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TABLE OF CONTENTS
S NO. CONTENTS PAGE NO.1 EXECUTIVE SUMMARY 3
2
ABOUT UNION BANK OF INDIA VISION MISSION VARIOUS POLICIES OFFERED BY BANK
4-5
3 SMALL SCALE INDUSTRIES 6-10
4IMPORTANCE OF SMALL AND MEDIUM ENTERPRISES
11-12
5 ISSUES IN LENDING AND THEIR SOLUTIONS 12-146 INITIATIVES TAKEN BY BANKS FOR SMEs 15-167 PERFORMANCE AND ACHIEVEMENTS 178 PRIORITY SECTOR DISTRIBUTION 189 RECENT STEPS UNDERTAKEN BY BANK 1910 RBI DIRECTIVES 2011 QUICK ESTIMATES OF 4TH CENSUS (2006-07) 21
12 EXPORT TRENDS OF SMEs IN LAST 60 YEARS
AND EXPORT PERFORMANCE21-22
13 RECOMMENDATIONS IN 11TH FINANCIAL
PLAN23
14 PROVISIONS FOR SMEs IN ANNUAL BUDGET
2009-1024
15 MSMED ACT 25
16 SOME POLICY REFORMS FOR THE SME
SECTOR25-26
17 SIDBI 27-28
18 SMERA 28-31
19 CGTMSE 32
20 ONICRA 32
1
21 NSIC 33
22 FUTURE SCENARIO 33
23 GUIDELINES FOR LENDING TO SMEs
RBI GUIDELINES
BANK INSTRUCTIONS
34-35
24 CREDIT APPRAISAL PROCEDURE 36-53
25 DETAILS OF WORK DONE 53
26 MAJOR LEARNING 53
27 CONSTRAINTS FACED 53
28 CREDIT APPRAISAL OF XYZ PVT. LTD. FOR
WORKING CAPITAL LOAN54-58
29 SUGGESTIONS AND RECOMMENDATIONS 58
30 ANNEXURE I 59
31 ANNEXURE II 67
32 BIBLIOGRAPHY 77
2
EXECUTIVE SUMMARY
SME branch, Union Bank of India deals with micro, small and medium enterprises.
The objective of project is credit appraisal of SMEs.
Small And Medium Enterprises (SMEs) play a catalytic role in the development of any country. They are the engines of growth in developing and transition economies.SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labor intensive mode of production; employment generation; no concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import intensive operations.
Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. A major obstacle in SME development is its inability to access timely and adequate finance.
If SMEs cannot find the financing they need; there will be a loss in potential growth for the economy. Hence credit appraisal of the firms has to be done.
Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit appraisals for any organization basically follow these steps: Assessment of credit need, financial statement analysis, financial ratios of the company, credit rating, working capital requirement, term loan analysis, submission of documents, NPA classification and recovery.
3
LITERATURE REVIEW
ABOUT UNION BANK OF INDIA
VISION
To become the bank of first choice in our chosen areas by building beneficial and
lasting relationship with customers through a process of continuous improvement.
CORPORATE MISSION
A logical extension of the Vision Statement is the Mission of the Bank, which
is to gain market recognition in the chosen areas.
To build a sizeable market share in each of the chosen areas of business
through effective strategies in terms of pricing, product packaging and
promoting the product in the market.
To facilitate a process of restructuring of branches to support a greater
efficiency in the retail banking field.
To sustain the mission objective through harnessing technology driven
banking and delivery channels.
To promote confidence and commitment among the staff members, to address
the expectations of the customers efficiently and handle technology banking
with ease.
4
The dawn of twentieth century witnesses the birth of a banking enterprise par
excellence- UNION BANK OF INDIA- that was flagged off by none other than the
Father of the Nation, Mahatma Gandhi. Since that the golden moment, Union Bank
of India has this far unflinchingly traveled the arduous road to successful banking.
Union Bank of India, a public sector bank was incorporated in 1919.
Union Bank of India, which has the vision to become one of the top three
Nationalized Banks in India by 2012, has identified funding MSME business as one
of its thrust areas. The bank has taken several initiatives to ensure credit growth in
this segment.
VARIOUS POLICIES OFFERED BY BANK FOR SMEs
Union high pride
Union procure: Financing of receivables through bills discounting relating
only to the products supplied by vendor to the concerned Corporate.
Union supply: Financing purchases of dealers through buyers’ bills
discounting relating only to products supplied by the concerned corporate
Union cyber: Term loan for PCO and cyber cafe
SME plus: Temporary short term working requirements of MSMEs
Union transport: To finance transport operators upto 10 vehicles of all make,
Utility Vehicles, Light Commercial, Medium Commercial, Luxury, and
Heavy Commercial Vehicles
Scheme for financing purchase of generator sets etc.
5
SMALL SCALE INDUSTRIES:
Small and medium-sized enterprises (SMEs) are the backbone of all
economies and are a key source of economic growth, dynamism and flexibility
in advanced industrialized countries, as well as in emerging and developing
economies.
Small & Medium Enterprises (SMEs) play a predominant role in most
developed and developing economies not only because of their number and
variety but also due to their involvement in all segments of the economy. Their
contribution to regional development, their complementary role to support the
large sector, and as a basis for technological innovations and adaptations are
widely acknowledged. SMEs, in most countries, make up the majority of
businesses and account for the highest proportion of employment. They
produce about 25% of OECD exports and 35% of Asia’s exports. SMEs
account for a considerable share of industrial enterprises, employment and
production and therefore, occupy a place of strategic importance in Indian
economy as well. The contribution of SME firms to our national economy in
terms of creating a vibrant manufacturing sector, winning the global market
through increased exports, employment generation etc has been highlighted on
many occasions.
Microsoft may be a software giant today, but it started off in typical SME
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. While not every small business turns into a multinational,
they all face the same issue in their early days – finding the money to enable
them to start and build up the business and test their product or service.
6
With the advent of planned economy from 1951 and the subsequent industrial
policy followed by Government of India, both planners and Government
earmarked a special role for small-scale industries and medium scale industries
in the Indian economy. Due protection was accorded to both sectors, and
particularly for small scale industries from 1951 to 1991, till the nation adopted
a policy of liberalization and globalization. Certain products were reserved for
small-scale units for a long time, though this list of products is decreasing due
to change in industrial policies and climate.
SME growth was also coupled with the policy of de-concentration of industrial
activities in few geographical centers. It can be observed that by and large,
SMEs in India met the expectations of the Government in this respect. SMEs
developed in a manner, which made it possible for them to achieve the
following objectives:
High contribution to domestic production
Significant export earnings
Low investment requirements
Operational flexibility
Location wise mobility
Low intensive imports
Capacities to develop appropriate indigenous technology
Import substitution
Contribution towards defense production
Technology – oriented industries
Competitiveness in domestic and export markets
7
The MSME segment in India has been receiving focused attention. With the
introduction of Micro Small & Medium Enterprises Development (MSMED) Act
2006, this sector is being increasingly viewed as an agent of economic growth by
Government institutions, corporate bodies and banks. The policy focus and the
Government's thrust towards promoting the MSME segment, along with
globalization and India's robust economic growth, have paved the way to several
latent business opportunities for this segment.
In accordance with the provision of Micro, Small & Medium Enterprises
Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises
(MSME) are classified in two Classes:
(a) Manufacturing Enterprises: The enterprises engaged in the manufacture or
production of goods pertaining to any industry specified in the first schedule to the
industries (Development and regulation) Act, 1951). The Manufacturing Enterprises
are defined in terms of investment in Plant & Machinery.
(b) Service Enterprises: The enterprises engaged in providing or rendering of
services and are defined in terms of investment in equipment.
Manufacturing Sector
Enterprises Investment in plant & machinery
MicroInvestment in plant and machinery less
than Rs 25 lac
SmallInvestment in plant and machinery over
Rs 25 lac but not exceeding Rs 5 Cr
MediumInvestment in plant and machinery over
Rs 5 Crores but less than Rs 10 Cr
8
At the same time one has to understand the limitations of SMEs, which are:
Low Capital base
Limited access to technology
Lack of awareness of global best practices
Concentration of functions in one / two persons
Inadequate exposure to international environment
Inadequate contribution towards R & D
Lack of professionalism
Managerial inadequacies
Delayed Payments
Poor Quality
Incidence of Sickness
Lack of Appropriate Infrastructure and
Lack of Marketing Network.
In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports.
9
Service Sector
Enterprises Investment in equipments
Micro Does not exceed ten lakh rupees:
SmallMore than ten lakh rupees but does not
exceed two crore rupees
MediumMore than two crore rupees but does not
exceed five core rupees
SMEs have been established in almost all-major sectors in the Indian industry.
Such as:
Food Processing
Agricultural Inputs
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics
Electro-medical equipment
Textiles and Garments
Leather and leather goods
Meat products
Bio-engineering
Sports goods
Plastics products
Computer Software, etc.
