Sanket Su Mmer Final

Credit Appraisal & Trade Finance At Union Bank of India
Chapter
EXECUTIVE SUMMARY
Union Bank of India has seen a phenomenal increase in their deposits and advances over the years. This report highlights various norms and policies followed by the bank before granting bank finance and monitoring of account and also a study of banks credit Loan Policy, Branch Banking and Forex Department at Kalbadevi Branch. The project has been divided into two parts. Initial chapters of the project are concerned general concept and fundamental principles of Credit Appraisal of proposals and the later part deals with concept and mechanism of Trade Finance.
The method of study was fully based on the secondary sources of data and the various information provided by the staff members in Union Bank of India, Kalbadevi Branch
Banks provides various services to the importer and exporter for carrying out International Trade. The report mentions the functioning of Forex Department and how the various departments under Forex are inter-linked. Offering credit is an operation fraught with risk. Before offering credit to an organization, its financial health must be analyzed. Based on the financial health of an organization, banks assign credit ratings. These credit ratings are used to fix the interest rate and quantum of installment.
This study aims to analyze the credit health of organizations that approach Union Bank of India for credit facilities. After analyzing credit health, the credit rating is determined. On the basis of credit rating, the interest rate guidelines circular is consulted to fix a price for the credit facilities i.e. determine the interest rate.
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Also, lending continues to be a primary function in banking. In the liberalized Indian economy, clientele have a wide choice. External Commercial Borrowings and the domestic capital markets compete with banks. In another dimension, retail lending- both personal advances and SME advances- competes with corporate lending for funds and for human resources. But lending by nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be competitive without compromising on the basic integrity of lending. The quality of the Banks credit portfolio has a direct and deep impact on the Banks profitability. This study has been conducted with the purpose of getting in-depth knowledge about the credit appraisal procedure and trade finance in the organization.
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Chapter
INDUSTRY PROFILE
THE INDIAN BANKING INDUSTRY The last decade has seen many positive developments in the Indian banking sector. The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 are estimated at Rs 40, 90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.
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Credit Appraisal & Trade Finance At Union Bank of India Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect Mergers &Acquisitions, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
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Chapter
COMPANY PROFILE
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 travelled the arduous road to successful banking........ A journey that spans 88 years. We at Union Bank of India, reiterate the objective of our inception to the profound thoughts of the great Mahatma... "We should have the ability to carry on a big bank, to manage efficiently crores of rupees in the course of our national activities. Though we have not many banks among us, it does not follow that we are not capable of efficiently managing crores and tens of crores of rupees." Union Bank of India is firmly committed to consolidating and maintaining its identity as a leading, innovative commercial Bank, with a proactive approach to the changing needs of the society. This has resulted in a wide gamut of products and services, made available to its valuable clientele in catering to the smallest of their needs. Today, with its efficient, value-added services, sustained growth, consistent profitability and development of new technologies, Union Bank has ensured complete customer delight, living up to its image of, GOOD PEOPLE TO BANK WITH. Anticipative banking- the ability to gauge the customer's needs well ahead of real-time forms the vital ingredient in value-based services to effectively reduce the gap between expectations and deliverables. No wonder, Union Bank's unique family of about 26,000 qualified / skilled employees is and ever will be dedicated and delighted to serve the discerning customer with professionalism and wholeheartedness.
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Union Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Follow on Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held by Institutions, Individuals and Others. Over the years, the Bank has earned the reputation of being a techno-savvy and is a front runner among public sector banks in modern-day banking trends. It is one of the pioneer public sector banks, which launched Core Banking Solution in 2002. Under this solution umbrella, All Branches of the Bank have been 1135 networked ATMs, with online Tele-banking facility made available to all its Core Banking Customers - individual as well as corporate. In addition to this, the versatile Internet Banking provides extensive information pertaining to accounts and facets of banking. Regular banking services apart, the customer can also avail of a variety of other valueadded services like Cash Management Service, Insurance, Mutual Funds and Demat. The Bank will ever strive in its endeavor to provide services to its customer and enhance its businesses thereby fulfilling its vision of becoming THE BANK OF FIRST CHOICE IN OUR CHOSEN AREA BY BUILDING BENEFICIAL AND LASTING RELATIONSHIP WITH CUSTOMERS THROUGH A PROCESS OF CONTINUOUS IMPROVEMENT.
Union Bank of India is the fifth largest nationalized bank, serving the varied needs of over 29.5 million customers through a pan-India network of over 3000 branches. At the end of March 2011, the Bank had a total business mix of Rs 3, 55,483 crore, with deposits of Rs 2, 02,461 crore and advances of Rs 1, 53,022 crore. The capital adequacy ratio for the Bank stood at 12.59% at the end of March 2011. Union Bank of India is firmly committed to consolidating and maintaining its identity as a leading, innovative commercial Bank, with a proactive approach to the changing needs of the society. This has resulted in a wide gamut of products and services, made available to its valuable clientele in catering to their smallest needs.
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Credit Appraisal & Trade Finance At 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 sizeable markets 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.
Overview on banks deposits and advances (Rs. in crores) Items Deposits 2005-06 74094 2006-07 85180 28173 63658 2007-08 103859 34061 75878 2008-09 138703 43194 98265 2009-10 170040 54483 121249 2010-11 202461 58399 153022
Investments 26010 Advances 54644
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Credit Appraisal & Trade Finance At Union Bank of India SUMMARIZED BALANCE SHEET (Rs. In Lakhs) Particulars Capital Reserves & Surplus Deposits Borrowings Other Liabilities and Provisions TOTAL LIABILITIES Cash and Balances with Reserve Bank of India Balances with Banks and Money at Call and Short Notice Investments Advances Fixed Assets Other Assets TOTAL ASSETS
Mar'10 50512 991866 17003974 921531 548301 19516184 1246824 330845 5440353 11931529 230544 336089 19516184
Mar'11 63533 1212919 20246129 1331597 744267 23598445 1761045 248799 5839914 15098608 229279 336089 23598445
Looking forward Union Bank of India is well positioned to expand its customer base and grow business at healthy margins. The two initiatives that they started in the year 2010-11 are likely to help the business in coming years. The first is objective of becoming the No.1 Retail Bank in Customer Service Excellence. In this, we are building a new model, called Branch of the Future that will enhance our customer service capabilities to leverage higher wallet share of customers. This strategy will help in building our retail asset and liabilities profile. Along with plans for expanding alternative channels, this project will help in differentiating Union Bank of India from others. Secondly, revamping the system of Human Resource Management in the Bank, with primary focus on building specialized skills and developing leadership chain. These initiatives will not only start showing results in the current year but also prepare Union Bank for a higher trajectory of growth. They are focused on developing capabilities for becoming the preferred banker to the NextGen customers and new Bankable class. They believe that the current fiscal, FY12 would be a better year for the Bank compared to FY11. Page 8
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Chapter
ART OF LENDING
Credit Decision making is similar to match making. The idea is that while selecting a borrower, we should take the same degree of care as is taken by the parents while finalizing an alliance for her daughter. In selecting the borrower, we as bankers should not only satisfy that the project is viable but also that the borrower is one who can be entrusted with the banks money. Before entertaining any Credit application, we as bankers should ask ourselves following questions: 1. Who is the borrower? 2. What is the Project? 3. How bank funds are going to be repaid? 1. Who is the borrower? The most vital part of Credit analysis is identifying the right type of borrower. Borrower Existing Banker can formulate his opinion on the person based on his past records. New If the information about the persons past is missing, the banker has to make proper enquiries from all the parties related to borrower and also obtain report from the existing banker of the borrower. Here CIBIL report is of help.
It is advisable to interview the applicant, when any person requires credit. The applicant is expected to take his banker into confidence and share with him the strong points and pitfalls about his business.
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Credit Appraisal & Trade Finance At Union Bank of India Where we as bankers have belief that the borrower is holding back critical information that has vital bearing on the success of the project, it is better not to entertain credit appraisal. It is also very important to see the enthusiasm of client in maintaining relationship with the bank. The applicant is required to contribute margin towards the project out of his own resources towards the project. Quite often the capital is brought in the form of Quassi Equity i.e. by way of loans from friends and relatives. It is very important to ascertain this source of capital, who the donors are? Their relationship with the borrower, terms of repayment etc. To make sure that there will be no sudden demand for refund of amount as this is going to cause liquidity problem for the promoter/borrower. If the applicant has relationship with other banks then it is advisable to obtain a secret report from the other banks, about the track record of the borrower.
2. What is the project? The bankers are not technical people, so they prepare a project report prepared by a consultant to know about: Technical feasibility Financial Viability.
But the same project report will not guarantee the success of the project should be understood. Example: If a unit is manufacturing a particular product that is doing well in a particular area, this means that adequate infrastructure is available to support this activity and sanctioning of finance to one more unit will not entail risk provided that there is no oversupply. With integration of global economy with local economy, doors have opened up for international competition. It has become imperative for bankers to be well equipped with technology, and that full advantage of available resources is taken.
3. How the bank funds are going to be repaid? It is very important to observe elements of business that are generally overlooked by financial statements measure the credit worthiness of the applicant Sanket N. Dedhia Page 10
