A REPORT

ON

CREDIT APPRAISAL OF WORKING CAPITAL FINANCE FOR ABC

LTD. AT PUNJAB NATIONAL BANK

BY

AYUSH KRIPLANI
14BSPHH010164
IBS HYDERABAD

PUNJAB NATIONAL BANK

A REPORT
ON
CREDIT APPRAISAL OF WORKING CAPITAL FINANCE FOR ABC
LTD. AT PUNJAB NATIONAL BANK

BY
AYUSH KRIPLANI
14BSPHH010164
PUNJAB NATIONAL BANK

A report submitted in partial fulfillment of

the requirements of MBA Program of
IBS Hyderabad

Distribution List:
Company Guide:

Faculty Guide:

Mr. VK Singhal

Prof. Rajesh Pathak

(Chief Manager)

(IBS Hyderabad)

Date of Submission: 8th May 2015

AUTHORISATION:
This is to certify that the Project Work titled Credit Appraisal of Working Capital
Finance for ABC Ltd. at Punjab National Bank is a bona-fide record of research
work done by Ayush Kriplani, 14BSPHH010164 in partial fulfillment of the
requirement of MBA program of IBS Hyderabad. This work has not been submitted
earlier for any other purpose, to the best of my belief.

Company Guide

Faculty Guide

Mr. VK Singhal

Prof. Rajesh Pathak

Chief Manager, CAD

IBS Hyderabad

Punjab National Bank

i|Page

ACKNOWLEDGMENT:
I wish to express my gratitude to Punjab National Bank for giving me an opportunity to
be a part of their esteemed organization and enhance my knowledge during the course of
my summer training in their premises.
In the earnest attempt to prepare this report, Prof. Rajesh Pathak has played a pivotal role
and has provided me with constant motivation as a guide. I am truly obliged and indebted
to him for the time and focus he provided.

I would like to extend a heartfelt thank to my company guide, Mr. VK Singhal (Chief
Manager) for his valuable and enlightened guidance. He shared his immense knowledge
and experience with me and took out very valuable time from his busy schedule and with
the support from my guide I could understand the working of the Credit Division, Head
Office of PNB.

I am also thankful to the library staff that provided me with the requisite study materials
and helped me during my training. I am also thankful to the employees of PNB for
providing great support and helping in the successful completion of my training.

The learning during the project was immense and valuable. My work included the study
of various aspects of Credit Administration.

ii | P a g e

EXECUTIVE SUMMARY:

Disbursing credit is the core activity of the banks and financial institutions. Smooth flow
of credit in the economy is crucial for growth and expansion of trade and commerce.
Businesses needs credit facilities for long term to fund new projects, to expand existing
capacities and in short term to meet operational and working capital requirement. Banks
earn interest income and fee based income on the loans and advances disbursed. While
expansion of the credit facilities is in the interest of both banks and businesses, at the
same time there are risks associated with the disbursal of credit. Banks have to be
cautious in deciding how much and to whom credit is being provided. Over a period of
time, sophisticated processes have been developed to ensure efficient delivery of the
credit while ensuring meticulous appraisal of proposals, evaluation of different
perspectives and risk analysis.

Objective of the credit policies is to balance the twin goals of providing convenient and
timely credit facilities to the businesses while minimizing the exposure to the risk of
default and fraud. Punjab National Bank being a leading national bank provides ideal
opportunity to study the credit delivery mechanisms, processes and procedures.

Seeking opportunities for a healthy exposure in banking sector, I Ayush Kriplani

undertook training at the Credit Administrative Division of one of the most reputed bank
in the country, Punjab National Bank, New Delhi. Through my training here I gained
practical exposure of functioning of banking industry.

The objective of the study was to analyze in depth, the loan policies & sanctioning of
loans for corporate bodies. Different corporate bodies require capital for 2 prime
purposes i.e. to finance their new projects or to meet their working capital requirements.
However, this project report deals with sanctioning of credit facilities for working capital
financing. In case of working capital financing, the basic task for the bank is to calculate
the net working capital, which is done through working capital assessment. The main tool
for assessment of working capital finance is CMA data through which maximum
iii | P a g e

permissible bank finance (MPBF) is calculated. In Punjab National Bank MPBF is

calculated using following method:

1. Chargeable Current Asset

2. Other Current Asset
3. Total Current Assets (1+2)
4. Current Liability (other than bank borrowings)
5. Working Capital Gap (3-4)
6. Margin (25% of total current assets)
7. Projected NWC
8. Permissible Bank Finance (5-6) or (5-7) whichever is lower.

This project report also explains how PNB uses its risk rating to rate any company, in
order to determine the credit risk involved with the company. The credit risk rating can
be helpful in fixing the correct pricing for financing.

In order to understand these functions, I went through various books provided by the
banks library to understand the theory behind working capital and appraisal system. Also
some real proposals were studied to understand the basic procedures involved in the
workings.

Banks have to be very cautious while providing credit to companies & must ensure the
use of such funds in accordance with the proposed use. Thus in order to minimize the risk
and at the same time to earn suitable income in the form of interest, a thorough
understanding of the proposal and the company is required. Also in order to obtain the
loan every company tries to present its best image to the bank, thus its the job of the
manager to analyze the financials of the company completely in order to correctly assess
the companys creditability and ability to pay back the loan. This report explains the
basic procedure necessary to achieve the above mentioned objectives.

iv | P a g e

TABLE OF CONTENTS

PARTICULARS
Certificate
Acknowledgement
Executive Summary
S. NO.
1.

2.

3.

4.

PAGE NO.
i
ii
iii-iv
PARTICULARS

About the project

1.1 Background
1.2 Objectives
1.3 Methodology
1.4 Scope of the study
1.5 Limitations of the study
Banking industry at a glance
2.1 Definition of a bank
2.2 Structure of banking industry
About Punjab National Bank
3.1 Corporate profile
3.2 Vision
3.3 Mission
3.4 Diversification of PNB
3.5 New IT based products/services
3.6 Achievements and Awards
3.7 Financial Performance (2014)
3.8 Organization Structure
3.9 About CAD
3.10 Proposal
3.11 Risk Management Department (RMD)
Working Capital Management
4.1 CMA data for assessment of WC Requirements
4.2 Main factors to be analyzed in CMA forms
4.3 Types of lending
4.4 Assessment of fund based working capital
4.5 Fund based facilities
4.6 Assessment of non fund based working capital facility
4.7 Deferred Payment Guarantee

PAGE
NO.
4
4
5
5-6
6-7
7
8
8-10
11
12
12-14
14
15
15
15
16
16-18
19-21
22
23-24
25
26-29
29-30
30-31
31-32
33-35
35-36
36-40
40
Page 1 of 82

5.
6.
6.1
7.
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
7.13
7.14
8.
9.
10.
11.

Key financial ratios

41-43
Credit risk rating
44-45
Credit risk rating at PNB
45-47
Case study on working capital financing
48
Brief about the company
48-49
Gist of the proposal
50
Industry/Sector Analysis
51
Borrowers profile
52-54
Financials of ABC Ltd.
54-59
Credit rating of ABC Ltd.
59-61
Security and Pricing
62-64
Details of working capital limits from the consortium/multiple 65
banking
Assessment of Fund Based Limits
66
Assessment of Non Fund Based Limits
66-68
Strength and weakness of ABC Ltd.
69
Risk with Mitigants/Observations
70-72
Recommendations
73
Conclusions
73-74
Learning from SIP
75-76
List of Abbreviations
77-78
References
79
Appendix
80-82

List of Tables:

S. NO.
1
2
3
4
5
6
7
8
9
10
11

PARTICULARS
Table 1: Performance Highlights of PNB
Table 2: Profit for 2014
Table 3: Profitability Ratios (2014)
Table 4: CAD (Sanctioning Power)
Table 5: Operating Cycle
Table 6: Risk Model
Table 7: Credit Risk Rating
Table 8: Details of ABC Ltd.
Table 9: Gist of the Proposal
Table 10: Borrowers Profile
Table 11: Financials of ABC Ltd.

PAGE NO.
16-17
17
18
22
27-28
45-46
46-47
49
50
52-54
54-56
Page 2 of 82

12
13
14
15
16
17
18
19
20
21
22.

Table 12: Key Financials

Table 13: Calculation of TNW
Table 14: Credit Rating of ABC Ltd.
Table 15: Security
Table 16: Account Details of ABC Ltd.
Table 17: Pricing
Table 18: Working Capital Limits under Consortium
Table 19: Assessment of Fund Based Limits
Table 20: Assessment of LCs
Table 21: Assessment of BG
Table 22: Risk with Mitigants/Observations

56
57
59-61
62
63
64
65
66
66-67
68
70-72

List of Figures:

S. No.
1
2
3
4
5
6
7
8
9
10

PARTICULARS
Figure 1: Banking Industry of India
Figure 2: Structure of Banking Industry
Figure 3: PNB Hierarchy
Figure 4: Organization Structure at PNB
Figure 5: Structural Hierarchy within PNB
Figure 6: Operating Cycle
Figure 7: Types of Facilities
Figure 8: Balance sheet of ABC Ltd.
Figure 9: Profit and Loss A/c of ABC Ltd.
Figure 10: Cash Flow Statement of ABC Ltd.

PAGE NO.
10
11
19
20
21
27
32
80
81
82

Page 3 of 82

1. About the project :

1.1 Background:

PNB is one the biggest public sector banks in India. It has the biggest network of
ATMs and is continuously improving its technology in order to meet the present
days competition.

In this report we will understand the different steps that are taken while any proposal
for a loan is passed through the bank. There are two types of loans i.e. Working
Capital and Term Loans. However in this project we will talk about the loan for
working capital financing while working on the live case study of ABC Limited.

The working capital assessment includes the following:

To prepare the CMA data for WC assessment in order to ensure optimum investment
in current assets so that the normal operations are not affected adversely.

To track and evaluate the health of borrower accounts on a continuous basis through
PMS report that is to detect unsatisfactory /adverse signals at an early stage in a
comprehensive manner and to propose speedy corrective and remedial steps to
prevent the account from becoming NPA as well as to minimize the loan losses.

To understand the importance of appropriate and effective risk management along

with the maintenance of comprehensive risk policies.

To understand the treatment of sick units either by restructuring or by bifurcating the

units.

Page 4 of 82

1.2 Objectives:

The main objective of this report is to understand in-depth sanctioning and analysis of
working capital loan and their appraisal by Punjab National Bank for the corporate
sector through different case studies.

To assess the financial position of the company that approaches PNB for the credit
finance purpose. This would involve analysis of past and present financial statements,
analysis of the cash flow and impact of the project undertaken on it and critical
analysis and evaluation of CMA data.

To judge whether the project is viable or not i.e. whether it can generate adequate
profit for servicing its debts within a reasonable period of time and still left some
funds for further development. In order to understand the whole project needs to be
assessed for its strengths and weaknesses.

1.3 Methodology:

In order to learn and observe the practical applicability and feasibility of various
theories and concepts, the following sources are being used:

Discussions with the company guide and other staff members.

Discussions with various other department heads.

Secondary Sources of Information:

RBI guidelines regulating the activities of the banks.

Bank credit policy and related circulars and guidelines issued by the bank

Research papers and documents prepared by the bank and other related officials.

Study of proposals and manuals.

Website of PNB and other net sources.

Page 5 of 82

How the work was undertaken:

Academic Understanding: The project uses the concepts studied in financial

management like financial statements, receivables management, cash flow statement,
working capital management.