High contribution to domestic production
Significant export earnings
Low investment requirements
Operational flexibility
Location wise mobility
Low intensive imports
Capacities to develop appropriate indigenous technology
Import substitution
Contribution towards defense production
Technology – oriented industries
Competitiveness in domestic and export markets
10
IMPORTANCE OF SME SECTOR
In spite of limitations, the SMEs have made significant contribution towards
technological development and exports:
The SME sector plays a vital role in the growth of the country. It contributes
almost 40% of the gross industrial value added in the Indian economy. It has
been estimated that a million Rs. of investment in fixed assets in the small scale
sector produces 4.62 million worth of goods or services with an approximate
value addition of ten percentage points.
MSMEs are crucial to the economic growth process and play an important role
in the country’s overall production network. They are drivers behind a large
number of innovations and contribute through creation of employment,
investments and exports.
The MSMEs play a pivotal role in the overall industrial economy of the
country. India has nearly13 million MSMEs which produce a diverse range of
products (about 8000 odd items), including consumer items, capital and
intermediate goods. In terms of value, the sector accounts for about 45% of the
manufacturing output and around 40% of the total export of the country.
In India, MSME is the most important employment-generating sector and is
an effective tool for promotion of balanced regional development. This sector
is the second largest manpower employer, after agriculture. This sector
employs an estimated 60 million persons.
This sector is ideally suited to build on the strengths of our traditional skills
and knowledge, by infusion of technologies, capital and innovative marketing
practices.
11
The factors – strengths coupled with opportunities – that work in favor of
Indian MSMEs include their high contribution to domestic production,
significant export earnings, low investment requirements, operational
flexibility, location-wise mobility, low intensive imports, capacities to develop
appropriate indigenous technology, import substitution, contribution towards
defense production and competitiveness in domestic and export markets. The
sector, therefore, presents an opportunity to harness local competitive
advantage to achieve global dominance in industrial production and provide
even greater employment.
ISSUES IN LENDING AND THEIR SOLUTIONS
There were a number of issues in lending to the SME sector, which banks generally
faced. The key issues among them are outlined below:
a) Information Asymmetry: Accurate information about the borrower is a
critical input for decision-making by banks in the lending process. Where
information asymmetry (a situation where business owners or managers know
more about the prospects for, and risks facing their business than their lenders)
existed, lenders responded by increasing lending margins to levels in excess of
that which the inherent risks required. However, the sheer ticket size of SME
lending made it unviable for banks to invest in development of information
systems about SME borrowers. In such situations, banks also curtailed the
extent of lending even when SMEs were willing to pay a fair risk adjusted cost
of capital. Implication of raising interest rates and/or curtailing lending was
that banks would not have been able to finance as many projects as otherwise
would have been the case.
12
b) Granularity: This refers to a situation where the risk grading system at banks
did not have the requisite capability to discriminate between good and bad
risks. The consequence was tightening of credit terms, or an increase in prices,
or both. From the borrower’s perspective, this leaded to an outcome where the
bank was over-pricing good risks and under-pricing bad risks.
c) Pecking Order Theory: Pecking order theory flows from the above two
issues, which made SME lending highly difficult for banks. Under this
hypothesis, SMEs, which faced a cost of lending that is above the true risk-
adjusted cost, had incentives to seek out alternative sources of funding.
Evidence suggests that in such situations SMEs preferred to utilize retained
earnings instead of raising loans from banks.
d) Moral Hazard: Even when loans are made to SMEs, it may so happen that the
owners of these SMEs take higher risks than they otherwise would without
lending support from the banks. One reason for this situation is that the owner
of the firm benefits fully from any additional returns but does not suffer
disproportionately if the firm is liquidated. This is referred to as the moral
hazard problem, which can be viewed as creating a situation of over-
investment. The moral hazard problem may, thus, result in SME lending
turning bad in a short period of time, a situation that all banks would like to
avoid.
FOLLOWING STEPS HAVE BEEN TAKEN AS REMEDIAL MEASURES:
13
a) Collateral: Existence of collateral that can be offered to banks by SMEs could
be one effective way of mitigating risk. Banks could, therefore, look at
collateral when pursuing the question of SME lending. It can also be stated that
a borrower’s willingness to accept a collateralised loan contract offering lower
interest (relative to unsecured loans) will be inversely related to its default risk.
However, not all SMEs would be able to offer collateral to banks. Hence,
Reserve Bank of India (RBI) allows banks, with a good track record and
financial position on SSI units, to dispense with collateral requirements for
loans.
b) Relationships: The length of the relationship between a bank and its SME
customers is also an important factor in reducing information asymmetry, as an
established relationship helps to create economies of scale in information
production. A relationship between a SME and a bank of considerable duration
allows the bank to build up a good picture of the SME, the industry within
which it operates and the caliber of the people running the business. The closer
the relationship, the better are the signals received by the bank regarding
managerial attributes and business prospects.
c) Quality of Information: SMEs are required to provide accurate and
qualitative information to the banks for them to undertake a reliable risk
assessment. Accurate risk assessments obviously rely upon good information
regarding the SME and its prospects. Hence, it is suggested that banks should
make efforts to encourage SMEs to improve the quality of information
provided.
Recognizing the importance of the MSME sector, Government has announced
14
several initiatives aimed at increasing the flow of credit to this sector. The
objective is to double the flow of credit to the sector from Rs 67,600 crore in
2004-05 to Rs 1,35,200 crore by 2009-10, i.e., within a period of 5 years. It also
suggested rationalizing the cost of loans to MSME sector by adopting a
transparent rating system with cost of credit linked to the rating of an enterprise.
INITIATIVES TAKEN BY BANK FOR SME:-
• Bank has launched its ambitious “Project Navnirman” for transforming itself
from a ‘Banking Organization’ to a ‘Sales Oriented Financial Service
Organization’. With this strategic initiative in mind, a separate vertical named as
“MSME Vertical” has been carved out to oversee the growth of MSME finance in
the Bank across the country.
• As part of the organizational restructuring exercise for improving credit flow to
MSMEs, bank has streamlined its processes to increase efficiency. Central
Processing Centers (CPCs) have been established at key locations to:
a. accelerate the credit flow to MSMEs through focused sales and marketing
b. enhance customer service through quick Turn Around Time
c. reduce NPAs in MSMEs through efficient supervision and monitoring
d. lower cost and build expertise
• Bank has entered into MoU with :
15
a. SIDBI: for joint processing of loan applications and WC limits
b. SMERA: for rating of MSME clients only
c. CGTMSE: for extending guarantee cover
d. NSIC: for financing around 250 training institutes
e. ONICRA agency specialized in credit rating of MSMEs
• The Bank also set up a research chair at the prestigious Indian Institute of
Management, Ahemdabad. The chair will fund research in MSME sector and
findings will be shared with the Bank.
• On an ongoing basis and as per RBI directives, meetings of Standing
Committee on Customer Service were held with the active participation of
customers of the Bank. The bank has broad based for the invitees to cover
various segments of customers’ viz., pensioners, women entrepreneurs, young
generation etc.
• To solicit the MSME clients, bank has launched a web based information
channel i.e., “SME Helpline” and all the Regional offices of the Bank have been
designated as the “MSME Care Centers” and the details of the same have been
placed on the banks website. The MSME entrepreneurs/clients can contact any of
the centers across the country and get their queries satisfied.
PERFORMANCE: -
16
The MSME credit growth of the bank has been driven by focusing on assured Turn
Around Time (TAT), Credit Delivery at affordable prices, customized products, and
enhancing the base of MSME clients.
MSME portfolio of the Bank recorded a growth of 31.91% for the year ended March
2009.The outstanding under MSME segment as on March 31, 2009 was Rs.16,149
Crore as against Rs.12,242 Crore as on March 31, 2008 and Rs.8833 Crore as on Mar
31, 2007.
The share of the MSME lending constituted 16.60% of the total advances of the Bank
as on March 31 2009 as compared to 16.13% in the previous year.
Priority Sector Advances registered the growth of 21.02% and stood at Rs.36,341 Cr
as on March 31, 2009. Small Enterprises segment comprises of 26% of its total
priority sector advances
ACHIEVEMENTS:-
Union Bank was awarded a National Award for Excellence in Lending to Micro
Enterprises 2008-09 on 29th August, 2009. The Bank attained Second Rank based on
its excellent performance in lending to micro enterprises during the year 2008-09.
The Bank was awarded the Gold Trophy and a certificate in the Elite Class for
Excellence in Marketing & Brand Communication by Association of Business
Communicators of India (ABCI) in March 2010.
The Bank was awarded the prestigious “Skoch Challenger Award” 2009 for
excellence in capacity building through innovative concept of “Village Knowledge
Centre” as part of financial inclusion initiatives.
