Summer Training Project Report On Credit Appraisal

Analysis of Credit Appraisal at Union Bank of India 18719103911
EXECUTIVE SUMMARY
In todays scenario, it is very important to understand that every industry needs to support itself and hedge itself against risks. No matter which industry or sector the company belongs, it needs to update every day itself to the various things happening all over the world which may directly or indirectly affect its business, growth and potential in the market. The credit report is an important determinant of an individual's financial credibility. They are used by lenders to judge a person's creditworthiness. The project focused on the analysis of credit appraisal in Union Bank of India (UBI). It is one of India's largest state-owned banks listed on the Forbes 2000. It has assets of USD 13.45 billion and all the bank's branches have been networked with its 1135 ATMs. It renders credit ratings to their clients on the basis of their loan sanctioned amount, past records, validity and feasibility of their projects, etc. Ratings can be assigned to short-term and longterm debt obligations as well as securities, loans, preferred stock and insurance companies. Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model assess various aspects of the projects and assigns scores against them thereby determining the risk level involved with the project. The project starts with the brief introduction to the industry profile related to banking sector in India and introduction to the company, the mission and vision of the company along with a brief introduction regarding the products offered by the company. Project also includes the theoretical framework of the study, that is, credit report and credit rating, corporate credit rating, term sheets, letter of credit and guarantee. The objective of the study was to know the credit rating system and the methodologies applied and the way balance sheet and other financial techniques are used in deciding whether or not to approve the loan. Both primary and secondary sources were used in this project report.
Gitarattan International Business School
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The analysis was made by various discussions with the staff members of the bank. The analysis includes evaluation of the management, financial statements of M/S SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD., and its significant accounting policies. It also includes analysis of audited balance sheet of M/S. SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD., its breakup and evaluation of key ratios by Union Bank of India. It was concluded that in UBI, the process of credit appraisal includes a thorough study of the project which involves evaluation of management, technical feasibility, financial viability and risk analysis. Thus, Union Bank of India has sound system for credit appraisal.
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1.1 ABOUT UNION BANK OF INDIA

Union Bank of India (UBI) is one of India's largest state-owned banks (the government owns 55.43% of its share capital), is listed on the Forbes 2000. It has assets of USD 13.45 billion and all the bank's branches have been networked with its 1135 ATMs. Its online Tele banking facility is available to all its Core Banking Customers - individual as well as corporate. It has representative offices in Abu Dhabi, United Arab Emirates, and Shanghai, Peoples Republic of China, and a branch in Hong Kong The Union Bank of India was built up in twentieth century and declared open by the Father of the Nation, Mahatma Gandhi. The bank with its efficient value-added services, sustained growth, consistent profitability and development of new technologies bank has ensured complete customer delight, living up to its image of, GOOD PEOPLE TO BANK WITH. Bank is offering credit cards, home loan, union de-mat, ATM, International debit card, online tax payment facility, Railway e-ticketing kiosk, etc., services to its customers through core banking solution. The Union Bank of India has 2261 branches out which 1031 branches are under CBS. All the ATMs are inter-connected through the Banks ATM Switch, thus facilitating on-line operations in case of CBS customers. The Bank is a member of Cash Tree consortium and also has bilateral arrangement with State Bank of India, enabling the Banks ATM cardholder access to over 20000 ATMs across the country. UBI Net connects 65 Offices and 984 branches located in 323 centers, facilitating speedier transmission of MIS data (Network Map). The network also facilitates the implementation of Core Banking Solution, apart from DEMAT services, Cash Management services, fund transfers, messaging system, etc. The Bank is using VSAT network for connecting branches and ATMs wherever leased line connectivity is not feasible. We have 590 VSATs operational, connecting 194 branches/extension counters and 316 ATMs.
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1.1.1 The Vision Statement

To become the bank of first choice in our chosen area by building beneficial and lasting relationship with the customers through a process of continuous process. Technologically Strong Financially Sound All India presence Personalized Services Value Maximization
1.1.2 The Mission Statement

A logical extension of the Vision Statement is the Mission of the Bank, which is to gain market recognition in the chosen areas. To facilitate a process of restructuring of branches to support a greater efficiency in the retail banking field. To be premiere bank, responsive to the needs of our target market customers, recognized for consistently superior service quality innovative products, thereby delivering superior value to our shareholders.
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1.1.3 BOARD OF DIRECTORS

SHRI DEBABRATA SARKAR Chairman & Managing Director SHRI S.S.MUNDRA Executive Director SHRI SURESH KUMAR JAIN Executive Director SHRI CHANDAN SINHA RBI Nominee Director SHRI B.M.SHARMA Chartered Accountant Director
SHRI N.SHANKAR Director representing Workmen Employees SHRI B N BHATTACHARJEE Director representing Officer Employees
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1.2 OVERVIEW OF THE INDUSTRY

1.2.1 Introduction to the Banking Sector
The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. Banks are among the main participants of the financial system in India. Banking offers several facilities and Opportunities.
The Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions. The Reserve Bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system. Since the nationalization of banks in 1969, the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become highly customer focused has forced the slow-moving public sector banks to adopt a fast track approach.
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1.2.1.1 Classification of the Banks
Public Sector Banks
Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches.
Private Sector Banks
The RBI has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.
Foreign Banks
The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organization. The presence of foreign banks in India has benefited the financial system by enhancing competition, resulting in higher efficiency. There has also been transfer of technology and specialized skills which has had some "demonstration effect" as Indian banks too have upgraded their skills, improved their scale of operations and diversified into other activities.
At a time when access to foreign currency funds was a constraint for the Indian companies, the presence of foreign banks in India enabled large Indian companies to access foreign currency resources from the overseas branches of these banks. Also with the presence of foreign banks, as borrowers in the money market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market.
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Co-operative Banks
Co-operative banks are small-sized units organized in the co-operative sector which operate both in urban and non-urban centers. Co-operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
Co-operative banks function on the basis of 'no-profit no-loss'. Co-operative banks, as a principle, do not pursue the goal of profit maximization. Therefore, these banks do not focus on offering more than the basic banking services. So, co-operative banks finance small borrowers in industrial and trade sectors, besides professional and salary classes.
1.2.2 Banking in India
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now obsolete.
The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. In India the banks are being segregated in different groups.
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Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban.
Many even are only catering in cities. Some are of Indian origin and some are foreign players. All these details and many more are discussed over here. The banks and its relation with the customers, their mode of operation, the names of banks under different groups and other such useful information are talked about. One more section has been taken note of is the upcoming foreign banks in India.
Post-Independence:
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included: The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b). In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
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The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business of banking in India.
As per Section 5(b) of Banking Regulation Act, 1949, banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise. As per Section 5(d) of Banking Regulation Act, 1949, company means any company as defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act.
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1.2.3 A Brief about RESERVE BANK OF INDIA
Establishment: The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. Preamble: The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Acts governing Banking Operations: Companies Act, 1956: Governs banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates
to nationalization of banks Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881
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1.3 PRODUCTS AND SERVICES

UNION BANK OF INDIA provides various types of product and services .The wide range of product and services consists of: Banking
Accounts & Deposits cumulative deposit scheme, deposit reinvestment certificate,
monthly income scheme, union flexi-deposit, senior citizens scheme, multi gain savings account, no frills saving account, union super salary account, union classic current account
Retail Loans union cash, union home, union health, union miles, union education, union
top up, EMI calculator, union smile.

