a project report on credit risk rating analysis at sbi commercial branch

“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

EXECUTIVE SUMMARY

The State Bank of India has been, over the years, the flagship of Indian banking. State

Bank of India is the largest bank in India with deposits of Rs 3,67,000 crores as on March

31, 2005. It dominates the Indian banking sector with a market share of around 20% in

terms of total banking sector deposits. The increasing focus on upgrading the technology

back-bone of the bank will enable it to leverage its reach better, improve service levels,

provide new delivery platforms, and improve operating efficiency to counter the threat of

competition effectively. SBI will maintain a good earnings profile in the medium term

despite high pressure on yields due to the increasing competition in the banking sector.

SBI’s earning profile is characterised by consistency in the return on assets

(PAT/Average Assets), at around 1% per annum for the past three years, and diverse

income streams. To maintain yields and pursue credit growth, the bank is aggressively

targeting retail finance and small and medium enterprises (SMEs).

The project was being undertaken at State Bank of India Commercial Branch, Belgaum.

A study on Organisation, operations, products & services of State Bank of India was

done. The project focuses upon the credit rating risk assessment practiced by State Bank

of India. A brief study on M/s Margale Foundries was done. The Credit risk rating

assessment mechanism, financial statements like Balance Sheet, Ratio Analysis of

Margale Foundries was studied. The area covered for the study of credit Rating Risk

Assessment of Margale Foundries by State Bank of India are the industrialists in and

around Belgaum who have availed loan facilities from State Bank of India. The Title of

the project is “A Study on Credit Risk Assessment of M/s Margale Foundries in State

Bank of India” The important findings of the study are during the year 2004-2005, the

current ratio was at 1.00 as against the estimate of 1.10. This is due to locking up of

receivables with SAME deutz Fahr India P. Ltd. The delay in realization of receivables

hindered the unit from producing upto the mark and selling more.

Some of the suggestions are the unit’s Current Ratio is 1, it should be improved by

infusing long term funds. As there was delay in realisation of receivables the unit should

take steps to stop supplying to default customers & try to acquire new customers. Banks

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must have a MIS to enable them to manage and measure the credit risk inherent in all on

and off-balance sheet activities.

CONCLUSION

The banking system must be prepared to deal with the opportunities of higher growth,

and the challenges of ensuring more equitable growth. In dealing with the needs of rural

enterprises and of small and medium enterprises in urban areas, banks have to look for

new delivery mechanisms. These must economise on transaction costs and provide better

access to the currently under-served. To serve new rural credit needs, innovative channels

for credit delivery will have to be found. The State Bank of India is India's largest

commercial bank and is ranked one of the top five banks worldwide. It serves 90 million

customers through a network of 9,000 branches and it offers -- either directly or through

subsidiaries -- a wide range of banking services.

RISK MANAGEMENT

Risks are inherent in any financial intermediation and hence the bank is exposed to

certain risks that arise from its business and the environment within which it operates.

The bank has developed and is implementing various guidelines for managing risks like

setting up exposure limits, systematic internal controls and risk management systems

with consistent approach.

In order to manage risks, organizations need to be able to measure those risks

prospectively. They need to know, based on their current position, how much risk are

they taking. Organizations are addressing this challenge with statistical risk measures.



OVERVIEW OF BANKING SECTORThe 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:

Early phase from 1786 to 1969 of Indian Banks

Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

HISTORICAL PERSPECTIVE

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. In 1921, all

presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank

carried out limited central banking functions also prior to establishment of RBI. It

engaged in all types of commercial banking business except dealing in foreign exchange.

Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was

constituted as an apex bank without major government ownership. Banking Regulations

Act was passed in 1949. This regulation brought Reserve Bank of India under

government control. Under the act, RBI got wide ranging powers for supervision &

control of banks. The Act also vested licensing powers & the authority to conduct

inspections in RBI. In 1955, RBI acquired control of the Imperial Bank of India, which

was renamed as State Bank of India. In 1959, SBI took over control of eight private

banks floated in the erstwhile princely states, making them as its 100% subsidiaries. RBI

was empowered in 1960, to force compulsory merger of weak banks with the strong ones.

The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. In July

1969, government nationalised 14 banks having deposits of Rs.50 crores & above. In

1980, government acquired 6 more banks with deposits of more than Rs.200 crores.

Nationalisation of banks was to make them play the role of catalytic agents for economic

growth. The Narsimham Committee report suggested wide ranging reforms for the



banking sector in 1992 to introduce internationally accepted banking practices.The

amendment of Banking Regulation Act in 1993 saw the entry of new private sector

banks.Banking Segment in India functions under the umbrella of Reserve Bank of India -

the regulatory, central bank. This segment broadly consists of:

1. Commercial Banks

2. Co-operative Banks

Nationalisation Of Banks In India

The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then

prime minister. It nationalised 14 banks then. These banks were mostly owned by

businessmen and even managed by them. Before the steps of nationalisation of Indian

banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under

the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary)

took place on 19th July, 1960.

INTRODUCTION TO BANKING

Banks safeguard money and valuables and provide loans, credit, and payment services,

such as checking accounts, money orders, and cashier's checks. With the passage of the

Financial Modernization Act in 1999, banks also may offer investment and insurance

products, which they were once prohibited from selling. As a variety of models for

cooperation and integration between the financial services industries have emerged, some

of the traditional distinctions between banks, insurance companies, and securities firms

have diminished. In spite of these changes, banks continue to maintain and perform their

primary role in the financial system—accepting deposits and lending funds from these

deposits

TYPES OF BANKS


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BANKS 1998-99

State Bank of India and Associates 08

Nationalized Banks 19Domestic Private Sector Banks 25

New Domestic Private Sector Banks 09

Foreign Banks 29

TYPES OF BANKING SERVICES

There are several types of banks, which differ in the number of services they provide and

the clientele they serve. Although some of the differences between these types of banks

have lessened as they begin to expand the range of products and services they offer, there

are still key distinguishing traits. Commercial banks, which dominate this industry, offer

a full range of services for individuals, businesses, and governments. These banks come

in a wide range of sizes, from large global banks to regional and community banks.

Global banks are involved in international lending and foreign currency trading, in

addition to the more typical banking services. Regional banks have numerous branches

and automated teller machine (ATM) locations throughout a multi-state area that provide

banking services to individuals. Community banks are based locally and offer more

personal attention, which many individuals and small businesses prefer. In recent years,

online banks—which provide all services entirely over the Internet—have entered the

market, with some success. However, many traditional banks have also expanded to offer

online banking, and some formerly Internet-only banks are opting to open branches.

The Indian Banking System:Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks

and non-scheduled banks. The scheduled banks are those, which are entered, in the



Second Schedule of RBI Act, 1934. Such banks are those, which have a paid-up capital

and reserves of an aggregate value of not less than Rs.5 lacs and which satisfy RBI that

their affairs are carried out in the interest of their depositors. All commercial banks-

Indian and Foreign, regional rural banks and state co-operative

banks-are Scheduled banks. Non-Scheduled banks are those, which have not been

included in the Second Schedule of the RBI Act, 1934. The organized banking system in

India can be broadly divided into three categories:

(i) Commercial banks, (ii) Regional Rural Banks and (iii) co-operative banks. The

Reserve Bank of India is the supreme monetary and banking authority in the country and

has the responsibility to control the banking system in the country. It keeps the reserves

of all commercial banks and hence is known as the “Reserve Bank”. Commercial Banks

has been in existence for many decades. Commercial banks mobilize savings in urban

areas and make them available to large and small industrial and trading units mainly for

working capital requirements. After 1969 commercial banks are broadly classified into

nationalised or public sector banks and private sector banks.

COMMERCIAL FINANCING

The commercial financing model in Indian banking can be broadly categorized into project finance and working capital finance. These two segments form the pivot around which banks operate.

PROJECT FINANCE

Banks offer long term and short terms loans to business houses, corporations to set up their projects. These loans are disbursed after the approval from the banks’ core credit validating committee. In India, there are 11 national level land 46 state level financial and investment institutions that cater to long term funding requirements of the industry. The project finance segment is highly competitive with various players offering innovative schemes to entice corporate.WORKING CAPITAL



In order to meet the diverse needs and requirements of the business community, banks

offer working capital funds to corporate. Working capital finance is specialized line of

business and is largely dominated by the commercial banks. The Indian banking saw

dramatic changes in the last decade or so ever since the advent of liberalization and

India’s integration with the world economy. These economic reforms and the entry of

private players saw nationalized banks revamp their service and product portfolio to

incorporate new, innovative customer-centric schemes. The Indian banking finally woke

up to the surging demands of the ever-discerning Indian consumer. The need to become

highly customer focused (generated by high competitive levels) forced the slow-moving

public sector banks to adopt a fast track approach. Taking a leaf out of the private sector

banks, the public sector banks too went for major image changes (including corporate

brand building exercises) and customer friendly schemes. Marketing and brand building

programs were also given a new thrust in the new liberalized banking scenario.

Promotional budgets were hiked to cater to the new and large discerning target audience.

Banks were now keen on marketing their products and service though various mediums

to reach their core customers. Direct marketing, Internet marketing, hoarding, press ads,

television sponsorships, image makeovers etc. became an integral part of a bank’s

marketing mix. To meet the personalized needs of the customer and in order to

differentiate its services, banks repositioned themselves in specialized fields, like housing

loans, car finance, educational loans etc. to optimally service the customer. Permission

marketing became the new strategy that banks began to propound i.e. feeding the

customer (with his or her consent) with product and service information and thereby

enticing him towards the bank’s product service portfolio.

NEW GENERATION BANKING

The liberalize policy of Government of India permitted entry to private sector in the banking, the industry has witnessed the entry of nine new generation private banks. The major differentiating parameter that distinguishes these banks from all the other banks in the Indian banking is the level of service that is offered to the customer. Verify



the focus has always been centered around the customer – understanding his needs, preempting him and consequently delighting him with various configuration of benefits and a wide portfolio of products and services. These banks have generally been established by promoters of repute or by ‘high value’ domestic financial institutions. The popularity of these banks can be gauged by the fact that in a short span of time, these banks have gained considerable customer confidence and consequently have shown impressive growth rates. Today, the private banks corner almost four per cent share of the total share of deposits. Most of the banks in this category are concentrated in the high-growth urban areas in metros (that account for approximately 70% of the total banking business ). With efficiency being the major focus, these banks have leveraged on their strengths and competencies viz. Management, operational efficiency and flexibility, superior product positioning and higher employee productivity skills. The private banks with their focused business and service portfolio have a reputation of being niche players in the industry. A strategy that has allowed these banks to concentrate on few reliable high net worth companies and individuals rather than cater to the mass market. These well-chalked out integrates strategy plans have allowed most of these banks to deliver superlative levels of personalized services. With the Reserve Bank of India allowing these banks to operate 70% of their businesses in urban areas, this statutory requirement has translated into lower deposit mobilization costs and higher margins relative to public sector banks.

FUNCTIONING OF A BANK

Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the Babasabpatilfreepptmba.com


public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise."

Banks essentially perform the following functions:

Accepting Deposits from public/others (Deposits) Lending money to public (Loans)

Transferring money from one place to another (Remittances)

Acting as trustees

Keeping valuables in safe custody

Government business

BANKING PRODUCTS

Banks in India have traditionally offered mass banking products. Most common deposit

products being

Savings Bank

Current Account

Term deposit Account

Lending products being

Cash Credit

Term Loans.

In view of several developments in the 1990s, the entire banking products structure has

undergone a major change. IT revolution has made it possible to provide ease and

flexibility in operations to customers. Rapid strides in information technology have, in

fact, redefined the role and structure of banking in India. Further, due to exposure to

global trends after Information explosion led by Internet, customers - both Individuals

and Corporates - are now demanding better services with more products from their banks.

Financial market has turned into a buyer's market. Banks are also changing with time and


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are trying to become one-stop financial supermarkets. Market focus is shifting from mass

banking products to class banking with introduction of value added and customised

products. Products like debit cards, flexi deposits, ATM cards, personal loans including

consumer loans, housing loans and vehicle loans have been introduced by a number of

banks.

COMMERCIAL BANKING IN INDIA

India has a well developed banking system. Most of the banks in India were founded by

Indian entrepreneurs and visionaries in the pre-independence era to provide financial

assistance to traders, agriculturists and budding Indian industrialists. Indian banks have

played a significant role in the development of Indian economy by inculcating the habit

of saving in Indians and by lending finance to Indian industry.

The commercial banking structure in India consists of: Scheduled Commercial Banks and

Unscheduled Banks. Scheduled commercial Banks constitute those banks, which have

been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI

includes only those banks in this schedule, which satisfy the criteria laid down vide

section 42 (6) (a) of the Act.Indian banks can be broadly classified into nationalised

banks/public sector banks, private banks and foreign banks.

The commercial banking structure in India consists of:

Scheduled Commercial Banks Unscheduled Banks

Scheduled Banks in India constitute those banks which have been included in the Second

Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those

banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the

Act.As on 30th June, 1999, there were 300 scheduled banks in India having a total

network of 64,918 branches.The scheduled commercial banks in India comprise of State

bank of India and its associates (8), nationalised banks (19), foreign banks (45), private

sector banks (32), co-operative banks and regional rural banks.



"Scheduled banks in India" means the State Bank of India constituted under the State

Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of

India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted

under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings)

Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and

Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank

included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but

does not include a co-operative bank".

STATE BANK OF INDIAINTRODUCTION OF BANK

The Bank is actively involved since 1973 in non-profit activity called Community

Services Banking. All the branches and administrative offices throughout the country

sponsor and participate in large number of welfare activities and social causes. Its

business is more than banking because it touches the lives of people anywhere in many

ways.

SBI’s commitment to nation-building is complete & comprehensive

State Bank of India (SBI) was nationalised in July 1955 under the SBI Act of 1955.

Seven banks of SBI formed subsidiary and was nationalised on 19th July, 1960.

The State Bank of India is India's largest commercial bank and is ranked one of the top

five banks worldwide. It serves 90 million customers through a network of 9,000

branches and it offers -- either directly or through subsidiaries -- a wide range of banking

services.

HISTORY OF STATE BANK OF INDIA

The Imperial Bank of India

The origins of the State Bank of India go back to the early years of the nineteenth century. To Calcutta, then the capital of British India and a bustling city with an active mercantile community. It was in this environment that the Bank of Calcutta was established in 1806. Later renamed the Bank of Bengal, it was the first of the three Presidency



Banks. The second, the Bank of Bombay, followed in 1840 and the third, the Bank of Madras, in 1843. Created out of the needs of the mercantile community the three Presidency Banks, nevertheless, introduced the banking habit to others and so helped to lay the foundation of a modern banking system in India. In 1921, the three Presidency Banks were merged to form the Imperial Bank of India. Inevitably, the Imperial Banks role expanded. It became the premier bank in India .And till the creation of the Reserve Bank o India in 1935; it was entrusted with certain Government banking functions.

Including the cash work of the Government. However, its growth was confined to commercial centers leaving almost three fourths of India untouched. In banking terms, while urban India progressed, rural India stagnated

The State Bank of India

In 1947 came Independence. And with the era of economic planning began. The development of industry, the building of the vast dams, giant steel plants, and essential thermal power plants heralded a shift from what, till then, had been traditionally an agriculture and trade based economy.With the metamorphosis of the economy, banking had even more of a key role to play. For if the industrialisation of the country was to keep in step with the upliftment of agriculture there

was a need for a bank that could serve both.In 1955, by an Act of Parliament, the Imperial Bank of India was reconstituted. And so was born the State Bank of India. With a new sense of social purpose and over 130 years of banking experience.In 1959, eight banks of the former princely states became associates of the State Bank. And the

State Bank Group was now poised for a dynamic thrust forward in



India’s banking scene. The first step was reaching more people. Especially in rural India. Though, by 1960, the State Bank had almost doubled the number of its offices to 882, the real breakthrough was not in the Bank’s size. There was a sea change in the very concept of banking; from banking for the classes to banking for the masses. It was a change that started a surge of growth that made the State Bank even more relevant in the context of the national economy. It was a change that evolved as a result of State Bank’s growing awareness of the problems that beset a developing nation’s economy. Through all

this, of course, the Bank continued to be the premier banking institution in the country. For instance, as it did in its days as the Imperial Bank of India, the State Bank continues to conduct Government banking business. It acts as the agent of the Reserve Bank of India in places where the Reserve Bank has no offices. The State Bank also maintains currency chests in over 2000 offices all across the country to ensure an adequate and continuous circulation of currency notes and coins. And because of its vast and ever expanding domestic and global network, the Bank offers services that have few parallels

.ABOUT STATE BANK OF INDIA

The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India in terms of profits, assets, deposits, branches and employees. With a network of over 9,000 branches in India and 51 foreign offices in 32 countries, the Bank commands about one-fifth of the total deposits and loans in all scheduled commercial banks in the country. State Bank of India is the successor to Imperial Bank of India. The latter was established in 1921 with the amalgamation of three Presidency



Banks of Bombay, Bengal and Madras. State Bank of India came into being on 1.7.1955 through the State Bank of India Act, 1955. The Banks of erstwhile princely states of India joined the State Bank Group as subsidiaries under the State Bank of India (Subsidiary Banks) Act 1959. Over the years, the Bank has expanded rapidly. The Reserve Bank of India is the single largest shareholder of the Bank (with 59.73% stockholding followed by 14.1% NRI/FIIs, 11.8% financial institutions, 11.1% individuals and remaining with mutual funds and corporates). SBI's shares and bonds are listed for trading on all the major Indian stock exchanges. Its GDR is listed on the Luxembourg Stock Exchange. With a view to inculcating transparency in banking transactions and for providing information to customers, the Bank launched a Citizen's Charter in the form of the Code of Fair Banking Practices together with the General Terms and Conditions of Service. Appropriately named, 'Towards Excellence' Code reflects the Bank's commitment to provide service of the highest order and serves as a document of self-discipline.

ASSOCIATE BANKS State Bank of India has the following seven Associate Banks (ABs) with controlling interest ranging from 75% to 100%.

1. State Bank of Bikaner & Jaipur (SBBJ)2. State Bank of Hyderbad (SBH)

3. State Bank of Indore (SBIR)

4. State Bank of Mysore (SBM)

5. State Bank of Patiala (SBP)

6. Sate Bank of Saurashtra (SBS)



7. Sate Bank of Travancore (SBT)

Branch Network

Interactive branch locator allows to establish contact with any of the over 8900 SBI branches in India.

Worldwide network of SBI Bank

SBI Bank India has 52 Foreign Offices in 34 countries. SBI India serves the international needs of its foreign customers, in addition to conducting retail operations. The focus of the offices of SBI is India-related business.

LocationHeadquartered in Mumbai, SBI has hundreds of branches all over the country. It also has 52 foreign offices in 34 countries

Sharing Social responsibilities

Be it victims of earthquake at Lathur or Bhuj or the Tsunami State Bank of India

has contributed to the Prime Minister and Chief Minister’s Relief Funds.

Funded socially oriented projects for health & education.

Conducted camps for blood donation, adult literacy, medical check up

Initiated awareness programmes for AIDS, Cancer, TB, Anti Drug-addiction and

supported more than 100 organisations on an average, every year

SHAREHOLDING PATTERN FORM - AName of the Company: State Bank of India



Scrip Code - 112 Quarter Ended - 30.09.2005

Category Code Category

No. of Shares

held% of

Shareholding

I CONTROLLING / STRATEGIC HOLDINGSA BASED IN INDIA1 Indian Individuals/HUFs & Relatives 2 Indian Corporate Bodies/Trusts/Partnerships

3 Persons acting in Concert (also include Suppliers/Customers) 314338700 59.73

4 Other Directors & Relatives ( other than in I above )

5 Employee Welfare Trusts/ESOPs (already converted into shares)

6 Banks/ Financial Institutions 7 Central / State Govt. 8 Central / State Govt. Institutions 9 Venture Funds / Private Equity Funds

Sub Total A 314338700 59.73

B BASED OVERSEAS

10 Foreign Individuals ( including FDI ) 11 Foreign Corporate Bodies ( including FDI ) 12 Non Resident Indians (individuals) 13 Non Resident Indians Corporate Bodies

Sub Total B NIL NIL

C GDR,s/ADRs/ADSs

Sub Total C NIL NIL

D OTHERS ( Please specify here )

Sub Total D NIL NIL

E ANY OTHER SHARES LOCKED-IN ( except covered above)

Sub Total E NIL NIL

SUB TOTAL I 314338700 59.73

Category Category No. of Shares % of



Code held ShareholdingII FREE FLOATA BASED IN INDIA1 Indian Individuals/HUFs 29886541 5.682 Indian Corporate Bodies/Trusts/Parterships 9107916 1.733 Independent Directors & Relatives 0 0.004 Present Employees (Physical shareholdings ) 4095183 0.785 Banks/Financial Institutions 28089406 5.346 Central / State Govt. 469514 0.097 Central / State Govt.Institutions 0 0.008 Insurance Companies 4145516 0.799 Mutual Funds 31823315 6.0510 Venture Funds/Private Equity Funds 0.0011 Customers 0.0012 Suppliers 0.00

Sub Total A 107603244 20.45

B BASED OVERSEAS

13 Foreign Individuals 0 0.0014 Foreign Corporate Bodies 175206 0.0315 Foreign Institutional Investors (SEBI - registered ) 62443178 11.8616 Non Resident Indians ( Individuals ) 256565 0.0517 Non Resident Indian Corporate Bodies 0.00

Sub Total B 62874769 11.95

C GDRs/ADRs/ADSs 41468018 7.88

Sub Total C 41468018 7.88

D OTHERS ( Please specify here )

Sub Total D

Sub Total II 211960178 40.27 GRAND TOTAL 526298878 100.00

BROAD SUMMARY OF HOLDINGSNo. of Shares

held% Of

Shareholding

Total Controlling / Strategic Holdings 314338700 59.73

Total Free-Float 211960178 40.27

GRAND TOTAL 526298878 100.00



SUMMARY OF DOMESTIC/FOREIGN HOLDINGSNo. of Shares

held% of

Shareholding

Total Domestic Holdings 107617391 20.45

Total Foreign Holdings 104342787 19.83

GRAND TOTAL 211960178 40.27

CLAUSE 35: BOMBAY STOCK EXCHANGE Reporting Institution: State Bank of India For the quarter ended: 30.09.2005 Date of report: 08.07.2005

CATEGORY SHARES HELD % to Total

A Promoter's Holdings

1 Promoters - Indian Promoters 0 0.00

- Foreign Promoters 0 0.00

2 Persons acting in Concert 314338700 59.73

Sub-Total 314338700 59.73

B Non-Promoters Holdings

3 Institutional Investors a Mutual Funds & UTI 31832695 6.05

b Banks, Financial Instituions, Insurance Companies(Central/State Govt./Non-govt. Institutions) 32695056 6.21

c FIIs 62443178 11.86

Sub-Total 126970929 24.13

4Others

a Private Corporate Bodies 8952860 1.70b Indian Public 33981724 6.46c NRIs 256565 0.05



d OCBs 175026 0.03e TRUST's 155056 0.03f OTHERS ( GDR'S) 41468018 7.88

Sub-Total 84989249 16.15

GRAND TOTAL 526298878 100.00

FORM C: FREE-FLOAT HOLDERS (DISCLOSE ONLY HOLDINGS OF 1% & ABOVE) (List of holders categorywise) Reporting Institution: State Bank of India Scrip Code - 112 Quarter Ended - 30.09.2005

SL NO HOLDER NAME

No. of Shares HELD

% of Shareholding

Category Code

Relationship, if any with anyone in I

1 The Bank Of New York 41468018 7.88

2 Life Insurance Corporation Of India 28199611 5.36

3Fidelity Management & Research Co. A/CFidelity Investment Trust - Fidelity

7200000 1.37

GRAND TOTAL 77713732 14.77

STATE BANK FOREIGN OFFICESThere are 52 Foreign Offices in 34 countries service the international needs of the bank's

foreign customers, in addition to conducting retail operations. The focus of these offices

is India-related business.

PROFILE The SBI’s powerful corporate banking formation deploys multiple channels to

deliver integrated solutions for all financial challenges faced by the corporate universe.

The Corporate Banking Group and the National Banking Group are the primary delivery

channels for corporate banking products. The Corporate Banking Group consists of

dedicated Strategic Business Units that cater exclusively to specific client groups or

specialize in particular product clusters. Foremost among these specialized groups is the

Corporate Accounts Group (CAG), focusing on the prime corporate and institutional

clients of the country’s biggest business centers. The others are the Project Finance unit



and the Leasing unit. The National Banking Group also delivers the entire spectrum of

corporate banking products to other corporate clients, on a nationwide platform.

PRODUCTS AND SERVICES

INDUSTRIAL SECTORWorking Capital Financing

SBI offers working capital finance to meet the entire range of short-term fund

requirements that arise within a corporate’s day-to-day operational cycle.The SBI

working capital loans can help your company in financing inventories, managing internal

cash flows, supporting supply chains, funding production and marketing operations,

providing cash support to business expansion and carrying current assets. SBI’s working

finance products comprise a spectrum of funded and non-funded facilities ranging from

cash credit to structured loans, to meet the different demands from all segments of

industry, trade and the services sector. Funded facilities include cash credit, demand loan

and bill discounting. Demand loans are considered also under the FCNR (B) scheme.

Non-funded instruments comprise letters of credit (inland and overseas) as well as bank

guarantees (performance and financial) to cover advance payments, bid bonds etc.

Project Finance

The SBI has formed a dedicated Project Finance Strategic Business Unit to assess credit

proposals from and extend term loans for large industrial and infrastructure projects.

Apart from this, project term loans for medium sized projects and smaller clients are

delivered through the CAG and the NBG.In general, project finance covers industrial

projects, capacity expansion at existing manufacturing units, construction ventures or

other infrastructure projects. Capital intensive business expansion and diversification as

well as replacement of equipment may be financed through the project term loans. Project

finance is quite often channeled through special purpose vehicles and arranged against

the future cash streams to emerge from the project. The loans are approved on the basis

of strong in-house appraisal of the cost and viability of the ventures as well as the credit

standing of promoters.

SBI deferred payment guarantee



SBI can extend deferred payment guarantees to industrial projects for obtaining imported

equipment. The DPG is a standby credit guaranteeing deferred payments, usually for

payments for capital goods, turnkey contracts etc.

Corporate Term Loan

The SBI corporate term loans can support your company in funding ongoing business

expansion, repaying high cost debt, technology upgradation, R&D expenditure,

leveraging specific cash streams that accrue into your company, implementing early

retirement schemes and supplementing working capital.Corporate term loans can be

structured under the FCNR (B) scheme as well, with the option of switching the currency

denomination at the end of interest periods. This will help you take advantage of global

interest rate trends vis-à-vis domestic rates to minimize your debt cost. The bank’s

corporate term loans are generally available for tenors from three to five years,

synchronized with your specific needs.SBI corporate term loans may carry fixed or

floating rates, as befits the exact requirement of the client and the risk context. Again,

these rates will be linked to the bank’s prime lending rate.SBI corporate term loans can

have a bullet or periodic repayment schedule, as required by the client. The repayment

mode may be linked to the cash accruals of the company.The Bank’s expert credit crew

gauges the applicant’s particular fund requirements and evaluates the company’s credit

worthiness, factoring in the cash flows generated by it.

Structured Finance

SBI structured finance involves assembling unique credit configurations to meet the

complex fund requirements of large industrial and infrastructure projects. Structured

finance can be a combination of funded and non-funded facilities as well as other credit

enhancement tools, lease contracts for instance, to fit the multi-layer financial

requirements of large and long-gestation projects.

SBI advantage in structured finance

Being India’s largest bank and with the rich experience that it brings with it, SBI

commands formidable expertise in engineering financial packages that address complex

requirements with minimum risk. Further, SBI has firm relationships across the financial



map of the world, which can be leveraged to structure solutions that may necessitate the

participation of several credit agencies.

Dealer Financing

SBI extends financial support to the corporate distribution networks, by providing both

working capital finance and term loans to select dealers of identified companies. This

gives dealers to leverage their business relationship with major corporates to avail low

cost credit. Also, this type of financial solutions allows the corporate negotiate a better

price with dealers. Dealer financing may be extended in the bill discounting form or

simply as cash credit.

Channel Financing

Channel financing is an innovative finance mechanism by which the bank meets the

various fund necessities along your supply chain at the supplier’s end itself, thus helping

you sustain a seamless business flow along the arteries of the enterprise. Channel finance

ensures the immediate realization of sales proceeds for the SBI client’s supplier, making

it practically a cash sale. On the other hand, the corporate gets credit for a duration

equaling the tenor of the loan, enabling smoother liquidity management.SBI has the

world’s largest banking network of over 9,000 branches and this enables it to deliver the

financial solution at your suppliers’ doorsteps, across the span of the country.

Equipment Leasing

The SBI’s has deployed a dedicated Strategic Business Unit for lease financing that is

richly experienced in arranging lease contracts for procuring expensive equipment for

your project or plant. At SBI, we arrange lease agreements as stand alone contracts or as

part of a structured package.

Loan Syndication

The SBI leverages its vast network of relationships to arrange syndicated credit products

for corporate clients and industrial projects. With its rich experience and strong

reputation, SBI’s syndication desk can assemble large loan packages involving a ring of

reputed financial entities, domestic and international, that match the large credit

requirements of infrastructure projects.

TRADE and SERVICES SECTOR



Eligibility Profit making Corporates/Non-corporates (surface transport operators) owning more than 10 well-maintained vehicles (including the proposed).

Quantum of finance

Minimum Rs. 10 lacs and maximum Rs. 10 crores.

RepaymentTerm Loan: Maximum 5 years.

Repayment will be in Equated Monthly Installments (EMI), starting two months after disbursement. Cash Credit: Repayable on demand, renewal every year.

Eligible amount of finance

Term Loan: 100 % of the cost of the chassis, inclusive of excise duty. Other expenses are to be borne by the borrower. Where body building is not required, 80 % of the cost of the vehicle will be financed. An additional Term Loan limit, subject to a maximum of 20% of the original limit may be sanctioned for repair of the vehicle, on or after the 3rd year if the loan account is regular.Cash Credit : 80% of receivables.

PrepaymentTerm Loan: Maximum 1% p.a. on the pre-paid amount, for the residual period.

Rate of Interest



For Term loans, 8.50% p.a. with monthly rests and for Cash Credit, 11.75% p.a. with monthly rests.

Security Primary: Hypothecation of vehicles financed as well as book debts. Collateral:

i) At least 50% of the loan amountii) Personal guarantee of promoters and two third-party

guarantors.

Applicability Metro/urban/semi-urban centers

Bill Finance

The bank’s bill finance product helps you bridge the fund gap between the date of sale of products to the receipt of payments. The bank purchases the bill of exchange your company receives against a product sale, at a discount, thus doing away with the delay in realizing the receivables.The extent of discounting would amount to the interest calculated till the payments for the original sale are realized, and will be determined on the basis of market interest rates as well as the credit rating of the borrower.

Cash Credit for Traders

SBI cash credit can be in the form of a running account, similar to an overdraft secured by a charge on current assets, that meets the frequent cash requirements of your trading cycle.



Term Loan for Asset Acquisition

The specialized product has been designed to help you purchase plant, machinery, land or other physical assets required during the growth and expansion of the your company.

Letters of Credit

The SBI offers Letters of Credit to facilitates your purchases of goods in trading operations, both domestic and international. Backed by the SBI’s strong reputation, you will be able to build better trust in trade and forge business relationships faster.The bank’s vast network of branches and correspondent banks enables your enterprise to sustain a seamless flow of business on a wide platform.Further, the bank’s informed trade finance crew can provide you with sophisticated credit and trade information and market knowledge, helping you extract more value from business.

Bank Gaurantees

The SBI guarantees the creditworthiness or the business capacity of its clients through its financial and performance guarantees.

Small and Medium EnterprisePROJECT UPTECHSBI extends consultancy services through PROJECT UPTECH for technology upgradation of small-scale industries. The bank's Consultancy Cells are trained for comprehensive techno-managerial studies and the bank offers financial packages as follow-up support for implementation of the upgradation ventures.



Management Consultancy Services The Bank's Consultancy Services Cells are established in the Bank's Local Head Offices and offer support to clients by:

Counseling young entrepreneurs Organizing short-term Entrepreneurial Development and

Industrial Management Programmes

Techno economic feasibility reports; project appraisals; short market survey

Techno managerial studies of individual firms for enhancing their competitiveness in key areas like marketing, costing and pricing, MIS and corporate delivery systems.

Technology Upgradation

As an extension of its Management Consultancy Services and for supporting client's efforts for modernization, the bank has set up an Industrial Technology Group engaged in the following tasks:

Enhancing technology awareness among industrialists Catalyzing a step-up in quality, productivity and cost

effectiveness

Disseminating technological/market information

GENERAL PURPOSE TERM LOANS

State Bank of India grants term loans to small scale industries for meeting general

commercial purposes like substitution of high cost debt, research and development,

shoring up net worth and funding business expansion.The tenor of the loan is normally

is 3 years, and the pricing is fine-tuned to suit the risk profile of the borrower. The



repayment is structured in monthly or quarterly installments, according to the cash

generation cycle.

Eligibility criteria for these term loans

The SSI unit that takes the loan should not have any history of defaults in payment of

interest or installments of the principal. The unit should have a strong performance record

and a respectable credit rating as per the bank’s own credit assessment scales ( In case of

loan above Rs. 25 lakhs )

Type of security/guarantee required for the loan

Extension of hypothecation charge over the current assets and fixed assets is required as

primary security. Further, the borrower whose aggregate loans with the Bank exceed Rs 5

lakh may explore the possibility of collateralizing tangible security such as immovable

property and third party guarantee. In all cases, personal guarantees of

proprietors/partners/promoters have to be furnished.

Margins applicable

A minimum margin of 25 per cent is applicable for acquisition of land and building,

building construction, renovation of offices, showrooms, godowns, purchase of

equipment, vehicles etc. In other words, the quantum of the loan will be restricted to 75

per cent of the total expenditure.

LIBERALIZED CREDIT FOR SSI

State Bank of India extends production-linked credit facilities to small-scale industries,

ancillary industrial units and village and cottage industrial units on liberal terms and

conditions.

Under this scheme, the quantum of advances is not linked to the security

furnished, but the genuine requirements of the unit. The pricing of the loan is based

on credit assessment, and the units with strong ratings may be given finer rates.

No collateral security is required for loans up to Rs 5 lakh. Composite term loans

can be sanctioned up to Rs 25 lakh combining term loan and working capital.

Types of financial assistance under the Liberalized scheme



A. The Liberalized scheme offers a range of financial products including the following:

1. Term loans for acquisition of fixed assets

2. Working capital loans financing current assets

3. Letter of credit for acquisition of machinery and purchase of raw materials

4. Bank guarantee in lieu of security deposits to be made with government

department/other departments for execution of orders.

5. Deferred payment guarantees for purchase of machinery on deferred payment

basis.

6. Bill facility for purchase of raw materials and for sale of finished goods.

7. Composite loans (term loans plus working capital) up to Rs 25 lakh.

Margins applicable

For requirements up to Rs 25,000, no margins are involved. For limits ranging from Rs

25,000 to Rs 5 crore, the margin is set at 20 per cent. For credit limits above Rs 5 crore, a

25 per cent margin may be applied.

ENTREPRENEUR SCHEME

State Bank of India grants financial assistance to technically qualified, trained and

experienced entrepreneurs for setting up new viable industrial projects. Loans are

extended to technocrats who are unable to meet the normal margin requirements under

the liberalized schemes.

Eligibility criteria for the Entrepreneur schemeThe borrower has to be a technically

qualified person (a degree/diploma holder in engineering or technology), a craftsman

with adequate experience or training or a person possessing a degree in business or

industrial management, a chartered accountant or a cost accountant with relevant

experience.

Types of financial assistance under the Entrepreneur scheme

The bank provides:



term loans,

working capital and

equity fund finance

Margins applicable

For requirements up to Rs 5 lakh, no margins are involved. For needs ranging from Rs 5

lakh to Rs 20 lakh, the margin is set at 10 per cent.

EQUITY FUND SCHEME

Under the Equity Fund scheme, the SBI grants financial assistance to entrepreneurs who

are not able to meet their share of equity fully, by way of interest-free loans repayable

over a long period.This type of assistance fills in the gap between the margin

requirements in the project and the capital contributed by the promoter. The Equity Fund

assistance can be normally repaid over 5 to 7 years after the moratorium period.

Eligibility criteria for the Equity Fund scheme

The bank extends Equity Fund assistance only to new projects, which are also eligible

for the SBI’s Liberalized scheme and the Entrepreneur scheme. The project cost has to

be more than Rs 25,000. Type of security is required for the equity fund assistance

Security available for other loans should be extended to cover equity assistance also.

STREE SHAKTI PACKAGE

The Stree Shakti Package is a unique scheme run by the SBI, aimed at supporting

entrepreneurship among women by providing certain concessions. An enterprise should

have more than 50% of its share capital owned by women to qualify for the scheme.

The concessions offered under the Stree Shakti Package are:

1. The margin will be lowered by 5% as applicable to separate categories.

2. The interest rate will be lowered by 0.5% in case the loan exceeds Rs 2 lakh.

3. No security is required for loans up to Rs 5 lakh in case of tiny sector units

BUSINESS ENTERPRISES



An individual or a firm (partnership or proprietorship) who has established a business

venture for the purpose of providing any services like restaurants, Xerox copy centers,

computer centers, STD Booths are eligible for this scheme. Original cost of the

equipments (including land, building, machinery, furniture and fixture, etc. should not

exceed Rs.10 lakh.Extent of assistance is normally capped at Rs 10 lakh out of which

working capital limit sanctioned can be up to Rs 5 lakh. For requirements of up to Rs

25000, the margin is nil. For requirements between Rs 25000 and Rs 50000 the margin is

20 per cent. For requirements more than Rs 50,000 the margin is 50 per cent. For loans

up to Rs 25000 and more than Rs 25000, the primary security is the charge over the

assets purchased out of the Bank's finance. The collateral for loans up to Rs 25000 is nil,

for more than Rs 25000, it is the charge over the immovable or movable assets or third

party guarantee.

STATE BANK OF INDIA

COMMERCIAL BRANCH

BRIEF INTRODUCTION

The industrialists and big customers felt difficult to transact in small

banks and also much attention was not being paid to customers. Hence for easy

transaction and personal care to the customers they started the commercial branch on 14-

11-98. this bank deals mainly with big customers who want to borrow Rs25 lakhs and

above come here.

COMPANY PROFILE

Area profile Belgaum

District population About 10.00 lakhs

Major Industries

Foundries

Machine shops



Hydraulics

Textiles (sarees)

Dairy

Sugar

Financial Institutions

Total Nationalised branches in Belgaum 432

District

State Bank of India

Branches in Belgaum district 24

SBI Branches in Belgaum City 12

Branch details

Location Halgekar Building

Goaves Hindwadi

Belgaum-590011

Premises Leased

Area: 8740 SQFT

Rent:@Rs.5.85 per Sq ft

Monthly Rent: Rs. 51,000/-

Date of opening 14-11-98

Incumbany SMG V

Facilities 1. Fully Computerised

2. Trade Finance

3. Forex – “B” category

4. SWIFT / SFMS

Inspection Rating A + (December 2003)

Staff Strength

Field officers 6



Foreign Exchange 1

Bill Transaction 1

Accountant 1

In 1st Floor Advances Department

2nd Floor Accounts & Foreign Exchanges

Department

Important Customers

1. M/s Vishwanath Sugars

2. M/s Shri Renuka Sugar Ltd

3. M/s Ashok Iron Works Group

4. M/s Jinabakul Group

5. M/s Manickbag Group

6. Gudi Family

7. M/s Polyhydron Group

8. Vega Group

9. M/s Hind Group

Top 10 Depositors

1. M/s Vishwanath Sugars

2. M/s BT Patil & Sons

3. M/s Oilgear Towler Polyhydron (PVT)

4. M/s Shri Renuka Sugar Ltd

5. M/s Jinabakul Group

6. M/s Reliance Industries

7. M/s Hind Auto Cranks (Pvt)

8. M/s Fiarfield Atlas (PVT)

9. M/s Ashok Iron Works

10. M/s KLS Society

ORGANISATION STRUCTURE



Chief Manager is overall incharge of all the bank transactions. He also

handles the Foreign Exchange. Under him comes the Manager Credit who manages and

controls all the credit related transactions.

In absence of chief Manager the Manager Credit is incharge of all the

bank related activities. Under him are three deputy managers. Each deputy Manager

handles 20 to 25 customers & 80 to 100 accounts among which some maybe

manufacturers or traders or builders. Individually they manage their work. The work is

allotted equitably to each Deputy Manager.

RESEARCH METHODOLOGY

Project Idea

The purpose of the project is to study and understand Credit Risk Assessment and Rating

Mechanism of State Bank of India, Commercial Branch, Belgaum.

The study focuses on credit Rating Analysis of M/s Margale Foundries, which is in

the line of activity of castings and also manufacturers of auto components. As loans are

subject to default in their repayment. SBI tries to assess the repayment capacity of

various firms through a tool called Credit Risk Assessment and Rating. Credit rating is


Chief Manager Narendra.D.Tele

Dileep A. Bankapur

Deputy Manager(Advances)

Ashok. Patvardhan

Deputy Manager(Advances)

NarasimhanDeputy Manager

(Advances

Sheena MathurConcurrent

Auditor


necessary for loans and advances of high volume to ensure their prompt repayment and to

minimize NPA’s.

Title of the Project: “Credit Risk Rating Analysis of M/s Margale Foundries”

Objectives

Main objective –

Assess the credit rating of M/s Margale Foundries

To study the comparative analysis of Balance sheet of the company and the credit

risk rating summary of the company for the financial year 2004-05.

Sub objectives –

Organization study of State Bank of India, its products, achievements, and future

trends in the company.

To understand Indian banking sector in general and commercial banking in

particular.

To understand the Credit Risk Assessment and Rating methodology practiced by

State bank of India.

To find out whether it is safe to lend high volume loan of more than Rs.25 lacks

to M/s Margale Foundries.

Conduct analysis of Balance Sheet, Ratio analysis, risk assessment verification to

arrive at rating.

To understand in brief the SMERA (Small & Medium Rating Agency) agency

guidelines followed by SBI

Sample area

The area covered for the study is Belgaum district’s State Bank of India where Industries

in & around Belgaum city have availed loan facilities from State Bank of India.

Duration of the Project is 60 days. (15th May to 14th July 2006)

Scope of the project



1. To interact with employees and understand the working of State bank of India,

Commercial Branch, Belgaum.

2. Detailed in depth interaction with credit managers to understand the risk

assessment and rating mechanism of SBI.

3. To Work Within SBI And Study Financial Statements, Reports, Etc.,

4. To study the performance of the client company and SBI’s credit rating Model

based on the nature of activities of company.

5. Assess the credit rating of Margale Foundries through credit rating analysis

with the use of financial results and calculated ratios.

Data collection Data obtained for the first time and used specifically for the particular

Primary Data: Primary data is the data obtained for the first time and used specifically

for the research study.

Primary data is collected through in depth interview and discussion with SBI credit

managers. This will help me to get qualitative information for analysis of credit rating.

Secondary Data: Secondary data are the data that have already been collected by and are readily available from other sources

Secondary data is collected through:

Magazines, Books and literature study

Internet and websites.

SBI’s Manuals, Reports, and circulars.

This will help be useful to collect quantitative data required for analysis of performance

and rating.

Project methodology

The study is mainly based on risk assessment, ratio analysis and Balance sheet and other

financial statements analysis. The data of quantitative nature such as financial statements,

ratios etc., are collected from State Bank of India Belgaum Branch’s Records and Reports

submitted to SBI by Margale Foundries. Techniques used for quantitative analysis are,



1. Comparative Financial Statements: The comparative analysis of financial statements

is a process of evaluating the relationship between component parts of financial

statements to obtain a better understanding of the firm’s position and performance.

2. Common sized Statements: Common sized Statement expresses assets and liabilities

as

per cent of total assets and expenses and profits as per cent of sales.

3. Ratio Analysis: Ratio Analysis is a systematic use of ratios to interpret/assess the

performance and status of the firm.

Qualitative data is collected through questionnaire filled by credit managers of bank to

understand the rating mechanism and other qualitative facts and their effects on CRA

model and ratings.

Limitations

Restrictions regarding disclosure of financial information from banks.

Detailed analysis was not possible due to limitation on project time.

Limited exposure to banking sector in our course module and related topics.

Statistical analysis tools could not be used.

There were time constraints.

Credit Risk ManagementWhat is Risk?

The word risk is derived from an early Italian word “resicare” which means “to dare”

Risk can be defined as emanating from a situation as something which throws a

challenge to a person to act or not to act with regard to an event or happening. These

challenges (or risks) under the different walks of life may take various forms. A soldier

may run the risk of life in a battle and a traffic police may run the risk of being hit by an

automobile on the road. Thus, the concept of risk is synonymous with the uncertainties in

a preposition and the degree of risk may be computed in terms of probability of an

outcome that is not desired. Every event or situation has some element of associated

risks. It is possible to reduce them to a manageable level but these cannot be wiped out

together. In short we cannot think of a zero-risk situation, whether in our work

environment or in our personnel lives.Risk taking is a deliberate action in the process of



financial decision making. The action results from an optimal choice made by the

decision maker, which in turn,

emanates from a systematic analysis of the various alternatives available. Risk taking is

calculated decision and phrases like outcome of “fate” or “come what may” etc do not

find a place in the process of risk assessment.

Subjective vs objective assessment of risk

Though lending bankers have traditionally been taking decisions only after weighing all

the inherent risks in credit proposal, there is a renewed thrust today on the importance of

laying down a structured system of assessment and management of risk in banks. The

credit analysts have indeed been assessing all the underlying risks as perceived by a

banker through the process of assessing all the underlying risks as perceived by a banker

though the process of assessment was highly subjective. As a result, lending bankers used

to denote the risk content in a credit proposal by using statements such as fair banking

risk, high banking risk or acceptable banking risk etc. on the basis of which credit

decisions were taken. However subjective evaluation of risk serves a limited purpose.

The fast changing economic scenario which has perhaps affected the banking system the

most, has generated the new kinds of risks, besides bringing about a sea change in the

concept of risk management. In order to manage these risks, we need to set a limit for

ourselves for risk absorption. In financial parlance, this limit is known as risk appetite.

This can be done only if the various elements of risks in a preposition are quantified and

aggregated. The new age risk assessment process therefore relies heavily on objective or

quantified assessment of risk. In a risk management process, today’s lending banker does

not stop with his findings that a credit proposal has an acceptable or fair banking risk. He

goes a step further and finds out the degree of acceptability of such risk elements.

Thereafter, he may then take a credit decision in favor of the proposal if the degree of

acceptability lies within his risk appetite limit.

CREDIT RISKThe degree of credit risk is the probability that a loan lent to a borrower may not be

repaid. The extent of repayment likely to be made and the time taken in the process are

important factors in the computation of probability of default. Probability of the



occurrence of counterpart default determines the extent of credit risk in a business

preposition.

Credit risk of an activity has a dual perspective- business specific and

management specific. The business specific risk may further be bifurcated into systematic

and non-systematic risk components. System risks are those posed to the business

proposition by factors like recession or depression in the business, government

regulation, political unrest, environmental issues etc. over which the management of the

business may not have control. Thus though an enterprise is healthy and efficient in

operation, the extraneous risk factors, may, at times prove to be significantly challenging.

Fortunately, these risks have historically been around 25% to 30% of the entire risk

spectrum, the rest 70% to 75% emanating from the enterprise specific risk elements. The

non-system risks i.e. the enterprise specific risk components are therefore the most vital

factors in the evaluation and assessment of credit risks in a credit appraisal proposal.

The term credit risk is defined, “as the potential that a borrower or counter-

party will fail to meet its obligations in accordance with agreed terms”.

In simple terms it is the probability of loss from a credit transaction.

Loans are the largest and most obvious source of credit risk. Loans are given by banks in

the form of corporate lending, sovereign lending, project financing and retail lending.

However other sources of credit risk exists throughout the activities of banks, including

in the banking book and in the trading book and both on and off the balance sheet. Banks

are increasingly facing credit risk in various instruments other than loans, including

acceptances, interbank transactions, trade financing, foreign exchange transactions,

financial futures, swaps, bonds, equities, options and in the extension of

commitments and guarantees, and the settlement of transactions.Credit risk encompasses

both default risk and market risk. Default risk is the objective assessment of the

likelihood that counterparty will default. Market risk measures the financial loss that will

be experienced should the client default.

Credit risk includes not only the current replacement value but also the potential loss

from default.

The components of credit risk are:



Credit growth in the organization and composition of the credit folio in terms of

sectors, centers and size of borrowing activities so as to assess the extent of credit

concentration.

Credit quality in terms of standard, sub-standard, doubtful and loss-making assets.

Extent of the provisions made towards poor quality credits.

Volume of off-balance-sheet exposures having a bearing on the credit portfolio.

According to Reserve Bank of India, the following are the forms of credit risk:

Non-repayment of the principal of the loan and/or the interest on it. Contingent liabilities

like letters of credit/guarantees issued by the bank on behalf of the client and upon

crystallization – amount not deposited by the customer. In the case of treasury operations,

default by the counter-parties in meeting the obligations. In the case of securities trading,

settlement not taking place when it is due. In the case of cross-border obligations, any

default arising from the flow of foreign exchange and/or due to restrictions imposed on

remittances out of the country.

Credit risk-rating framework:A credit risk-rating framework deploys a number/alphabet/symbol as a primary summary

indicator of risks associated with a credit exposure. These rating frameworks are logic-

based, utilize responses made on a specified scale and promote the accuracy and

consistency of the judgement exercised by the banks. For loans to individuals or small

businesses, credit quality is typically assessed through a process of credit scoring. Prior

to extending credit, a bank or other lender will obtain information about the party

requesting a loan. In the case of a bank issuing credit cards, this might include the

party's annual income, existing debts, whether they rent or own a home, etc. A standard

formula is applied to the information to produce a number, which is called a credit score.

Based upon the credit score, the lending institution decides whether or not to extend

credit. The process is formulaic and highly standardized. Many forms of credit risk—

especially those associated with larger institutional counterparties—are complicated,

unique or are of such a nature that that it is worth assessing them in a less formulaic

manner. The term credit analysis is used to describe any process for assessing the credit



quality of counterparty. While the term can encompass credit scoring, it is more

commonly used to refer to processes that entail human judgement. One or more people,

called credit analysts, review information about the counterparty. This might include its

balance sheet, income statement, recent trends in its industry, the current economic

environment, etc. They may also assess the exact nature of an obligation. For example,

secured debt generally has higher credit quality than does subordinated debt of the same

issuer. Based upon their analysis, they assign the counterparty (or the specific obligation)

a credit rating, which can be used for making credit decisions.

Credit risk limits:

For managing credit risk, a bank generally sets an exposure credit limit for each

counterparty to which it has credit exposure. This is standard procedure in many contexts.

It could be a corporate loan, individual loan or a derivative dealer transacting with

counterparties. All entail credit risk. All are contexts where credit exposure limits are

used. A bank may also use aggregate credit exposure limits. A bank might set credit

exposure limits by industry. It might also set a total exposure credit limit for all its

corporate lending activities. Exposures are calculated with the help of credit risk models.

Depending on the assessment of the borrower (commercial as well as retail) a credit

exposure limit is decided for the customer, however, within the framework of a total

credit limit for the individual divisions and for the company as a whole. Also within the

limit as per RBI, i.e. not more than 20% of capital to individual borrower and not more

than 40% of capital to a group borrower.

Threshold limit is set depending on the:

Credit rating of the borrower

Past financial records

Willingness and ability to repay

Borrower’s future cash flow projections.

RBI GUIDELINES ON CREDIT RISK MANAGEMENTA counterparty risk arising from non-performance of trading partners is, however the

most important factor significantly contributing towards credit risk. The non performance



generally arises from refusal or inability to perform by the counterparty due to adverse

price movements or from external constraints that were not anticipated by the principal.

The steps in the process of management of credit risk include the following. It is

necessary that the process of credit risk management and the following steps are

articulated in the approved loan policy of a lending bank.

Steps:

1. Measurement of risk through credit rating/scoring;

2. Quantification of risk through;

Estimating expected loan losses over a chosen time horizon (through

tracking portfolio behavior over 5 or more years), and

Unexpected loan losses i.e. the amount by which actual losses exceed the

expected loss (through statistical measurement tools like standard

deviation of losses etc.

3. Pricing the risk on a scientific basis; and

4. Controlling the risk through effective Loan Review Mechanism and portfolio

management.

SETTING UP PRUDENTIAL LIMITSAn important aspect of instituting a framework of credit risk management is the process

of laying down the prudential limits on various aspects of credit, which itself is a

mechanism to restrict the magnitude of credit risk. The process may involve the

following:

I. Setting up benchmarks on liquidity ratios (viz Current Ratio), gearing ratios

(viz Debt Equity Ratio), Profitability ratios, Debt Service Coverage Ratios or

other ratios, with flexibility for deviations. The necessary conditions in which

deviations may be permitted and the approving authority for such deviations

should be clearly spelt out in the loan policy of the banks.

II. Setting up of single group borrower limits, which maybe lower than the limits

prescribed by the RBI to provide a filtering mechanism.



III. Setting up of exposure limit ie. sum total of exposures assumed in respect of

those single borrowers enjoying credit limits in excess of a threshold limits,

say 10% to 15% of capital funds. The substantial exposure limit may be

fixed at 600% or 800% of capital funds, which depends on the degree of

concentration risk to which the bank is exposed.

IV. Setting up of maximum exposure limits to industry, sector etc. Proper systems

for evaluation of the exposures at reasonable intervals is necessary in this

regard. The limits may also require adjustments especially when a particular

sector or activity faces slow down or encounters specific problems, other

sector/industry specific problems. The exposure limits to sensitive sectors,

which are subject to a high degree of asset price volatility e.g. advances

against equity shares, real estates etc. and credit facilities provided to specific

industries, which are subject to frequent business cycle movements, would

necessarily be required to be restricted. Similarly lower portfolio limit should

be set for high-risk industries and any excess exposure should be fully backed

adequate collaterals or strategic considerations.

V. Evaluation of the maturity profile of the loan book of the bank is necessary,

keeping in view the various factors viz. market risk, risk evaluation capability,

liquidity etc.

RISK RATINGIn order to facilitate taking credit decision in a consistent manner, a decision maker

would look for a risk rating system which serves as a single point indicator of diverse risk

factors of a counterparty and reflect the underlying credit risk of a loan book as well. For

a the purpose, a substantial degree of standardization is required in ratings across

borrowers, which should be designed so as to reveal the overall risk of lending, the

critical inputs of setting pricing and non-price terms of loans. Such standardized risk

rating systems should also present meaningful information for review and management of

loan portfolio and provide a reasonable degree of comfort to the decision makers in its

knowledge of loan quality at any moment of time



LOAN REVIEW MECHANISM (LRM)Setting up a proper loan review mechanism for large value accounts with responsibilities

designed in various areas is one of the most important ingredients of credit risk

management process. LRM is effective tool for continuous evaluation of the quality of

loan book and bringing about qualitative improvements in credit administration. The

main objective of LRM include:

Prompt identification of loans, which develop credit weaknesses, and initiation of

timely corrective action.

Evaluation of portfolio quality and isolating the problem areas.

Providing information for determining adequacy of loan loss provision.

Assessment of the adequacy of and adherence to loan policies and procedure and

monitoring of the compliance with relevant laws and regulations and

Providing top management with information on credit administration, including

credit sanction process, risk evaluation and post sanction follow up.

The loan reviews should focus on:

Approval process

Accuracy and timeliness of credit ratings assigned by loan officers

Adherence to internal policies and procedures, and applicable laws/regulations

Compliance with loan covenants

Post sanction follow up, sufficiency of loan documentation

Portfolio quality, and

Recommendation for improving portfolio quality.

Credit Risk in off-balance sheet exposureBanks provide off-balance sheet credit facilities, which include Bank Guarantees, Letters

of Credit, Forex forward contracts, Swaps, Options etc. Decision on providing these off-

balance sheet facilities are taken after examining the proposal in terms of the normal

credit appraisal process. The off-balance sheet exposures may be divided into three broad

categories



1. Full risk (credit substitutes)- stand by letters of credit, money guarantees etc.

2. Medium risk (not direct credit substitutes, which do not support existing financial

obligations) – bid bonds, letters of credit, indemnities and warranties, and

3. Low risk-reverse repos, currency swaps, options, futures, etc.

The important ratios used for credit risk rating assessment are as follows:

Sl.No. Ratio Category Selected ratios1. Liquidity Ratios Current Ratio2. Gearing Ratios TOL/TNW3. Profitability Ratios PAT/Net Sales4. Return Ratios PBDIT/Total assets5. Coverage Ratios PBDIT/Interest6. Inventory and receivables

holding RatiosInventory +

receivables/ net sales.

Credit RatingA credit rating agency is a company that rates the ability of a person or company to pay

back a loan. The rating given by a credit rating agency is important because it affects the

perceived risk element incorporated into interest rates that are applied to loans.

Perhaps the most difficult task in this world is to make a man part with his money. It is

slightly lesser difficult when you instantly provide something in exchange (like normal

shopping or eating out). But when a common man is asked to “lend” his money to group

of people (read company) whom he hardly knows, or does not have time to enquire

about, it demands more than a casual reassurance. Safety and return are the two most

important criteria for any investor. While returns are easy to understand in terms of

interest rates or dividends paid, the safety part is very fuzzy, based on perceptions rather

than facts.

The need for credit rating

Credit rating firms can help lenders derive meaning out of the plethora of information

and understand the uncertainties that surround lending relationships. Further, by

providing the service of information generation and making available the information and

its interpretation to everyone, the specialized credit raters do away with the need for each

and every investor to do this himself. It thus allows small investors to avoid the high per

unit costs associated with doing the analysis themselves. The rating agencies gather



information about the borrower from a variety of reliable sources, like bankers, borrower

from a variety of reliable sources, like bankers, auditors and other important stakeholders,

which ensures that their views are unbiased and fair.

The fairness and reliability is further enhanced by the fact that it is a committee of

professionals

who are not connected with the borrower. The analysis is based on an all-round analysis

of quantitative as well as qualitative factors like past performance, economic

environment, market positioning, quality of management and predictions about future,

and is thus as complete as can be.

What exactly is Credit Rating

The credit rating is a symbolic (using letters, ‘+’, ‘-‘) indicator of the current opinion of

the relative capability of the issuer to service its debt obligation in a timely fashion, with

specific reference to the instrument being rated. The rating is generally divided in two

broad categories, Investment Grade and Non-Investment grade. It is focused on

communicating to the investors, the relative ranking of the default loss probability for a

given fixed income investment, in comparison with other rated instruments. It is based

upon the relative capability and willingness of the issuer of the instrument

to service the debt obligations (both principal and interest) as per the term of the contract.

The process starts with a request made by the company that wants its instrument rated.

The rating team then develops a list of information requirements. After a round of

management meetings and plant visits, a preview, followed by a review committee

meeting happens, where the final rating is decided, and thereafter communicated to the

company. An important activity, called “surveillance” continues even after this, whereby

the rating agency monitors the accepted ratings over the tenure of the instrument. Ratings

are revised over the tenure of the instrument. Ratings are revised over time based on

changing circumstances. A whole gambit of factors affecting the company’s



capability to service its debt obligation are considered, like industry characteristics,

market position, operational efficiency, funding policies, financial flexibility and

management quality.

Credit Rating in India

In India, there are four major credit rating agencies: CRISIL, ICRA, CARE and FITCH

(formerly Duff & Phelps). The first three are promoted by financial institutions lDBI,

ICICI and IFCI. These rating agencies mainly rate debt instruments, but some, like

ICRA, also rate equity offerings. On the regulatory front, credit rating is mandatory for

Non-Banking Finance Companies (NBFCs) who accept fixed deposits as also corporates

that issue debentures or bonds whose tenure exceeds 18 months. Credit rating is optional

for the rest.

The role of Credit RatingThe potential power in the hands of rating firms, to make a surrogate decision for

investors, begs a logical next-step question: ‘How does the non-specialist bondholder

come to trust the judgment of a rating firm?’ Here, the long-run reputation of the rating

firm in its assessments of large numbers of bonds over time -- which surely is a broader

experience and exposure than any individual bondholder is likely to have – must be the

crucial element in conveying trust to the bondholder. It being their very field of expertise,

the word of rating agencies is taken as the bible, and most of the commonplace investors

are happy with their investment decision as long as they can back it up with these ratings.

Factors involved in credit rating

Credit rating depends on several factors, some of which are tangible/numerical and some

of which are judgmental and intangible. Some of these factors are listed below:

Overall fundamentals and earnings capacity of the company and volatility of the

same

Overall macro economic and business/industry environment

Liquidity position of the company (as distinguished from profits)



Requirement of funds to meet irrevocable commitments

Financial flexibility of the company to raise funds from outside sources to meet

temporary financial needs

Guarantee/support from financially strong external bodies

Level of existing leverage (borrowings) and financial risk

As mentioned earlier ratings are assigned to instruments and not to companies and two different ratings may be assigned to two different instruments of the same company eg a company may be in a fundamentally weak business and may have a poor rating assigned for 5 year debentures while its liquidity position may be good, leading to the highest possible rating for a 3 month commercial paper. Very few companies may be assigned the highest rating for a long term 5 or 7 year instrument eg CRISIL has only 20 companies rated as AAA for long term instruments and these companies include unquestionable blue chips like Videsh Sanchar Nigam, Bajaj Auto, Bharat Petroleum, Nestle India apart from institutions like ICICI, IDBI, HDFC and SBI.

FUNCTIONS OF CREDIT RATINGCredit rating serves following functions:

1) Provides superior Information: Provides superior information on credit risk for

three reasons: (i) An independent rating agency, unlike brokers, financial

intermediatories, underwriters who have vested interest in an issue, is likely to

provide an unbiased opinion; (ii) Due to professional and highly trained staff,

their ability to assess risk is better, and finally, (iii) the rating firm has access to a

lot of information which may not be publicly available.

2) Low cost information: Rating firm gathers, analyses, interprets and summarizes

complex information in a simple and readily understood formal manner. It is

highly welcome by most investors who find it prohibitively expensive and simply

impossible to do such credit evaluation of their own.



3) Basis for a proper risk and return: If an instrument is rated by a credit rating

agency, then such instrument enjoys higher confidence from investors. Investors

have some idea as to what is the risk associated with the instrument in which

he/she is likely to take, if investment is done in that security.

4) Healthy discipline on corporate borrowers: Higher credit rating to any credit

investment tends to enhance the corporate image and visibility and hence it

induces a healthy discipline on corporate.

5) Greater credence to financial and other representation: When credit rating agency

rates a security, its own reputation is at stake. So it seeks financial and other

information, the quality of which is acceptable to it. As the issues complies with

the demands of a credit rating agency on a continuing basis, its financial and other

representations acquire greater credibility.

6) Formation of public policy: Public policy guidelines on what kinds of securities

are eligible for inclusions in different kinds of institutional portfolios can be

developed with greater confidence if debt securities are rated professionally.

BENEFITS OF CREDIT RATINGFor different class of persons different benefits accrue from use of rated

instruments. Such benefits directly accruing to investors through rated instruments

are:

(A) Benefits to Investors

Investors are benefited in very many ways if the corporate security in which they

intend to invest their saving has been rated by credit rating agency. Some of the

benefits are as:

(1) Safeguards against bankruptcy: Credit rating of an instrument done by credit

rating agency gives an idea to the investors about degree of financial strength of

the issuer company which enables him to decide about the investment Highly

rated instrument of a company gives an assurance the investors of safety of

instrument and minimum risk of bankruptcy.



(2) Recognition of risk: Credit rating provides investors with rating symbols which

carry information in easily recognizable manner for the benefit of investors to

perceive risk involved in investment. It becomes easier for the investors by

looking at the symbol to understand the worth of the issuer company because the

instrument is backed by the financial strength of the company which in detail

cannot be provided at the minimum cost to each and every one and at the same

time they cannot also analyse or understand such information for taking any

investment decisions. Rating symbol gives them the idea about the risk involved

or the expected advantages from the investment.

(3) Credibility of issuer: Rating gives a clue to the credibility of the issuer company.

The rating agency is quite independent of the issuer company and ahs no business

connections or otherwise any relationship with it or its Board of Directors, etc.

Absence of business links between the rater and the rated firm establish ground

for credibility and attract investors.

(4) Easy understandability of investment proposal: Rating symbol can be

understood by an investor which needs no analytical knowledge on his part

Investor can take quick decisions about the investment to be made in any

particular rated security of a company.

(5) Saving of resource: Investors rely upon credit rating. This relieves investors from

the botheration of knowing about the fundamentals of a company, its actual

strength, financial standing, management details, etc. The quality of credit rating

done by professional experts of the credit rating agency reposes confidence in him

to rely upon the rating for taking investment decisions.

(6) Independence of investment decision: For making investment decisions,

investors have to seek advice of financial intermediaries, the stock brokers,

merchant proposal, but or rated instruments, investors need not depend upon the

advice of these financial intermediaries as the rating symbol assigned to a

particular instrument suggest the credit worthiness of the instrument and indicates

the degree of risk involved in it.



(7) Choice of investments: Several alternative credit rating instruments are available

at a particular point of time for making investment in the capital market and the

investors can make choice depending upon their own risk profile and

diversification plan.

(8) Benefits of rating surveillance: Investors get the benefit of credit rating agency’s

on-going surveillance of the rating and rated instilments of different companies.

The credit rating agency downgrades the rating of any instrument if subsequently

the company’s financial strength declines or any event takes place, which

necessitates consequent dissemination of information on its position to the

investors. In addition to above, investors have other advantages like: Quick

understanding of the credit instruments and weigh the rating with advantages

from instruments; quick decisions making for investment and also selling or

buying securities to take advantages of market conditions; or, perceiving risk by

the company.

(B) Benefits of Rating to company

Company which had its credit instrument or security rated by a credit rating

agency is benefited in many ways as summarized below:

1. Lower cost of borrowing: A company with highly rated instrument has the

opportunity to reduce the cost of borrowing from the public by quoting lesser

interest on fixed deposits or debentures or bonds as the investors with low risk

preference would come forward to invest in safe securities though yielding

marginally lower rate of return.

2. Wider audience for borrowing: A company with a highly rated instrument can

approach the investors extensively for the resource mobilization using the press

media. Investors in different strata of the society could be attracted by higher rate

instrument, as the investors understand the degree of certainty about timely

payment of interest and principal on a debt instrument with better rating.

3. Rating as marketing tool: companies with rated instrument improve their own

image and avail of the rating as a marketing tool to credit better image in dealing



with its customers feel confident in the utility products manufactured by the

companies carrying higher rating for their credit instruments.

4. Reduction of cost in public issues: A company with higher rated instrument is able

to attract the investors and with least efforts can raise funds. Thus, the rated

company

Can economies and minimize cost of public issues by controlling expenses on

media

coverage, conferences and other publicity stunts and gimmicks. Rating facilitates

best prancing and timing of issues.

4. Motivation for growth: rating provides motivation to the company for growth as

the promoters feel confident in their own efforts and are encouraged top

undertaken expansion of their operations or new projects. With better image

created though higher credit rating the company can mobilize funds from public

and instructions or banks from self assessment of its own status, which is subject to

self-discipline and self-improvement, it can perceive and avoid sickness.

6. Unknown issuer: Credit rating provides recognition to a relatively unknown issuer

while entering into then market through wider investor base who rely on rating

grade

rather than on name recognition.

7. Benefits to brokers and financial intermediaries: Highly rated instruments put the

brokers at an advantage to make fewer efforts in studying the company’s credit

position to convince their clients to select an investment proposal. This enables

brokers

and other financial inter-mediaries to save time, energy, costs and manpower in

convincing their clients about investment in any particular instrument.

Company in many cases would not be identical. Such differences are

likely to occur because of value judgment differences on qualitative aspects of the

analysis in tow different agencies.

SMERASME Rating Agency of India Ltd (SMERA), the dedicated rating agency for SME sector



in India was formally launched at the hands of Union Finance Minister, Shri P.

Chidambaram, at a ceremony at Coimbatore. SMERA has been set up by Small

Industries Development Bank of India (SIDBI) in association with Dun & Bradstreet

(D&B), Credit Information Bureau (India) Limited and leading public and private sector

banks. SMEs are critical to the nation’s economy – they contribute approximately 40% of

the country’s domestic production, almost 50% of India’s total exports and 45% of

India’s industrial employment. Despite their economic significance, SMEs face a number

of bottlenecks that prevent them from achieving their full potential. A major obstacle in

SME development is its inability to access timely and adequate finance. There are several

reasons for low SME credit penetration, key among them being insufficient credit

information on SMEs, low market credibility of SMEs (despite their intrinsic strengths)

and constraints in analysis. This leads to sub-optimal delivery of credit and services to the

sector. Rating Agencies can play an important role in addressing some of these concerns.

In this context, SMERA is wholly committed to facilitating the overall growth and

development of Indian SMEs. The agency’s primary objective is to provide SME ratings

that are comprehensive, transparent and reliable. SMERA aims to be the country’s

premier agency that is focussed primarily on providing ratings to SMEs so as to reflect

their intrinsic strength, with a view to facilitate faster and easier access to credit. The

SME policy recently announced by Government of India also lays emphasis on using this

as a tool for increasing credit to the sector. At the launch of SMERA, the Finance

Minister highlighted the three major benefits that would accrue to the rated SME units,

viz., adequate and timely credit, low collaterals and lower rate of interest. Mr.

Chidambaram stated that his confidence in SMERA’s long-term success stemmed from

the fact that major public and private sector banks would be stakeholders in the Rating

Agency. The Finance Minister also delineated a 4-pronged strategy adopted by the

Government of India, to promote the SME sector:

a. Doubling the flow of credit to the SSI and tiny sector in 5 years

b. Enactment of an SME bill. Currently a draft of the bill is under consideration

c. Launch of SMERA, a rating agency dedicated to the SME sector



d. Enhancement of Credit Linked Capital Subsidy (CLCS) limit from Rs.40 lakhs

term loan to Rs.100 lakhs and simultaneously enhancing the percentage of

subsidy from 12% to 15%, the notification of which is expected shortly

In his address, Mr. Chidambaram requested the bankers to adopt a more considerate

approach towards SMEs that have experienced difficulties in repayments due to

circumstances beyond their control, and only adopt a strict approach towards willful

defaulters.

SMERA is driven by institutions that are leaders in their respective spheres of activity:

SIDBI is the principal financial institution for the promotion, financing and

development of industry in the SME sector in the country. Over the last 15 years

of its existence, it has developed a suite of products and services for the SME

sector. SMERA will be able to draw upon SIDBI’s longstanding experience in

dealing with Indian SMEs and its strong relationships with public & private sector

banks.

Dun & Bradstreet (D&B) is the world’s leading provider of business information

and Risk Management Solutions with a database covering over 95 million

business entities. Over the past 164 years, D&B has built up an impressive track

record in SME Risk Evaluation & Rating and has over 70 million SMEs in its

global database.

Credit Information Bureau (India) Ltd [CIBIL] is a composite credit bureau

catering to both the commercial and consumer segments. It therefore serves as a

repository of valuable payment information, which plays a major role in reducing

information asymmetries and credit risk.

SMERA is also supported by several leading public and private sector banks that

are active in the SME space. The recognition and acceptance of SMERA’s ratings

within the banking sector will help SMEs save time, effort and money while

approaching different banks for credit. It will also simplify and quicken the



process of lending to SMEs, while simultaneously reducing lending costs to the

sector as a whole.

SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI , Dun &

Bradstreet Information Services India Private Limited (D&B), Credit Information Bureau

(India) Limited (CIBIL) and several leading banks in the country.

SMERA is the country's first rating agency that focuses primarily on the Indian SME

segment. SMERA's primary objective is to provide ratings that are comprehensive,

transparent and reliable. This would facilitate greater and easier flow of credit from the

banking sector to SMEs.

MISSION OF SMERA

To empower the sector through ratings by providing a credible assessment of their

strengths in a transparent report from enabling faster decision and increased flow of

formal credit. We are aware that new generation entrepreneurs though with sound

business ideas are not so lucky in obtaining bank finance. We feel that independent rating

and assessment from a specialized and professional rating agency would help them in

obtaining credit facilities at fair terms.

What is SMERA rating?

SMERA Rating is an independent third-party comprehensive assessment of the

overall condition of the SME, conducted by SME Rating Agency of India Limited

It takes into account the financial condition and several qualitative factors that

have bearing on creditworthiness of the SME

SMERA Rating consists of 2 parts, a Composite Appraisal/Condition indicator

and a size indicator

SMERA Rating categorises SMEs based on size, so as to enable fair evaluation of

each SME amongst its peers

An SME unit having SMERA Rating would enhance its market standing amongst

trading partners and prospective customers.

BENEFITS

1. Wide Recognition and AcceptanceBabasabpatilfreepptmba.com


With each bank having separate rating processes and disclosure requirements for the purpose of disbursing loans, SMEs find themselves spending significant time, effort and money while approaching different banks for credit. As SMERA has adopted a comprehensive, transparent and reliable rating process, it would have a wider acceptance within the banking system of the country. In addition to this, SMERA would be supported by SIDBI and a large number of public and private sector banks in the country Such wide acceptance would result in, SMERA Ratings becoming a key requirement in the loan application process. It will also simplify the process of credit requests and make the process more cost-effective.

2. MOU with Banks

SMERA has taken the initiative of entering into MOUs with 14 Banks, viz., State Bank of India, Punjab National Bank, Syndicate Bank, Canara Bank, State Bank of Bikaner & Jaipur, Dena Bank, Corporation Bank, Union Bank of India, UCO Bank, CitiGroup, Bank of India, Vijaya Bank, Allahabad Bank and Bank of Baroda. Further a number of banks have announced favorable credit terms including reduction in interest rates to units rated by SMERA. Andhra Bank, Bank of India & SIDBI has already announced reduction in interest rates for units rated by SMERA.3. Favorable borrowing terms

Better ratings from SMERA has already started benefiting units by way of more favorable credit terms in terms of interest rebates.

Lower collateral requirements Reduced Interest Rates



Simplified lending norms

4. Faster Access to Credit

SMERA Ratings facilitate banks/lending institutions in reducing the turnaround time in processing credit applications, thereby providing SMEs access to timely and adequate credit.5. Lower Rating Fees

The rating fees charged by SMERA are very competitive, and the rating fee is subsidised upto 75 % for eligible SSI units. i.e. Units having a valid Small Scale Industries Registration Certificate (Permanent / Provisional). Units can get rated as low as Rs 4209/- all taxes included.

6. SMERA: An initiative of leaders

SME Rating Agency of India Limited (SMERA) is a joint initiative by Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B), Credit Information Bureau (India) Limited (CIBIL) and several leading banks in the country. SMERA is the country's first & only dedicated rating agency that focuses primarily on the SME segment. SMERA's primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs

.7.Fair evaluation amongst peers

SMERA Ratings categorise SMEs based on size, so that each SME is evaluated amongst its peers. This enables rational comparison of



companies of the same size, thus ensuring that the smaller companies are not at a disadvantage while applying for credit.

8. Benefit to SME & SSI Units

SMERA Rating adds credibility to the status of the SME unit

It also helps opens doors to deal with large companies esp. those who deal with a big number of vendors

SMERA Ratings serve as motivation to adopt good governance practices which are beneficial in the long run

SMERA Ratings also help in international trade and commerce and serve as first point to generate interest among potential trading partners

Ratings also acts as an tool for self correction.& self improvement

In event of a 0.25 % interest reduction to a unit getting rated by SMERA the reduction in interest cost comes to Rs. 25000/- on a loan of Rs 1 cr for 1 year thereby outweighing the cost of rating from SMERA.

9. Benefit to Banks

SMERA Ratings facilitates Pricing of loan products / attractive terms

It is also useful in compliance with regulatory and capital adequacy norms

Helping the banker through Early warning signals through review ratings as mandated by it



10. Industry-benchmarked ratings

SMERA Ratings take into account industry dynamics by factoring in a system through which an SME could compare its strengths and weaknesses with those of other companies in the same line of business. This is done through statistically derived industry benchmarks for various ratios.

SMERA in pact with SBI

The SME Rating Agency of India Limited (SMERA) signed an agreement with State

Bank of India recently to encourage the small and medium enterprises (SME) clients of

the bank to get rated by SMERA. It is in talks with more banks and financial institutions

in this regard.

The inaugural offer of rating fees at Rs. 7,500 (plus taxes) was valid till October

31. The agency had appealed to the Centre to grant 75 per cent of rating expenses as

subsidy to the units.

SMERA TO EMPOWER SMEs WITH RATINGSSME Rating Agency of India Ltd. [SMERA] has been setup with the very purpose of

Rating of the Small and Medium Enterprises segment As we know, SME sector is the key

driver of any economy and Indian Economy is no exception. The 551sector alone

contributes over 40% of India's industrial output and, one third of India's exports.

However, the share of this sector in the Net. Bank Credit [NBC] has not been upto the

desired level. This is one upto the desired level. This is one of the main reasons hindering

the prospects of growth of this sector. In the absence of timely and adequate credit from

the Formal financial system, the sector has to depend on informal credit or wait for

sufficient build up of own capital for investment in the business. Often good business

opportunities are lost as units in the sector can't cope up with the requirements for want

of funds. Coming back on the low share of formal credit to the sector, there could be

several reasons for the same. One of the biggest factors being non-availability of enough



reliable data to facilitate effective decision making. To put it succinctly, the information

asymmetry in respect of this sector, if plugged could create a suitable environment for the

lenders and remove the hesitation or reluctance in lending to this sector. Thus need for

agency to specifically cater to address this gap was always felt and as a result SMERA

was born. SMERA is an initiative to create a suitable environment with the aim of aiding

in the overall growth of the sector by making available reliable and credible opinion on

the SMEs.

SMERA rates an enterprise in entirely and also takes into account the relative

industry benchmarks and the operating environment of the enterprise. In other words,

SMERA not only analysis the financial performance of the unit it also takes into

consideration several qualitative, parameters ascertained through a site visit and

interview of the promoters / key personnel of the SME unit before “arriving at the final

rating for an enterprise.” SMERA believe that, looking at the nature of the sector, rating

them requires a different orientation, specialized approach. Today, SMERA is the only

rating agency focused and dedicated for Rating SME units. SMERA has been promoted

SIDBI, Dun & Bradstreet, CIBIL and commercial banks. With the stakeholders in

SMERA being largely banks, the acceptance of rating given by SMERA is likely to be

high amongst the banks. Further SMERA is working jointly towards making SMERA

ratings useful to banks in thier credit delivery process to SMEs. Towards this it has

entered into MOUs with Bank of India, Canara Bank, Corporation Bank, Punjab National

Bank, and State Bank of India, Syndicate Bank, United Bank of India and Vijaya Bank

and is in talks with several other banks for rating of their SME clients. SME ratings could

be used by banks to validate their internal risk rating of SME clients and or reduce the

turn around time in the credit delivery process of the SME clients. In fact benefits, by

way of lower interest rates are already being felt by few SME units who have obtained

rating from SMERA. Some of the leading banks have started offering benefits from

ratings by indicating linking interest rate to SMERA ratings, offering cash subsidy for

ratings from SMERA offering better credit terms to SME units.

Pertinent to mention here that reduction in interest rates is only one such

benefit that may accrue to an SME unit other benefits being availability of D-UN-S



number, making it possible for benchmarking with other units and over all improvement

in the performance and health of the units.

The concept of rating is new, though there was a felt need for transparent

and independent assessment of SMEs, Hence, they are reaching out to the SMEs and the

response of the SMEs towards rating would be directly linked to the benefits perceived

from getting a rating. Towards this, support from the banks in the form of interest rate

reduction, faster. Credit dispensation would go a long way in inducing SME units to opt

for rating in around 4 months of its existence, SMERA has assigned ratings more than 70

SMEs has over 200 units at various stages of assessment.

CREDIT RISK ASSESSMENT MODEL OF STATE BANK OF INDIAINTRODUCTION

The Credit Rating System (CRS) in vogue since 1992 was replaced by the Credit Risk

Assessment (CRA) System in 1996, applicable to the commercial accounts under C & I

Segment. Later on it’s scope was enlarged by the introduction of various models to

include commercial accounts in SSI and AGL segments in 1998, C & I Trade Advances

in 1999 and lastly the Non-Banking Financial Companies (NBFCs) in 2000. In between,

a review of the basic model (since introduced in 1996) was done in 1998.

The world financial sector has been on the roll since the late ‘90s and the pace of

this motion has become more pronounced with the passage of time. In the aftermath of

WTO and related developments, the integration of the Indian economy with the world

economy is a natural corollary. But such a development has totally altered the basics of

market dynamics. The scale of competition has become sharper and more focused day by

day- the essence of a comfortable margin in venture has become history and the

companies are required to operate on a slender margin to keep the business afloat. The

Bank is not sheltered from this intense competition. Booking of the business is the

compulsion for the survival, this, in turn, means quoting a very competitive pricing of our

loan lest the business is lost. In essence, the relevance of ratings linked pricing is

nebulous. In such a scenario, the parameters for measurement of risk dimension has to be

enlarged/made broad-based so that only the businesses do not go past the bank but the



extent of risk itself is mirrored into our risk assessment system. The extant CRA structure

therefore, needs fine tuning from time to time to meet challenges posed by the prevailing

market realities. Given the rapid changes in the methodology for the assessment of risk

which would become more pronounced in the near future with the advent and

enforcement of New Capital Accord entailing a drastic overhauling of the system, an

attempt has been made for an empherical review of the CRA structure

Basics of CRA MODEL

Any model, more so a financial model is a time dependent entity. This entity is always a

combination of quantifiable and unquantifiable parts commonly referred to as objective

and subjective elements an assessment. The degree of subjectivity/techniques developed

and employed to map the particular scenario is dependent on the level of mathematical

techniques developed and employed to map that particular state. In financial institutions,

the judgmental input at the operating level has a matching role to play to supplement the

quantitative methods applied to assess the risks associated with a credit proposal. The risk

equivalence can be expressed as under:

Risk in a financial proposal = (Fixed part) + (Pertubative Fluctuations)

- Quantifiable + Unquantifiable parts = Objectivity + Subjectivity

In the line with this argument, the present Credit Risk Assessment model is a

combination of objective as well as subjective elements. At any point of time, in any

model, there would be a variation in the degree of pertubative fluctuations part only if the

basic structure is designed to sustain/ absorb maximum shocks/volatility within a modern

range. Fluctuations of a very high intensity call for a specialized event specific frame to

deal with and no generalizations can be made on this score.

The risk Dimensions

There are two dimensions to the question of risk fluctuations:

a. Even the fixed part has its elements of uncertainty, which can be termed as an

aberration/interruption on the system. Measurement of such an aberrations

indeterminate to the extent of limitations of the observer in a particular framework.

b. The subjectivity of the course swings from one extreme to the other. The observer/

appraiser at the operating level (branch etc) measures the risk/identifies the gaps



based on his own assessment. The extent of risk and process of which there may be

four types:

Future risk unlimited and human capability unlimited.

Future risk unlimited and human capability limited.

Future risk limited and human capability unlimited.

Future risk limited and human capability limited.

LOGICAL CORROLLARIES: THE COLLATERAL DIMENSION

A risk dimension puts a limit on the human capability matrix and in a way various types

of possibility and unpredictability affect measurement of various risks- credit risk

included. In many cases, these uncertainties put a limit on our ability to predict a future

horizon of impossibility, which would bring on the curtain down on the Banker’s efforts

to understand the credit risk and the associated risks. The uncertainties therefore cannot

be deterministic and these oscillate in a domain dictated by various dimensions of

economy, the capability of the company management as well as their willingness to

perform in the frame in which the company operates. Such an argument leads to the

following:

a. Assuming that a quantifiable dimension of risk yields results to a fairly good

approximation, subjectivity would still remain but an effort can be made to reduce it’s

degree in all Credit Risk Assessment efforts.

b. The appraiser at the operative level would have to take responsibility for the subjective

portion of the risk assessment.

c. Such a crucial responsibility may act as a drag on the efforts of the bank to increase the

quantum of credit off-take and hence improve the market share.

d. Such a change can be met resolutely by putting in place a committee system in

decision

making right from a medium size branch.

e. Also it would be accepted that a CRA framework can yield result upto a certain degree

of approximation and any notion of complete mapping of risk is only a theoretical

proposition burdened with uncertainty, limits of human capability, inadequacy of



complete mathematical formalism and hence impossibility.

f. Such an understanding would ultimately also help in minimizing the risk avoidance

behavior which is best tackled in a negative way at present by not entertaining a

proposal.

CRA MODEL: A SUMMARY

a. A single unified model for all the bands of C & I, SSI and AGL segments

( excluding Trade and NBFC sectors) for exposure (FBL+NFBL) above Rs.25

lacs.

b. Single rating for a company enjoying both working capital and term loan

facilities.

c. Rationalisation of Value statements with reduction in sub-brackets wherever

found necessary.

d. Decrease in the financial score from 66 to 47.

e. A new set of parameters identified and collectively put under ‘Business Risks’

carrying 20 marks. To qualify for financial assistance the company would have to

secure full marks (02) under the parameter, “Compliance of Environment

Regulations”. Incase the existing units in the books of the bank do not secure full

marks (02), the bank would explore all possibilities for exercise of the exit option.

f. Reduction in the Industry Risk score from 24 to 08

g. Increase in Management Risk score from 10 to 25

h. Maintaining the negative marks for Qualitative score at 10.

i. The Quantitative (Dynamic) – Industry comparison under Financial Risk only to

be commented upon as a collateral tool for recommendation/sanction of a

proposal.

j. The Quantitative (Dynamic)- Historical comparison deleted and the parameters

aligned with ‘Trends in Performance’ under Financial Risk.

k. In case a company scores zero in any of the three parameters of Management Risk

i.e. (i) ‘Integrity/Corporate Governance’, (ii) ‘Track Record’ and (iii) Managerial



l. Competence/Commitment’, there would be no need for further assessment of risk

and the proposal would be declined. As a corollary to this, the management risk

factors would be the first risk bracket to be assessed and only in the event of the

company meeting the sub hurdle requirements in the above three parameters ,

other types of Risk Assessments would follow. In case the existing units in the

books of bank score zero, the bank would explore all the possibilities for the

exercise of exit option.

m. To conform to the new loan policy SB4/SBTL4 would be the hurdle rate for new

connections/enhancement in the limits of existing accounts.

The Detailed Structure of the CRA Framework

SET 1:

A. Financial Risk

(a) Static Ratios

SL.No Ratios Score

(i) Current Ratio 5

(ii) TOL/TNW 5

(iii) PAT/Net sales (%) 10

(iv) PBDIT/NET Sales (Times) 5

(v) ROCE (%) 5

(vi) Inventory/ Net Sales+Recievables/Gross Sales (Days) 5

(vii) Trends in performance 3

TOTAL 38

(b) Future Prospects :

SL.No Parameters Score

(i) Projected Profitability 3

(ii) Non-Achievement of Projected Profitability (-3)

TOTAL 3



© Risk Mitigation: Collateral Security/Financial Standing


(i) Collateral Security/Financial Standing 6

TOTAL 6

B. BUSINESS RISK:


(i) Technology 4

(ii) Capacity Utilization vs Break Even Point 2

(iii) Compliance of Environment Regulations 2

(iv) User/Product Profile 2

(v) Consistence in Quality 4

(vi) Distribution Network 2

(vii) Consistency of Cash Flows 4

TOTAL 20

C. INDUSTRY RISK


(i) Competition 2

(ii) Cyclicality/Industry Outlook 2

(iii) Regulatory Risk 2

(iv) Contemprorary Issues like WTO, etc. 2

TOTAL 8

D. MANAGEMENT RISK


(i) Integrity: Sole properitory firm / partnership firm / Pvt. Ltd.



Companies

Or

Integrity (for corporate) : corporate governance

(ii) Track Record 3

(iii) Managerial Competence/ Commitment 3

(iv) Expertise 2

(v) Structure & Systems 2

(vi) Experience in Industry 2

(vii) Credibility: Ability to meet Sales Projections 2

(viii) Credibility: Ability to meet Profit (PAT) Projections 2

(ix) Payment Record 2

(x) Strategic Initiatives 2

(xi) Length of relationship with bank 2

TOTAL 25

E. QUALITATIVE FACTOR


(i) Marks under Qualitative Factors (-10)

F. SUMMARY

Risk Category Sub-Total Score Total Score

(i) Financial Risk

a) Static Ratios 38

47 b) Future Prospects 3



c) Risk Mitigation:Collateral

Security/ Financial Standing

6

(ii) Business Risk 20 20

(iii) Industry Risk 8 8

(iv) