Escolar Documentos
Profissional Documentos
Cultura Documentos
On
Working Capital Management
At
Company Guide
Faculty Guide
Gomti Nagar
Greator Noida
Submitted By:
Vikas Kumar Singh
Roll No. 39
2014-16
Certificate
Page 2
Acknowledgement
I would like to extend my heartfelt gratitude to Mr. Gaurav Rapal Zonal HR Manager of
HDFC Bank for providing me an opportunity to undergo my Summer Internship Project in their
esteemed organization. I am extremely grateful to my company guide Mr. Slesh Chandra,
Personal Banker Authorizer, Gomti Nagar-2 Branch, Lucknow for his guidance and
cooperative nature that helped me in completing this project report. I have learned many new
things about the working capital loans provided by bank to the customers and also its appraisal
part while working at HDFC bank.
I would also like to thank Mr. Manoj Srivastava, Senior Manager who permitted me to
work on my project in his branch and for his timely support and advice that helped me in
preparation of this report.
I express my sincere gratitude towards my faculty guide Prof. Anand Rai at JRE Group
of Institutions, Greater Noida for his time to time guidance and encouragement to take up this
interesting topic.
Last but not the least I would like to thank the Placement Cell at JRE Group of
Institutions for placing me at a prestigious organization like HDFC Bank for my Summer
Internship Project.
Page 3
Abstract
The project report is on the study of working capital management and the credit appraisal
process of HDFC Bank Ltd. The working capital management here refers to the working capital
loan provided by the bank to the customers and its appraisal.
Working capital is one of the most difficult financial concepts to understand. In fact, the term
means a lot of different things to a lot of different people. By definition, working capital is the
amount by which current assets exceed current liabilities. It involves the relationship between a
firms short term assets and its short term liabilities.
Funds needed for short term needs for the purpose like payment of wages, payment to suppliers
and other day to day expenses are known as working capital. The goal of working capital
management is to ensure that the firm is able to continue its operation and that it has sufficient
cash flow to satisfy both maturing short term debt and upcoming operational expenses. Such
funds which are needed by business are provided by banks. HDFC bank provide working capital
loan to its prospective customers.
The first part of the report is to analyze the market, who is the prospective customers of the bank
for working capital loan. To know who are the customers of the HDFC Bank Ltd. near Gomti
Nagar Branch-2, whether they need working capital loan (CC Limit) or not, all such data needs
to be collected.
The second part of the report is the credit appraisal of the working capital loan provided by the
bank. Credit appraisal is an important activity carried out by the credit department of the bank to
determine whether to accept or reject the proposal for finance.
JRE Group of Institutions
Page 4
This report talks about bank lending. It starts with principles of lending then through role of RBI
and then types of lending i.e. Fund based lending and Non-fund based lending along with brief
explanations and examples as well.
In the following chapter Credit appraisal is briefly overviewed before talking about the credit
appraisal process in general and then the process undertaken by HDFC Bank Ltd. Credit report
and credit rating is discussed thereafter.
The last there is some of a few cases that I could fully cover during my tenure at the Gomti
Nagar-2 Branch of HDFC Bank Ltd. at Lucknow. This includes the appraisal procedure the bank
took for a working capital loan (CC Limit). In the end, I speak about my findings, conclusion and
recommendations.
Page 5
Table of Contents
SL. NO.
1.
PARTICULARS
Introduction
PAGE NO.
7
2.
10
3.
15
4.
Objectives
20
5.
Research Methodology
21
6.
22
7.
24
9.
39
8.
Case Study
44
9.
Findings
46
10.
Conclusions
47
11.
Limitations of Study
48
12.
Recommendations
49
13.
References
50
Page 6
Introduction
Management is an art of anticipating and preparing for risks, uncertainties and overcoming
obstacles. An essential precondition for sound and consistent assets management is establishing
the sound and consistent assets management policies covering fixed as well as current assets. In
modern financial management, efficient allocation of funds has a great scope, in finance and
profit planning, for the most effective utilization of enterprise resources, the fixed and current
assets have to be combined in optimum proportions.
