e-Seva, e-Hundi, Utility Bill Payment, Visa Electron
Debit Card, Instant Funds Transfer, On-line Tax Accounting System, RTGS etc.
Various Insurance Linked Deposit products like AB Jeevan Abhaya, AB Jeevan
Prakash, AB Jeevan Prakash Plus, AB Arogyadaan and AB Flex.
New Tech savvy product AB Kisan Vikas ATM Card has been introduced.
Shortly introducing – Internet Payment Gateway, Internet Banking.
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Corporate Social Responsibility (CSR):
Being an integral part of society, Bank is aware of its corporate social
responsibilities and has engaged in community and social investments. During the year,
Bank has taken many initiatives with the objective of providing philanthropic assistance
for development, education etc.
Under the aegis Andhra bank rural development trust bank is imparting training to
youth in rural and semi urban areas so that poor people can take up self
employment ventures. They also conduct vocational and human resource
development training. So far they have provided training to 71,666 participants.
The bank has taken initiatives for including more people from the marginalized
and down trodden sections into the banking system. The bank has already
implemented financial inclusions in districts of Orissa and Andhra Pradesh.
During the year '07-08' the bank has adopted Gundugolanu village in Andhra
Pradesh for improving health, sanitation, education facilities with a comprehensive
budget of 5.50 cr.
The bank is setting up a school in the campus of Andhra University in
Vishakhapatnam.
Along with the Andhra Pradesh Government and NABARD, it has set up
APBIRED for providing training to unemployed youth for improving their skills.
In the year 2011-2008, the bank has donated 2.14 cr to various trusts and NGOs.
Under the aegis of Andhra Bank Rural Development Trust, Bank is imparting
training to youth in rural and semi-urban areas so that the poor people can take up
self-employment ventures. This also conducts various vocational and human
resource development training programmes. So far, training has been imparted to
71,666 participants in self-employment ventures and in capacity building.
The Bank has taken initiatives towards implementing financial inclusion in some
of the districts for bringing more and more people of the marginalized and the
downtrodden sections into banking system.
The Bank has already implemented 100% financial inclusion in the districts of
Srikakulam (Andhra Pradesh) and Ganjam (Orissa). During the year 2011-08,
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Bank has adopted the Gundugolanu village in the district of West Godavari in
Andhra Pradesh tor improving health, sanitation, education and social service
facilities in the village, with a comprehensive budget of Rs. 5.50 crore.
In a move towards encouraging higher studies, Bank is setting up Andhra Bank
School of Business in the campus of Andhra University, Visakhapatnam (Andhra
Pradesh).
The Bank along with Government of Andhra Pradesh, NABARD and other select
banks sponsored the Andhra Pradesh Bankers / Institute of Rural & Entrepreneurship
Development (APBIRED), which will offer training to unemployed youth for
improving their skills. This is located at Hyderabad. The Bank is also making donations
to charitable trusts and other institutions engaged in the upliftment of the society.
As per Karmayog.org research work they ranked Andhra Bank as No. 3
organization out of top organizations with regard to corporate social responsibility.
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Theoretical Aspects:
Overview of Credit Appraisal
Credit appraisal means an investigation/assessment done by the banks before
providing any Loans & advances/project finance & also checks the commercial,
financial & technical viability of the project proposed, its funding pattern & further
checks the primary & collateral security cover available for recovery of such funds.
Brief overview of Credit
Credit Appraisal is a process to ascertain the risks associated with the extension of
the credit facility. It is generally carried by the financial institutions, which are involved
in providing financial funding to its customers. Credit risk is a risk related to non-
repayment of the credit obtained by the customer of a bank. Thus it is necessary to
appraise the credibility of the customer in order to mitigate the credit risk. Proper
evaluation of the customer is performed this measures the financial condition and the
ability of the customer to repay back the Loan in future. Generally the credits facilities
are extended against the security know as collateral. But even though the Loans are
backed by the collateral, banks are normally interested in the actual Loan amount to be
repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure
the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a Loan applicant. Factors
like age, income, number of dependents, nature of employment, continuity of
employment, repayment capacity, previous Loans, credit cards, etc. are taken into
account while appraising the credit worthiness of a person. Every bank or lending
institution has its own panel of officials for this purpose.
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However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending, which
must be kept in mind, at all times.
Character
Capacity
Collateral
If any one of these are missing in the equation then the lending officer must question
the viability of credit. There is no guarantee to ensure a Loan does not run into
problems; however if proper credit evaluation techniques and monitoring are
implemented then naturally the Loan loss probability / problems will be minimized,
which should be the objective of every lending Officer.
Credit is the provision of resources (such as granting a Loan) by one party to another
party where that second party does not reimburse the first party immediately, thereby
generating a debt, and instead arranges either to repay or return those resources (or
material(s) of equal value) at a later date. The first party is called a creditor, also known
as a lender, while the second party is called a debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later. We use
credit to buy things with an agreement to repay the Loans over a period of time. The
most common way to avail credit is by the use of credit cards. Other credit plans include
personal Loans, home Loans, vehicle Loans, student Loans, small business Loans, trade.
A credit is a legal contract where one party receives resource or wealth from another
party and promises to repay him on a future date along with interest. In simple Terms, a
credit is an agreement of postponed payments of goods bought or Loan. With the
issuance of a credit, a debt is formed.
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Basic types of credit
There are four basic types of credit. By understanding how each works, you
will be able to get the most for your money and avoid paying unnecessary charges.
Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. You often have to pay a deposit, and you may pay a late
charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for a
few days or several years. Money can be repaid in one lump sum or in several
regular payments until the amount you borrowed and the finance charges are
paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the
store or the easy payment plan. The borrower takes the goods home in exchange
for a promise to pay later. Cars, major appliances, and furniture are often
purchased this way. You usually sign a contract, make a down payment, and
agree to pay the balance with a specified number of equal payments called
installments. The finance charges are included in the payments. The item you
purchase may be used as security for the Loan.
Credit cards are issued by individual retail stores, banks, or businesses. Using a
credit card can be the equivalent of an interest-free Loan- end of each month.-if
you pay for the use of it in full at the
Brief overview of Loans
Loans can be of two types fund base & non-fund base:
Fund Base includes:
Working Capital
Term Loan
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Non-fund Base includes:
Letter of Credit
Bank Guarantee
Bill Discounting
Fund Base:
Working capital
The objective of running any industry is earning profits. An industry will require
funds to acquire “fixed assets” like land, building, plant, machinery, equipments,
vehicles, tools etc., & also to run the business i.e. its day-to-day operations.
Funds required for day to-day working will be to finance production & sales. For
production, funds are needed for purchase of raw materials/ stores/ fuel, for employment
of labor, for power charges etc. financing the sales by way of sundry debtors/
receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital
& working capital. Working capital in this context is the excess of current assets over
current liabilities. The excess of current assets over current liabilities is treated as net,
for storing finishing goods till they are sold out & for working capital or liquid surplus
& represents that portion of the working capital, which has been provided from the long-
Term source.
Term Loan
A Term Loan is granted for a fixed Term of not less than 3 years intended normally
for financing fixed assets acquired with a repayment schedule normally not exceeding 8
years.
