CHAPTER 1 4.

Limitation of the study

The present study has all the limitation of case study method.

5. Presentation of studies

The present study is arranged as follows:

CHAPTER 1- Chapter 1 an introduction gives an Introduction to the title and to the report.

CHAPTER 2 - Chapter 2 deals with profile of IDBI Bank.

CHAPTER 3 - Chapter 3 give theoretical view of the title.

CHAPTER 4 - The topic under the study is given in Chapter 4.

CHAPTER 5- chapter 5 summarizes the results of the study.

CHAPTER 2 IDBI BANK A PROFILE

The Industrial Development Bank of India Limited, now more popularly known as IDBI Bank, was established as a wholly-owned subsidiary of

Reserve Bank of India. The foundation of the bank was laid down under an Act of Parliament, in July 1964. The main aim behind the setting up of IDBI was to provide credit and other facilities for the Indian industry, which was still in the initial stages of growth and development. In February 1976, the ownership of IDBI was transferred to Government of India.

After the transfer of its ownership, IDBI became the main institution, through which the institutes

engaged in financing, promoting and developing industry were to be coordinated. In January 1992, IDBI accessed domestic retail debt market for the first time, with innovative Deep Discount Bonds, and registered path-breaking success. The following year, it set up the IDBI Capital Market Services Ltd., as its wholly-owned subsidiary, to offer a broad range of financial services, including Bond Trading,

Equity

Broking,

Client

Asset

Management.

In September 1994, in response to RBI's policy of opening up domestic banking sector to private participation, IDBI set up IDBI Bank Ltd., in association with SIDBI. In July 1995, public issue of the bank was taken out, after which the

Government's shareholding came down (though it still retains majority of the shareholding in the bank). In September 2003, IDBI took over Tata Home Finance Ltd, renamed IDBI Home finance Limited, thus diversifying its business domain and entering the arena of retail finance sector.

The year 2005 witnessed the merger of IDBI Bank with the Industrial Development Bank of India Ltd. The new entity continued to its development finance role, while providing an array of wholesale and retail banking products (and does so till date). The following year, IDBI Bank acquired United Western Bank (which, at that time, had 230 branches spread over 47 districts, in 9 states). In the financial year of 2008, IDBI Bank had a net income of Rs 9415.9 crores and total assets of Rs 120,601crores.

THE PRESENT

Today, IDBI Bank is counted amongst the leading public sector banks of India, apart from claiming the distinction of being the 4th largest bank, in overall ratings. It is presently regarded as the tenth largest development bank in the world, mainly in terms of reach. This is because of its wide network of 509 branches, 900 ATMs and 319 centers. Apart from being involved in banking services, IDBI has set up institutions like The National Stock Exchange of India. IDBI Ltd is now virtually a universal bank. Total business size of around Rs 134189 crore .It uses information technology (IT) platform to

structure and deliver personalized banking services and customized financial solutions to its clients.

VISION STATEMENT "To be trusted partner in progress by leveraging quality human capital and setting global standards of excellence to build the most valued financial conglomerate"

Business Summary

The genesis of "Industrial Development Bank of India Limited" (IDBI Ltd) can be traced to the establishment of The Industrial Development Bank of India (IDBI), its predecessor entity, in 1964, by an Act of Parliament to provide credit and other facilities for the development of Indian industry.

IDBI Ltd entered commercial banking with the incorporation of IDBI Bank Ltd as a its subsidiary. On April 2, 2005, IDBI Bank Ltd was merged into IDBI Ltd as per the scheme of amalgamation sanctioned by RBI. The merger seeks to consolidate business across the value chain and provide economies of scale to the merged entity, enabling it to offer an array of customer friendly services to its existing and prospective clients, both within the geographical boundaries of India and, in due course, abroad.

IDBI was the First Bank to introduce:

ATM Next -Online information on the ATM like Cricket scores, movie listings

First ATM network with Audio instructions Easy Fill-'The online mobile refilling service ATM locator on MMS mobile E-Tax collections system-First in India Cart to Card-First in Asia Pacific

PROBLEMS FACED BY IDBI AFTER LIBERALIZATION Net profit dropped. Decline in sanction and disbursements. Lack of proper leadership. IDBIs NPA increased rapidly. Improper business practices. ICRA downgraded IDBIs rating in 2001. Failed to retain its top-rated customers.