Cards - Classic / Silver / Gold, Corporate Credit Cards, Add-On Cards Insurance & Investment mutual fund, union healthcare Demit demit accounts, online share trade Payment
NRI Banking

Remittance - Union E-Remit, Details for Remittance Savings & Deposits - NRO Non Resident Ordinary A/c Scheme, NRE Non Resident Loan & Services house loans, foreign currency loans, loans against deposit, immovable
External Rupee, Union Unfixed, Foreign Currency Deposit
property, and shares or debenture
Payments - Union Bill Pay
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Corporate Banking

CMS - Union Speed, Union Centralized Debits/Credits, Union Prompt E-Tax - Customs and Direct taxes, Central Excise and Service Tax Trade Finance trade finance for exporters, trade finance for importers, foreign currency Insurance - Non life Insurance Corporate Agency, Insurance- Corporate Agency Syndication of Loans MSME Banking Loans & Policies
loans, correspondent banking

Internet Banking

Account Information Transfer of Funds Bills Requests Mails Trade Limits Currency Uploads Customization Financial enquiries Non-Financial enquiries
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2.1 INTRODUCTION
In 1994, the RBI established the Board of Financial Supervision (BFS), which operates as a unit of the RBI. The entire supervisory mechanism was re-aligned to suit the changing needs of a strong and stable financial system. The supervisory jurisdiction of the BFS was slowly extended to the entire financial system except for the capital market institutions and the insurance sector. Its mandate is to strengthen supervision of the financial system by integrating oversight of the activities of financial services firms. The BFS has also established a sub-committee to routinely examine auditing practices, quality, and coverage. In addition to the normal on-site inspections, Reserve Bank of India also conducts off-site surveillance which particularly focuses on the risk profile of the supervised entity. The Offsite Monitoring and Surveillance System (OSMOS) were introduced in 1995 as an additional tool for supervision of commercial banks. It was introduced with the aim to supplement the on-site inspections. Under off-site system, 12 returns (called DSB returns) are called from the financial institutions, which focus on supervisory concerns such as capital
adequacy, asset quality, large credits and concentrations, connected lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks). In 1995, RBI had set up a working group under the chairmanship of Shri S. Padmanabhan to review the banking supervision system. The Committee certain recommendations and based on such suggestions: a rating system for domestic and foreign banks based on the international CAMELS model combining financial management and systems; and control elements was introduced for the inspection cycle commencing from July 1998. It recommended that the banks should be rated on a five point scale (A to E) based on the lines of international CAMELS rating model. CAMELS evaluate banks on the following six parameters:
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(a) Capital Adequacy: Capital adequacy is measured by the ratio of capital to riskweighted assets (CRAR). A sound capital base strengthens confidence of depositors.
(b) Asset Quality: One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making. (c) Management: The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. . This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance. (d) Earnings: It can be measured as the return on asset ratio. (e) Liquidity: Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals. (f) Sensitivity to Risks: This parameter assesses the various risks to which the bank is exposed. These risks can be market risks, forex risks, interest rate risk etc.
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Each of the above parameters is weighted on a scale of 1 to 100 and contains number of subparameters with individual weightages. TABLE NO.: 1 Rating Symbol A B C
Rating symbol indicates Bank is sound in every respect. Bank is fundamentally sound but with moderate weaknesses. Financial, operational or compliance weaknesses that give cause for supervisory concern. Serious or immoderate finance, operational and managerial weaknesses that could impair future viability. Critical financial weaknesses and there is high possibility of failure in the near future.
2.2 CREDIT DISBURSEMENT AT UNION BANK OF INDIA

Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department of the bank. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes:1. Working capital finance 2. Term loan for mega projects 3. Non fund based Limits like Letter of Guarantee, Letter of Credit Companies present audited balance sheets of the current and previous years. These are used to determine the financial health, turnover trends and rise and fall of profitability. Then credit rating is done.
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The financial health and credit rating are the theoretical methods for determining the right interest rate. However, in practice, banks consider other factors such as history with client, market reputation and future benefits with clients.
2.2.1 Credit Risk Management

In todays scenario, it is very important to understand that every industry needs to support itself and hedge itself against risks. Risks are of various kinds and in different magnitude. No matter which industry or sector the company belongs it needs to update every day itself to the various things happening all over the world which may directly or indirectly affect its business, growth and potential in the market. Banks are directly related to people, industry and market. In the recent times, we have seen that the retail loan section of the banks have come up as one of the important areas. All the big industries, small and medium enterprises and individuals, avail loans for all their purposes. The important thing in this case is that, banks cant give loans to everyone. They need to check the credit worthiness of the borrower. To rate the worthiness of an individual, banks have various methods like checking their market image, their past record, potential and security provided. From this, it is decided that whether they are worthy enough or not. In more financial terms, for corporate loans there are various methods like balance sheet analysis, fund flow and cash flow analysis, working capital management, ratio analysis etc.
2.2.2 How does risk matter to the bank?

Banks and Financial Institutions perform the essential function of channelizing funds from those with surplus funds to those with shortage of funds. Broadly, the risks by the banks today can be classified as under:
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I.
Credit Risk: It is one of the major risks faced by the banks on account of the nature of their business activity, which includes dealing with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk includes borrowers risk and portfolio risk. Borrower risk may be defined as the possibility that a borrower will fail to meet his obligations in accordance with agreed terms. Portfolio risk arises due to credit concentration/investment concentration etc.
II.
Market Risk: Market risk is the potential of erosion in income or market value of an asset arising due to changes in market variables, such as interest rate, foreign exchange rate, equity prices and commodity prices. Transaction Rate Risk: The risk in the erosion of earnings due to variation in interest rate within a given time zone is referred to as interest rate risk. Interest rate risk may itself arise on account of gap or mismatch risk, basis risk, embedded options risk, yield curve risk etc. Exchange Rate Risk: This risk is of two types viz. transaction risk and translation risk. Transaction risk is observed when movements in price of a currency, upward or downward, results in a loss of a particular transaction. In a situation of Translation risk, the Balance Sheet of a Bank, when converted in home currency, undergoes a drastic change, chiefly owing to exchange rate movements and changes in the level of investments or borrowings in foreign currency even without having translation at a particular point of time. Equity Price Risk: The risk arises from the potential of an institution to suffer losses on its exposure to capital markets, from adverse movements in prices of equity. Commodity Price Risk: The risk arises from the potential of movements in prices of physical products, which are or can be traded in the secondary market. These products include agricultural products, minerals, oils and precious metals.
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III.
Liquidity Risk: It arises due out of the possibility that a bank maybe unable to meet its
liabilities as they become due for payment or may be to find the liabilities at a cost much higher than normal cost. The risk arises due to mismatch in the timing of inflows and outflows of funds, and from funding of long term assets by short- term liabilities. Surplus liquidity could also represent a loss to the bank in terms of earnings missed and hence an earning risk.
IV.
Operational Risk: It arises out of malfunctioning of information systems or service
delivery process or internal sabotage. In all these cases, the losses are similar and even can generate losses of unknown magnitude.
V.
Systemic Risk: Banks are highly inter-related with mutual commitments. Hence the failure of one institution generates a risk of failure for those other banks which have committed funds with defaulting bank.
VI.
Solvency Risk: It occurs when the bank is landed in a chronic situation of not able to
meet its obligation. This type of risk gives the ultimate impression that the bank has failed. Lending involves a number of risks. In relation to the risks related to credit worthiness of the counter party, the banks are also exposed to interest rate, forex and country risks.
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2.2.3 Credit Risk