Working capital in simple terms means the amount of funds that a company requires for
financing its day-to-day operations. Finance manager should develop sound techniques of
managing current assets.
Working capital is one of the most difficult financial concepts to understand. In fact, the term
means a lot of different things to a lot of different people. By definition, working capital is the
amount by which current assets exceed current liabilities. It involves the relationship between a
firms short term assets and its short term liabilities.
Funds needed for short term needs for the purpose like payment of wages, payment to suppliers
and other day to day expenses are known as working capital. The goal of working capital
management is to ensure that the firm is able to continue its operation and that it has sufficient
cash flow to satisfy both maturing short term debt and upcoming operational expenses. Such
funds which are needed by business are provided by banks. HDFC bank provide working capital
loan to its prospective customers.
Page 7
Working capital loan is also called as CC Limit or OD Limit, which is provided by banks to the
firms for their day to day payments to the suppliers. Every firm needs funds to carry on its day to
day operations such funds are provided by HDFC bank at lower interest rate. Firms to whom the
CC limit is provided are like: Proprietorship, Partnership, Private Ltd., Public Ltd., and HUF.
Firms should be at least 2 years old to get the CC limit from bank; this is called as Vintage
Period. The firm whose turnover is less than 7.5 crore comes under EEG and a firm whose
turnover is more than 7.5 crore comes under BBG (Business banking Group). The bank usually
provides 30% of the turnover as working capital loan to the firms. The bank keeps the Stock and
Debtors as Primary Security and Property as a Secondary Security. Bank does not keep Plot as a
security for working capital loan.
There is also a CC Limit process called Take over Process. If a firm is already taking CC limit
from some other bank, then HDFC bank also provide them CC Limit by take over there already
running CC limit from their current bank at much lower rate than they are getting now and they
also enhance the limit value.
CC Limit is called as Cash Credit Limit and OD Limit is called as Overdraft Limit. In CC Limit
bank hypothecate the stock but in OD limit bank does not hypothecate the stock, this is the
difference between CC Limit and OD Limit. But CC Limit is mostly taken by the firms.
After taking the documents from the owner of the firm regarding working capital loan
(CC Limit) the documents are send to the concerned department for further process. Now the
appraisal of the loan has to be done by the credit manager. Credit manager analyze the
documents and see whether the person is eligible for the CC Limit or not.
Page 8
Character
Capacity
Collateral
If any one of these is missing in the equation then the lending officer must question the viability
of credit. There is no guarantee to ensure a Loan does not run into problems; however if proper
credit evaluation techniques and monitoring are implemented then naturally the Loan loss
probability / problems will be minimized, which should be the objective of every lending officer.
Industry/Company Overview
JRE Group of Institutions
Page 9
The HDFC Bank was incorporated on August 1994 by the name of HDFC Bank Limited, with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January1995. The Housing Development Finance Corporation (HDFC) was
amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry
in 1994.
HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over
4014 branches spread over 2464 cities across India. All branches are linked on an online real
time basis. Customer is also serviced through Telephone Banking. The Bank also has a network
of about over 11,766 networked ATMs across these cities.
The promoter of the company HDFC was incepted in 1977 is India's premier housing finance
company and enjoys an impeccable track record in India as well as in international markets.
HDFC has developed significant expertise in retail mortgage loans to different market segments
and also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, a strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.
Business:
HDFC Bank offers a wide range of commercial and transactional banking services and treasury
products to wholesale and retail customers. The bank has three key business segments:
Page 10
Wholesale Banking Services The Bank's target market ranges from large, bluechip
manufacturing companies in the Indian corporate to small & midsized corporate and agri based
businesses.
Retail Banking Services The objective of the Retail Bank is to provide its target market
customers a full range of financial products and banking services, giving the customer a one
stop window for all his/her banking requirements.
Treasury Within this business, the bank has three main product areas Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. The Treasury
business is responsible for managing the returns and market risk on this investment portfolio.
2015
Aditya Puri
Barron's
Companies 2015
J. P Morgan Quality
recognition Award
rate
Page 11
SWOT Analysis:
Strength
Weakness
1. One of the leading new age private sector 1. Rural penetration is low.
banks.
2. Lesser no. of branches when compared
2. HDFC Bank has over 4014 branches and with its competitors.
over 11,766 ATMs, in 2464 cities in India.
3. Existing CBS across its branches.
4. Huge Employee base i.e. more than 51000
employees.
5. Large collaborations with corporate for
employee salary accounts.
Opportunities
Threats
Page 12
Organization Structure:
MD
Adiyta Puri
Treasurer
Ashish Parthasarthy
Director
Partho Datta
Director
Shyamala Gopinath
Head, Business,
Commodities & Rural
Banking
Anil Nath
Renu Karnad
Director
Keki Mistry
Director
Pandit Palande
Director
Bobby Parikh
Director
Anami Roy
Page 13
Departmental Structure:
Regional Head
Circle Head
Cluster Head
Direct Report
(DR) - Branch
Branch Head
Personal Banker
Authorizer (PBA)
Teller Authorizer
Page 14
Page 15
long period. This helps in maintaining balance between deposits and advances and to
meet depositors obligation.
Profitability: The third rule of lending is to lend at higher rate of interest than
borrowing rate. This is called as interest spread / margin. One has to strike a balance
between profitability and safety of funds. Interest rates must be charged competitively
but at the same time spread should be adequate.
Risk diversion: An old saying says never put all your eggs in one basket. A
lender must lend to a diversified customer base. Diversification must be made in
terms of geographical locations, borrowers, industry, sector etc. It is done so as to
mitigate adverse financial effects of a business cycle, catastrophe, chain effect etc.
Loan Policy: Banks are basically a lending institution. Its major chunk of revenue is
earned from interest on advances. Each bank has its own credit policy, based on the
principles of lending, which outlines lending guidelines and establishes operating
procedures in all aspects of credit management. The policy is drafted by the Credit Policy
Committee and is approved by the banks board of directors.
The credit policy sets standards for presentation of credit proposals, financial covenants,
rating standards and benchmarks, delegation of credit approving powers, prudential limits
on large credit exposures, asset concentrations, portfolio management, loan review
mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts,
regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's
lending strategy (both at the macro level and individual borrower level) and have to be in
conformity with RBI guidelines. The loan policy typically lays down lending guidelines
in the following areas:
Page 16
Page 17
Collateral security: As part of a prudent lending policy, bank usually advances loans
against some security. The loan policy provides guidelines for this. In the case of term
loans and working capital assets, bank takes as 'primary security' the property or goods
against which loans are granted. In addition to this, banks often ask for additional security
or 'collateral security' in the form of both physical and financial assets to further bind the
borrower. This reduces the risk for the bank. Sometimes, loans are extended as 'clean
loans' for which only personal guarantee of the borrower is taken.
Types of Lending:
Lending can be for long term tenure or short term tenure. Lending is broadly classified into two
broad categories: fund based lending and non-fund based lending.
Page 18
Loan: -In this case, the entire amount of assistance is disbursed at one time only, either in
cash or by transfer to the companys account. It is a single advance. The loan may be
repaid in installments, the interests will be charged on outstanding balance.
Overdraft: - In this case, the company is allowed to withdraw in excess of the balance
standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond
which the company will not be able to overdraw the account. Legally, overdraft is a
demand assistance given by the bank i.e. bank can ask for the repayment at any point of
time. However in practice, it is in the form of continuous types of assistance due to
annual renewal of the limit. Interest is payable on the actual amount drawn and is
calculated on daily product basis.