17
PRIORITY SECTOR DISTRIBUTION
ENTERPRISE AMOUNT INVESTMENT
MICRO (MFG) UPTO 25 LAKH 20%
MICRO
(SERVICE)
UPTO 10 LAKH 20%
MICRO (MFG) UPTO 5 CRORE 40%
MICRO
(SERVICE)
UPTO 2 CRORE 40%
SMALL (MFG) UPTO 5 CRORE 40%
SMALL
(SERVICE)
UPTO 2 CRORE 40%
MICRO ENTERPRISESSMALL ENTERPRISES
Micro and small enterprises are a part of priority sector.
Out of total finances, 60% to micro and 40 % to small industries
Medium enterprises are not a part of priority sector.
18
RECENT STEPS UNDERTAKEN BY BANK
Granting of additional need based credit facilities
Conducting cluster surveys and issuing of instructions as a corrective measure.
Reduction in margin requirement
Reduction in interest rates of MSEs.
NBFCs (Non Banking Finance Companies), MFIs (Micro Finance Institutions),
NGOs (Non Government Organizations), SHPIs( Self Help Promoting
Institutions)are engaged in micro credit on lending activity.
CLUSTER BASED APPROACH
All firms which are interrelated are considered as cluster. Their problems are
analyzed and solved. Bank offer concession in interest rates, collateral securities
etc.
NURSING SICK UNITS BACK TO HEALTH
Restructuring of debt of all small and medium enterprises at terms which are par
with that of corporate debt restructuring (CDR) mechanism.
For improving credit flow to MSEs Central Processing Centers are established
for marketing and minimum response time for sanction of MSE proposals. At
present SME SARALS are established at 7 centers attached to FGMOs.
19
RBI DIRECTIVES
Public sector banks were advised to fix their own targets for funding MSEs in
order to achieve a minimum 20% year on year growth in credit to MSEs
The objective was to double the flow of credit from Rs 67600 crore in 2004-05
to rs 135200 crore to the MSE sector by 2009-10within a period of 5 years
Commercial banks were advised to make efforts to provide credit cover on an
average to atleast 5 new micro, small and medium enterprises at each of their
semi-urban/ urban branches per year
Credit limit upto 5 lac will be collateral free and credit limit upto 25 lac and 1
crore will be free if covered under CGS (Credit Guarantee Scheme) of
CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprise).
Also entered in MoU with SME Rating Agency (SMERA). Under this, bank is
offering concessional rate of interest to SMERA rated accounts.
MoU with NSIC has been entered for financing NSIC-TIC(NSIC Training
Cum Incubation Centre) for promoting entrepreneurship and skill development
20
QUICK ESTIMATES OF 4 TH CENSUS (2006-07)
Number of MSMEs 26.1 million
Number of Manufacturing Enterprises 7.3 million
Number of Service Enterprises 18.8 million
Number of Women Enterprises 2.1 million (8%)
Number of Rural Enterprises 14.2 million (54.4%)
Employment 59.7 million
Per unit employment 6.24
Per unit fixed investment Rs.33.78 lakh
Per unit original value of Plant & Machinery Rs.9.66 lakh
Per unit gross output Rs.46.13 lakh
EXPORT TREND OF SMEs IN LAST 60 YEARS
Year Total exports
(Rs. Crores)
Exports from SSI
sector
(Rs. Crores)
Percentage share
1951-52 716 Negligible -
1961-62 660 Negligible -
1971-72 1608 155 9.6
1976-77 5142 766 14.9
1981-82 7809 2071 26.5
1986-87 12567 3644 29.0
1991-92 44040 13883 31.5
21
1992-93 53688 17785 33.1
1993-94 69547 25307 36.4
1994-95 82674 29068 35.1
1995-96 106353 36470 34.2
1996-97 118817 39249 33.4
1997-98 126286.00 44442.18 35.19
1998-99 141603.53 48979.23 34.59
1999-00 159561.00 54200.47 33.97
2000-01 202509.7 69796.5 34.47
2001-02 207745.56 71243.99 34.29
2002-03 252789.97 86012.52 34.03
EXPORTS PERFORMANCE OF SME
SME Sector plays a major role in India's present export performance. 45%-
50% of the Indian Exports is contributed by SSI Sector. Direct exports from the
SSI Sector account for nearly 35% of total exports. Besides direct exports, it is
estimated that small-scale industrial units contribute around 15% to exports
indirectly. This takes place through merchant exporters, trading houses and export
houses. They may also be in the form of export orders from large units or the
production of parts and components for use for finished exportable goods. Non-
traditional products account for more than 95% of the SSI exports. The exports
from SSI sector have been clocking excellent growth rates in this decade. It has
been mostly fuelled by the performance of garments, leather and gems and
jewellery units from this sector. The product groups where the SSI sector
dominates in exports are sports goods, readymade garments, woolen garments and
knitwear, plastic products, processed food and leather products.
22
RECOMMENDATIONS IN 11 TH FINANCIAL
PLAN
Envisaging the critical role which the MSMEs play in Indian Economy,
following recommendations having been made in 11th Financial Plan (2007-
2012):
• A total of 170 Technology Business Incubators and 50 Technology
Innovation Centers should be set up with a total outlay of Rs. 1100Crores.
• Enhancement in budget in all schemes promoting innovation and
entrepreneurship.
• Polytechnics and Industrial Training Institutes should be encouraged to
organize short-term programs for vocational training of school dropouts in a
variety of multi-skilled job positions that would be available in SMEs.
• TIFAC (Technology Information, Forecasting and Assessment Council) will
coordinate the activities of technology profiling of MSME clusters with
active cooperation and involvement of CII, UNIDO and INAE.
• Making available to MSMEs Special Purpose Machines (SPM), to meet our
customers' specialized and highly complex requirements
• Promoting Patenting and Quality Assurance
• Comprehensive retraining programs for the workers & employees in MSMEs
be introduced with incentives/ financial support for them
• Taxation & Duty structures for MSMEs be kept such that they encourage
innovation
• Better amenities need to be provided around MSMEs or their clusters located
in rural/ small town areas to check the concentration of population in urban
areas
23
PROVISIONS FOR SMEs IN ANNUAL BUDGET
2009-10
Following provisions have been made in Annual Budget (2009-10) for Micro, Small
and Medium Enterprises:
A fund, worth Rs. 4,000 crore, will be formed out of the Rural Infrastructure
Development Fund (RIDF) and provided to the Small Industries Development
Bank of India (SIDBI). This fund is expected to incentivize banks and State
Finance Corporations (SFCs) to extend loans to MSMEs by refinancing 50% of
incremental lending to these players during 2009-10. This move will facilitate
credit flow at affordable rates for MSMEs and thereby provide them the much-
needed fiscal support.
Rs 144 crore for Credit Support Program to provide Guarantee cover to banks for
extending loans to Small/Tiny units without collateral.
Rs 823 crore for Prime Minister’s Employment Generation Program to provide
subsidy to beneficiaries’ meeting cost of training and to meet residual/ committed
liabilities under Prime Minister’s Rozgar Yojana /Rural Employment Generation
Program.
MICRO, SMALL & MEDIUM ENTERPRISES
24
DEVELOPMENT ACT (MSMED)
A single comprehensive legislation for the promotion, development and enhancement
of the competitiveness of the MSME sector - Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 came into effect from October 2006.
BENEFITS OF THE MSMED ACT (2006)
The enactment of the Micro, Small & Medium Enterprises Development (MSMED)
Act 2006 is sure enough a reflection of the Government of India’s commitment for
the growth and the development of SMEs in India. It addresses, and streamlines at
the same time, key governance & operational issues being faced by the Micro, Small
& Medium industry in India and at the same time aims to promote, encourage and
synthesize the MSME sector within the context of the changing world trade
environment.
SOME POLICY REFORMS FOR THE SME SECTOR
• National Manufacturing Competitiveness Council (NMCC) was set up to energize
and sustain the growth of the manufacturing industry. New Promotional Package
for MSMEs, and focus on accelerating development of clusters.
• Revised strategy of lending and introduction of newer measures, such as the
scheme to establish Small Enterprises Financial Centers (SEFC) for strategic
alliance between branches of banks and SIDBI located in 388 clusters identified by
ministry of SSI.
• Promotion and financial support for Credit-cum-Performance Rating in MSME
25
sector in India, to facilitate greater and easier flow of credit from the banking sector
to SMEs.
• The National Commission for Enterprises in the Unorganized Sector (NCEUS) has
been set up as an advisory body and a watchdog for the informal sector to bring
about improvement in the productivity of these enterprises for generation of large
scale employment opportunities on a sustainable basis, particularly in the rural
areas.
• Facilitation of technology transfer through the Technology Bureau for Small
Enterprises (TBSE).
• The SME forum also expanded its network by entering into 2 domestic (the
National Small Industries Corporation – NSIC & Small and Medium Enterprises
Rating Agency (SMERA) & 2 overseas MoU’s with Japan, Finance Corporation
for Small & Medium Enterprises (JASME), Japan and German Association of
Small and Medium Enterprises (BVMW).