Credit Risk is the possibility of losses associated with changes in the credit profile of the borrowers or counter parties. These losses could take the form of outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality, short of default. Credit Risk of a bank has two distinct facts i.e. risk inherent to the individual business unit/loan account and risk from macro credit portfolio perspective. Credit Risk emanates from banks dealings with an individual, corporate, bank, financial institution or a sovereign. Credit Risk may take the following forms: In the case of direct lending : Principal/and or interest amount may not be repaid; In the case of guarantees or letters of credit : Funds may not be forth coming from the constituents upon crystallization of the liability; In the case of treasury operations : The payments or series of payments due from the counter parties under the respective contracts may not be forthcoming or cease; In the case of securities trading business : Funds/securities settlement may not be effected; In the case of cross border exposure: The availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign. Credit Risk has got two components: Quantity of risk which is nothing but the outstanding loan balance as on the date of default and the Quality of risk i.e. severity of losses which is defined by both default probability and the receivers that could be effected in the event of default. Credit Risk is therefore, a combined outcome of: Default Risk: It is the probability of the event of default, i.e., missing a payment obligation. In todays parlance, payment default is declared when a scheduled payment has not been made within regulatory time from laid down.
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Exposure Risk: The outstanding balances at the time of default are not known in advances particularly under facilities like committed lines of credit, ODs, project financing, off balance sheet items like guarantees/LC facilities etc. this uncertainty prevailing with future amounts at risk, generates exposure risk. Recovery Risk: The losses in case of default are the amount outstanding at default time less recovery. Normally, once a borrower defaults, banks resort to enforcement of security. It thus involves great amount of uncertainties. These uncertainties can be traced to : Value of Collateral Security: Recovery risk depends on the nature of charged assets,
their location and possession, marketability/appeal, legal status etc. At times, the economic value of assets charged may erode over a period and may even go below the value of outstanding debt. Contrarily, where collaterals are of high value and are capable of generating buyers interest may even cancel the loss. Guarantors Value: The net worth of guarantors and in turn their ability to discharge
liabilities upon invocation of guarantee may undergo changes affecting the ultimate realization amount. Enforceability of Securities: The ability of a bank to access the securities/collaterals
charged to a bank in order to dispose them off may itself be doubtful. Secondly, enforcement of securities/contracts is also defined by the prevailing legal system.
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In view of this, it becomes difficult to predict the recoverable amount in advance. The combine outcome of all three elements ultimately defines the credit risk of a bank. Once these estimates are made, the loss in case of default can be measured by using the formula: EL= PD EAR LGD Where, EL= Expected Loss PD= Probability of Default EAR= Exposure at Risk LGD= Loss Given Default i.e. (1-Recovery Rate)
2.2.4Credit Report and Credit Rating

The credit report is an important determinant of an individual's financial credibility. They are used by lenders to judge a person's creditworthiness. They also help the person concerned to narrow down on the financial problem areas. Credit report is a document, which comprises detailed information about the credit payment history of an applicant. It is mostly used by the lenders to determine the credit worthiness of an applicant. The business credit reports provide information on the background of a company. This assists one to take crucial business related decisions. People can also assess the amount of business risk associated with a company and then decide whether they would be comfortable in providing them with credit facilities. The degree of interest that would be shown by investors in their company can also be gauged from the business credit reports as they can get an idea of the conception of their customers regarding themselves. Since these records are updated at regular intervals of time they enable people to identify the risk levels associated with a business as well as its future. These reports also allow businesses to get detailed information about the financial status of business partners and suppliers.
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2.2.4.1 Corporate Credit Rating Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans, preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of a country's investment surroundings and/or a company's ability to honor its debt responsibilities. The ratings therefore assess an entity's ability to pay debts. Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model assess various aspects of the projects and assigns scores against them thereby determining the risk level involved with the project. It is divided in Four Sections: 1. Rating of the Borrower Financial Risk Management Risk 2. Market Condition/ Demand Situation 3. Rating of the Facility 4. Business Consideration
1) Rating of the Borrower It 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. Short term ratios include Current Ratio, which determines the liquidity position of the company over a period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. It is excess of current assets over current liability. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets.
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According to the guidelines given to UBI, the ideal level is at 1.33:1. However the acceptable level is at 1.17:1.At times, current ratio may not be a true indicator. Hence, it is important for the evaluator to understand the nature of the industry. Long term ratio includes Debt Equity Ratio. It is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the company already has acquired high amount of funds from market thereby reducing the investor share over the securities available, increasing the risk. It is also important for the lender bank to assess the firms debt paying capacity over a period. Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum acceptable level is 1.50.It also necessary for the lender to determine the ability of the firm to achieve the projected growth by evaluating the projected sales with actual. However such parameter remains non applicable if the business is new. Financial risk evaluation is only one of the parameter and not the only parameter for determining the risk level. It is important to evaluate the Management Risk also while evaluating the risk relating to borrower. 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 competitiveness, it is essential to take initiatives.
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2) Market potential / Demand Situation A 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. The demand supply situation / market potential play an important role in determining the growth level of the company like: Level of Competition: monopoly , favorable , unfavorable Seasonality in Demand: affected by short term seasonality, long term seasonality or may not be affected by seasonality in demand. Raw Material Availability Location Issues like proximity to market, inputs, and infrastructure: Favorable, neutral, unfavorable. Technology, i.e., proven technology- not to be changed in immediate future, technology undergoes change, outdated technology. Capacity Utilization
3) 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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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 favor of the applicant, however underperformance make the lender more vigilant. Thus, the Credit rating of the business takes into consideration various aspects that directly or indirectly bear an effect the performance of the business.
2.2.5 Lending Interest Rate After evaluating the risk level involved, the lender bank decided on lending Interest Rate. In UBI, these are categorized into 9 segments: 1. Lowest Risk CR-1 2. Low Risk CR-2
3. Medium Risk CR- 3 4. Moderate/ Satisfactory Risk CR- 4 5. Fair Risk CR- 5 6. High Risk CR- 6 7. Higher Risk CR- 7 8. Highest risk CR- 8 9. NPA CR- 9 In UBI, a business receiving Credit Rating above level 6 are not considered good from point of investment and thus are avoided.
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2.2.5.1 Determination of Interest Rate The interest rate is determined from the interest rate guidelines circular. This circular is regularly updated to reflect the banks latest credit policies. The rupee credit is based on BPLR and the foreign exchange loans are based on LIBOR. The guidelines define how much interest rate is to be assigned for a particular credit rating and credit duration. However, credit rating and its use in determining interest rate is a theoretical concept and the bank may allow a reduction in interest rate under the following conditions: Good Client: The organization is a long term client and brings good business to the bank. The organizations actions show that it intends to become a long term customer of the bank. Banking Consortium: The organization is seeking credit from a consortium of banks. In some cases like this, the lead bank might decide the interest rate and all the member banks of the consortium follow this interest rate.
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2.2.6 Term Sheet

Following a favorable feasibility check, the next step is preparing term sheet. A Term Sheet is brief document that provides details on aspects like:

Account Details Financial highlights for immediate previous two audited years and projection for
proceeding year