Achievements

IT Team of the Year(2007) Award of IBA5 Best IT Security Practices Award of NASSCOM Best CTO Award of Cyber Media Won two special awards, for Best Payments Initiative and Outstanding Achiever of the Year (2007)

New Business Initiatives

IDBI completed the reorganization of its business into separate verticals focused on SME, Agribusiness, Personal Banking, Mid Corporate, Large Corporate and Infrastructure.

Bank will also open branches in Singapore, Dubai and Shanghai, with either the Dubai or Singapore branch opening likely by the end of March.

Steps initiated for mortgage guarantee business.

Took another initiative in reaching out to the smaller clients by introducing facility of online application for educational loan.

Bank introduced a new product for encashment/sale of Foreign Currency by NRI Clients and

encashment of Travelers Cheques by Bank.

SUBSIDIARY COMPANY OF IDBI BANK

IDBI Capital Market Services Limited

IDBI Capital Market Services Ltd. (head quartered in Mumbai), is a leading provider of financial services and is a 100% subsidiary of IDBI Bank Ltd. The company was set up in 1993 with the objective of catering to specific financial

requirements of financial institutions, banks, mutual funds and corporate houses. The company

provides a complete range of financial products and services that includes:

Stock Broking-Institutional and Retail Derivatives Trading Distribution of Mutual Funds Investment Banking PF/Pension Fund Management Retail Marketing of Bonds and IPOs Depository Services

IDBI Home Finance Limited

IDBI Home finance Ltd. is 100% subsidiary of IDBI Bank Ltd. acquired the entire shareholding of Tata Finance Ltd. in Tata Home finance Ltd. in September 2003. The name of the company was changed to IDBI Home finance Ltd. Over the years, the company has taken steps to enhance its retail reach, strengthen brand image, improve asset quality, thereby achieving business growth.

IDBI Intech Limited

IDBI Intech Ltd. is a wholly owned subsidiary of IDBI Bank Ltd. IDBI has set up IDBI Intech Ltd. (INTECH) in March 2000 to tap the opportunities arising from the IT sector. INTECH capitalizes on

the banking business knowledge acquired over the years supplemented with experience in

Implementation & Management of state-of-the-art.

IDBI Gilts ltd

IDBI Gilts Ltd. was set up as a wholly owned subsidiary of IDBI Bank Ltd. to undertake Primary Dealership [PD] Business. In accordance with RBI guidelines, the PD business of IDBI Capital Market Services Ltd. [ICMS] has been de-linked and transferred to IDBI Gilts Ltd. The company was incorporated in December 2006 and became operational from July 24, 2007. The company's business ambit includes Bond trading, underwriting in auctions of primary issuance of Government dated securities and treasury bills. In addition, IDBI Gilts also plans to be a major player in the interest rate and credit derivative market.

CHAPTER 3 THEORITICAL VIEW

Micro, small and medium enterprises (MSME) sector has been recognized as an engine of growth all over the world. The sector is characterized by low investment requirement, operational flexibility, location wise mobility, and import substitution. In India, the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is the first single comprehensive legislation covering all the three segments. In accordance with the Act, these enterprises are classified in two:- (i) manufacturing enterprises engaged in the manufacture or

production of goods pertaining to any industry specified in the first schedule to the Industries (Development and regulation) Act, 1951. These are defined in terms of investment in plant and

machinery; (ii) service enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. India has a vibrant micro and small enterprise sector that plays an important role in sustaining the economic growth, by contributing around 39 per cent to the manufacturing output and 34 per cent to the exports in 2004-05. It is the second largest

employer of human resources after agriculture, providing employment to around 29.5 million people (2005-06) in the rural and urban areas of the country. Their significance in terms of fostering new entrepreneurship is well-recognized. This is

because, most entrepreneurs start their business from a small unit which provides them an opportunity to harness their skills and talents, to experiment, to innovate and transform their ideas into goods and services and finally nurture it into a larger unit.

IMPORTANCE OF SMALL AND MEDIUM ENTERPRISES Large scale generation of wage employment is possible with the growth of SMEs in on economy. The pattern of contribution of GDP in any economy will show that the SME sector is a dominant contributor to the well being of a country. SME projects do not generally involve large financial resources , but at the same time the sector is growth driver in an economy.