• With an objective to link small entrepreneurs, individual innovators with the
academia, R&D institutions & businesses in UK & India, CII has also signed an
MoU with the Centre for Entrepreneurial Learning (CfEL), Judge Business School,
University of Cambridge. At the same time CII continuously work towards the
process of tying up Small, Medium and Large industry partnerships, through
Sourcing & Business Development meets.
SIDBI (SMALL INDUSTRIAL DEVELOPMENT
26
BANK OF INDIA)
MISSION
To empower the Micro, Small and Medium Enterprises (MSME) sector with a view
to contributing to the process of economic growth, employment generation and
balanced regional development
VISION
To emerge as a single window for meeting the financial and developmental needs of
the MSME sector to make it strong, vibrant and globally competitive, to position
SIDBI Brand as the preferred and customer - friendly institution and for enhancement
of share - holder wealth and highest corporate values through modern technology
platform.
SIDBI was started with the motto of refinancing firms. SIDBI has also started tying
up with other nationalized and commercial banks in this regard that can help it gain
some more visibility and selling the products that need aggressive marketing. SIDBI
has a special corporate status because it has got an expertise since 1964 and has been
an agent in government schemes and finance is provided considering all expenses
related to the project from conceptualization of the project to the successful execution
of the project.
Four basic objectives are set out in the SIDBI Charter for orderly growth of industry.
27
They are:
Financing
Promotion
Development
Co-ordination
The Charter has provided SIDBI considerable flexibility in adopting appropriate
operational strategies to meet these objectives. The activities of SIDBI, as they have
evolved over the period of time, now meet almost all the requirements of small scale
industries which fall into a wide spectrum constituting modern and technologically
superior units at one end and traditional units at the other.
MoU BETWEEN UBI and SIDBI
Joint identification of viable projects.
Co-financing of the projects
In case where term loan is considered by SIDBI, working capital facilities would be
sanctioned by the bank and vice versa.
SMERA
SME Rating Agency of India Ltd (SMERA), the dedicated rating agency for SME
sector in India was formally launched at the hands of Union Finance Minister,
Shri P. Chidambaram, at a ceremony at Coimbatore. SMERA has been set up by
Small Industries Development Bank of India (SIDBI) in association with Dun &
Bradstreet (D&B), Credit Information Bureau (India) Limited and leading public
and private sector banks. SMERA''s primary objective is to provide ratings that
28
are comprehensive, transparent and reliable. This would facilitate greater and
easier flow of credit from the banking sector to SMEs.
There are several reasons for low SME credit penetration, key among them being
insufficient credit information on SMEs, low market credibility of SMEs (despite
their intrinsic strengths) and constraints in analysis. This leads to sub-optimal
delivery of credit and services to the sector. Rating Agencies can play an
important role in addressing some of these concerns. In this context, SMERA is
wholly committed to facilitating the overall growth and development of Indian
SMEs. The agency’s primary objective is to provide SME ratings that are
comprehensive, transparent and reliable. SMERA aims to be the country’s premier
agency that is focused primarily on providing ratings to SMEs so as to reflect their
intrinsic strength, with a view to facilitate faster and easier access to credit. The
SME policy recently announced by Government of India also lays emphasis on
using this as a tool for increasing credit to the sector.
SIDBI is the principal financial institution for the promotion, financing and
development of industry in the SME sector in the country. Over the last 20
years of its existence, it has developed a suite of products and services for the
SME sector. SMERA will be able to draw upon SIDBI’s longstanding
experience in dealing with Indian SMEs and its strong relationships with public
& private sector banks.
Dun & Bradstreet (D&B) is the world’s leading provider of business
information and Risk Management Solutions with a database covering over 95
million business entities. Over the past 164 years, D&B has built up an
impressive track record in SME Risk Evaluation & Rating and has over 70
million SMEs in its global database.
29
Credit Information Bureau (India) Ltd [CIBIL] is a composite credit bureau
catering to both the commercial and consumer segments. It therefore serves as a
repository of valuable payment information, which plays a major role in
reducing information asymmetries and credit risk.
SMERA is also supported by several leading public and private sector banks
that are active in the SME space. The recognition and acceptance of SMERA’s
ratings within the banking sector will help SMEs save time, effort and money
while approaching different banks for credit. It will also simplify and quicken
the process of lending to SMEs, while simultaneously reducing lending costs to
the sector as a whole.
CII has entered into a MoU with the SMERA. MoU will serve as a trusted third
party opinion on SME units’ capabilities and creditworthiness, as an
independent evaluation by an accredited third party will have good acceptance
from Banks, Financial Institutions, SME Customers and Buyers, enable SMEs
to secure adequate credit from Banks and Financial Institutions on time & at
competitive cost, benefit Banks and Financial Institutions by providing them an
independent evaluation of the strengths and weaknesses of the applicant
borrowing unit, which would help them in evaluating risk and taking credit
decision, and facilitate vendors/buyers in judging the capabilities and capacity
of the SME units for taking a decision on finalization of purchase contacts with
them.
WHAT IS A SMERA RATING?
SMERA Rating is an independent third-party comprehensive assessment of
the overall condition of the SME, conducted by SME Rating Agency of India
Limited.
30
It takes into account the financial condition and several qualitative factors that
have bearing on credit worthiness of the SME.
SMERA Rating consists of 2 parts, a Composite Appraisal/Condition
indicator and a Size indicator.
Financial Strength
High Moderate Low
Performance
Capability
Highest SE1A SE1B SE1C
High SE2A SE2B SE2C
Moderate SE3A SE3B SE3C
SMERA Rating categorizes SMEs based on size, so as to enable fair
evaluation of each SME amongst its peers.
CGTMSE
Availability of bank credit without the hassles of collaterals / third party
guarantees would be a major source of support to the first generation
entrepreneurs to realize their dream of setting up a unit of their own Micro and
Small Enterprise (MSE). Keeping this objective in view, Ministry of Micro,
Small & Medium Enterprises (MSME), Government of India launched Credit
Guarantee Scheme (CGS) so as to strengthen credit delivery system and
facilitate flow of credit to the MSE sector. To operationalise the scheme,
Government of India and SIDBI set up the Credit Guarantee Fund Trust for
Micro and Small Enterprises (CGTMSE).
31
The other objective is that the lender availing guarantee facility should
endeavor to give composite credit to the borrowers so that the borrowers obtain
both term loan and working capital facilities from a single agency. The Credit
Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a
MSE unit, which availed collateral free credit facilities, fails to discharge its
liabilities to the lender, the Guarantee Trust would make good the loss incurred
by the lender up to 75 / 80/ 85 per cent of the credit facility.
ONICRA
Onicra Credit Rating Agency is a path breaking innovative organization that
analyzes data and provides rating solutions for Individuals and Small and
Medium Enterprises(SMEs). This rating enables the lender or service provider
to take a valued judgment on the Individual or SME based on its Financial,
Background and Productivity analysis.
NATIONAL SMALL INDUSTRIES CORPORATION
(NSIC)
National Small Industries Corporation Ltd. (NSIC), an ISO 9001 certified
company, since its establishment in 1955, has been working to fulfill its
mission of promoting, aiding and fostering the growth of small scale industries
and industry related small scale services/business enterprises in the country.
Over a period of five decades of transition, growth and development, NSIC has
proved its strength within the country and abroad by promoting modernization,
upgradation of technology, quality consciousness, strengthening linkages with
32
large medium enterprises and enhancing exports - projects and products from
small industries.
NSIC carries forward its mission to assist small enterprises with a set of
specially tailored schemes designed to put them in a competitive and
advantageous position. The schemes comprise of facilitating marketing support,
credit support, technology support and other support services.
FUTURE SCENARIO
While the Manufacturing sector would continue to be the flag bearer of the
SME growth, however many of sunrise industries such as Information
technology (IT), Biotechnology (BT), Pharmaceuticals and Nanotechnologies
along with IT enabled services that are in the service sector will also play a
significant role in the growth and development of SMEs.
GUIDELINES FOR LENDING TO SMEs
RBI GUIDELINES
DISPOSAL OF APPLICATION: all loan application upto Rs. 250000
should be disposed off within 2 weeks and those upto 5 lac within 4 weeks
provided the loan applications are complete in all respects and accompanied
by check list.
33
COLLATERAL: the limit of all MSE borrowal account of collateral free
loan is Rs 5 lac. Bank on the basis of good track record and financial position
of MSE units may increase the limit of dispensation of collateral requirement
for loan upto Rs. 25 lac (with approval of appropriate authority).
COMPOSITE LOANS: a composite loan of Rs 1 crore can be sanctioned by
banks to MSE entrepreneurs for their working capital and term loan
requirement through single window.
DEBT RESTRUCTURING MECHANISM FOR MSEs: RBI has issued the
detailed guidelines to ensure restructuring of debt of all eligible small and
medium enterprises.