For Instance, If a person is earning or starts his own business and say he earns Rs. 100/-
100Rs.
60Rs.
40 Rs. Is available.
Own welfare/leisure
Does he have provision for his employees working for him? Is he having any existing debt? Will he be able to meet our commitment in spite of having existing debt? Will he be able to bear any contingency, like increase in cost? Is the borrower ready to sacrifice on way of living?
Family
Health
The most critical factor is to analyze all this, which can only happen if we as bankers step in shoes of borrower and think what all factors can affect us and then take a proper and appropriate decision.
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PRINCIPLES OF GOOD LENDING
Accepting deposits of money for the purpose of lending or investment is the main function of the banker. The success of lending depends on our judgment and skill of appraisal. It is required to be modified from time to time to suit the changing economic environment and banking habits of clientele. Nevertheless, there are principles of good lending which is time tested and would form a sound foundation of any lend proposition. 1. Safety Safety means, we as banker must feel that money lend would definitely come back. If not should not be lent for speculative or unproductive use. It should be given to right type of borrower who is competent and honest. End use of advance should be ensured. 2. Liquidity It is statutory and contractual obligation of the banker to repay deposits when demand is made as per agreed terms. This means that bank should remain adequately liquid so that a demand made at any point of time is honored. Obviously while lending banker has to take care that it is not enough that money will come back regularly, but also that the money is obtained on demand or in agreed terms of payment. 3. Purpose Purpose of loan has assumed significance in the developing bank. The purpose should be productive so that money not only remains safe but also provides a source of repayment. It should not be anti social or used for hoarding or speculation. Loans for personal expenses should be discouraged. 4. Profitability Like other commercial organization banks must make profits and remain viable units. Within the frame of statutory reserves, lending rates prescribed by RBI and targeted lending; it has been a uphill task for banks to maintain profitability.
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Credit Appraisal & Trade Finance At Union Bank of India 5. Security Security is considered as insurance or a cushion to fall back in case of emergency. There may be unexpectated hange in circumstances which may affect the safety and liquidity of advance. It is to provide against such circumstances that security is taken which can be realized and banker can reimburse himself if well calculated and almost certain source of payment fails. The merits and competence of borrowers (CAPACITY AND CAPTIAL) should be given due regarded. It should also be kept in mind that it is not very difficult for a dishonest borrower to raise money from other sources against the same security.
National objective A lending proposition, however safe and profitable may not enjoy preference if it does not fall in the priorities set by government or RBI or other social obligation. Spread/Diversification of Risk Lending is a calculated risk. It is advisable that risk is minimized in case adverse circumstances. Not all eggs to be kept in the same basket. Therefore bank should finance different types of business activities spread in different types. Post sanction supervision and control Regular follow up advances has the same importance as of sanctioning the proposal. Stock Statements, financial statements etc. should be inspected regularly. The adverse features should be noted well in time and corrective actions need to be taken. Documentation should be given due importance because minor lapses in executing documents may render them invalid in court of law.
To summarize an ideal advance is one which is granted to a reliable borrower for an approved purpose in which the borrower has adequate experience, sound knowledge and money will be repaid in reasonable amount of time from the proceeds of the project.
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Chapter
WHAT IS CREDIT APPRAISAL?
What is credit appraisal? Credit Appraisal is the process by which a lender appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. Credit appraisal process of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time, or not. Here bank has their own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. However, the borrower alone doesnt have to do all the hard work. The banks need to be cautious, lest they end up increasing their risk exposure. All banks employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers. Components of Credit Appraisal Process While assessing a customer, the bank needs to know the following information: Incomes of applicants and co-applicants, age of applicants, educational qualifications, profession, experience, additional sources of income, past loan record, family history, employer/business, security of tenure, tax history, assets of applicants and their financing pattern, recurring liabilities, other present and future liabilities and investments (if any). Out of these, the incomes of applicants are the most important criteria to understand and calculate the credit worthiness of the applicants. As stated earlier, the actual norms decided by banks differ greatly. Each has certain norms within which the customer needs to fit in to be eligible for a loan. Based on these parameters, the maximum amount of loan that the bank can sanction and the customer is eligible for is worked out. The broad tools to determine eligibility remain the same for all banks. We can tabulate all the conditions under three parameters. Parameter Technical feasibility Economic viability Bankability DOCUMENTS Field Investigation, Market value of asset LTV(Loan to Value) Past month bank statements, Asset and liabilities of the applicant
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Besides the above said process, profile of the customer is studied properly. Their CIBIL (Credit Information Bureau (India) Limited) score is checked. 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.
CREDIT
FUND BASED
NON FUND BASED
OVERDRAFT
TERM LOAN
CASH CREDIT
LETTER OF CREDIT
LETTER OF GUARANTEE
Fund Based Facility: Fund based facilities provided by the banks are basically term loan, working capital loan and the overdraft facility
Non-Fund Based Facility: Non fund based facilities provided by the banks are letter of credit and letter of Guarantee.
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1) Working Capital Loan (Fund Based) a) Overdraft 1) Bank Overdraft is a limit on borrowing on a Banks Current Account Balance. 2) It is a short term facility given to the account holder depending upon the limits decided. 3) The borrower has also to make the payment in limited period only. They are Review and Renewed within One Year. The interest portion to be recovered every month b) Cash Credit 1) Cash Credit provided against goods (paid goods), stock, Raw material, Work in Progress, Finished Goods. 2) Margin: 25% to 40% (Depending on Liquidity of Goods.) 3) Interest Charged Monthly. 4) Monthly Inspection of Goods. 5) Secured against Book Debts. 6) Monthly: Statement of Goods of Shops and Warehouse 7) Invoices to be checked. 8) List of Book Debts not above 90 days. c) Term Loan: 1) 2) 3) 4) 5) 6) 7) 8) 9) Repayable in Installments. (Monthly/Quarterly/Annually) Interest to be served monthly. Term Loan Agreement. Demand Promissory Note. Debt Balance Confirmation (every 6 months) List of Machinery (Assets) and full Insurance of all the Assets with all the clauses. Invoices of Insurances to be obtained and checked. Inter Transfer of funds to be avoided (Diversion of funds) e.g. Subsidiary firm. Cash Withdrawal from Cash Credit Account to be avoided. (Except Salary) Page 16
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Credit Appraisal & Trade Finance At Union Bank of India 10) Have check on the Kite Flying i.e. Fund movements only paper money involvement (in cheque clearing). 2) Working Capital Loan (Non Fund Based) a) Letter of Credit (LC) b) Bank Guarantee (BG) a) Letter of Credit
It is an indirect form of Financing for working capital needs as bank assumes only the risk, the credit being provided by the supplier himself. The purchaser of goods on credit obtains a Letter of Credit from a bank. The bank undertakes the responsibility to make payment to the supplier in case the buyer fails to meet the obligations
b) Bank Guarantee: Could be a finance guarantee or a performance guarantee. Under finance guarantee, the bank guarantees the beneficiary, certain amount on behalf of its customer who has commercial relationship with the beneficiary. Under performance guarantee, the bank guarantees performance of a contract or goods/services supplied under a contract by its customer. However, even in the latter case, if its customer fails to deliver, it settles the claim of the beneficiary in money terms only; the bank does not fulfill the contract obligation of its customer. Example of Finance guarantee Two parties enter into a contract. One is the supplier and the other is the buyer. The terms of supply include 25% of advance to be given by the buyer. The buyer wants assurance of supply as per the contract with the seller. Hence he insists on a bank guarantee by the sellers bank. The sellers bank gives the same against some security given by the seller. In case the seller does not fulfill the contract, the beneficiary of the guarantee lodges a claim with the guarantee-issuing bank. The bank then pays the buyer the assured sum. Example of Performance guarantee Similarly, in the case of an export contract, the foreign buyer, who is the importer, may insist upon the sellers bank issuing a performance guarantee to ensure that the seller sticks to the delivery schedule. The buyer will establish a letter of credit in favour of the seller through his bank only upon the buyers bank receiving the required performance guarantee from the sellers bank.
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Credit Appraisal & Trade Finance At Union Bank of India Lodging a claim under a guarantee with the guarantee-issuing bank by the beneficiary is known as "invocation" of a guarantee. Cancellation of a guarantee is known as "revocation" of a guarantee. Various methods for assessment of Working Capital are discussed in detail: FUND RM SIP
RECEIVABLES
FUND
1. Projected Annual Turnover Method for SME units (Nayak Committee) For SME units, which enjoy fund based working capital limits up to Rs.5 crore, the minimum working capital limit should be fixed on the basis of projected annual turnover. 25% of the output or annual turnover value should be computed as the quantum of working capital required by such unit. The unit should be required to bring in 5% of their annual turnover as margin money and the Bank shall provide 20% of the turnover as working capital finance. Nayak committee guidelines correspond to working capital limits as per the operating cycle method where the average production/ processing cycle is taken to be 3 months. Example: Anticipated Annual Output (A) Working Capital Requirement: 25% of A (B) Margin : 5% of A (C) Maximum Permissible Bank Finance (B-C) 120 30 6 24
Important clarifications: i. The assessment of WC limits should be done both as per Projected Turnover Method and Traditional Method; the higher of the two is to be sanctioned as credit limit. If the operating cycle is more than 3 months, there is no restriction on extending finance at more than 20% of the turnover provided that the borrower should bring n proportionally higher stake in relation to his requirements of bank finance. ii. While the approach of extending need based credit will be kept in mind, the financial strengths of the unit is also important, the later aspect assumes greater significance so as to Sanket N. Dedhia Page 18