 THE time lag between conception of an SMEs project and commencement of business is not substantial. SME cluster take care of the 4Cs ,as per the Ganguly Committee Report ,Customer focus, Cost Control , cross sale and containing Risk. When compared to similar products and service of large sized units, SME products and service are competitive and customer friendly in terms of cost, without compromising quality.

BENEFITS IN FINANCING SMEs

Benefits in financing SMEs from the view point of the national economy. The benefits arising from higher order focus of SME financing may be broadly states as follows.

1. Increasing the contribution of the SME sector in the GDP of the country.

2. Entrepreneurial interest would be encouraged and growth in number of SMEs may be possible.

3. New products and services would be increasingly available for consumers. 4. Competitiveness in business will increase.

ACTIVITIES OF SMEs
The SME sector may concern itself with a commercial activity permissible under law .Hence, any type of manufacturing, processing or industrial activity or trading or allied operation , may be the domain of the SME sector. However, the following activities may be encouraged for the SME sector:

1. Village and cottage industries. 2. Computer software development and computer service. 3. Data conversion /Data processing service. 4. Medical/Legal transcription activities. 5. Website design and development. 6. Call centers . 7. Content development and animation.

8. Video film making. 9. Tailoring. 10. Studio. 11. Cable TV network 12.Laundry and dry cleaning.

In India , as there is no specific policy of reservation or preferential treatment for a particular type of activity for SMEs, they stand on an equal footing with large sized business units .However , the items listed above are considered more suitable for SMEs having regard the following factors:

1. Involvement of lesser amount of financial resources. 2. Lower gestation period. 3. Wide scope of marketing.

LEGAL CONSTITUTION FOR SMEs

Under the general Law/principles of Equity, any individual or group of individual , may form an acceptable form of organization to undertake the

business of an SME, provided they have attained the age of majority .Whenever specific rules of constitution exist the same should be complied with. Any particular form of constitution by itself does not

confer special benefits for an SME . The choice of a constitution (whether partnership or private limited etc)by a group of individual depends upon their resources level , business perception , convenience of management and coverage of business operation , etc.

SMEs in India are generally constitute in any of the following forms: Sole Proprietary concern. Partnership concern Limited company Hindu Undivided Family It is also possible to run SMEs as Public Trust.

UTILITY OF CREDIT RATING FOR SMEs

Credit rating is an important tool for the

assessment of any credit account, as well as for under taking post disbursement monitoring and follow-up . In this respect, the Basel Committee considers that credit rating facilitates the monitoring of credit risk . The system in each bank should be integrated into the institutions overall analysis of credit risk and capital adequacy . The system should be strong enough to support the

identification and measurement of risk from credit exposures.

In the context of an SMEs , the utility of a credit rating may be viewed from the following aspects;

1. Evaluation of the borrower in totality 2. Transaction level analysis, credit pricing and tenure. 3. Activity-wise , sector wise portfolio study, keeping in view a macro level position. 4. Fixation of outer limit for taking up , maintaining an exposure that arises out of risk rating.

5. Monitoring of existing exposures , and deciding exist strategies in appropriate cases. 6. Allocation of risk capital (economic capital) in cases of poor graded accounts. 7. A voidance of an over concentration of exposure in specific risk grades.

In short ,the credit rating mechanism for SME enables :

Bifurcation of accounts into graded risk attributes. Pricing of credit based on risk grade. Focusing higher order attention on monitoring poorly graded accounts.

Credit Rating Grades

Grade no. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Nature grade AAA AA AAA+ ABBB BB+ BBBB B

of

Definition of the Grade Highest Safety Very High Safety High Safety Adequate Safety Moderate Safety Marginal Safety Low Safety or Risk Prone Substandard or High probability of Default Doubtful or Very High Probability of Default Loss or Highest Probability of Default

PROBLEMS OF SMEs

1.Low capital base for and inadequate availability of institutional funds.

2.Low technology base and inability to move up to the current technological system owing , mainly to lack of funds required for technology up gradation.

3. Poor quality of products/service as compared to those provided by large sized units due , mainly to absence/inadequacy of quality control assessment.

4.Weak/ineffective management unable to cope with contemporary business requirements.