Nature of Project Cost of Project Means of finance Purpose Tenure of Term Loan Interest rate Reset Margin Interest Rate, Commission
Door to Door Tenor, i.e., the period within which the entire amount is to be disbursed. Repayment Terms Prime Security Collateral Security Upfront fees, i.e., the charges levied by the bank for processing the documents.
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2.2.7 Proposal
An approved term sheet leads to preparation proposal. A proposal is prepared in standard format; this enables the bank to keep a proper track record and also facilitates proper comparison. A proposal with full-fledged document providing details on project has to be submitted for requesting finance from bank. A proposal contains information on following aspects: Details of Account: It includes name of the Account Holder, Date of incorporation, Line of Activity, Internal Credit Rating level, Address of the Registered Office, Name of Directors, Share Holding Pattern, Asset Classification, and Purpose of the Loan. Securities: Lenders often feel more confident about a loan if they are given a security interest in the assets of a business. Then, if the borrower does not repay the loan as promised, the lender can take the property the borrower pledged, sell it and use the proceeds to repay (or partially repay) the borrowed amount. It provides detailed information on nature of securities given in lieu of the Loan. They are of two types Prime securities, Collateral Securities. Prime Securities: Pari Passu is a term used in banking transactions which means that
the charge to be created is in continuation of an earlier charge which might be held by the same institution or by any other institution. Collateral Securities: In lending agreements, collateral is a borrower's asset that is
forfeited by the lender if the borrower is insolvent - that is, unable to pay back the principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which the lender becomes the owner of the collateral. It includes details on: nature / description of collateral security indicating area & location of property, value in Rupees, date of valuation along with name of assessor, insurance amount &date of expiry, personal guarantee / corporate guarantee if any, includes name of the guarantor, value of guarantee.
Gitarattan International Business School Page 29
Financial Highlights: It provides details of important financial elements over a period of years. It includes details on paid capital, tangible net worth, net-working capital, current assets, current liabilities, net profit, net sales, reserves and surplus, intangible assets, long term liabilities, fixed assets, investments, non-current assets like guarantees, cash accruals, and capital employed. It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio and so. Status of the project: In this part of proposal, a brief about the project is explained; it includes information on nature, type of project, purpose of the project, commencement details, the promoters and related details of the project. If it is an on-going project, it also gives details on progress and status of progress. Evaluation of Industry :This Section gives brief details on: Scope of the industry Growth level and overall performance of the industry Recent Developments and Trend Evaluation
Conduct of the Account: This section provides details on regularity in Submission of: Stock Statements / Book Debt Statement QPR Statements / Half Yearly Statement Financial Statements CMA Data
Compliance to Terms of Sanction: It furnishes information on following aspect: Completion of Mortgage formalities Registration of Charges with ROC Whether documents valid and in force Compliance of RBI guidelines
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Exposure details from banking system: The sharing pattern of the banks is mentioned in this section of proposal. It includes: Name of the bank Percentage of share for the fund based and non-fund based Limits Amount in Rs.
Non Fund based credits are in form of guarantees like Letter of Credit (L/C), Letter of Guarantee (L/G). Letter of Credit: A Letter of credit also known as documentary credit is the most
commonly accepted instrument of settling international trade payments. A letter of credit is an arrangement whereby a bank, acting at the request of a customer, undertakes to pay a third party by a given date, on documents being presented in compliance with the conditions laid down.
Letter of Guarantee: A letter from a bank stating that a customer owns a particular
security and that the bank will guarantee delivery of the security. A letter of guarantee is used by an investor who is writing call options when the underlying stock is not in his or her brokerage account. A Call Option is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. Assessment of Non Fund Based Limit: Non Fund Based Limits are normally to be sanctioned for existing customer only who already enjoys fund based limits. If there comes a new borrower, full processing as applicable to Fund Based Limits are to be carried out. Borrowers background and experience of meeting commitments to be examined in details. L/C limit to be considered as per terms of Purchase or contract, lead period and minimum economical quantity of supply of stocks. Non Fund based Limits are to be supported by necessary fund based limits.
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Past experience of payment of bills under L/C needs to be verified before considering new request. Any request for financial Guarantee to be critically examined before taking decision. Details of Allied Concerns: This section provides information about the allied concerns aspects like the performance, promoters, share holding pattern, operation exposure and experience from various banks. Terms and Condition: It is important both for the bank and the applicant to safeguard their interest. This could be achieved by settling at mutually acceptable terms and condition in order to ensure that both the parties; the lender and borrower perform their part of obligation, thereby not putting other party at loss. All loans are subject to regulations and conditions. The legal information relating to these regulations and conditions can be viewed in this section. It is advisable for both the parties to read the information carefully before approval.
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3.1 OVERVIEW
Research is formal work undertaken systematically to increase the stock of knowledge and the use of this stock of knowledge to devise new applications. This chapter deals with objectives of the study, the objectives are an end that can be reasonably achieved within an expected timeframe and with available resources. In general, an objective is broader in scope than a goal, and may consist of several individual goals. It also deals with the sources from which the data was collected. The research and methodology adopted for the present study has been systematic and was done in accordance to the objectives.
3.2 RESEARCH DESIGN

The study is analytical in nature as it aims at analyzing the various sources and schemes of funding. Two types of data are collected, one is primary data and another one is secondary data. Primary Data: Discussion with managers and other staff members at Union Bank of India.
Secondary Data: Books Database from Banks Internal reports of the Bank Websites E-circulars of the Bank and RBI.
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3.3 SCOPE OF THE STUDY

Offering credit is an operation burdened with risk. Before offering credit to an organization, its financial health must be analyzed. Credit should be disbursed only after ascertaining satisfactory financial performance. 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 foreign exchange 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.
3.4 OBJECTIVES OF THE STUDY

The following are the objectives of the study:
To know the credit rating system and the methodologies applied in the bank. To assess the financial health of organizations that comes to Union Bank of India for
credit sanctioning regarding import export purposes.
To know the way balance sheet and other financial techniques are used in deciding
whether or not to approve the loan. To know the other important aspects apart from the financial techniques which are of
equal importance for credit rating and appraisal.
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3.5 LIMITATIONS OF THE STUDY

All research studies also have limitations and a finite scope. Limitations are often imposed by time and budget constraints. We precisely list the limitations of the study. It describes the extent to which we believe the limitations degrade the quality of the research. The limitations specific to this project are as follows: All the factors affecting the financial health of the bank could not be taken into
consideration as it would have become very complicated The data for the past years was collected from various secondary sources where some
figures were not exactly mentioned and were rounded off due to which there is the possibility of minimal error. Though attempt has been made to collect as much data as possible but for some factors
very less but relevant data was available. RBI internal guidelines are not available.
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4.1 OVERVIEW
Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with the goal of highlighting useful information, suggesting, conclusions, and supporting decision making. In this chapter, the data that was gathered with help of internal reports of bank was analyzed to reach at the conclusion. Complete process is analyzed with the help of a case study. Taking M/S SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD. and its balance sheet as used by the bank.
4.2 M/S. SHIV-VANI OIL & GAS EXPLORATION SERVICES
LTD.
4.2.1 History
Shiv-Vani Oil & Gas Exploration Services Limited (SVOGESL), headquartered in New Delhi, was incorporated in December 1989, and rapidly evolved to emerge as a key player in the upstream sector of the oil industry. SVOGESL offers a wide spectrum of services in the field of oil and natural gas exploration and production. These include shot hole drilling, seismic surveying, directional drilling, well development, down hole operations, engineering and logistics, natural gas compression and allied services across 36 sites in India and the Middle East. Shiv-Vani has expanded its considerable capabilities through the acquisition of cutting edge technologies, latest equipment and the forging of new partnerships.
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4.2.2 Group Companies

Shiv-Vani Oil & Gas Exploration Services Ltd. (INDIA) Shiv-Vani Oil & Gas Co. LLC (OMAN) SV Oil & Nature Gas Limited (MAURITIUS) SV Videsh Limited (Cyprus) SV Oil & Natural Gas Limited (MAURITIUS) Oil Block Holding Limited (Cyprus) Shiv-Vani Oil Services Limited (India) Shiv-Vani Singapore PTE Limited (Singapore) TNG Shiv Geo Oil Services Limited (India)
4.3 EVALUATION OF MANAGEMENT