Credit Appraisal & Trade Finance At Union Bank of India take care of quality of banks assets. The margin requirement, as a general rule, should not be diluted. 2. MPBF Method (Tandon and Chore Committee Recommendations) The Tandon Committee was appointed to suggest a method for assessing the working capital requirements and the quantum of bank finance. Since at that time, there was scarcity of banks resources, the Committee was also asked to suggest norms for carrying current assets in different industries so that bank finance was not drawn more than the minimum required level. The Committee was also asked to devise an information system that would provide, periodically, operational data, business forecasts, production plan and resultant credit needs of units. Chore Committee, which was appointed later, further refined the approach to working capital assessment. The MPBF method is the fall out of the recommendations made by Tandon and Chore Committee. Regarding approach to lending: the committee suggested methods for assessment of working capital requirements.
i.
First Method of lending: According to this method, Banks would finance up to a max. of 75% of the working capital gap (WCG= the total current assets - current liabilities other than bank borrowing) and the balance 25 % of the WCG considered as margin is to come out of long term source i.e. owned funds and term borrowings. This will give rise to a minimum current ratio of 1.17:1. The difference of (1.17-1) represents the borrowers margin which is popularly known as Net Working Capital (NWC) of the unit
ii.
Second Method of lending: As per the 2nd method Bank will finance maximum up to 75% of total current assets (TCA) & Borrowers has to provide a minimum of 25% of total current assets as the margin out of long term sources. This will give a minimum current ratio of 1.33:1
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Example: Current Liabilities Creditors for purchase Other current liability Bank borrowings Current assets 100 Raw material 50 Stock in process 200 Finished goods Receivables Other current assets Total Current Liabilities 350 Total Current Assets 200 20 90 50 10 370
Calculating NWC First method of lending Total CA Less: CL Bank Borrowing Second method of lending 370 Total CA 150 Less: 25% of CA 370 92
Working Capital Gap 25% of WCG from long term sources MPBF Current ratio
220
Less: CL - Bank Borrowing
150
55 165 MPBF 1.17: 1 Current ratio 128 1.33: 1
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The following steps are usually undertaken while giving a business loan (Cash Credit):
1) Customer approaches to bank. Bank checks 3 things through various ways i.e. Customers Creditability, Capacity, Commitment. 2) Customer submits the proposal. 3) Banks require various lists of documents such as r next Audited Balance Sheet and Profit and Loss Account for past 3 years, Projected Balance sheet for next 2 years, Cash Flow Statement etc. All these reports give bank and understanding regarding the companys Creditors, Debtors, Other bank exposures etc. 4) Banks ask for personal guarantees of partners if it is a partnership firm. 5) Banks get the report from CIBIL (Credit Information Bureau India Limited) to obtain the information regarding the company and its previous history. Bank has special cell for this as CID (Credit Information Department). 6) Bank to obtain the credit rating done by various Rating agencies for the project. 7) Based on the credit rating, interest rate is added to the Base Rate i.e.9.45% (decided by RBI) 8) All the documents are compiled and finally a proposal report is prepared through banks and is send for approval to the higher authority i.e AGM in our Kalbadevi Branch 9) Banks prepare a proposal document and while preparing this report bank keep continuous interaction with the customer and see exactly what other services it can provide to customer in line to the advances so that bank can earn more fee and non fee based income and satisfy the customer needs. 10) While constantly extending the facility Banks ask for CMA (Credit Monitoring Arrangement) Report from the company. The CMA report provides detailed understanding regarding the company. CMA consists of Profit and Loss Account, Balance Sheet, Working Capital Assessment and Permissible Bank Finance, Fund Flow Analysis, Calculation of Break Even Point, Sensitivity Analysis, Ratio Analysis, Debt Service Coverage Ratio, Security Coverage Ratio.
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NORMS OF LENDING Union bank has a Credit policy to serve its corporate goals. It has also changed from time to time to suit the economic environment and aspirations of people. The policy is framed on the directives of RBI. The factors such as availability of resources for deployment, safety of the funds, profitability etc. Are taken into consideration. Effort is also made to foster the culture and enhance the image of the bank. New thrust areas to be financed are mentioned separately. Having defined the overall credit policy, bank formulates various schemes for schematic lending in order to reach the targeted group of borrowers. This set of guidelines is called as norms of lending. Norms encompasses areas such as: 1. Eligibility criteria. 2. Differential rate of interest. 3. Margins. 4. Repayment schedule. 5. Inventory holdings. 6. Financial indicators. 7. Credit rating. 8. Penalties and concession. The rational of these norms is discussed in brief here under: 1. Eligibility Criteria The norms set for deciding eligibility criteria for availing bank loan are generally precautionary and differential in nature. The purpose is to identify bonafied person or corporate body. For example:
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Credit Appraisal & Trade Finance At Union Bank of India Bank may consider loan request of individuals or firms which have been registered with appropriate authorities. This helps to properly identify the body and in later date, if need be, legal recourse should be taken against them expeditiously. Organizations like CIBIL, CREDIT RATING AGENCIES etc. Are helpful here. Norms for financing sister concerns are separately mentioned to nullify possibilities of diversion of funds Norms regarding income, caste, age, sex etc. Are set to see the benefit or concession such as subsidy, concessional rates etc. Are seen and passed on to beneficiary. Certain type of industries for which financing is not allowed will be clearly mentioned inside the policy.
2. Interest Rates: Interest is the main source of income for the bank, however bank has prescribed minimum possible interest rates for loans to remain competitive and attract business. Rate of interest are also used to extend concessions to foster targeted lending . For example: Under govt. Sponsored schemes loans are extended to Students, Exporters, women entrepreneurs at a concessional rate of interest. Interest charged to sick units is concessional. If the loan is not productive rate of interest must be higher. Interest rate also depends on Credit Rating, amount of finance availed etc.
3. Margins Margins are stipulated to maintain the owners stake in the security being financed and as a cushion to fall back in cases of emergency. Margin thus depends on nature of security. For example:
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Credit Appraisal & Trade Finance At Union Bank of India If goods are perishable then margin is higher. If security has high depreciation, obsolesce, margin is higher.
4. Repayment Schedules Banks would like to recover term loans as early as possible so that funds could be recycled. However this is to be done without affecting the sustaining levels of the borrower. Banks therefore should be indicating minimum prescribed DSCR for every project. 5. Inventory holdings: To discourage the borrower from using banks money for hoarding, it is advisable not to allow bank finance against inventory which is against or beyond the normal levels. Tondon committee has done commendable work in recommending norms for holding levels. 6. Financial Indicators: The norms in this area generally relate to the financial soundness and owners stake in the business. Credit rating has now become mandatory ever since Basel 2 approach has been adopted by major banks. Many important ratios like DER, current Ratio, Sales turnover etc. are important parameters that are to be examined. To sum up we can say that norms of lending broadly indicate to a loan officer like us the minimum parameters the must fulfilled or looked into while processing the proposal. However norms could not be rigid or absolute. This could be made flexible in deserving cases. 7. Credit 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 Credit rating is done for calculating Base Rate for borrower Sanket N. Dedhia Page 24
Credit Appraisal & Trade Finance At Union Bank of India The credit rating technique used by the banks differs from bank to bank.
Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model asses various aspects of the projects and assign scores against them thereby determining the risk level involved with the project. If the loan amount exceeds 10 crores, then external credit rating of the firm is compulsory required by the bank It is divided in four sections: 1. Rating of the Borrower::
a. Financial Risk This part of credit rating model deals with assessing the financial and managerial ability of the borrower. The financial ability of the firm is derived by calculating ratios that determine the short term and long term financial position of the firm. b. Management Risk: It is It is the management of the company that acts as guiding force for the firm. The key managerial personnel should bear the capacity to bail out the company from crisis situation. In order to remain competitive it is essential to take initiatives. c. Market/Industry Risk: Company does not operate in isolation there are various market forces that acts in either favorable or unfavorable manner towards its performance. Thus the rating would not give true picture if does take market or demand situation in consideration.
2. Rating of the Facility The company can start functioning only after completing statutory obligations laid down by the governing authority. Such statutory obligation involves obtaining licenses, permits for ensuring smooth operations. Preparation and Submission of Financial Statements, Stock statements in the standard format within the given time schedule.
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Credit Appraisal & Trade Finance At Union Bank of India 3. Risk Mitigators Availability of Primary security Availability of collateral security and quality of collaterals. Available guarantee (directors/ third party). 4. Business Consideration The length of relationship with the bank enables the lender to assess the previous performance of the account holder. A good track record acts in the favour of the applicant, however a under performance make the lender more vigilant. The income value to the bank is also given due consideration (interest, commission, exchange etc).
Thus Credit Rating of the Business takes into consideration various aspects that directly or indirectly bear an effect on the performance of the business. After evaluating the risk level involved the lender bank decided on lending Interest Rate.
INVESTMENT GRADES: RISK LOWEST RISK MINIMAL RISK MODERATE RISK SATISFACTORY RISK ACCEPTABLE RISK WATCH RISK RATING CR-1 CR-2 CR-3 CR-4 CR-5 CR-6 SCORE (%) > 90 81-90 76-80 71-75 66-70 61-65
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Credit Appraisal & Trade Finance At Union Bank of India NON-INVESTMENT GRADES: RISK RISK PRONE HIGH RISK SUB STANDARD DOUBTFUL LOSS RATING CR-7 CR-8 CR-9 CR-10 CR-11 SCORE (%) 56-60 60 AND BELOW DEFAULT NPA -
In UBI, a business receiving Credit Rating above level 6 are not considered good from point of investment and thus are avoided.
For instance., Interest Rates for Small Scale Industries (Loan 25 Lakh & Above)
CREDIT RATING CR-1 CR-2 CR-3 CR-4 CR-5 CR-6 WORKING CAPITAL Base Rate + 3.50% Base Rate +3.75% Base Rate +4.00% Base Rate + 4.50% Base Rate + 4.75% Base Rate +5.50% CREDIT RATING CR-7 CR-8 CR-9 WORKING CAPITAL Base Rate + 6.00% Base Rate + 6.75% Base Rate + 6.75%
BASE RATE = 10.00% as on 1 st May 2011 Sanket N. Dedhia Page 27
RISKS INVOLCED IN THE CFEDIT APPRAISAL