On the Job Training: In this we looked upon the various cases of working capital
financing which are already done by the bank to understand the assessment of
working capital, what are the policies and the guidelines on which bank adheres to
and what are the parameters which banks take into consideration

The in-depth analysis on these topics has been done through case study that gave a
better understanding and highlights the practical implementation.

Assessment of WC requirements through CMA forms.

Credit Rating of the company.

The study has also been completed with the help of secondary data collected from the
records, circulars and notifications issued by PNB from time to time.

1.4 Scope of the Study:

With a constant improvement in the technology as well as the financial sector, banks
are exposed to a greater amount of risk. Thus in the present scenario efficient project
appraisal has an assumed a great importance as it can check and prevent induction of
the weak accounts to our loan portfolio. All possible steps need to be taken to
strengthen pre-sanction appraisal.
The report seeks to present a comprehensive picture of credit management in the bank
as its effectiveness is highlighted by the quality of its loan portfolio. The study is
undertaken is undertaken to understand the process of preparation of CMA data for
WC assessment and credit risk management. These form important pillars for any
financial business.

Page 6 of 82

In the Indian financial circumstances, it becomes important to keep a track on

borrower accounts to prevent the loan from becoming NPA. This requires a
continuous evaluation. Further the sick units may undergo restructuring as well as
bifurcating. Hence the study covers all these aspects.

1.5 Limitations of the study:

Assumptions and forecasting are based on the current market conditions and volatility
in prices is quite high.

All the information cannot be included as most of the information is confidential and
not approachable.

The study is done keeping in mind the policies of the head office.

Government policies have a significant impact on certain industries.

The data used in the study is secondary which can lead to some kind of discrepancy,
anomaly or biasness in the study.

The financial statements of the proposed project that we will appraise are subject to
risks and uncertainties that could cause results to differ materially from those
expressed in the statements. Such risks and uncertainties include, but are not limited
to:

1) Changes in Indian Law.

2) Changes in Indian or global economic conditions.
3) Government regulations; disputes with labor organizations.
4) Availability of new and improved technology.

Page 7 of 82

2. Banking industry at a glance:

Bank is the main confluence that maintains and controls the flow of money to make the
commerce of the land possible. Government uses it to control the flow of money by
managing Cash Reserve Ratio (CRR) and thereby influencing the interest rates.

2.1 Definition of a Bank:

In India, definition of banking has been given in the Banking Regulation Act (BR
Act), 1949. According to Sec 5(c) of the BR Act, A banking company is a company
which transacts the business of banking in India. Further Sec 5(b) of the BR act
defines banking as, accepting for the purpose of lending or withdrawal, by cheque,
draft and order or otherwise.

The functions of bank include accepting deposits from the public and other
institutions and then to direct them as loans and advances to parties mainly for growth
and development of industries. It extends loans for the purpose of education, housing
etc. and as a part of social duty towards agricultural sector as decided by the RBI. The
bank takes the deposit at lower level of interest rate and gives loans at higher rates of
interest. The difference in these transactions constitutes Punjab National Bank main
source of income.

Banking in India has undergone startling changes in terms of growth and structure.
Organized banking was prevalent in India since the establishment of The General
Bank of India in 1786. The Reserve Bank of India (RBI) was established as the
central bank in 1955. RBI undertook an exercise to reduce the fragmentation in the
Indian Banking Industry post independence by merging weaker banks with stronger
banks. This resulted in the reduction of the number of banks from 566 in 1951 to 85
in 1969.

Page 8 of 82

The economic reforms unleashed by the government in early nineties included

banking sector too. Entry of new private banks was permitted by RBI under specific
guidelines. A number of liberalization and deregulation measures like efficiency,
asset quality, capital adequacy and profitability have been introduced by the RBI to
bring Indian banks in line with International best practices. With a view of giving
State owned banks operational flexibility and functional autonomy, partial
privatization has been authorized as a first step, enabling them to reduce the stake of
the government to 51%.

Recently, the banking system emerged relatively unscathed from the global economic
downturn of 2008-09. While credit growth slowed down, banks were able to control
the level of non performing assets (NPAs), thanks partly to the Reserve Bank of India
allowing one time restructuring of accounts. The government has been supporting the
growth of public sector banks by infusing capital as per requirement. The government
is expected to continue its support for the banking industry, while simultaneously
imposing stringent prudential norms to ensure its orderly growth.

Presently, the Indian banking sector consists of 26 public sector banks, 20 private
sector banks and 43 foreign banks along with 61 regional banks rural banks and more
than 90,000 credit cooperatives.

Page 9 of 82

Figure 1- Banking Industry Of India

Page 10 of 82

2.2 Structure of banking industry:

Figure 2- Structure of banking industry

Page 11 of 82

3. About Punjab National Bank:

PNB was founded in the year 1895 at Lahore as an off-shoot of the Swadeshi Movement.
It has the distinction of being the first Indian Bank to have been started solely with Indian
Capital. The bank was nationalized in July 1969 along with other 13 banks.

The bank made steady progress right from its inception. It has shown resilience to tide
over many a crisis. It withstood the crisis in banking industry of 1913 and the severe
depression of the thirties.

With the passage of time, the bank grew its operations and its reach throughout the
country. It also brought smaller banks under its banner like The Bhagwan Dass Bank
Limited, Universal Bank of India, The Bharat Bank Limited etc.

3.1 Corporate Profile:

Punjab National Bank is an Indian financial services company based in New
Delhi, Delhi, India. Founded in 1894, the bank has over 6,300 branches and over
7,900 ATMs across 764 cities. It serves over 80 million customers. Punjab National
Bank is one of the Big Four banks of India, along with State Bank of India, ICICI
Bank and Bank of Baroda. The bank has been ranked 248th biggest bank in the
world. PNB has a banking subsidiary in the UK, as well as branches in Hong Kong,
Dubai and Kabul. It has representative offices in Almaty (Kazakhstan), Dubai,
Shanghai (China), Oslo (Norway) and Sydney (Australia).
With its presence in all the important centers of the country, PNB offers a wide
variety of banking services which include corporate and personal banking, industrial
finance, agricultural finance, financing of trade and international banking. Among the
clients of the bank are Indian conglomerates, medium and industrial small scale
industries, exporters, non-resident Indians and multinational companies. The bank
enjoys strong fundamentals, large franchise value and good brand image in the
market.
Page 12 of 82

The bank strength lies in its corporate belief of growth and stability.
With over 60 million satisfied customers and more than 5100 offices including 5
overseas branches, PNB has continued to retain its leadership position amongst the
nationalized banks. The bank enjoys strong fundamentals, large franchise value and
good brand image. Besides being ranked as one of the Indias top service brands,
PNB has remained fully committed to its guiding principles of sound and prudent
banking. Apart from offering banking products, the bank has also entered the credit
card, debit card, bullion business, life and non life insurance, asset management
business etc. PNB has earned many awards and accolades during the year in
appreciation of excellence in services, Corporate Social Responsibility (CSR)
practices, transparent governance structure, best use of technology and good human
resource management. During the FY 2014 the bank achieved the net profit of Rs
140512 lacs. Bank has a strong capital base with capital adequacy ratio of 12.29% as
on March 2014. The bank had the advances ratio of 75.06% and the capital employed
ratio of 9.29% for the year ended march 2014. Punjab National Bank ratio of net non
performing assets to net advances declined to 2.8% as of 31 December 2014, from
3.07% as on September 2013.
Bank always looked at technology as a key facilitator to provide better customer
service and ensure that its IT Strategy follows the Business Strategy so as to arrive at
Best Fit and the bank has made rapid strides in this direction. All branches of the
bank are under Core Banking Solution (CBS) since December 2008, thus covering
100% of its business and providing anytime anywhere banking facility to all
customers including customers of more than 3200 rural and semi urban branches. The
bank has diversified its offering to young generation and offered internet banking
services to its customer which enables online booking of rail tickets, payment of
utility bills, and purchase of airline tickets for their customers. Towards developing a
cost effective alternative channels of delivery, the bank with 5050 ATMs has the
largest ATM network amongst Nationalized Banks.
With the help of advanced technology, the bank has been a front runner in the
industry so far as the initiatives in terms of Financial Inclusion. With its policy of
Page 13 of 82

inclusive growth, the banks mission is Banking For Unbanked. The bank has
launched a drive for biometric smart card based technology enabled financial
inclusion with the help of business correspondents/business facilitators (BC/BF) so as
to reach out to every customer. The bank has started several innovative initiatives for
marginal groups like rickshaw pullers, vegetable vendors, dairy farmers etc. Bank has
launched a welfare scheme of adoption of village viz., PNB VIKAS. Under the
scheme bank has selected 117 villages in different circles for all round improvement
in the living standards of villagers. Besides, bank has formed PNB PRERNA, an
association of the wives of the banks senior management. The association through its
voluntary initiatives has undertaken activities like distribution of food to the poor and
needy, provision of computers, books, stationary items to poor girl students at various
orphanages and schools etc.

3.2 Vision:
To be a Leading Global Bank with Pan India footprints and become a household
brand in the Indo- Gangetic Plains providing entire range of financial products and
services under one roof .

To evolve and position the bank as a world class, progressive institution providing
comprehensive financial and related services.

Integrating frontiers of technology and services various segments of the society,

laying more emphasis on the weaker sections of the society.

Committed to excellence in servicing the public debt and also excelling in corporate
values.

Page 14 of 82

3.3 Mission:
Banking for the unbanked

Use latest technology aimed at customer and act as an effective catalyst for an overall
socio-economic development.

To provide excellent professional services and improve its position as a leader in

financial and related services.

Build and maintain teams of motivated workforce with high work ethics.

3.4 Diversification of PNB

Diversification initiatives of the bank have shown promising results. PNB has
undertaken bullion business, merchant business, mutual fund business, PNB Debit
Card and has also undertaken foreign exchange business. Consistent profit
performance, improved fundamentals and strong technology base have provided PNB
distinct advantages to meet the forces of competition effectively.

3.5 New IT Based Products/Services:

PNB has launched several new products/services with special focus on various
customer segments. During the year bank introduced various products/services such
as

World travel card as a prepaid card in 3 currency denomination for person intending
to travel abroad.

Prepaid gift card (PNB Uphaar).

Kisan credit card enabled for ATMs.

VAT collection through internet banking channel.

Introduction of passbook facility for FI customers.

Inward remittances with western money union and money gram.

Page 15 of 82

3.6 Achievements and Awards:

MSME Banking Excellence Award 2014.

PNB bags RBI Rajbhasha Award 2014.

Annual Society Banking Excellence Award 2014.

Golden Peacock Business Excellence Award 2014 by Institute of Directors.

Award for CSR Activity 2014.

PNB bags Golden Peacock Award for innovative product/service for the year 2014.

Vigilance Excellence Award 2014.

3.7 Financial Performance (2014)

PNB has maintained its frontline position in the Indian banking industry through its
performance in terms of net profit, operating margins, total business deposits, CASA
deposits and customer base.
The key contributors to the banks impressive operational and financial performance
has been bank focus on customer based business with trust on SME, agriculture, more
inclusive approach to banking, better asset management, improve margin
management, thrust on recovery and increased efficiency in core operations of the
bank.
The performance highlights of the banking terms of business and profit are shown as
follow:
Rs. (In Crores)
Parameters

Mar14

Mar13

Mar12

Mar11

Operating
Profit

7160.15

7009.95

6703.95

5698.96

Page 16 of 82

Net Profit
Margin (%)

7.7

11.4

13.4

16.6

Deposit

4612045

3990002

3844082

3162319

Advance

3660732

3202891

3013465

2477466

Table 1 Performance Highlights of PNB

Profit Financials (2014):

Rs. (In Crores)
Sr. No.