5.Proportionately higher amount of Non- Performing Advance (NPA)of banks/financial institution in SME sector creates risk aversion in lending.

6. Economic efficiency is limited affecting their products / services in competition with large sized units.

Nursing of SMEs
Nursing of borrowal accounts involves taking care of sick accounts so as o improve the position from the angle of safety of loans advances of lender over a period of time. Therefore both the borrower and the bank(in case of bank lending) would be interested in adopting a structured nursing programme , in view of the following . 1.From the borrowers side, it provides opportunity for designing a final restructuring ,with a roadmap for settling the final commitments in an acceptance ,with a roadmap for settling the final commitments in an acceptable manner. Wherever considered

justified, the finance charges (rate of interest/service charges 0 may be reduced by the financing bank, thereby providing necessary relief. Also through the window of the nursing arrangement , the borrower may be allowed respiratory finance on concessional terms. 2. From the financing banks side also , it may be useful in case where the ultimate viability of the business of the borrower has been satisfied . This

will enable the bank , in the course of time, to recover the amount lent to be lent under a nursing arrangement. In case a nursing arrangement is not entertained, the only other alternative available to a bank is to crystallize the securities , if any, and file a law suit for recovery . Such an extreme course of action would be undertaken when a bank is convinced that no nursing persuasion would be of any avail.

WHEN AN SME IS CONSIDERED SICK

An SME is considered sick , if : a)The account remain SUB-STANDARD for more than six months.

b)50% of the net worth (i.e. capital + reserves) is eroded due to accumulated losses.

c)the borrower has been in the business (commercial production in the case of manufacturing unit) for at least two years.

It is observed from the above that of the two minimum identification criteria, being in business commercial production is a compulsory criterion , while either the account has to remain sub standard for six months, OR erosion in net worth, are criteria of which one must be applicable so that the account may be classified as sick.

WARNING SIGNALS OF INCIPIENT SICKNESS

Prevention is better than cure, as the age old saying goes. This spirit is applicable in SME financing also. Hence , if warning signals are spotted at a nascent stage in financing an SME , the appropriate remedial measures can be initiated promptly , thereby prevention the units from actually becoming sick.

While the Regulatory Authority have not laid down any specific warning signals (as this is not possible) the following features generally indicate the incipient sickness of accounts:

 Default delayed payment of installments and/or interest in borrowal accounts like term loan ,cash credit ,overdraft etc. Cash credit overdraft facilities are supposed to be drawn up to a maximum of the sanctioned limit ,barring exceptional situation. In case there is continuous excess drawing in such accounts and/or the value of securities does not cover the outstanding balance , as per terms and condition for the facilities , this a warning signals. Frequent return of cheques due to financial reasons. Frequent return of bills drawn on various parties. Invocation of guarantees by the beneficiaries , issued on behalf of SME. Frequent complaints from suppliers of material of the SME about non payment of there bills.

 Large inventory build-up as compared to the volume of business. Allowing trade credit to its buyers for a very long period, say , over 6 months or so (this is also subject to the nature of the business) Non submission /delayed submission of Balance sheet (and profit/loss accounts).

GENERAL FACTORS RESPONSIBLE FOR ACCOUNTS BECOMING SICK

Reasons for sickness of each SME account need to be studied separately and appropriate remedial steps taken. However , the following general factors are found responsible for sickness in SME

accounts:

INTERNAL FACTORS: Diversion of fund, especially for associated sister concerns with without any interest. Business failure (product, marketing , etc.)

 Strained labour relations, leading to frequent disruption of work. Recurrent technical problem without any

permanent solution. Product obsolescence.

EXTERNAL FACTORS: Recession / severe deceleration. Non-payment of customer of concerned SME. Input/ power shortage. Accidents and natural calamities (many SMEs reportedly suffered in a massive way in the major earthquake in Gujarat on 26.1.2000) Change in government policies on excise duty/ import duty/ pollution control orders.

WHEN FINANCIAL NURSING SHOULD BE TAKEN UP

A financial nursing programme for an SME accounts may be prepared on the following basis: The unit/business is considered potentially viable.

 Thus, it must be satisfied that the borrower would be in a position to service its repayment obligation after implementation the relief package under the nursing programme , spread over a period not exceeding 5 years. The repayment period for restructured past debts should not exceed 7 years. No concession / relief should be extend after a period of 5 years from the of commencement of nursing programme.