CREDIT LINKED CAPITAL SUBSIDY SCHEME (CLCSS) FOR
TECHNOLOGICAL UPGRADATION OF MICRO AND SMALL
ENTERPRISES: Government of India, Ministry of Micro, Small and medium
Enterprises have conveyed there approval for continuation of CLCSS for
technology upgradation from X plan to XI plan(2007-12) subject to fulfillment
of certain terms and conditions.
BANK INSTRUCTIONS
The sanction of the proposals falling within the branch head delegation should
be disposed off within 7 days. The proposal with delegated authority of RO
should be disposed off within 5 days on receipt of the same at RO.
Branches should not insist for collateral for credit limit upto Rs 5 lac.
Branches should provide collateral free credit limit upto Rs 50 lac under
34
Credit Guarantee Scheme for MSEs subject to the satisfaction of borrower’s
track record and good and sound financial position
There is no such bar for the loan limit if the branch is satisfied about the track
record and financials of the borrower. It can sanction appropriate loan limit
irrespective of quantum.
Bank has also issued detailed guidelines regarding debt restructuring
mechanism for units in MSE sector.
INTRODUCTION TO THE PROJECT
CREDIT APPRAISAL PROCEDURE
The “financing gap” is all the more important in a fast-changing knowledge-based
economy because of the speed of innovation. Innovative SMEs with high growth
potential, many of them in high-technology sectors, have played a pivotal role in raising
productivity and maintaining competitiveness in recent years. But innovative products and
services, however great their potential, need investment to flourish. If SMEs cannot find
the financing they need, brilliant ideas may fall by the wayside and this represents a loss
in potential growth for the economy. Hence credit appraisal of the firms has to be done.
Credit appraisal is done to evaluate the credit worthiness of a borrower. The credit
proposal is prepared to indicate the need based requirement and the rationale for its
recommendation. Bank has in place a well-defined framework for approving credit limits
of different segments. Requests for credit facilities from the prospective borrowers shall
be on the prescribed format and the full-fledged proposal should be prepared for
submission to the appropriate sanctioning authority for approval. These proposals analyze
various risks associated with bank lending i.e. business risks, financial risks, management
35
risks, etc. and clarify the process by which such risks will be managed on an ongoing
basis.
The credit appraisals for any organization basically follow the following process:
Assessment of credit need
Financial statement analysis
Financial ratios of the company
Credit rating
Working capital requirement
Term loan analysis
Submission of documents
NPA classification and recovery
ASSESSMENT OF CREDIT NEED
The first step in the process of credit appraisal is to assess the need for loan to the
borrower. In the first step the need of financial requirement is understood i.e. for which
purpose the loan is required .The banks basically provide two types of credit facilities to
their clients.
36
FUND BASED FACILITY
Fund based facilities provided by the banks are basically term loan & working
capital loan.
NON FUND BASED FACILITY
Non fund based facilities provided by the banks are letter of credit and letter of
guarantee.
LETTER OF CREDIT
Used for any transaction wherein one or more parties to the transaction requires
the comfort zone of guarantee of payment by a reputable bank. An LC is issued
by a bank on behalf of one of it's creditworthy customers, whose application for
the credit has been approved by that bank.
The parties to a Letter of Credit are
37
CREDIT
FUND BASED
TERM LOANWORKING CAPITAL
NON FUND BASED
LETTER OF CREDIT
LETTER OF GUARANTEE
(1) The Buyer (the applicant)
(2) The Buyer's bank (the issuing)
(3) The Beneficiary (the seller/payee)
(4) The beneficiary's bank (the ADVISING BANK).
The LC outlines the conditions under which payment (credit) will be made to a
third party (the Beneficiary). The conditions are specified by the buyer.
It is the responsibility of the issuing bank to ensure, on behalf of its client (the
Buyer), that all documentary conditions have been met before the Letter of
Credit funds are released.
LETTER OF GUARANTEE
Letter of guarantee or popularly known as Bank Guarantee is a form of
indemnity letter issued by bank on behalf of its client, whereby the bank
promises to indemnify the beneficiary in the event of default of its client.
A letter of guarantee often helps firms conduct business with parties they would
never normally get the chance to deal with. Many suppliers will often choose to
do business with customers that have a letter of guarantee because it eliminates
the risk that they will not receive the appropriate payment for the goods that they
are selling.
A bank guarantee, like a line of credit, guarantees a sum of money to a
beneficiary. Unlike a line of credit, the sum is only paid if the opposing party
does not fulfill the stipulated obligations under the contract. This can be used to
essentially insure a buyer or seller from loss or damage due to
nonperformance by the other party in a contract.
38
FINANCIAL STATEMENT ANALYSIS
Key points to be checked in financial statement:
Type of statement: Examine weather financial statement is audited or
unaudited. If the report is audited study the auditor certificate.
Nature of activity: Engaged in trading or manufacturing activity or services,
what kind of the products the company dealt in.
Series of statement: Examine the financial statements. Examine balance
sheets (audited, provisional and projected) and profit and loss account.
Important factor to note the trend is to observe statements of the last 3 to 5
years to know about the trend in the performance of the firm. Prepare year
wise break up of statements for observing trend. Compare between the
projected and actual statements. Check the gap and reason for gap.
FINANCIAL RATIOS
On the basis of financial statements, financial ratios are calculated.
CURRENT RATIO
Formula for calculating current ratio is:
Current Assets
Current liabilities
It is necessary that current assets should be sufficient to meet current liabilities.
Current ratio should be atleast 1.33:1 according to bank norms.
For example, according to break-up of balance sheet of XYZ Pvt. Ltd. as given
in annexure I, total current assets are Rs. 107.71lacs and total current liabilities
are Rs. 68.52lacs.Hence current ratio comes to be 1.57.
DEBT EQUITY RATIO (DER)
39
Formula for calculating current ratio is:
Debt
Tangible Net Worth (TNW)
The ratio gives the proportion in which financing of company is done. If it
works to 2:1, it means that the long term Creditors have provided Rs 2 of every
Re 1 of the owner’s contribution. If a company has more of debt and less of
capital, it may be problems with regard to repayment of installments and
payment of interest.
In the analysis of XYZ Pvt. Ltd. DER comes to be 3.08. Total debt of company
includes long term liabilities and current liabilities of Rs 168.33lacs and
68.52lacs respectively. Total net worth of company is Rs. 76.98lacs. TNW is
sum of paid up capital, reserves and surplus and intangible assets.
DEBT SERVICE COVERAGE RATIO (DSCR)
Given by:
Interest + PAT + depreciation + installment of term loan
Interest + installment of term loan
If an enterprise has borrowed funds, it is required to repay the same and also
pay the interest. DSCR should not be less than 1.35 individually.
RATING MODEL
R.B.I. has given considerable emphasis on having a proper risk rating in place
as a credit rating system is considered as an instrument that helps the bank in
Measuring the Credit Risk at the transaction level
Frequency of inspection
40
Credit rating is done for calculating BPLR (Bank Prime Lending Rate) for
borrower
The credit rating technique used by the banks differs from bank to bank.
Following parameters are taken into consideration:
1.RATING OF BORROWER
A. EVALUATION OF FINANCIAL RISK
i. Current ratio
ii. Debt Equity ratio
iii. Sales performance (actual V/S projected)
iv. Net profit margin (net profit to sales)
v. Return on capital employed (Profit After Tax/ Capital
Employed)
vi. Debt Service Coverage Ratio (for term loans)
B. MANAGEMENT RISK
i. Experience of management and promoters
ii. Composition of management (qualification)
iii. Succession planning for key ratios
iv. Labor relations (w.r.t strikes, disputes etc)
v. Honoring financial commitment( to banks/ financial institution
ns/ creditors/ government etc)
C. EVALUATION OF MARKET OR INDUSTRY RISK
i. Market potential
ii. Competitive situation (no. of competitors, big competitors etc)
iii. Raw material availability and procurement
iv. Selling and distribution arrangement
41
v. Technology advantage
2. RATING OF FACILITY
i. submission of stock statement
ii. submission of audited balance sheet, P & L and financial data
iii. repayment schedule (only for term loans)
iv. margin given on term loan
v. operation in account
vi. payment of loan and interest( timely or irregular)
3. RISK MITIGATORS
i. availability of collateral security and quality of collaterals
ii. available guarantee (director’s/ third party)
4. BUSINESS ASPECTS
i. length of satisfactory relationship with UBI
ii. income value to the bank ( interest, commission, exchange etc)
Points are given for each field out of a maximum limit and these points are added.
Credit rating is done on the basis of percentage, i.e., sum of points obtained to total
points.
INVESTMENT GRADES:
42
RISK RATING SCORE ( %)
LOWEST RISK CR-1 > 90
MINIMAL RISK CR-2 81-90
MODERATE RISK CR-3 76-80
SATISFACTORY RISK CR-4 71-75
ACCEPTABLE RISK CR-5 66-70
WATCH RISK CR-6 61-65
NON INVESTMENT GRADES:
RISK RATING SCORE ( %)
RISK PRONE CR-7 56-60
HIGH RISK CR-8 55 & BELOW
SUB STANDARD CR-9 DEFAULT- NPA
DOUBTFUL CR-10 -
LOSS CR-11 -
For example:
INTEREST RATES FOR SMALL INDUSTRIES
43
CREDIT RATING WORKING CAPITAL TERM LOAN
CR1 BPLR - .25 BPLR + .25
CR2 BPLR BPLR + .5
CR3 BPLR + .25 BPLR + .75
CR4 BPLR + .75 BPLR + 1.25
CR5 BPLR + 1 BPLR + 1.50
CR6 BPLR + 1.5 BPLR + 2
CR7 BPLR + 2 BPLR + 3
CR8 BPLR + 2 BPLR + 3
CR9 BPLR + 2 BPLR + 3
Current BPLR is11.75%
WORKING CAPITAL ASSESSMENT
Apart from financing for investing in fixed assets, every business also requires
funds on a continual basis for carrying on day to day operations. These include
amounts expenses incurred for purchase of raw material, manufacturing,
selling, and administration until such goods are sold and the money is received.
While part of the raw material may be purchased by credit, the business would
still need to pay its employees, meet manufacturing & selling expenses (wages,
power, supplies, transportation and communication) and the balance of its raw
material purchases. Working capital refers to the source of financing required
by businesses on a continual basis for meeting the short term needs. Working
capital purpose may be defined as the funds required in carrying the required
level of current assets to enable the unit to run its operation at the expected
levels without any liquidity constraint. Limits to the various borrowers are
assessed depending upon their requirements and their line of activity.
44
OPERATING CYCLE OF THE COMPANY: The operating cycle is the
average time between purchasing or acquiring inventory and receiving cash
proceeds from its sale. From the operating cycle the bank can understand about
the future working capital requirement of the company.
Any manufacturing activity entails a cycle of operation comprising of 5 stages
from introduction of cash to realization of debts:
COMPONENTS OF OPERATING CYCLE
Time taken for acquiring raw material and average storing period
Conversion processing time
Average storing period for finished goods
45
WIPFINISHED GOODS
RECIEVABLESCASH
RAW MATERIAL
Average collection period for book depts.
Banks can check that how many days are consumed by this working cycle and
how much amount is stuck in the process and accordingly bank can finance the
companies.
46
OPERATING CYCLE
47
PURPOSE OF FUNDS
Purchase of raw material
Payment of wages
Payment for consumption of power and fuel
Payment of manufacturing overheads
Payment of administrative overheads
Payment of selling and distribution overhead
1. TURNOVER METHOD:
Under this method the bank finances maximum of 20% of the projected sales of
the borrower and the borrower has to contribute 5% as his margin. This method
is applicable for SSI borrowers up to Rs.5.00 crores.
EXAMPLE:
RS. IN LACS
A TOTAL SALES / TURNOVERPROJECTED 2,25
B 25% OFF TURNOVER [OF “A”] [WCG] 56.25
C MARGIN AT 5% OF TURNOVER [OF “A”] 11.25
D LIMIT PERMISIBLE 20% OF “A” [B –C] 45
2. FLEXIBLE BANK FINANCE(FBF) METHOD :
Under this method the borrowers requirements are assessed based on the past
practice/holding levels while the projections should reasonably conform with
the past trends, deviations can be accepted subject to satisfactory justification.
48
EXAMPLE:
31.3.08
(AUD.)
31.3.09
(AUD.)
30.9.10
(Prov.)
1 Total Current Assets 250.00 331.00 274.64
2
Less : Current Liabilities
(Other than Bank Borrowing) 230.00 321.01 204.54
3 Working Capital Gap 20.00 9.99 70.10
4
Actual / Projected Net
Working Capital 10.00 -24.24 40.09
5 Flexible Bank Finance (3-4) 10.00 34.23 30.01
DRAWING POWER (DP)
1. DP is the amount of loan sanctioned that the borrower is eligible to take every
month.
2. DP is calculated by stock statement. Companies are asked to submit their stock
statement every month.
3. Check and calculate total stock. Consider stock less than 90 days only (general
case).
4. Subtract all the creditors’ amount from stock amount since DP covers only the
paid up amount.
5. Calculate margin on stock. Generally margin is taken as 25% of total amount
obtained in earlier step.
6. Calculate the amount of debtors that is to be considered by bank in drawing
power. Generally this amount is 50% of total debtors’ amount.
7. Add amount to be paid by bank on stock and debtors. This amount is known as
DP of a particular account for a particular month.
49
8. DP should always be less than sanction limit. Sanction limit is predefined
For example, in case of XYZ Pvt. Ltd., working capital loan issued is Rs 50lacs.
Suppose value of stocks (less than 90 days) for a particular month is Rs. 1.5lacs,
creditors is Rs .5lac, debtors is Rs. 3lacs.
DP for the particular month will be
DP = 1.5-.5+1.5 (50% of 3) lacs
= 3.5 lacs
TERM LOAN:
Term loans are a lump-sum payment with payback over a specified period of time.
They may be used to finance equipment, a change in ownership, a new business
acquisition or other long-term needs of a company. The period of loan vary from 3
to 7 years.
There are many issues in providing a term loan. Some of the main issues are:
Check whether the purpose of loan is valid or not. The unit should
undertake detailed market study. The demand & supply gap of the product
should be assessed. For example if the loan is being taken for new machinery,
check whether there is any need for new machinery in the factory. Purpose of
loan can be:
o Land
o Building
o Plant and machinery
o Term loan for working capital etc.
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Verify the cost of project. Check the estimated cost given for the project. It
should not be overstated. For example:
o If loan is taken for machinery then verify its price from market or other
similar firms.
o If loan is demanded for buying land then check if the area of land
should be optimum.
o If loan is demanded for building then verify that the width, length and
structure proposed should be optimum.
Check all means of finance. It is useful to check how a borrower can finance
its project since bank does not provide 100% finance. Means of finance can
be:
o Bank term loans
o Capital withdrawal
o Unsecured loan
o Internal accruals
Calculations shall be based upon future projections and estimates given
by party in their project reports. Examine balance sheets, profit sales and
profit (audited, estimated and projected) to find out amount of loan, tenure,
margin, interest rate etc.
DSCR: DSCR for each year should not be less than 1.35. Average
DSCR for all years should not be less than 1.50
If all the conditions are favorable, loan is issued.
51
DOCUMENTS AND FORMALITIES
Once the credit limit is sanctioned main documents are obtained from the client
concerned. The nature of documents varies depending upon the type of facility
sanctioned and terms of sanction. Some of the main documents are:
Loan agreement conveying in terms and conditions of loan.
A comprehensive credit agreement.
Agreement of hypothecation of book debts and stocks.
Pledge letters of agreement in respect of documents of title to goods covering
credit limits.
Corporate and personal guarantee.
Documents conveying equitable mortgage on primary security i.e. fixed assets
pertaining to the project and on the additional security (collateral)
Personal guarantee of the borrower and guarantor (if any)
NON PERFORMING ASSET:
Non Performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by
RBI.
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for
identification of NPAs, from the year ending March 31, 2004.
52
A Non performing asset (NPA) shall be an advance where
Interest and /or installment of principal remain overdue for a period of more
than 90 days in respect of a Term Loan,
The account remains 'out of order' for a period of more than 90 days, in
respect of an overdraft/ cash Credit(OD/CC)
DETAILS OF WORK DONE
Major work assigned was renewing the working capital loan limit of various SMEs
according to mentioned procedure. I also learnt method for calculation of drawing
power and term loan assessment.
MAJOR LEARNING
Breakup and analysis of balance sheet by calculating various financial ratios.
Finding the appropriate loan amount and rate applicable.
CONSTRAINTS FACED
No data of any company can be disclosed.
53
FINDINGS AND CONCLUSION
CREDIT APPRAISAL OF XYZ PVT LTD FOR WORKING
CAPITAL
The management has been in this field for the last 12 years and dealing with
bank from past 7 years.
There are charges of Rs.100.00lac in favor of SIDBI. Term Loan is availed for
purchasing plant & machinery.
Balance sheet break up of last three years has been taken into consideration.
A copy of the contents of process note,made while issuing a loan, is shown in
annexure II
Credit rating: CR 4
We observe that the capital has been static for the last several years but now
the Company has increased the paid up capital to Rs.10.00 lac as of 31.03.09
and proposes to continue this level in the current & next fiscal.
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)0.00
2.00
4.00
6.00
8.00
10.00
12.00
Paid up capital
Paid up capital
54
The general reserves are also increasing by retaining the net profit in the
system. They have increased to 45 lacs as compared to 18 lacs previous year.
General reserves have increased by 150%.
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)0.005.00
10.0015.0020.0025.0030.0035.0040.0045.0050.00
General Reserves
General Reserves
The Company has informed that they have increased the unsecured loans from
Rs.9.ac [31.3.08] to Rs.23lac [31.03.09], i.e., 155.55%.
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)0.00
5.00
10.00
15.00
20.00
25.00
Loans from Friends / Relatives
Loans from Friends / Rela-tives
55
Share application money has reduced from Rs.24.7lac [31.3.08] to Rs.22.5 lac
[31.03.09], i.e., 8.9%.
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)0.00
5.00
10.00
15.00
20.00
25.00
30.00
Share Application
Share Application
Long term liabilities have increased to Rs. 168.33lacs from 39.5lacS, i.e.,
326.15%.
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
TOTAL LONG TERM LIABILITIES
TOTAL LONG TERM LIABIL-ITIES
56
Fixed assets have also increased tremendously to Rs.301.32 lacs as compared
to Rs. 76.68 lac last year, i.e., 292.95%.
31.3.07 (Aud) 31.3.08(Aud) 31.3.09(Aud)0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
TOTAL FIXED ASSETS
TOTAL FIXED ASSETS
We observe that the sales are showing increasing trend.
Current ratio has been above the benchmark (1.57) against 1.03 of last fiscal
year. This is due to decrease in current liabilities.
DER is under the required limit (3.08) which is due to increase in Tangible
Net Worth of the company. TNW has increased around 2 times as compared
to last year.
We may say that financial position of the Company has been improving and it
must be maintained as projected by the Company.
Company has negative NWC (Net Working Capital) due to increase in total
fixed assets.
57
Method used for finding out the cash credit limit is turnover method:
Figs. In lacs
A TOTAL SALES 250
B 25% OFF TURNOVER [OF “A”] [WCG] 62.5
C MARGIN AT 5% OF TURNOVER [OF “A”] 12.5
D LIMIT PERMISIBLE 20% OF “A” [B –C] 50
Hence the amount of loan sanctioned is Rs 50lac.
SUGGESTIONS AND RECOMMENDATIONS
Perhaps key steps needed to be taken include:
Bank should launch more schemes for different sections in SME sector.
Promote measures to accelerate the opening–up of SME sector to the
globalised (WTO) environment.
To integrate economic development of the Indian Small industry with the
global economy in a truly multilateral trade regime.
ANNEXURES
58
ANNEXTURE I
UNION BANK OF INDIA
BREAK UP OF BALANCE SHEET
ACCOUNT : XYZ PVT. LTD.
BRANCH : SSI, OKHLA, NEW DELHI
(Rs. In Lacs)
Year Ending31.3.07 (Aud)
31.3.08(Aud)
31.3.09(Aud)
A)CURRENT ASSETS
1Cash & Bank Balance 1.40 1.00 0.70
2Investments
a) Govt./Other Trustee Securities 0
b) Fixed Deposits with banks/ MMMF/ 0.00
CPS/CDS etc
3Receivables 0.00 0.00 0.00
a) Inland upto 6 months
b) Exports 0.00
4Inventory 0.20 0.30 0.50
a) Raw Materials 0.20 0.30 0.5
- Indigenous 0.00
- Imported
b) Stores & Spares
- Indigenous
- Imported
59
c) Stock-in-Process
d) Finished Goods
e) Others (Scrap)
5Deferred Receivables (due within one year)
6Advances to Suppliers of Raw Materials / 11.00 45.00 30
Stores/ Spares
7Advance Tax Payment
8sundry debtors 39.17 59.73 76.51
9Other Current Assets 0.00
10Advance to staff 0.00
TOTAL CURRENT ASSETS 51.77 106.03 107.71
B)CURRENT LIABILITIES
1Short Term borrowings from bank 0.00
2Unsecured Borrowings (include. ICDS etc.) 0
3Sundry Creditors 32.00 63.00 40.00
4Sundry Creditors for Expenses/Others
5Advances / Progress payment from 5.50 0.00 11
Customers / Dep. from Dealers
6Dividend papyable including D tax
7Deposits maturing within 1 year
8Instalments of TL/DPG/Deb./R.P.Share 1.3
/ECB/ADR/GDR due within one year
9Int. & Other charges accrued but not due
for payment.
10Provision for Taxation 2.16 1.74 1.22
60
11Provision for Bonus
12Other Statutory Liabilities
13Other Current Liabilities / Provisions 26.90 38.20 15
TOTAL CURRENT LIABILITIES 66.56 102.94 68.52
C)FIXED ASSETS (Net of Depreciation)
1
Land & Building 15.00 13.90 165.52
Plant & Machinery 48.50 52.96 119.563
Other Fixed Assets ( Inc.vehicle) 6.80 9.50 15.64
Furniture & Fixture 0.21 0.32 0.665
Capital Work in Progress
(-) Revaluation Reserve
TOTAL FIXED ASSETS 70.51 76.68 301.32
D)
LONG TERM LIABILITIES 1
Debentures 2
loan from ICICI bank 8.00 6.00 23
Term Deposits 4
Term Loans UBI Bank a/c no: 11.00 22.00 405
SIDBI 1006
Car Loan 1.50 2.50 3.337
Loans from Friends / Relatives 6.00 9.00 23.008
Other Term Liabilities (include. ECB/
ADR/GDR/FCNR(B) Loans etc.)
TOTAL LONG TERM LIABILITIES 26.50 39.50 168.33
61
E)MISCELLANEOUS ASSETS
1Investments 0
2Amounts due from Associates/ Subsidiaries
4HousingLoan
5FDR 5.00 5.00 5.00
6EMD 1.10 2.30 2.5
7Adv. to Suppliers of Capital Goods
8Deferred receivables
9Security Deposits 1.80 1.80 1.76
10Book Debts Older than 6 Months 0
11Other Miscellaneous Assets/ ICD etc.
TOTAL MISCELLANEOUS ASSETS 7.90 9.10 9.26
F)NET WORTH
1Paid up capital 1.00 1.00 10.00
2General Reserves 14.00 18.00 45
3Premium 0
4Share Application 10.00 24.70 22.5
5Revaluation reserves
6Deferred tax liabilities
7Other Reserves[Excl. Provisions]
8Balance of Profit
TOTAL NET WORTH 25.00 43.70 77.50
G)INTANGIBLE ASSETS
62
1Goodwill
2Premilinary expanses 1.23 1.67 0.52
3Other Intangible Assets
TOTAL INTANGIBLE ASSETS 1.23 1.67 0.52
TOTAL ASSETS 131.41 193.48 418.81
TOTAL LIABILITIES 118.06 186.14 314.35
Net working capital[CA-CL] -14.79 3.09 39.19
Net working capital[LTL-LTA] -28.14 -4.25 -65.27
Year Ending31.3.07 (Aud.)
31.3.08(Aud)
31.3.09(Aud)
Paid up Capital 1.00 1.00 10.00Reserves & Surpluses 24.00 42.70 67.50Intangible Assets 1.23 1.67 0.52Tangible Net Worth 23.77 42.03 76.98Long Term Liabilities 26.50 39.50 168.33Capital Employed 50.27 81.53 245.31Net Block 70.51 76.68 301.32Investments 0.00 0.00 0.00Other Non Current Assets 7.90 9.10 9.26Net Working Capital -28.14 -4.25 -65.27Current Assets 51.77 106.03 107.71Current Liabilities 66.56 102.94 68.52Current Ratio 0.78 1.03 1.57DER (TOL/TNW) 3.92 3.39 3.08 SALES & JOB WORK 220.00 240.00 250.00 - Domestic[net of excise] 220.00 240.00 250 - Exports 0
63
Less: Excise Duty 0.00 0.00 0Net Sales 220.00 240.00 250.00Other Income 0.00Net Profit After Tax 4.00 4.60 7.7Depreciation 10.00 12.00 24.00Cash Accruals 14.00 16.60 31.70D.S.C.R. %age of Net Profit to Sales 1.82 1.92 3.08ROCE 7.96 5.64 3.14
FLEXIBLE BANK FINANCE
XYZ PVT.
LTD.31.3.07 (Aud.)
31.3.08(Aud)
31.3.09 (Aud.)
1Total Current Assets 51.77 106.03 107.71
2
Less : Current Liabilities (Other than Bank Borrowing) 66.56 102.94 68.52
3Working Capital Gap -14.79 3.09 39.19
4
Actual / Projected Net Working Capital -28.14 -4.25 -65.27
5Flexible Bank Finance (3-4) 13.35 7.34 104.46
6 Net Sales 220.00 240.00 250.00
7NWC to TCA (%) -54.36 -4.01 -60.60
8FBF to TCA (%) 25.79 6.92 96.98
64
9
Sundry Creditors to TCA (%) 61.81 59.42 37.14
10
Sundry Creditors to TCL (%) 48.08 61.20 58.38
INVENTORY & RECEIVABLE NORMS
Particulars
31.3.06 (Aud.) 31.3.07(AUD) 31.3.08 (Aud.)
Raw Materials - Indigenous 0.00 0.00 0.00
(Months’ Consumption) 0.00
Receivables - Exports 0.00 0.00 0.00
(Months’ Sales)0.00
Other Current Assets
51.57 105.73 0.00
(Rupees In Lacs)
0.00
Sundry Creditors
32.00 63.00 0.00
(Months’ Purchases)
0.00 0.00
RM Consumption – Imported
0.00 0.00
RM Consumption - Indigenous
0.00 0.00
Cost of Production
0.00 0.00
65
Cost of Sales 0.00 0.00
Sales - Domestic
0.00 0.00
Sales - Export 0.00 0.00
Purchases 0.00 0.00
ANNEXURE II
UNION BANK OF INDIASSI, OKHLA Branch/NRO Delhi /NZ
EXECUTIVE SUMMARY TO THE COMPETENT AUTHORITY
FOR APPROVAL
66
PROPOSAL FOR: RENEWAL OF WORKING CAPITAL LIMITProcess Note No: Dated: TO: The Chief Manager,SSI okhla Branch, New Delhi
Group NABanking UNION BANK OF INDIAMonth of reviewAssets ClassificationInternal credit ratingStatus of account[Please Tick appropriate box]
Regular
Early Alert System
Special Mention Account
1. a) Name of the Account : b) Branch / Zone : c) Date of incorporation:
2. Constitution : 3. Address-
Regd./Admn. Office : Unit/Works :
4 Names of directors : Names of directors Means as per CR dt.
5. Background of Promoters/Directors :
.
. Capital structure : Name of share Holders Share capital Share Total
67
premium Amount
7. In case of partnership firms Indicate capital contributed By each partner separately :
8. Line of activity : 9. Sector/BSR Code : 10. Comments on latest Credit/
Search report : 11. Whether a/c is taken over / to be
Takenover. If so norms for Take over are fulfilled :.
12. a) Dealing with bank since : b) Credit facilities since13. Total indebtedness : [Rs. in lacs]
Fund Based Non-Fund Based
Total
Existing
Proposed
Existing
Proposed
Existing
Proposed
OUR BANK Working
Capital Car loan-I
Car Loan-II
SOD Limit Sub Total
68
Other Banks Working
Capital T.l.. / D.P.G.l..
Sub TotalFin. Institutions (SIDBI) Working
Capital T.l.. / D.P.G.l.. Term Loan -I Term Loan -II
Sub totalTOTAL
14. Financial Indicators : [Amount in Rs.lac]
Year Ending31.3.07 (Aud.)
31.3.08(Aud.)
31.3.09(Aud.)
Paid up Capital Reserves & Surpluses Intangible AssetsTangible Net WorthLong Term LiabilitiesCapital Employed Net Block Investments Other Non Current AssetsNet Working CapitalCurrent AssetsCurrent LiabilitiesCurrent RatioDER (TOL/TNW) SALES & JOB WORK
69
- Domestic[net of excise] - Exports Less: Excise DutyNet Sales Other IncomeNet Profit After TaxDepreciation Cash AccrualsD.S.C.R.%age of Net Profit to Sales
[i] COMMENTS FINANCIAL INDICATORS:
[ii] Audit notes in balance sheet if any, to be specified :
Evaluation of Management :
Evaluation of Industry :
16. Evaluation of business risk:
17. [A] CONDUCT OF ACCOUNT[i] Regularity in submission of:
Stock /BD statements : MSOD :
Financial statements : CMA Data :
17.[B] Comments on Operations / Overdues:
Turnover in A/c is commensurate with the limits:
Frequent excesses are given: Cheques are returned frequently:
70
18. COMPLIANCE TO TERMS OF SANCTION:A: Completion of mortgage formalities :
B: Registration of charges with RoC :
C: Whether Documents valid and in force :
D: Compliance of RBI guidelines :
19[a] Dates of Inspection during the yearDate of inspection Irregularity Action taken
19[b](i) Nature and Value of collateral securityProperty detail
Value in Rs.Lac
Dt. Of valuation along with name of valuer
InsuranceAmount & date of expiry
Remarks
Second charge on the factory land & building at 203-204 DSIDC Shed, Okhla Industrial Area, Phase-I, New Delhi and plant & machinery installed there in with SIDBI.
19. [b](ii) Personal Guarantee:Names of guarantors (directors in their
personal capacity)Means as per CR dt. 20.03.09
20[a] Whether the name of the Company/Directors figure in RBI Defaulters’/caution List/ Willful defaulters/ECGC. If yes please furnish data:
20[b] Whether Director/Partner/Proprietor is a Director in our /other bank or
71
is related to them. If yes : 20[c]: Any litigation in force against the firm/Company or against Partners/ Directors. If so mention detail and present position:
21. Audit Observation :
22(a) Any other feature observed in the monitoring report :
23. [b] Conduct of account & Exposure Details from our bank:[Rs. In lac]
OUR BANKLimit
sExisti
ng
LimitsRecommendedBy branch
D.P. O/s as on
14.03.09
Value of Security[14.03.09
]
Irregularities, if any
A] NON FUND BASED LIMITS
SUB LIMIT [A]
B] FUND BASED LIMITSCC(H)SOD[Deposits]
SUB-LIMIT [B]
C] TERM LOAN Car Loan-ICar Loan-II
SUB-LIMIT [C]
GRAND
72
TOTAL[A+B+C]
23[a] Details of excesses allowed during the year:
No. Occassions excesses allowed Maximum excesses allowed
23[b] Other exposure, if any, including investments:
23[c] Other liabilities of partners/directors[in their individual capacity]:
24 [a] Conduct of Account and Exposure Details from Banking system[incl. our Bank]
Fund Based Non Fund Based% Share
Sanctioned Amount
% Share
Amount
1 Union Bank of India
25-a. Operational Experience with regard to Sister/Allied Concern: Name of the concern
Branch
CoA Contingent
Working Capital
Term Loan
Investments
Present irregularity,If any
26. COMMENTS ON ASSESSMENT OF LIMITS [a] Projected level of sales :
[b] Comments on inventory /receivables :
Particulars
31.3.06
(Aud.)31.3.07 (AUD)
31.3.08 (Aud.)
31.3.09 (Est)
31.3.10
[Proj.]Raw Materials –
73
Indigenous(Months’ Consumption)Raw Materials – Imported(Months’ Consumption)Stock in process(Months' cost of production)Finished goods(Months' cost of sales)Receivables (Months’ Sales)Other Current Assets (Rupees In Lacs)Sundry Creditors(Months’ Purchases)
[c] Working capital assessment :
31.3.07 (Aud.) 31.3.08(AUD)
31.3.09
(AUD.)
1Total Current
Assets
2
Less : Current Liabilities
(Other than Bank Borrowing)
3Working Capital
Gap
4Actual / Projected
Net Working Capital
5Flexible Bank Finance (3-4)
6 Net Sales7 NWC to TCA (%)
74
8 FBF to TCA (%)
9Sundry Creditors
to TCA (%)
10Sundry Creditors
to TCL (%).[e] Assessment of Non-Fund-Based Limits : [f] Consortium Arrangement :[g]Any other matter :
27. CREDIT RATING: Particulars Max. Marks Scored
I Rating of borrowerII Rating of facilityIII Risk mitigatorsIV Business aspects
Sub totalEquivalent marks=
Indicate products / services proposed to be marketed to customer:
29. RECOMMENDATIONS:[covering risk factors & justification for sanction][a] Justification:
[b] Special limits to tide over the contingencies: Whether the borrower was used to & justified in obtaining additional /
temporary / adhoc sanction at Branch level for meeting mismatches in funds flow on sudden requirement.
Whether need for such special limit still continues, if yes, the amount and justification
If, such special limit is not found necessary-‘Nil’ should be reported:
[c] RECOMMENDATIONS [Rs. in Lac]
AMOUNT Margin
Interest Prime SecurityExisting
Proposed
75
CC(Hyp)W/wCC(BD)SOD
Terms & conditions:
Senior Manager
SANCTIONED / DECLINED
CHIEF MANAGER
76
BIBLIOGRAPHY
Union Bank Of India Manuals And Policies
I M Pandey, Financial Management, Working Capital Management, Pg: 577-
590
Ambrish Gupta, Financial Accounting for Management, Pg: 616-625
http://www.dcmsme.gov.in
http://www.and.nic.in/C_charter/indust/msmeact2006.pdf
http://msmehyd.ap.nic.in/MSME/SalientFeaturesMSMEDAct.pdf
http://msme.gov.in/AR-2008-09-Englishindex.pdf?
GXHC_gx_session_id_=a8ef968a8d1886d1&
http://www.icai.org/resource_file/9964243-249.pdf
77