Particulars

March14

Interest Income

449581

Interest Expense

282203

NII (spread) (1-2)

167378

Other Income

47103

Gross Profit

71563

Profit Before Tax

49965

Profit After Tax

34522

Table 2 Profit For 2014

Page 17 of 82

Profitability Ratios: Financial Year (2014)

Rs. (In Crores)
Sr. No.

Particulars

March14

Return on net worth

9.39%

Return on long term fund

86.17%

Net profit margin

7.28%

Return on assets

1063.78

Adjusted cash margin

7.85%

Table 3 Profitability Ratio (2014)

Page 18 of 82

3.8 Organization Structure:

The bank has its corporate head office at Bhikaji Cama at New Delhi. The delegation
of power is decentralized up to the branch level in order to enable quick decision
making within the company. The top down approach followed within the PNB can be
easily understood through the following two diagrams:

HEAD OFFICE

CIRCLE OFFICES

BRANCHES

Figure 3 PNB Hierarchy

Page 19 of 82

Board of
directors

CMD

ED

GM(credit)

GM(NPA and
weak account)

GM(retail and
lending)

GM(treasury)

GM(IRMD)

DGM

DGM

DGM

AGM

AGM

AGM

GM(deposits)

GM(audit)

Functional Head

Figure 4 Organization Structure at PNB

CMD- Chief Managing Director

ED- Executive Director
GM- General Manager
AGM- Assistant General Manager
DGM- Deputy General Manager

Page 20 of 82

Delivery channels at PNB:

The following figure clearly describes the structural hierarchy within PNB

Corporate
office(HO)

Circle
office (CO)

Branch
office
(BO)

Circle
office (CO)

Large
corporate
branches

Retail
Hub

Circle
office
(CO)
Specialized
branches
e.gagriculture

Figure 5 - Structural Hierarchy within PNB

There are different departments within PNB also which take care of their own
responsibilities and coordinate with other departments in order to maintain smooth
functioning of the organization as a whole. These are:

CAD

HRD

Treasury

Risk Management Department

International Banking Division

Page 21 of 82

3.9 About CAD:

CAD i.e. Credit Administration Division is the operational department of the bank
that deals with proposal for loans received by the bank. It looks after the proposal for
all types of credit which falls within the power of GM. A Credit Proposal goes
through different levels of verifications to ensure internal controls and other practices
to ensure that exceptions to policies, procedures and limits are reported in a timely
manner to the appropriate level of management for action. The bank has introduced
committee system in credit sanction process where in every loan proposal falling
within the vested power is discussed in credit sanction committee. Such committees
have been formed both at head office and zonal levels.

CAC at HO
level
HOCAC
Level I
HOCAC
Level II
HOCAC
Level III
Management
Committee

Headed by
Senior
most
(credit)
Senior most ED
CMD
MC

Credit Proposals
GM Above Rs. 35 crore but up to
Rs. 50 crore
Above Rs. 50 crore and up to
Rs. 100 crore
Above Rs. 100 crore and up to
Rs. 400 crore
More than 400 crore

Table 4 CAD (Sanctioning Power)

The CAD is assisted by the Risk Management Division (RMD), technical department
and the industry desk for the risk analysis and technical feasibility of credit proposals.

Page 22 of 82

3.10

Proposal:

In this section we would be discussing about:

Key points to be mentioned in a credit appraisal proposal report.

Documents to be attached with the proposal.

Information required to be penned in proposal reports made by the CAD

department of PNB.
Preparation of the Proposal:
A proposal is a document connecting the link between the borrower and the
lending institution and it helps to appraise the advance. Generally a branch
prepares a proposal and sends it to the controlling office. The controlling office
never talks directly with the borrower and all its decision pertaining to credit
extension to the borrower depends only on the information which is conveyed
through the proposal. Thus the proposal should convey all the relevant
information into it.
The Proponent:
The proposal should reveal the information like name of the proponent, his total
worth, assets and liabilities, date when he dealt with the bank, his deposits and
other ancillary benefits derived by the bank from his association. If there are two
or more partners, individual worth of each of the partners should be given.
The Business:
The proposal should reveal the information like date of commencement of the
business, nature of business and manufacturing process if any, licenses for
business, financial statements, profitability turnover in the business, future
prospects etc. Even when the limit is within the sanctioning authority of the
manager, the summary of the balance sheet/CMA data should be duly audited by
certified auditor. The projections for the next years and the analysis of the
Page 23 of 82

achievement so far are also recommendable. The turnover in the account and sales
turnover in the business should be compared with industry standards as provided
by the RBI and wide variations if any should have a valid reason associated with
it.
The Security:
The proposal should supply information like the exact nature of the security
offered as a primary and/or collateral security, its value, ownership etc. The list of
security documents required to be obtained, insurance, particulars of registration
of charge wherever necessary, inspection of the stocks and margin stipulations. If
the collateral security is immovable property, the entire details such as extent of
land location, date of valuation and even the current value as per some
approximation should be provided.
The Facility:
The proposal should reveal the information like the type of facility required,
extent of limits required and the basis of assessment of limits, repayment terms,
purpose of advance, sources of repayment etc. If the facility being reviewed,
particulars of current facilities, conduct of accounts and audit remarks should be
given in the proposal.
Managers comment and recommendations:
Apart from the above mentioned information, the branch manager needs to
comment and give recommendations in a complete and comprehensive manner.
The manager should comment on the following points:

The nature of business,

Availability of infrastructure and raw materials and arrangements made,

Profitability of the project,

Security available and guarantor proposed.

Page 24 of 82

3.11

Risk Management Department (RMD):

Credit Risk is the possibility of loss associated with changes in credit quality of
the borrowers or counter parties. In a banks portfolio, losses stem from outright
default due to inability or unwillingness of a borrower or counter party to honor
commitments in relation to lending, settlement and other financial transactions.
PNB has an elaborate risk management structure in place. Credit Risk
Management structure at PNB involves:

Integrated Risk Management Division (IRMD)

Circle Risk Management Departments (CRMDs)

Risk Management Committee (RMC)

Credit Risk Management Committee (CRMC)

Credit Audit Review Division (CARD)

The risk management philosophy and policy of the bank focuses on reducing
exposure to high areas, emphasizing more on the promising industries, optimizing
the return by striking a balance between risk and return on assets and striving
towards improving market share to maximize shareholders value.
The credit risk rating tool has been developed with a view to provide a standard
system for assigning a credit risk rating of the borrower of the bank according to
their risk profile. The rating tool is applicable to all large corporate borrower
accounts availing total limits (fund based and non-fund based) of more than Rs.
12 crore or having total sales/income of more than Rs. 100 crore. The bank has
robust credit risk framework and has already placed credit risk rating models on
central server based system PNB TRAC, which provides a scientific method for
assessing credit rating of a client. Taking a step further during the year, the bank
has developed and placed on central server score based rating models in respect to
retail banking. These processes have helped the bank to achieve fast and accurate
delivery of credit, bring uniformity in the system and facilitate storage of data &
analysis thereof. The analysis also involves analyzing the projections for the
future years.
Page 25 of 82

4. Working Capital Management:

Working capital is defined as the total amount of funds required for day to day operations
of a unit. It can be referred as the current asset holding of an enterprise. Its often
classified as Gross Working Capital (GWC) and Net Working Capital (NWC). Working
Capital finance is utilized for operating purposes, resulting in creation of current assets
(such as inventories and receivables). This is in contrast to term loans which are utilized
for establishing and expanding a manufacturing unit by the acquisition of fixed assets.
Gross Working Capital refers to the funds required for financing total current assets of a
business unit. Net Working Capital, on the other hand is the difference between current
assets and current liabilities (including bank borrowings) that is nothing but the surplus of
long term sources over long term uses.
A positive NWC is always desirable as it provides not only margin for the working
capital requirement but also improves ability of the borrower to meet its short term
liabilities.
A negative WC implies that the short term funds have been diverted for long term uses
and the firm is facing a liquidity crunch. Such situations arise due to losses. In such a
situation company is forced to raise long term debt to avoid issues in the near future.
Every business unit has an operating cycle, which indicates that a unit procures raw
material from its funds, converts them into stock in progress which is again converted
into finished goods which can be sold for cash and thus transformed into fund.
Alternatively, it can be sold on credit and on realization thereof gets converted into fund.
The operating cycle is described in terms of number of days or months varying from
company to company
Thus every rupee invested in current assets at the beginning of the cycle comes back to
the promoter with the profit element added, after the lapse of a specific period of time.
This length of time is known as operating cycle or working capital cycle.

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Funds

Raw
Materials

Receivables

Finished
Goods

Stock In
Process

Figure 6 Operating Cycle

In order to keep the operating cycle going on, certain level of current assets are always
required, the total of which gives the amount of working capital required. Thus total
working capital can be obtained by assessing the level of various components of current
assets.

Stages
Raw-Material

II

Stock in
Process

III

Finished Goods

Time
Holding Period

Value
Value of RM consumed
during the period
Time taken in converting RM + Manufacturing
RM to FG
expenses during the period
(Cost Of Production)
Holding period of FG before RM + Manufacturing
being sold
expenses + Administrative
Overheads for the period
(Cost Of Sales)
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IV

Receivables

Credit allowed to buyer

RM + Manufacturing
expenses + Administrative
Overheads + profit (sales)
for the period

Table 5 Operating Cycle

Factors Affecting the Requirement of Working Capital:

1) Nature of Activity: Need for working capital depends upon what type of business the
firm is in. Working Capital requirements for a manufacturing firm will depend on various
factors such as products, technologies etc. Thus a manufacturing will require more
working capital as compared to trading and service units.

2) Length of Operating Cycle: More the length of operating cycle, more the requirement
of working capital. If the operating cycle will be more than the amount invested will take
longer to get converted into cash thus the firm will need more working capital in order to
maintain its operations.

3) Market Trend: The market trend of allowing credit to customers also varies from
industry to industry and from city to city. More the credit allowed to customers more is
the need of working capital.

4) Availability of Raw-Materials: When the availability of raw-materials is assured and

comfortable, lower stock maintenance is required. When there is expectation of shortage
or rise in prices, more money is blocked in current assets.

5) Location of the unit: When the unit is located near the source of raw material, lower
shortage will result in lower working capital.
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6) Type of customers: When there are regular customers, low stock of finished goods is
needed. When the sales are to be made to walk-in customers, more level of stock is
required this will block the funds.

7) Seasonality Factor: When the raw material required is available in a particular season,
the stock for the whole year is to be purchased in the particular season. E.g. - Sugarcane.
Similarly for the products required in a particular season higher level of finished stocks
have to be kept.

4.1 CMA Data (Credit Monitoring Arrangement) for Assessment of WC

Requirements:
Companies approaching bank for working capital financing need to assess their
working capital requirements. This assessment forms the most basic part of working
capital and companies must present a clear picture of this assessment to the banks for
the sanction of loan. CMA data is one of the resources used to assess working capital
for a company and it involves the preparation of number of forms. These forms have
a prescribed format in which they are presented and these forms clearly define
financial position of the company. CMA data distinguishes current assets and current
liabilities and determines the net working capital for a particular period. This net
working capital is then used to determine one of the most important variable i.e.
Maximum Permissible Bank Finance (MPBF). The bank adopts a suitable method for
the determination of MPBF using any one of the methods, Tandon or Nayak
Committee.
In PNB, MPBF is assessed by using the method recommended by Nayak Committee
if the amount demanded is less than Rs. 5 crore and through Tandon Committees 2nd
rule otherwise.
Preparation of CMA data forms an integral part of CAD and it is based on this data
that the further steps are taken. CMA consists of six forms and they are:

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FORM I: Break up of facility: This forms gives details regarding the different
forms in which credit has been asked by company such as cash credit, packing credit,
letter of credit, bank guarantee etc.