Cash Credit: - In practice, the operations in cash credit facility are similar to those of
overdraft facility except the fact that the company need not have a formal current
account. Here also a fixed limit is stipulated beyond which the company is not able to
withdraw the amount. Legally, cash credit is a demand facility, but in practice, it is on
continuous basis. The interests is payable on actual amount drawn and is calculated on
daily product basis. Concept of margin also plays a vital role unlike overdraft.
Working Capital Term Loans: - To meet the working capital needs of the company,
banks may grant the working capital term loans for a period of 3 to 7 years, payable in
yearly or half yearly installments.
Page 19
Objectives
-
To know who are the prospective customers of the bank for working capital loan.
Page 20
Research Methodology
Introduction:
Credit appraisal means investigation/assessment done by the bank before providing any
loans and advances/project finance and also checks the commercial, financial & industrial
viability of the project proposed its funding pattern and further checks the primary &
collateral security cover available for recovery of such funds.
Problem statement:
-
To know whether the interest rate is dependent upon the type of business or not
To know whether the interest rate is dependent upon the turnover or not
To study the credit appraisal system in HDFC Bank Ltd.
Data collection:
i.
ii.
Primary data:
Informal interview with manager at HDFC Bank Ltd.
Collecting information from the customers regarding working capital loans
Secondary data:
Books, Websites, Customer files at HDFC Bank, Circulars of HDFC Bank
Page 21
of documents
Title clearance reports ofReceipt
the properties
to be obtained from empanelled
Valuation
of the properties
Assessment
Proposal
to defaulters
be of
obtained
preparation
of
financial
proposal
from
data
empanelled
valuer/engineers
Check
for reports
RBI defaulters
list,Preparation
willful
list,
CIBIL
data, ECGC,
Caution list
visit
by
bank
officers
(Balance sheet, KYC Pre-sanction
papers, Different
govt.
registration
no.,
MOA,
AOA
etc.
etc
Advocates
Disbursement of Loan
Post sanction activities such as receiving stock statements, review of accounts, renew
of accounts, etc
(On regular basis)
Page 22
I.
II.
Both the above aspects need to be appraised/ examined at the time of the initial entry of a
customer to the Bank as also at the time of subsequent periodic reviews. Naturally, the appraisal
would be different in respect of:
-
Retail segment like personal loans for consumer durables, house etc
Farming sector/agriculturists
MSME sector
Page 23
in
similar
business,
RBI/CIBIL
reports
on
defaulters/willful
defaulters,
Corporate action taken by SEBI/NSE/BSE, reports from their vendors/dealers who may be our
customers, actual performance vs estimates, frequent overdrawing, history of restructuring etc.
In case of adverse report in any of the above areas, there could be justifications/mitigations
which should be looked into. If need be the appraising officer may personally visit the other bank
for personal discussions. The gist of such oral discussion may be recorded in the file of the
borrower and brought out in the proposal. KYC guidelines as framed by RBI and adopted by
Bank are to be followed by the branches.
ii.
iii.
Borrowers ability to service the principal and interest, meet the cash flow requirement in
respect of payments, absorb additional burden due to escalation of raw material cost etc
iv.
Page 24
i.
ii.
Current Ratio
iii.
iv.
v.
vi.
viii.
ix.
PAT/Capital employed
Investments
Segmental Revenue if applicable
Page 25
Cross verification with our existing customers in the line and other players in the line,
would serve as first hand information.
4. Licenses / Certifications - Ask for a copy of licenses, permits, registrations or
certifications if they are directly related to and required for the specific work the
company must perform. If copies are not available, request the number and issuing
authority of each document.
5. Web Site Addresses - All Companies have their websites. Companies that say they do
not have a website or do not need one have to be treated with caution. Good companies
always make efforts to allow clients or partners to keep in touch with them, receive notice
of changes of office address, e-mail addresses or phone numbers, reminders of services
offered or updates on new services.
6. Corporate Brochure or Company Overview - Every company should have a
professional and well-developed presentation of their business concept or services. This
evidences the level of preparation of the company, and demonstrates whether they have
sufficiently developed their capabilities. Project Reports / Information Memoranda, are
not to be taken for face value. They need to be critically examined vis--vis other sources
like similar businesses.
7. Each proposal should bear reference related to RBI/CIBIL/ECGC/ List of Defaulters /
willful Defaulter List, etc. As per existing guidelines, Branch / Zonal Office must bring
out this aspect in the proposal.
8. Pre-Sanction Inspection Branches should note to conduct pre-sanction inspections
before submitting new proposals. Inspection reports should be prepared strictly as per the
format. Findings of the inspection should be brought out in the proposal.
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9. It should invariably include the place of work of the entity in addition to visiting the
corporate office, meeting promoters & employees etc.
10. Critical information as envisaged in Credit policies / Circulars, are to be obtained and
scrutinized.
11. Scrutiny of statements of accounts with previous / existing bankers, to be done, to
ascertain their conduct. This is more so necessary while takeover of the facilities is
involved.
12. Risk Mitigation - Proper coverage of risk and mitigation in the proposal reflects good
understanding of the business. As per existing guidelines, Branch / Zonal Office must
bring out these aspects in the proposal.
13. Status of Litigation If the company is involved in any litigation/disputes/ arbitration,
Zone / Branch should give details in the proposal.
14. Assessment of Limits Financial parameters like DER, Current Ratio for W/C & DSCR,
DER, FACR, BEP, IRR, sensitivity analysis for Term Loan are to be properly captured in
the proposals. Proposals should not be considered without these parameters being
adequately brought out.
15. Risk Rating - Risk Rating Exercise for Credit Rating & Pricing has to be done as per
different Risk Scoring Modules.
16. The security which is obtained by the Bank (either as principal or as collateral) shall be
verified as to its title clearance as well as value by independent Panel Advocates/ Valuers
and periodical Encumbrance Certificate shall be obtained. In this regard, extant
guidelines, is enumerated in Branch Circular from time to time are to be meticulously
observed.
Page 27
Pre Disbursement:
Suitable monitoring of various acts by the customer/Branch officials/out-side agencies should be
done at the pre-disbursement stage. Depending upon the terms of sanction in each case, the
following actions/steps, wherever applicable, may be taken prior to disbursement:
Obtention of satisfactory credit reports from existing lenders and other service providers
such as D&B, CIBIL etc. if stipulated. Branch staff, which is processing the applications
for credit requests of new customers, should personally call on the Bank/FI with whom
the incumbent is presently enjoying facilities and discreetly enquire about the conduct
and general aspects of the account. This is in addition to obtaining status reports.
The personal visit to the operating staff of that Bank/FI may reveal more about the
proposed borrower which may not have been incorporated in the report. Wherever it is
not desirable to obtain Status Report for the fear of putting our competitor on guard,
decision may be taken on the basis of scrutiny of proponents statement of account for the
last one year with the existing Banker and the fact that the Sanctioning Authority has
satisfied itself about the credit worthiness of the proponents on the strength of statement
of account for the last one year and that status report is not being obtained for the fear of
putting the existing banker on guard should be recorded in the proposal.
However, in case Branch desires not to obtain Status Report from other Bankers/Service
providers prior to disbursement then specific approval of the higher authority viz GM NBG
and/or GM Head Office should be obtained
Page 28
In such cases the Branch should obtain status report subsequently and the staff should visit the
Bank/FI immediately after disbursement to discreetly enquire about the conduct and general
aspects of the account.
Adhering to Head Office guidelines for Credit Rating exercise pertaining to entry level
for new accounts.
Clarity in regard to draw down of amounts such as first date of disbursal and last date of
disbursal, the stages in which the monies are required to be drawn, its acceptance and
evaluation at Branch level (If these are already included in the credit proposal, the same
must be adhered to).
Vetting of documents
Keeping the duly completed/signed check list on record along with other security
documents
Page 29
During Disbursement:
Credit delivery in loan accounts is distinct from running accounts such as Cash Credit. All
disbursements whether in loan account or in running accounts, will be related to actual /
acceptable performance of the business unit and should never lose sight of basic objective of
safety of Bank's exposure in the credit assets. The disbursements should commensurate with the
progress of the project / business activity, also taking into account the extent of margin brought
in by the promoters up to the given point of time.
The sanction of the limit is not a commitment in isolation to extend funds to the borrower under
all circumstances. It is only a financial contract to make available funds for due performance of
various business objectives and goals set out in his proposal. Bank's disbursements depend upon
due performance compliance of borrower's own commitments. Therefore, the credit delivery has
to be used as an effective monitoring tool to ensure that there are only normal and acceptable
credit risks.
The following aspects wherever applicable, may be considered for monitoring:
Page 30
Certificate from Companys Statutory Auditors on the extent of cost incurred on the
project at any given point of time, implementation progress certificate from approved
architect/contractor etc., wherever applicable.
Status report on the suppliers of machinery as per the guidelines which ensures
genuineness of supplier/transaction must be obtained.
Even while making direct payments, whenever doubt arises about the genuine nature of
the transaction, due care is to be exercised.
Stock inspection data regarding regular movement of goods, actual sales keeping pace
with projections, not having unacceptable quality rejections in sales, not accumulating
slow/ obsolete inventory, elongation of debtors beyond acceptable levels, change in credit
periods from suppliers etc.
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Post Disbursement:
Monitoring of the actual performance of the borrowers on monthly basis by calling for
MSOD statements and comparing the same with the projected performance figures
appearing in the customers own CMA data submitted to Bank, sanctioned proposal / QIS
returns etc. Any substantial deviation will have to be probed into, not waiting for
submission of audited financials.
Monitoring of an account is not confined to any single office (Branches including Large
Corporate/Mid Corporate branches/Zonal Office /NBG office/Divisional Office/Head Office)
and concerted efforts will have to be made at all levels with whatever information available at
each level, to prevent any deterioration in asset quality. Under-lending or delay in lending can be
equally painful to the wellbeing/viability of the borrowers unit and this itself can lead to asset
becoming non-performing.
Page 32
Page 33
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 company's investment surroundings and a company's ability to honor its debt responsibilities. .
The ratings therefore assess an entity's ability to pay debts. There are various organizations that
perform credit rating for various business organizations.
HDFC Bank Ltd. follows a finely defined Credit Rating Model for assessing the creditworthiness
of the applicant. The credit rating model of HDFC Bank Ltd. assesses various aspects of the
projects and assigns scores against them thereby determining the risk level involved with the
project.
It is divided in five sections:
1. Rating of the borrower
-
Financial risk
Management risk
1) Rating of the borrower: This part of credit rating model deals with assessing the financial
and managerial ability of the borrower. The financial ability of the firm is derived by calculating
ratios that determine the short term and long term financial position of the firm.
JRE Group of Institutions
Page 34
Short term ratios include Current Ratio, 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.
According to the guidelines given to HDFC Bank Ltd. the ideal level is at 1.33:1 however the
acceptable level is at 1.17:1.
However at times current ratio may not be a true indicator, the current ratio for road projects is
very high but this does not indicate that the company is not using its assets well but the ratio is
high because the activity involves more in dealing with current assets. Hence it is important for
the evaluator to understand the nature of the industry.
Long term ratio include Debt Equity Ratio 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 is 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.
JRE Group of Institutions
Page 35
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 competitive it is essential to take initiatives. Such skills are developed over years of
experience, thus for better performance it is required to have a team of well qualified and
experienced personnel.
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 plays an important role in determining the
growth level of the company like
1. Level of competition: Monopoly, Favorable, Unfavorable
2. Seasonality in demand: affected by short term seasonality, long term seasonality or may
not be affected by seasonality in demand.
3. Raw material availability
4. Location issues like proximity to market,
unfavorable
5. Technology i.e. proven technology: Not to be changed in immediate future, technology
undergoes change, outdated technology.
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
Page 36
licenses, permits for ensuring smooth operations. Preparation and Submission of Financial
Statements, Stock statements in the standard format within the given time schedule.
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 an under-performance make the lender more vigilant. The income value to
the bank is also given due consideration. Thus Credit Rating of the Business takes into
consideration various aspects that have direct or indirect effect on the performance of the
business.
After evaluating the risk level involved the lender bank decides on lending interest rate.
In HDFC Bank Ltd. they are categorized in 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 HDFC Bank Ltd., a business receiving Credit Rating above level 6 are not considered good
from point of investment and thus are avoided.
Page 37
Questionnaire:
Q.1 You are doing banking or funding your business from which bank?
o
o
o
o
o
o
o
o
HDFC Bank
ICICI Bank
AXIS Bank
SBI
PNB
Bank of Baroda
Union Bank
Others, ______________
Yes
No
Yes
No
Yes
No
Proprietorship
Partnership
Private Ltd.
Less than 1 Cr
1 to 5 Cr
More than 5 Cr
Hypothesis Testing:
To know whether the interest rate is dependent upon the type of business or not.
Ho: Means of interest rate for Proprietorship, Partnership and Private Ltd. are same
JRE Group of Institutions
Page 38
H1: Means of interest rate for Proprietorship, Partnership and Private Ltd. are not same
Result:
Descriptive
95% Confidence Interval for
Mean
N Mean Std. Deviation Std. Error Lower Bound Upper Bound Minimum Maximum
Proprietorship 24 12.45
.491
.100
12.25
12.66
11
13
Partnership
7 12.04
.721
.272
11.38
12.71
11
13
Private Ltd.
4 12.16
.533
.266
11.31
13.01
12
13
35 12.34
.557
.094
12.15
12.53
11
13
Total
ANOVA
Sum of
Squares
df
Mean Square
Between Groups
1.057
.528
Within Groups
9.509
32
.297
10.565
34
Total
Sig.
1.778
.185
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Multiple Comparisons
Tukey HSD
(I) Your firm (J) Your firm
is of which
is of which
Mean
type?
type?
Difference (I-J)
Sig.
Proprietorship Partnership
.411
.234
.200
-.16
.99
Private Ltd.
.292
.294
.588
-.43
1.02
Proprietorship
-.411
.234
.200
-.99
.16
Private Ltd.
-.120
.342
.935
-.96
.72
Proprietorship
-.292
.294
.588
-1.02
.43
.120
.342
.935
-.72
.96
Partnership
Private Ltd.
Partnership
Interpretation:
Since, P Value = 0.185 which is more than significance value i.e., P>0.05
Therefore, HO is accepted
Hence we can say that, rate of interest for proprietorship; partnership and private ltd. are
same i.e. around 12%.
To know whether the interest rate is dependent upon the turnover of the business or
not.
Ho: Means of interest rate for turnover Less than 1 cr., 1-5 cr., More than 5 cr., are same
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H1: Means of interest rate for turnover Less than 1 cr., 1-5 cr., More than 5 cr. are not
same.
Result:
Descriptive
95% Confidence Interval for Mean
Std.
Std.
N Mean Deviation Error
Lower Bound
Upper Bound
Minimum Maximum
.202
.061
12.73
13.00
13
13
1-5 crore
15 12.39
.309
.080
12.22
12.56
12
13
9 11.61
.343
.114
11.35
11.87
11
12
35 12.34
.557
.094
12.15
12.53
11
13
ANOVA
Sum of Squares
df
Mean Square
Between Groups
7.883
3.941
Within Groups
2.683
32
.084
10.565
34
Total
F
47.016
Sig.
.000
Page 41
Multiple Comparisons
Tukey HSD
95% Confidence Interval
(I) How much is your
turnover?
1-5 crore
1-5 crore
.482*
.115
.001
.20
.76
1.257*
.130
.000
.94
1.58
-.482*
.115
.001
-.76
-.20
.776*
.122
.000
.48
1.08
-1.257*
.130
.000
-1.58
-.94
-.776*
.122
.000
-1.08
-.48
Interpretation:
Since, P Value = 0.000 which is less than significance value i.e., P<0.05
Therefore, HO is rejected and H1 is accepted.
Hence we can say that, rate of interest is different for different turnovers.
The business whose turnover is more than 5 cr. from them bank charges lower rate of
interest than others i.e. around 11%.
Case Study
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Mr. XYZ is a customer of the bank who holds a current account with the branch. He owns a
cement store nearby and approached the bank for a Working Capital loan (CC Limit) of
Rs. 40, 00, 000 as he wanted to expand his business.
PRE-SANCTION ACTIVITIES:
1.
2.
3.
4.
KYC formalities
Scrutiny of bank accounts
Family background, social reputation, duration in the business
Checking RBIs willful defaulters list, Special Approval List (SAL) of ECGC, CIBIL
report.
5. The acceptability of the product, its market demand/supply position, market competition,
market arrangement etc. has to be checked
6. Techno-economic appraisal of the unit to be carried out as per the guidelines by Technical
Appraisal Department (TAD) of HDFC
7. Visit to the store and residence of the applicant
8. Checking store rent agreement, residence proof etc.
9. Checking of documents
ASSESSMENTS:
1. Working capital assessment:
As this units WC requirement is below Rs.5 crores, the bank adopts Turnover
method for assessment. Under this method the WC is arrived @ 20% of the
projected turnover based on the assumption of a three month operating cycle.
2. Financial ratios:
JRE Group of Institutions
Page 43
Debt equity ratio: Mr. XYZ business D/E ratio stood at 1.7:1 which was considered
often and received the money once in a month from the customer.
Debt Service Coverage Ratio: He had a fair DSCR ratio of 1.65:1 which implied
that he generated enough Net operating income to pay off his debts.
Findings
-
By using SPSS and applying tools like One Way ANOVA and Post Hoc Test, it is clear
that bank charges lower interest rate from the businesses whose turnover is high as they
Credit is core activity of the banks and important source of their earnings which go to pay
interest to depositors, salaries to employees and dividend to shareholders.
Page 44
types of loans.
For each type of loan, there are different norms as per the guidelines of RBI.
The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators.
Conclusions
-
banks.
Every bank has its own internal credit rating procedure to rate the clients (Borrowers).
After doing the assessment of the financial indicators it is up to the judgment of the top
management of the bank to sanction such loan. The very decision could be against the
assessment result.
If the company is with bank from inception stage then they are given preference, as
credible and loyal party over their financial indicators.
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As the credit appraisal is one of the most crucial areas for any bank, some of the
analysis, but due to time constraint, analysis was of limited areas only.
The study was only on desk jobs related to credit. I was not exposed to the field
survey and valuation part.
Actual balance sheets, ratios, financial statements of the customers were not shared with me for
my records and thus my study lacks certain details.
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Recommendations
-
Closely monitoring and inspecting the activities and stocks of the borrowers from time to
time can avoid the misuse of advances.
The bank must further secure itself by holding a second charge on all the fixed assets of
the borrower.
The time period taken by the banks to sanction the limits should be significantly reduced
to allow the borrowers to make use of the credit when the need is most felt.
There should be a standard rating process to remove the subjectivity and different
perceptions of the rater (person who does credit rating process for a borrower company).
It will remove the human biasness in the process.
Personal guarantee does not give any physical asset to the bank. It is for the moral
binding on the part of the borrower. Hence, bank should prefer to use this type of
guarantee as this will reduce the default rate on the part of borrower.
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References
-
www.hdfcbank.com
www.rbi.org.in
www.wikipedia.com
www.investopedia.com
www.theofficialboard.com
Books Referred:
-
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