Market reputation of the promoter / management of the company: Satisfactory Business managed by qualified personnel: The qualified professionals & experienced persons are proposed to be appointed for managing the overall operation of the company. Details of key management personnel of Shiv-Vani Oil & Gas Exploration Services Ltd. are as under:
Mr. Prem Singhee is the Chairman and Managing Director of the Company since its
inception. He holds a Bachelors degree in commerce from Osmania University, and has more than twenty six years of experience in the oil and gas industry. Mr. Singhee is a brother of Mr. Padam Singhee. He is also a son-in-law of Mr. Dwarka Das Daga.
Mr. Padam Singhee is a Joint Managing Director of the Company. He has been
working with the Company since 1990. He is a graduate in commerce from Osmania University, and has more than twenty two years of experience in the oil and gas industry.
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Mr. Prateep Kumar Lahiri has been a Director of the Company since 1995. Mr.
Lahiri holds a Master degree in history from Allahabad University (Uttar Pradesh) and is a retired Indian Administrative Service (IAS). He has experience of working in senior positions with various administrative departments of the State and Central Government. He served as Executive Director on the resident Board of Directors of Asian Development Bank, Manila. He was Secretary to the Government of India, Ministry of Finance, and Department of Revenue. Prior to that he was Secretary to Government of India in the Ministry of Mines. At present, he is also Director of Vishwakriya Housing Finance Limited and Bharat Seats Limited. He is also a Chairman, Governing Council & Executive Board of ISM University, Dhanbad.
Captain Hiteshi Chander Malik has been a Director of the Company since October
2007. He has rich aviation experience with the Ministry of Defense, the Department of Civil Aviation. He has also worked with the Directorate General of Civil Aviation and worked in the capacity of Advisor to the Ministry of Civil Aviation and continued to advise four Honorable Ministers till August 2004.
Mr. Dwarka Das Daga has been a Director of the Company since 1990. He holds a
Bachelors degree in commerce from Calcutta University and is currently also working as a director of Daga Shipping Agents Pvt. Ltd. Mr. Dwarka Das Daga is the father-in-law of Mr. Prem Singhee.
Mr. Rajneesh Gupta joined the Board on 30 January 2009. He holds a B.Sc degree
from Allahabad University and completed his Engineering in Electrical (Hon.) from Punjab Engineering College in 1969. He was selected for the All India Engineering Services Examination 1970 and joined the Indian Telecom Services (ITS) in January 1972 in the Department of Telecommunications of the Government of India.
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He has rich experience of 35 years, worked as Chairman & Managing Director of Mineral Exploration Corporation Ltd. under the Ministry of Mines and worked as Managing Director of Bharat Gold Mines Ltd.
Mr. Om Prakash Garg was appointed as a Director of the Company in 1992. He is a
graduate in commerce from Maharishi Dayanand University (Haryana) and has experience in various industries. He is a Managing Director of Overseas Carpets Ltd. and a Director of Dwaresh Overseas Construction Pvt. Ltd, New link Overseas Finance Ltd. and various other organizations/ companies.
Mr. Sachikanta Mishra was appointed as a nominee Director of the Company on 13
February, 2012. He is Post Graduate in Mathematical Economic with about 12 years experience macro modeling, strategy, research, financial and management
consulting etc. Currently working as Vice president in IFCI, Managing the Corporate Advisory Group Decision making Is it concentrated? : A committee of directors comprising of qualified & experienced personnel will professionally manage the company. Organization structure / Succession planning / Labor relations: The Company will be a professionally managed company hence, any threat of succession planning is not perceived.
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4.4 Forming Part of financial statements of SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD.
4.4.1 Significant Accounting Policies
Basis of preparation of financial statements: These financial statements have been prepared on an accrual basis and under historical cost convention and in compliance, in all material aspects, with the applicable accounting principles in India, the applicable accounting standards notified under section 211 (3C)and the other relevant provisions of the Companies Act, 1956. All the assets and liabilities have been classified as current or noncurrent as per the Companys normal operating cycle and other criteria set out in Schedule VI to the Companies Act, 1956. Based on the nature of the products and the time between the acquisition of assets for processing and their realization in cash and cash equivalent, the company has ascertained its operating cycle to be less than 12 months. Use of estimates: The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported balances of assets & liabilities and disclosure relating to contingent liabilities as at the date of financial statements and reported amounts of income and expenses during the period. Accounting estimates could change from period to period. Actual results could differ from those estimates. Appropriate changes in estimates are made as the Management becomes aware of change in circumstances surrounding the estimates. Changes in estimates are reflected in the financial statements in the period in which changes are made, if material, their effects are disclosed in the notes to the financial statements. The management periodically assesses using, external and internal sources, whether there is an indication that an asset may be impaired. An impairment loss is recognized wherever the carrying value of an asset exceeds its recoverable amount.
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An impairment loss for an asset is reversed if, and only if, the reversal can be related objectively to an event occurring after the impairment loss was recognized. The carrying amount of an asset is increased to its revised recoverable amount, provided that this amount does not exceeds the carrying amount that would have been determined (net of any accumulated amortization). Revenue Recognition: Revenue is primarily derived from oil & gas exploitation and other allied services. The same is accounted for by the Company on the basis of Gross value of work done. Profit on sale of fixed assets / investments are recorded on transfer of title from the company and are determined as the difference between the sale price and carrying value of the fixed asset / investments. Interest is recognized using the time-proportion method based on rates implicit in the transaction.
Provisions and Contingent liabilities: A provision is recognized if, as a result of a past event, the company has a present legal obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle obligation. Provisions are determined by the best estimate of the outflow benefits required to settle the obligation at the reporting date. Where no reliable estimate can be made, a disclosure is made as contingent liability. A disclosure for a contingent liability is also made when there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. Where there is a possible obligation or a present obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is made. Provision for onerous contracts, i.e. contracts where the expected unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it, are recognized when it is probable that an outflow of resources embodying economic benefits will be required to settle a present obligation as a result of an obligating event, based on a reliable estimate of such obligation.
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Fixed Assets and Capital work-in-progress: Fixed assets are stated at cost, less accumulated depreciation and impairments, if any. Direct costs are capitalized until fixed assets are ready for use. Borrowing costs directly attributable to acquisition or construction of fixed assets, which necessarily take a substantial period of time to get ready for their intended use, are capitalized. Capital work-in-progress comprises outstanding advance paid to acquire fixed assets, and the cost of fixed assets that are not yet ready for their intended use at the reporting date.
Depreciation and amortization: Depreciation on fixed assets is provided on the straight-line method at the rate prescribed under Schedule XIV to the Companies Act, 1956. Depreciation for assets purchased / sold, impaired or discarded during a period is proportionately charged. Individual low cost assets (acquired for less than Rs. 5000/-) are depreciated fully in the year of purchase. Retirement & Other benefits to employees Gratuity: In accordance with the Payment of Gratuity Act, 1972, the company
provides for gratuity, a defined benefit retirement plan covering eligible employees. The plan provides a lump-sum payment to vested employees at retirement, death, incapacitation or termination of employment, of an amount based on the respective employees salary and the tenure of employment with the company subject to conditions specified in aforesaid act. Provident Fund: Eligible employees receive benefits of provident fund, which is a
defined benefit plan. Both the employee and the Company makes monthly contribution to the provident fund plan equal to a specified percentage of the covered employees salary. The rate at which the annual interest is payable to the beneficiaries is being administered by the government.
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Compensated Absence: The employees of
the Company are