FORM II: Operating Statement or Profit and Loss Statement: This help banker to
know about the expenses and tells about the income generated during the year.

FORM III: Analysis of Balance Sheet: This helps banker to assess the financial
health of an entity on date of documentation of the business entity.

FORM - IV: Comparative Statement of Current Assets and Current Liabilities: This
form explains the operating cycle of the company.

FORM V: Maximum Permissible Bank Finance: This form will show how much
loan bank is eligible to give to the company.

FORM VI: Fund Flow Statement: Many companies do window dressing in their
financial statements and fudge with their accounting figures. A profitable firm may
have negative operative cash flows. Thus fund flow and cash flow analysis helps the
bankers to check the sources of inflow and points of outflow.
The CMA data is prepared by both company as well as the bank. The bank uses the
CMA prepared by the company to analyze the correctness of the working capital
requirements and understand its validity. However it must be noted that the entire
CMA data is prepared using the balance sheet of the company and certain other
documents submitted by the company to the banks.

4.2 Main Factors to be Analyzed in the CMA Forms:

1) Sales:

Sales may be shown on growth path even when the production is not increasing; the
reasons for the same should be analyzed.

If the growth in sales is unusually high then reasons for the same should be analyzed
like it may be due to the increase in capacity utilization or may be due to expansion

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and increase in installed capacity. And to validate the same, latest trend in growth
should be checked by looking at the latest sales data.

Increase in PBT may also pertain to reasons such as decrease in cost. Now the main
components of the cost include raw material, labor, power, administrative, selling and
distribution and other non operating expenses. Therefore in order to check for the
same one should look at the three main components which are:

a) Raw Material Cost

b) Cost of Production
c) Cost of Sales

2) Current Assets and Current Liabilities:

In current assets one should thoroughly analyze Cash in Hand and Loans& Advances.

If the current ratio is less than 1:33, it means promoters margin at present is less than
25%.

Decrease in creditors or cost of borrowings has to be reflected in profits.

3) Fund Flow Statement:

In order to keep a check that funds are not being diversified in other fixed assets,
Fund Flow Statement should be analyzed.

4.3 Types of lending:

Lending is classified into two broad categories: Fund Based and Non Fund Based
lending.

Fund Based Lending is a direct form of lending in which a loan with an actual cash
outflow is given to the borrower by the bank. In most cases such a loan is backed by
primary and/or collateral security. The loan can be provided for financing capital
goods and/or working capital requirements.
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In Non Fund Based Lending the banks make no fund outlay. However, such
arrangements may be converted to fund based advances if the client fails to fulfill the
terms of his contract with the counterparty. Such facilities are known as contingent
liabilities of the bank. Facilities such as Letter Of Credit and Guarantees fall
under the category of non fund based credit.

Cash Credit
Packing
Credit
Overdraft &
Demand
Loan

Fund based

Term Loan
Credit
facilities

Bill Finance

Letter of
credit

Revocable &
Irrevocable
Revolving L/C

Non-Fund
Based
Performance
Letter of
Guarantee

Financial

Figure 7 - Types of Facilities

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4.4 Assessment of Fund Based Working Capital:

While public sector banks in India are normally independent entities they are subject
to intense regulation by the Reserve Bank of India (RBI). This includes rules about
the how much the bank should lend to individual borrowers so called MPBF. There
are multiple methods as suggested by different committees from time to time. We
have discussed the following recommendations by three committees:

Nayak Committee:
This method is known as simplified turnover method and it focuses on small scale
industries and other tiny industries having an aggregate fund based working capital
limits up to Rs 5 crores.
For such companies working capital requirements are calculated solely on the basis of
their sales turnover. The sanctioning authority may satisfy themselves about the
reasonableness of the projected turnover of the company based on their annual
statements and assumptions. These units would require bringing in 5% of the turnover
as the margin. In other words, according to Nayak Committee recommendations 25%
of the projected turnover would be the working capital requirements of the company,
of which 4/5th would be financed by the bank and remaining 1/5th has to be brought
by the owner as margin.
Example: ABC is a company with a projected sales turnover of 100 crores.

Then Working Capital Requirement is 25% i.e. 25 crores.

Of the above amount, bank would give 4/5th or 20 crores and the rest 5 crores is to be
arranged by the owner as the margin.

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Tandon Committee:
A committee headed by Shri P.L. Tandon, the ex-chairman of PNB, was constituted
with the view to suggest improvements in the existing cash credit system. It suggested
three methods of lending:
1st Method Of Lending:
According to this method bank would finance up to maximum of 75% of working
capital gap (WCG), which is the difference between the current assets and current
liabilities excluding bank borrowings and the remainder 25% was considered as a
margin which would be bought through long term funds.
MPBF: 75% of Working Capital Gap (Total Current Assets - Other Current
Liabilities)
2nd Method Of Lending:
As per this method, Banks would finance maximum 75% of Total Current Assets
(TCA) and borrowers have to provide a minimum of 25% of TCA as margin out of
long term uses. This will give a minimum ratio of 1:33.
MPBF: 75% of Total Current Assets - Other Current Liabilities
3rd Method Of Lending:
It is same as 2nd method, with a difference that TCA excludes core current assets
which is financed through long term funds.
MPBF: 75% [(Total Current Assets Core Current Assets) Other Current
Liabilities]

Page 34 of 82

Chore Committee:

The RBI constituted, in April 1979, a working group under the chairmanship of Shri
K.B. Chore, to review the system of cash credit with the particular reference to the
gap between sanctioned limit and the extent of their utilization. It was also asked to
suggest alternative type of credit facilities which would ensure greater credit
discipline and enable the banks to relate the credit limits to increase in output or other
productive activities.
The committee recommended assessment of working capital requirements have to be
mandatorily assessed based on 2nd method of lending suggested by Tandon
Committee except for sick units under rehabilitation.

4.5 Fund based facilities:

Fund Based Facilities are direct form of lending in which a loan with an actual cash
outflow is given to the borrower by the bank. In most cases such a loan is backed by
primary and/or collateral security. The loan can be provided to for financing capital
goods and/or working capital requirements. PNB provides following fund based
facilities:

Cash credit
Cash Credit account is a drawing account against the credit granted by the bank and is
operated in exactly the same way as a current account on which the overdraft has been
sanctioned. The various types of securities against which cash credits are allowed are
pledge/hypothecation of goods or produce, pledge of documents of title to goods,
mortgage of immovable property, book debts, trust securities etc. In cash credit
accounts the borrower is allowed to draw on account within the prescribed limit as and
when required.

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Overdrafts:
Overdraft accounts are treated as current accounts. Normally overdrafts are allowed
against the bank own deposits, government securities approved shares and/or
debentures of companies, life insurance policies, government supply bills, cash
incentive and duty drawbacks, personal security etc.
Overdraft accounts should be kept in the ordinary current account head at branches.

Demand Loans:
A demand loan account is an advance for a fixed amount and no debits to the account
are made subsequent to the initial advance except for interest, insurance premium and
other sundry charges. As an amount credited to the demand loan account has the effect
of permanently reducing the original advance, any further drawings permitted in the
account will not be secured by the demand promissory note taken to cover the original
loan. A fresh loan account must, therefore be opened for every new advance granted
and a new demand promissory note is taken as security.
Demand loan is a loan, which is payable on demand in one shot i.e. bullet repayment.
Normally demand loans are allowed against the bank own deposits, government
securities, approved shares and/or debentures of companies, life insurance policies,
pledge of gold/silver ornaments and mortgage of immovable property.

Bill Finance:
Bill finance is the advances against the inland bills that are sanctioned in the form of
limits for purchase of bills or discount of bills or bills sent for collection. Bills are
either payable on demand or after usage period.

4.6 Assessment of Non Fund Based Working Capital Facility:

The credit facilities given by the banks where actual bank funds are not involved are
termed as Non Fund Based Facilities. These facilities are divided in 2 broad
categories as under:

Page 36 of 82

Letter of credit:
Letter of credit is a method of settlement of payment of a trade transaction and is
widely used to finance purchase of raw material, machinery etc. It contains a written
undertaking by the bank on behalf of the purchaser to the seller to make payment of
stated amount on presentation of stipulated documents and fulfillment of all the terms
and conditions incorporated therein. Letter of credit thus offers both the parties to a
trade transaction a degree of security. The seller can look forward to the issuing bank
for payment instead of relying on the ability and willingness of the buyer to pay.

Parties to a letter of credit:

1) Applicant/opener: It is generally the buyer of the goods who gets the letter of credit
issued by his bank in favor of the seller. The person on whose behalf and under whose
instructions the letter of credit issued is known as applicant/opener of the credit.

2) Opening Bank/Issuing Bank: The bank issuing the letter of credit.

3) Beneficiary: The seller of goods in whose favor the letter of credit is issued.

4) Advising Bank: Notification regarding issuing of letter of credit may be directly sent
to the beneficiary by the opening bank. It is however, customary to advise the letter of
credit through some other bank operating at the place/country of the seller. The bank
which advises the letter of credit to the beneficiary is known as advising bank.

5) Confirming Bank: A letter of credit substitutes the credit worthiness of the buyer
with that of the issuing bank. It may sometimes happen especially in import trade that
the issuing bank is itself not widely known in the exporters country and exporter is
not prepared to rely on the letter of credit opened by that bank. In such cases opening
bank may request other banks, usually in the country of exporter to add its
confirmation which amounts to an additional undertaking being given by the bank to

Page 37 of 82

the beneficiary. The bank adding its confirmation is known as the confirming bank.
The confirming bank has the same liabilities as that of the opening bank.

6) Negotiating Bank: The bank that negotiates the documents drawn under the letter of
credit and makes payment to the beneficiary.

Letter Of Credit Mechanism:

Any business venture will involve purchase transactions relating to machine/other
capital goods and raw materials etc. and also sale transactions relating to its products.
The customer may be an applicant for a letter of credit for his purchases. The
complete mechanism is divided into three distinct parts:

1) Issuing Of Credit: Letter of credit is always issued by the buyers bank (issuing bank)
at the request and on behalf of and in accordance with the instructions of the applicant.
The letter of credit may either be advised directly or through some other bank. The
advising bank is responsible for transmission of credit and verifying the authenticity
of signature of issuing bank and is under no commitment to pay the seller. The
advising bank may also be required to add confirmations and in that case will resume
all the liabilities of issuing bank in relation to the beneficiary as stated already.

2) Negotiation of Documents by Beneficiary: On receipt of letter of credit, the

beneficiary shall arrange to supply the goods as per the terms of letter of credit and
draw necessary documents as required under L/C. The documents will then be
presented to the negotiating bank for payment/acceptance as the case may be. The
negotiating bank will make the payment to the beneficiary and obtain reimbursement
from the opening bank in terms of credit.

3) Settlement Of Bills Drawn Under Letter Of Credit By The Opener: The last step
involved in letter of credit mechanism is retirement of documents received under L/C
by the opener. On receipt of documents drawn under letter of credit, the opening bank
is required to closely examine the documents to ensure compliance of terms and
Page 38 of 82

conditions of credit and present the same to the opener for his scrutiny. The opener
should then make the payment to the opening bank and take delivery of documents so
that the delivery of goods can be obtained by him.