A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of
land, construction of, buildings, purchase of machinery, modernization, renovation or
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rationalization of plant, & repayable from out of the future earning of the enterprise, in
installments, as per a prearranged schedule.
From the above definition, the following differences between a Term Loan & the
working capital credit afforded by the Bank are apparent:
o The purpose of the Term Loan is for acquisition of capital assets.
o The Term Loan is an advance not repayable on demand but only in installments
ranging over a period of years.
o The repayment of Term Loan is not out of sale proceeds of the goods & commodities
per se, whether given as security or not. The repayment should come out of the future
cash accruals from the activity of the unit.
o The security is not the readily saleable goods & commodities but the fixed assets of
the units.
It may thus be observed that the scope & operation of the Term Loans are entirely
different from those of the conventional working capital advances. The Bank’s
commitment is for a long period & the risk involved is greater. An element of risk is
inherent in any type of Loan because of the uncertainty of the repayment. Longer the
duration of the credit, greater is the attendant uncertainty of repayment & consequently
the risk involved also becomes greater.
However, it may be observed that Term Loans are not so lacking in liquidity as they
appear to be. These Loans are subject to a definite repayment programme unlike short
Term Loans for working capital (especially the cash credits) which are being renewed
year after year. Term Loans would be repaid in a regular way from the anticipated
income of the industry/ trade.
These distinctive characteristics of Term Loans distinguish them from the short Term
credit granted by the banks & it becomes necessary therefore, to adopt a different
approach in examining the applications of borrowers for such credit & for appraising
such proposals.
The repayment of a Term Loan depends on the future income of the borrowing unit.
Hence, the primary task of the bank before granting Term Loans is to assure itself that
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the anticipated income from the unit would provide the necessary amount for the
repayment of the Loan. This will involve a detailed scrutiny of the scheme, its capital
assets. Financial aspects, economic aspects, technical aspects, a projection of future
trends of outputs & sales & estimates of cost, returns, flow of funds & profits.
Non-fund Base:
Letter of credit
The expectation of the seller of any goods or services is that he should get the
payment immediately on delivery of the same. This may not materialize if the seller &
the buyer are at different places (either within the same country or in different
countries). The seller desires to have an assurance for payment by the purchaser. At the
same time the purchaser desires that the amount should be paid only when the goods are
actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is
to provide a means of payment to the seller & the delivery of goods & services to the
buyer at the same time.
Definition
A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at
the request & on the instructions of the customer (the applicant) or on its own behalf,
o Is to make a payment to or to the order of a third party (the beneficiary), or is to
accept & pay bills of exchange (drafts drawn by the beneficiary); or
o Authorizes another bank to effect such payment, or to accept & pay such bills of
exchanges (drafts); or
o Authorizes another bank to negotiate the Terms & conditions of the credit are
complied with against stipulated document(s), provided.
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Bank Guarantees:
A contract of guarantee is defined as ‘a contract to perform the promise or discharge
the liability of the third person in case of the default’. The parties to the contract of
guarantees are:
a) Applicant: The principal debtor – person at whose request the guarantee is executed
b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of
default.
c) Guarantee: The person who undertakes to discharge the obligations of the applicant
in case of his default.
Thus, guarantee is a collateral contract, consequential to a main co applicant & the
beneficiary.
Purpose of Bank Guarantees
Bank Guarantees are used to for both preventive & remedial purposes. The guarantees
executed by banks comprise both performance guarantees & financial guarantees. The
guarantees are structured according to the Terms of agreement, viz., security, maturity &
purpose.
Branches may issue guarantees generally for the following purposes:
a) In lieu of security deposit/earnest money deposit for participating in tenders;
b) Mobilization advance or advance money before commencement of the project by the
contractor & for money to be received in various stages like plant layout,
design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers & for obtaining
full payment of the bills;
e) Performance guarantee for warranty period on completion of contract which would
enable the suppliers to period to be over; realize the proceeds without waiting for
warranty) To allow units to draw funds from time to time from the concerned
indenters against part execution of contracts, etc.
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f) Bid bonds on behalf of exporters
g) Export performance guarantees on behalf of exporters favoring the Customs
Department under EPCG scheme.
Bill discounting:
Definition:
As per Negotiable Instrument Act, “The bill of exchange is an instrument in
writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a certain person, or to
the bearer of that instrument.”
Discounting of bill of exchange:
A seller (Drawer) if need cash, may handover the B/E to the Bank, NBFC, a
company or a high Net worth Individual and obtain ready cash this is known as
discounting of bill. the practice in India is that, the financing organization holds the
original B/E till the drawee pays on maturity. For discounting the bill, financiers charge
an interest on the bill amount for the duration of the bill which is called discount
charges.normal maturity periods are 30, 60, 90, 120 days.
Types of Bills
1. Demand Bill
2. Usance Bill
3. Documentary Bills
a. Documents against acceptance (D/A) bills
b. Documents against payment (D/P) bills
4. Clean Bills
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Advantages
To Investors
1. Short Term source of finance
2. Outside the purview of Section 370 of Indian Companies Act 1956
3. No tax deducted at source
4. Flexibility
To Banks
1. Safety of funds
2. Certainty of payment
3. Profitability
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Credit Appraisal Process
Receipt of application from applicant
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
properties documents
Pre-sanction visit by bank officers
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list
etc
Title clearance reports of the properties to be obtained from empanelled
Advocates
Proposal preparation
Valuation reports of the properties to be obtained from empanelled valuer/engineers
Preparation of financial data
Assessment of proposal
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Documentations, agreements, mortgages
Sanction/approval of proposal by appropriate sanctioning authority
Disbursement of Loan
Post sanction activities such as receiving stock statements, review of accounts, renew of
accounts, etc
(On regular basis)
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CREDIT PROCESS
Pre-Sanction Process
Indicative list of Activities in the Appraisal Function
A. Preliminary appraisal
Obtain
i. Application for working capital Finance
ii. Audited financial for the previous three years
iii. Details of existing borrowing arrangements
iv. Reports from existing Banker on the application copy
v. Financial statements, borrowings relationship of Associate
firm/group companies
vi. Profile of promoters /senior management personnel
If request includes project financing, obtain additional:
i. Project report
ii. Appraisal report form Financial institutions in case Appraisal
has been done by them
iii. NOC form term lenders if already financed by them
iv. Report form Merchant bankers in case capital market is being
accessed
Examine the following:
i. Bank’s lending policy/RBI guidelines, policies
ii. Prudential Exposure norms
iii. Industry Exposure restrictions
iv. Group Exposure restrictions
v. Industry related risk factor List of defaulters
vi. Caution lists
vii. Compliances regarding transfer of borrowal accounts from one
bank to another, it applicable
viii. Gov. regulation/legislation impacting on the industry
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ix. Acceptability of the promoters
x. Application’s status vis-à-vis other units in the industry
xi. Financial status in broad term and whether it is acceptable
xii. Examine also the following in case of request of project finance :
xiii. Weather the project cost is prima facie acceptable
xiv. Debt/equity gearing proposed and whether acceptable
xv. Promoter’s ability to access capital market for debt/equity support
xvi. Whether critical aspect of project –demand, product cost
profitability etc. are prima facie in order
xvii. Arrived at a preliminary decision to support or not to support the
request.