entitled to
compensate absences which are both accumulating and non-accumulating in nature. The expected cost of accumulating compensated absence is measured based on the additional amount expected to be paid as a result of the unused entitlement that has accumulated at the Balance Sheet date. Expenses on non-accumulating compensated absences are recognized in the period in which the absences occur. Foreign Currency Transactions: Investments in foreign entities are recorded at the exchange rate prevailing on the date of making the investment. Transactions in foreign currencies are recorded at the rates prevailing on the date of transaction. Monetary items denominated in foreign currency are restated at the rate prevailing on the balance sheet date. Exchange difference arising on the settlement of monetary items or on reporting companys monetary items at rates different from those at which they were initially recorded during the year or reported in the previous financial statements, are recognized as income or expense in the year in which they arise except in case of long term liabilities, where they related to acquisition of fixed assets, in which case they are adjusted to the carrying cost of such assets. Taxes: Tax expense comprises of current tax related to earlier years & deferred tax. Income tax is accrued in the same period when the related revenue and expenses arise. A provision is made for income tax annually, based on the tax liability computed, after considering tax allowances & exemption. Provisions are recorded when it is estimated that a liability due to disallowances or other reason is probable. The difference that result between the profit considered for Income Taxes and the profit as per the financial statements are identified, and thereafter a deferred tax asset or deferred tax liability is recorded for timing differences, namely the differences that originate in one accounting period and reverse in another, based on the tax effect of aggregate amount of timing difference.
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The tax effect is calculated on the accumulated timing difference at the end of an accounting period based on enacted or substantively enacted regulations. Deferred tax assets are recognized only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized. Tax credit is recognized in respect of Minimum Alternate Tax (MAT) as per the provisions of Section 115JAA of the Income Tax Act, 1961 based on convincing evidence that the Company will pay normal income tax within statutory time frame and is reviewed at each Balance Sheet date. The MAT credit is recognized as an asset in accordance with the recommendation provided in the Guidance Note issued by the Institute of Chartered Accountants of India. Earnings per Share: Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. For the purpose of calculating diluted earnings per share, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding during the period adjusted for the effects of all dilutive potential equity shares. Investments: Investments are classified as long term based on Managements intention at the time of purchase. Cost for overseas investment comprises the Indian Rupee value of the consideration paid for the investment translated at the exchange rate prevalent at the date of investment. Long-term investments are carried at cost less provisions recorded to recognize any decline, other than temporary, in the carrying value of each investment. Impairment of assets: The Company assesses at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. If such recoverable amount of the asset or the recoverable amount of the cash generating unit to which the asset belongs is less than its carrying amount, the carrying amount is reduced to recoverable amount.
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The reduction is treated as an impairment loss and is recognized in the profit & loss account. If at the balance sheet date there is an indication that if a previously assessed impaired loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the recoverable amount subject to a maximum of depreciated historic cost. Cash Flow Statement : Cash flows are reported using the indirect method, whereby net profit before tax and extra ordinary items are adjusted for the effects of transactions of a noncash nature, any deferrals or accruals of present or future operating cash receipt or payments and item of income or expenses associated with investing or financing cash flows. The cash flows from operating, investing and financing activities of the company are segregated. Inventories: Stores, spares (consumable & capital) parts & other consumables are valued at cost on First-in-first-out basis. Segment Data: The Company considers its principal activity of providing oil and natural gas exploitation services to be a complete segment and all revenues for the year ended 31 March 2011 have been derived from this segment. Borrowing Costs: Borrowing Cost that are directly attributable to the acquisition, construction or production of a qualifying asset, is capitalized as part of the cost of that asset in accordance with the Accounting Standard 16 on Borrowing Costs. Other borrowing costs are charged to revenue. Events occurring after the Balance sheet date: Where material, events occurring after the date of the Balance Sheet are considered up to the date of approval of accounts by the Board of Directors.
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4.4.2 Audited Balance-Sheet of SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD.
TABLE NO.: 2 As At S.No. (A) Particulars SOURCES FUNDS 1. SHAREHOLDER S' FUNDS (a) Share Capital (b)Reserves Surplus 2. DEFERRED TAX LIABILITY 3. LOAN FUNDS (a) Secured Loans (b)Unsecured Loans Total 3415.03 2750.85 1868.46 458.26 2326.73 1677.70 51.07 1728.77 133.80 97.45 46.36 954.50 46.36 878.26 924.63 OF 31.03. 2011 (Rs. In Crore) As At 31.03. 2010
and 908.14
(B)
APPLICATION OF FUNDS
1.
FIXED ASSETS (a) Gross Block Less: Depreciation (b) Net Block 2313.95 344.19 1969.76 2108.02 2084.74 244.25 1840.49 224.33 2064.82
(c) Capital Work- 138.25
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in-progress 2. 3. INVESTMENTS CURRENT ASSETS, LOANS & ADVANCES (a) Inventories 199.08 73.00 268.96 43.02 56.83 56.78
(b) Sundry Debtors 641.05 (c) Cash & Bank 245.42 Balances (d) Loans & 591.70
629.97
Advances Total 4. LESS: CURRENT LIABILITIES PROVISIONS (a) Liabilities (b) Provisions Total 75.49 445.95 1231.28 57.53 402.40 612.55 Current 370.47 344.87 & 1677.24 1014.95
(C)
MISCELLANEOUS EXPENDITURE
1.
Deferred Revenue 18.90 Expenditure TOTAL
18.90
16.69
16.69
3415.03
2750.85
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4.4.3 Analysis of M/S. SHIV-VANI OIL & GAS EXPLORATION SERVICES LTD. By Union Bank of India
TABLE NO.: 3
BREAK UP OF BALANCE SHEET S.No. Particulars 31.03.2010 (Aud.)
(Rs. In Crore) 31.03.2011 (Aud.)
(A) 1. 2.
CURRENT ASSETS Cash & Bank Balance Investments a) Govt./Other Trustee Securities b) Fixed Deposits with banks/ MMMF/ . 27.43 226.61 15.59 18.81
3.
Receivables a) Inland up to 6 months b) Exports 197.50 293.05
4.
Inventory a) Raw Materials - Indigenous - Imported b) Stores & Spares - Indigenous - Imported
73.00
199.08
52.56
61.96
117.68
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c) Stock-in-Process d) Finished Goods e) Others (Scrap) 6. Advances to Suppliers of Raw Materials / Stores/Spares Advance Tax Payment Other Current Assets TOTAL CURRENT ASSETS
10.34
28.18
0.70
0.66
7. 8.
47.76 225.00 586.28
102.71 485.45 1325.71
(B) 1. 2.
CURRENT LIABILITIES Short Term borrowings from bank Unsecured Borrowings (include. ICDS etc.) Sundry Creditors Advances / Progress payment from Customers/Dep. From dealers Unsecured borrowings from others Installments of TL/DPG/Deb./R.P.Share/ADR/GDR due within one year Int. & Other charges accrued & due for payment. Int. & Other charges accrued but not due 176.87 243.23 239.33 252.50 139.25 203.00
3. 4.
5. 6.
7.
8.
Provision for Taxation
48.14
65.71
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9. 10. 11.
Dividend Payable Other statutory liabilities Other Current Liabilities / ACCEPTANCES TOTAL CURRENT LIABILITIES
4.67 4.75 105.50
9.34 0.51 117.91
718.52
892.18
(C)
FIXED ASSETS (Net of Depreciation) Land & Building Plant & Machinery Other Fixed Assets Furniture & Fixture Capital Work in Progress Less: Revaluation Reserves TOTAL FIXED ASSETS 2064.82 2108.02 20.95 1804.60 11.78 3.16 224.33 20.60 1935.09 10.72 3.36 138.25
1. 2. 3. 4. 5.
(D) 1. 2. 3. 4. 5.
LONG TERM LIABILITIES Debentures Term Deposits Term Loans from Banks/ FIs Deferred Tax Liability Other Term Liabilities (include. ECB/ADR/GDR/Loans etc. TOTAL LONG TERM LIABILITIES 1412.01 97.44 0.65 1273.29 133.80 357.20 250.00
1510.10
2014.29
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(E)
MISCELLANEOUS ASSETS Investments 56.78 316.11 56.83 159.04
1.
Amounts due from Associates/ Subsidiaries Other Loans & Advances Bals/Dep. with Government Departments/Statutory Bodies Adv. to Suppliers of Capital Goods INTEREST & OTHER RECEIVABLES DEFERRED TAX ASSET
2. 3.
4. 5.
6.
Security Deposits Book Debts Older than 6 Months
1.66 110.91
12.15 180.33
7.
Other Miscellaneous Assets/ ICD etc. TOTAL MISCELLANEOUS ASSETS 485.45 408.35
(F) 1. 2. 3. 4. 5. 6.
NET WORTH Ordinary Share Capital (Paid up) General Reserves Revaluation Reserves Share Premium Other Reserves Balance of Profit 458.02 44.60 344.64165 458.02 39.60 369.52
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46.36 31.00
46.36 41.00
TOTAL NET WORTH
924.63
954.50
(G) 1. 2. 3.
INTANGIBLE ASSETS Goodwill Adverse P & L A/c Other Intangible Assets TOTAL INTANGIBLE ASSETS 16.69 16.69 18.90 18.90
TOTAL ASSETS TOTAL LIABILITIES
3153.24 3153.24
3860.98 3860.98
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4.4.4 Key Ratios evaluated by Union Bank of India