Effectiveness of Credit Management in the bank is highlighted by the quality of its loan portfolio. Every Bank is striving hard to ensure that its credit portfolio is healthy and that Non Performing Assets are kept at lowest possible level, as both of these factors have direct impact on its profitability. In the present scenario efficient project appraisal has assumed a great importance as it can check and prevent induction of weak accounts to our loan portfolio. All possible steps need to be taken to strengthen pre sanction appraisal as always Prevention is better than Cure. With the opening up of the economy rapid changes are taking place in the technology and financial sector exposing banks to greater risks, which can be broadly classified as under: Government regulations and policies, availability of infrastructure facilities, Industry Rating, Industry Scenario & Outlook, Technology Up gradation, availability of inputs, product obsolescence, etc. Operating efficiency, competition faced from the units engaged in similar products, demand and supply position, cost of labor, cost of raw material and other inputs, pricing of product, surplus available, marketing, etc.
Industry Risks
Business Risks
Management Risks
Background, integrity and market standing/ reputation of promoters, organizational set up and management hierarchy, expertise/competence of persons holding key position in the organization, delegation and decentralization of authority, achievement of targets, track record in execution of project, debt repayment, industry relations etc. Financial strength/standing of the promoters, reliability and reasonableness of projections, past financial performance, reliability of operational data and financial ratios, adequacy of provisioning for bad debts, qualifying remarks of auditors/inspectors etc.
Financial Risks
In light of the foregoing risks, the banks appraisal methodology should keep pace with ever changing economic environment. The appraisal system aims to determine the credit needs/requirements of the borrower taking into account the financial resources of the client. The
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Credit Appraisal & Trade Finance At Union Bank of India end objective of the appraisal system is to ensure that there is no under - financing or over financing. Following are the aspects, which need to be scrutinized and analyzed while appraising: Fund-Flow Statement A fund-flow statement is often described as a Statement of Movement of Funds or where got: where gone statement. It is derived by comparing the successive balance sheets on two specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications (uses) of funds to ultimately give the position of net funds available with the business for repayment of the loans. A projected Fund Flow Statement helps in answering the under mentioned points. How much funds will be generated by internal operations/external sources? How the funds during the period are proposed to be deployed? Is the business likely to face liquidity problems?
Balance Sheet Projections The financial appraisal also includes study of projected balance sheet which gives the position of assets and liabilities of a unit at a particular future date. In other words, the statement helps to analyze as to what an enterprise owns and what it owes at a particular point of time. An appraisal of the projected balance sheet data of the unit would be concerned with whether the projections are realistic looking to various aspects relating to the same industry. Financial Ratios While analyzing the financial aspects of project, it would be advisable to analyze the important financial ratios over a period of time as it may tell us a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under:
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1. Current Ratio Current Assets / Current Liabilities It is necessary that current assets should be sufficient to meet current liabilities. Current Ratio should be at least 1.33:1 according to the bank norms.
2. Debt-Equity Ratio 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 owners 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.
3. Debt Service Coverage Ratio (PAT + Interest + Depreciation + Installment of term loam) / 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.
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In Pictorial form, the Loan Process Flow in UNION BANK OF INDIA Is As Follows:
Stage 1 Pre-Qualifying Stage 2 Application Stage 3 Processing Stage 4 Underwriting Stage 5 Closing/Renewal
>> Preliminary determination of borrowing capacity and credit history
>> Fill out loan application.
>> Credit check. (CIBIL Report) >> Appraisal of property.
>> Loan goes to for approval.
>> Signing documents drawn.
>> Gathering documents from applicant.
>> Title search.
>> Consent letter from surety.
>> Employment & residential history complied.
>> All conditions prescribed in credit policy are met.
>> Documents sent to title company.
>> Buyers bring in money and sign documents.
>> Loan is approved. >> Title company records deed.
>> Verification of financial reserves.
>> Compiling industrial visit report.
>> Buyers get keys to property.
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Documents to be obtained 1) Title Deed. 2) Search Report. 3) City Survey Extract. 4) Valuation Report (Banks Architect Approved Value). 5) Industry Report (Industrial Consultant). 6) List of Machinery obtain. 7) Insurance Cover of Property. 8) Photograph of properties and industry with machinery.
Documents required 1) Balance Sheet of 3 years. 2) Estimated and Projected Balance Sheet 3) Sales Tax Return data. 4) Income Tax Return. 5) Shop Establishment Letter. 6) License copy of area working. 7) Details of property: (Partners, Proprietor, Directors , firms etc) 10/Page 8) Technical feasibility report from consultant 9) CA Certificate. 10) Property Search Report from (CA, Advocate, Industrial consultant). Sanket N. Dedhia Page 32
Credit Appraisal & Trade Finance At Union Bank of India 10) Stock Statement and Book Debt Statement 11) List of Creditors and Debtors. 12) Agency (Letter of Agency issued by company). 13) Credit Report and Information of (Firm, Partners etc) 14) Stock Inspection done by Bank. 15) Market Inquiry. 16) Existing Bankers Report (Satisfactory).
Proposal processing 1) Credit Report. 2) Credit Investigation. 3) Bankers Report. 4) Analysis of Balance Sheet. 5) Analysis of Cash flow and Fund flow Statements. 6) Process Note. 7) Ratings 8) Recommendations. 9) Sanction Conveying to the Customer. 10) Obtain documents. 11) Due Diligence Report. 12) Competitors, Debtors, Creditors Study. 13) Limited Company Resolution (Doctrine of ultra-vires) 14) MOA, AOA, Certificate of Registration, Registrar of physical inspection. Companies--- (Charge of Bank),
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Chapter
INTRODUCTION TO FROREIGN EXCHANGE
In India any transaction, which is denominated in a currency other than rupees, is referred as foreign exchange transaction. In India international trade gives rise to Forex transaction.
MR. X NAYANS UNCLE IN USA
$1000 CHEQUE ON BIRTHDAY
NAYAN INDIA
CREDIT TO NAYAN CREDIT TO UBI
DEP WITH UBI
BANK OF AMERICA CREDITS UBI A/C AND DEBTS MR. X ACCOUNT
SENDS TO BANK OF AMERICA
Simple forex transaction: What happens is that when NAYANs deposits a foreign currency cheque with Union bank of India, bank sends it to Bank of America with whom bank has a Nostro account; Bank Of America checks the balance with Mr. X and then debits his account and credits $1000 in account of UBI, UBI then converts the foreign exchange and credits Samip account in home currency.
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Credit Appraisal & Trade Finance At Union Bank of India Indias Forex Position Receipts in Forex Current Account Transaction Visible Exports Cotton Jems and Jewellery Marine Food Agro based Products Invisible Exports Travel Services Royalties Outward Remittances Payments in Forex Current Account Transaction Visible Imports Oil and Petrol Defense Equipments Raw Materials Machinery Invisible Imports Travel Services Royalties Outward Remittances]
Capital A/C Transactions Loans Investments
Capital A/C Transactions Loans Investments
Balance of trade of a country is a difference between forex from visible exports and payments in forex towards visible imports during a particular period. Share of India in International Trade is 0.91 %. Leaders are Japan, China, US, Germany. When India exports, importers over there demand high Quality, less Time, low Price, whereas it is vice versa for exporters of our country except in quality. This entire data is called as Balance of Payment. Today out foreign reserves account for around $250 billion BOT and BOP are statistical data compiled by RBI to know its position in foreign trade and foreign exchange which in turn enables the govt. to take appropriate policy decision.
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Convertibility of rupee A currency is said to be convertible if it can be converted into any other without any restriction at a rate determined by market forces. As far as Indian rupee is concerned the present position is as under: On Current Account transaction the rupee is merely freely convertible then earlier. On Capital account transactions rupee is convertible to the extent of $2, 00,000per person per annum.
On 1.6.2000 FEMA was introduced and FERA was repelled
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In 1973 FERA was introduced
To increase $ assets in India
And to Control and monitor all forex transaction
RBI allowed Banks to become
Authorized Dealers ADs.

