PROJECT REPORT
“AN ANALYTICAL STUDY OF CREDIT APPRAISAL SYSTEM AT
”
BANK OF INDIA
IN PARTIAL FULFILLMEMT OF THE DEGREE D EGREE OF BBA
SUBMITTED SUBMITTED BY
DEEPAK KUMAR
(EXAM. ROLL NO. 01214701811) UNDER GUIDANCE OF
Mr. MANOJ VERMA (Faculty, Project guide)
1
MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT STUDIES SECTOR-22, ROHINI, DELHI- 110085 AFFILATED TO GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY
Self Certificate
I hereby certify that I, Deepak Kumar, have successfully completed my internship with “ Bank Of th
India, Delhi Cantt.” for 5 weeks (from 25 June to July 29,2013).This is also to certify that this is
my original work and has not been previously submitted as a part of another degree or diploma of another Business School or University. The findings and conclusions of this report are based on my personal study and experience, exp erience, during the tenure tenu re of my Summer Internship.
2
Deepak Kumar
Signature:
Date:
CERTIFICATE FROM THE ORGANISATION
3
4
Acknowledgement
No task is single man‟s effort. Any job in this world however trivial or tough cannot be
accomplished without the assistance of others. An assignment puts the knowledge and experience of an individual to litmus test. There is always a sense of gratitude that one likes to express towards the persons who helped to change an effort in a success. The opportunity to express my indebtedness to people who have helped me to accomplish this task. I would like to take this opportunity to acknowledge my gratitude to various people who have helped me during successful completion of the project. Their systematic guidance has helped me to complete project in systematic and smooth manner. With profound sense of gratitude, first of all would like to acknowledge my sincere thanks to Mr. V K Sharma (Manager at Bank of India, Delhi Cantt., New Delhi) who helped me to get into Bank of India for the summer internship. He has been very supportive and kind during my internship and showed a keen interest in me and constantly appreciated my work. I deem it a proud privilege to extend my greatest sense of gratitude to my mentor at Bank of India MR. K.K Garg (senior manager, credit deptt.) and Mr. Vijay Kumar (manager) and other staff of the bank
for the keen interest, inspiring guidance, continuous
encouragement, valuable suggestions and constructive criticism throughout the pursuance of this report. I feel highly indebted towards my faculty guide Mr. Manoj Verma for his constant guidance and support which helped me to make this project successful. Last but not the least, it would be unfair if I don‟t express my indebt edness to my parents and
all my friends for their active cooperation which was of great help during the course of my training project.
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TABLE OF CONTENTS CHAPTER NO.
TOPICS
PAGE NO.
SELF CERTIFICATE
2
CERTIFICATE FROM ORGANISATION
3
ACKNOWLEDGEMENT
4
TABLE OF CONTENT
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6
Executive Summary
Banks in India underwent a drastic change in terms of its working and policies after liberalization. The field of Trade Finance and Credit Appraisal also witnessed these changes. The project will deal with the development of understanding of credit appraisal policies adopted by the bank. It will also help in improving knowledge about the credit appraisal system and to know the patterns of credit appraisal in Bank of India. The report begins with the introduction to the company, its area of operation, its products and services, its achievements, etc. There is a detailed industry analysis of the banking industry which shows the evolution, growth and current scenario and challenges faced by the banking industry. It also covers the major players in the industry and their market shares and their performance. The report covers financial analysis of Bank of India which reveals the financial performance of Bank of India during the year 2010 to 2012.The tools use for financial analysis are ratio analysis and financial analysis. It also covers the comparative financial analysis of Bank of India with Canara Bank. The report contains the detailed study of the project. As we know that no finance can be made available without the credit appraisal of the project, thus this chapter talks about the process flow of the Advances operation. The client proposal helps us to understand the Analysis of Working Capital and Term Loans which forms the base for the advances made by the bank. The various standards and ratios used by the bank are also analysed. On the advances side, the Analysis of a proposal has been done to give a clear understanding of the procedure followed at the bank. 7
The conclusion and recommendations part which is very important after analysis is made. I have also try to study the existing policies with the aim at finding out how the working can be improved.
PROJECT SUMMARY
The project undertaken is “Analysis of Credit Appraisal at Bank of India”. The credit appraisal process is the scientific way of giving the credit to corporate client by analysing the credit worthiness of the company through different parameters. This project will give an insight to the procedure followed at Bank of India to assess the credit worthiness of the borrower. I did my internship with Bank of India which is located in Delhi Cantt.. The major reason for choosing the Banking industry was to understand the working in the banks and also to gain knowledge about banking industry and how it is helping the economy. Due to recent surge in industrialization, the Indian economy is booming. To provide more impetus to the industries, the government is encouraging their foray into various industries. In
8
order to fund the projects, the corporate depend on the credit and trade services provided by the banks. In the changing trade scenario, India has come up as an emerging player. There are great potentials and opportunities opp ortunities in the tradin g sector on the domestic and international in ternational sector. The economic growth of any country is dependent on its Import and Export. Thus providing need based Credit is one of the most important factor helps exporter to make export orders and importers to make purchases. As finance has a risk attached, thus we need to appraise the proponent before lending any credit this process is called Credit Appraisal which checks the need of finance for the business. It involves i nvolves appraisal appr aisal of the background of o f the proponent, propon ent, commercial, technical and financial appraisal. Then the Term Loan / Working Capital Assessment is done to find the limit of finance required. The project describes about the process of credit appraisal for two different industries from the information required to the processes involved. The project also details about the credit policy and the credit rating process. A practical formulation of the credit proposal has been done to provide a better understanding of the subject.
Objectives
To work with an eminent Bank and to get a taste of corporate life.
To understand the working in the banks.
To bridge a gap between practical life and the theory that we have learnt in our courses.
To understand the business and competitive environment in which Bank of India operates.
To analyze and understand the financial position of Bank of India viz-a-viz its competitors.
To study the policies the policies and procedure procedu re for the Credit Appraisal for fo r the Trade Credit. 9
Chapter 1
INTRODUCTION
10
F inanc nanciial Ov Ove erview
Business Mix reaches 569710crores,growth of 10.62%
Type
Public (BSE: BOI)
Industry
Financial services
Founded
07-Sep-06
Headquarters
Mumbai, India
Key people
Alok Kumar Misra (CMD)
Products
Commercial Banking Retail Banking Private Banking Banking Asset Management Mortgages Credit Cards
Net Profit shoots up by 8% from Rs.2488.7 crores to Rs.2677.52 crores.
Revenue
24,480.67 crore
Total assets
3,84,535.47 crore
Operating Income
6,693.95 crore
Net income
2,677.52 crore
Website
www.bankofindia.com
Operating Profit up by 24.33% (Rs. 6693.95Crore) supported by growth in net interest income as well as other income.
Advances grew by 16.77% to 248833.34crores
Net Interest Income rises by 6.43% to Rs. 8313.5Cr from Rs. 7810.7Cr, despite challenging conditions.
Net Interest Margin reported 4.43%
11
BANK OF INDIA: COMPANY PROFILE
in Mumbai. Bank of India (BoI) is a state-owned commercial bank with headquarters in Mumbai. Government-owned since nationalization in 1969, It is India' is India'ss 4th largest PSU bank, after State after State Bank of India,Punjab India,Punjab National Bank and and Bank of Baroda. Baroda. Bank of India was founded on September 7, 1906 by a group of eminent businessmen from Mumbai. In July 1969 Bank of India was nationalized along with 13 other banks.
It has 4157 branches including 29 branches outside India, and about 1679 ATMs. BoI is a founder
member
of SWIFT SWIFT (Society
for
Worldwide
Inter
Bank
Financial
Telecommunications), which facilitates provision of cost-effective financial processing and communication services. The Bank completed its first one hundred years of operations on 7 September 2006.
The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community.
Beginning with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years. It has evolved into a mighty institution with a strong national presence and sizable international operations. In business volume, Bank of India occupies a premier position among the nationalized natio nalized banks.
Bank of India has several firsts to its credit. The Bank has been the first among the nationalised banks to establish a fully computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a 12
network of 29 branches (including three representative offices) at key banking and financial centres viz. London, New York, Paris, Tokyo, Hong-Kong, and Singapore.
HISTORY OF BANK OF INDIA
1906: BoI founded with Head Office in Bombay.
1921: BoI entered into an agreement with the the Bombay Stock Exchange to manage its clearing house.
1946: BoI opened a branch in London, in London, the the first Indian bank to do so. This was also the first post-WWII overseas branch of any Indian bank.
1950: BoI opened branches in Tokyo in Tokyo and Osaka. and Osaka.
1951: BoI opened a branch in Singapore. in Singapore.
1953: BoI opened a branch in Kenya in Kenya and another in Uganda. in Uganda.
1953 or 54: BoI opened a branch in Aden. in Aden.
1955: BoI opened a branch in Tanganyika. in Tanganyika.
1960: BoI opened a branch in Hong in Hong Kong.
1962: BoI opened a branch in Nigeria. in Nigeria.
1967: The Government of Tanzania nationalized BoI's operations in Tanzania and folded them into the government-owned National Commercial Bank, Bank, together with those of Bank Bank of Baroda and several other foreign banks.
1969: The Government of India nationalized the 14 top banks, including Bank of India. In the same year, the People's Democratic Republic of Yemen Yemen nationalized BoI's branch in Aden, and the Nigerian and Ugandan governments forced BoI to incorporate its branches in those countries. count ries.
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1970: National Bank of Southern Yemen incorporated BoI's branch in Yemen, together with those of all the other banks in the country; this is now National now National Bank of Yemen. BoI Yemen. BoI was the only Indian bank in the country.
1972: BoI sold its Uganda operation to Bank of Baroda.
1973: BoI opened a rep in Jakarta. in Jakarta.
1974: BoI opened a branch in Paris. in Paris. This was the first branch of an Indian bank in Europe.
1976: The Nigerian government acquired 60% of the shares in Bank of India (Nigeria).
1978: BoI opened a branch in New in New York.
1970s: BoI opened an agency in San in San Francisco.
1980: Bank of India (Nigeria) Ltd, changed its name to Allied Bank of Nigeria.
1986: BoI acquired Paravur acquired Paravur Central Bank (Karur Central Bank or Parur Central Bank) in Kerala in Kerala in a rescue.
1987: BoI took over the three UK branches of Central Central Bank of India (CBI). CBI had been caught up in the Sethia fraud and default and the the Reserve Bank of Indiar equired equired it to transfer its branches.
2003: BoI opened a representative office in Shenzhen. in Shenzhen.
2005: BoI opened a representative office in Vietnam. in Vietnam.
2006: BoI plans to upgrade the Shenzen and Vietnam representative offices to branches, and to open representative offices in Beijing, in Beijing, Doha, Doha, and Johannesburg. and Johannesburg. In addition, BoI plans to establish a branch in Antwerp in Antwerp and a subsidiary in Dar-es-Salaam, in Dar-es-Salaam, marking its return to Tanzania after 37 years.
2007: BoI acquired 76 percent of Indonesia-based PT Indonesia-based PT Bank Swadesi.
2011: BoI opened a fully owened Subsidairay in Auckland, New Zealand on 6th October,2011 (Bank of India (New Zealand) Ltd.)
The Bank’s Mission
14
"To provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the re uirement uirementss of our stakeho stakeholder lders". s".
The Bank’s Vision
"To become the bank of choice for corporates, medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business, mass market and rural markets"
PRODUCT AND SERVICES
Loan Product
Deposit Product
Investment
&
Insurance
Cash credit
Savings Bank Account
Overdraft
BOI Savings Plus
Loan against Bank Deposit
Current Deposit Account
Bonds
Loan against NSC, KVP, LIC
Double Benefit Deposit
Insurance
Fixed Deposit
Equity And
Quarterly
policies etc.
Agricultural Loan
SSI Finance
Star
SSI
Scheme,
Priyadarshini Scheme etc.
Monthly
Income
Derivatives
Income
Certificate
Star Home Loan
Recurring Deposit
Star Personal Loan
Foreign Currency Deposit
15
Mutual Funds
Certificate Supreme
Star coin
gold
Star Mortgage Loan
Star IPO
FCNR Deposit
Star Autofin
Floating
Star Education Loan
Medimobile Loan
Gold Loan
Commercial loans
Scheme
Rate
Deposit
Scheme
Deposit Scheme for Senior Citizens
Special Deposit Product
Bullion Banking
for High Value Deposit
Export Finance
Customer
Channel Credit
Discount Future Cash Flows
Foreign Currency Swing limits
Exporter‟s Gold Card
Dual Currency Swing Limit
Trade Finance
Bill Finance
Bank Guarantee
NRI Loan
Cards
Online Services
Credit Card
Debit Card
-------------------------------Forex services
-------------------------------
Product And Services
Trade Services
Forex Service Branch Locater
Star
Access To Bank
Connect
Internet
Banking Services
Banking
BOI STAR ePay
Star e-Remit Service
Star Shar(e) trade
e-Payment
of
Central
ATM
Phone Banking
DGFT Online e Payment
Online Booking of Indian Airlines & RailwaysTicket
e-Payment of Direct Taxes
Online Transfer
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Mobile Banking
Excise & Service Tax
Interbank
Internet
Fund
Email Statements
CHAPTE CHAP TER R2
INDUSTRY ANALYSIS
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BANKING INDUSTRY ANALYSIS
The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase phas e of o f customers customer s market. mark et. The customers have more choices c hoices in choosing cho osing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. Banks are among the main participants of the financial system in India. Banking offers several facilities & Opportunities. This section provides comprehensive and updated information, guidance and assistance in all areas of banking in India. Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.
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The commercial banking structure in India consists of: Scheduled Commercial Banks & Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain customer base. The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). Banks now looking at business process management (BPM) to increase returns on investment, improve customer relationship management (CRM) and employee productivity. For, these entities sustaining long-term customer relationship management (CRM) has become a challenge with almost everyone in the market with similar simil ar products.
Historical Background
The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:
· PHASE I - Early phase from 1786 to 1969 of Indian Banks · PHASE II - Nationalization of Indian Banks and up to 1991 · PHASE III - Indian Financial & Banking Sector Reforms after 1991.
PHASE I:
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay 19
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. termath deposit During those day‟s public has lesser confidence in the banks. As an af termath mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to the traders.
PHASE II:
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India Indi a under Government ownership. ownersh ip. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: · 1949: Enactment of Banking Regulation Act. · 1955: Nationalization of State Bank of India. · 1959: Nationalization of SBI subsidiaries. · 1961: Insurance cover extended to deposits. · 1969: Nationalization Nationalization of 14 major banks. · 1971: Creation of credit guarantee corporation. corporation. · 1975: Creation Creation of regional rural banks. · 1980: Nationalization of seven banks with deposits over 200 crore.
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After the nationalization of banks, the branches of the public sector bank India raised to approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
PHASE III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation lib eralisation of banking bankin g practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure
Banking industry is the back bone for growth of any economy. The journey of Indian Banking Industry has faced many waves of economic crisis. Recently, we have seen the economic crisis of US in 2008-09 and now the European crisis. The general scenario of the world economy is very critical. It is the banking rules and regulation framework of India which has prevented it from the world economic crisis
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STRUCTURE OF INDIAN BANKING INDUSTRY
Banking Industry in India functions under the sunshade of Reserve Bank of India - the regulatory, central bank.In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.
Banking System in India Reserve bank of India (Controlling Authority)
Development Financial institutions
IFCI IDBI ICICI
NABARD NHB
Commercial
Banks
Banks
IRBI
EXIM Bank
SIDBI
Regional Rural
Land Development
Banks
Banks
Public Sector Banks
Cooperative
Private Sector Banks
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Banks
SBI Groups
Nationalized Banks
Indian Banks
Foreign Banks
Banking Industry mainly consists of: • Commercial Banks • Co-operative Banks
SCHEDULED BANKS IN INDIA
(1) Scheduled Commercial Banks
Public Sector Banks
Private
Sector
Banks
(26)
Regional
India
Banks
(25)
Nationalized Bank
Foreign Banks In
Old
(29)
Private
Banks
Other
Public
Sector
Banks
New
Private
Banks
(IDBI)
SBI
And
Its
Associates
(2) Scheduled Cooperative Banks
23
(95)
Rural
Scheduled Urban Cooperative Cooperative Banks
Scheduled State Cooperative Cooperative Banks
Public Sector Banks
Public sector banks are those banks which are owned by the Government. The Govt. runs these Banks. In India 14 banks were nationalized in 1969 & in 1980 another 6 banks were also nationalized. Therefore in 1980 the number of nationalized bank 20. At present there are total 26 Public Sector Banks in India (As on 26-09-2009). Of these 19 are nationalised banks, 6(STATE BANK OF INDORE ALSO MERGED RECENTLY) belong to SBI & associates group and 1 bank (IDBI Bank) is classified as other public sector bank. Welfare is their primary objective.
Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges 24
Nationalised banks
Other Public SBI SBI & its its As Ass sociat iates Se Sector Banks
Allahabad Bank
Andhra Bank
Bank Of Baroda
IDBI
Bank Of India
(Industrial
Bank Of Maharastra
Development
Canara Bank
Bank
Central Bank Of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental
Bank
Of
State Bank of India
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
State Bank of Bikaner And Jaipur
India)Ltd.
Of
Commerce
Punjab & Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank Of India
United Bank Of India
Vijaya Bank
(State Bank of Saurastra merged with SBI in the year 2008 and State Bank of Indore In 2010)
Private Sector Banks
The RBI has given licenses to new private sector banks as part of the liberalisation process.
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These banks are owned and run by the private sector. Various banks in the country such as ICICI Bank, HDFC Bank etc. An individual has control over there banks in preparation to the share of the banks held by him. Private banking in India was practiced since the beginning of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest development bank in the world as Private Banks in India and has promoted world class institutions in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalization of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930 Private sector banks have been subdivided into following 2 categories:-
Old Private Sector Banks
Bank of Rajasthan Ltd.
Catholic Syrian Bank Ltd.
City Union Bank Ltd.
Dhanalakshmi Bank Ltd.
Federal Bank Ltd.
ING Vysya Bank Ltd.
Jammu and Kashmir Bank Ltd.
Karnataka Bank Ltd.
Karur Vysya Bank Ltd.
Lakshmi Vilas Bank Ltd.
New Private Sector Banks
with Centurian Bank)
Ratnakar Bank Ltd.
SBI Commercial and International
Centurian Bank of Punjab (since merged with HDFC Bank)
Nainital Bank Ltd.
Bank of Punjab Ltd. (since merged
Bank Ltd.
26
Development Credit Bank Ltd.
HDFC Bank Ltd.
ICICI Bank Ltd.
IndusInd Bank Ltd.
Kotak Mahindra Bank Ltd.
Axis Bank (earlier UTI Bank)
Yes Bank Ltd.
South Indian Bank Ltd.
Tamilnad Mercantile Bank Ltd.
United Western Bank Ltd.
F oreign Banks nks I n I ndi ndia
Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organisation. The presence of foreign banks in India has benefited the financial system by enhancing competition, resulting in higher efficiency. There has also been transfer of technology and specialised skills which has had some "demonstration effect" as Indian banks too have upgraded their skills, improved their scale of operations and diversified into other activities. At a time when access to foreign currency funds was a constraint for the Indian companies, the presence of foreign banks in India enabled large Indian companies to access foreign currency resources from the overseas branches of o f these banks. Also Als o with the presence of foreign forei gn banks, as borrowers borro wers in the money mone y market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market. Now, it is the challenge for the supervisors to maximize the advantages and minimize the disadvantages of the foreign banks' local presence
27
ABN AMRO Bank N.V.
Abu
Dhabi
Commercial
HSBC
(Hongkong
Shanghai
Bank Ltd
&
Banking
Corporation)
American Express Bank
JPMorgan Chase Bank
Antwerp Diamond Bank
Krung Thai Bank
Arab Bangladesh Bank
Mashreq Bank
Bank
Mizuho Corporate Bank
Indonesia
Oman International Bank
Bank of America
Shinhan Bank
Bank of Bahrain & Kuwait
Société Générale
Bank of Ceylon
Sonali Bank
Bank of Nova Scotia
Standard Chartered Bank
Bank of Tokyo Mitsubishi
State Bank of Mauritius
International
UFJ
Barclays Bank
BNP Paribas
Calyon Bank
ChinaTrust
Commercial
Bank
Citibank
DBS Bank
Deutsche Bank
Cooperative banks in India
The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative 28
movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businessess of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number
of
primary
co-operative
banks.
Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
Rural banks in India
Rural banking banking in I ndi ndia started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector. Regional rural banks in India penetrated every corner co rner of o f the country and extended a helping helpi ng hand in the growth process pro cess of the
country.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, Ind ia, there are 14,475 14,47 5 rural banks in i n the country countr y of which 2126 (91%) (9 1%) are located loc ated in
remote
rural
areas.
Apart from SBI, there are other few banks which functions for the development of the rural areas
Haryana
in
India.
State
Few
of
Cooperative
them
are
Apex
as
Bank
follows.
Limited
The Haryana State Cooperative Apex Bank Ltd. commonly called as HARCOBANK plays a vital role in rural banking in the economy of Haryana State and has been providing aids and financing farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and giving
service
to
its
depositors.
NABARD
National Bank for Agriculture Agricu lture and Rural Development (NABARD) is a development d evelopment bank in the sector of Regional Rural Banks in India. It provides and regulates credit and gives service for the promotion and development of rural sectors mainly agriculture, small scale industries, 29
cottage and village industries, handicrafts. It also finance rural crafts and other allied rural economic activities to promote integrated rural development. It helps in securing rural prosperity
and
Sindhanur
its
Urban
connected
Souharda
matters.
Co-operative
Bank
Sindhanur Urban Souharda Co-operative Bank, popularly known as SUCO BANK is the first of its kind in rural banks of India. The impressive story of its inception is interesting and inspiring
United
for
all
the
youth
Bank
of
of
this
country.
India
United Bank of India (UBI) also plays an important role in regional rural banks. It has expanded its branch network in a big way to actively participate in the developmental of the rural and semi-urban areas in conformity with the objectives of nationalisation.
Syndicate
Bank
Syndicate Bank was firmly rooted in rural India as rural banking and have a clear vision of future India by understanding the grassroot realities. Its progress has been abreast of the phase of progressive banking b anking in India especially especial ly in rural banks.
Industry Segments
30
Current trend in banking Currently banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. 31
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of o f the banking industry, industr y, with the private and foreign banks b anks holding 18.2% and 6.5% respectively.
Growth trends The growth of banking in the coming years is likely to be more qualitative than quantitative, according to the report. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate The Indian banking market is growing at an astonishing rate, with assets expected to reach US$1.5 trillion by 2014. An expanding economy, middle class, and technological innovations are all contributing to this growth. The country‟s middle class accounts for over 352 million
people. In correlation with the growth of the economy, rising income levels, increased standard of living, and affordability of banking products are promising factors for continued expansion. The Indian banking Industry is in the middle of an IT revolution, focusing on the expansion of retail and rural banking. Players are becoming increasingly customer-centric in their approach, which has resulted in innovative methods of offering new banking products and services. Banks are now realizing the importance of being a big player and are beginning to focus their attention on mergers and acquisitions to take advantage of economies of scale and/or comply with Basel II regulation. Indian banking industry assets are expected to reach US$1.5 trillion by 2014 and are poised to receive a greater infusion of foreign capital. The banking industry should focus on having a small number of large players that can compete globally rather than having a large number of fragmented players.
Technology In Banking
In the six decades of independence banking has evolved in four different phases. During the fourth phase important initiatives were taken with regard to improve the banking system. The entry of foreign banks resulted in a paradigm shift in the way banking was done in India. The arrival of foreign banks and private banks with there superior state of the art technology
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pushed the Indian banks to adopt latest technology in market, so that they could retain there customer base. Information technology has been used under two different avenues in banking. One is communication and connectivity and other is Business process reengineering. Information technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and help the financial intermediaries reach geographically distant and different market. In India banks as well as other financial entities entered the world of information technology and with Indian financial network(INFINET). INFINET, a wide area satellite network (WAN) using VSAT(very small aperture technology) was jointly set up by Reserve Bank of India and Institute for Development and research for banking in1999. INFINET which was initially comprised only public sector banks was opened for participation by other categories of members. The information technology act 2000 has given legal recognition for creation, transmission, and retention of electronic data to be treated as a valid proof in the court of law The Reserve Bank of India has assigned priority to the up gradation of technology in the banks. Substantial Sub stantial progress has been made for developing develop ing a modern, efficient, effi cient, integrated int egrated and secure payment and settlement system for the financial service sectors. Modernization of clearing and settlement system through MICR based cheque clearing, popularizing electronic clearing services (ECS) and integration of RBI-EFT scheme with funds transfer schemes of bank, introduction of o f centralized fund management mana gement system (CFMS) are significant significan t milestones in this regard. The coverage of electronic clearing services has been significantly effective to encourage non paper based fund and develop a centralized facility for effective payment. The scheme for electronic fund transfer operated by the reserve bank has been augmented and now it is present in 13 cities. The centralized fund management system (CFMS) which would enable banks to obtain account ac count wise and centre cent re wise position of their thei r balances has been implemented in a phased manner from November 2001.
Membership of INFINET has been opened to all the banks in addition to those in the public sector banks. At the base of all the interbank message transfers using the INFINET is the structured financial messaging system (SFMS). It would serve as a secure communication 33
carrier with templates for intra and interbank messages in a strict message format that will facilitate straight through messaging. All the interbank messages will be stored and switched to central hub at Hyderabad while the intra bank messages will stored in the bank gateway. Security standards of SFMS will match the international standards. Information technology has immense untapped potential in banking. Strengthening the information technology in banks could improve the effectiveness of asset liability of banks. Building up of a related data base would strengthen and enhance the forecasting of liquidity of banks at the branch level. This could enhance the risk management capabilities of banks.
Legal/ Regulatory Issues Related To Banking Banks works under various legal frameworks most important of them are, the Banking regulation act 1949, Basel II norms, RBI act, Negotiable Instruments act.
Banking Regulation Act 1949 The banking regulation act was passed as banking companies act and it came into force in 16/3/49. Subsequently it was changed to Banking regulation act on 1/3/66.
BASEL II Norms Basel II is the second of the Basel accords which are recommendation on the banking laws and regulations issued by banking committee on banking supervision. The purpose of Basel II norms is to create international standards that banking regulators can use when creating regulations about how much capital does banks needs to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international system can help protect the international financial system from many types of problem that arise should a bank or a series of banks collapse. collap se. In practice Basel II attempts to accomplish this by setting up rigorous risks and capital management requirement designed to 34
ensure that the banks hold capital reserves appropriate to the risks the banks exposes itself to through its investment and lending practices. Generally speaking this rules says that the greater the risk the bank exposes itself, the greater the capital bank requires to safeguard its solvency and overall economic stability.
Opportunities and Challenges for Players The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. First, the market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Second, banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. Third, with increased interest in terest in India, competition from foreign banks will only intensify. Fourth, given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.
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Competition Analysis
Market
Cap.(Rs.
Net
Interest
Net
Name
Crores)
Income
Profit
SBI
1,44,291.42
1,06,521.45
11,707.29
Bank of Baroda
28,623.80
29,673.72
5,006.96
PNB
26,098.10
36,428.03
4,884.20
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Bank of India
19,999.04
28,480.67
2,677.52
Canara Bank
18,280.40
30,850.62
3,282.72
IDBI Bank
11,563.20
23,369.93
2,031.61
Union Bank
11,451.42
21,144.28
1,787.13
Indian Bank
7,518.83
12,231.32
1,746.97
Oriental Bank
7,044.57
15,814.88
1,141.56
IOB
6,969.75
17,897.08
1,050.13
Allahabad Bank
6,852.86
15,523.28
1,866.79
Corporation Ban
6,496.95
13,017.78
1,506.04
Andhra Bank
6,345.64
11,338.73
1,344.67
Syndicate Bank
6,097.75
15,268.35
1,313.39
Central Bank
5,922.05
19,149.50
533.04
UCO Bank
5,191.40
14,632.37
1,108.67
Dena Bank
3,372.81
6,794.13
803.14
Bank of Mah
3,012.82
7,213.96
430.83
Vijaya Bank
2,874.13
7,988.12
580.99
State B Bikaner
2,576.35
6,291.36
652.03
State Bnk Tr
2,469.50
6,828.76
510.46
United Bank
2,303.17
7,961.09
632.53
State Bnk My
2,244.99
5,078.44
369.15
Punjab & Sind
1,621.89
6,474.50
451.28
UTI – Gold
391.38
-
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The above table reveals the data for market capitalization, Net Profit, and Net Income of the PSU banks. This clearly shows that Bank of India ranks 4th among all other PSU banks in terms of profitability, market cap. and Net Interest Income.
Market share SBI Bank of Baroda
27.00%
PNB
42.50%
Bank of India 3.50%
Canara Bank IDBI Bank
5.40%
Others
6.00% 7.60% 8.00%
The above pie chart depicts the market share for PSU banks. It clearly indicates that SBI is the leader among all the PSU banks holding 42.5% market share,while Bank of Baroda stood 2nd in number holding 8% market share. Hence from the above chart we can say that the market share of Bank of India is 6%.
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Competitive Competitive Forces Model (Porter’s Five Force Model)
(3)
(2) Potential
Entrants
is high as development financial institutions as well as private and Foreign Banks have entered in a big way
The threat of substitute product
is very high like credit unions and investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.
(1) Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus.
(4)
(5)
Bargaining power of buyers
is high as corporate can raise funds easily due to high Competition.
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Bargaining power of the supplier is high. With the new financial instruments they are asking higher return higher return on the investments.
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has increased. Each bank is coming up with new products to attract the customers and tailor made Loans are provided. The quality of services provided by banks has improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance and development activities. But they now entered into retail banking which has resulted into stiff competition among the exiting players. 3. Threats from Substitutes
Competition from the non-banking financial sector is increasing rapidly. The threat of substitute product is very high like credit unions and in investment houses. There are other substitutes as well banks like mutual funds, stocks, government securities, debentures, gold, real estate etc.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining bar gaining power. This is mainly because of competition. co mpetition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns to the investors, the investments in deposits is not growing in a phased manner. The suppliers demand a higher return for the investments.
6. Overall Analysis
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The key issue is how banks can leverage their strengths to have a better future. Since the availability of funds is more and deployment of funds is less, banks should evolve new products and services to the customers. There should be a rational thinking in sanctioning Loans, Loan s, whi whicch will will brin bring g down down the the NPAs. PAs. As A s there the re is a expec ex pected ted reviva rev ivall in the Indian Indi an economy econo my Banks have a major role to play. Funding corporate at a low cost of capital is a special requisite.
Market Analysis
The Product Mix: The banks primarily deal in services and therefore, the formulation of product mix is required to be in the face of changing business environmental conditions. The changing psychology, the increasing expectations, the rising income, the changing lifestyles, the increasing domination of foreign banks and the changing needs and requirements of customers at large make it essential that they innovate their service mix and make them of world class. Against this background, we find it significant that the banking organizations minify, magnify combine and modify their service mix.
Product Portfolio: The bank professionals while formulating the product mix need to assign due weight-age to the product portfolio. By the concept product portfolio, emphasis is on including the different types of services/ schemes found at the different stages of the product life cycle. The portfolio denotes a combination or an assortment of different types of products generating more or less in proportion to their demand. The quality of product portfolio determines the magnitude of success. It is excellence of bank professionals that help them in having a sound product portfolio. We find the composition of a family sound, if members of all the age groups are given due place. Like this, the composition or blending of a service mix is considered to be sound, if well established and likely to be profitable schemes are included in the mix. The bank 41
professionals are supposed to perform the responsibility responsibil ity of composing the same. An organization with a sound product portfolio gets a conducive environment and successes in increasing the sensitivity of marketing decisions. If the banks rely solely on their established services and schemes, the multidimensional problems would crop cro p up in the th e long lon g run because when the th e well established services/schemes would start saturating or generating losses, the commercial viability of banks would of course, be questioned. It is in this context, that we find designing of a sound product portfolio essential to an organisation. We can‟t deny that the product portfolio of the foreign banks is found sound since they keep their eyes moving. The innovation, diffusion, adoption and elimination processes are taken due care. The public sector commercial banks need to innovate their service and this makes a strong advocacy in favour of analyzing the product portfolio.
The Price Mix In the formulation of product mix, the pricing decisions occupy a place of outstanding significance. The pricing decisions or the decisions related to interest and fee or commission charged by banks are found instrumental in motivating or influencing the target market. The Reserve Bank of India and the Indian Banking Association are concerned with the regulations. The rate of interest is regulated by the RBI and other charges are controlled by the Indian Banking Association. To be more specific in the Indian setting, we find this component of the marketing mix significant because the banking organizations are also supposed to sub serve the interests of weaker sections and the backward regions. The public sector commercial banks in particular are supposed to play developmental role with societal approach. It is natural that this specific role of the public sector commercial banks complicates the problem of pricing.
Promotion Mix In the formulation of marketing mix the bank professionals are also supposed to blend the promotion mix in which different components of promotion such as advertising, publicity, sales promotion, word-of-mouth promotion, personal selling and telemarketing are given due 42
weight age. The different components of promotion help bank professionals in promotion the banking business.
The Place Mix This component of the marketing mix is related to the offering of services. The two important decision making areas are making available the promised services to the ultimate users and selecting a suitable place for bank branches. The selection of a suitable place for the establishment of a branch is significant with the viewpoint of making the place accessible and in addition, the safety and security provisions are also found important. The banking organizations are not free to open a branch since the Reserve Bank of India regulates the subject of branch expansion but so far as the management of branch is concerned, the branch managers have option to select a place which is convenient to both the parties, such as the users and the bankers. In the Indian perspective, the protection to the bank‟s assets and safety to the users and bank ers need due weight age.
The vulnerable area or regions need adequate provisions to make the branch safe. The management of office is also found significant with the viewpoint of making the services attractive. The furnishing, civic amenities and parking f acilities acilities can‟t be overlooked. Thus, the place mix is found to be an important decision making area which requires due attention, both at macro and micro levels.
The People Sophisticated technologies, no doubt, inject life and strength to our efficiency but the instrumentality of sophisticated technologies start turning sour if the human resources are not managed in a right fashion. Generation of efficiency is substantially influenced by the quality of human resources.. While fixing criteria for selection, banks assign due weight age to the ethical values. The education and training facilities have been innovated.
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The foreign banks and the private sector commercial banks reward for efficiency and at the same time also demotivate the inefficient bankers. This helps them in improving the efficiency of even the inefficient people. The development of human resources makes the ways for the formation of human capital. Incentives, of course, inject efficiency and the organizations offering more incentives succeed in motivating the people.
MACRO vs MICRO ECONOMIC ANALYSIS 44
PROBLEMS FACED BY INDIAN ECONOMY
I.
F ALL I N SAV SAVII NGS NGS RATIO
The savings ratio is the % of income that is saved not spent. A fall in the savings ratio implies that consumer spending is increasing; often this is financed through increased borrowing.
Effects Of Fall In Savings Ratio
Higher Level Of Consumption
This results in increase in Aggregate Demand. The increase in AD will cause an increase in economic growth and lower unemployment. However, rising Aggregate Demand may cause inflation. Inflation will occur when growth is faster than the long run trend rate. This is now a potential problem in the th e India. Inflation has recently recentl y gone above 7.50%
Boom And Bus
A fall in the savings ratio is usually accompanied by a rise in confidence. It is the rise in confidence which encourages borrowing and consumers to run down savings. Therefore, there is always a danger that a falling savings ratio can be a precursor to a boom and bust situation.
Economy More Sensitive To Interest Rates
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With a fall in the savings ratio interest rate changes will have a bigger effect in reducing spending. This is because levels of borrowing are higher and therefore a rise in interest rates has a significant impact on increasing interest repayments. Also, higher rates will not be increasing incomes from savings as much.
Balance Of Payment
With higher levels of consumer spending, there will be an increase in imports. Therefore this will lead to deterioration in the current account. The current account deficit could put downward pressure on the exchange rate in the long term. However, some people argue a fall in the savings ratio is not a problem, but, it is just a reflection of strong economy and booming housing market, market , which increases scope for equity eq uity withdrawal.
II.
INFLATION
Inflation is posing a serious challenge to the economic growth of India. The WPI inflation rate flared up during the period driven by significant increase in the prices of commodities, primary articles and manufactured products, even though very small part of global crude price increase has been passed on to the Indian consumers.
III.
GLOBAL RECESSION
It appears that Europe, Japan and the US are entering into recession. Falling house prices, crisis in the financial system, and lower confidence could lead to a sharp downturn, with the worst still to come. Many argue that India‟s growth is not so depe ndent on growth in the West. However, the Indian stock markets have been hit by the global crisis. India‟s growing
service sector and manufacturing sector would be adversely impacted by a global downturn.
I V.
RISE I N CRUD CRUDE E PRI CES
46
How global crude prices would behave probably has no easy answers; however we believe that the current challenging and uncertain macro-economic conditions does not lead Indian financials into a state of crisis. But continued rise in crude prices and its resultant impact on inflation, interest rates and government finances has the potential to do so. Hence, crude price remains the key risk to our positive stance on the Indian financials. In the last couple of months oil prices have surged by 45% from US$ 100 to US$ 145 (and now back to US$ 115). India currently imports 70% of its crude requirement, resulting in pressure on government coffers on back of risin g crude prices.
V.
DEPRECIATI EPRECI ATING NG I NR
Surge in crude prices has severely impacted current account deficit of the country. This coupled with the outflow of FII investments has resulted in INR to depreciate sharply against dollar further fueling inflation.
IMPACT OF ECONOMIC PROBLEMS ON INDIAN FINANCIALS
The current macro-economic conditions are expected to result in
SLOWDOWN IN CREDIT GROWTH
IMPACT ON MARGINS OF BANKS
PREASURE ON CREDIT QUALITY
SLOWDOWN IN CREDIT GROWTH
While the rise in interest rates should lead to a moderation in demand for credit, Indian banks too are exercising caution while lending.. Risks and uncertainties in the system have increased given the higher crude and commodity prices and its inflationary impact. This would curtail consumption, which would impact economic growth adversely. Further higher 47
rates will not only impact the profitability of Indian corporate but also impact IRRs of various proposed capex projects. This coupled with elections next year could lead to some postponement of capex plans of corporate, leading lead ing to negative impact on demand de mand for credit. Higher rates have particularly impacted retail loan growth.
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IMPACT ON MARGINS OF BANKS
During the past 18 months, CRR has increased by 400 bps to 9.0% currently and RBI has also discontinued with interest payment on CRR balances. Every 50 bps hike in CRR generally negatively impacts margins by ~5 bps. In fact in an environment, where liquidity is tight, interest rates are at elevated levels and risk premiums have increased, the banks tend to regain the pricing power. This would not only help the banks to adequately price in risks but also help protect their margins. Apart from hiking PLRs, banks are also resorting to reprising (in fact right-pricing) the loans that were sanctioned well below PLRs. Significant portion of fixed rate loans would also get re-priced over the period of 12-18 months.
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PRESSURE ON CREDIT QUALITY
Higher lending rates are expected to impact credit quality for the banking system. The extent of the impact on credit quality would also be bank specific given the loan mix (retail vs. corporate), proportion of unsecured lending, credit profile of corporate loan book and industry wise exposure. Indian banks‟ fundamental s are relatively resilient with better risk
management systems, dramatically improved asset quality, stronger recovery mechanisms (legal provisions) and with adequate capitalization and provisioning.
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Even Certain sectors (like real estate, airlines industry) might feel the stress due to the changing macro environment and rise in interest rates. Many companies where crude forms a key raw material component are expected to get hit more severely. Similarly, sectors like real estate and SMEs, which are interest rate sensitive, would face higher delinquencies if interest rates strengthen further by 100-200 bps.
NECESSARY INITIATIVES TAKEN BY RBI & MINISTRY OF FINANCE TO TACKLE ECONOMIC PROBLEMS
As most of economists feel that the most horrible problem which India is facing currently is inflation which has crossed 7.50%. To come out of these problems RBI and ministry of finance and other relevant government and regulatory entities are taking various initiatives which are as follows...
RBI MONITORY POLICY
•
With the introduction of the Five year plans, the need for appropriate adjustment in monetary and fiscal policies to suit the pace and pattern of planned development became imperative. The monitory policy since 1952 emphasized the twin aims of the economic policy of the government:
Spread up economic development in the country to raise national income and standard of living, and
To control and reduce inflationary pressure in the economy.
This policy of RBI since the First plan period was termed broadly as one of controlled expansion, i.e.; a policy of “adequate financing of economic growth and at the same time the time ensuring reasonable price stability”. Expansion of currency and credit was essential to
meet the increased demand for investment funds in an economy like India which had embarked on rapid economic development. Accordingly, RBI helped the economy to expand
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via expansion of money and credit and attempted to check in rise in prices by the use of selective controls. OBJECTIVES OF MONITORY POLICY
Price Stability
Monitory Targetting
Interest Rate Policy
Restructuring Of Money Market
Regulation Of Foreign Exchange Market
WEAPONS OF MONITORY POLICY Central banks generally use the three quantitative measures to control the volume of credit in an economy, namely:
Raising bank rates
Open market operations and
Variable reserve ratio
However, there are various limitations on the effective working of the quantitative measures of credit control adapted by the central banks and, to that extent, monetary measures to control inflation are weakened. In fact, in controlling inflation moderate monetary measures, by themselves, are relatively ineffective. On the other hand, drastic monetary measures are not good for the economic system because they may easily send the economy into a decline. In a developing economy there is always an increasing need for credit. Growth requires credit expansion but to check inflation, there is need to contract credit. In such a encounter, the best course is to resort to credit control, restricting the flow of credit into the unproductive, inflation-infected sectors and speculative activities, and diversifying the flow of credit towards the most desirable needs of productive and growth-inducing sector. It should be noted that the impression that the rate of spending can be controlled rigorously by the contraction of credit or money supply is wrong in the context of modern economic societies. 50
In modern community, tangible, wealth is typically represented by claims in the form of securities, bonds, etc., or near moneys, as they are called. Such near moneys are highly liquid assets, and they are very close to being money. They increase the general liquidity of the economy. In these circumstances, it is not so simple to control the rate of spending or total outlays merely by controlling the quantity of money. Thus, there is no immediate and direct relationship between money supply and the price level, as is normally conceived by the traditional quantity theories. When there is inflation in an economy, monetary restraints can, in conjunction with other measures, play a useful role in controlling inflation.
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FISCAL POLICY
Fiscal policy is another type of budgetary policy in relation to taxation, public borrowing, and public expenditure. To curve the effects of inflation and changes in the total expenditure, fiscal measures would have to be implemented which involves an increase in taxation and decrease in government spending. During inflationary periods the government is supposed to counteract an increase in private spending. It can be cleared noted that during a period of full employment inflation, the aggregate demand in relation to the limited supply of goods and services is reduced to the extent that government expenditures are shortened. Along with public expenditure, governments must simultaneously increase taxes that would effectively reduce private expenditure, in an effect to minimise inflationary pressures. It is known that when more taxes are imposed, the size of the disposable income diminishes, also the magnitude of the inflationary gap in regards to the availability of the supply of goods and services. In some instances, tax policy has been directed towards restricting demand without restricting level of production. For example, excise duties or sales tax on various commodities may take away the buying power from the consumer goods market without discouraging the level of production. However, some economists point out that this is not a correct way of combating inflation because it may lead to a regressive status within the economy.
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As a result, this may lead to a further rise in prices of goods and services, and inflation can spread from one sector of the economy to another and from one type of goods and services to another. Therefore, a reduction in public expenditure, and an increase in taxes produces a cash surplus in the budget. Keynes, however, suggested a programme of compulsory savings, such as deferred pay as an anti-inflationary measure. Deferred pay indicates that the consumer defers a part of his or her wages by buying savings bonds (which, of course, is a sort of public borrowing), which are redeemable after a particular period of time, this is sometimes called forced savings. Additionally, private savings have a strong disinflationary effect on the economy and an increase in these is an important measure for controlling inflation. Government policy should therefore, include devices for increasing savings. A strong savings drive reduces the spendable income of the consumers, without any harmful effects of any kind that are associated with higher taxation. Furthermore, the effects of a large deficit budget, which is mainly responsible for inflation, can be partially offset by covering the deficit through public borrowings. It should be noted that it is only government borrowing from non-bank lenders that has a disinflationary effect. In addition, public debt may be managed in such a way that the supply of money in the country may be controlled. The government should avoid paying back any of its past loans during inflationary periods, in order to prevent an increase in the circulation of money. Anti-inflationary debt management also includes cancellation of public debt held by the central bank out of a budgetary surplus. Fiscal policy by itself may not be very effective in combating inflation; therefore a combination of fiscal and monetary tools can work together in achieving the desired outcome.
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DIRECT MEASURES
Direct controls refer to the regulatory measures undertaken to convert an open inflation into a repressed one. Such regulatory measures involve the use of direct control on prices and rationing of scarce goods. The function of price control is a fix a legal ceiling, beyond which prices of particular goods may not increase. When ceiling prices are fixed and enforced, it means prices are not allowed to rise further and so, inflation is suppressed. Under price control, producers cannot raise the price beyond a specified level, even though there may be a pressure of excessive excessiv e demand forcing it up.
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In times of the severe scarcity of certain goods, particularly, food grains, government may have to enforce rationing, along with price control. The main function of rationing is to divert consumption from those commodities whose supply needs to be restricted for some special reasons; such as, to make the commodity more available to a larger number of households. Therefore, rationing becomes essential when necessities, such as food grains, are relatively scarce. Rationing has the effect of limiting the variety of quantity of goods available for the good cause of price stability and distributive impartiality. Another control measure that was suggested is the control of wages as it often becomes necessary in order to stop a wage-price spiral. During galloping inflation, it may be necessary to apply a wage-profit freeze. Ceilings on wages and profits keep down disposable income and, therefore the total effective demand for goods and services. On the other hand, restrictions on imports may also help to increase supplies of essential commodities and ease the inflationary pressure. However, this is possible only to a limited extent, depending upon the balance of payments situation. Similarly, exports may also be reduced in an effort to increase the availability of the domestic supply of essential commodities so that inflation is eased. In general, monetary and fiscal controls may be used to repress excess demand but direct controls can be more useful when they are applied to specific scarcity areas. As a result, antiinflationary policies should involve varied programmes and cannot exclusively depend on a particular type of measure measur e only.
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Chapter 3
54
RESEARCH METHODOLOGY
The purpose of research is to discover answers to the questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Though each research study has its own specific purpose, we may think of research objectives as falling into a number of following broad categories:
To gain familiarity with a phenomenon or to achieve new insights into it.
To portray accurately the characteristics of a particular individual, situation or a group.
To determine the frequency with which something occurs or with which it is associated with something else.
To test a hypothesis of a casual relationship between variables.
Research methodology is a way to systematically solve the research problem . it may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. Research methodology has many dimensions and research methods do constitute a part of the research methodology. The scope of research methodology is wider than that of research methods. Thus, when we talk of research methodology we not only talk of the research methods but also consider the logic behind the methods we use in the context of our research study and explain why we are using a particular method or technique and why we are not using others so that research results are capable of being evaluated either by the researcher himself or by others. Why a research study has been undertaken, what data have been 55
collected and what particular method has been adopted, why particular technique of analyzing data has been used and a host of similar other question are usually answered when we talk of research methodology concerning a research problem or study.
Research is often described as active; diligent and systematic process of inquiry aimed at discovering, interpreting and revising facts. This intellectual investigation produces a greater understanding of events, behaviors or theories and makes practical application through laws and theories. In other words we can say, the purpose of research is to discover answers to the questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them.
RESEARCH METHODOLOGY
The research methodology means the way in which we would complete our prospected task. Before undertaking any task it becomes very essential for any one to determine the problem of study. I have adopted the following procedure in completing my study report. 1. Formulating the problem 2. Research design 3. Determining the data sources 4. Analysing the data 5. Interpretation 6. Preparing research report
56
(1) Formulating The Problem Problem
I am interested in the banking sector and I want to make my future in the banking sector so decided to make my research study on the banking sector. I analysed first the factors that are important for the banking sector and I came to know that providing credit facility to the borrower is one of the important factors as far as the banking sector is concerned. On the basis of the analyzed factor, I decided on creating a detailed and researched report on the credit appraisal mechanism.
(2) Research Design
The research design tells about the mode with which the entire project is prepared. My research design for this study is basically descriptive. Because I have utilized the large number of data of the banks. Descriptive research includes surveys and fact-finding enquiries of different kinds. The major purpose of descriptive des criptive research is description of the state of o f affairs, as it exists e xists at present. present . The main characteristic of this method is that the researcher has no control over the variables; he can only report what has happened or what is happening. It is also called as ex post facto research. Most ex post facto research projects are used for descriptive studies in which researcher seeks to measure such items as, for example, frequency of shopping, preferences of people, or similar data. Descriptive research also includes attempts by the researcher to discover causes even when they cannot control the variables. The methods of research utilized in descriptive research are survey methods of all kinds.
Why descriptive research?
In this case descriptive study was most suitable because it helped in giving focus to the preferences, knowledge, kno wledge, beliefs & satisfaction of a group of people p eople in a given population and an d characteristics of the successful and unsuccessful companies. Moreover it helped in determining the relationships between two or more variables.
(3) Determining The Data Source 57
The data source can be primary or secondary. The primary data are those for data which are used for the first time in the study. However such data take place much time and are also expensive. Whereas the secondary data are those data which are already available in the market. These data are easy to search and are not expensive too. For my study I have utilized totally the secondary data. Which is raw in state I analysed this data for my research purpose .
Source Of Secondary Data
Annual reports of banks
Reports of RBI
Internet
Books etc.
Source of primary data
Data generated from ratio analysis For this purpose I used following ratios:
Gross NPA ratio Net NPA ratio
Provision ratio
Capital adequacy ratio
Operating expenses/total asset ratio
Cost/income ratio
Loan loss coverage ratio
Data generated by the comparison of banks: For this purpose I compare following facts or data of banks
58
Comparison of credit growth with annual results. profitability
Comparison of unsecured loans
Comparison of deposit growth
Comparison of provision coverage
(4) Analyzing the Data The primary data would not be useful until and unless they are well edited, tabulated and analyzed. When the person receives the primary data many unuseful data would also be there. So, I analyzed the data and edited them and turned them in the useful tabulations. So, that it can become useful in my report.
As no study could be successfully completed without proper tools and techniques, same with my project. For the better presentation and right explanation I used tools of statistics and computer very frequently. And I am very thankful to all those tools for helping me a lot. Basic tools which I used for project from statistics are- Bar Charts - Pie charts - Tables
Bar charts and pie charts are really useful tools for every research to show the result in a well clear, ease and simple way. Because I used bar charts and pie charts in project for showing data in a systematic way, so it need not necessary for any observer to read all the theoretical detail, simple on seeing the charts anybody could know that what is being said. Technological Tools Ms- Excel Ms-Word
59
Above application software of Microsoft helped me a lot in making project more interactive and productive. Microsoft-Excel had a great role in my project, it created for me a situation of “you sit and get”. I provided it simply all the detail of data and in return it given me all the relevant
information.. And in last Microsoft-Word did help me for the documentation of the project in a presentable form.
(5) Interpretation of the Data
With use of analyzed data I managed to prepare my project report. But the analyzing of data would not help the study to reach towards its objectives. The interpretation of the data is required so that the others can understand the crux of the study in more simple way without any problem so I have added the chapter of analysis that would explain others to understand my study in simpler way. In this segment I interpret my findings in the form of graphs and charts. All the data which I got form the market will not be disclosed over here but extract of that in the form of information will definitely be here.
(6) Project Writing
This is the last step in preparing the project report. The objective of the report writing was to report the finding of the study to the concerned authorities. LIMITATIONS OF THE STUDY
The limitations that I felt in my study are:
It is a herculean task to gather the financial data of every bank as it requires a wide and extensive research and sometimes may be impossible to gather.
Since my study is based on the secondary data, the operation as to gather all the necessary information and present it in a understandable manner is a tough task. 60
The report provides only the study based on research and hence cannot be taken as the representative of all the policies implemented by banks.
61
CHAPTE CHAPTER R4
FINANCIAL ANALYSIS
62
FINANCIAL ANALYSIS
This section will show, how Bank Of India has done financially over the last three years (2010-2012). I have calculate all the financial ratios including the banking ratios also, to show how Bank Of India fair up against its competitors. To do that I have used the last three years balance sheet, profit and loss account, and cash flow statement of Bank Of India.
LIQUIDITY RATIOS A class of financial metrics that is used to determine a company's ability to pay off its shortterms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. 1. CURRENT RATIO
This ratio is a rough indication of a firm's ability to service its current obligations. Generally, the higher the current ratio, the greater the "cushion" between current obligations and your Company's ability to pay them. The composition and quality of current assets is a critical factor in the analysis of your Company's liquidity. It is calculated as Total current assets divided by total current liabilities. Current Ratio =
Current Assets Current Liabilities
Current Ratio 5
4.32
4
3.83
3.49
3 Current Ratio
2 1 0 20 10
20 11
20 12
63
Year
Current Assets
Current Liabilities
Current Ratio
(Rs. In crores)
(Rs. In crores)
2010
37043.75
8574.63
4.32
2011
49723.21
12974.69
3.83
2012
46176.95
13243.43
3.49
Interpretation :- From the above table it can be observed that the current ratio of Bank of
India stood at 4.32 ,3.83,3.49 in the year 2010,2011,2012 respectively. This shows that bank has enough current assets available to pay off its short term obligations. The current ratio has declined marginally to 3.83 in 2011 and has further declined to 3.49 in 2012 because of increase in short term investments,borrowings and other current liabilities. So it can be inferred that bank is effectively utilising the available funds.
2. LIQUID RATIO
It is also known as the „„Quick Ratio‟‟ or "Acid Test" ratio; it is a refinement of the current
ratio and is a more conservative measure of liquidity. The ratio expresses the degree to which your current Company's current liabilities are covered by the most liquid current assets. Generally, any value of less than 1 to 1 implies a "dependency" on inventory or other current assets to liquidate short-term debt. It is calculated as Cash plus trade receivables divided by total current liabilities.
Liquid Ratio = Cash + Trade Receivables Total Current Liabilities
64
Liquid Ratio 3.64
4 R a
2.88
2.62
3
t 2 i o
Liquid Ratio 1 0 20 10
20 11
2 0 12
Years
Years
Liquid
Current
Assets
Liabilities
(Rs.
Liquid Ratio
In (Rs. In crores)
crores) 2010
31230.13
8574.63
3.64
2011
37309.99
12974.69
2.88
2012
34711.26
13243.43
2.62
Interpretation : - A quick ratio of 1:1 is considered favourable because for every rupee of
current liability,there is atleast one rupee of liquid assets. A higher value of ratio is considered favourable. Here this ratio stood higher than one during the study period i.e 3.64 in 2010,2.88 in 2011 and 2.62in 2012.although the ratio shows a declining trend but it is still above the benchmark level.This shows that bank has enough liquidity to service its short term debt and is utilising its funds in a rational manner.
3. CREDIT DEPOSIT RATIO
This ratio indicates how much of the advances lent by banks is done through deposits. It is the proportion of loan-assets created by banks from the deposits received. The higher the 65
ratio, the higher the loan-assets created from deposits. Deposits would be in the form of current and saving account as well as term deposits. The outcome of this ratio reflects the ability of the bank to make optimal use of the available resources
CREDIT DEPOSIT RATIO = Loans and advances(net advances(net of provisions) provisions)
X 100
TOTAL Deposits
Credit Deposit Ratio 76.93
R a t i o
77 76 75 74 73 72 71 70 69 68 67
72.04 70.33
20 10
Credit Deposit Ratio
20 1 1
20 12
Years
Year
Loans & Advances
Total Deposits
(Net
Of (Rs. In crores)
Provisions)(Rs.
In
Credit Deposit Ratio
crores) 2010
165527
229761.94
72.04
2011
210200.7
298886
70.33
2012
244816.9
318216
76.93
Interpretation :- An ideal credit deposit ratio should range between 65- 75 %.
.the above table exhibits the credit deposit ratio of the bank during 3 years. This ratio stood at 72.04% ,70.33% and 76.93% in the year 2010,2011,2012 respectively. It It shows that Bank of
66
India is performing well. It It can also be observed that in the year 2012 the credit deposit ratio has slightly crossed 75%(stipulated level as per RBI guidelines).This shows that in this year bank has borrowed some fund from outside. Nevertheless, the overall credit performance of the bank is satisfactory.
PROFITABILITY RATIOS A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
1. Operating Profit Ratio
A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. It Is Also known as "operating profit margin."
Calculated as:-
Operating Profit Ratio = Operating Profit X 100 Net sales
67
Operating Profit Ratio 26.32% 26.50% 26.00% R a t i o
25.50%
24.75%
25.00% 24.50%
23.50%
24.00%
Operating Profit Ratio
23.50% 23.00% 22.50% 22.00% 2 01 0
20 11
20 12
Years
Year
Operating Profit
Sales
Operating
(Rs. In crores)
(Rs. In crores)
2010
4704.78
17877.99
26.32
2011
5384.22
21751.72
24.75
2012
6693.95
28480.67
23.50
Profit
Ratio (in %)
Interpretation :- From the data in the above table, it can be observed that the operating
profit ratio of the bank is showing a declining trend. Although the operating profits have increased but not exactly with same proportion as compared to increase in sales. This may be due to increase in the interest expenses and other operating expenses particularly the staff expenses in the year 2011 and 2012. Therefore the bank should check on unnecessary operating expenses to correct this situation and to provide a sufficient return.
2. NET PROFIT RATIO
This ratio indicates the Net margin on a sale of Rs.100. It is calculated as follows: Net Profit Ratio = Net Profit X 100 68
Sales
This ratio helps in determining the efficiency with which affairs of the business are being managed. An increase in the ratio over the previous period indicates improvement in the operational efficiency of the business. The ratio is thus on effective measure to check the profitability of business. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.
Net Profit Ratio 14.00% 11.44%
12.00% R
10.00%
a
8.00%
t i o
9.74%
9.40%
6.00%
Net Profit Ratio
4.00% 2.00% 0.00% 20 10
20 1 1
20 1 2
Years
Year
Net Profit
Sales
Net Profit Ratio
(Rs. In crores)
(Rs. In crores)
(in %)
2010
1741.07
17877.99
9.74
2011
2488.7
21751.72
11.44
2012
2677.52
28480.67
9.40
Interpretation :- The net profit ratio of the bank stood at 9.74% & 9.40% in the year 2010
& 2012 respectively. This is due to higher provisions and interest expense in these years. But in the year 2011 the bank has performed well with net profit reaching the double digit mark at 11.44% as the bank had maintained a tighter control at interest and other indirect expenses. 69
Although the net profit ratio shows a fluctuating trend but the overall profitability of the bank is satisfactory as per industry trend.
3. RETURN ON ASSETS
Returns on assets ratio is the net income (profits) generated by the bank on its total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be the resulting returns on total assets.
Return On Assets = Operating profit(net profit(net of provisions provisions n contingencies) contingencies) Average or Total assets
Return on Assets 0.75% R
0.71%
0.70%
0.70%
a t 0.65% i o
0.60%
0.63%
Return on Assets
0.55% 20 10
2 0 11
20 1 2
Years
Year
Net profit
Average
(Rs. In crores)
assets
or
Total
Return On Assets (in %)
(Rs. In crores) 2010
1741.07
274966.46
70
0.63%
2011
2488.7
351172.56
0.71%
2012
2677.52
384535.47
0.70%
Interpretation :- The Return On Assets ratio of Bank of India are 0.63%,0.71% and 0.70% in
the year 2010,2011,2012 respectively. The return on assets increased in 2011 due to huge increase in total assets and net profits in this year as compared to 2012 wherein return on assets fell to 0.70% as net profit couldn‟t increase with the same proportion as of total
assets.thus it lead to the conclusion that overall efficiency or profitability of the bank is improving.
4. INTEREST SPREAD
Interest spread is the difference between the average lending rate and the average borrowing rate for a bank or other financial institution. This is very similar to interest margin. If a bank's lending was exactly equal to its borrowings (i.e. deposits plus other borrowing) the two numbers would be identical. In reality, bank also has its shareholder's funds available to lend, but at the same time its lending lendin g is constrained by reserve reser ve requirements. Changes in the spread are an indicator of profitability as the spread is where a bank makes its money
Interest Spread = (Interest income ÷ Interest earning assets) - (Interest expense ÷interest bearing liabilities
71
Interest spread 5.06%
5.20% R 5.00% 4.57%
a 4.80%
4.43%
4.60% i 4.40% o 4.20% 4.00% t
Interest spread
20 10
20 11
20 12
Years
Year
Interest spread (in %)
2010
4.57
2011
5.06
2012
4.43
Interpretation :-From the figures exhibited in the above table,it can be observed that interest
spread of the bank stood at 4.57% in 2010,increased to 5.06% in 2011due to greater proportionate increase in interest in terest earned earn ed as compared to interest inter est expended ex pended and in 2012 it fell from 5.06% to 4.43% as interest earned had not increased in the same proportion as interest expended. Thus it can be inferred that interest spread of the bank is fluctuating.
72
ACTIVITY RATIOS Activity ratios are calculated to measure the efficiency with which the resource of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales
1. FIXED ASSETS TURNOVER RATIO
Measure of the productivity of a firm, it indicates the amount of sales generated by each Rupee
spent on fixed assets, and the amount of fixed assets required to generate a
specific level of revenue. Changes in the ratio over time reflect whether or not the firm is becoming more efficient in the t he use of its fixed assets. assets .
73
Fixed assets turnover ratio =
Sales Revenue Net Fixed Assets
Fixed Assets Turnover ratio 12 10.28 10 R
8
9.19 7.82
a t
6
i o
4 2 0 20 10
20 11
Fixed Assets Turnover ratio
20 12 Years
Year
Sales Revenue
Net Fixed Assets
Fixed Assets Turnover
(Rs. In crores)
(Rs. In crores)
Ratio
2010
17877.99
2286.75
7.82
2011
21751.72
2365.95
9.19
2012
28480.67
2771.59
10.28
Interpretation :- The fixed assets turnover ratio of the bank stood at 7.82 in 2010, it
increased to 9.19 in 2011 and has further increased to 10.28 in 2012. Therefore it can can be inferred that fixed assets ratio of the bank is consistently increasing and It indicates that during the period of study fixed assets have been effectively used in the bank without much additional investment and also the capital is not blocked in fixed assets.
2. TOTAL ASSETS TURNOVER RATIO
Total assets turnover ratio = Sales Revenue Total Assets 74
Total Assets Asset s Turnover Turnover Ratio
8
7.41
R a
7
6.5 6.19
t i o
6
Total Assets Turnover Ratio
5 2010
Year
2011
2012 Years
Sales Revenue
Total Assets
Total Assets Turnover
(Rs. In crores)
(Rs. In crores)
Ratio
2010
17877.99
274966.46
6.50
2011
21751.72
351173
6.19
2012
28480.67
384535.5
7.41
Interpretation :- The above table exhibits Total Assets Turnover Ratio. It stood at 6.50 in
2010.In 2011 it has decreased marginally to 6.19 and after that it has increased to 7.41 in 2012. It shows a fluctuating trend. But overall efficiency of bank is satisfactory and is utilising its Total Assets effectively.
LEVERAGE RATIO
75
Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income.
1. DEBT- EQUITY RATIO
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.
Debt Equity Ratio =
Long Term Debt Shareholder’s Shareholder’s Equity
76
Debt- Equity Ratio 19 18.5 18
18.56 17.72
17.5 17
16.71
Debt- Equity Ratio
16.5 16 15.5 2010
Year
2011
2012
Long Term Debt
Shareholder’s Shareholder’s Equity
Debt Equity Ratio
(Rs. In crores)
(Rs. In crores)
2010
252161.84
14229.99
17.72
2011
320907.19
17290.68
18.56
2012
350330.25
20961.79
16.71
Interpretation :- The ratio shows the extent to which funds have been provided by long-term
creditors as compared to the funds provided by the owners. Here the Debt-Equity ratio for the above period is always high. This shows that the bank is more relying on outside funds as compared to internal sources of capital in its capital structure. From the long-term lenders point of view this ratio is not n ot satisfactory
77
CAPITAL ADEQUACY RATIO
A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted) assets. National regulators tracks banks CAR to ensure that it can absorb reasonable amount of loss and are complying with the banking statutory capital requirements. In the simplest formulation, a bank's capital is the "cushion" for potential losses, which protect the bank's depositors or other lenders. The RBI has set the minimum capital adequacy ratio at 10%for 78
all banks. A ratio below the minimum indicates that the bank is not adequately capitalized to expand its operations. The ratio ensures that the bank do not expand their business without having adequate capital.
Capital Adequacy Ratio = (Tier I + Tier I )Capital Risk Weighted Assets(Including Off Balance Sheet Items)
Capital Adequacy Adequacy Ratio
R a t i o
13.20% 13.00% 12.80% 12.60% 12.40% 12.20% 12.00% 11.80% 11.60% 11.40%
12.94%
Capital Adequacy Ratio
12.17% 11.95%
2 0 10
20 11
20 12 Years
Year
Capital
Adequacy
Ratio 2010
12.94
2011
12.17
2012
11.95
Interpretation :- The capital adequacy ratio of Bank of India stood at 12.94%,12.17% and
11.95% in the year 2010,2011,2012 respectively.It indicates that during the study period bank has maintained a healthy capital adequacy ratio which is above 10% as prescribed by RBI (under Basel II ).
79
INTEREST COVERAGE RATIO
This Ratio indicates the interest paying capability of firm .The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its earnings before interest and taxes, also known as EBIT. The lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of bankruptcy or default
Interest coverage ratio = Net profit before interest & tax Fixed interest charge
Interest Coverage Ratio R 1.3 t
1.25
1.21
a
1.2
1.18
i o
Interest Coverage Ratio
1.1 2010
2011
2012 Years
Year
Net
profit
before
Fixed interest charge
Interest coverage ratio
interest & tax
(Rs. In crores)
(Rs. In crores)
2010
14615.89
12122.04
1.21
2011
17436.41
13941.03
1.25
80
2012
23744.75
20167.23
1.18
Interpretation :- The interest coverage ratio of Bank of India stood at 1.21,1.25,1.18 in the
years 2010,2011,2012 respectively. Since this Ratio indicates the interest paying capability of firm and ideal Ratio is 1.5 times. So interest paying capacity of the bank is moderate.
CASH FLOW ANALYSIS OF BANK OF INDIA FOR THE YEAR ENDED 2010,2011,2012
CASH FLOW STATEMENT OF BANK OF INDIA 2010
2011
2012
Net Profit before tax
2493.83
3495.38
3577.52
Net Cash Flow from Operating Activities
8439.81
6133.09
-1702.55
Net cash flow from Investing Activities Activit ies
-224.72
-720.22
-616.67
Net cash flow from Financing Activities Activit ies
1253.78
771.3
28.71
Net Increase/decrease in Cash & Cash Equivalents
9468.87
6184.17
-2290.51
Opening Cash & Cash Equivalents
21761.3
31230.1
37414.3
Closing Cash & Cash Equivalents
31230.1
37414.3
35123.8
CASH FLOW FROM OPERATING ACTIVITIES
81
Interpretation :- The above cash flow statement of Bank of India reveals that the net cash
flow from operating activities stood at 8439.81 in the year 2010.It has declined to 6133.09 in 2011. This may be due to greater proportionate increase in advances as compared to interest earned this year. Also operating expenses were at higher side during this year. In 2012 the net cash from operating activities has further declined and has become negative. Here it may be noted that despite a great increase in interest earned, cash flow from operating activities have declined. This is due to greater increase in borrowings this year which has lead to more interest expense. Also deposits has not been increased in the same proportion as compared to advances this year.
CASH FROM INVESTING ACTIVITIES:-
Interpretation :- The net cash flow from investing activities has been in negative figures in
all the 3 years of the study period. It stood at -224.72 in 2010,which is followed by a great decline in 2011 and has reduced to -720.22 . Although its has increased to tune of 103.55 crores in 2012 but the net cash flow from investing activities is still in negative figures and it stood at -616.67. the huge outflow of cah from investing activities in the year 2011 is due to a huge investment in subsidiaries and fixed assets.
CASH FROM FINANCING ACTIVITIES:-
Interpretation :- The net cash flow from financing activities during the period of study has
been showing a declining trend. It stood at 1253.78 crores in 2010, which has reduced to 771.3 in 2011 and in is followed by a huge decline of 742.59 in 2012 and has reduced to 28.71 crores in this year. This is due to greater dividend payments and interest payment on IPDI and subordinate bonds and upper tier II bonds during the year 2011 and 2012.
82
COMPARATIVE ANALYSIS OF BANK OF INDIA WITH CANARA BANK
RATIO ANALYSIS
BANK OF INDIA
CANARA BANK
RATIOS:
RATIO S: 3 1 .3 .1 0 3 1 .0 3 .1 1 31 3 1 .0 3 .1 2
3 1 .3 .1 0 3 1 .0 3 .1 1 3 1 .0 3 .1 2
Current Ratio
4.32
3.83
3.49 Cu Current Ratio
3.28
4.75
4.13
Liquid Ratio
3.64
2.88
2.62 Liquid Ratio
2.82
3.93
3.17
72.04 .04
70.33 .33
71.30
71. 57 57
70. 27 27
6.84
1.87
26.99
26. 48 48
19. 26 26
23.42 23.42
15.18 15.18
16.11
17. 46 46
10. 64 64
Return On Assests
0.63
0.71
1.14
1.20
0. 0 .88
Fixed Assest Turnover Ratio
7.82
9.19
10.28 Fixed Assest Turnover Ra Ratio
6.56
8.11
10.80
Total tal Asse Assets ts Turno rnover Rati Ratio o
6.50 .50
6.19 .19
7.41 .41 Total Asse Assets ts Turno rnover Rat Ratio
7.08
6.86
8.25
Debt Equity Ratio
17.72
18.56
16.71 Debt Equity Ratio
16.57
15. 38 38
15. 10 10
Cap Capital tal Adeq Adequ uacy acy Rati Ratio o(CAR (CAR))
12.94 .94
12.17 .17
11.95 .95 Cap Capital tal Adeq Adequ uacy acy Rati Ratio o(CAR (CAR))
1 3. 3.43
15. 38 38
13. 76 76
Interest Spread
4.57
5.06
4.43 In Interest Spread
3.32
3.47
3.80
Interes erestt Coverag eragee rati atio
1.21 .21
1.25 .25
1.18 .18 Interes erestt Coverag eragee rat ratio
1.29
1.33
1.18
Credi edit Deposit Rati atio (CDR) Operating P rofit Ratio Net Profit Profit Ratio Ratio
76.93 Credi edit Depo eposit Rati atio (CDR) 4.70 Operating P rofit Ratio 18.80 18.80 Net Profit Profit Ratio Ratio 0.70 Re Return On Assests
The above table exhibits various financial ratios of Bank of India India and the ratios of Canara Bank. Below is the comparative analysis of these ratios:-
1. CURRENT RATIO :- From the above table it can be observed that current ratio of Bank of India stood at 4.32, 3.83, 3.49 and that of Canara bank stood at 3.28, 4.75, 4.13 for the years 83
2010,2011,2012 respectively .Although both are having enough liquidity but going by increasing trend of current ratio for Canara bank it shows that it is not utilising its funds efficiently as compared to Bank of India.
Current Ratio 5 4.5
4.75
4.32
4.13 3.83
4 3.5
3.49
3.28
3 Bank Of India
2.5
Canara bank
2 1.5 1 0.5 0 20 10
20 1 1
20 1 2
2. LIQUID RATIO :- The liquid ratio for both the banks shows fluctuating trend. Both have been maintaining a healthy liquid ratio but as compared to Bank of India, Canara Bank has excess short term liquidity available which may not be so good as the opportunity cost of holding excess liquidity might be more that may affect its profitability.
3. CREDIT DEPOSIT RATIO (CDR) :- The credit deposit ratio plays an important role in determining the profitability of the banks. By comparing the CDR for both the banks it can be observed that CDR of Bank of India is quite fluctuating during the study period while that of Canara bank is more or less stable. But overall the credit performance of both the banks is quite good.
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78.00%
Credit Deposit Ratio (CDR)
76.93%
76.00% Bank Of India
74.00%
Canara bank 72.00%
72.04%
71.57%
71.30% 70.00%
70.33%
70.27%
68.00% 66.00% 20 1 0
20 1 1
2 0 12
4. OPERATING PROFIT RATIO :- The Operating Profit Ratio of Bank Of India stood at 6.84%, 1.87%, 4.70% and that of Canara Bank stood 26.99% ,26.48%, 19.26% at for the
years 2010,2011,2012 respectively.It indicates that the operational efficiency of Canara Bank is much better than that of Bank of India and it has a better control on its expenses.
5. NET PROFIT RATIO :- It can be observed from the above table that the Net profit ratio of Bank of India stood at
23.42%, 15.18%, 18.80% and that of Canara Bank stood at
16.11%,17.46,%10.64% for the years 2010,2011,2012 respectively. Although the Net Profit of
Canara Bank is much higher than that of Bank of India during the period of study but the Net Profit ratio of Bank of India is much better than that of Canara Bank. This indicates that overall profitability of Bank of India is much sound than Canara Canar a Bank.
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Net Profit Ratio 25.00%
23.42%
20.00%
17.46% 16.11%
18.80%
15.18%
15.00% 10.64%
Bank Of India Canara bank
10.00%
5.00%
0.00% 20 10
20 11
20 12
6. RETURN ON ASSETS :-The return on assets for both the banks shows fluctuating trend.It stood at 0.63%, 0.71%, 0.70% for Bank of India and 1.14%, 1.20%, 0.88% for Canara Bank for the year 2010,2011,2012 respectively. It shows that Canara Bank has a better return on investment as compared to Bank of India.
7. FIXED ASSETS TURNOVER RATIO :- The fixed Assets Turnover ratio of Bank of India stood at 7.82, 9.19, 10.28 and that of Canara Bank stood at 6.56, 8.11, 10.80 . It shows similar trend for both the banks. Thus it can be inferred that both the banks are utilising its fixed asstes efficiently.
8. TOTAL ASSETS TURNOVER RATIO :- The total assets turnover ratio is also showing similar trend for both the banks. But if looking at the figures for both the banks for total assets turnover ratio during the study period it stood at 6.50, 6.19, 7.41 for Bank of India and at 7.08, 6.86, 8.25 for Canara Bank it can be inferred that Canara bank is utilising its total assets in a
better way as compared to Bank of India.
9. DEBT – EQUITY EQUITY RATIO :- The Debt-Equity ratio of Bank of India stood at 17.72, 18.56, 16.71 and that of Canara Bank stood at 16.57, 15.38, 15.10 for the year 2010,2011,2012
respectively. Both the banks This indicates that both the banks are more relying on outside funds
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as compared to internal sources of capital in its capital structure have a very high debt- equity ratio. But as compared to Bank of India, Canara Bank has a lesser reliance on the debt.
10. CAPITAL ADEQUACY RATIO :- This ratio determines the capacity of a bank in terms of meeting with the liability and other risks such as credit risk, operational risk. The above table reveals that capital adequacy ratio stood at 12.94%, 12.17%, 11.95% for Bank of India and that of Canara Bank it stood at 13.43%, 15.38% ,13.76% for the year 2010,2011,2012 respectively. As this ratio measure of how much capital is used to support the banks' risk assets.
The analysis reveals that both the banks have maintained a healthy ratio beyond the minimum limit of 10% prescribed by RBI (under Basel II).but it is higher for canara bank as compared to Bank of India.this indicates that Canara bank is the more efficient in terms of meeting with the liability and other risks such as credit risk, operational risk as compared to Bank of India.
Capital Adequacy Adequacy Ratio (CAR) 15.00%
15.38%
13.43%
20.00%
13.76% 12.94% 12.17%
10.00%
11.95%
5.00% 0.00% 2010 2011 2012
Bank Of India Canara bank
11. INTEREST SPREAD :- Interest spread is the difference between the average lending rate and the average borrowing rate for a bank or other financial institution. Changes in the spread are an indicator of profitability as the spread is where a bank makes its money. The interest spread of Bank of India stood at 4.57% , 5.06% ,4.43% and that of Canara Bank stood at 3.32%, 3.47%, 3.80% during the study period. Clearly it reveals that Bank of India has greater interest spread as
compared to Canara bank.
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Interest Spread 6.00% 5.06% 5.00%
4.57%
4.43%
4.00%
3.80%
3.47%
3.32%
Bank Of India 3.00%
Canara bank
2.00% 1.00% 0.00% 20 1 0
20 1 1
2 0 12
12. INTEREST COVERAGE RATIO :- This Ratio indicates the interest paying capability of firm. The interest coverage ratio of both the banks shows similar trend. It stood at 1.21, 1.25, 1.18 for Bank of India and that of Canara Bank it stood at 1.29, 1.33 ,1.18 for the year 2010,2011,2012 respectively. Although it is slightly less than the ideal ratio of 1.5 for both the banks but on an average we can say that this ratio is satisfactory for both the banks as it is above 1.
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COMPARATIVE CASH FLOW STATEMENT ANALYSIS
CASH FLOW STATEMENT OF …. BANK OF INDIA
CANARA BANK 2010
2011
2012
2010
2011
2012
Net Profit before tax
2493.83
3495.38
3577.52
3821.43
5025.89
4082.71
Net Ne t Cas h Flow from from Operating Operating Activities
8439.81
6133.09 - 1702.55
4694.39
8527.34
- 832.22
Net cash flow from Investing Activities
- 224.72
- 720.22
- 616.67
- 72.21
- 73.22
- 141.56
Net cash flow from Financing Activities
1253.78
771.3
28.71
- 1628.75
2600.78
- 1554.94
Net Increase/decrease in Cash & Cash Equivalents
9468.87
6184.17 - 2290.51
2993.43
11054.9
- 2528.72
Opening Cash & Cash Equivalents
21761.26
31230.1
37414.3
16659.78
19653.21
30708.11
Closing Cash & Cash Equivalents Equivalents
31230.13
37414.3 35123.79
19653.21
30708.11
28179.39
NET CASH FLOW FROM OPERATING ACTIVITIES:ACTIVITIES:-
Interpretation :- The net cash flow from operating activities of Bank of India shows a
declining trend as it stood at 8439.81crores in 2010 and has further reduced to 6133.09 crores in 2011 and reached to negative in 2012 at -1702.55crores. whereas in canara bank the net cash flow from operating activities shows as fluctuating trend as it stood at 4694.39 crores in 2010 which has increased to 8527.34crores in 2011 and then in 2012 it shows a huge fall in the cash flow and consequently has reached to negative figures at -832.22 crores .This may be due to increase in interest inte rest and operating expenses. ex penses.
NET CASH FLOW FROM INVESTING ACTIVITIES ACTIVITIES :-
Interpretation :- The Net cash flow from investing activities for both the banks during the
study period has been showing a declining trend and is in negative figures. But the reduction over the years in cash flow from investing activities in Canara bank is much lower than in
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Bank of India. This shows that Canara bank is enjoying a better return on its investments and is investing rationally.
NET CASH FLOW FROM FINANCING ACTIVITIES:ACTIVITIES:-
Interpretation :- The Net cash flow from financing activities for Bank of India is showing a
decreasing trend during the study period but has never turned negative. Whereas in case of Canara bank it shows a fluctuating trend. In In the year 2010 it is negative and stood at -1628. 75 crores whereas it has improved to 2600.78 crores in 2011 but it has further declined to 1554.94 crores. This is due to higher dividend payment and interest payment on Tier I and Tier II bonds and there has been no inflow during this period. Therefore in can be inferred that Bank of India is doing good in financial activities as compared to Canara Bank.
90
91
Chapter 4
RESEARCH PROJECT
92
PROJECT DETAILS DETAILS The project undertaken by me at Bank of India was “Analysis of Credit Appraisal ”. Credit Appraisal is the process of calculating the creditworthiness of a business or an organization before providing any an y Loans & advances/project finance. fin ance. The details of the project are as under:-
Advances (Credit Appraisal) Credit Appraisal is the process of calculating the creditworthiness of a business or an organization. Credit Appraisal involves a wide variety of financial analysis techniques, including ratio and trend analysis as well as the creation of projections and a detailed analysis of cash flows. Credit appraisal also includes an examination of collateral and other sources of repayment as well as credit history and management ability. Before approving a commercial loan, a bank will look at all of these factors with the primary emphasis being the cash flow of the borrower. A typical measurement of repayment ability is the debt service coverage ratio. The debt service coverage ratio divides this cash flow amount by the debt d ebt service (both principal princ ipal and interest i nterest payments pa yments on all al l loans) that will be required requ ired to be met.
93
Another criteria involved in the process of credit appraisal is determination of credit rating which means assessing the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates or the refusal of a loan by the creditor. The ratings are of two types- external ratings and internal ratings. As the name implies external ratings are given by external rating agencies like Moody‟s, Standards and Poors etc.
Internal ratings are designed by the institution which requires it. Immaterial of the source of rating whether internal or external it should be robust to be accepted as a reliable tool. For corporate borrowers, the criteria for assessing risk are well known: profitability, growth, industry outlook, competitive advantages, management and shareholders, in addition to the standard set of financial and operational performance ratios. A rating system can also serve as a tool for credit policy. For instance, some minimum rating might be required to grant a loan. It is this process which tries to evaluate the credentials and needs of the evaluator; the business opportunity oppo rtunity is made available av ailable to the bank in the form fo rm of Client Description. Descripti on. Bank on submission of the Client description do a feasibility study of the project and check the viability and the needs of the Customer.
94
•
Client Description
•
Proposal Creation
•
Operations
Client Description of the Project
Proposal for the Trade Credit is created.
The Operation department takes takes care of the proper documents and sanctions the limit
•
Analysis/Review Analysis/Review of the CMA Data
Review
The Advances thus made are done based on their requirement-
Advances
Term Loans
Working Capital Limit
The project takes a practical approach in analyzing the procedure of the Credit Appraisal, two proposals one based on Term Loan and the other on Working Capital has been detailed to look into the intricate details of the process followed at Bank of India.
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CREDIT APRAISAL PROCESS
Proces rocess Fl F low
Submission of Project Report along with the Request Letter
Carrying out due diligence
I f not appr approve oved
if appr approve oved
Preparation of proposal
Submission of Proposal to Head Office
I f No queries raised aised
I f querie ri es raised aised
Sanction of proposal on
Project Rejected
various Terms & Condition
Communication of Sanction
Acknowledgement of Sanction
Application to comply with Sanction Terms & Condition & execution of Loan Documents
96
Solve the queries
Review of Sanction
Disbursement
Credit Policy at Bank of India
The bank has been working on its credit priorities which have been changed with the changing times to cope up with the changes. The credit priorities for the bank stand as:
Maintenance of asset quality
Maintaining growth and reasonable risk adjusted returns on credit exposures
Retaining/Improving the Market share
Thrust on priority sector lending
Bank is conscious of the risk-return spread, thus bank has to judiciously set priorities in terms of asset quality and return maximization. With the changing needs, Bank has kept an open policy towards unfocussed assets. Asset quality priority calls for value driven culture with conservative risk strategy, whereas market share priority calls for volume driven and aggressive credit strategy. At the present situation, bank has to have a mix of both.
The purpose for the credit needs to be ascertained, with adherence to the guidelines and directives.
Credit Delivery
The credit requirements may be dispensed in any of the following modes –
97
Sole Banking Arrangements – In account, where we remain to be sole lenders, the account with ratings “AAA” (LC1 to LC2) and “AA” (LC3 to LC4).
Multiple Banking – In an arrangement where borrower desires to avail credit from other banks, without a formal consortium arrangement. The borrower has to furnish details from time to time. The credit from other banks should not exceed 10% of the working capital limits. Also, exposure for working capital needs should not exceed 75% of the total working capital requirements of the borrower.
Consortium Lending – It‟s a framework where banks have the freedom to frame the ground for lending.
Syndication – It is an arrangement between two or more lending institutions to provide a credit facilit y using common loan documentation. documentati on.
Cre Credit Thrust Thrust
The Bank of India has been proactively involved in lending to the priority sector to make sure it meets the target prescribed by GOI/RBI which presently are –
Priority sector target of 40% of net Banks credit.
Exposure to agriculture not less than 18% of net Bank credit, and direct finance to agriculture should not be less than 13.5% of net bank credit.
Exposure to weaker sections not less than 10% of net bank credit.
Export credit target of 12% of net Banks credit and etc.
Bank of India has well laid policies, which are reviewed periodically some of which are as follows –
Increasing finance for production as well as investment for agriculture finance.
Priority is given to Infrastructure under priority sector financing.
Focus is on Low risk short duration exposures
Bank gives certain concessions to have better customer relations. 98
Bank has made efforts to make the process faster, by encouraging issuance of Kisan Credit Cards.
Bank has been experimenting with innovative/area based schemes to improve lending
Bank has made many tie-ups with corporate, NGOs, NBFCs in order to focus on different areas of finances.
The Changing Market Realities
Bank of India reviews the policies to be able to revise them as per the changing market scenario. With the changing times, the bank has shifted their focus on to major corporate clients with less risk. The corporate financing opens up ample opportunities in terms of financing mergers, acquisitions, IPO IPO financing etc. The thrust also lies on the post sale finance services both for supplier and buyer. The need to have exposures of the bank linked with products such as factoring and forfeiting to ensure risk free recovery.
Bank of India does not encourage funding in areas of harmful/depleting substances. Also, the bank tries not to finance finan ce areas which are affected by b y government policies.
Analysis of Credit Appraisal
Credit Appraisal is the process which is required for appraisal of the proponent to assess his credit needs. The process of Credit Appraisal at Bank of India is no different. It involves appraising the background of the Management, doing a technical and financial feasibility study. Appraisal thus compromises two distinct segments –
Appraising the acceptability of the customer
Assessment of Customer Credit needs.
99
Main components of Credit Appraisal
Background of the Management Management
It involves knowing the borrower by either obtaining status reports from previous bankers or by scrutinizing the management in case of corporate. The check is made to make sure that borrower/ promoters name does do es not appear in the ECGC list of defaulters. defaul ters.
Commercial Appraisal
It involves detailed study about the product and its market, to understand the demand-supply situation, the competition in the segment, effect of government policies on the industry etc.
Technical Appraisal
In case of project involving manufacturing or production, technical appraisal is carried out. The TEV study is not done in case of service or for industries where he good does not go through a state change. Also, there are exceptions where the TEV study is not required by the sanctioning authority. The traditional industries which are running over generations and whose viability cannot be questioned can be exempted from TEV study. But it would be required for some new venture with not much information on its know-how, its demand-supply pattern. Thus in all new and Greenfield projects TEV study is carried out, even then if the company is reputed and the Term Loan requirement is less than Rs. 20 Cr, TEV study can be waived off.
Its validity is for one year provided the scope of the project does not change.
Financial Appraisal
100
The second segment of Credit Appraisal i.e. Assessment of Customer Credit needs, requires the financial performance of the proponents. The financial study gives us the clear idea about the ability of the proponent to absorb unanticipated financial cost. Along with the cost of the project, the financial projections pro jections are scrutinized scrutin ized to ascertain the financial fina ncial need for the project. proj ect.
The Performance Indicators are –
Profitability Ratios
Debt-Equity Ratios
Debt Service Coverage Ratio
Break-Even Point
Profit / Volume Ratio
Pay Back Period
Benefit Cost Ratio
Internal Rate of Return
Sensitivity Analysis
In case of higher limits, few other ratios are calculated –
Current Ratio
Total outside Liabilities (TOL) / Equity Ratio
EBITDA / Interest Ratio
PBT / Net Sales Ratio
(Inventory + Receivables) / Sales Ratio
DSCR ( Debt Servicing Coverage Ratio)
In financial appraisal, the projections are scrutinized so as to have an achievable Sales, creditors, and holding level. The Ratios are properly analyzed in order to have them within limits else an explanation for the same is taken from the proponent. To make them more meaningful, the ratios are put against the industry average. The positive and the negative factors which could affect the financial need of the customer are considered. 101
Some important aspects to be analyzed –
Investment in subsidiaries should not be more than 10% of the Tangible Net Worth; else the excess amount is deducted from the Net worth for computing various ratios.
Financial figures are reworked in order to avoid any misinterpretations.
The position of contingent liabilities, disputed tax liabilities and their impact on the performance.
Types of facilities of Credit Delivery
Generally bank gives the following types of facilities to the customer: The types of facilities would comprise of term loans , demand loans, O/Ds, cash credit, WCDL, advances against bills, channel credit, invoice discounting/financing, discounting of future cash flows/rent receivables and lines of credit, L/Cs, guarantees , acceptance facilities ,cash management etc These credit facilities can be broadly divided into two types:
Funded credit facilities Non- funded credit facilities facilit ies
F unde unded cred credit fac faciilities ties
These facilities mainly consist of: 1. Working capital ( fund based)
The working capital includes the following :
Cash credit hypothecation of stocks
EPC-sublimit of CC
102
Cash credit hypothecation of book debts
FBP/FBD/ODF OBC
FBN-DP/DA 90 days
2.
Term loans
Non- funded credit facilities
These facilities mainly consist of –
Guarantee
LC-inland/ foreign DP/DA 180 days
Analysis of assessment of Working Capital Limits
In Bank of India, the working capital requirement of the borrower is assessed using different methods, based on the limits.
Turnover Method
Borrowers with a credit limit of less than Rs. 5 Cr, the working capital requirement is computed as 25% of the projected annual turnover, of which bank provides 4/5th (i.e. 20% of the projected annual turnover) and the remaining 1/5th is contributed by the borrower as margin. On an average the average business cycle assumed by the bank is 3 months; the bank is flexible to consider the working capital limits in case of longer business cycle.
Level of Holding / MPBF
In this method of working capital assessment, bank determines the level of holding of inventories by looking into the past levels of holding for inventory and receivables. In case of 103
A rated accounts with fund-based limits exceeding Rs 5 crores, cash flow statements would be obtained and scrutinized. Cash DSCR and cash interest coverage ratios may also be worked out and commented in the proposal.
Cash Budget System
The assessment of working capital requirement may be done on the basis of the projected cash budget statement (annual) comprising of the projected receipts and payments for the next 12 months on account of: Business operations, Non- business operations, Cash flow from capital accounts, Sundry items
Analysis of assessment of Term Loan
The appraisal process of a term loan is a little different form the appraisal process of working capital. A few more factors have to be considered for the term loan appraisal in addition to the other details like borrower‟s profile, credit rating etc.
For providing term loan facilities, a few more factors have to be considered. They are the funded debt/equity ratio, the DSCR both for the project and the company, as a whole as also the period of repayment should be given due weight-age. Also the cash-flow statements are to be obtained and analyzed in all accounts with limits of Rs5 crores and above or wherever needed
Risks associated with the borrowal accounts like critical inputs risk, operational risk, production process p rocess risk, marketing and labour risks risk s are to be analyzed anal yzed and taken tak en into account acco unt in the assessment. 104
The following things are taken into consideration while appraising the term loan –
Project particulars
Cost of source of finance,
Amount of advance and purpose
Repayment schedule
Details of security/ value of security/margin: basis of valuation
Comments on the project
Project revenue, profitability and DSCR
Marketing viability
Project implementation schedule along with present status of reports
Availability of refinance
Analysis of Credit Proposal of Term Loan
Propos roposal al of R&R R&R I nfra nfra Priva Private teL imite imited d
Question – Industry – Industry is Infrastructure under the heads “Roads and ports”
The company XYZ LTD. Limited has a fund based requirement of Rs. 10000 lacs. The company is under PPL (Public Private Partnership).
Credit Requirement
Facility
Proposed
Term Loan
10000
105
Working Capital ( FB ) Non-Fund Based Total
10000
The Memorandum of Sanction or Memorandum of Approval starts with the Proposal Number for Reference along with date of application and date of creation for the proposal.
The Credit Proposal along with major sections from A to J, with all sections together accounting for a total of 36 customized headings which contain data depending on the credit proposal requirement for that project. p roject. Example Ex ample – The The Term loan requirement for this project does not require Working Capital Assessment.
Borrow Borrower Profile rofi le
The first section named A is Borrower Profile, which contains the basic details about the borrower i.e. Name of Account, Constitution(Private/Public), Constitution(Privat e/Public), Business Activity(Example – Construction of roads and highways), Business and Account establishment dates, Credit Risk Grades, Group and Directors Information, Consortium (Yes/No), Multiple Banking Arrangement (Yes/No).
The XYZ LTD. Public Limited (Unlisted) is into Construction of Roads and Highways. It was established in 2004 and has been in business with the bank since 2006. The Risk Grades assigned for Borrower Risk Grade is LC6 and for Borrower Pricing Grade is LC7. The Group for the project is a Joint venture between public and private firms. Mr. K. Singh is the Managing Director and it is a consortium lending with the market share as 9.09%.
Sharing Pattern of Term Loan
106
Name of Bank
Amount
Percentage (%)
Other Banks
100000
90.91
Bank of India
10000
9.09
Total
110000
100
I ssue for Consider Considerati ation
The second section named B is I ssue ssues s for Cons Consiideration ration. It covers the Last Review, Any additional request. The XYZ LTD. Limited is submitting a new request for a fund based loan of Rs. 10000 lacs.
F acili acilities and Securi Security ty Cover
The third section named C is F acili acilities and Securi Security ty Cover. Under facilities it covers the limits sanctioned, the pricing, the outstanding amount, and over dues if any. Also it covers the Repayment of Term Loan.
Limits
Existing
Proposed
Inc/Dec
Pricing
O/s
Over dues
Term Loan
--
10000
--
9.5 %
9094
--
Working
--
--
--
--
--
--
--
--
--
--
--
--
--
10000
(+)10000
--
9094
--
Capital Non-Fund Based Total
Repayment of 48 unequal quarterly installments commencing from June 2012. The door to Term Loan
door period is 16.5 years. The tail period is 15.5 years. Total project period is 32 years.
107
Under Security Cover, the borrower is required to provide the principal and collateral security. But in cases collateral can be exempted. In principal security it usually covers the current assets of the company, whose value is ascertained and acts as a security cover against the credit provided to the borrower. In case of consortium, since there are many banks so each bank has to find out their share depending upon the share of loan granted i.e. the total project cost is Rs.150000 lacs and the loan share is 9.09%. Thus the security value as per Bank of India loan share comes out to be 9.09% of Rs.150000 equal to Rs.13646 lacs. Guarantor may be required to provide security against credit, but it is again not a mandate and depends upon project.
Security
Particulars
Principal
Hypothecation assets,
Date of Evaluation of Eventual
Value(Our share) 13646
Escrow
Account, Assignment of
Rights,
Assignment
of
Insurance, DSRA Collateral
--
--
--
E xposure xposure
The fourth section named D is Exposure, which provides details about the Borrower‟s Exposure, Group Exposure, Industry Exposure and Conduct/Value of Account. In Borrower‟s Exposure, we take into account all the existing exposure of the borrower with
Bank of India, with Other Banks, with FIs / LIC etc.
108
Facility
Amount
O/s
With Bank of India
TL
10000
9094
With Other Banks
TL
95000
86357
With FIs / LIC
TL
5000
4548
110000
99999
Total
In Group Exposure , the group which in our case is a Joint venture between a public and private. Thus the group exposure e xposure with Bank of India needs need s to be calculated. Both the Borrowers Exposure and Group Exposure needs to be within the limits sanctioned as per the Credit Policy.
Borrower
Group
Cap
Actual
Cap
Actual
294000
10000
735000
170376
Industry Exposure marks the cap for that sector, the Bank and the Zone Exposure as well as NPA for that sector.
Exposure to Industry Sectoral Cap for Industry
506065
Bank‟s Exposure
379966
Zone‟s Exposure
151557
109
NPA Bank
242
NPA Zone
--
Conduct/Value of the Account is very important criteria in deciding the Rate of Interest. It takes into account the conduct, utilization of limits as well as the earnings made. Utilization
Last Year
Percentage
Amount Term Loan
4675
Current Year
Percentage
Amount 46.75
9600
96
Earnings Interest
444
912
Other Income
0.73
25
Total
444.73
937
Yield %
9.51
9.76
The Low Yield is on account of ROI being linked to the Government Securities, as it is a Public Private Partnership, so the ROI charged is low.
F avorable avorable factors actors
The project is a joint venture between XYZ LTD. and Government of Rajasthan, with promoters having robust experience in project development d evelopment and implementation. implemen tation.
The government of Rajasthan has accorded high priority for development and up gradation of infrastructure and has thus created state road development funds to provide balance investment. inves tment.
Investment is expected to be recovered through the levy of toll fees.
Financial Position of XYZ Infra 110
The project is an effort to improve the road infrastructure. It is a joint venture of the public and private institution.
Paid-up Capital
The paid up capital is constant at Rs. 5000 lacs at the end of FY 2008, and is estimated to increase to Rs. 25800 lacs by FY 2009 and to Rs. 28300 lacs by FY 2010. The company is planning to raise the amount by IPO/Private Placement for funding the project cost. The timing timi ng for IPO would depend depen d on market conditions. cond itions. Thus in case of delay dela y in IPO/Private Placement process, the promoters will provide an undertaking for arranging the equity requirement of the capital.
Net Sales
The year FY 2008 is the first year of operations. The revenues for the same will start coming from the toll collected on the completed stretches. The revenues earned for the year 20072008 was Rs. 929 lacs and were estimated to Rs. 7500 lacs for the Year 2008-2009. The sales were found to be in line to achieve the estimated sales. Other Income of Rs 114 consisted of interest on Fixed Deposits. Profits/Profitability
The company has suffered a net loss of Rs. 2781 lacs as the revenues were operational for part of the year. Also, as interest of Rs. 15 Cr has been expensed due to prior completion of the project.
The gaps had been met by the Financial Security Fund of the Government. The EBIDTA is expected to be Rs. 7500 lacs at the end of FY 2010.
111
The company as a whole would be break even and start generating profits from their second year of operations. The losses if any will be met by the FSF set up the government. Investments
The company has projected investments at Rs. 12500 lacs, as it has planned to invest in land adjacent to the toll roads. The investment in land banking would be financed with the proceeds of the IPO/Private placement. pl acement.
Total Net Worth TNW at Beginning of the Year
29106
Add: Increase in paid up capital
-
Increase in share premium
-
Net profit for the year
-
Decrease in intangible assets
-
Less: Decrease in paid up capital General Reserve used for Provision
-
Increase in Intangible Assets
-
Dividend payment including tax
-
Loss during the Year
2781
TNW at end of Year
26325
The TNW is estimated to be Rs. 52500 lacs at end of FY 2011, and to Rs. 52200 lacs at end of FY 2012.
Particulars
FY 2011
FY 2012
TNW at Beginning of the Year
26325
52500
Add: Increase in paid up capital
20800
2500
Increase in share premium
-
-
Net profit for the year
-
-
112
Decrease in intangible assets
-
-
Sub-debt from XYZ LTD.
9800
-
Additional funding from Public
2000
-
Contribution from Government
8500
2600
-
-
General Reserve used for Provision
-
-
Increase in Intangible Assets
2200
-
Dividend payment including tax
-
-
Loss during the Year
12725
5400
52500
52200
State Fund Less: Decrease in paid up capital
TNW at end of Year
Financial Position of XYZ Infra
Audited
Audited
Estimated
Projected 2012
09
2010
2011
5000
5000
25800
28300
29106
26325
52500
52200
-12500
-12500
Paid up Capital Equity Preference Share Tangible Net Worth Investment in Cos Adjusted TNW
29106
26325
45250
44290
Capital Employed
48951
125623
173500
200000
Net Block
50161
120805
160700
184500
929
7500
15500
929
7500
15500
Net Sales Domestic Exports Total Other Income
114
EBITDA
105
1000 458 113
-100
7500
Interest
1585
12700
12900
-12800 -1280 0
-5400
Gross Profit
105
-1127
Taxes
41
-2
Cash Accruals
64
-1129
-7400
-100
1652
5400
5400
-2781
-12800
-5500
200
2900
Depreciation Net Profit
64
Net Profit / Capital Employed %
0.05
Current Assets
1334
12165
Current Liabilities
2545
7348
0.524165
1.655552531
-
-
Term Liab. / Adjusted TNW
0.68
3.77
2.3
2.83
TOL/Adjusted TNW
0.77
4.05
2.3
2.83
0.42
1
Ratios Current Ratio -Debt/Equity
Profitability Percentage : PAT / Net Sales DSCR Company as a Whole
Average DSCR 2.34
For Specific TL
Average DSCR 2.37 0.29
Interest Coverage Inventory + Recievables / Sales (%)
I mportant portant Rat Ratiios
Debt-Equity Ratio – There is an increase in project cost due to increase in the price of raw
material (i.e. Bitumen) from Rs 150000 lacs to Rs 161800 lacs. The increase in cost would be met by the sponsors. Thus the DER ratio comes out to be 2.12.
114
The ISCR for the project is 0.29 for FY 2010 and at 0.42 Interest Service Coverage Ratio – Ratio – The for the FY 2011. The low ISCR ratio is acceptable as the company has made provision for payment of interest in the form of Financial Security Fund and also Debt Service Reserve Account (DSRA) has been factored in the project cost. With operations going to full scale, the company should improve the ISCR Ratio.
Debt Service Coverage Ratio – The Average DSCR for the project is 1.67. With other
projects in line, the average aver age DSCR is expected to go above 2, which is acceptable. a cceptable.
Analysis of Term Loan Assessment
The project is a joint venture between the government and private institution. It is a part of the initiative taken by the Government for improving the roads and infrastructure to promote tourism. The estimated cost of the project is 150000 lacs.
Project Cost (Rs. In lacs) Equity
IPO
Debt
Interest
5000 free
sub-debt 24000
Government Sub-Debt from Banks/FI‟s
5000
Sub-Debt from XYZ LTD.
4000
Term Loans from Banks/FI‟s
110000
The company has taken a Term loan of 110000 lacs by a consortium of 12 banks. With our share at Rs. 10000 lacs(9.09%).
115
The project cost increased from Rs. 150000 lacs to Rs. 161800 lacs on account of increase in the raw material. The increase will be offset by the saving initiated by the company of Rs. 9900, and the remaining Rs. 11800 lacs, part of which Rs 2000 lacs will be met by the Government and remaining Rs. 9800 lacs will be met by the sub-debt from the sponsors.
As Security, the term loan has a first pari passu charge on the assets of the project. The value of security under our share is Rs. 13646 lacs. The company is also required to maintain insurance for the cost and expenses incurred for management of the risks. The price charged is 9.5%, which is then linked to the Government Securities. This pricing is sector specific and as infrastructure is priority sector for the Bank. The interest rates are kept low by linking it to the Government Securities. The project appraisal finds that the substantial stretches have been completed before time. Toll collection has commenced. The Average DSCR for the project works out to be 2.34
The company is servicing interest in spite of losses, from the Financial Security Fund made available by the government.
In the process, a complete viability study of the project as in this case the road viability is studied in terms of its connecting ends and the purpose it serves in comparison to the existing road links in terms of shorter route etc. The purpose for undertaking the project is studied indepth to calculate the amount of advance. Also the study of expenses as in this case:
Civil Work Cost – The civil cost with provision for contingencies and price escalation.
Land Acquisition and Rehabilitation expenses – Cost of acquiring the land and implementing the rehabilitation program.
Preliminary and Pre-Operative Expenses – The expenses incurred for project development and administrative expenses.
116
Interest during Construction – The The amount is estimated and the company has to make provisions for effectin g the payment before the start of operations. o perations.
The current status, the proposed improvements and estimated benefits of the project are studied.
Traffic Assessment
In order to assess the potential of the project, a traffic assessment study is done. This helps us to understand the feasibility of the project. The traffic volume has been arrived by multiplying with the seasonal variation factor to arrive at Annual Average Daily Traffic (AADT). The growth rate is then identified based on the study done on the traffic pattern.
Project Appraisal, viability, profitability projections, DSCR
The average DSCR works out to be 2.37, with a minimum of 1.28 in the first year of operation. With the traffic study the growth potential for traffic has been identified. The project period provides a revenue tail of 17 years to mitigate any unforeseen risks. Thus the project is economically viable and technically feasible.
Se Sensitiv itivit ity y An Ana alys lysis
The project is subject to toll revenue and operating cost risks thus we do a sensitivity analysis
Scenario
Senior Debt without DSRA
Senior Debt with DSRA
Avg. DSCR
Avg. DSCR
Min. DSCR
117
Min. DSCR
Base Case
2.35
1.28
2.37
1.58
Base Case Traffic 2.20
1.19
2.22
1.48
1.19
2.20
1.46
1.26
2.35
1.56
Reduced by 10 % Increase in Project 2.18 cost by 10% Increase in O&M 2.33 cost by 10%
Se Security rity
The principal security is the charge on current assets i.e. movable, tangible, intangible assets, receivables, cash and investment. An Escrow account is maintained into which all the investment in the project, and all project revenues and proceeds are deposited.
Debt Service Reserve Account
The company is also asked to maintain a DSRA from the commencement of operations to meet the debt service requirements. An amount equal to the principal and interest for one quarter is maintained. Amount in DSRA shall be utilized only in case of short fall in cash flows for meeting the debt service requirements.
Industry Perception
An efficient transportation system is a pre-requisite for sustained economic development. Transportation system includes roads, railways, waterways etc. Roads are considered the 118
primary means of transportation transportatio n in the country due to easy accessibility. On an estimate around 61% of the total freight and 86% of the total passenger traffic is carried by roads.
India has the second-largest road network in the world, aggregating 3.34 million km. In the decreasing order of the volume of traffic movement, the road network can be divided into National Highways, State Highways, Major district distri ct roads and Rural and other ot her roads.
Roads are the preferred mode of transportation in India. Road Transport has emerged as the dominant segment in India‟s transportation sector. T he sector has plays a major role in the
country GDP.
The State Highways are secondary system of road transportation, providing linkages to the national highways, connecting important towns, tourist centers and ports. Major district roads run within the district connecting areas of production with the markets and providing interconnectivity between the rural areas and district headquarters.
The secondary system of roads carried 40% of the total road traffic, although they constitute around 18% of the total road length. They contribute significantly to the rural economy and thus to the industrial development of the country by enabling movement of raw materials and products.
Branch Recommendations
The company is an initiative of the government to improve the infrastructure with the objective of making the state a preferred destination for tourism. The company is also responsible for improvement, rehabilitation, and maintenance of the project roads and the sponsors sp onsors has a proven track t rack record in the infrastructure infrastru cture sector.
119
The PDA (Partnership and Development Agreement), authorizes the company to collect the toll fees from the users of the Project Roads and transfer the project roads at the end of the Project period. Considering the viability of the project, acceptable DSCR, DSRA provision, experience and track record of the promoters and tail period of 17 years, the Term Loan limit of Rs. 10000 lacs is given to the company.
Management Management of the Company
The Board of Director‟s are from the Government bodies and X YZ LTD.. This is JV 50:50
between the public and private p rivate so the management does d oes not stand as guarantors. guarant ors. It is the Private body which needs to be studied i.e. XYZ LTD..
XYZ LTD. – It is a premier financial institution with the objective of developing projects in
the infrastructure sector. The key promoters are Central Bank of India, HDFC, and UTI. The company undertakes projects in the following broad business segment –
Commercialization of Infrastructure projects
Financial Services ranging from project financing, investment banking etc.
The company is a premier in financing Infrastructure projects and has huge exposure and experience for carrying out the implementation of the Project.
Credit Review
This is a very important activity to monitor the progress of the Client project and to make sure that the funds are being used in the same area as mentioned. The default time period is half-by yearly basis. Though the proposal is reworked on yearly basis to mark the progress of the project and make changes in the limits / interest rates and other terms and conditions. 120
Credit Rating
The bank while evaluating the credit proposal derives the credit rating which has to be over and above “LC5”, based on which the interest rates to be charged are decided. In speci al
cases bank may consider projects with LC6 and LC7. The Borrower Risk Grade and Borrower Price Grade both are checked and the recommendations are made.
Risk Ri sk factors factors and and Mi Mitigation tigation
Risk Type
Mitigation
Time and Cost Overruns during construction
The company has undertaken improvement works and completed substantial portion before time Adequate escalation provisions are provided.
Statutory Approvals and Clearances
The critical clearances are obligations of the Government, which has a joint venture, thus no delays
Commercial Risk
Geographical location adds to the positives, as traffic has registered a growth of 61% for last five years The roads provide more efficient connectivity to National Highways
Senior
and
Banks/FI
Subordinated
debts
from The entire debts flow from Banks/FI will be managed by the XYZ LTD. Financial Services.
Equity
In case of unavailability of IPO, the entire proceeds would be managed by b y the sponsors
Political Events
As per PDA, the government takes care of the any cost incurred due to the any political 121
event
Credit Pricing The bank charges interest rates which are dependent on the nature of the project, the risk associated with the project etc. Thus referencing to the article attached in the appendix we can be clear on the components which account for the same. Also, in the form of Pre-payment charges and commitment charges, the bank charges for either prepayment of the interest component or either not using the loan to the limit as mentioned in the terms and conditions of the memorandum. Also, the bank charges processing fees, as mentioned in the terms and conditions of the memorandum. Last but not the least, in case of any defaults or non-fulfillment of any condition can cause for a charge in the form of liquidated damages.
Bank’s Policy
The Bank of India policy varies for every industry, thus for the roads and highways projects under Public Private Partnership (PPP) are as follows:
Financing to road projects may be considered on the basis of a viability study, taking into account the traffic study and revenue generation capacity of the project.
In sanctioning proposals, the risk assessment and mitigation should be addressed.
Before any disbursement takes place, the bank makes sure that all the project agreements and contracts have been undertaken by the promoter.
The following arrangements are also considered i.e. Escrow Account, Comprehensive Insurance cover, maintenance of DSRA etc after the Commencement Operation Date (COD).
Since Infrastructure projects are of generally longer durations hence the credit review plays an important part to check whether the th e project is going as per the schedule, sch edule, else remedial action needs to be initiated. 122
The total sanctioned limit for roads and highways project is fixed at 5 % of the Gross Domestic Advances of the Bank.
For any relaxation banks needs to get the approval from the Ministry of Commerce.
Financial parameters to be followed: o
Maximum D/E Ratio is 4:1
o
Minimum Average DSCR should be 1.25
123
Chapter 5
CONCLUSION
&
RECOMMENDATIONS
124
Observation & Findings
As per the observations made during the study of my project I found that the bank needs to review its credit rating system and needs to be more stringent in norms. Thus bank needs to make sure that it invests in sectors which promise better growth, which can be done by a thorough study of the market forces. So banks need to maintain the opportunity risk balance, to invest in corporate with higher operational efficiency. Banks needs to focus on sectors such as Infrastructure, the bank guidelines for financing this sector should be made liberal and thus bank should try to give various concession facilities. Thus for risk rating bank takes external rating for the company carrying out the project and not for the specific project. The concession should be given in the form of relaxation in prepayment charges, maintenance maint enance of DSRA account, margins etc.
Conclusion
The association with Bank of India for project on “Analysis of Credit Appraisal” has been an
educational experience.
125
It has helped a lot to understand the practical aspects of Trade Finance and Credit Appraisal and how the various methods/policy that we been studying theoretically are applied in business. With the globalization process, the role of Trade Finance and Credit has undergone a sea change and it is a major profit center for better performing banks. Credit operations have become more significant and complex today than what it was few years back. The role played by the technology and the rapid changes in the financial sector cannot be ascertained. The role of information technology is pivotal particularly because unless informational expectations are clarified and met, Trade and Credit operations cannot be made efficient in operations. oper ations. Credit provided by the banks is an important source of finance for the corporate. But the bank has to check the acceptability of the corporate before they can sanction the loan to it. Along with this, the assessment of the credit needs of the corporate also has to be done by the bank. This entire process is called the credit appraisal process of the bank. The bank then decides whether to sanction the loan to the corporate or not. If the loan is to be sanctioned then what rate of interest is to be provided to the corporate is decided based on the risk rating of the corporate and a host of other subjective factors. This process of credit appraisal is to be carried out at the time of initial entry of a corporate to the bank as also the consequent periodic reviews or renewals to make sure that the credit is given to the business which is creditworthy and in limits as per the needs of the business. Bank of India has steadily been growing over the last many years. The financial turmoil has impacted the bank, the credit for which goes to the strict Credit Appraisal issuing procedure. This helps the bank to keep its NPA value at a minimum. The NPA of the firm has been declining over the years and this year it was just 1.47% of total advances. This is a very healthy figure and shows how effective the bank is in its credit management.
126
Net NPA to Advances Ratio 5.00% 4.50%
4.50%
4.00% 3.50% 3.00%
2.77%
2.50% 2.00% 1.50%
1.49%
1.00%
0.74%
0.50%
1.47%
1.31% 0.91% 0.52%
0.44%
0.00% 20 04
2 00 5
20 0 6
20 07
20 08
20 09
2 0 10
20 1 1
20 1 2
To sum up, the paradigm shift in the risk exposure levels of the financial institutions, has definitely led to Credit Appraisal assuming a center stage. Undoubtedly all financial institutions need to perform Credit Appraisal. But to have a proper Credit Appraisal operation in place, requires a thorough understanding of the underlying factors. Such an understanding will enable the financial institution to identify and unbundle the risks and further aid in adopting and developing appropriate risk management models to manage risks and thereby making the process of Credit Appraisal a success. Thus we can say that the bank, given its resources, can occupy a better place in the near future, all it needs is a broader perspective and the right attitude to make maximum use of its resources.
Recommendations
127
Bank of India has been in the banking sector for years, thus the products and services offered in Trade finance and Credit Appraisal Process have developed to a great extent: it is almost flawless. But some recommendations have been provided which are as follows –
Cre Credit App Appraisa raisall
The new credit rating models that have recently come need to be developed further so as to increase their accuracy. This will help the bank immensely in the future.
Usually, the review of the account for “AAA”, “AA” and “A” rated companies is
once in a year. The review and consequently the credit appraisal of the account for the “A” rated companies should be done at a period less than a year, maybe once every 9 months. This is because the “A” rated accounts are at a relativel y higher risk than the “AAA” or the “AA” rated account
The manual process of Credit Appraisal should be automated to considerable effect.
The Credit Appraisal process should be more organized, the repetitive process should be made to minimize and thus helping help ing to make the process faster.
Bank of India should give more concession to infrastructure sector. Especially to power, road and ports as it is need n eed of the hour.
The bank needs to work in depth market study for projects with lower credit ratings to be able to identify them as valuable va luable customers.
Key Concerns for the Bank of India
Bank is increasing its international operations with some of its branches in high-risk countries. Any adverse event in these countries could lead to negative impact on bank's business and profitability. p rofitability.
Due to rising inflation, RBI has been following stringent credit norms leading to rise in cost of funds and slower credit growth for banks. This will put additional pressure on profitability of bank. 128
Banks are considered to be barometer of economy and have been major beneficiary of current economic boom. Any significant downturn in economy could affect bank adversely.
Bank of India needs to enhance their IT implementation in comparison with the private players.
Practical aspect of Learning from Bank B ank of India The experience at the Bank of India, Delhi Cantt. Branch in one of the largest Public Sector bank was a fulfilling fulfillin g one. During Durin g my time here I got to understand the t he intricacies involved in Corporate Banking. At Bank of India, Delhi Cantt. Branch I got the in depth study of the Corporate Banking operations at the bank. I had the chance to get exposure to the various trade finance products and services offered. The new trends and opportunities lying ahead for the bank were also studied. Also, I got a practical understanding of the Credit Appraisal process followed at Bank of India by analyzing the real-time proposals being worked at Bank of India. The Credit Policy helped to understand the various regulations followed at Bank of India. The Credit Rating system gives an insight to the various risk factors considered by Bank of India and also the risk management strategies followed at Bank of India. I also got an exposure to forex exchange transactions. I have learned how forward contacts are booked, how payments are received and made,how the communication is made with overseas banks. I found that summer training project provides a lot of learning opportunities. I gained a lot of knowledge about the practical aspect of fieldwork. Observing and learning how to deal with clients and how to solve their queries was an amaing experience. My exposure to the outer world through my training had given me a chance to relate my theoretical knowledge with its practical applicability. I have become more confident and I have also improved on my sense of appreciation.
129
In the end, the environment at the Bank was very helpful in intellectual development.
Annexure
BALANCE SHEET OF BANK OF INDIA (As on 31st march 2010,2011,2012) 31.03.10
31.03.11
31.03.12
Total Share Capital
525.91
547.22
574.52
Equity Share Capital
525.91
547.22
574.52
Share Application Money
0
0
0
Preference Share Capital
0
0
0
Reserves
12275.46
15423.99
19153.57
Revaluation Reserves
1428.62
1319.47
1233.7
CAPITAL
AND
LIABILITIES:
130
Net Worth
14229.99
17290.68
20961.79
Deposits
229761.94
298885.81
318216.03
Borrowings
22399.9
22021.38
32114.22
Total Debt
252161.84
320907.19
350330.25
8574.63
12974.69
13243.43
274966.46
351172.56
384535.47
15602.62
21782.43
14986.71
15627.51
15527.56
19724.55
Advances
168490.71
213096.18
248833.34
Investments
67080.18
85872.42
86753.59
Gross Block
3790.82
4020.14
4237.8
Accumulated Depreciation
1504.07
1654.19
1466.21
Net Fixed Assets
2286.75
2365.95
2771.59
Capital Work In Progress
65.07
114.8
48.63
Other Assets
5813.62
12413.22
11465.69
Total Assets
274966.46
351172.56
384535.47
Other
Liabilities
And
Provisions
Total Liabilities
ASSETS:
Cash And Balances With RBI Balances With Banks,Money At Call
131
PROFIT AND LOSS A/C OF BANK OF INDIA (for the year ended 31st march 2010, 2011,2012) (Rs. in crores) 31.03.10
31.03.11
31.03.12
Interest Earned
17878
21751.7
28480.7
Other Income
2616.64
2641.77
3321.17
Total Income
20494.6
24393.5
31801.8
Interest Expended
12122
13941
20167.2
Operating Expenses
3667.81
5068.24
4940.66
Total Expenses
15789.9
19009.3
25107.9
Operating Profit
4704.78
5384.22
6693.95
2210.93
1888.84
3116.43
Provision For Tax
752.78
1006.68
900
Net Profit
1741.07
2488.7
2677.52
Extraordinary Items
0
0
0
Profit B/F
0
0
0
Total
1741.07
2488.7
2677.52
Preference Dividend
0
0
0
Equity Dividend
307.21
428.65
444.3
Corporate Dividend Tax
0
0
0
INCOME:
EXPENDITURE:
Other
Provision
Contigencies
And
Pershare Data
132
Eps(Rs.)
33.11
45.48
46.6
Equity Dividend(%)
70
70
70
Book Value(Rs)
243.75
292.26
Transfer To Statutory Reserve
450
625
669.4
Transfer To Other Reserve
862.42
1419.4
1542.12
428.65
444.3
466
Balance C/F To Balance Sheet
0
0
0
Total
1741.07
2488.7
2677.52
Appropriations
Proposed Dividend/Transfer To Govt
Client Application Form
Std. No. SSID -29 P.A 10,000 Forms – 2 2- 98
BANK OF INDIA
APPLICATION FORM FOR CREDIT FACILITIES
133
APPLICATION FORM FORM FOR CREDIT FACILITIES OF OVER RS. 2 CRORE
Details about the Unit and its Management
Brief Description of the Industrial Activity
Funding Activities of the Unit
Repayment Source of Funds (*)
Securit
Rate
y
Int.
of per month
Present O/s
Amount of Default
(in 000s of Rs.)
(if any)
(*) (Indicate sources of funds with name & address, e.g., banks/ financial institutions/others (specify)
Arrears in Statutory Payments (if any)
Past Performance Enclose certified copies of the
134
(a) Memorandum and articles of Association
(b) Audited Balance Sheet and Trading and Profit and Loss A/cs for the three years of the promoter company.
(c) Copy of the agreement(s), if any. Entered into among the promoters.
Shareholding pattern
Employees Details
Details about associates firms
Technical feasibility (Please enclose the feasibility / project report)
Utilities (Give comments on requirement. availability/adequacy, qualitative aspects, etc.)
Details about the Effluent
Details about the quality control
135
Economic feasibility
Cost of Project (Please furnish estimates of cost of project under the following heads. Indicate the basis for arriving at the cost of project)
Means of Financing (Please furnish details of sources of finance for meeting the cost under the following heads)
Details about Promoter‟s contribution to the project
Financial Assistance Required
Schedule of Implementation (Please indicate the progress made so far in the implementation of the project and furnish the schedule of implementation.
Future Projections (To be given for the next five years)
Government Consents Repayment Programme
136
Details of Securities to be offered: Primary and Secondary (Working capital and term loan securities to be indicated separately)
Encl: Certified Xerox Xerox Copies Copies of
a) Audited Balance Sheets with Trading And Profit & Loss account, for the last three years.
b) Memorandum and Articles of Association, Certificate for Commencement of Business in case of limited companies…
c) Income Tax, Wealth Tax Returns and assessment orders for the last three years. for the unit as well as proprietor/partners/promoters/directors.
d) Sales Tax Returns and assessment orders for the last three years.
BANK OF INDIA
137
Bio-data form
Details of existing fixed assets
Particulars of buildings proposed to be constructed
Particulars of machinery
Projections of performance, profitability and repayment
Cash flow statement
Projected balance sheet
Assessment of working capital requirements
Checklist for entrepreneurs entrepreneurs
1.
BANK OF INDIA WELCOMES YOU TO apply for credit facilities to finance your Small Scale Unit.
138
2.
We consider it as YOUR RIGHT to get loans from us for your viable and creditworthy projects. Our simplified procedures proced ures will speed up the processing p rocessing of your application. appl ication.
3.
Whilst we recognize your right, you have a corresponding RESPONSIBILITY to earnestly Implement your project and repay our dues as per terms agreed to at the time of sanction
Kindly follow the instruction given below : i) Select appropriate application given bellow: Form No. SSID 26 for loans upto Rs. 5 lakhs. Form No. SSID 27 for loans upto Rs. 50 lakhs. Form No. SSID 28 for loans upto Rs. 2 crores. Form No. SSID 29 for loans above Rs. 2 crores.
ii) Please fill in all details sought in the form. If you wish to furnish any additional data /information, it may be submitted as an annexure. iii) Kindly ensure that all the documents enlisted in the application form are tendered alongwith the form.
Generally, following documents are required for credit limits over Rs. 5 lakhs : a) Balance sheets with Trading and Profits and Loss account, for the last three years. b) Memorandum and articles of Association, Certificate for Commencement of Business. c) Income Tax, Wealth Tax Returns and assessment orders for the last three years. 139
d) Sales Tax Returns for the last three years. e) Copy of sale/lease deed of land and building/factory shed/gala etc. f) Copy of Government order converting the land into industrial land, if applicable. g) Copy of site plan of land and building, duly approved by local authority. h) Copy of sanction of adequate water and power connection. i) CMA data if ANNEXURE III and IV of the form not filled in. j) Quotation/catalogues/invoice in respect of each machine to be purchased. k) Assets & Liabilities Statement – (CBD23) duly filled in by all partners/guaranters/ promoters – directors directors alongwith proof of ownership of assets listed therein. l) Copy of Title deeds of Property proposed as a collateral security.
140
References
Bank of India, Branch Circulars, Ref: CBB, Sub: Credit Appraisal
Bank of India, Client Proposals, Ref: CBB, Sub: Advances Operations
Bank of India, Reference Manual for Corporate Banking Relationship Manager, product Guide, Version – 4, 4, Jan 2008
Bank of India, Branch Circular No. 101/84 dated 04.08.07, Sub: Exposure on Roads and Highways under Public Private Partnership.
Bank of India, Credit Policy of the Bank for the Financial year 2007-2008
Mukherjee D. D., ed. 2006. Credit Appraisal, Risk Analysis and Decision Making, Mumbai-SnowWhite.
Financial Accounting ,a managerial perspective by Ashok Banerjee.
www.bankofindia.com
www.moneycontrol.com
www.rbi.org.in
www.scribd.com
www.slideshare.com
www.sirfpaisa.com
141
www.sulekhab2b.com
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