Types of Letter Of Credit:

1) Revocable Letter Of Credit: This may be amended or cancelled without prior

warning or notification to the beneficiary. Such letter of credit will not offer any
protection and should not be accepted as beneficiary of credit.

2) Irrevocable Letter Of Credit: This cannot be amended or cancelled without the

agreement of all the parties thereto. This type of letter of credit is mainly in use and
offers complete protection to the seller against subsequent development against his
interest.

Bank Guarantee: Sec 126 of Indian Contract Act defines guarantee as a contract to
perform the promise of discharge of liability of a third person in case of default.

Parties To A Guarantee:

1) Surety (Guarantor): Person, who gives the guarantee

2) Principal Debtor: Person on whose behalf guarantee is given.
3) Creditor: The person to whom guarantee is given (beneficiary).

Types of Guarantee:

1) Financial Guarantee: In financial guarantee the guarantor is undertaking to pay

damages in monetary terms on the happening of some defaults. In these cases the
LGs are issued in lieu of financial transactions. Example- LG for payment of
determined liabilities towards tax, excise duties, and LG issued towards disputed
liabilities.
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2) Performance Guarantee: Under this head, the LGs are issued mostly to secure
performance of contracts, the need to pay LG amount will arise only in the event of
non performance of the contractual obligation. Example- Performance with regard to
construction of building, installation of plant & machinery.

4.7 Deferred Payment Guarantee:

Like term loans, deferred payment guarantees are also given for the acquisition of
fixed assets. Term loan involves payment in cash whereas in the DPG, the bank
commits to pay the beneficiary in the case of default made by its customer
(purchaser). Therefore, the issuance of DPG should be treated at par with the grant of
term loans and the proposals for the two should be examined in the same manner.
The proposals for issuances of a DPG can be entertained in either of the following two
ways:

The bank executes a guarantee deed on behalf of the customer (purchaser) in favor of
the manufacturer/supplier/financial institution.

The bank accepts /co-accepts usance bill on behalf of its customer drawn by
manufacturer/supplier.
As in the case of term loans, DPGs bank should have a charge on the
machinery/equipment purchased until the banks liability under the guarantee ceases.

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5. Key Financial Ratios:

a) Current Ratio: A liquidity ratio that measures a companys ability to pay short term
obligations.

Current Ratio = Current Assets

Current Liability

Company has to maintain a current ratio of 1.33:1. The higher the current ratio, the more
capable the company in paying of its obligations.
b) Quick Ratio: An indicator of a companys short term liquidity. The quick ratio measures
a companys ability to meet its short term obligations with its most liquid assets. Higher
the quick ratio betters the position of the company. Quick Ratio is effective in case stocks
are obsolete, non-saleable or waste.
Quick Ratio = Current Assets Inventory & Prepaid Expenses
Current Liability

c) Working Capital Turnover Ratio: This ratio basically shows how efficiently the liquid
funds in the business are utilized to achieve the sales level. Though a good ratio shows
efficient use of working capital, very high ratio indicates the case of overtrading where
the scale of business is increased/expanded without corresponding increase of working
capital/liquid resources.

Working Capital Turnover Ratio = Net Sales

Total Working Capital

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d) Debt Equity Ratio: It represents the ratio between capital invested by the owners and the
funds provided by lenders.

Debt Equity Ratio = Long Term Debt

Equity

e) Debt Service Coverage Ratio: The Debt Service Coverage Ratio indicates the ability of
the firm to generate cash accruals for repayment of installment and interest.

DSCR = PAT+Depriciation+Interest on term loan

Yearly Installment+Interest on term loan

f) Gross Profit Margin: This represents the gross profit margin available to unit or
efficiency of firm in producing each unit of product and is good indicator of cost control
and sales promotion. The ratio indicates the average spread available between cost of
sales and sales revenue.

Gross Profit Margin = Revenue-COGS

Revenue

g) Operating Profit to Sales: This ratio gives the margin available after meeting cost of
manufacturing. It provides a yardstick to measure the efficiency of production and
margin on sales price i.e. the pricing structure.

Operating Profit to Sales = Profit before Tax-Other Income

Sales

h) Return on Equity: The amount of net income returned as a percentage of shareholders

equity. Return on equity measures a firms profitability by revealing how much profit a
company generates with the money that shareholders have invested.

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Return on Equity = Net Income

Shareholders Equity
i) TOL/TNW: This ratio gives a view of borrowers capital structure. If the ratio shows a
rising trend, it indicates that the borrower is relying more on his own funds and less on
outside funds and vice versa.

TOL/TNW = Total Outside Liability

Tangible Net Worth
j) Inventory Turnover Ratio: This ratio shows how many times a companys inventory is
sold and replaced over a period. A high ratio suggests lower level of inventory, as such,
lesser probability of stock containing obsolete.

Inventory Turnover Ratio = Cost Of Goods Sold

Average Inventory

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6. Credit Risk Rating:

A credit risk rating is an evaluation of the credit worthiness of the debtor, specially a
business (company) or a government, but not individual consumers. The evaluation is
made by a credit rating agency of the debtors ability to pay back the debt and the
likelihood of default. Credit rating is determined by credit rating agencies. The credit
rating represents the credit rating agencys evaluation of qualitative and quantitative
information for a company or government, including non public information obtained by
the credit rating agencies analysts.

Various External Credit Rating Agencies in India are:

1) CRISIL
2) ICRA
3) FITCH
4) CARE
Factors determining credit risk:
1) State of economy.
2) Wide swing in commodity prices.
3) Fluctuations in foreign exchange rates and interest rates.
4) Trade restrictions.
5) Economic sanctions.
6) Government policies.
.
Some company specific factors are:
1) Management Expertise.
2) Company Policies.
3) Labor Relations.

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Credit Risk Rating is assigned to the borrower based on the detailed analysis for their
ability and willingness to repay the debt from the bank. Whether to lend to the borrower
or not: the credit risk of the borrower determines the appetite of the bank in determining
exposure level. A bank would be willing to lend highly rated borrowers but would not
like to lend to borrowers with very poor credit risk rating.

6.1 Credit risk rating at Punjab National Bank:

PNB has elaborate risk management structure, processes and procedures in place. For
the appraisal of the loan proposals, RMD provides the risk ratings for the client and
project based in the patented internal models of the PNB that have been developed
based on statistical analysis of data. These models are placed on central server based
system PNB TRAC, which provides facility to access credit risk rating of client.
The credit risk rating captures risk factors under four areas:
1) Financial Evaluation
2) Business or Industry Evaluation
3) Management Evaluation
4) Conduct of Account
Some of the important risk rating models used in loan appraisals are
summarized as below:
S.No
.

Credit
Rating

Risk Applicability
Total Limit

1
2

Large Corporate

Sales

Above Rs. 15 Crore.

Above
Rs
100 Crore.
Mid Corporate
Between 5 Crore and 15 Between Rs
Crore.
25 Crore and
100 Crore.
New
Project Above Rs. 5 Crore.
Cost
of
Rating Models
Project above
15 Crore.

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Entrepreneur New New Business requiring Cost

of
Business Model
finance b/w 20 Lakh and 5 Project upto
crore.
Rs.15 Crore.
Credit
Risk All Banks and Financial Institutions.
Rating model for
banks and FI

Table 6 Risk Model

Cumulative weighted score is calculated and the rating of the project/company is
ascertained as per the chart below:
Rating
Description
category

score obtained

Grade

AAA

Minimum risk

Above 80.00

AAA

AA

Marginal risk

Between
80.00

77.50

AA+

Between
77.50

72.50

AA

Between
72.50

70.00

AA-

Between
70.00

67.50

A+

Between
67.50

62.50

Between
62.50

60.00

A-

Between
60.00

57.50

BB+

Between
57.50

52.50

BB

Between
52.50

50.00

BB-

BB

Modest risk

Average risk

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Marginally
acceptable risk

Between
50.00

47.50

B+

Between
47.50

42.50

Between
42.50

40.00

B-

30.00

High risk

Between
40.00

Caution risk

Below 30.00

Table 7 Credit Risk Weight

Therefore, Credit Risk Rating is an important part for lending to the borrowers and
proper financial analysis of the borrowing company needs to be done to get the
accurate picture. PNB tries to map the external rating by agencies with their own
rating to judge the financial stability of the borrowing company.

Page 47 of 82

7. Case Study On Working Capital Financing:

After understanding the process of process of project appraisal and financing, I got a real
company to appraise for my project. Due to confidentiality clause of the bank, real
company name has not been used in the report.

ABC LTD. Has applied for the renewal of FBWC limits of Rs 120 crore and
enhancement of NFB limits from Rs 580 crore to Rs 630 crore.

7.1 Brief about the company:

ABC Ltd.; a Public Limited Company, started operations in the year 1984, when it
became the first company in India to manufacture Submerged Arc Welded (SAW)
pipelines using the U-O-E technology.

With integrated facilities at multiple locations and ever expanding market

opportunity, ABC Ltd. has diversified from a single product company to multi
product company. Its products include large diameter Submerged Arc Pipelines and
Spiral Pipelines for the energy transportation sector; carbon, alloy and stainless steel
seamless pipes & tubes manufactured by conical piercing process used for industrial
applications; and Ductile Iron (DI) pipes for water and waste water transportation.
Besides these, the company also provides various value added products like pipe
coating, bends and connector castings to its clients.
The companys manufacturing facilities are located in various parts in western,
northern and southern part of India. The company has three SAW pipe manufacturing
facilities in India. Its first plant was set up in Kosi-Kalan, Uttar Pradesh to
manufacture SAW pipes. There are two manufacturing bases at Mundra, Gujarat i.e.
Mundra-I and Mundra-II. The company DI pipe plant is also situated at Mundra,
Gujarat which is a fully integrated unit with a blast furnace and coke oven plant. At
Nasik, Maharashtra the company owns a seamless pipes facility. The company has
Page 48 of 82

also setup an H Saw pipe manufacturing facility at Bellary, Karnataka to capture

South Indian market. The company sells approx. 40% of its products (primarily large
diameter SAW pipes and Seamless Tubes) in global markets.

Particulars

Details

Name

ABC LTD.

Constitution

Public Limited Company

Promoters

i) Mr. PR
ii) Mr. SJ
iii) Mr. TA
iv) Mr. SJJ

Directors

i)Mr. SKB
ii) Mr. DD
iii) Mr. SK
iv) Mr. RK
v) Mr. RN
vi) Mr. GS
vii) Mr. SJ
vii) Mr. TA
viii) Mr. SS

Registered Office

Uttar Pradesh

Incorporation Date

1984

Industry/Activity

Iron and Steel (manufacturing of

submerged arc welded pipes/spiral pipes,
DI pipes, Pig iron, seamless pipes).
Table 8 Details of ABC Ltd.

Page 49 of 82

7.2 Gist Of The Proposal:

Sanctioning Authority Management Committee
Dealing With PNB since 2004
Proposal Renewal cum Enhancement
Type Consortium
Lead Bank State Bank Of Patiala
PNB Share FB 10% and NFB 16.57%
External Rating Done By CARE
Internal Rating A4
External Rating Care-AA
Risk Weight 30%

Nature

Fund Based

Existing Proposed Secured/Unsecured along

with
the
basis
thereof
(As per RBIs guidelines)

CC(H)

120.00

Fund
Ceiling

120.00
Secured

Based
120.00

120.00

ILC/FLC

580.00

630.00

ILG/ FLG

580.00

630.00

Non Fund Based

Secured

Non Fund Based

580.00
Ceiling

630.00

TOTAL
COMMITMENT

750.00

700.00

Table 9 Gist of the proposal

Page 50 of 82

7.3 Industry/Sector Analysis:

Since ABC Ltd. belongs to iron and steel industry, I have done analysis of the steel
sector to understand the future growth prospects of the company.
India is expected to become the second largest steel producer in the world by 2016.
Easy availability of low cost manpower and presence of abundant iron ore reserves
makes India competitive in the global set up.

Steel production in India has increased at a compound annual growth rate (CAGR) of
7.9 percent over FY09-14 to reach 81.54 million tons per annum (MTPA). The total
market value of the Indian steel sector stood at US$ 57.8 billion in 2011 and is
anticipated to touch US$ 95.3 billion by 2016. Total consumption of steel grew to
73.9 million tons (MT) in FY14 as against 73.5 MT in FY13; over FY08-14
consumption has expanded at a CAGR of six percent. Driven by rising infrastructure
development and growing demand for automotives, steel consumption is expected to
grow at an average of 6.8 percent, reaching 104 MT by 2017.

The government of India has allowed 100% Foreign Direct Investment (FDI) under
the automatic route in the steel sector. It has also reduced the basic custom duty on
the plants and equipment required for initial setup or expansion of iron ore pellets
plants and iron ore beneficiation plants from 7.5/5 percent to 2.5 percent.
Huge scope for growth is offered by Indias comparatively low per capita steel
consumption, the expected rise in consumption due to increased infrastructure
construction and the thriving automobile and railway sectors.

Page 51 of 82

7.4 Borrowers Profile:

Group Name

ABC Group

a. Address of Regd. Office

Corporate Office

A-1, UPSIDC Indl. Area, Nandgaon

Road, Kosi-Kalan, Distt. Mathura
(U.P.) 281403
Jindal House, 12 Bhikaji Cama Place,
New Delhi

b. Name & Tel./Mob. No. of the CFO (with email ID)

Mr. XYZ,
XYZ@abc.com

c. Works/Factory
Product

Coating and Large Dia Pipes/L-SAW Pipes/Bends

Address

A1-UPSIDC Industrial Area, Nandgaon Road,

Kosi-kalan, Distt. Mathura (U.P.),

Product

Seamless tubes/pipes

Address

A-59-60 MIDC Sinnar, Dist Nashik, Maharashtra

Product

100% EOU (large Dia/L-SAW/H-SAW coating

Address

S. No. 94/1, 94/2 and 96 Nanakapaya village,

Mundra Taluka, Kutchh distt. (Gujarat).

Product

Coke Oven Battery

Address

Village Paragpur, Mundra Taluka, Kutchh distt.

Page 52 of 82

Product
and coating

DI-CI Pipes, Pig iron, large dia/L-SAW/H-SAW pipes

Address

Village Samagoga, Mundra Taluka, Kutch Distt.

Address

Village Torangullu, Bellary, Karnataka

d. Constitution & its code as per Ladder

Public Limited company

34

e. Date of incorporation

31.10.1984 name changed on

11.01.2005

f.

05.02.2004

Dealing with PNB since

g. Industry/Sector

Iron & Steel (Manufacturing of

submerged arc welded pipes/Spiral
Pipes, DI Pipes, Pig Iron, Seamless
Pipes) and iron mining.

h. Business Activity (Product)/ Installed Capacity.

Manufacturing of sub-merged Arc welded pipes / spiral pipes, DI-CI pipes, Carbon,
Alloy and Stainless seamless pipes
Installed Capacity
Kosi

SAW Pipes

Seamless

250,000

DI-CI

Pellets

Nashik

220,000

IPU Mundra

350,000

EOU @ Mundra

425,000

500,000

Page 53 of 82

Bhilwara

12,00000
-

@ includes 150,000 MT of spiral plant

Table 10 Borrowers Profile

7.5 Financials Of ABC Ltd:

Rs. (In Crores)
31.03.13 31.03.14
Audited

31.03.14

Estimates Audited

31.03.15

31.03.16

Estimates Projected

Gross Sales

5760.02

5723.38

5783.93

6789.67

7457.02

- Domestic

2344.20

2353.38

4008.46

3824.72

4313.77

- Export

3415.82

3370.00

1775.47

2964.95

3143.25

% growth

8.11

(-ve)

0.42

19.11

9.71

Net sales

5616.69

5470.00

5509.59

6566.00

7203.50

82.40

40.00

84.64

83.96

83.96

Operating Profit/Loss

183.50

278.40

106.14

266.43

470.55

Profit before tax

265.92

318.40

190.78

350.39

554.51

Profit after tax

193.41

222.8

144.26

262.79

415.88

Depreciation/amortization
of expenses

154.95

184.90

212.75

245.13

264.28

Cash profit/ (Loss)

348.36

407.70

357.01

507.92

680.16

EBIDTA/PBIDTA

595.08

718.17

629.75

868.71

1095.71

55.25

55.25

55.25

55.25

55.25

3669.03

3688.03

3822.51

4052.99

4436.56

Other Income

Paid up capital
Reserves and Surplus
excluding

Page 54 of 82

revaluation reserves
Deferred Tax Liability

174.76

221.26

221.26

221.26

a) Tangible Net Worth

3899.04

3743.28

4099.02

4329.50

4713.07

756.52

819.31

773.16

910.10

1152.92

3142.52

2923.97

3325.86

3419.40

3560.15

Total Borrowings

3243.23

2309.38

4393.80

5482.86

5416.65

Secured

2294.93

2256.64

2497.89

2980.65

3322.86

Unsecured

948.30

52.84

1895.91

2502.21

2093.79

Investments

826.52

819.31

788.16

910.10

1152.92

Total Assets

8170.19

8074.80

8497.02

9595.07

9912.22

Current Assets

3121.33

3888.16

3707.68

4188.44

4527.05

Non Current Assets

5048.86

4186.64

4789.34

5406.63

5385.17

Out of which net fixed

assets

3567.42

2973.18

3526.05

3999.98

3835.70

366.74

1293.20

1260.88

1207.79

1204.19

Current Ratio

1.13

1.50

1.52

1.41

1.36

Debt Equity Ratio

0.88

0.64

0.59

0.51

0.47

Operating Profit/Sales

6.76

9.91

1.93

9.04

10.68

TOL/Adjusted TNW

1.05

1.52

1.33

1.33

1.21

Long Term Sources

5415.60

4670.26

6050.17

6614.42

6589.36

Long Term Uses

5048.86

3377.06

4789.34

5406.63

5385.17

Surplus/ Deficit

366.74

1293.20

1260.88

1207.79

1204.19

b) Investment in allied
concerns and amount of
cross holdings
c) Net owned funds (a b)

Net Working Capital

Page 55 of 82

Short Term Sources

2754.59

3888.16

2446.80

2980.65

3322.86

Short Term Uses

3121.33

2594.96

3707.68

4188.44

4527.05

Surplus/ Deficit

(366.74)

(1293.20) (1260.88)

(1207.79)

(1204.19)

Table 11 Financials of ABC Ltd.

Key Financials Up to Last Quarter 31.12.2014

Period
ended

Sales

Cumulative
position as
on last
quarter
ended
Dec14

Corresponding % change
position as on
last quarter
ended Dec13

Accepte
d for
the
current
year

4517.86

4146.01

89.65

54.03

66.00%

83.96

PBT

280.34

110.59

153.50%

350.39

80.00%

PAT

191.43

87.21

119.50%

262.79

72.85%

Other
income

8.97% 6566.00

% age
Remarks
achievemen
t upto latest
quarter
ended
Dec14
68.81% Except sales,
proportionate
106.78% PBT/PAT
achieved.

Table 12 Key Financials

Page 56 of 82

Observations on Financial Indicators

1. Tangible Net Worth:

Reconciliation of TNW
Rs. (In crores)
TNW as on close of FY ended 31.3.2013
Increase in capital
Add Profit during the year transferred to reserves
Add Increase in deferred tax liability
Less
TNW as on close of FY ended 31.03.2014
Table 13 Calculation of TNW

3899.04
153.48
46.50
4099.02

The TNW of the company has increased from Rs. 3899.04 crores as on 31.3.2013 to
Rs. 4099.02 as on 31.3.2014 due to increase in profit and increase in DTL as against
estimated TNW of Rs. 3743.28 crore for 2013-14.
2. Sales:
The company has achieved net sales (inclusive of export sales) of Rs. 5509.59 crore
during the year 2013-14 as against estimated sales of Rs. 5470.00 crore which is
100% of the projections. However, export sales are down from Rs. 3415.82 crore
(2013) to Rs. 1775.47 crore (2014).
The company exports its products all over the world with focus on Middle East and
North Africa nations (MENA). The company has estimated net sales of Rs. 6566.00
crore for the FY2014-15, which includes export sales of Rs. 2964.95 crore. Company
has already achieved sales of Rs. 4517.86 crore up to Dec14 which accounts 68.81%
achievement of the projections.
The orders for Large Diameter Pipes are slated to be executed over 6-9 months and in
case of Ductile Iron Pipes, the same are slated to be executed over next 12-18 months
or more. Company has participated in various bids and is likely to get orders in

Page 57 of 82

phases. The current order book includes approximately 50% of export orders. The
major export orders are from MENA, South East Asia and Far East.
In the view of the above order book position and actual sales recorded up to Dec14,
estimated net sales of Rs. 6566.00 crore for FY2014-15 seems to be achievable.
3. Profitability:
Company has achieved PBT of Rs. 190.78 crores and PAT of Rs. 144.26 crores for
FY2014 which are lower in comparison to last FY2013. The main reason for decline
in profit is due to sluggish demand in Exports, squeezed profit margins, high cooking
coal prices, higher cost of iron ores and appreciation in US Dollars are some the
reasons affecting the profitability of the company. However, the profitability of the
company has improved in current financial year 2014-15 due to commencement of
operations of additional capacity in DI Pipes and stabilization of pellet plant in
Bhilwara which is presently working at 100% capacity.
The profitability of the company has further improved with the start of pellet plant in
Bhilwara. The PAT of the company also consists of income from value addition
activities, considered as a part of its WC operating cycle. The PAT has improved
during current financial year from Rs. 110.59 crore of 9 months ended Dec13 to Rs.
280.34 crore as at Dec14.
4. Current Ratio And NWC:
Actual NWC has increased from Rs. 366.74 crore as at 31.3.2013 to Rs. 1260.88
crore as at 31.3.2014, as against projected NWC of 1293.20 crore. Similarly, the
current ratio has improved from 1.13 (2013) to 1.52 (2014) which is also above the
bench value.
5. DER:
DER of the company has improved from 0.88 (2013) to 0.59 (2014) which is also
within the acceptable range.

Page 58 of 82

6. Diversion Of Funds:
As per Audit report on ABS as at 31.3.2014, there is no diversion of funds reported.

7.6 Credit rating of ABC Ltd:

Whether
fresh/renewal/
enhancement

Renewal Cum Enhancement

Asset Classification
as on 31.12.14 and
last PMS score

Standard

Current PMS score is 72.62, Rank 4 as at Dec14 (The technical error is now
rectify by the branch)

Credit Risk Rating

by Bank is A4
indicating lower risk

Rating Date of
Rating
Present

Facility rating

ABS

Validity
date

Reasons for
degradation

A4

22.10.14 59.71

31.03.14 19.10.15 NA

Previous BB

22.07.13 56.39

31.03.13

Present

22.10.14 LGD
31.03.14
Grade6/7

LA4

Previous -

Rating
from
External
Agency(CARE AA
rating mapped to our
A2 rating)

Score

NA

Agency Rating Date of Rating

Significance of Rating

Validity Date

CARE

AA-

23.12.14

low credit risk

22.12.15

CARE

A1+

23.12.14

low credit risk

22.12.15

Page 59 of 82

Whether
Non priority.
priority/non priority
sector as per PS&LB
guidelines Subsector may also be
mentioned.
Whether
Agriculture/Retail/
SME/Large

Large

Whether priority
sector or not

Non priority

If yes, sub head

Not applicable

a) Whether Sensitive NO
Sector Real
Estate/Capital
Market
b) Applicable Risk
weight

30%

Consortium/Multiple Consortium
Banking
Lead Bank

State Bank of Patiala

PNBs Share %

FB 10% and NFB 16.57%

Date of application

01.02.15(BO)

Date of receipt of
proposal At
BO/CO/HO

16.01.15(BO) & 18.2.2015(HO)

Date of
acknowledgement
given to the party

30.01.15(BO)

Page 60 of 82

Date of
clarifications, if any,
received at CO/HO

26.2.2015(HO), 11.3.2015(HO) , 18.3.2015(HO) & 23.3.2015(HO)

Date of submission
of proposal

23.3.2015

Date of original
sanction
Renewal by MC on 23.09.2013
Date of last sanction
WCDL of Rs 100 crore by HOCAC-III on 13.3.2015
Authority/In
Principle Consent/
NBG clearance with
date

NA

Customer ID No.

D10219275

Activity code (as per

ladder)

7506
Table 14 Credit Rating of ABC Ltd.

CARE AA rating is mapped to our A2 rating and our present rating is A4 on the basis
of ABS as at 31.3.2014 which is on the account of improvement in financial
evaluation and also improvement in industry outlook from earlier marginally
unfavorable to neutral.

Page 61 of 82

7.7 Security And Pricing:

1. Primary
For Working Capital Limits 1st charge on the current assets (present and future) of the
company on pari passu basis with other consortium banks.

2. Collateral

Hypothecation/Mortgage of Block Assets Immovable Properties: NIL

Second pari passu charge shared with consortium members.

Nature of
limits

Term Loan
Working
Capital

Security Value of block

assets as on:
ABS 31.3.14

Fixed

3740.95

Value of
block assets
(excluding
specific
charge if any)

Extent of first
charge holders

3736.77

Balance /
residual value of
charge available
to bank/
consortium

995.00

2741.77

Assets
Table 15 - Security

Page 62 of 82

Position Of Account as 17.03.15

Rs. (In crores)
Limit

V.S.

D.P.

Outstanding

Fund Based Limit

CC(H & BD) & PC(H)

120.00

1040.25

120.00

WCDL

0.64
50.00

FOBP/FOUBP/FABC/FOBNLCL (120.00)
/FOUBNLC
Fund Based Ceiling

0.00

120.00

50.64

580.00
adhoc
250.00$

177.28

Non Fund Limit

ILC/FLC

235.00
ILG / FLG

580.00

288.49

Non Fund Based Ceiling

830.00#

700.77

TOTAL COMMITMENT

950.00

751.41

Table 16 Account Details of ABC Ltd.

Adhoc NFB limit of Rs. 250 crore sanctioned by MC on 24.7.2014 for 9 months.

One way interchangeability is allowed from FB to NFB.

There was low availment in FB limits as our interest on CC is higher than the other
member banks. Company used to avail limits by the way of WCDL. No over
drawings allowed during the review period. The company has been availing NFB
facility to the full extent in view of the increase in business and order book. However,
MC on 24.7.2014 had approved adhoc FLC limit of Rs. 250 crore for 9 months over
and above the existing NFB limits.

Page 63 of 82

There has been no devolvement of LCs and invocation of BGs during the review
period. However company is routing proportionate sales through us.

PRICING
Facility

Existing

Proposed

Applicable rate

CC

BR+1.75=

11.50% i.e.
BR+1.25%

11.25% i.e.
BR+1.00%

12.00%

(FGM recd 10.75%)

PC

BR+0.75%
i.e.11.00%

BR+0.75%
i.e.11.00%

BR+0.75%
i.e.11.00%

FB

Rs.10 lacs

Rs.10 lacs

As applicable

NFB

pa + ST

pa + ST

lump sum

lump sum

Commission
on NFB

30% of
normal
charges

30% of normal
charges

As per schedule

Other
charges, if
any

Nil

Nil

As per schedule

Processing
Fee

Table 17 - Pricing
The external risk rating is CARE AA and internal rating is A4 on the basis of ABS as
at 31.3.2014 which has improved from B1 and applicable rate of interest is
BR+1.00% i.e. 11.25%. The existing rate of interest charged in this account is
12.00% and lead bank is charging @ 11.50%. In the view of the above, as against
FGM and CH recommendations for approval of interest for CC limit @ BR+0.50%
i.e. 10.75%, we propose charging of interest @BR+1.25% i.e. 11.50% which is line
with the lead bank.

Page 64 of 82

7.8 Details Of Working Capital Limits From The Consortium/Multiple Banking:

Name of
the Bank
State bank
of Patiala
Canara
Bank
Standard
Chart. Bank
State Bank
of India
State Bank
of Mysore
ICICI Bank

Existing
FB
NFB
240.00 550.00

Axis Bank
Karnataka
Bank

PNB
ING Vysya
Bank
HDFC
Bank
State Bank
Travancore
United
Bank of
India

DBS
Total

Share %
FB
NFB
20.00
15.71

Proposed
FB
NFB
240.00 600.00

Share %
FB
NFB
20.00
15.78

ROI
11.50%

60.00

338.00

5.00

9.66

60.00

338.00

5.00

8.89

11.95%

80.00

150.00

6.67

4.28

80.00

150.00

6.67

3.95

13.50%

200.00

535.00

16.66

15.29

200.00

595.00

16.66

15.67

10.40%

60.00

157.00

5.00

4.49

60.00

207.00

5.00

5.45

11.50%

35.00

320.00

2.92
12.50

9.14
7.43

35.00
150.00

370.00
300.00

2.92
12.50

9.74
7.89

11.75%
11.75%

150.00

260.00
0.83

10.00

0.83

12.00%

10.00

16.57

120.00

630.00

10.00

16.57

12.00%

4.58

2.71

55.00

95.00

4.58

2.50

11.30%

3.75

5.29

45.00

185.00

3.75

4.87

11.65%

2.92

3.00

35.00

105.00

2.92

2.76

12.25%

9.17

2.14

110.00

75.00

9.17

1.97

12.00%

4.29

150.00

3.96

10.00

120.00

55.00

45.00

35.00

580.00

95.00

185.00

105.00

110.00

75.00

150.00

1200.00 3500.00 100.00 100.00 1200.00 3800.00 100.00 100.00

Table 18 Working Capital Limits under Consortium

Page 65 of 82

7.9 Assessment Of Fund Based Limits:

Accordingly FGM and CH have recommended accepting the lead bank assessment
note for FY 2013-14 which is as under:

As on 31st Mar

2013

2014

2014

2015

2016

Aud.

Est.

Aud.

Est.

Proj

Total CA

3277.17

3786.08

3467.28

4188.45

4527.06

Other CL (Except Bank

Borrowings)

1589.81

1602.01

1200.87

1780.64

1822.86

Working Capital Gap

1687.36

2184.07

2266.41

2407.81

2704.20

Net Working Capital

(Act./Proj)

862.05

984.07

1346.65

1207.81

1204.20

Assessed Bank Finance

825.31

1200.00

919.76

1200.00

1500.00

Table 19 Assessment of Fund Based Limits

Lead Bank has assessed FBWC requirement of Rs 1200 crore for FY 2014-15 and our
share shall continue to be at Rs. 120 crore. In the satisfactory conduct of the account,
FGM and CH have recommended renewal of existing FBWC limits of Rs. 120 crore
for FY 2014-15 and also for FY 2015-16 which we also endorse.

7.10

Assessment Of Non Fund Based Limit:

Total Purchases of RM (Est.)

Procurement out of LC (%)
Monthly RM purchases out of LC
a) Usance (months)
b) Lead time (months)
Total Time (a + b)

Foreign LCs
2240.00
100%
186.67
6
3
9

Domestic LCs
2080.00
90%
156.00
4
2
6

Total LCs
4320.00
342.67

Page 66 of 82

LC Limit required
LC Limit required (say)
Our share

1680.00
936.00
1700.00
900.00
ILC/FLC Rs 630.00 crore proposed to
be increased from Rs 580.00 crore and
out of that Rs 80.00 crore for import of
capital goods.(full interchangeability
allowed between ILC and FLC)
Documentary : Yes
Non Documentary :No
Margin (Existing / Proposed): Existing Nil. Proposed Nil.
Table 20 Assessment of LCs

2600.00
630.00

LC limits are utilized for import/ purchase of raw materials such as steel plates, slabs,
welding flux, wire etc. The facility is required by the company for importing mother
pipes, steel plates, flux, coking coal, iron ore, electrodes, raw material and other
consumables. At times, the requisite grades of steel plates are not available in time
and have to be booked well in advance. As per the policy of overseas suppliers the
company is required to place orders for their entire requirement for a particular order
sufficiently in advance. Moreover, to obviate delay and variation in the quality of
plates, the company has to place order for the entire quantity of plates/other materials
required for particular order at one go.
The company is in the business of manufacturing of pipes including large diameter L
SAW and H Saw pipes where the product is manufactured based on specific orders
having specific size/ quantity. Majority of the raw material i.e. API grade steel plates
and HR Coil are imported from various countries including Korea, Europe, Japan and
China. Besides steel, company also imports coking coal etc.
Based on projected sales of Rs.6789.67

crores for FY 2014-15, lead bank has

assessed NFB facilities at Rs.3800 crores, increase from Rs 3500 crore and has also
allocated us enhanced share of Rs.630.00 crores

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Particulars of BG limit:

2014-15

Outstanding BGs as on 1.4.2014

750.00

Add BGs required during the period 2014-15

870.00

Less: Estimated/ maturity/ cancellation of BGs during the period

400.00

Requirement of BGs

1220.00

Recommended BG limit

1200.00

Financial : Yes

Performance : Yes

Margin (Existing/ Proposed): Nil

Table 21 Assessment of BG
As the contracts are executed over a period of one/ two years & thereafter guarantee
is to be provided for satisfactory performance of the executed work. Further, validity
period of guarantees issued in favor of Joint Chief Controller of Imports and Exports
is up to a maximum of three years excluding claim period of 6 months. Thus, validity
period required for performance bank guarantees in favor of various clients is also up
to a maximum of 3 years excluding claim period of 6 months.
Branch has confirmed that lead bank assessment note was discussed in the consortium
meeting on 11.12.2014. Lead Bank has assessed the enhanced NFB requirement of Rs
3800 crore for consortium as a whole from existing level of Rs 3500 crore. Our share
in NFB limits is proposed to be enhanced from existing level of Rs 580.00 crore to Rs
630.00 crore.

During the review period, there is no invocation/devolvement of

LG/LC as such; FGM and CH have recommended approval of NFB limits of Rs 630
crore for FY 2014-15 and also for FY 2015-16 which we also endorse.
MC on 24.7.2014 had approved adhoc NFB limits of Rs 250 crore for 9 months. The
said limit was allowed for execution of an export order for USD 80 million for supply
of

Large Dia steel welded pipes at Oman. The supply of pipes is slated to be

completed within a time span of 7 to 9 months. Company has also informed that said
project has been executed and would be completed by April15. A condition is
stipulated that this adhoc limit be got adjusted on its due date.

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7.11

Strength And Weakness Of ABC Ltd:

Strength:

Diversified business model catering to oil & gas, water and other industrial
application.

Global pipe production, finishing, distribution and service network.

Pallet production facility right at iron ore mine head.

Diversified customer base and historic relationships with major international

companies around the world with proximity to customers.

Highly talented and motivated human resource.

Low-cost operations, primarily at state-of-the art, strategically located production

facilities with favorable access to raw materials, energy and labor, and 25 years of
operating experience and satisfactory capital structure.
Weakness:

The product is used in oil & gas, water and other industrial application which
directly comes under the govt and any change in govt policy shall affect the
performance of the company.

There is an increased risk of unfairly traded steel pipe imports in markets in which
ABC Ltd. sell its products.

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7.12

Risk With Mitigants/Observations:

RISK

MITIGANTS/ OBSERVATIONS

The Company is diversified manufacturer

and supplier of Iron and steel products for
energy, water sector and industrial
applications. The principal products are
Large Dia SAW pipes, Seamless Tubes,
Ductile Iron pipes and pellets.

The efficiency of the company to generate sales

by utilizing the short term borrowing is low
compared to the peer.

These steel pipes are used for transportation

of Oil, Gas and Water and supplied to
various Large customers like GAIL, ONGC,
HPCL, BPCL and L &T in India and to
fortune 500 overseas companies. As
company is into diversified product range,
there is no competitor in peer group who
are engaged in such a diversified products.
Every company is having own strategy on
borrowing policy
2

Compared to the benchmark values ROCE is

low.

The operative fixed asset of the company has

increased, increasing the fixed cost of the
company. This has decreased the operating
profitability of the company. Compared to
median value of the industry operating
leverage is high.

Since ABC Ltd is into large pipe and steel

manufacturing which needs lot of Capital for
putting up the plants. In last couple of years
the Company has set up a new Pellet
manufacturing plant for capacity of 1.2
Million MT and extended an additional
2,00,000 MT capacity in its Ductile Iron
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pipe. These two projects have involved huge

capital in these years due to which the debt
levels have increased. Therefore, ROCE is
lower in last FY 2014. These plants have
been ramped up and operationalised in
middle of FY 2014.Presently the Pellet plant
is operational at 100% capacity and DI plant
is also generating revenues. The same is
shown in the companys 9 months results up
to Dec 2014 in which the Revenues and
profitability have been increased. Compared
to last year net profits of Rs 144 crores, the
company has achieved Rs 280 crores in 9
months.
3

Efficiency of the company to optimally use and

maintain its inventory level comes out to be
low and inventory turnover is low compared to
the industry.

Since the Company is into diversified

products, one of its segment viz Large Dia
are project driven. These orders are normally
executed with 6-9 months period. The
inventory against these order are imported
material and have a lead time of around 3-4
months. Further, to freeze the margins on
these orders, the company booked RM
immediately on receipt of Sales order. Due
to which, the inventory for these orders are
normally accumulated over a period of 6-9
months. In last quarter of FY 2014, the
company have bagged a huge order of appx
USD 200 million and the company have
ordered its RM in that quarter due to which
Inventory level are higher. These orders have
been executed in current financial year.

The debtors older than 6 months are 31% of the

total debt.

As per Annual report of FY 2014, Rs 414 crs

were outstanding debtors for more than 180
days; the Company has recovered appx 150
crores out of the above in current financial
year. Apart from above, a sum of Rs 65 cr
o/s from GAIL against which the company
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filed court case which is awarded in favor of

the company and money is received which is
lying unadjusted in a separate account till
finalization of case. Further, as per industry
practice, appx 5-10% amount is withheld by
the clients for performance of contracts in
large dia segment and will be released after
12-15 months time after performance period
is over due to which the debtors level for
more than 6 months are normally higher.
5

The company has substantial investment in The company have inducting strategic
subsidiary companies having accumulated loss. partners in various infra business to
Investment In group company is 23% of TNW. strengthen the operational efficiency. Since
the infra business takes time in
implementation, support from its holding
company is required.

Sales have almost remained stagnant and

profitability has decreased.

Sales of first 9 months has increased from Rs

4146.01 crore to Rs 4517.86 crore (2014)
and PBT has also improved from Rs 110.59
crore (up to Dec13) to Rs 191.43 crore (9
months Dec14)

PBT achieved is only 24% of that targeted

As against estimated PBT of Rs 350.39 crore

for FY 2015, actual achievement is Rs
280.24 crore in first 9 months of current
financial year, showing 80% achievement.

Table 22 Risk with Mitigants/Observations

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7.13

Recommendations:
Renewal of FBWC limits of Rs. 120 crore and enhancement of NFB limits from
Rs. 580 crore to Rs. 630 crore.

Risk indentified by the RMD, HO to be critically examined and necessary

remedial steps to be taken by BO/CO.

Before opening of LCs under capital goods, it must be ensured that company has
proper tie up for long term funds/resources.

In every quarterly consortium meeting, the company should submit details of

LCs, buyers credit and guarantees for procurement of material and the same
should be discussed in the consortium meeting about its security coverage.

Quarterly order position should be submitted by the company to the consortium.

Any availment beyond the assessed limits of the consortium, the company should
take prior permission from the consortium banks to maintain financial discipline.

Branch to ensure that the adhoc limit of Rs. 250 crore already availed should be
got adjusted on its due date.

7.14

AGM (Branch) to ensure adequate availement of sanctioned credit facilities.

Conclusions:
Lending is more of an art than an exact science. Taking perfect lending decisions
requires understanding the business of the company and analyzing it from
multiple perspectives. While attempt is made to infuse objectivity in the appraisal,
sound lending decisions involves taking subjective view of the proposal. This is
where experience and judgment of the appraiser plays a key role.

Since bank lends the funds deposited by the general public with expectations of
safety and security, the lending decisions taken by the banks primarily focus on
the safety of funds. Risk aversion and risk diversion are the main parameters in
the bank lending.

To remain viable, a bank must earn adequate profit on its investment. This calls
Page 73 of 82

for adequate margin between deposits rates and lending rates. In this respect,
appropriate fixing of interest rates on both advances and deposits is crucial..
Unless interest rates are competitively fixed and margins are adequate, bank may
lose customers to their competitors and become unprofitable.

To mitigate risk, banks lend to a diversified customer base. Diversification should

be in terms of geographical location, nature of business etc.

Banks achieve diversification by specifying strict exposure norms that limit the
exposure to a particular industry, business group and company.

Appraisal of working capital proposal is focused on ascertaining the working

capital requirement of funds. Overfunding will lead to operational inefficiencies
while underfunding could impact the normal operation.

Different industries possess different challenges in WC assessment as; the WC

varies from industry to industry.

Post sanction processes that include monitoring of accounts, ensuring end use of
funds etc. are as critical as pre sanction appraisal process for the security of funds.

The project is rejected without detailed appraisal if it has some features like
bankers report on the promoters is not satisfactory, promoters are reported to
have indulged in illegal and anti social activities, financial position of the
promoter company is not satisfactory, cost of the project is unduly high, industry
to which a particular unit belongs has low priority or is included in the negative
list of government guidelines etc.

Page 74 of 82

8. Learning From SIP:

Banking Industry is one of the crucial foundation pillars for a developing economy. The
banking industry in India originated in the last decade of 18th century. However it got
wings after the 90s reforms. An industry which started with the basic purpose of
depositing cash and lending money has grown enormously over the years. There are so
many aspects of banking industry at present that its I difficult to cover all of them.
I consider myself extremely lucky and fortunate that I got to do my project work from the
Head Office of PNB, New Delhi. PNB being one of the biggest public sector banks, the
scope of learning that I got was immense here. Also being the HO the workload is
immense and responsibilities are of extreme importance and all the decisions regarding
PNB and its policies are taken from here.
CAD department has different segments and zones. Different segments perform different
task for e.g. Credit Rating is done by a different segment and other analysis by different
segment. Also the workforce is divided into zones i.e. different people look at proposals
from different parts of the company.
I learnt how minute details and points have to be mentioned in every report; a single
carelessness can develop in a huge problem. Thorough knowledge of the industry, rules
and regulations followed make sure smooth functioning of the department. Also one very
important point is restructuring of the financial statements from the banks perspective.
Every company tries its best to present as flowery a picture as possible however its the
responsibility of the bank to find the true status of the company and then decide the
viability of the proposal.
I also learnt that updating oneself with latest guidelines is very important which was
visible in the library where employees would gather during breaks to discuss different
matters. Also keeping oneself up to date with new terms and conditions makes it easier to
quickly find the feasibility of the proposal and reduce the chances of making an error.

Page 75 of 82

In the end it is very important to note that knowledge and willingness are two very
critical pillars to perform the tasks at hand. Just like hard work and intelligence are very
essential parts of a mans success. Neither one of them will be able to take you through.
We need to have a balance of both of them in order to succeed.

Page 76 of 82

9. List Of Abbreviations:

PNB: Punjab National Bank.

RBI: Reserve Bank Of India.

WC: Working Capital.

TL: Term Loan.

HO: Head Office.

BO: Branch Office.

CAD: Credit Administration Division.

CMA: Credit Monitoring Arrangement.

NPA: Non Performing Assets.

DER: Debt Equity Ratio.

CRR: Cash Reserve Ratio.

BR: Banking Regulations.

FI: Financial Institutions.

CMD: Chief Managing Director.

ED: Executive Director.

GM: General Manager.

AGM: Assistant General Manager.

DGM: Deputy General Manager.

HRD: Human Resource Department.

RMD: Risk Management Division.

NWC: Net Working Capital.

GWC: Gross Working Capital.

WCG: Working Capital Gap.

TOL: Total outside Liabilities.

TNG: Tangible Net Worth.

FG: Finished Goods.

WIP: Work In Progress.

MPBF: Maximum Permissible Bank Finance.

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LC: Letter Of Credit.

BG: Bank Guarantee.

DPG: Deferred Payment Guarantee.

DSCR: Debt Service Coverage Ratio

CASA: Current Account/Savings Account.

PMS: Preventive Monitoring System.

NFB: Non Fund Based.

FB: Fund Based.

Page 78 of 82

9. References:

Books:

Varshney, P.N. (2014) Banking Law and Practice (25th Edition), Sultan Chand &
Sons Publication.

Toor, N.S. (2011) Hand Book of Banking Information (32th Edition), Skylark
Publication.

Mukherjee, D.D. (2010) Credit Appraisal, Risk Analysis and Decision Making (6th
Edition), Snow White Publication Pvt. Ltd.

Websites:

http://www.rbi.org.in/home.aspx - RBI official website.

https://www.pnbindia.in/En/ui/Aboutus.aspx

https://www.pnbindia.in/En/ui/CorporateMission.aspx

https://www.pnbindia.in/En/ui/Awards.aspx

http://www.crisil.com/research/research.jsp

PNB Journals (for internal circulation only):

Gist of operative circulars on loans and advances.

PNB annual report.

Documents and reference material of PNB.

Internal Files of PNB.

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10. Appendix:

Financial Statements of ABC Ltd.

Balance Sheet

Figure 8 Balance sheet of ABC Ltd.

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Profit and Loss A/c

Figure 9 Profit and Loss A/C of ABC Ltd.

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Cash Flow Statement

Figure 10 Cash Flow Statement of ABC Ltd.

Page 82 of 82