HOW FINANCIAL NURSING IS GENERALLY UNDERTAKEN

Once an SME is identified as POTENTIALLY VIABLE, financial nursing is to be drawn up in such way that the unit turns out and starts normal functioning as soon as possible, with regard to meeting its financial commitments. The aforesaid financial nursing takes the form of providing various RELIFES AND CONCESSIONS which are generally as follows:

Penal interest, if any, charged in borrowel account is to be waived, from the date of the unit incurring cash losses. Rate of interest for existing Term Loan and working capital accounts may be reduced where justified, subject to a maximum reduction of 3 % p.a.

Interest rate on fresh working capital amount may be charged at 1.5% p.a. less than the normal rate for such accounts. Fund for startup expenses, including payments to pressing creditors, may be provided after due assessment with an interest rate charged at 1.5% p.a. less than the normal rate for such accounts. Promoters should contribute fresh funds towards a rehabilitation package, which should generally be a minimum of additional Term Loan requirement under the rehabilitation package. The above is only an indicative list. In actual cases, reliefs concessions would be worked out

depending on the economics of rehabilitation scheme.

1. SULAB VYAPAR LOAN ELIGIBLE SEGMENT Traders and Services Sector. FACILITY Fund based: Overdraft, cash credit, term loan. Bill discounting. Non fund based: Bank guarantee and letter of credit. LOAN AMOUNT Minimum: Rs. 5 lakhs maximum Rs. 500 Lakhs. TENOR TL: up to 5years. SECURITY a. Hypothecation of stock and book debts and assets financed by bank. b. Personal guarantee of the borrower. c. Collateral Security up to 110% of the loan amount.

PROCESSING CHARGES Up to 1%of loan amount.

2.DEALER FINANCE ELIGIBLE SEGMENT Distribution chain partners comprising dealer, stockists, Distributors etc. FACILITY Overdraft, Cash credit, Term loan, other working facility. PURPOSE a.Over draft/Cash credit working capital / meeting temporary mismatch of fund. b.Other working capital facilities on case to case basis. c. TL: Acquisition of fixed assets, renovation of premises, retiring of high cost debt etc. LOAN AMOUNT Minimum Rs. 10 lakhs maximum 500 lakhs. TENOR 1 year to 3 years.

 SECURITY a. exclusive charge on all assets of the borrowers. b. Personal guarantee of the borrowers. c. Collateral security as deemed necessary. PROCESSING CHARGES 1% of Loan amount.

3. PREFERRED CUSTOMER SCHEME ELIGIBLE SEGMENT All Entities in SSI segment as cover under MSMED Act 2006 having a satisfactory relationship with either IDBI bank or SIDBI. FACILITY General Purpose Overdraft/ Short term loan limit to be utilized as desired by the client. PURPOSE a. Non project specific expenses like adding/ Replacement of machinery, Balancing Equipment renovation/ addition to factory building/ fixtures, computer/ software, WC margin needs, Marketing related expenses, setting a franchise, brand building, Deposits for contract, temporary shortage of working capital

b. Initially investment in new projects where full project/ schemes as not been crystallized could also be covered under the schemes e.g. buying new industrial land or shade for expansion etc. c. Expenditure incurred 3 months before issue of offer letter by the bank could also be considered. LOAN AMOUNT a. Up to Rs. 200Lakhs for customer of IDBI Bank. b. Up to 100Lakhs for customer of SIDBI. TENOR a. Overdraft- 12 months b. Short term loan 12 months for equal repayment and no moratorium. SECURITY Extension of existing security and personal guarantee. PROCESSING CHARGES Up to 1.00% of loan amount service tax etc.

4.LEADING AGAINEST THE SECURITY OF FUTURE CREDIT CARD RECEIVABLES. ELIGIBLE SEGMENT a. Reputed Restaurants b. Hotels c. Large Petrol pumps d. Hospital FACILITY Overdraft ,Term loan given to retail merchant establishment that accept credit/debit card. PURPOSE a. OD: Temporary mismatch of funds . b. TL: Acquisition of fixed asset , renovation of premises, retiring of high cost debt , etc. LOAN AMOUNT a. minimum Rs 50Lakhs b. Maximum Rs 500Lakhs TENOR a. OD up to 1 year. b. TL up to 3 years.