TABLE NO.: 4
S.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
Particulars Paid up Capital Reserves & Surpluses Intangible Assets Tangible Net Worth Long Term Liabilities Capital Employed Net Block Investments Other Non-Current Assets Net Working Capital Current Assets Current Liabilities Current Ratio Debt Equity Ratio DER (TOL/TNW) SALES & SERVICE - Domestic - Exports
31.03.2010 (Aud.) 46.36 878.26 16.69 907.93 1510.10 2418.03 2064.82 56.78 428.67 -132.24 586.28 718.52 0.82 1.66 2.45
31.03.2011 (Aud.) 46.36 908.14 18.90 935.60 2014.29 2949.89 2108.02 56.83 351.53 433.52 1325.71 892.18 1.49 2.15 3.11
1071.80
1222.13
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19.
- Job Work Less: Excise Duty Net Sales & Job Work Other Income Net Profit Before Tax Net Profit After Tax Depreciation Cash Accruals Percentage(%) of Net Profit to Sales ROCE 1071.80 17.00 150.46 92.0058 81.72 173.73 14.04 1222.13 11.49 84.65 40.65 106.40 147.05 6.93
20. 21. 22. 23. 24. 25. 26.
27.
6.22
0.00
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5.1 MAJOR FINDINGS

Capital: Against the authorized share capital of Rs.70 Crore, the paid up capital for March 2011 is Rs 46.36 Crore. During the year the company has allocated 2457895 equity share of Rs.10/- each at a premium of Rs.370/- per share to Templeton Strategic Emerging Market Funds III L.D.C on preference basis so there is no increase/decrease of paid up capital. Reserve & Surplus: No premium collected for current year. The reserve & surplus increased by Rs.29.88 Crore over previous year balance of R&S of Rs.878.26 Crore resulting the net R&S as on 31.03.2011 at Rs.908.14 Crore. Tangible Net Worth: The TNW increased from Rs.907.93 Crore as of 31.03.2011 to Rs.935.60 Crore as of 31.03.2011. Long Term Liabilities: The Term Liabilities increased by Rs.504.19 Crore from 31.03.2010 to 31.03.2011 mainly on account of increase in Deferred Tax liability by Rs.36.36 Crore & increase in Debentures by Rs.250 Crore & increase in Foreign currency convertible bonds by Rs.356.55. Net Block: The Net Block increased by Rs.43.20 Crore from 31.03.2010 to 31.03.2011 mainly due to increase of Rs.130.49 Crore in P&M and Rs0.20 Crore in Furniture & Fixture but also decrease of Rs.86.08 Crore in Capital work in progress & Rs.0.35 Crore in L&B. NON Current Assets: On account of decrease in the Loans & Advances, this has been taken as NCA, the total NCA decreased by Rs.77.10 Crore during 2010-2011. NWC: Due to increase in the Net Block & decrease in NCA,the NWC increased from negative(-)Rs.132.24 Crore as of 31.03.2010 to Rs.433.52 Crore as on 31.03.2011.
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Current Assets: The CA increased from Rs.586.28 Crore on 31.03.2010 to Rs.1325.71 Crore on 31.03.2011 mainly due to increase in the Sundry debtors and other Current assets. Current Liabilities: We have considered the Term Loan installments due for payment during 2011-12 as CL for 31.03.2011. The company has to repay the TL installment of Rs.243.23 Crore during 2011-2012.WC outstanding also increased from Rs.139.25 Crore (31.03.2010 Aud B/s) to Rs.203 Crore(31.03.2011 Aud B/s).The level of Sundry Creditors also increased by Rs.13.17 Crore which has altogether resulted as increase of Rs.173.66 Crore in total Current liabilities resulting the CL increased from Rs.718.52 Crore as on 31.03.2010 to Rs.892.18 Crore as on 31.03.2011. Current Ratio & DER: Due to increase in CA, the CR has increased from 0.82 to 1.49 respectively from March2010 to March2011.Though the CR is below than the minimum prescribed by our bank, however the TOL/TNW for March2011 charge 1% additional interest for no compliance of the financial covenants including Min. Current Ratio of 1.7:1 and TOL/TNW of 3.50:1. Accordingly we are charging 1% additional interest over the prescribed ROI of BPLR+0.50%. Net Income & Profitability: The Company is working as service provider to Oil Exploration companies such as ONGC Oil India ltd etc. Despite of increase in the Net Income from Rs.1071.80 Crore during 2009-2010 to Rs.1222.13 during 2010-2011, the Net Profit after Tax declined from Rs.92.01 Crore to Rs.40.65 Crore during the same period. This has happened mainly due to increase in the borrowing cost (Interest paid) on Term Loan & other direct expenses including consumption of Stores and spares. As the total outstanding of Secured Term Loans declined by Rs.122.99 Crore, the interest and financial charges paid increses by approx Rs.46.88 Crore.
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5.2 DISCUSSION
With the help of secondary data and reports provided by the bank, the findings of the study are as follows: The banks have their own credit rating system and that they try to update it with the latest method available. The ratios have a very important role to play; a thorough understanding of them leads one to the future prospects of the borrower and also tells a lot about its financial soundness. Another important thing is the balance sheet, its break up and the study of it, tells a lot about any organization. Retail loan sector in India has a long way to go; a steady growth is projected in the coming years.
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6.1
CONCLUSION
Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds of depositors i.e. general public are mobilized by means of such advance / investment. Thus, it extremely important for the lender bank to assess the risk associated with credit; thereby ensure the security for the funds deposited by the depositors. In Union Bank of India, the credit appraisal is done by thorough study of the project which involves: evaluation of management, technical feasibility, financial viability and risk analysis. The credit report is an important determinant of an individual's financial credibility. These are used by lenders to judge a person's creditworthiness. It renders credit ratings to their clients on the basis of their loan sanctioned amount, past records, validity and feasibility of their projects, etc. Every bank has its own credit rating system and it tries to update the system with the latest method available. In credit rating systems, the ratios have a very important role to play; a thorough understanding of them leads one to the future prospects of the borrower and also tells a lot about its financial soundness. Another important thing is the balance sheet, its break up and the study of it, tells a lot about any organization.
Bank takes the audited balance sheets of their borrowers and breaks it according to their prescribed Performa, calculates the key ratios and then evaluates the creditworthiness of its borrowers. From the above analysis, the important or key aspects that Union Bank of India emphasizes in rating any organization are: organizations capital, its reserve and surplus, tangible net worth, its long term liabilities, net block, non - current assets, organizations net working capital, its current assets and current liabilities, its current ratio and debt equity ratio and organizations net income and profitability.
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6.2
RECOMMENDATIONS
After carrying on the study, the following recommendations have been made: The appraisal system is to be made more realistic and transparent. The applicant and, if required, his consultant should be briefed on the objective procedures which bank applies to arrive at decisions so as to educate them to understand the requirements of bank and to prepare credit proposals in a scientific manner . The process followed in sanctioning the loan and documentation required is cumbersome; hence it is suggested to make the process easier. Bank should develop flexible systems and procedures for dealing with customers and modify their role to be a facilitator. It may either provide software to these customers to prepare stock and financial statements or help and guide them in preparation of renewal proposal / statements. A few changes and improvements in the policies could help infuse credit appraisal. The bank should expand its presence in international markets. Having such a strong technological base, the bank must use these capabilities to differentiate its products and services from those of its competitors. Union bank of India should take care that fresh generation of NPAs should not take place. It needs more efficient system to assess the quality of assets. Bank should focus on reducing the expenses as the increase in expenses has badly affected the growth in net profit. Bank should increase the number of branches only if they are profitable enough.
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REFERENCES
BOOKS: Srivastava, R.M & Nigam, Divya (2010): Management of Indian Financial Institution (10th edition), Himalya Publishing House. Bhole, L.M (2009): Financial Institution and Markets (5th edition), Tata Mc Graw- Hills. M.Y.Khans, Corporate Finance and Its Basic Usage. Credit Appraisal, Risk Analysis and Decision Making book, by DD Mukherjee. Banking Strategy, Credit Appraisal and Lending Decisions: A Risk-Return Framework. By Bhattacharya, Hrishikesh.
WEBSITES http://www.rbi.org.in/, last accessed on 8 August July, 2012 http://www.unionbankofindia.co.in/, last accessed on 14 August, 2012 http://www.unionbankofindia.co.in/about_us.aspx, last accessed on 18 August, 2012 http://www.unionbankofindia.co.in/PER_retailloans.aspx, last accessed on 25 August, 2012 http://economictimes.indiatimes.com/shiv-vani-oil-&-gas-exploration-servicesltd/balancesheet/companyid-10432.cms, last accessed on 27 August, 2012 http://www.shiv-vani.co.in/pdf/Annual%20report/AnnualReport2010-11.pdf , last accessed on 5 September, 2012 http://www.shiv-vani.co.in/pdf/Annual%20report/Annual_Rreport_2012.pdf , last accessed on 10 September, 2012 http://www.shiv-vani.co.in/pdf/notice/shivani-notice-2011.pdf ,last accessed on 19 September, 2012 http://en.wikipedia.org/wiki/Union_Bank_of_India,last ,accessed on 27 September,2012 Inter Office And Intra- Office Circulars.
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ANNEXURE
Format of Term Sheet Union Bank of India Industrial Finance Branch, New Delhi
APPROVAL OF BROAD TERMS OF THE PROPOSAL
IFB: ADV: Name of the account Account with Group Existing connection or new connection Credit Rating Background of promoters
Dated:
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(Rs. In Crores) Brief Financials Year (Aud.) Net Sales PAT(Loss) TNW* Current Ratio TOL/TNW RATIO Year (Aud.) Year (Prov.)
(Rs. In Crores) Nature of Project
Cost of Project
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MEANS OF FINANCE Nature of Facility
Amount Margin Interest/Commission Interest reset Purpose Period of the facility Moratorium Door To Door Tenor Repayment terms Security Prime
Rs. (In Crores)
Collateral security Upfront fees
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Prepayment terms Whether conforms to Loan Policy Customer profitability, (in case of existing accounts) 1. Commission earned on bills purchased/discounted. 2. Processing charges 3. Commission on LC/LG 4. Credit balances in a. SB b. CD 5. Term deposits a. Through own sources b. Through third party
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UNION BANK OF INDIA Break Up of Balance Sheet
ACCOUNT: BRANCH: Industrial Finance Branch, New Delhi
(Rs. In Crore) S.No. Particulars 31.03.2010 (Aud.) 31.03.2011 (Aud.)
(A) 1. 2.
CURRENT ASSETS Cash & Bank Balance Investments a) Govt./Other Trustee Securities b) Fixed Deposits with banks/ MMMF/ .
3.
Receivables a) Inland up to 6 months b) Exports
4.
Inventory a) Raw Materials - Indigenous - Imported
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b) Stores & Spares - Indigenous - Imported c) Stock-in-Process d) Finished Goods e) Others (Scrap) 6. Advances to Suppliers of Raw Materials / Stores/Spares Advance Tax Payment Other Current Assets TOTAL CURRENT ASSETS
7. 8.
(B) 1. 2.
CURRENT LIABILITIES Short Term borrowings from bank Unsecured Borrowings (include. ICDS etc.) Sundry Creditors Advances / Progress payment from Customers/Dep. From dealers Unsecured borrowings from others Installments of TL/DPG/Deb./R.P.Share/ADR/GDR due within one year Int. & Other charges accrued & due for payment. Int. & Other charges accrued but not
3. 4.
5. 6.
7.
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due 8. 9. 10. 11. Provision for Taxation Dividend Payable Other statutory liabilities Other Current Liabilities / ACCEPTANCES TOTAL CURRENT LIABILITIES
(C)
FIXED ASSETS (Net of Depreciation) Land & Building Plant & Machinery Other Fixed Assets Furniture & Fixture Capital Work in Progress Less: Revaluation Reserves TOTAL FIXED ASSETS
1. 2. 3. 4. 5.
(D) 1. 2. 3. 4. 5.
LONG TERM LIABILITIES Debentures Term Deposits Term Loans from Banks/ FIs Deferred Tax Liability Other Term Liabilities (include.
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ECB/ADR/GDR/Loans etc. TOTAL LONG TERM LIABILITIES
(E)
MISCELLANEOUS ASSETS Investments
1.
Amounts due from Associates/ Subsidiaries Other Loans & Advances Bals/Dep. with Government Departments/Statutory Bodies Adv. to Suppliers of Capital Goods INTEREST & OTHER RECEIVABLES DEFERRED TAX ASSET
2. 3.
4. 5.
6.
Security Deposits Book Debts Older than 6 Months
7.
Other Miscellaneous Assets/ ICD etc. TOTAL MISCELLANEOUS ASSETS
(F) 1. 2. 3.
NET WORTH Ordinary Share Capital (Paid up) General Reserves Revaluation Reserves
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4. 5. 6.
Share Premium Other Reserves Balance of Profit TOTAL NET WORTH
(G) 1. 2. 3.
INTANGIBLE ASSETS Goodwill Adverse P & L A/c Other Intangible Assets TOTAL INTANGIBLE ASSETS
TOTAL ASSETS TOTAL LIABILITIES
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ABBREVIATIONS USED
BOPP CBS VSAT EMI NRO NRE CMS E-TAX UBI USD ATM CBS PSBs RBI BFS OSMOS CAMELS CRAR
Biaxially Oriented Film Core Banking Solution Very Small Aperture Terminal Equated Monthly Installment Non Resident Ordinary Non-resident Indian Cash Management Services Electronic tax Union Bank of India Union States Dollar Automated Teller Machine Core Banking System Public Sector Banks Reserve Bank of India Board of Financial Supervision Off-site Monitoring and Surveillance System Capital Adequacy, Asset, Quality, Management, Earning, Liquidity Capital to Risk (Weighted) Assets Ratio
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GNPA MGNT EL PD EAR LGD ROC L/C L/G IAS ITS GAAP MAT NCA NWC CL CA
Gross Non Performing Asset Management Expected Loss Probability of Default Exposure at Risk Loss Given Default Registration of Charges Letter of Credit Letter of Guarantee Indian Administrative Service Indian Telecom Services Generally Accepted Accounting Principles Minimum Alternate Tax National Credit Act Net Working Capital Current Liability Current Asset
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Summer Training Project Report On Credit Appraisal