Offence was criminal and jail was result Was repelled in 2001
FERA was a draconian act
FEMA was introduced
Administered by GOI
Administered by RBI, for managing forex reserves judiciously
Offence was Criminal
Offence is Civil and result financial penalty
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TRADE CONTROL REGULATION
EXCHANGE CONTROL REGULATION
MOMENT OF GOODS
MOMENT OF FUNDS
CTRL BY MINISTRY OF COMMERCE MINISTRY OF FINANCE
DGFT
POWERS TO
RBI
FOREIGN TRADE PUB.
PUBLICATION
EXCHG CONTROL MANUAL
NEG. LIST OF IMPORTS
BANNED
RESTRICTED
CANALISED
Eg: ARMS
YOU SHOULD HAVE IMPORT LISCENCE
IMPORTED ONLY THROUGH AGENCIES EG. MMTC ,ONGC
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Credit Appraisal & Trade Finance At Union Bank of India Foreign Exchange Dealer's Association of India (FEDAI) was set up in 1958 as an Association of banks dealing in foreign exchange in India (typically called Authorized Dealers - ADs) as a self regulatory body. It's major activities include framing of rules governing the conduct of inter-bank foreign exchange business among banks vis--vis public and liaison with RBI for reforms and development of forex market. Presently some of the functions are as follows:

Guidelines and Rules for Forex Business. Training of Bank Personnel in the areas of Foreign Exchange Business. Accreditation of Forex Brokers Advising/Assisting member banks in settling issues/matters in their dealings. Represent member banks on Government/Reserve Bank of India/Other Bodies. Announcement of daily and periodical rates to member banks.
FEDAI which is a company registered under Section 25 of the companies Act, 1956 has subscribed to the Uniform customs and practice for documentary credits (UCPDC), Uniform rules for collections (URC) & Uniform rules for bank to bank reimbursement.
UCPDC Provisions Uniform Customs and Practice for Documentary Credits (UCPDC) is a set of standard rules governing Letters of Credit, clarified by International Chamber of Commerce (ICC). The current set of rules has been published by ICC in its brochure no. 500 and has become effective from 1 st January, 1994. Brochure no. 600 is being introduced with effect from 1st July, 2007. UCPDC is a document of worldwide importance which is universally recognized by over 165 countries. India has also accepted to adhere to the rules of UCPDC. Hence, all banks in India have to issue and Sanket N. Dedhia Page 39
Credit Appraisal & Trade Finance At Union Bank of India operate the credits subject to the rules of UCPDC-500 and UCPDC-600 and have to incorporate the clause in their credit the same are subject to the respective UCPDC rules. The bank should make payment for the documents received under the Letter of Credit within seven banking days, following the day of receipt of the documents, provided the documents received are in accordance with the terms of the credit established by it.
Export Credit Guarantee Corporation of India Limited (ECGC): It was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, and Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community.ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports.
Role of ECGC in Exports: ECGC offers insurance protection to exporters against payment risks Provides guidance in export-related activities Makes available information on different countries with its own credit ratings Makes it easy to obtain export finance from banks/financial institutions Assists exporters in recovering bad debts Provides information on credit-worthiness of overseas buyers
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Credit Appraisal & Trade Finance At Union Bank of India DGFT India: DGFT is responsible for implementing the Foreign Trade Policy or Exim Policy with the main objective of promoting Indian exports. DGFT or Directorate General of Foreign Trade is a government organization in India responsible for the formulation of EXIM guidelines. Functions of DGFT To implement the Exim Policy or Foreign Trade Policy of India by introducing various schemes and guidelines through its network of DGFT regional offices through-out the country. DGFT perform its functions in coordination with state governments and all the other departments of Ministry of Commerce and Industry, Government of India. To Grant Exporter Importer Code Number to Indian Exporter and Importers. IEC Number is a unique 10 digit code required by the traders or manufacturers for the purpose of import and export in India. DGFT IEC Codes are mandatory for carrying out import export trade operations and enable companies to acquire benefits on their imports/exports, Indian customs etc in India. DGFT permits or regulate Transit of Goods from India or to countries adjacent to India in accordance with the bilateral treaties between India and other countries. To promote trade with neighboring countries. To grant the permission of free export in Export Policy Schedule 2.
Apart from the above, DGFT also acts as a trade facilitator. It also deals with the quality complaints of the foreign buyers. Officials DGFT works in close coordination with other related economic offices like Customs Commission rates, Central Excise authorities, DRI authorities and Enforcement Directorate.
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Credit Appraisal & Trade Finance At Union Bank of India Foreign Exchange Transaction involves: 1. Transfer of funds 2. Conversion of salaries
Banks in India maintain foreign currency A/C with banks abroad. For example Union Bank of India holds an account with Bank of America in US $. From UBIs point of view this account is called as NOSTRO ACCOUNT (our account with you) where as from Bank Of Americas point of view it is called VOSTRO ACCOUNT ( your account with us). Simultaneously banks in India in their own books maintain dummy ledger in the name of foreign bank for the purpose of double entry book keeping and reconciliation. Funds transfer from one country to another takes place by passing book keeping entries Dr. and Cr. Through accounts maintained by banks in India. Instruments used in Funds Transfer 1. Cash 2. Cheques 3. RTGS/NEFT. 4. SWIFT for documentary transfer.
In India banks deal in foreign currency to make profit. They buy and sell various foreign currencies and hence must determine buying and selling rate for each foreign currency. In any forex transaction in India whether it is of buying type or selling type will be decided from banks point of view and not from point of view of customer. Transaction in which bank receives foreign currency is call as buying rate and transaction in which bank gives foreign currency is called as selling rate.
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Chapter
WHAT IS TRADE FINANCE?
TRADE FINANCE
Funds/money Activity
Exchange of goods between exporter & importer
Transfer of funds from one country to other
Exchange Earners Foreign Currency Account (EEFC)

The Reserve Bank India has given general permission to all Authorized Dealers to open Exchange Earners Foreign Currency accounts in form of a non-interest bearing current account in the name of the exporters and other recipients of foreign exchange, by way of inward remittances. The account holder is permitted to credit up to 100% or 50% of the export proceeds to this account. EEFC account can be opened by the following type of persons (individuals, firms, companies etc.) resident in India There is no restriction on withdrawal in rupees of funds held in EEFC a/c. However amount once withdrawn will not be eligible for conversion into foreign currency & credit into account. RBI has permitted banks to open EEFC Account in any permitted currency. However many banks for operational convenience, have permitted their branches to open accounts only in four major currencies, namely, USD, GBP, JPY & EURO.
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In a trade transaction:
SHIIPING CO. IN INDIA
SHIPING CO. USA
4.) GOODS
3.) BILL OF
LADING B/L
2.) GOODS
12.) GOODS 11.) B/L

AND DOCS 1.) CONTRACT FOR A00 SCOOTERS
FOR $100,000 BAJAJ EXPORTER INDIA FORD IMPORTER USA
5.)
DOCS TO BANK
8.) MAKES 10.) PAYMENT

PAYMENT
7.)MAKE
PAYMENT AND TAKE DOCS
UNION BANK
9.) PAYMENT
CITIBANK USA
6.) DOCS TO
IMPORTES BANK FOR PAYMENT
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Export Process: 1) The contract between Importer and Exporter. 2) Importer opens L/C with Importers Bank. 3) Importer Bank sends through SWIFT the L/C to the Bank (UBI). 4) Union Bank of India will forward the document either to Exporter Bank or Exporter directly, thus acting as Advising Bank since it is a Correspondent of the Foreign Bank. 5) The L/C is authenticated and sent to the exporter with covering letter indicating Our Bank charges. 6) Exporter gets L/C and approaches to Bank for Packing Credit. Packing Credit Department: (i) Based on contract and L/C, Packing Credit can be given. (ii) Credit Department will scrutinize the client for Credit Rating and sanction The Preshipment limit. (iii) Exporter makes the payment and sends the cheques to PC. (iv) Packing Credit Department will verify the cheque and check that whether It is within limits and there is no diversion of funds. Also need to check and Verify the sign/amount and date. Thereafter the payment is being made. 7) Exporter manufactures the goods and sends it through shipments. Thereafter exporter collects the shipping document Invoice - Certificate of Origin Bills of Lading Drafts Insurance Policy and other documents as per L/C Terms
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Credit Appraisal & Trade Finance At Union Bank of India 8) The Exports documents are submitted back to Union Bank of India.
Export Collection: For Exporter the facility is provided for taking payments on due date. (i) Verification to ensure all documents as per L/C. (ii) Entry of details in the system. (iii) Covering letter is attached which includes a) All the documents list. b) Payment or Remittance details c) Nostro account no. Three sets are being made 1st is send to the Importers Bank. 2nd the Exporter and 3rd is Banks Copy.Importer Bank on receipt of documents verifies the same and gives it To Importer and collects the payment from importer. Export Negotiation: If the Exporter wants an advance against the bills, then Negotiation is done. i.e. Bills are purchased by the Bank. (i) The documents received are verified and scrutinized with a help of Process sheet. Here the documents are checked and the limit is seen, then Pre-shipment Finance is converted to Post-shipment Liability. (ii) Advance to the extent of 70 to 80% is given to the Exporter against the Documents. (iii) The documents are then sent to the Importers Bank. (iv) If the documents are non discrepant, then Importer Bank remits the amount to the Exporters Banks Nostro account.
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Credit Appraisal & Trade Finance At Union Bank of India (v) Importers Bank sends documents to Importer on which payment is made by Importer to Bank. (vi) Importer collects the goods on producing the documents. (vii) Once the payment is received in Nostro account with exporter consent bank will either buy or sell $ in order to remit the funds in Rupees. The exporter has $ Bank buys $ at bid rate and sells $ in the market. The amount received is adjusted against the advance given and balance if any is transferred to the exporter on his request.
TERMINOLOGY OF EXPORT FINANCE
INDIAN RUPEE
FOREGIN CURRENCY
PRE SHIPEMNT
POST SHIPMENT
PCFC
PRE SHIPMENT CREDIT IN FC
PSCFC
POSTSHIPMENT CREDIT IN FC
PACKING CREDIT
BILL PURCHASE
FOR: MFG RM PACKING SHIPPING
TO: FINANCE RECIVABLES AND BOOK DEBTS
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Export Procedure When an Indian exporter ships his goods to a party in another country, he needs to receive payment from the foreign buyer. The bank plays a significant role in facilitating this process. Firstly, the exporter forwards his documents to the bank. The bank then lodges the bill in the database with the relevant details, and assigns it a serial number. This serial number is based on the type of export bill it is. The bill number will be of six digits and the running number should be given to the (export) bills received for collection, purchase or negotiation. After scrutinizing the documents, the bank sends it to the foreign buyer or buyers bank, depending on the request of the exporter. If sending to a bank, then the exporter needs to include a bill of exchange in the set of documents. A bill of exchange is an instrument containing an unconditional order directing a certain person to pay a certain sum of money to the bearer of the instrument. Thus, the bill of exchange authorizes the foreign bank to collect payment from the buyer. Pre Shipment Finance Export finance may be broadly classified as pre-shipment and post-shipment finance depending upon stage at which the finance is extended. Finance extended to exporters, prior to shipment of goods is termed as pre-shipment finance while that extended after shipment of goods is termed as post-shipment finance.
Pre-shipment means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or an confirmed and irrevocable order for the export of the goods from India or any other evidence of order for export from India having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been specifically waived.
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Export Letter Of Credit Financing of exports by letter of credit is now a common practice, and several overseas correspondent banks are opening letters of credit in favor of exporters. The terms of the credit should not violate any exchange control regulations. Advising banks normally advise the exporter to seek amendments if the terms and conditions are not consistent with FEMA regulations. Further, the terms of the credit should not contradict with one another and should contain precise and unambiguous instructions.
Packing Credit Packing Credit is an advance granted to an exporters or sub-suppliers for financing for the procurement off raw materials, processing, manufacturing, packing, transporting, warehousing and shipping of goods meant for export. PC is generally granted to an exporter who has an export order or LC in his own name and will actually export the goods. However, packing credit can also be granted to supporting manufacturers or suppliers of goods who do not have export orders or LCs in their own names but are exporting through merchant exporters or export houses. The advance is granted against pledge or hypothecation of stocks to be processed / produced to execute the export order. In exceptional circumstances, where there is a need, a portion of the packing of the packing credit can be released as a clean advance for the purpose of procuring stocks based on the export order/LC. An undertaking from the borrower that the advance will be backed by security of stocks within a period not exceeding 15 days should be taken is such cases. Branches should closely monitor such clean facilities and ensure that the advance is covered by adequate stocks within 15 days.
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Credit Appraisal & Trade Finance At Union Bank of India Pre Shipment Finance in Foreign Currency Exporters can avail pre-shipment credit in foreign currency and discount the export bills in foreign currency at post shipment stage. Authorized dealers are permitted to extend pre-shipment credit in foreign currency (PCFC) to exporters for domestic and imported inputs or exported goods at LIBOR/EURO LIBOR/EURIBOR related interest rates. Pre-shipment credit can be granted in any of the convertible currencies. PCFC can be extended in one convertible currency in respect of an export order invoiced in another convertible currency at the risk and cost of cross currency transaction to the exporter. PCFC can also be extended for exports to ACU countries. PERIOD OF CREDIT PCFC, as in the case of rupee pre-shipment credit is initially available for a specified period decided by sanctioning authority after taking into account relevant factors with maximum period of 180 days and branches should monitor the end use of credit as in the case of rupee credit. It must also be ensured that advances granted under the PCFC scheme are not diverted for domestic purposes. Post Shipment Finance Post-shipment finance is a finance normally granted to an exporter of goods and services after shipment from India, till the date of repatriation of the export proceeds. The advance may be against shipping documents or on the security of duty drawback or export related receivables from investment in India. Post shipment finance is normally short-term working capital finance. However depending upon the credit terms e.g. deferred export, it can also be granted for longer periods. As a general rule, in the case of physical exports, post-shipment finance is extended to the actual exporter who has exported the goods or to an exporter in whose name the export documents are transferred. Postshipment finance is also granted for deemed exports in which the goods do not leave the country and the proceeds for deemed exports are received by the suppliers in the India itself.
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Credit Appraisal & Trade Finance At Union Bank of India Forms of Documentary Collection:
1. Documents Against Payment (D/P): Under this method, the shipping documents concerning the shipment of goods are given to the importer against payment for the goods. The payment is made by the importer against the sight draft sent along with the shipping documents. If the importer does not honour the draft, he is not given the shipping documents. Procedure for Collection of Payments under D/P: The following procedure is followed for collection of payment under Documents against Payment: 1. The exporter sends the shipment and obtains shipping documents from the clearing and forwarding agent. 2. He prepares a sight draft on the importer for the value of goods. 3. The exporter submits the sight draft along with other shipping documents to his bank. The exporters bank acknowledges that all the documents as noted by the exporter are presented. 4. The exporters bank sends the shipping documents and the draft along with a collection letter to a correspondent bank known as the remitting bank which is usually located in the importers country. 5. The remitting bank notifies to the importer upon receipt of the draft and the documents and requires him to make the payment against the draft so that the documents are released to him. 6. All the documents including those establishing the importers title to the goods are released to him upon his payment of the amount of the sight draft. 7. The remitting bank sends the remittance to the exporters bank which in turn, credits the account of the exporter. 8. In case, the importer doesnt make the payment, the set of documents are returned to the exporter
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2. Documents Against Acceptance (D/A): In this case, the remitting bank hands over the shipping documents to the importer only upon acceptance of the accompanying draft. The acceptance implies that he agrees to pay the amount of the draft on the due date. Under D/A terms, there is always a period of credit (usance period) on the expiry of which the importer is required to make payment. The disadvantage of D/A term is that it enables the importer to take delivery of the goods before making payment. He may not pay on due date and may not pay at all for a number of reasons, i.e. having become bankrupt or on account of his dishonesty. D/A terms should be given only to very reliable parties. Procedure for Collection of Payment under D/A: The collection of payment under D/A is completed in two stages: a) Acceptance b) Collection In the first stage, the sequence of steps is the same as outlined for D/P mode of payment with the only difference being importer instead of making payment, conveys his acceptance on the Usance draft and the documents are released to him. The remitting bank sends acceptance to the collecting bank and the same is given to the exporter. The exporter has to wait for the expiry of the usance period and then submit the acceptance to his bank for collection. After the expiry of the usance period, the exporter submits the acceptance to the bank for collection of payment. The collecting bank credits account of the exporter upon realization. The importer is in the most advantageous position under both D/P & D/A modes of payment because he can delay the payment until the goods arrive in his country or even later, if he is facing some liquidity problems. The importer would, however, be liable to pay the draft legally if he defaults in making the payment on due date. His trade reputation may also suffer in the process.
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Credit Appraisal & Trade Finance At Union Bank of India Import Letter of Credit An Import letter of credit is an unconditional undertaking given by a bank (issuing Bank) at the request of the customer (applicant) to pay a seller (beneficiary) against stipulated documents provided all the term and conditions of the credit are complied with. In letter of credit arrangement the issuing bank can: Undertake to make payment to or to the other of the beneficiary or to the accept and pay bills of exchange drawn by the beneficiary. Authorize another bank to effect such payment, or accept to pay such bills of exchange. Authorize another bank to negotiate against stipulated documents.
Parties to a letter of credit 1. Applicant/ Opener the buyer of goods (importer) who has to make payment to the overseas supplier 2. Issuing Bank- the bank, which issues the credit and undertakes to make the payment on behalf of the applicant as per terms of LC? 3. Beneficiary - the seller of the goods (exporter) who obtains payment on presentation of documents complying with the terms and conditions of the LC 4. Advising Bank- banks which advices the LC certifying its authenticity to the beneficiary and is generally a bank operating in the country of the beneficiary. 5. Confirming Bank a bank which adds its guarantee to the LC opened by another bank and thereby undertakes responsibility for payment /acceptance /negotiation /incurring deferred payment under the credit in addition to that of the issuing bank. It is normally a bank operating in the country of the beneficiary and hence its guarantee adds to the acceptability of the LC to the beneficiary. 6. Nominated Bank Bank specifically authorized by the issuing bank to make payment etc. under the LC 7. Reimbursing Bank Bank authorizing to honor the reimbursement claim made by the paying, accepting or negotiating bank. It is normally the bank with which issuing bank has account from which the payment is to made.
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Credit Appraisal & Trade Finance At Union Bank of India 8. Transferring Bank- in the transferable LC the 1st beneficiary may request the bank authorized to pay, incur a deferred payment undertaking, accept or negotiate, to transfer the LC in favor of 2nd beneficiary. Such a bank is called a transferring bank. In case of freely negotiable credit, the bank specifically authorized in the LC as a transferring bank, can transfer the LC. Commercial Documents The documents that are needed by the buyer and the seller for their normal commercial transactions are termed as commercial documents a. Invoice b. Packing list c. Other documents: Weight Certificate Certificate of Analysis and Quality Certificate of Inspection Health certificate Transport Documents
d. Bill Of Lading \ e. Airway Bill
f. Risk covering Document Insurance Policy is an undertaking given by the insurers promising to pay compensation in case the goods under movement or otherwise are subjected to loss, theft, damage. In international trade marine insurance is the most common document obtained either by exporter or importer for the safety of documents.
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R-Returns The information about the inflows and outflows of foreign exchange is of great importance to the Government of India and Reserve Bank of India for making policy decision. As a member of International Monetary Fund, the Central Government has an obligation to present the quarterly balance of payment (BOP) statistics to the IMF. R-Returns should be submitted twice in a month on 15th and the last day of the month. If 15th or the last day of the calendar month is a holiday, then the return should be submitted on the preceding working day. The R-Returns must reach RBI within 7 calendar days from the close of period to which they may relate Every transaction, which causes in-flow of foreign exchange in India or outflow of foreign exchange from India, affects the position of foreign currency assets or liabilities, which is required to be reported to Reserve Bank of India. As these transactions take place by way of debit and credits to the Nostro accounts maintained by authorized dealers and Vostro account of nonresident banks maintained with the authorized dealers, every debit and credit to these accounts are required to be reported. Thus there are two types of R returns: 1. R return (Nostro) 2. R return (Vostro) A separate R return (Nostro) for each currency and a separate R return (Vostro) is required to be submitted irrespective of number of accounts operated upon in that currency.
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Chapter
GLOSSARY
LIBOR: London Inter-Bank Offer Rate is the interest rate that the banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.
INCOTERMS: INCOTERMS stands for International Commercial Terms. These terms were first defined by the ICC in 1936 and were revised from time to time to suit trade requirements. The terms were last revised in the year 2000. Incoterms are abbreviated language of rights and obligations between the two parties to a contract in respect of the following: Functional responsibilities of the two parties at the time delivery of the goods. It pinpoints the cost, which is to be borne by either the exporter or by the importer. Bearing of Risks: Up to what point should they be borne by the exporter in the form of loss of or damage to goods and from which point onwards, the responsibility passes on to importer? INCOTERMS can be grouped in to four: E, F, C and D terms. E terms i.e. Ex Works. Here Seller has minimum obligations F terms are used when buyer takes the contract of carriage. C terms are used when seller to make contract of carriage and / or insurance. D terms are related to arrival contracts. Sanket N. Dedhia Page 56
Foreign Inward Remittance Certificate (FIRC) This is a document issued by the bank when the exporter receives advance payment against exports. The document states the details of the beneficiary, the foreign currency value, the rupee value of the proceeds, date of realization, and requires two signatories of the bank. This document is issued so that the exporter can lodge the bill with the bank, as proof of advance payment.
NOSTRO A/C: An account of Bank with another bank in another country, usually in currency of that country. E.g. ABC Bank in India having an account with XYZ bank in U.S having dollar operation.
VOSTRO A/C: An account held by Foreign bank XYZ Bank of U.S. with ABC Bank in India, usually in currency of India, rupees.
SWIFT: Society for Worldwide Interbank Financial Telecommunication. It started from 1973 in Brucel, with Head office in Belgium, and it is adopted by 239 countries. In swift we have big directory in which we have code for different banks worldwide. It is updated after every 6 months. SWIFT is the financial industry-owned co-operative supplying secure, standardized messaging services and interface software to 7,800 financial institutions in more than 200 countries. SWIFT's worldwide community includes banks, broker/dealers and investment managers, as well as their market infrastructures in payments, securities, treasury and trade.
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Chapter
12
CONCLUSIONS & RECOMMENDATIONS
My association with Union Bank for project on Credit Appraisal & Trade Finance has been an enriching experience. I was able to familiarize with all the forex and credit transactions, the terminology, various customers, types of loans granted to customers on the basis of their requirement also on the basis of the timing of shipment, and then there was all documentation verification along with the maintenance of same, guidelines by RBI and FEMA under which the credit and forex transaction takes place.
The study at UBI gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance, term loan assessment and Foreign Exchange.
I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how while the Forex Manager must know the whole procedure of both Import and Exprt
At Union Bank of India, Circle Office the priority to appraise a proposal was given to new or fresh clients over the existing clients presenting proposals for renewal The present risk rating model does not have any mechanism to prioritize certain sectors of the economy. There are certain sector in the economy where risk spread is low and certain sectors where spread of risk is high like real estate. Also, there are certain infrastructural projects which need to be prioritized. The risk rating model is not flexible to incorporate all these issues
Most important learning was that FOREX rate were quoted by saying both buy as well as sell rate & there are 3 types of rate: TT, TC and Forwards Forex is still a nascent market. It is a highly specialized job and requires a lot of dedication and constant innovation and improvement upon the existing practices. Bank need to foresee its demand should make adequate arrangement for dealing with same by upgrading its existing Infrastructure, Technology which will not only improve turnaround time but also efficiency & less paperwork.
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REFERNCES
Mckinsey & Company. India Banking 2010 - Towards a High-performing Sector UBI Journals (For internal circulation only) UBI Circulars and Guidelines www.unionbankofindia.com www.rbi.gov.in www.moneycontrol.com www.nseindia.com www.
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Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

Investments 26010 Advances 54644

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

PRINCIPLES OF GOOD LENDING

Credit Appraisal & Trade Finance At Union Bank of India

WHAT IS CREDIT APPRAISAL?

Credit Appraisal & Trade Finance At Union Bank of India

NON FUND BASED

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

Less: CL - Bank Borrowing

55 165 MPBF 1.17: 1 Current ratio 128 1.33: 1

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

BASE RATE = 10.00% as on 1 st May 2011 Sanket N. Dedhia Page 27

Credit Appraisal & Trade Finance At Union Bank of India

RISKS INVOLCED IN THE CFEDIT APPRAISAL

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

>> Preliminary determination of borrowing capacity and credit history

>> Fill out loan application.

>> Credit check. (CIBIL Report) >> Appraisal of property.

>> Loan goes to for approval.

>> Signing documents drawn.

>> Gathering documents from applicant.

>> Title search.

>> Consent letter from surety.

>> Employment & residential history complied.

>> All conditions prescribed in credit policy are met.

>> Documents sent to title company.

>> Buyers bring in money and sign documents.

>> Loan is approved. >> Title company records deed.

>> Verification of financial reserves.

>> Compiling industrial visit report.

>> Buyers get keys to property.

Credit Appraisal & Trade Finance At Union Bank of India

Credit Appraisal & Trade Finance At Union Bank of India

INTRODUCTION TO FROREIGN EXCHANGE

MR. X NAYANS UNCLE IN USA

$1000 CHEQUE ON BIRTHDAY

DEP WITH UBI

BANK OF AMERICA CREDITS UBI A/C AND DEBTS MR. X ACCOUNT

SENDS TO BANK OF AMERICA

Capital A/C Transactions Loans Investments

Capital A/C Transactions Loans Investments

Credit Appraisal & Trade Finance At Union Bank of India

On 1.6.2000 FEMA was introduced and FERA was repelled

Credit Appraisal & Trade Finance At Union Bank of India

To increase $ assets in India

And to Control and monitor all forex transaction

RBI allowed Banks to become

Authorized Dealers ADs.

FERA was a draconian act

FEMA was introduced

Administered by RBI, for managing forex reserves judiciously

Offence was Criminal

Offence is Civil and result financial penalty