 PROCESSING CHARGES Up to 1% of loan amount + applicable. SECURITY a. Hypothecation of future card receivables. b. In addition, Bank may require charge on other current asset / fixed asset for appropriate value depending upon case to case basis. c. Personal Guarantee of the borrower. 5. WORKING CAPITAL FINANCING SOFTWARE DEVELOPMENT ENTITIES ELIGIBLE SEGMENT The entity must be engaged in export of Software /software service to acceptable countries. FACILITY a. Overdraft limit b. Loan Equivalent Ratio (LER) for booking of Forward Contracts against underlying transaction. PURPOSE Working Capital Finance. service charges as

 LOAN AMOUNT Minimum Rs 25 lakhs and Maximum Rs 200 lakhs. TENOR 12 months PROCESSING CHARGES Up to 1.00% of loan amount.

6.FINANCE TO MEDICAL PRACTITIONERS

ELIGIBLE SEGMENT Promoters should have minimum MBBS/ BAMS/ BDS/ BHMS. FACILITY Term Loan, Working Capital PURPOSE The scheme is exclusively for financing to Doctor/medical practitioners to undertake all activities related to medical profession.

 LOAN AMOUNT a.Minimum :Rs 50,000 b.Maximum :Rs 2 crores TENOR a. Not exceeding 7 years b. No prepayment penalty for loan upto Rs 5 lakhs. PROCESSING CHARGES Processing fee up to 1% will be charged with a minimum of Rs 500. SECURITY a. Term loan :Exclusive charges on assets financed and to be registered with ROC in case of limited companies. b. Working capital : Exclusive charges on all the current assets. c. Personal guarantee of the promoter director (in case of limited companies)

MARGINE 1. Term loan: a. 25%for new assets b. 35% for old assets

2. Overdraft: a. 25%on stock b. 40% on book debts

7. LOANS TO SMALL ROAD WATER TRANSPORT OPERATORS (SRWTOs) ELIGIBLE SEGMENT

a. All SRWTOs b. All goods/passenger transport vehicles including light commercial vehicle , auto rickshaws, motorbuses and lorries are eligible . Small refrigerated vans , bulk carriers for carrying petroleum/edible oil.

c.Water transport units such as small boats, launches, etc. are also covered.

FACILITY
a. Term loan b. Cash credit/overdraft c. Bank Guarantee

 PURPOSE a. New Asset finance b. Working capital c. Take over of existing loans. TENOR a. OD/CC/BG-Not exceeding 1 year b. TL for new asset finance-not exceeding 5 year c. Prepayment, if any , may be allowed without any prepayment penalty. PROCESSING CHARGES a. 0.50%p.a.of loan amount. SECURITY a. Exclusive charges on assets financed and to be registered with RTO and ROC as applicable. b. Personal guarantees of the promoter directors in case of limited companies. c.3rd party guarantees MARGINE a. Depending upon the nature of facilities. b.

8. VENDOR FINANCING PROGRAM

 PRE- SALE FUNDING Target segment MICRO SMALL AND MEDIUM Enterprises as per definition gives in MSMED Act 2006 Nature-overdraft/CC and NFC LC for purchase PF material ELIGIBLITY CRITERIA Vendor of existing corporate relationships of IDBI Bank. PURPOSE Fund the manufacturing cycle TENOR one year REPAYMENT SCHEDULE From bill/Invoice Discounting PROCESSING FEES Up to 1%of loan sanctioned COLLATERAL a. second charge on the fixed assets of the vendor on reciprocal basis with the term lenders.

b. Personal Guarantee of directors/partners/sole proprietor. POST SALE FUNDING TARGET SEGMENT Micro small and medium given in MSMEDAct2006. NATURE OF LOAN Bill discounting / financing against invoice. ELIGIBILITY CRITERIA Vendor of existing corporate relationship of IDBI Bank. PURPOSE Fund the receivable cycle. TENOR 180 days maximum REPAYMENT SCHEDULE By OEM on due date.

PROCESSING FEES Up to 1 % of loan sanctioned.

 COLLATERAL Personal Guarantee of directors/partners/sole proprietor.