B. Detailed appraisal
Carry out a detailed appraisal alter a pre-sanction visit to applicant Company/their
office/project site.
Working capital facilities
Examine/Analyze/Assess;
i. Financials (in the prescribed form)
ii. Financial ratio and other ratios relevant to the project- Dividend policy
iii. Other aspects viz.
Depreciation method and Revaluation method
Record of defaults (tax duties etc.)
Pending suits having financial implications (custom excise etc.)
Qualification of balance sheets, Auditor remarks etc.
iv. Trends in sale and probability
v. Past deviation in sale and profit projections
vi. Product capacity & use-past and projected
vii. Estimate/ projections of sales values
viii. Estimated working capital gap with reference to acceptable build up of
inventory/receivable/other current asset.
ix. Project levels whether acceptable
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By sourcing information where necessary from:
Stock Exchange Directory financial journals/ publications, professional entities like
INFAC, CMIE etc. with emphasis on following aspects:
Market share of the units under comparison
Unique features
Profitability factors
Financial pattern of the business
Inventory receivable levels
Capacity utilizations
Production efficiency and costs
Bank borrowing patterns
Financial ratio & other relevant ratio
Credit rating
Draw up trading for:
Working capital
Term finance
Opinion reports
Compile opinion report on partners/promoters and the proposed
guarantors
Review of the proposal
Strength and weakness of the exposure proposed
Risk factor and steps proposed to mitigate them
Deviations proposed from usual norms of the bank and the reasons
Proposal of sanction:
Prepare a draft proposal in prescribed format with required back-up details
and with recommendations for sanction
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Sanction
Indicative list of Activities Involve in the sanction Function
Peruse the proposal to see if the report prima facie presents the
proposal; remit it back to the Assessor for the required
data/clarifications.
Examine critically the following aspect of the proposed
exposure
1. Bank’s lending policy
2. Borrowers status in the industry
3. Industry aspect
4. Experience with units in similar industry
5. Overall strength of the borrower
6. Project level of operation
7. Risk Factors critical to the exposure and adequacy of
safeguards there against proposed.
8. Value of existing connection with the borrower
9. Credit risk rating
10. Security pricing charges and concessions proposed for the
exposure and covenants stipulated vis-à-vis the risk perception
POST SANCTION PROCESS
1. Follow up
The follow-up functions will cover the following:
(a) Ensuring on an ongoing basis compliance with terms and conditions of
sanction through the system of control measures/feedback viz. Inspection
visits, prescribed financial/ operation statements from the borrower interaction
with borrower etc.
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(b) Tracking performance of the borrower, ensuring safety and recoverability
of the advances
(c) Ensuring compliance with all the internal and external reporting
requirements covering the advances.
Indicative list of the activities involved in the Follow-up function is as follows:
Conveying sanction of advances to the borrower detailing the terms and
conditions and obtaining acceptance thereof
Preparation-submission of control returns for sanction
CMA reporting of sanction where applicable
Completion of applicable documentation; maintaining custody and validity
of the documents.
Creation of charge over security and completion of all relevant and
applicable formalities, including:
1. Creation of Registered or Equitable mortgage
2. Creation of second charge
3. Registration of charge with ROC
4. Periodical search of charge with ROC
Ongoing scrutiny of transaction in the various accounts by perusal of leaders,
registers, vouchers etc. to watch for proper conduct of the accounts, healthy turnover
therein and proper- end use of funds.
Ongoing verification of assets charged as security, to ensure availability and safety
of the assets.
Maintaining ongoing contact with the borrower and co-leaders and keeping abreast
of developments in the borrower entities and business environment.
Preparation of reviews of IRAC, identification of deterioration assets and
initiations of corrective action where warranted.
Account wise follow up of NPAs for recovery /rehabilitation, preparation of
related recommendations to appropriate authority for approval.
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Supervision
i. Supervision function should primarily ensure that the effective fallow of
advances is in the place of the asset quality of good order is maintained.
Supervisor should look out for early warning signals, identity ‘incipient
sickness’ and initiate proactive remedial actions.
ii. Indicative list of activities involved in supervision function is as follows
Ensuring proper flow-up of advances and observations at the operating level of
the system laid down by the bank. Periodic and random examination of
statements received, control register and files/record covering the advance will
assist this process.
Ensuring the security documents are kept current and that all related
documentation formalities are observed by the officials responsible.
Ensure that the function at the follow-up level are performed diligently and as
per extant instructions of the bank.
Monitoring and Controlling
i. Monitoring and controlling function ensures that effective supervision is
maintained on advance and appropriate responses are initiated whenever early
warning signals are seen. The function also tracks customer satisfaction and
provides responses where necessary.
ii. Indicative list of activity involved in monitoring control function are as follows:
Ensure that the effective supervision id maintained on advance by the lower level
functionaries responsible for follow-up and supervision scrutiny of returns /
reports received from these line functionaries, interaction with them, feedback
from the customer, commentary in inspection/audit reports etc. will assess this
process.
Monitoring high value advances through specific focus on these in the
return/report received on advance and by keeping watch on the developments in
the borrower company/industry
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Ensuring non-recurrence at the operating level of the company noticed
lapses/irregularities pointed out in various audit reports.
Ongoing monitoring of asset portfolio by tracking changes from time to time;
chalk out and arrange for carrying out specific action to ensure high standard
asset content.
Extending guidelines to down the line functionaries on the follow-up and
‘supervision’ of the exposures at risk.
Assessment of Risk, Profitability and Efficiency:
1. Industry Risks
2. Management Risks
3. Operational Risks
4. Collateral Security
5. Financial Risks
a) Industry Risks:
i) Production stage
(1) Raw materials
(2) Power, Fuel, Labour
(3) Technology
(4) Infrastructure
(5) R & D
ii) Post Production Process
(1) Demand
(2) Competition
(3) Marketing arrangements
Page | 52
b) Management risks:
i) Promoters
(1) Experience of the group
(2) Management proficiency
(3) Experience of promoters
(4) Employed executives
c) Operational risks:
i) Supply of information to banks
ii) Record of irregularity
iii) Limit management
iv) Compliance of sanction stipulations
d) Collateral security:
i) Collateral cover
e) Financial risks:
i) Liquidity
(1) Current ratio
(2) Non-working capital
ii) Profitability
(1) Operational profit
(2) Return of capital employed
(3) Net profit
iii) Interest coverage
(1) PBDIT / Interest
(2) Term indebtness
(3) Overall indebtness
iv) Efficiency in utilization of current assets
Page | 53
Interpretation:
Above tables shows how Banks assess the risk, profitability and efficiency. In
order to award loan to the business entity banks has to look in to the risk, return and
efficiency by using the past and present information available about the company. Banks
consider the following factors to assess the risk.
Industry Risk
Here the banks will look in to the all risk factors that related to an industry. Include
the production stage risk and post production risk. Production stage risk assessed by
considering the factors like raw materials, technology, Infrastructure etc and post
production risk involves demand, competition and marketing challenges.
Management Risk
Promotes experience, management proficiency, employed executives are the
factors which comes here.
Operational risk
Here banks look in to the past records of the customer’s transactions. Supply of
information to the bank, record of the irregularities and compliance of sanctions and
stipulations are considered here.
