Credit Analysis - Purpose and Factors to be considered: An Overview”

“Credit Analysis - Purpose and Factors to be considered: An Overview”

SUBMITTED BY

Name: Mr. Ninad Gupte DPGD/AP11/0024

Welingkar Institute o !anage"ent #evelop"ent $ %esearc& Year of Submission: 2013

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ACKNOWLEDGEMENT

First and foremost, I thank the Almighty God for sustaining the enthusiasm with which plunged into this endeavor.

I avail this opportunity to express my profound sense of sincere and deep gratitude to many  people who are responsible for the knowledge and experience I have gained during the project work.

In the first place, I thank Welingkar Institute o !anage"ent #evelop"ent and %esearc&  for given me this opportunity to this project

I extend my overwhelming overwhelming gratitude gratitude to my teachers for their valuable valuable guidance guidance and meticulous meticulous supervision during the preparation of this roject !eport.

"y hearty and inevitable thanks to my company and central #ank of India who helped me to  bring out the project in a successful manner. I would be failing in my duty if I do not acknowledge a deep sense of gratitude to my parents and friends who have helped me in completing project work successfully.

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CERTIFICATE

$his is to certify that project titled % Credit Analysis - Purpose and Factors to be considered & has been been submi submitt tted ed by !r' (inad An Overvie Overview” w” has (inad )up )upte te seat no' #P)#*A #P)#*AP++* P++*,,. ,,. a candidate candidate for the ost ost Graduate Graduate 'iploma 'iploma examinatio examination n of

(elingkar (elingkar Institu Institute te of "anagement "anagement

under my guidance and direction. $he matter presented in this report has not been submitted for any other purpose in this Institute.

 ))))))))))))))))))))))) Guide& lace& "umbai 'ate &

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TABLE of CONTENTS Particulars

Serial Numer

To!ic Executive Summary

1.1

Pa"e Numer 5

1.2

Introduction Definition

1.3

Basic Types of redit

1."

redit #na$ysis %rocess

'apter 2

2.1 2.2

%urpose of redit #na$ysis Dimensions of redit #ppraisa$

1" 16

'apter 3

3.1

(actors to )e considered in redit ana$ysis Si*nificance of (inancia$ Too$s omponents of redit yc$e redit ris, #pproac'es to Eva$uatin* redit -is, Importance of redit -is, #ssessment

1! 2+ 2& 31 35 3!

redit #na$ysis -eport ase Study

"2 52

(ormat of term $oan s'eet Bi)$io*rap'y

66 6&

C#a!ter $

3.2 3.3 3." 3.5 3.6 'apter "

".1 ".2

#nnexure

6 7

4

! &

E%EC&TI'E S&MMAR(

$he financial crises have become the main cause for recession which was started in *++ from - and was spread across the world. $he world economy has been majorly affected from the crisis. $he securities in stock exchange have fallen down drastically which has become the root cause of bankruptcy of many financial institutions and individuals. $he root cause of the economic and financial crisis is credit default of big companies and individuals which has badly impacted the world economy. o in the present scenario analy/ing one0s credit worthiness has  become very important for any financial institution before providing any form of credit facility so that such situation doesn0t arise in near future again. $he project involved the complete study of overview of credit analysis to understand the importance impo rtance of credit credit analysis analysis and credit analysis analysis system system followed followed by the banks in India. India. $he 1redit Appraisal is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and moni monitorin toring g with the objective of ensuri ensuring ng and maintaining the 2uality of lending and managing credit risk. $he results of the project have been an outcome of a detailed analysis of collected secondary data and well supported by analysis of primary data collected through an informal interview interview with banker of 1entral 1entral #ank of India 31#I4. $he project contains case study on "5 sect sector or of 1#I 1#I to elab elabor orat atee on the the expla explanat natio ions ns..

$he $he proj projec ectt conta contain inss vari variou ouss fina financ ncia iall

information 3balance sheet, Income sheet, ratios and cash flows4 and graphs to the further.

Finally we concluded the results of the project by combining both the primary and the secondary data analyses that credit analysis helps us give an overall picture about the industry as a whole and the firm0s position and to assess whether it would be able to repay the credit or run into crisis.

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C)APTER * I I+tro,uctio+ -I.$/ Credit analysis  is the method by which one calculates the creditworthiness of a business

or organi/ati organi/ation. on. In other words, it is the evaluation of the ability of a company to honor its financial commitments. commitments. $he audited financial statements of public limited companies might be analy/ed w&en it issues or &as issued bonds or s&ares'  6r, a #ank may analy/e the financial statements of a small business beore "aking or renewing a co""ercial loan . $he term refers to either case, whether the business is large or small. 1redit analysis involves a wide variety of financial analysis techni2ues, including ratio and trend analysis as well as the creation of projections and a detailed analysis of cash flows. 1redit analysis also includes an examination of collateral and other sources of repayment as well as credit history and management ability. $radit $ra dition ionall ally, y, ban banker kerss hav havee fac faced ed cre credit dit risk in the for form m of def defaul aultt by bor borrow rowers ers 3individual7 organi/ation4. $o this date, credit risk remains major concern for lenders worldwide. $he more they know about the creditworthiness of a potential borrower, the greater the chance they the y can max maximi imi/e /e pro profi fits, ts, inc increa rease se mar market ket sha share, re, mi minim nimi/e i/e ris risk, k, and red reduce uce the fin financi ancial al  provision that must be made for bad debt. 1redit risk is a risk related to non8repayment of the credit obtained by the customer of a  bank. $hus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. roper evaluation of the customer is performed this measures the financial condition and the ability of the customer to repay back the 9oan in future. Generally the credits facilities are extended against the security know as collateral. #ut even though the 9oans are backed by the collateral, banks are normally interested in the actual 9oan amount to be repaid along with the interest. $hus, the customer:s cash flows are ascertained to ensure the timely payment of  principal and the interest.

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Defi+itio+ -I.0/

Credit: it: $he amount of money available to be borrowed by an individual or a company is  Cred

referred to as credit because it must be paid back to the lender at some point in the future. For example, on a company:s balance sheet, a debit will increase the inventory account 3an asset4. 6n the other hand, a credit will increase the company:s accounts payable 3a liability4.  Credit Risk: $he risk of loss of principal or loss of a Interest on principal slowing from a

 borrower:s failure to repay a loan or otherwise meet a contractual obligation. 1redit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. 

Creditt Analysi Credi An alysis: s: A type of analysis an investor or bond portfolio manager performs on

companies or other debt issuing entities encompassing the entity:s ability to meet its debt obligations. $he credit analysis seeks to identify the app ropriate level of default risk associated with investing in that particular entity.

 Credit

Analyst:

A fi fina nanc ncia iall pr prof ofes essi sion onal al wh who o ha hass ex expe pert rtis isee in ev eval alua uati ting ng th thee

creditworthiness of corporate and small enterprises. 1redit analysts determine the likelihood that a borrower will be able to meet financial obligations and pay back a loan, often by reviewing the borrower:s financial history and determining whether market conditions will be favorable to repayment. 1reditt analy 1redi analysts sts are typi typically cally employed employed by commercial and investment banks credit card issuing institutions, credit rating agencies and investment companies.

7

Basic T1!es of Cre,it -I.2/

$here are four basic types of credit. #y understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges. ;. /ervice credit  is monthly payments for utilities such as telephone, gas, electricity, and water. . Credit cards  are issued by individual retail stores, banks, or businesses. -sing a credit card can be the e2uivalent of an interest8free 9oan8 end of each month.8if you pay for the use. 1%I2F O32%3I2W OF 0OA(/:

#ank can provide credit of two types fund based ? non8fund based&  Fund 1ased includes: (orking 1apital and $erm 9oan  (on-Fund 1ased includes: 9etter of 1redit and #ank Guarantee

8

Cre,it A+al1sis Process -I.3/

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F0OW OF C%2#I4 A(A05/I/ Receipt of application from applicant

Receipt of documents (Balance sheet, !" papers, #ifferent $o%t& re$istration no&, '), ) ), and properties documents

*re+sanction %isit - an. officers

"hec. for RB/ defaulters list, illful defaulters list, "/B/ data, "", "aution list itle clearance reports of the properties to e otained from empanelled )d%ocates

aluation reports of the properties to e otained from empanelled

*reparation of financial data

*roposal preparation

)ssessment of proposal

anctionappro%al of proposal - appropriate sanctionin$ authorit-

#ocumentations, a$reements, mort$a$es

#isursement of oan

*ost sanction acti%ities

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/4A)2/ /4A)2 / I( C%2#I4 C%2# I4 A(A05/I A( A05/I/ /:

$he cre credit dit pro proces cesss beg begins ins wit with h a tho thorou rough gh ana analys lysis is of the bor borrow rower0 er0ss cre credit ditwor worthi thines ness, s, or capacity and willingness to repay the loan. $he examiner should find an assessment by the credit officer of&  $he borrower0s current and expected financial condition.  $he borrower0s ability to withstand adverse conditions or %stress.@ $he borrower0s credit

history and a positive correlation between historical and p rojected repayment capacity. $hee  $h

optimal optim al lo loan an st stru ruct ctur ure, e, in incl cludi uding ng lo loan an am amor orti ti/at /atio ion, n, cov coven enant ants, s, re repor porti ting ng re2uirements  the underwriting elements.

 1ollateral pledged by the borrower  amount, 2uality and li2uidityB bank ability to reali/e

the collateral under the worst worst case scenario. And,  Cualitative factors, such as management, the industry and the state of the economy.

$he credit policy and standards should define acceptable loan purposes, types of loans and loan structures, and industries to which the bank is willing to lend, as well as the types of information the lender is is re2uired to obtain obtain and analy/e. $he policy and standards help help to create the framework, re2uirements and tolerance limits for lending in which all bank credit personnel will engage. $he lender must understand the bank0s credit risk risk management system and his7her his7her role in it, as s7he engages in lending activities  analysis, underwriting and monitoring

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$he econd stage is to Analysis An alysis of risks associated with any borrower should focus on the four foundations of creditworthiness, shown below& •

Industry involves the industry dynamics and the company0s position within the industry.

(eakness in the industry itself can significantly impact loan repayment ability and the company0s position within the industry is an important issue. •

Financial Financi al Conditi Condition on  focuses on the borrower0s ability to generate sufficient cash, the

first source of loan repayment, or to draw on existing resources, e.g., capital or assets, to repay bank borrowings. borrowings. $he credit analyst analyst examines examines the income statement, statement, the balance balance sheet she et and the cas cash h fl flow ow sta statem tement ent to eva evalua luate te thi thiss fou founda ndatio tion n of cre credit ditwor worthi thines ness, s, focusi foc using ng on pro profi fitab tabili ility, ty, eff effici iciency ency,, li2u li2uidi idity ty,, a •

nd lev levera erage, ge, in par partic ticula ular. r.

!anage"ent !anage"e nt 6uality ent entai ails ls th thee com compe pete tenc nce, e, in inte tegr grit ity y and al alli lianc ances es of th thee key

individuals indiv iduals running running the company. company. "anagem "anagement ent weakness weakness or dishonesty dishonesty can have an impactt on both repayment capacity impac capacity and security security reali/ation. reali/ation. 'epth of management management is always a concern, especially in smaller, family run o rgani/ations. •

/ecurity %eali7a %eali7ation tion  determines the level of the bank0s control over collateral and the

likely likel y li2uidation li2uidation value, factoring factoring in time, i.e., net present present value. (eakn (eakness ess in security reali/ation threatens the second source of loan repayment. In third and fourth stage At the stage when the credit risk is evaluated it is important to  provide a clear and substantiated assessment of the general political and an d economic risk in the country,, the risk at micr country micro o level for the industry where the company performs, performs, as well as the specific risk related to the specific loan applicant and his ability to adapt to the changes in the economicc environment. economi environment.

$he analysis analysis of the cash cash flow is of great great importanc importancee to the credit

risk evaluation. $he amount of the credit resource that is actually needed is determined with the help of this analysis. As it was already stated, for the company to perform effectively, it is very important that the extended loan should correspond exactly to the cash resource needed. Its insufficiency or excess leads to lowering the profitability of the credited undertaking and respectively to a number of unfavorable effects on the financial situation of the borrower and his capacity to service the credit in accordance with the negotiated terms.

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$he stage when the credit risk evaluation is prepared involves both an assessment of the reliability of the loan applicant and of the general economic risk for the period as well as a number of forecasts for the tendencies in their future development. From this analysis one can get a clear idea about the assessment of the credited undertaking, the correspondence  between the amount of the re2uired loan and the results from the cash flow analysis about the real need for credit resources and its capacity to generate income. An evaluation should be made of the credit security or guarantee. $he analysis of the credit risk is a prere2uisite for taking an ade2uate credit decision and setting the credit terms. $herefore, if the decision is to approve and accept the credit, the credit bank carefully determines the type of credit, its maturity and the terms for repayment of the principal, the interest rates and the charges. It is extremely important that these conditions meet the needs and the credit risk. It might happen that the conditions of the commercial bank turn out to be unacceptable for the loan applicant. $hat is why it is recommended to work out trade8offs, which will satisfy both parties to the credit deal. 6nce the credit has been agreed, the next step is preparing the paperwork and its actual extension.

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C)APTER * II Pur!ose of Cre,it A+al1sis -II.$/

9ending has always been the primary function of banking, and accurately assessing a  borrower0s creditworthiness has always been the only method of lending successfully. $he  purpose of the credit analysis is to identify the risks to which a bank may be exposed over the life of a project financed by the bank, and to evaluate if the transaction is structured in a way that makes those risks acceptable by the parties involved. (henever an individual or a company uses a credit that means they are borrowing money that they promise to repay with in a pre8decided  period. In order to assess the repaying capability i.e. to evaluate their credit worthiness banks use various techni2ues that differ with the different types of credit facilities provided by the bank. In the current scenario where it is seen that big companies and financial institutions have been  bankrupted just because of credit default so 1redit Appraisal has become an important aspect in the banking sector and is gaining prime importance. . ince exposure to credit risk continues to be the leading source of problems in banks world8 wide, banks and their supervisors supervisors should should be able to draw useful lessons from past experiences. experiences. #anks should now have a keen awareness awareness of the need to ident identify, ify, measure, measure, monitor and control credit risk as well as to determine that they hold ade2uate capital against these risks and that they are ade2uately compensated for risks incurred. $he #asel 1ommittee is issuing this document in order to encourage banking supervisors globally to promote sound practices for managing credit risk. Although the principles contained in this paper are most clearly applicable to the business of lending, they should be applied app lied to all activities where credit risk is present. I"portance o Credit Analysis o Individual 1orrowers

In case of the individual borrowers the system of credit analysis is used in order to measure the economic capability. $his is done in the context of repayment of debt. $he system tries to find out if the borrower would be able to pay his debts at the proper time. (ith the help of credit analysis the lenders can also find out if the debtor would at all be able to pay back the debt.

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I"portance o Credit Analysis o Corporate 2ntities

$he system of credit analysis is also applicable for reviewing the financial capacities of a certain issuer who is dealing in debt instruments. $his process is thus extremely crucial for those who  put their money in these debt instruments as their investment decisions are guided by the financial capacity of the issuer. 1redit 1re dit ana analys lysis is re2 re2uir uires es the Fun Fundin ding g Ins Instit tituti ution on to ass assess ess the ri risks sks and rew reward ardss of extending a loan. 1redit risk is a risk related to non8repayment of the credit obtained by the customer of a bank. $hus it is necessary to appraise the credibility of the borrower in order to mitigate the credit risk. Given the risks inherent in lending, all lenders conduct their credit analysis with the following principles in mind. 1redit analysis supports the work of marketing marketing officers by evaluating companies before lending money to them. $he analysis must also determine whether the information submitted is ade2uate for decision8making purposes, or if additional information is re2uired. 4&e !a8or Purpose o Credit analysis is to:

;. 5xamine the nature of the borrower0s business in the context of its industry *. Ident Identify ify and 2uanti 2uantify fy the busines businesss risks risks in lending lending situa situation tion =. Analy/e Analy/e cash flow flow to estimat estimatee future future sources sources and uses of cash to to make conclusi conclusion on with respect to likelihood of repayment as per the proposed and agreed terms and >. "ake recommend recommendations ations to to the proper proper type and struct structure ure of loan loan facility facility in the the light of the the  perceived financing needs and risks. D. $he end result result is to enable enable the the lenders lenders to maximi maximi/e /e risk return return..

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Dime+sio+s Dime+s io+s of Cre,it C re,it A!!raisal A!!raisa l -II.0/ !anage"ent Appraisal

A lot of attention has to be paid to this area, for this is one of the long term factors affecting the  business of the concern. 'oes the management have enough experience in the lineE (hat is its track recordE (hat are the antecedentsE Introduced to us by whomE $hese are some of the 2uestions that need to be answered before we can take up any kind of exposure. Co""ercial Appraisal

$he business has to be commercially viable for us to proceed further. Is there enough demand in the marketE Is the product accepted in the marketE ow many substitute products are thereE (hat about entry and exit barriersE Is there scope for further growthE $he nature of the product demand for the same, the existing and perceived. In the segment, ability of the proponents to withstand the same, government policies governing the industry, etc. need to be taken into consideration. Financial Appraisal

'oes the promoter has the capacity to raise finance8 both own e2uity and debtE (hat are the sources of marginE (ill the business generate sufficient funds to service the debt and other stakeholdersE Is the capital structure optimalE $horough scrutiny of the financial aspects of the re2uest needs to be carried out. Apart from ascertaining the need based character of the limits re2uested for, the financial health of the  proponents, ability a bility to absorb unanticipated financial costs need to be looked into. (here higher limits are considered, detailed analysis of the financial health would be made and the following ratios computed&  1urrent ratio  $otal outside liabilities7e2uity ratio  rofit before interest and taxes7interest ratio  rofit before tax7et sales ratio

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 Inventory H receivables7ales ratio  '1! if the borrower enjoys any term loan with any bank7FI even if no $9 is being

considered by our bank. Assessment of working capital credit re2uirements hinges normally on the projected sales and other financial figures. All the above ratios would be compiled for the past two7three years including the latest audited balance sheet. As the ratios would vary from industry to industry, services, trade, etc.

2cono"ic Appraisal

(hat is the breakeven levelE (ill the business post positive net present value through its economic lifeE (hat is the level of cost 7benefitE (hat is the Internal !ate of !eturn 3I!!4E (ill the cost of funding and operations be well below the I!!E

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C)APTER * III Factors to e co+si,ere, i+ Cre,it a+al1sis -III.$/ In order to obtain a credit, the prospective borrower has to apply through a re2uest for credit limit form in the format provided by commercial banks and financial institutions. $his form, in effect, serves as a credit analysis report. $he given given inform informati ation on is analy/ analy/ed ed in detail detail by the commer commercia ciall banks banks and financi financial al institutions to measure the viability of the project. It covers the following aspects of the project& ;. Identiication o t&e Pro8ect and t&e Pro"oters: •

•

•

 ame and brief introduction of the project.  ame, address, background, educational 2ualification, technical 2ualification and  business experience of project promoters and sponsors. Asset8liability position of promoters and of sister concerns.

*. Pro8ect Organi7ation and !anage"ent: •

9egal form of project organi/ation.

•

6rgani/ational structure and management set8up.

•

Authority distribution and reporting relationships.

•

hareholding distribution among promoters and sponsors.

•

"emorandum of Association and Articles of Association of the project.

=. 4ec&nical Aspects o t&e Pro8ect: •

9and and location of the project.

•

#uilding, structures, and fixture re2uirement.

•

"achinery, e2uipment, and vehicles re2uirement. 18

•

!aw materials and other inputs re2uirement.

>. !arketing Aspects o t&e Pro8ect: •

roposed product mix and product line.

•

ricing strategy.

•

"ode and 1hannels of distribution. d istribution.

•

romotional strategy.

•

9ocal and global market outlook.

D. Pro8ect costs and Financial Aspects o t&e Pro8ect: •

'etailed break8up of project costs& fixed, variable, and semi8variable.

•

(orking capital needs.

•

roposed debt8e2uity structure of the project.

•

roposed sources of financing.

•

roposed primary and collateral securities for loan with valuation.

•

roposed loan repayment schedule with desired moratorium period.

. /ocio-econo"ic Aspects o t&e Pro8ect: •

5mployment generation.

•

-se of advanced technology.

•

1ontribution to G'.

•

Foreign exchange savings

$he documentation of the factors to be considered in these categories should contain clear and unambiguous unambiguous statements statements describing their potential potential impact impact on credit credit standing. standing. $he design design of the forms should already be apt to prevent or reduce longwinded descriptions of the factors and unclear assessments with regard to the impact on credit standing. $his can be achieved by using standardi/ed text modules and limited field si/es 19

20

Si"+ifica+ce of Fi+a+cial Tools -III.0/

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$he following document has to be reviewed for credit analysis is as follows&  Income statement  #alance sheet  1ash Flow statement  ey Financial ratios  Financial rojections

Inco"e /tate"ent: $he income statement gives an important perspective of the health of a business.  It reports the selling activities of a company over a certain period of time.  It shows the profit of the company  #orrower should provide three years of actual results, showing that& •

e has generated sufficient operating income.

•

ales growth is consistent with market share and market si/e assumptions.

•

$he operating margins are consistent over time.

4&e 1alance /&eet $he balance sheet is the snapshot of the borrower0s financial condition at a specific point in time. It presents:  (hat the company has today 3Assets4.  ow much does the company owe today 39iabilities4  (hat is the company worth today 3et worth752uity4  4&e borrower s&ould provide t&ree years o &istorical balance s&eets in order or t&e

bank: •

$o generate, analy/e and compare the ratios.

•

$o identify the trends.

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Cas& Flow /tate"ent $he importance of cash flow analysis lies in the fact that cash flow is the first source of loan repayment. $he task of the credit analyst7officer is to satisfy him7her that the borrower has demonstrated the capacity in the past, and is likely to continue to have the capacity in the future, to generate sufficient cash flow to repay the proposed loan plus interest. 1ash flow analysis involves the use of the balance sheet and the income statement to identify the sources and uses of cash for the operating needs of the business. #y analy/ing the changes in cash, a lender gains insight, not only into the effects of past management decisions, but also into the company0s direction. 1hanges in working capital and capital expenditures are 2uantified and highlighted. $he analysis highlights cash needs directly, thereby showing the competing uses of cash to repay the bank0s debt. $he management of a company has many choices for the use of its cash. 5ach day, decisions are made concerning the investment, financing and operations needs of the company. $he following represent some of those decisions covering each of the three key areas&

J 6perations flows  Cash inflows:

1ash receipts for sale of goods and services 1ash income from investments All other cash receipts not classified as financing or investing activities  Cash outflows:

1ash payments to ac2uire goods and services 1ash payments for administrative expenses such as salaries, rent and utilities 1ash payments to lenders or taxes

J Financing flows  Cash inflows:

1ash proceeds from new e2uity 1ash proceeds of issuing new debt  Cash outflows:

1ash payments of dividends 1ash payments to reac2uire e2uity 1ash payment to creditors

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J Investing flows  Cash inflows:

1ash receipts from the sale of investments 1ash receipts from the sale of assets  Cash outflows:

1ash disbursements to buy investments 1ash disbursements to ac2uire assets

Financial %atios !atios are used to better understand trends in the borrower0s financial condition and operations. $hey reflect how the balance sheet and income statement intersect.  Liquidity, Efficiency, Efficiency, Profitability, Profitability, and Leverage Leverage . $here are four types of ratios such as Liquidity, 

0i9uidity: $here are two types of li2uidity ratios& Curren Cur rentt ratio rati o & A broad measure of li2uidity which indicates the amount of current assets

available to repay the current liabilities over the next ;* months. Acceptable current ratios vary from industry to industry and are generally between +' and ; for healthy businesses. businesses. If a company:s current ratio is in this range, then it indicates good short8term financial strength. I it is below + ?  then the company may have

 problems paying its bills b ills on time. owever, low values do not indicate a critical problem but should concern the management It is expressed as follows& Current ratio = Current assets/current liabilities.

6uick %atio* Acid 4est & is used to test the ability of a business to pay its short8term

debts. 9i2uid assets are e2ual to total current current assets "inus inventories inventories and prepaid e=penses' e=penses' $he acid test ratio ratio should be ;&; or higher, however this this varies widely widely by industry. industry. In general, general, the higher the ratio, the greater the company:s li2uidity. It is expressed as follows& Cuick ratio K Cash+ Mkt. Securities + Account Recv./Current liabilities 24



2icie 2 iciency ncy %atio: %ati o:

!atios that are typically used to analy/e how well a company uses

its assets and liabilities internally. $here are > types of ratio which as follows& a. Fi=ed asset turnover ratio: $his ratio measures measures the utili/ation utili/ation of business business is obtaining obtaining form its investment in fixed assets i.e. how effectively it uses its fixed assets. A high figure indicates efficient use of asset, the company is getting high sales revenue from each fixed assets. A low figure will indicate that managers are not using fixed assets to their full  potential.  It is expresse as: Sales revenue / net book value of fixe assets

 b. /tock 4urnover*inventory 4urnover & $his ratio is a relationship between the cost of goods sold and the cost of average inventory during a particular period. It is expressed in number of times. !atio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. -sually a high inventory turnover7stock velocity indicates efficient management of inventory A low inventory turnover ratio indicates an inefficient management of inventory.  It is expresse as: cost of !oos sol / avera!e stock 

d' #ebtors*%eceivable 4urnover %atio & $his ratio shows how efficient the firm is at collecting

its debt. $he higher the value of debtor0s turnover the more efficient is the management of debtors or more li2uid the debtors are. imilarly, low debtors turnover ratio implies inefficient management of debtors or less li2uid debtors. It is the reliable measure of the time of cash flow from credit sales. $here is no rule of thumb wh ich may be used as a norm to interpret the ratio as it may be different from firm to firm  It is expresse as: "#ebtors/Creit net sales$ % &'(

e' Accounts Payable #ays on @and: It is the average number of days it takes to pay payables

in cash. $his ratio gives insight into a company0s company0s pattern of payments. If the number is higher 25

than the terms offered by suppliers, it may be a cause for concern because suppliers may re2uire cash on delivery. It is is worth noting that a low number is not necessarily a good thing. Accounts  payable provides a source of spontaneous financing.  It is expresse as: "Accounts )a*able / Cost of !oos Sol$ % &'(

' %eturn on assets:   $his ratio indicates how profitable a company is relative to its total

assets. !6A gives an idea as to how efficient management is at using its assets to generate earnin earnings. gs. 1alcul 1alculate ated d by dividi dividing ng a company company:s :s annual annual earnin earnings gs by its total total assets assets,, !6A is displayed as a percentage. ometimes o metimes this is referred to as Lreturn on investmentL  It is expresse as: et profit after taxes/,otal assets 3-se net profit before taxes to eliminate the effect of taxes4.

g' %eturn on 29uity:

$his ratio measures the return on owner0s e2uity 3et worth4. $he a mount of net income returned as a percentage of shareholders e2uity. !eturn on e2uity measures a corporation:s profitability by revealing how much profit a company generates with the money shareholders have invested. $his ratio is more meaningful to the e2uity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Interpretat Interpretation ion of the ratio is similar to the interpretation interpretation of return return on shareholder shareholder:s :s investments investments and higher the ratio better is ;  Return on -uit*=et -uit*=et Inco0e Inco0e "net profit after tax 1 preference preference ivien$ ivien$ / Shareholer Shareholer2s 2s  -uit*3%455

26

Pro itabili bility ty :  Proita a' )ross proit "argin:   $he gross profit margin looks at cost of goods sold as a

 percentage of sales. It reflects efficiency with which a firm produces its products. As the gross profit is found by deducting cost of goods sold from net sales, higher the gross  profit better it is. $here is no standard G ratio for evaluation. owever, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends 6ross )rofit 0ar!in = "6ross )rofit/et Sales$ %4553 = 77778.

b' (et proit ratio :   ratio is used to measure the overall profitability and hence it is very

useful to proprietors. $he ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. 6bviously, higher the ratio the  better is the profitability. profitability.  et profit ratio = "et profit profit / et sales$ %455 = 77778.

c' %eturn on capital e"ployed:  is a measure of the returns that a business is achieving from the

capital employed, usually expressed in percentage terms. !615 indicates the efficiency and  profitability of a company:s capital investments. !615 should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders: earnings, and vice versaB a good !615 is one that is greater than the rate at which the company  borrows.

 R9C- = -I, / Capital -0plo*e = -I, / "-uit* + on;current
27

0eve vera rage ge  0e  4otal #ebts to 4otal Assets %atio :  5xtent to which the borrowed funds have been used

to finance a company0s investments ,otal #ebt to ,otal Asset = Shirt ter0 #ebt +
#ebt to 29uity ratio   'ebt8to852uity ratio indicates the relationship between the external

e2uities or outsiders funds and the internal e2uities or shareholders0 funds. owever, the interpretation of the ratio depends upon the financial and business policy of the company. $he. A ratio of ;&; is usually considered to be satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. $heoretically if the owners interests are greater than that of creditors, the financial position is highly solvent. In analysis of the long8term long8term financial financial position it enjoys the same importance importance as the current ratio in the analysis of the short8term financial position.

 #ebt -uit* Ratio = -xternal -uities / Internal -uities3 -uities3 9r  9utsiers funs / Shareholers funs3

 As a lon! ter0 financial ratio it 0a* be calculate as follows:

,otal
28

Interest Coverage:  $his ratio relates the fixed interest charges to the income earned by the

 business. It indicates whether the business has earned sufficient profits to pay periodically the interest charges. Interest coverage ratio is very important from the lender:s point of view. It indicates the number of times interest is covered by the profits available to pay interest charges. A high debt service ratio or interest coverage ratio assures the lenders a regular and  periodical interest income. inco me. #ut the weakness of the ratio may create some problems to the financial manager in raising funds from debt sources.  Interest Covera!e Ratio= et )rofit efore Interest Interest an ,ax / ixe Interest Char!es

#ebt ratio: A high debt ratio is unfavorable because it indicates that the company is already overburdened with debt

 #ebt Ratio = liabilities / assets assets

.

29

Com!o+e+ts of Cre,it C1cle -III.2/4

!egardless of where you seek funding 8 from a bank, a local development corporation or a relative 8 a prospective lender will review your creditworthiness. A complete and thoroughly documented loan re2uest 3including a business plan4 will help the lender understand you and your business. $he LFive 1:sL are the basic components of credit analysis. $hey are described here to help you understand what the lender looks for.  Cap Capaci acity: ty: to repay is the most critical of the five factors, it is the primary source of

repayment 8 cash. $he prospective lender will want to know exactly how you intend to repay the loan. $he lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. ayment history on existing credit relationships 8 personal or commercial8 is considered an indicator of future  payment performance. otential lenders also will want to know about other possible sources of repayment. Capital tal : is the money you personally have invested in the business and is an indication of  Capi

how much you have at risk should the business fail. Interested lenders and investors will expect expe ct yo you u to have contribu contributed ted fro from m you yourr own as asset setss and to hav havee und undert ertake aken n per person sonal al financial risk to establish the business before asking them to commit any funding.  Collateral: or guarantees are additional forms of security you can provide the lender. Giving

a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can:t repay the loan. A guara gua rant ntee ee,, on th thee ot other her ha hand, nd, is ju just st th that at 8 so some meon onee el else se si sign gnss a gu guar aran ante teee doc docum umen entt  promising to repay the loan if you can:t. ome lenders may re2uire such a guarantee in addition to collateral as security for a loan.  Conditions: describe the intended purpose of the loan. (ill the money be used for working

capital, additional e2uipment or inventoryE $he lender will also consider local economic

30

conditions and the overall climate, both within your industry and in other industries that could affect your business.  Character: is the general impression you make on the prospective lender or investor. $he

lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company.
31

CREDIT RISK-III.3/

#efault ris. "omponents of "redit ris.

"redit spread ris. #on$rade ris.

,he creit risk inclues: $he Mrst risk is referred to as default risk in which borrower does not repay obligation . $he second risk is labeled based on the reason for the adverse or inferior

 performance. $he risk attributable to an increase in the spread? or "ore speciBcally t&e credit spread? is reerred to as credit spread risk . $he risk attributable to a lowering of the credit

rating 3i.e., a downgrading4 is referred to as downgrade risk' 1redit 1redit analysi analysiss of any entity entityNa Na corpor corporati ation, on, a munici municipali pality, ty, or a sovere sovereign ign governm government entN  N  involves the analysis of a multitude of 2uantitative and 2ualitative factors over the past, present, and future. $here are four general approaches to evaluating credit risk&

FO% A 1A(? W@A4 I/ %I/D •

!isk is inability or unwillingness of borrower8customer or counter8party to meet their repayment obligations7 honor their commitments, as per the stipulated terms.

02(#2%E 4A/  •

Identify the risk factors, and

•

"itigate the risk 

32

@OW #O2/ %I/ A%I/2 I( C%2#I4D

In the business world, !isk arises out of  •

'eficiencies 7 lapses on the part of the management 3Internal factor4

•

-ncertainties in the business environment 35xternal factor4

•

-ncertainties in the industrial environment 35xternal factor4

•

(eakness in the financial position 3Internal factor4

4o put in anot&er way? success actors be&ind a business are: -

•

"anagerial ability

•

Favorable business environment

•

Favorable industrial environment

•

Ade2uate financial strength

As such, these are the broad risk categories or risk factors built into our 1!A models. 1!A takes into account the above types of risks associated with the borrower unit. $he eventual 1!A rating awarded to a unit 3based on a score of ;++4 is a single8point risk indicator of an individual credit exposure, ? is used to identify, to measure ? to monitor the credit risk of an individual proposal. At the corporate level, 1!A is also used to track the 2uality of #ank0s credit portfolio.

33

C%2#I4 $ %I/ 

•

Go hand in hand.

•

$hey are like twin brothers.

•

$hey can be compared to two sides of the same coin.

•

All credit proposals have some inherent risks, excepting the almost negligible volume of lending against li2uid collaterals with ade2uate margin.

02(#I() #2/PI42 %I//:

•

o, risk should not deter a #anker from lending.

•

A banker0s task is to identify7 assess the risk factors7 parameters ? manage 7 mitigate them on a continuous basis.

•

#ut it0s always prudent to have some idea about the degree of risk associated with any credit proposal.

•

$he banker has to take a calculated risk, based on risk8absorption7 risk8hedging capacity ? risk8mitigation techni2ues of the #ank.

34

35

A!!roac#es A!!roac #es to E5aluati+" E5aluati +" Cre,it Cre,i t Ris6 -III.7/4 -III.7 /4

•

Credit Credi t %atings %atin gs: 1redit 1redit rating is the process process of assigning assigning a letter rating rating to borrowers borrowers

indicating the creditworthiness of the borrower. !ating is assigned based on the ability of the borrower 3company4 to repay the debt and his willingness to do so. $he higher the rating of a company, the lower the probability of its default. $he companies assigned with the same credit rating have similar probability of default. 1redit rating helps the bank in in making several key decisions regarding regarding credit including&  (hether to lend to a particular borrower or notB what price to charge  (hat are the products to be offered to the borrower and for what tenorE  At what level should sanctioning be doneE  (hat should be the fre2uency of renewal and monitoringE •

/pecial Feature o %ating 4ool:  5xtensive data re2uirement and 1entrali/ed data base.  "ix of subjective and objective parameters.  Includes trend analysis.  ;= parameters are benchmarked against other players in the segment. $he tool contains

the latest available audited data7ratios of other players in the segment. $he data is updated at intervals.  1aptures industry outlook.  5asy accessibility and faster computation of scores.  Ade2uate security system and provision of audit trails for confidentiality.  "aintaining of past rating records in the system for collection of empirical data on rating

migrations. $his will enable the bank to arrive at 's 3robability of 'efault4 factor.

36

•

4raditional 4raditional Credit Analysis: $he tradit tradition ional al approach approach to credit credit analysis analysis calls calls for

assessing a prospective customer in the terms of %five 10s of credit@. Character   $he willi willingne ngness ss of the custom customer er to honour honour his obliga obligatio tions. ns. It reflec reflects ts integrity, a moral attribute that is considered very important by credit managers. Capacit*   $he ability of the customer to meet credit obligations from the operating cash flows. Capital  $he financial reserves of the customer. If the customer has difficulty in meeting his credit credit obliga obligatio tions ns from from its operatin operating g cash cash flow, flow, the focus shifts shifts to its capital. capital. Coll Collat ater eral al    $he $he secu securi rity ty offe offere red d by the the cust custom omer er in the the form form of pled pledged ged asse assets ts.. Conitions  $he general economic conditions that affect the customer. 4o get inor"ation on t&e ive CEs? a ir" "ay rely on t&e ollowing:

;. Financial /tate"ents   Financial statements contain a wealth of information *. 1ank $he bank banker er of the the pros prospe pect ctiv ivee cust custom omer er may may be anot another her source source of %eerences  $he info inform rmat atio ion. n. $o ensur ensuree a high higher er degr degree ee of cando candor, r, the the custo custome mer0 r0ss banke bankerr mayb maybee approached approached indirectly indirectly through the bank of the firm granting credit ;' 2=perience o t&e Fir"  1onsulting one0s own experience is very important. If the firm has previous

dealings with the customer, then it is worth asking how prompt has the customer been in making paymentsE ow well has the customer honoured his word in the pastE .' Prices and
37

•

Credit scoring "odels & A credit score is a numerical expression based on a statistical

analysis of a person:s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit  bureaus. In India, there are four credit information companies licensed by !eserve #ank of India. $he Credit Inor"ation 1ureau 0i"ited  has been functioning as a 1redit Information 1ompany from Oanuary *++;. ubse2uently in *+;+, 2=perian? 29uia= and @ig&"ark  were   were given licenses by !eserve #ank of India to operate as

1redit Information 1ompanies in India. Although all the four credit information companies have developed their individual credit score, the most popular is 1I#I9 credit score. $he 1I#I9 credit score is a three digit number that acts like a summary of individual:s credit history and credit rating. $his score ranges from =++ to P++ with P++ being the best score. Individual Individualss with no credit credit history will have a score of 8;. If the credit history is less than six months then score will be +. 1I#I9 credit score takes time to build up and usually it takes between ;Q and = months of credit usage before a decent credit score.

38

Im!orta+ce of Cre,it Ris6 Assessme+t -III.8/ 1redit is a core activity of banks ? an important source of their earnings, which go to pay intere interest st to deposi depositor tors, s, salari salaries es to employ employees ees ? divide dividend nd to shareh sharehold olders ers.. In credit credit,, it is not enough that we have si/able growth in 2uantity7 volume, it is also necessary to ensure that we have only good 2uality growth.

$o ensure asset 2uality, proper risk assessment right at the beginning, that is, at the time of taking an exposure, is extremely important.

"oreover, with the implementation of #asle8II accord>, capital has to be allocated for loan assets depending on the risk perception7 rating of respective assets. It is, therefore, extremely important for every bank to have a clear assessment of risks of the loan assets it creates, to become #asle8II compliant. $hat is why 1redit !isk Assessment 31!A4 system is an essential ingredient of the 1redit Appraisal exercise.

I(#IA( /C2(A%IO: •

In Indian banks, there was no systematic method of 1redit !isk Assessment till late ;PQ+0s7 early ;PP+0s.

•

ealth 1ode ystem 3;PQD4 7 I!A1 norms 3;PP=4 are Asset 3loan4 classification systems, not 1!A systems.

•

!#I came out with its guidelines on !isk "anagement ystems in #anks in ;PPP ? Guidance ote on "anagement of 1redit in 6ctober, *++*.

39

C%2#I4 %I/ A//2//!2(4  !I(I!G! /CO%2/ * @G%#02 %A42/ +' $he 1!A models adopted by the #ank take into account all possible factors which go

into appraising the risks associated with a loan. $hese have been categori/ed broadly into financial, business, industrial ? management risks and are rated separately. $o arrive at the overall risk rating, the factors duly weighted are aggregated ? calibrated to arrive at a single point indicator of risk associated with the credit decision.

assessmen mentt of financ financial ial risk risk involv involves es apprais appraisal al of the ' Fina Financ ncia iall para para"e "ete ters rs:: $he assess financial strength of the borrower based on performance ? financial indicators. $he overall overall financi financial al risk risk is assess assessed ed in terms terms of stati staticc ratios ratios,, future future prospe prospects cts ? risk risk mitigation 3collateral security 7 financial standing4.

characteristics ics of an industry industry which pose varying ;' Indu Indust stry ry par para" a"et eter ers: s: $he following characterist degrees of risk are built into #ank0s 1!A model& •

1ompetition

•

Industry outlook 

•

!egulatory risk 

•

1ontemporary issues like ($6 etc.

.' !ana !anage ge"e "ent nt para para"e "ete ters rs::  $he management of an enterprise 7 group is rated on the

following parameters&

•

Integrity 3corporate governance4

•

$rack record

•

"anagerial competence 7 commitment

•

5xpertise

•

tructure ? systems 40

•

5xperience in the industry

•

1redibility & ability to meet sales projections

•

1redibility & ability to meet profit 3A$4 projections

•

ayment record

•

trategic initiatives

•

9ength of relationship with the #ank 

' $he risk parameters as mentioned above are individually scored to arrive at an aggregate

score of ;++ 3subject to 2ualitative factors  negative parameters4. $he overall score thus obtained 3out of a max. of ;++4 is rated on a Q point scale from #;7#$9; to # Q 7#$9Q.

/A0I2(4 F2A4G%2/ OF C%A !O#20/: 4ype o !odels  /' (o' 3i4 3ii4

2=posure 0evel 6ver !s. D.++ crore !s +.*D crore to !s. D.++ crore

(on  4rading /ector !egular "odel implified "odel

4rading /ector < 4rade $ /ervices> !egular "odel implified "odel

3b> 4ype o %atings /' (o' 3i4

!odel !egular "odel

3ii4

implified "odel

4ype o %ating #orrower !ating Facility !ating #orrower !ating

(ew %ating /cales  1orrower %ating: + %ating )rades 4&ere is dierent rating given to t&e dierent banks' For e=a"ple /' (o'

1orrower %ating

%ange o scores

%isk level

Co"ort 0evel

;

1 #;

P>8;++

Rirtually Sero risk

Rirtually Absolute safety

41

* = > D

1 #* 1 #= 1 #> 1 #D

P+8P= Q8QP Q;8QD T8Q+

 T Q P +,

1 # 1 #T 1 #Q 1 #P C1+,

T+8TD >8P DT8= D+8D .-.J

;; ;* ;= ;> ;D

1#;; 1#;* 1#;= 1#;> 1#;D

>+8>> =D8=P =+8=> *D8*P U*>

;

1#;

8

9owest !isk 9ower !isk 9ow !isk "oderate !isk with Ade2uate 1ushion "oderate !isk

ighest safety igher safety igh safety Ade2uate safety "oderate afety

Average risk

Above afety $hreshold

Acceptable %isk   <%isk 4olerance 4&res&old> #orderline risk igh !isk igher risk ubstantial risk re8'efault !isk 3extremely Rulnerable to default4 'efault Grade

/aety 4&res&old

Inade2uate safety 9ow safety 9ower safety 9owest safety  il

#ank has introduced ew !ating cales for borrower for giving loans. !ating is given on the  basis of scores out of ;++. #ank gives loans to the borrower as per their rating like 1#I gives loans to the borrower up to 1#Q rating as it has average risk till 1#Q rating. From 1#P rating the risk increases. o banks do not give loans after 1#Q rating.

42

C#a!ter I' Case Stu,1 * CREDIT ANAL(SIS REPORT -I'.$/ %esearc& %ese arc& !et&od !e t&odolog ology y& $o study the 1redit Appraisal ystem, (e have taken a study of Central 1ank o India? in "5 sector, !u"bai' $his study will help in understanding the credit appraisal system in banks ? to reduce various risk parameters, which are broadly categori/ed into financial risk, business risk, industrial risk ? management risk associated in providing project finance. O1K2C4I32/:  $o study the 1redit Analysis at 1entral #ank o f India, "5 ector   $o check the commercial, financial ? technical viability of the project proposed ? its

funding pattern  $o check the primary ? collateral security cover available for recovery of such funds   $o study the credit rating methods followed by the bank for different credit ranges.  $o study a credit appraisal report of a firm.  $owards this end the preliminary appraisal will examine the following aspects of a

 proposal. #ank0s lending policy and other relevant guidelines7!#I guidelines&

%2/2A%C@ !24@O#O0O)5:

$he success of the analysis mostly depends on the methodology on which it is carried out. $he appropriate methodology will improve the validity of the findings. 4itle:

$o determine

43

%2/2A%C@ #2/I)(: •

$ype of research design& Analytical !esearch.

•

'ata collection & rimary and econdary data

•

!esearch approach & observation, individual depth interview

•

'ata ource & $he study is based on the data collected through primary and secondary sources

%2/2A%C@ P%OC2// #ata Collection: Pri"ary #ata:

;4 'epth Interview from analytical department of credit analysis and loan department =4 'ata explaining the working of process /econdary #ata:

;4 Audited financials of company *4 ewspapers >4 'atabase at 1#I D4 Internet T4 58 1irculars of 1entral #ank of India Q4 #rochures of bank, !#I, 1I#I9 /a"pling design $ sa"ple si7eL

A tool used by individuals to conduct a 2uantitative analysis of information in a company:s financial statements. !atios are calculated from current year numbers and are then compared to  previous years, other companies, the industry, or even the economy to judge the performance of the company. !atio analysis is predominately used by proponents of fundamental analysis. 0I!I4A4IO( OF 4@2 /4G#5:  'ue to the time constraint limited study on the project has been done  $he period is five year. ence the data cannot be compared to the longer life of the bank.

44

 As the credit appraisal is one of the crucial areas for any bank, some of the technicalities

are not revealed which may cause destruction to the information  In a rapidly changing industry, analysis on one day or in one segment can change very

2uickly. $he environmental changes are vital to be considered in order to assimilate the findings.

45

 Central 1ank o India Central 1ank o India , a government8owned bank, is one of the oldest and largest commercial

 banks in India India.. It is based in "umbai "umbai.. $he bank has >;++ branches and *T+ extension counters across *T Indian states and three -nion $erritories. At present, 1entral #ank of India has one overseas office, which is a joint venture with #ank of India, India, #ank of #aroda, #aroda, and the Sambian government. $he Sambian government holds >+ per cent stake and each of the banks has *+ per cent. 1entral bank of India is one of ;Q ublic ector banks in India to get recapitali/ation finance from the government over the next *> months. As on =; "arch *+;;, the bank:s reserves and surplus stood at ,QQ.QD crore. Its Its total business at the end of the the last fiscal amounted to *,+P,TDT.== crore. A number of innovative and uni2ue banking activities have been launched by 1entral #ank of India and a brief mention of some of its pioneering services are as under& ;P*; Introducti Introduction on to the ome avings afe 'eposit 'eposit chemeto chemeto build saving7thr saving7thrift ift habits habits in all sections of the society. ;P*> An 5xclusive 5xclusive 9adies 9adies 'epartment 'epartment to cater to the the #ank:s women women clientele. clientele. ;P* afe 'eposit 'eposit 9ocker 9ocker facility facility and and !upee $ravelle $ravellers: rs: 1he2ues. 1he2ues. ;P*P etting etting up of the the 5xecutor 5xecutor and $rust $rustee ee 'epartment. 'epartment. ;P=* ;P=* 'eposi 'epositt Insuran Insurance ce #enefit #enefit chem cheme. e. ;P* ;P* !ecurr !ecurring ing 'epo 'eposit sit cheme. cheme. ubse2uently, even after the nationali/ation of the #ank in the year ;PP, 1entral #ank continued to introduce a number of innovative banking services as under& ;PT ;PT ;PQ+ ;PQ+ ;PQ ;PQ ;PQP ;PP>

$he $he "erch "erchant ant #ank #ankin ing g 1ell 1ell was est estab abli lish shed. ed. 1entra 1entralca lcard, rd, the the credi creditt card card of of the the #ank #ank was introd introduced uced.. :lati :latinum num Oubi Oubilee lee "oney "oney #ack #ack 'eposi 'epositt chem cheme: e: was launch launched. ed. $he housing housing subsidi subsidiary ary 1ent 1ent #ank ome Finance Finance 9td. was was start started ed with with its head2uarters head2uarters at #hopal in "adhya radesh. Cuick 1he2ue 1ollection 1ollection ervice ervice 3C114 3C114 ? 5xpress 5xpress ervice ervice was set up to enable enable speedy speedy collection of outstation che2ues.

46

Further in line with the guidelines from !eserve #ank of India as also the Government of India, 1entral #ank has been playing an increasingly active role in promoting the key thrust areas of agriculture? s"all scale industries as also "ediu" and large industries . $he #ank also

introduced a number of elf 5mployment chemes to promote employment among the educated youth.

!/!2 /2C4O% :

In the the Indian Indian context,  context, the !icro? s"all and "ediu" enterprises  3""54 sector is broadly a $erm used for small scale industrial 3I4 units and medium8scale industrial units. 

!icro-enterprise  is one where the investment in plant and machinery 3their original cost

excluding land, building and items specified by the "inistry of mall cale Industries in its notification o. .6. ;T**354 dated 6ctober D, *++4 does not exceed !s.*D la.h.



/"all enterprise enterprise  one where the investment in plant and machinery 3see above4 is more

than !s.*D lakh but does not exceed !s.D crore.



!ediu" enterprise enterprise is one where the investment in plant and machinery 3see above4 is

more than !s.D crore but does not exceed !s.;+ crore. Assess"ent o Credit or !/!2 Gnits

In tune tune with with the liber liberali ali/ed /ed enviro environme nment, nt, our #ank #ank has adopted adopted the follow following ing system system for assessment of working capital re2uirements of the borrower.

4urnover !et&od:  $his method should be used for assessing fund based working

capital re2uirements enjoyed from the banking system up to !s.D.++ crore.

4raditional !et&od:  Fund based working capital re2uirements under this method

should be assessed under "ethod II of $andon 1ommittee for borrowers enjoying fund  based working capital limits of above !s.D.++ crore but less than !s.D+.++ crore.

47

Cas& 1udget !et&od:

$his method would be applicable to borrowers who are i. Falling under 1yclical Industries like $ea, ugar etc. ii. #orrowers availing Fund #ased (orking 1apital limits of !s.D+ crore and above from the  banking system.

C1I (O%!/ FO% /!2 - C%2#I4 APP%AI/A0

1redit appraisal means an investigation7assessment done by the bank prior before providing any loans ? advances7pr advances7project oject finance ? also checks the commercial, commercial, financial financial ? technical technical viability viability of the project proposed its funding pattern ? further checks the primary ? collateral security cover available for recovery of such funds.

#enchmark of ratios is as follows&

!atio

#enchmark

1urrent !atio

;.;+

'ebt852uity !atio

=&;

'ebt 'ebt er ervice vice 1ove 1overrage age !at !atiio 3Av 3Aver erag age4 e4&&

;.*D ;.*D

Interest 1overage !atio

;.D+&;

Asset 1overage !atio

;.==&;

 

 ormally et (orth to #ank #orrowings ratio ratio shall be ;&>. owever, deviation up to ;& can be allowed by next higher authority not below the rank of Sonal "anager in case of "anufacturing ? $rading accounts.

48

 For (orking 1apital and $erm 9oan -pto 6ne
49

9I"I$

!ate #ase !ate V 3a4

pread !ate V 3b4

5ffective !ate V 3aHb4K3c4

;+.TD

+.D+

;;.*D

Above !s. ;+ lacs ;+.TD and ? up to !s. ;++ 9acs

;.++

;;.TD

-p to !s ;+ lacs

For term loans above ; year& $eno $enorr prem premiium & $enor enor of the loan oan 3including "oratorium period4

!5"I-"

W;
+.*DV

W =
+.D+V

%ating& As per !eserve #ank of India, in case of advances up to !s.* crore to "icro and

mall 5nterprises 3"54 sector #ank should implement scoring model and information re2uir re2uired ed for the scorin scoring g model model should should be incorp incorpora orated ted in the applica applicatio tion n form form itsel itself. f. Accord According ingly ly #ank has formul formulate ated d two separa separate te scorin scoring g models models,, 3"58 3"58II and "58II "58II attached as Annexure III and IR4 for all advances up to !s.* crore falling under "5 sector. i. coring "odel "58I is is to be utili/ed for existing units and coring "odel "58II is to  be used for new units.ii. u nits.ii. For advances above !s.* crore and up to !s.D crore scoring model similar to 1A!$ of I'#I is to be utili/ed iii. For advances above !s.D crore 91!$ of our #ank is to be utili/ed. $he total number of weightage marks obtained by the concerned  borrower, the borrower would be rated as under.

50

%ating Agencies Agencies & #ank has entered into an "6- for erformance and 1redit !ating

"echan "echanism ism of ation ational al mall mall Indust Industri ries es 1orpor 1orporati ation on 3I1 3I1s4 s4 with with follow following ing rating rating agencies. ;. 1A!5 *. 1!II9 =. FI$1 >. I1!A D. "5!A If borrower opts for credit rating with with any of the above agencies, bank will consider consider following concessions.  1oncession of D+V in rocessing 1harges  Interest 1oncession of +.*DV for the following rating scale.

erformance 1apabilities

Financial trength

Interest 1oncession

igh ighest

5 ;A

igh

5 *A

+.*DV +.*DV

#ank is adopting the ratings assigned by the external rating agencies for the purpose of  pricing only and not as a substitute for #ank0s internal 1redit !ating exercise.#ank has also approved following agencies 3empanelled with 1Is4 for erformance and 1redit !ating. 3"63"6- to be signed4 signed4#as #ased ed on the presen presentt indica indicatio tions, ns, follow following ing exposur exposuree levels levels are  prescribed&

51

Individuals as borrowers

"aximum aggregate credit facilities of !s. *+ crores 3 Fund based ? non8fund based 4

 on8corporates

"aximum aggregate credit facilities of !s. Q+ crores 3 Fund based ? non8fund based 4

3 e.g. artnerships, OF, Associations 4

1orporates

"aximum aggregate credit facilities as  per prudential norms of !#I on exposures

Appraisal: $he budget must be scrutini/ed vis8X8vis the financial statements to satisfy that the forecasts are reasonable. 6nce the forecasts are found acceptable, the credit limit re2uired by the borrower is to be determined as the peak level of cash deficit as shown in the budget. $he sanctioning of the limit will be subject to the observance of the following: a. "aintenance of 1urrent !atioNdesired level is ;.;+  b. $he 'ebt& 52uity !atio 3$69& $(4 normally not to exceed *&; c. #orrower 7 Group exposure to be within norms determined by the #ank internally, but within the !eserve of India parametersB d. $he appraisal will also include assessment of the 1ompany profile and Industry rofile e. $here has to be an evaluation of risks at the time of fixing lending limits and if felt expedient, the level of operations and cash budget projections will be pruned down by the bank at the time of discussions before finali/ing credit limits. f. $he disbursal of credit facilities will be by way of 9oan and 1ash 1redit components as per stipulation of 9oan 'elivery ystem. Flexibility will be allowed in fixing maturity periods of the loans which can correspond to the 2uarterly budgets if the borrowers so choose. 6nce the

52

maturity period is fixed, prepayment of the loan component if re2uired shall be subject to !#I guidelines and also payment of a penalty upto *V of the repaid loan amount for the unexpired  period, as may be decided by sanctioning authority at his discretion. g. 1redit facilities on preferential terms like export credit should be assessed and disbursed in terms of existing procedure. owever, the total of such facilities and all other fund based facilities availed should be within the limits under the 1ash #udget'

53

CASE ST&D( -I'.0/ FAC !"EE  (a"e

Fle=i Poly"ers Private 0i"ited co"pany

Constitution

rivate 9imited 1ompany

%egistered Oice Address

#8 =+;, city light road , Athawagate urat8=PD ++=, Gujarat

0ine o Activity

"anufacturing of ' woven sacks

/ector

"anufacturing

#ealing wit& us

 ew 1onnection

Incorporation

;Dth Oune *++>

(a"e o #irectors

"r. Atulbhai rahladbhai atel "r. !ameshbhai #hagwanbhai atel "r. itendra argovinddas atel

)roup

 ot a recogni/ed group

%ating

/!2 ;

Associate Concern

'ynamic 6verseas 3India4 rivate 9imited

(o' O 2"ployees

ermanent & ** 1ontractual & >Q $otal & >P+

Proposed Credit re9uire"ent

F#(1 limits limits of !s.*.*D crores Fresh $erm 9oan of !s.*.++ crores

54

 #R$EF #AC%&R'()*: #AC%&R'()*: $he 1ompany was incorporated on ;Dth Oune *++> as rivate rivate 9imited 1ompany. 1ompany. $he 1ompany was promoted with the objective of carrying for manufacturing and selling of ' woven sacks to be manufactured from ' granules. $he promoters have sufficient experience in the line of activity. $he promoters had already made negotiations of the some of the industries as detailed under for selling the ' woven sacks& • • • • • •

Indian Farmers Fertili/ers 1ompany 9imited Gujaco masol #irla cement anghi 1ement Ambuja cement Rarious grain ? Food 5xport units of Gujarat, etc.

$he firm has also started marketing activity for their products by making personnel contacts ? writing introductory letters to potential customers ? as the promoters are in the same line of  business activity for the last ;D years they are having very good market contacts for the sales of the Finished Goods.

$he orders worth !s.*.D+ crores is expected to be finali/ed by end of August, *+;= and before commissioning of the plant as advised

55

+(AL$A$E FAC'R!: $he 1omp 1ompany any has has a pro8 pro8ac acti tive ve "ana "anagem gemen entt and and rom romot oter erss who who have have hands hands on  $he experience in sacks.  rofit making 1ompany since last D years.

performance of more than !s. .++ ?  $he company was awarded with trophy for export performance Q.++ 1rore for elf.

%aw %aw !ate !ateri rial al  $he major raw material for this plant is ' in the form of granules. $his raw material is available locally by sales ? distribution network of the major suppliers as under& •

•

!eliance Industries 9imited  and Agencies

•

9abdhi International

•

adlia petrochemicals 9td.

•

harada olymers

•

I19

$he raw materials materials are purchased from the suppliers suppliers against the advance payment payment only and cash discounts are offered resulting in the increase in profitability. Any variation in the cost of raw material is proposed to be passed on to the finished products and will not affect the profitability.

 -arketing !trategy.-arketing !trategy.-arketing arrange/ent : trong and experience people are leading company0s marketing department. 1ompany0s total turnover is divided into& 

5xports ales



9ocal ales



2=ports /ales:

•

1ompany0s T+V turnover is generated by way of exports sales. 1ompany has its own  presence in all most all countries. $he company is exporting ' in 9atin America,

56

African countries, "iddle 5ast, Far 5ast, - and 5urope. Almost all export customers are dealing with company for many years. •

6ut of total exports turnover + to T+V percentage orders are repeated orders and rest of the orders are new orders.

•

$he 1ompany has region wise 5xport "anagers who can cater the need of customers individually. 'ue to the 2uality and timely delivery of the material the company have less competition from these countries.

 0ocal /ales: •

In 9ocal "arket 1ompany is doing marketing its acks to the end customers.

•

$he company is the largest manufacturer of ..1. in India which generating repeated order from the local customers.

Proposed Credit 0i"it

roposal& anction forB i4 F#( F#(1 limi imits of !s.* !s.*.* .*D D cror crores es ii4 ii4 Fres Fresh h $er $erm m 9oa 9oan n of of !s. !s.*.+ *.++ + cro crore ress Approval for& i4 1!A rating rating of #8  3T; 3T; marks4 marks4 based based on projec projected ted financi financials als as on =;.+=.*+;= ii4 ii4 ricin ricing g for (1 (1 facili facilitie tiess Y;.++V Y;.++V above above #A! #A! as appl applica icable ble for for #8D #8D minimum Y;=.TDand for for $9 ;.D+V above #A! minimum minimum Y;>.*DV

57

+(A)$A$E FAC'R!: Peror"ance $ Financial Indicators: <%s' in Crores>

5ear Installed cap Cty.

,+;

,+.

,,J *D*+

,+, *D*+

,++ *D*+

,+ *D*+

*D*+

*D*+

;+*P

*+;

*+P;

*;>* *;.+

**;T

**Q

P.* +.++ +.>> +.>=

;P.TT +.++ ;.;Q ;.;T

*+.DQ +.++ ;.;P ;.;Q

P +.++ ;.*= ;.**

*;.Q* +.++ ;.=; ;.=+

**.=> +.++ ;.== ;.=*

>.> +.*P +. ;.*+ +.PD

D.P* +.TQ ;.;+ *.+> +.PD

D.T= +.TP ;.+P ;.P +.PD

D.TQ +.Q* ;.;D ;.PT +.PD

D.P +.QT ;.*> *.+* +.PD

D.P; +.QQ ;.=* *.+D +.PD

;.*= ;.T= >.;; *.> ;.=> ;.+;

*.+; *.D; *.D+ ;.Q+ ;.D* ;.T;

*.Q+ =.=+ ;.T ;.*T ;.D= *.>+

=.* >.;* ;.;P +.P* ;.D= *.DT

>.>P >.PP +.QQ +.Q; ;.DT *.T>

D.=Q D.QQ +. +.* ;.Q; =.*Q

3"$7pa.4  et ales Cty. 3approx4 3"$4  et ales 3Ralue4  35xport4 6perating profit rofit before tax #$7et sales 3V4 rofit after tax 1ash accruals #'I$ aid up capital $angible net worth Adjusted $( $697$( $697Adjusted $( 1urrent ratio 3times4 NWC

58

Audited 1alance /&eet: <%s' In crores> /ources o unds hare 1apital !eserves and urplus ecured 9oans & hort term 11 & 9ong term $9 -nsecured 9oans 'eferred $ax 9iability 4otal Application o Funds Fixed Assets 3Gross #lock4 9ess 'epreciation (et 1lock 1apital (ork in rogress rogress   Investments Inventories undry debtors 1ash ? bank balances 9oans ? advances to suppliers of

!aw material 7 spares Advance tax 3 9ess & 1urrent liabilities 4 39ess & rovisions rovisions 4 (et Current Assets "isc. 5xpenditure 3$o the extent not written off or adjusted 4  on81urrent Assets7 'eposits 4otal

;+',;',++ +.PD +.*P *.*D *.++ +.D+

;+',;',+ +.PD ;.+T *.*D ;.+ +.D+

'JJ

';M

*.T +.=T ';,

*.T +.P +'JN

;.T= ;.QD +.;D +.;>

*.;= *.>+ +.;D +.;*

+.;+ +.=;

+.*= +.T

;'

.';

+.+= 'JJ

+.+= ';M

!ove"ent in 4(W:!ove"ent in 4(W Opening 4(W H A$ H Inc. in 52uity 7 remium H78 1hange in Int. Assets H78 Adj. of prior year exp. 8 'ividend payment Closing in 4(W

Pro8ected ;+',;',+ ,',, +.*P +.PD 8+.+;

+';

59

;+',;',+; +'; +.TQ

;+',;',+. ',+ +.TP

',+

'N,

1ank Inco"e Analysis

<%s' in crores>

Fro"

Pro8ection ;+',;',++ +.; +.;> 8 8 8 +.+= ,';;

(1 Int. $9 Int. 91 #G #ill 6thers loan processing 4otal

Pro8ection ;+',;',+ +.*T +.*P 8 8 8 +.+; ,'M

#eviations in 0oan Policy: Para"eters

9i2uidity $697$( $697Adj. $( Average gross '1! 3$94 'ebt 7 e2uity 'ebt7Cuasi e2uity Any others

Indicative !in*!a= level as per loan policy

;.== =.++ ;.TD *&; 8

Co"panys level as on ;+',;',++  ;.=> >.;; *.> *.D> *.+;&; ;.;D&; 8

Co"panys level as on ;+',;',+

;.D* *.D+ ;.Q+ *.D> ;.+=&; +.>&; 8

#eaulters 0ist:(hether names of promoters, directors, company, group concerns figure in & !#I defaulters0 list dated =+.+P.*+;+ o (ilful defaulters0 list dated =;.;*.*++T o 51G1 caution list o (arning signals 7 "ajor irregularities in 1redit audit& inspection report &  ot applicable new unit 6ther audit reports & Advers erse ob observati ations in #a #alance sh sheet ot app appllicable ne new uni unitt Advers erse obs observati ations in Auditors report

il.

Any As among associate concerns

one

Co//ercial viability :

0Rs1in crores2 60

5ear ending

,,N-,J

;+st !arc&  et ales  et rofit 1ash Accruals Interest on $9s /ub 4otal $otal repayment Interest on $9 /ub 4otal <1> '1! 3Gross4  et '1! Average )ross

P.* +.*P + .  + .;  ,'N +.+ + + .;  ,'+ D .; = 8 '.

#/C%  Average (et

;'N

,,J-+,

;P.TT +.TQ ;.;+ +.*T +';M +.>+ +.*T ,'M *.+> *.TD

,+,-++

,++-+

*+.DQ +.TP ; .+ P + .* * +';+ + .> + +.* * ,' * .; ; *.T=

*;.+P +.Q* ;.;D +.; +';+ +.>+ +.; ,' *.=> *.QQ

,+-+;

,+;-+.

*;.Q* +.QT ;.*> +.;; +'; +.>+ +.;; ,'+ *.D =.;+

**.=> +.QQ ;.=* +.+D +';M +.>+ +.+D ,'. =.+> =.=+

4otal

.D +.PT M'; *.++ +.PT 'JM

#/C% 

1reak-even and sensitivity sensitivity analysis and w&et&er acceptable:<%s' acceptable: <%s' in crores> =;7+=7+P T+V P.*

=;8"ar8;+ =;8"ar8;; Q+V Q =V ;P.TT *+.DQ

=+8"ar8;* QDV *;.+P

=;8"ar8;= =;8"ar8;> QQV P+V *;.Q* **.=>

Q.T> +.++ +.* +.+P +.T= N';

;T.;= + .+ + + .> T + .; = +.=P +M';.

;T.TT +.++ +.D+ +.;D +.+ +N';

;Q.*+ +.++ +.D= +.; +.+= +N'N

;Q.Q> +.++ +.D +.;T +.+> +J';

;P.*T + .+ + + .D P + .; Q +.+> ,',,

+.+Q

+ .; =

+.;>

+.;D

+.;

+. ; T

5xpenses Interest 5xpenses 'epreciation $otal Fixed 1ost 3 14 1ontribution 3'KA8#4 1ontribution ratio 35K'7A4 #5 sales 3FK1754 12 sales as Q o (et

+.+ +.>+ +.=T +.P; +.P+ +.;+ P.;+

+ .; + + .D D +. = * ; .; + *.> = + .; * P. ; T

+.;; +.>Q +.=+ ;.+= *.** +.;; P.=

+.;* +.>* +.== ;.+* *.*= +.;; P.*T

+.;= +.=D +.=T ;.+; *.*P +.;+ ;+.;+

+ .; > + .* P +.> > ; .+ > *. = > + .; + ;+.>+

/ales

JN'M

.';N

.'.N

.;'J

.'J

.'

1reak even analysis 1apacity -tili/ation  et ales 3A4 Rariable costs !aw material 1onsumable spares ower and Fuel 6ther operating 5xp. tock 1hanges 4otal 3ariable Cost<1> Fi=ed Costs 'irect 9abour elling, Admin. ? General

61

Interir" Co"parison: <4o be given only w&ere data ro" co"parable units is available'> (a"e o Co"pany

F10

(F10

5ear

/ales

P14 * /ales Q

4O0 * 4(W

C% 

Ahmedabad ackaging Industries 9td.

=.=+

; .* +

*++T

*=.;;

* .; 

;.>T

;.;

inghal Industries vt. 9td

 .T +

88

*+;+

;D.;P

 .D *

*.P+ 1.90

Asia (oven acks vt. 9td.

T .> >

Akshat olymers

> .* D

;.++

*++Q

**.PQ

>. D =

=.;> 1.08

88

*+;+

;P.TT

D.P *

*.D+ 1.52

62

)rap&s

63

Analysis:•

$he $he firm firm is into into manu manufa fact ctur urin ing g of ' ' wove woven n sack sackss whic which h are are widel widely y used used as  packaging material in cement, fertili/er, etc.

•

As per I1!A report, grading and research services Flexible packaging sector is expected to grow at the rate of ;*.>+V.

•

$he company0s borrower rating is "58= based on projected financials as on =;.+=.*+;= 3the first full year of operations4.

•

rojected financials are in line with the financials of the some of the unit in similar line of activity and production level.

•

$he promoters are having experience of more than ;D years in the line of the activity.

•

$he affairs of the firm are expected to be managed on professional lines based on their  past experience.

•

$he conduct of accounts accoun ts of associate with the existing bankers has been satisfactory.

•

$he short and medium term outlook for the industry is stable

•

Availability of collateral security reflected in collateral coverage of D+.DV.

•

Gross average '1! of *.D>.

•

Average security margin of >QV.

•

$he company has ade2uate management skills and production7marketing infrastructure in  place to achieve the projected trajectory. $here is steady demand for the product.

Particulars Overall /coring Financial scoring #usiness scoring "anagement scoring Industry scoring

%ating /!2-; "58> "58= "58= "58=

64

 Find  Fi ndin ings gs  1redit appraisal is done to check the commercial, financial ? technical viability of the

 project proposed its funding pattern ? further checks the primary or collateral security cover available for the recovery of such funds

no rms for sanction of different types of loans   1#I loan policy contains various norms

 $hese all norms does not apply to each ? every case

 1#I norms for providing loans are flexible ? it may differ from case to case

 $he 1!A models adopted by the bank take into account all possible factors which go into

appraising the risk associated with a loan

 $hese have been categori/ed broadly into financial, business, industrial, management

risks ? are rated separately

assessmen mentt of financ financial ial risk risk involv involves es apprais appraisal al of the financ financial ial streng strength th of the  $he assess  borrower based on performance ? financial indicators

 After case study we found that in some cases, loan is sanctioned due to strong financial

 parameters

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%eco""endation  All the documents re2uired to appraise the project should be asked at the time of

application only rather than later by the bank   $he bank must bring more transparency in appraisal of the project there should be

explanation for an appraisal of the project that was sanctioned by higher authority.  $he bank must not rely on software or information provided by the client the bank should

dig in for other sources in order to draw a real picture for the company.  1redit scoring allows lenders to determine whether or not you fill the profile of the type

of customers they are looking for. #anks concer concerned ned should should contin continuous uously ly monito monitorr loans loans to identi identify fy account accountss that that have  #anks  potential to become non8performing.  At the time of projections due to lack of documents, the projections are done.

CO(C0G/IO( In bank the 1redit Appraisal is not simply a 2uantitative exercise of %numbers crunching@. #orrowers operate in a dynamic environment, and their ability to repay is rarely the result of static conditions reflected in periodic financial statements. $he recent era of volatile social,  political, and economic change across the globe is only one example of the unpredictable forces at work. $herefore, a sound credit rating system re2uires an analysis of broader credit risk management issues as well. $he case study gave a vast learning experience to me and has helped to enhance my knowledge. 'uring the study I learnt how the theoretical financial analysis aspects are used in practice during the finance assessment. I have reali/ed during my project that a credit analyst must own multi8 disciplinary talents like financial, technical as well as legal know8how. $he credit appraisal for working capital finance system has been devised dev ised in a systematic way. $here are clear guidelines on how the credit analyst or lending officer has to analy/e a loan proposal.

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Annexure 1: Format of Term Sheet 1entral #ank 6F India

/!2 Finance 1ranc&? !u"bai

Approval of #road $erms 6f $he roposal /B)#

#ated

Name of the account

)ccount ith roup :istin$ connection or ne connection "redit Ratin$ Bac.$round of promoters

(Rs& /n "rores; Brief inancials !ear () ()ud&; "urrent Ratio <= R)/

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!ear () ()ud&;

!ear (*ro%&;

(Rs& /n "rores;
"ost of *ro?ect

tal ')<  /<)<"
!s.

1rores

'ar$in /nterest"ommission /nterest reset *urpose

eriod of the facility !oratoriu"

'oor $o 'oor $enor  Repa-ment terms ecurit- A *rime

"ollateral securitpfront fees

*repa-ment terms

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@ of

=hether conforms to oan *olic"ustomer profitailit-, (in case of e:istin$ accounts; 1& 2& 3& 4&

5&

"ommission earned on ills purchaseddiscounted& *rocessin$ char$es "ommission on " "redit alances in a& B & "# erm deposits a& hrou$h on sources & hrou$h third part-

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1ibliograp&y Websites: 'ttp//000.r)i.or*.in/'ome.aspx 'ttps//000.centra$)an,ofindia 'ttps//000. centra$)an,ofindia.co.in/site/indexc)i.a .co.in/site/indexc)i.aspx spx 'ttp//crisi$.com/index.sp www.scribd .om!

1ooks *Kournals:

;. 1#I 1#I Oour Oournal nalss ? ews ews 9et 9ette ter  r  *. 58 1ircu 1ircular larss of 1entr 1entral al #ank #ank of India India and and !#I =. 1redit 1redit !isk !isk "anage "anagemen mentt 8 Andre Andrew w Fight Fight >. 1red 1redit it proce process ss and and 1redi 1reditt !isk !isk manag managem ement ent 8 Gunt Gunthe herr $hon $honab abaue auer, r, ecre ecreta tari riat at of the the Governing #oard and ublic !elations D. %1redit %1redit and bankin banking@ g@ #y& #y& . . 1. anda anda . Analysis Analysis of $he $he 1reditworth 1reditworthiness iness of bank loan applic applicants ants 8 'aniela 'aniela Feschijan Feschijan

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