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Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

1.1 ABOUT UNION BANK OF INDIA

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

1.1.1 The Vision Statement

1.1.2 The Mission Statement

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Analysis of Credit Appraisal at Union Bank of India 18719103911

1.1.3 BOARD OF DIRECTORS

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Analysis of Credit Appraisal at Union Bank of India 18719103911

1.2 OVERVIEW OF THE INDUSTRY

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Analysis of Credit Appraisal at Union Bank of India 18719103911

1.2.1.1 Classification of the Banks

Public Sector Banks

Private Sector Banks

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Analysis of Credit Appraisal at Union Bank of India 18719103911

1.2.2 Banking in India

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Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

1.2.3 A Brief about RESERVE BANK OF INDIA

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Analysis of Credit Appraisal at Union Bank of India 18719103911

1.3 PRODUCTS AND SERVICES

Accounts & Deposits cumulative deposit scheme, deposit reinvestment certificate,

top up, EMI calculator, union smile.

External Rupee, Union Unfixed, Foreign Currency Deposit

property, and shares or debenture

Payments - Union Bill Pay

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

loans, correspondent banking

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Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

2.2 CREDIT DISBURSEMENT AT UNION BANK OF INDIA

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Analysis of Credit Appraisal at Union Bank of India 18719103911

2.2.1 Credit Risk Management

2.2.2 How does risk matter to the bank?

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Analysis of Credit Appraisal at Union Bank of India 18719103911

Gitarattan International Business School

Analysis of Credit Appraisal at Union Bank of India 18719103911

Operational Risk: It arises out of malfunctioning of information systems or service

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Analysis of Credit Appraisal at Union Bank of India 18719103911

2.2.3 Credit Risk

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