Collateral security
The collateral cover offered by the customer review comes here.
Financial risk
Liquidity, profitability and interest coverage ratios are assessed here to determine
short term and long term solvency of the company.
Page | 54
CREDIT APPRAISAL STANDARDS:
QUALITATIVE:
At the outset, the proposition is examined from the angle of viability and also from
the bank prudential levels of exposure to the borrower, group and industry. Thereafter, a
view is taken about bank’s past experience with the promoters, if there is a track record
to go by. Where it is a new connection for the bank but the entrepreneurs are already in
business, opinion reports from existing bankers and published data if available are
carefully perused.
In case of a maiden venture, in addition to the drill mentioned heretofore, an
element of subjectivity has to be perforce introduced as scant historical data would be
available and weightage has to be placed on impressions gained out of the serious
dialogues with the promoters and his business contacts.
QUANTITATIVE:
1. Working capital: the basic quantitative parameters underpinning the Bank’s
credit appraisal are as follows:
i. Liquidity: current ratio (CR) of 1.33 will generally be considered as a
benchmark level of liquidity. However, the approach has to be flexible. Cr of
1.33 is only indicative and may not be deemed mandatory. In cases where the
Cr is projected at a level lower than the benchmark or a slippage in the CR is
proposed, it alone will not be a reason for rejection of the loan proposal or for
sanction of loan. In such cases, the reasons for low CR should be carefully
examined and in deserving cases the CR as projected may be accepted. In cases
where projected CR is found acceptable, working capital finance as requested
may be sanctioned.
ii. Net working capital: although this is a corollary of current ratio, the
movements in Net working capital are watched to ascertain whether there is a
mismatch of long term sources via-a-vis long term uses for purposes which
may not be readily acceptable to the Bank so that corrective measures can be
suggested.
Page | 55
iii. Financial Soundness: this will be dependent upon the owner’s stake or the
leverage. Here again the benchmark will be different for manufacturing,
trading, hire purchase and leasing concerns. For industrial ventures Total
Outside Liability/Tangible Net Worth ratio of 6.0 is reasonable but
deviations in selective cases for understandable reasons may be accepted by the
sanctioning authority.
iv. Turn –over: the trend in turn-over is carefully gone into both in terms of
quantity and value as also market share wherever such data are available. What
is more important is to establish a steady output if not a rising trend in
quantitative terms because sales realization may be varying on account of price
fluctuations.
v. Profits: while net Profit is the ultimate yardstick, cash accruals, i.e. profit
before depreciation and taxation conveys the more comparable picture in view
of changes in rate of depreciation and taxation which may have taken place in
the intervening years. However, for the sake of proper assessment, the non-
operating incomes are excluded, as these are usually one time or extraordinary
income. Companies incurring net losses consistently over 2 or more years will
be given special attention, their accounts closely monitored, and if necessary,
exit options explored.
vi. Credit Rating: wherever a Credit Rating Agency for any instrument has rated
the company, this will be taken into account while arriving at a final decision.
However, as the credit rating involves additional expenditure, bank would not
normally insist on this tool if such an agency had already looked into the
company finances.
vii. Capital Market: where the company’s shares are listed in stock exchanges,
the movement of the price of its share, the market value of shares like those of
competitors in the same industry, response to public/right issues are also kept
in view as these are reflective of the corporate image in the eyes of the
investors’ community.
Page | 56
2. Term Loan / Deferred Payment Guarantees
i. In case of term loans and deferred payment guarantees, the project report is
obtained from the customer, which may have been compiled either in-house or
by a firm or consultants/ merchant bankers. The technical feasibility and
economic viability is vetted by the Bank and wherever it is felt necessary.
ii. Promoter’s contribution of at least 20% in the total equity is what bank
normally expects. But the promoter contribution may vary largely in mega
projects. Therefore, there cannot be a definitive benchmark. The sanctioning
authority will have the necessary discretion to permit deviations.
Page | 57
Financial tools used in credit assessment:
Financial performance
The tool in its current form uses various parameters for rating a borrower on its
financial strength. These various parameters give us an idea of the different sources of
risk being faced by a company in different areas.
Sr. No. Parameters Weightage (%)
F1 Net Sales Growth Rate (%) 10
F2 PBDIT Growth Rate (%) 7
F3 PBDIT/Sales (%) 10
F6 TOL/TNW 10
F7 Current Ratio 10
F8 Operating Cash Flow 8
F9 DSCR 8
F12*$ Foreign exchange risk 10
F13 Expected values of D/E, if 50% of NFB credit
devolves (corrected for margin)
5
F24 Realisability of Debtors 12
F27* State of export country economy 5
F28* Fund repatriation risk 5
TOTAL 100
* Applicable for export units
$Applicable for units having imports and or exports
Page | 58
Definition of Parameters used w.r.t financial performance:
F1 - Net Sales Growth Rate
Importance of this indicator
This ratio refers to the compounded annual growth rate of net sales over a period
of three years.
The company’s growth ratio vis-à-vis other companies in the industry will be a
good tool to assess its performance. If the growth rate is low compared to others in the
industry, then it will enable us to analyse the problems unique to this company.
Formula
The compounded annual growth rate over the past 3 years is calculated in
percentage Terms.
CAGR (Compounded annual growth rate) for three years =
[{(Value of sales in current year) / (Value of sales in year –3)}(1/3) – 1}]*100
Notes
• Net sales = Gross sales – Indirect taxes
• For banks, NBFCs, and other financial institutions:
Net sales = net interest income + other income
Page | 59
F2 - PBDIT Growth Rate
Importance of this indicator
This ratio refers to the compounded annual growth rate of profits before
depreciation (non cash), finance costs (interest) and tax over a period of three years.
A consistent growth in this ratio indicates an improved performance of the
company, reflected in increasing profitability (compared to its sales growth).
Formula
The compounded annual growth rate over the past 3 years is calculated in
percentage Terms.
CAGR (Compounded average growth rate) for three years =
[{(Value of PBDIT in current year)/(Value of PBDIT 3 years back)}(1/3) – 1}]*100
Notes
• PBDIT denotes profit before depreciation, interest and tax.
• For banks, NBFCs, and other financial institutions, use PBT instead of PBDIT
Page | 60
F3 - PBDIT/Sales
Importance of this ratio
This ratio indicates the profit before depreciation, interest and tax as a percentage
of net sales.
The profit before interest, depreciation and tax is an indicator of the operational
efficiency. If this ratio as a percentage of sales is high, then it is a positive indication of
the operating efficiency in Terms of raw material consumption, employee productivity
and power consumption among other things. A high value indicates greater profitability
and hence betters capability to repay the debt. The ratio is a measure of the margin
available to a company from its operations.
Formula
This ratio (in %) is computed by dividing the PBDIT with Net Sales.
(PBDIT/Net Sales) x 100
• PBDIT = Operating profit before depreciation, interest and tax
• For banks, NBFCs, and other financial institutions:
Net sales = net interest income + other income
Use PBT instead of PBDIT
Page | 61
F6 - TOL/TNW
Importance of this ratio
This ratio gives a holistic representation of total outside liabilities in relation to
tangible net worth of company. It reflects the capacity of the business unit to assure the
creditors of the security they have for payment of both interest and instalment. It
indicates the extent to which the creditors are covered by asset.
This ratio shows how much outside borrowings are resorted to in comparison with
owners’ funds
Formula
The total outside liabilities are divided with the tangible net worth of the company.
Total Outside Liabilities / Tangible Net Worth
• TOL = Total liabilities - TNW
• TNW as defined in Debt Equity ratio
• Also calculate this ratio for banks, NBFCs and other financial institutions, as it will
give an indication of the capital adequacy of the company
Page | 62
F7 - Current Ratio
Importance of this ratio
Current assets of company are the assets that can be easily liquidated and
converted into cash. The current ratio measures short-Term liquidity of the company and
ability to meet its short-Term financial obligations. A high ratio is good from the point
of view of the bank but a very high ratio may affect profitability through a high
inventory carrying cost.
Formula
The ratio is worked out by dividing the Current Assets with Current Liabilities
Current Assets__________________
Current liabilities (including installments due during the year)
• To get a meaningful current ratio, we should account for the vulnerability of a
company to short Term insolvency. The current ratio could be high because of excess
inventory or slow realisation of debtors. Therefore, current assets must not include
inventory which is older than the normal working cycle of company (say 6-8 month),
receivables over 6 months, dies, spares required for more than 9 months of production
and disputed receivables. If such “excess assets” exist then please make necessary notes
in the remarks column. In such cases please indicate your assessment of the value of
current ratio.
• Also calculate this ratio for banks, NBFCs and other financial institutions, as it will
give an indication of the duration mismatch of the company’s balance sheet
Page | 63
F8 - Operating Cash Flow
Importance of this indicator
This measure indicates the company’s cash inflows and outflows arising from its
operations. It is different from funds flow of business.
It helps us to evaluate the company’s ability to generate cash inflows from
operations to pay debt, interest and dividends, and to explain the difference between net
income and net cash flow for operating activities. The operating cash flow can indicate
the company’s need for external financing.
While funds flow is good to match long Term and short Term use and source of
funds, this indicator tries to capture the capability of the firm to be able to meet its
business obligations.
Page | 64
Calculation
Operating cash flow ( for the last financial year) is computed in the following manner
Head Amount
Net Sales
Other income
Total receipts
Less: COGS
Gross Profit
Less: SGA/Operating expenses
PBDIT
- Increase / + decrease in non cash current assets
+ Increase / - decrease in current liabilities
Operating cash
Less: Income tax paid
Post tax operating cash
Less: Interest paid on LT & ST
Less: Dividend paid
Cash from operations
Repayment due of long Term debt
Page | 65
How to rate
Compare “cash flow from operations” to “repayment due of long Term debt”.
The rating is done as explained in the table below.
Description Score
The company is likely to default on repayment of its Loans and
Interest
O
The company is not in a position to meet its repayment obligations
from its own resources and it faces difficulties to arrange outside
funds
1
The company is in a position to meet its repayment obligation from
its own resources and Term funds that are already applied for (and
expected to be sanctioned shortly)
2
The company is in a position to meet its repayment obligation from
its own resources and Term funds
3
The company is in a comfortable position to meet its repayment
obligation from its own resources (no need for outside funds)
4
Page | 66
F9 - DSCR (Debt Service Coverage Ratio)
Importance of this ratio
This ratio measures the capacity of the company to service its debt i.e. repayment
of principal and interest. DSCR measures the number of times a company’s earnings
cover its total long-Term debt-servicing requirement, including interest and principal
repayments in Term Loans, over a period of one year.
This ratio will help us to evaluate if an adequate cash flow will be available to
meet debt obligation and also for providing margin of safety to lenders. This ratio also
helps to determine the time when repayment should commence and the pay-back period
of the Loan. This ratio is a good indicator of the long-Term solvency of a company.
Formula
The profit before depreciation and interest (PBDI) is divided by installments due during
the year plus interest.
P B D I__________
Installments for the year + interest
Page | 67
F12 - Foreign exchange risk
Importance of this indicator
Adverse movements in the foreign exchange rate can have a tremendous impact on
the company’s financial strength.
Foreign exchange risk may be either transaction based or portfolio based.
Transaction based risk is due to time lags between purchases being made and payment
being made, or sales being made and payment being received against these sales.
Portfolio based risk is on account of foreign exchange Loans where the repayment is
made on future dates in foreign currency. The rater needs to know how the likely
fluctuation in exchange rate will affect the profits of the company. Depending on
composition of international trade, the adverse exchange rate movement could affect the
profitability/cash flow. Prudent borrowers hedge their exposure to foreign exchange.
Only the un-hedged part of the foreign exchange exposure should be taken into account.
How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his
perception and knowledge of the foreign exchange risk. A potential model to allocate
score can be the following:
Description Score
The risk involved is > 10% of TNW 0
The risk involved is between 8% and 10% of
TNW
1
The risk involved is between 5% and 8% of TNW 2
The risk involved is less than 5% of TNW 3
The entire portfolio is hedged 4
Page | 68
Important notes
The foreign exchange risk can be quantified by using the forward exchange rates
prevailing in the currency market.
The risk involved can be estimated by evaluating two measures:
1. exports as % of TNW
2. Natural hedge involved, with a proxy measure being (1- imports divided by exports)
(always divide the smaller number by the larger one).
When this ratio is 1, foreign exchange risk from exports and imports cancels each other
out (provided it is to/from similar currency zones)
Example: total sales = 100, exports = 20, imports = 10, TNW = 200
Risk involved = exports x (1- imports/exports) = 20 x (1- 10/20) = 10
= 5% of TNW
Page | 69
F13 - Expected values of Debt Equity ratio if 50% NFB credit
devolves
Importance of this indicator
This indicator gives us an idea about the future expected debt equity structure in an
extreme situation.
It recalculates the Debt/Equity ratio when 50% of non-fund based limits devolve.
In doing so, it gives a sense of the long-Term financial stability in an extreme situation.
This is quite a good comforting factor for the bank. Most companies have to put up a
margin for their non-fund based credits. The new D/E ratio will have to be corrected for
this when the limits devolve, since part of it will be covered by the margin
Calculation
The calculation is the same as for F5 – Debt/Equity ratio, with
Debt = Long Term debt + 50% of the company’s non-fund based limits margin that the
company put up for its non-fund based limits.
Page | 70
F24 - Reliability of Debtors
Importance of this indicator
This indicator should indicate the quality of the debtors of the company and if
money can be recovered from them quickly and easily. A lot depends on how auditors
have treated the receivables.
There are many ways in which the auditors can play around with the receivables
viz. the receivables may be disputed. Receivables may be unrelated to business activity
of the company or there could be high amount of bad debts in the receivable portfolio of
the company. Any delay in receipt of payment from debtors/non-receipt of amount can
hamper the production cycle of a company as well as increase collection costs and the
probability of default on the part of the debtor of the company. Hence the reliability of
the debtors of a company is a critical input for assessing the financial risk of a borrower.
Page | 71
F27 – State of the export country economy
Importance of this indicator
The economy of the country(ies) to which is being exported, will have a significant
impact on the exporter’s business. A slowdown in the economic growth might even have
a more than linear impact on the exporter’s turnover and profitability, since importers
will typically may have the reaction to cut costs by cutting relationships with overseas’
suppliers.
How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his
perception and knowledge of the foreign exchange risk. The minimum score of 0 could
be assigned to exporters who trade the bulk of their products/services with 1 single
country, that is currently in a recession. The maximum score of 4 can be granted to
parties who have a wide portfolio of export countries, with most (or all) of these
countries showing strong economic growth.
Page | 72
F28 – Fund repatriation risk
Importance of this indicator
Exporters are often paid in the currency of the country to which they export. Some
of these currencies may be difficult to exchange or to wire back to India. In that case,
significant costs and risks are involved in the repatriation of funds, which could affect
the overall risk profile of the exporter.
How to rate
The rater has to subjectively rate this indicator on a score of 0 to 4 based on his
perception and knowledge of the foreign exchange risk. The minimum score of 0 could
be assigned to an exporter who trades the bulk of his products/services with a country
that has very stringent foreign exchange and currency repatriation policies. The
maximum score of 4 could be granted to exporters who only trade with countries, which
have no restrictions on the flow or repatriation of funds.
Page | 74
Analysis:
The analysis of the amount of money financed towards MSME’s and overall
Advances including all other kinds of loans is as follows:
For the end of Fiscal Years 2010, 2011, 2012 as on 31st march.
In Lakhs
Year
Industry
31st Mar-2010 31
st Mar-2011 31
st Mar-2012
No: A/C Amount No: A/C Amount No: A/C Amount
Micro 450 3827 559 5786 259 6191
Small 112 4562 116 4830 100 9673
Medium 3 1705 3 2937 3 2986 Tot Advances N.A 125638 N.A 151073 N.A 125638
Source: Secondary data
Inference: From the above table,
Comparison between Micro, Small, Medium in successive 3 years:
2010
2011
2012
0
2000
4000
6000
8000
10000
MicroSmall
Medium
2010
2011
2012
Page | 75
Comparison between Total Advances and MSME’s finance in successive 3 years:
Inference: From the above 2 tables
There is a consistent increase in the total value of amount financed to the MSMEs in
the past 3 years.
The total value of fund financed towards MSMEs is not upto the bank norms i.e., not
up to 20% of the total advances.
Though there are less number of borrowers regarding Medium enterprises, the
financed amount towards them is very high compared to Micro and Small
enterprises borrowers.
0
20000
40000
60000
80000
100000
120000
140000
160000
MSME's Tot Advances
2010
2011
2012
Page | 76
Customer’s perspective:
1) To classify the respondents on percentage bases, as per the number of Years
established in business.
Number of years Number of Respondents Percentage
Less than 3 4 8
3-5 22 44
6-10 12 24
More than 10 12 24
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
0
5
10
15
20
25
30
35
40
45
50
Less than 3 3 to 5 6 to 10 More than 10
% of Respondents
% of Respondents
Page | 77
Inference: From the above table,
• 8% of the respondents were established in the business for less than 3 years
• 44% of the respondents were established in the business for 3-5 years
• 24% of the respondents were established in the business for 6-10 years
• 24% of the respondents were established in the business for more than 21 years
It can be inferred from the above data that the majority of the respondents have
businesses established for a period of 3-6 years, followed by an equal number of
respondents having businesses of more than 10 years and 6-10 years, and finally a
meager portion being less than 3 years.
Page | 78
2) To classify the respondents’ business based on the nature of ownership and
represent the same as a percentage.
Nature of ownership Number of Respondents Percentage
Private Ltd 34 68
Public Ltd 0 0
Partnership 0 0
Sole Proprietorship 16 32
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
68% of the total sample consisted of Private Limited Companies
32% of the total sample consisted of Sole Proprietorship Firms
It can be inferred from the above table that a majority of the sample consisted of
Private limited Firms and all the remaining are Sole Proprietorship Firms.
No: of Respondents
Private Ltd
Sole Proprietorship
Page | 79
3) To do a sector wise classification of the businesses of the total sample.
Sectors Number of Respondents Percentage
Manufacturing 39 78
Service 6 12
Trading 5 10
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
78% of the total sample consisted of Manufacturing firms
12% of the total sample consisted of Trading firms
10% of the total sample consisted of Service firms
It can be inferred from the above data that the sample comprises of respondents i.e.,
businesses from a variety of sectors, with majority being Manufacturing firms and
service businesses form the smallest portion of the sample.
No: of Respondents
Manufacturing
Service
Trading
Page | 80
4) To classify the respondents based on the turnover per annum, in INR.
Turnover per annum Number of Respondents Percentage
Less than 50 Lakhs 10 20
50Lakhs-1 crore 20 40
1-5 crores 12 24
More than 5 crores 8 16
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
20% of the total sample consisted of companies having turnover less than 50 Lacs
40% of the total sample consisted of companies having a turnover 50L-1CR
24% of the total sample consisted of companies having a turnover 1CR – 5CR
16% of the total sample consisted of companies having a turnover more than 5CR.
Number of Respondents
Less than 50 Lakhs
50Lakhs-1 crore
1-5 crores
More than 5 crores
Page | 81
5) To classify the respondents based on the purpose for which loan was taken.
Type of loan Number of respondents Percentage
Term loan 42 84
Working capital loan 8 16
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: It can be inferred from the obtained data that the sample comprises of
respondents i.e., majority of Borrowers had taken the loan for Flooring of inventory and
working capital, and for modernization and upgradation of technology form the smallest
portion of the sample.
0
5
10
15
20
25
30
35
40
45
Term Loan Working Capital
No: of Respondents
No: of Respondents
Page | 82
6) To find out the criteria which are considered important by the respondents in
selecting their bank
Rank
Aspect
Very
Imp Imp Avg
Not
Imp
Not
at all
Imp
Weighted
mean
average
Better service 9 17 19 2 3 3.54
Single window dispensation 21 14 15 - - 3.58
Easy access 6 2 18 10 14 2.52
Attractive financing
conditions
14 18 18 - - 3.92
Low rates of interest 22 16 12 - - 4.20
Source: Primary data Tool used: Weighted Average
Formula: n n
∑ WiXi ∑ Wi
i=1 i=1
0 5 10 15 20 25
Better service
Single window dispensation
Easy access
Attractive financing conditions
Low rates of interest
Not at all Imp
Not Imp
Avg
Imp
Very Imp
Page | 83
Inference: From the above data, the following can be inferred,
Better service: This criterion is rated as 3.54 in a 5-point scale, which shows that the
respondents consider this to be Important in selecting a bank.
Single window dispensation: This criterion is rated as 3.58 in a 5-point scale, which shows
that the respondents consider this to be Important in selecting a bank.
Easy access: This criterion is rated as 2.52 in a 5-point scale, which shows that the
respondents consider this to be not much Important in selecting a bank.
Attractive financing conditions: This criterion is rated as 3.92 in a 5-point scale, which
shows that the respondents consider this to be Very Important in selecting a bank.
Low rates of interest: This criterion is rated as 4.20 in a 5-point scale, which shows that
the respondents consider this to be Very Important in selecting a bank.
Page | 84
0
5
10
15
20
25
30
Insufficientcollateral
PoorDocumentation
Delay Cost Involved High Interest
Number of Respondents
Number of Respondents
7) To classify the respondents based on the problems faced in raising finance from
public sector banks.
Problem Number of Respondents Percentage
Insufficient collateral 14 28
Poor Documentation 2 4
Delay 27 54
Cost Involved 1 2
High Interest 6 12
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
54% of the total respondents feel that delay in sanction is the problem faced in
raising finance from public sector banks.
28% of the total respondents feel that insufficient collateral is the problem faced
in raising finance from public sector banks.
12% of the total respondents feel that high interest rate is the problem faced in
raising finance from public sector banks.
4% and 2% of the total respondents feel that poor documentation and cost involved
are the problems faced in raising finance from public sector banks respectively.
Page | 85
8) To classify the respondents based on common reason for rejecting the
application for loan.
Reason Number of
Respondents Percentage
Management Inexperience 7 14
Application didn’t meet criteria 4 8
Not enough Guarantees provided 16 32
Not a profitable venture 23 46
Total 50 100
Source: Primary data Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
46% of the total respondents feel that the reason for rejecting an application for
loan is as it was not a Profitable Venture.
46% of the total respondents feel that the reason for rejecting an application for
loan is as enough guarantees are not provided.
14% of the total respondents feel that the reason for rejecting an application for
loan is as the management was very inexperience.
8% of the total respondents feel that the reason for rejecting an application for loan
is as the application didn’t meet the criteria.
0
5
10
15
20
25
ManagementInexperience
Application didn’t meet
criteria
Not enoughGuarantees
provided
Not a profitableventure
Number of Respondents
Number of Respondents
Page | 86
9) To classify the respondents based on demotivating factor in raising loan from
public sector banks.
Demotivating factor Number of
Respondents Percentage
Turned down before - -
Complicated procedure 8 16
Lengthy process 26 52
Too much documentation 16 32
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
52% of the total respondents feel that the de-motivating factor in raising finance
from the public sector bank as it is a lengthy process.
32% of the total respondents feel that the de-motivating factor in raising finance
from the public sector bank as too much documentation is required.
16% of the total respondents feel that the de-motivating factor in raising finance
from the public sector bank as it is a complicated procedure.
0
5
10
15
20
25
30
Turned downbefore
Complicatedprocedure
Lengthy process Too muchdocumentation
Demotivating Factors
Number of Respondents
Page | 87
10) To classify the respondents based on the better schemes provided by private
sector banks Vs public sector banks.
Bank Type Number of
Respondents Percentage
Public 50 100
Private - -
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
It can be clearly seen that all the respondents are interested in raising finance from
Public Sector banks only when compared to private sector banks.
0
10
20
30
40
50
Public
Private
Bank Type
Bank Type
Page | 88
11) To find out the criteria of level of satisfaction which are considered important
by the respondents for the loan sanctioned.
Rank
Aspect
Very
High
Hig
h Avg
Les
s
Very
less
Weighted
mean
average
The amount granted relative
to the amount requested
10 11 25 3 1 3.52
The simplicity of the
application form
26 12 10 2 - 4.24
Interest rate 12 14 18 5 1 3.62
Service fees 12 23 15 - - 3.94
Time to obtain approval 7 12 17 3 11 3.02
Guarantees required by the
institution
5 23 20 2 - 3.62
Response of the bank staff 28 22 - - - 4.56
Source: Primary data
Tool used: Weighted Average
Formula: n
∑ WiXi
i=1
-------------------------
n
∑ Wi
i=1
Page | 89
0 10 20 30
The amount granted relative to the amountrequested
The simplicity of the application form
Interest rate
Service fees
Time to obtain approval
Guarantees required by the institution
Response of the bank staff
Very less
Less
Avg
High
Very High
Page | 90
Inference: From the above data, the following can be inferred,
The amount granted relative to the amount requested: This criterion is rated as 3.52 in a
5-point scale, which shows that the respondents consider that in this factor their level of
satisfaction is above average.
The simplicity of the application form: This criterion is rated as 4.24 in a 5-point scale,
which shows that the respondents consider that in this factor their level of satisfaction
is very good.
Interest rates: This criterion is rated as 3.62 in a 5-point scale, which shows that the
respondents consider that in this factor their level of satisfaction is above average.
Service fees: This criterion is rated as 3.94 in a 5-point scale, which shows that the
respondents consider that in this factor their level of satisfaction is good.
Time to obtain approval: This criterion is rated as 3.02 in a 5-point scale, which shows
that the respondents consider that in this factor their level of satisfaction is just average.
Guarantees required by the institution: This criterion is rated as 3.62 in a 5-point scale,
which shows that the respondents consider that in this factor their level of satisfaction
is above average.
Response of the Bank Staff: This criterion is rated as 4.56 in a 5-point scale, which
shows that the respondents consider that in this factor their level of satisfaction is very
good.
Page | 91
12) To find out the criteria of obstacles which are faced by the enterprises
(respondents) in its growth.
Rank
Aspect
Very
High
Hig
h Avg
Les
s
Very
less
Weighted
mean
average
Technological barriers 26 12 10 2 - 4.24
Instability of demand for
product or service
23 15 8 2 2 4.10
Obtaining adequate finance 3 - 7 13 27 1.78
Low profitability of the sector 4 6 17 9 4 2.34
Taxation policies of the Govt. 7 12 17 3 11 3.02
Lack of experience &
managerial skills
- 8 16 2 24 2.16
Source: Primary data
Tool used: Weighted Average
Formula: n
∑ WiXi
i=1
-------------------------
n
∑ Wi
i=1
Page | 92
Inference: From the above data, the following can be inferred,
Technological Barriers: This criterion is rated as 4.24 in a 5-point scale, which shows
that the respondents consider that this factor as a major obstacle in their growth.
Instability of Demand: This criterion is rated as 4.10 in a 5-point scale, which shows
that the respondents consider that this factor as a major obstacle in their growth.
Obtaining Adequate Finance: This criterion is rated as 1.78 in a 5-point scale, which
shows that the respondents consider that this factor as a minor obstacle in their growth.
Low profitability of Sector: This criterion is rated as 2.34 in a 5-point scale, which
shows that the respondents consider that this factor as a normal obstacle in their
growth.
Taxation policies of Govt.: This criterion is rated as 3.02 in a 5-point scale, which
shows that the respondents consider that this factor as a normal obstacle in their
growth.
Lack of experience and & Managerial Skills: This criterion is rated as 2.16 in a 5-point
scale, which shows that the respondents consider that this factor as a minor obstacle in
their growth.
0 5 10 15 20 25 30
Technological barriers
Instability of demand for product orservice
Obtaining adequate finance
Low profitability of the sector
Taxation policies of the Govt.
Lack of experience & managerial skills
Very less
Less
Avg
High
Very High
Page | 93
13) To classify the respondents based on preferring Andhra Bank when there is a
need for refinance.
Preferred Number of
Respondents Percentage
Yes 41 82
No 9 18
Total 50 100
Source: Primary data
Tool used: Percentage
Formula: Xi * 100 / N
Inference: From the above table,
82% of the total respondents feel that they would like to prefer Andhra Bank
when there is a need for Re-Finance.
18% of the total respondents feel that they would not like to prefer Andhra Bank
when there is a need for Re-Finance.
Number of Respondents
Yes
No
Page | 95
FINDINGS:
The total value of the fund financed towards MSME’s is not upto the bank
norms i.e., not up to 20% of the Total Advances.
There is a consistent increase in the total value of amount financed to MSME’s
in the past 3- Fiscal years
Though there are less number of borrowers regarding Medium enterprises, the
financed amount towards them is high compared to Micro and Small
enterprises borrowers.
Respondents feel to prefer to deal only with Public Sector Banks, the reason is
they will be located in every nook and corner of the city.
Low rate of Interest is the criteria, which the borrowers most consider as
important by the respondents in selecting their bank.
Most of the respondents feel that the problem faced in raising finance from
public sector banks is Delay in Sanction and its Lengthy process.
The Respondents feel that the most common reason for rejecting an application
for loan is- “It is not a profitable venture”
When we consider the level of satisfaction of respondents, they are unhappy
with the amount granted to them compared with the requested amount and
Time also.
The respondents feel that the obstacles for their growth are most likely
Electricity problems, Technological barriers and Instability of Demand.
Page | 96
SUGGESTIONS:
The Credit department of Andhra Bank is at its full potential and the staff is
highly experienced and has a very strong intuitive sense. So, there is no special
recommendation on the entire process.
However, the procedure starting from getting loan application to disbursement
takes around 2-3 months and by the time disbursement is made, the market scenario
changes.
So, the process of loan sanctioning should be more speedy.
In order to make the process more flexible and efficient, an electronic database
should be designed carrying all the available and important information related to the
proposals accepted, and it should be easily accessible to the credit department. This
will help reduce paper work and loss of information.
Page | 98
CONCLUSION:
The study at Andhra Bank gave a vast learning experience and helped to enhance
my knowledge. And the study helped to know how the theoretical financial aspects are
used in practice during the loan assessment. And I have realized during my project work
that a credit analyst must own multi-disciplinary talents like financial, technical as well
as legal know-how.
The credit appraisal for business loans has been devised in a systematic way. It is a
process of appraising the credit worthiness of loan applications. Thus it extremely
important for the lender bank to assess the risk associated with credit; there by ensure
the security for the funds deposited by the depositors. There are clear guidelines on how
the credit analyst or lending officer has to analyze a loan proposal. It includes phase-
wise analysis which consists of 6 phases.
1. Financial statement analysis.
2. Working capital and its assessment techniques.
3. Techno economic feasibility analysis.
4. Credit risk assessment.
5. Documentation.
6. Loan administration.
To ensure the asset quality, proper risk assessment right at the beginning is
extremely important. That is why; credit risk management system is an essential one in
the credit appraisal exercise. Andhra Bank has formulated a credit risk rating model, it
consist important parameters like profitability, repayment capacity, efficiency of the
unit, historical & industry comparisons, e.t.c., depending on the borrower’s category.
Micro, Small & Medium Enterprises play a vital role for the growth of
Indian economy.
MSME’s are finding increasing opportunities to enhance their business
activities in core sectors.
Though MSME’s spread all over the urban areas, proper infrastructure
needs to be developed in the rural areas to establish these industries here.
There is a need of high level research and development required to develop these
sectors in both the urban and rural areas. The MSME’s sector is almost at its growth
stage, with further advancements in technology, this sector is likely to grow further and
contribute greatly to the economy of India.
Therefore, it is vital to provide proper funds to these emerging industries and
strengthen the economy.
Page | 100
BIBLIOGRAPHY
Books referred:
“The Dynamics of Entrepreneurial Development and
Management” by Vasant Desai - 6th edition.
“The Indian Financial system and Development” by Vasant
Desai – 2nd
edition.
“Financial Management” by I.M.Pandey – 10th
edition.
Yearly manuals of Andhra Bank
Guidelines books of Andhra Bank on “Lending Norms”
Websites:
www.andhrabank.in
www.rbi.gov.in
www.studyfinance.com
www.wikipedia.com
Page | 102
QUESTIONNAIRE
ON
MSM-ENTERPRENEUR’S PERSPECTIVE TOWARDS LOAN SANCTIONED
Name _______________________
Designation _______________________
Name of the company _______________________
Location _______________________
Questions:
1. How many years completed after the establishment of unit?
Less than 3 years
3 - 5 years
6 -10 years
More than 10 years
2. Nature of the Ownership?
Private Limited Company
Public Limited Company
Partnership Firm
Sole Proprietorship
3. To which sector your business is related to?
Manufacturing sector
Service sector
Trading sector
4. Are there any branches to your business?
Yes - _____
No
5. What is the total annual turnover of your business?
Less than 50 lakhs
50 lakhs to 1 crore
1 crore to 5 crores
More than 5 crores
Page | 103
6. What are the sources of finance used by your enterprise?
Owners financing
Private financial institutions
Equity finance
Bank financing
7. Have you ever raised finance from public sector banks?
Yes
No
8. What type of loan is taken by you?
Open term loan
Working capital loan (OCC-Open Cash Credit)
9. What is the total duration for repaying the loan sanctioned?
Less than 2 years □ 2 – 5 years
5 – 10 years □ Above 10 years
10. What is the actual mode of repayment period given by the bank?
Monthly
Quarterly
Half-Yearly
Yearly
11. How do you repay?
Strictly follow the period
Slightly extend the period
Frequently delay in repayment
Any others
12. For what purpose, your enterprise has taken loan?
Real estate acquisition to house the business
Increase the production
Construction, renovation or leasehold improvements
For flooring of inventory and working capital
For modernization and upgradation of technology
Page | 104
13. Rank the benefits of these schemes on the scale of 1-5; 1 being the most important:
Rank
Aspect
1 2 3 4 5
Better service
Single window dispensation
Easy access
Attractive financing conditions
Low rates of interest
14. What were the problems faced by your enterprise in raising finance from public sector
banks?
Insufficient collateral
Poor documentation
Delay in the sanction of loan
Cost involved is high
High rate of interest
15. Which of the following you feel is the most common reason for rejecting an application
for Loan?
The management team is too inexperienced
The application did not meet the criteria
The application was not correctly completed
The enterprise could not provide enough guarantees
Not a profitable venture
16. What factors demotivate you in applying for finance from the MSME financing schemes
of the public sector banks?
We were turned down before
Procedure to obtain this type of financing is too complicated
The process is lengthy
Too much of documentation is required
17. Are these public sector bank schemes are better than private sector bank schemes?
Yes
No
Page | 105
18. Please indicate your level of satisfaction with various aspects of obtaining finance from
these public sector banks. Kindly rate them on 5-point scale basis; 1 being strongly satisfied
and 5 being strongly dissatisfied:
Rank
Aspect
1 2 3 4 5
The amount granted relative to the amount requested
The simplicity of the application form
Interest rate
Service fees
Time to obtain approval
Guarantees required by the institution
Response of the bank staff
19. Apart from the existing schemes, what initiatives government can take for improving
MSME business in India?
_______________________________________________________________________________
_______________________________________________________________________________
20. Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1 being the
biggest
RANK
ASPECT
1 2 3 4 5
Technological barriers
Instability of demand for product or service
Obtaining adequate financing
Low profitability of the sector
Taxation policies of the Govt.
Lack of experience & managerial skills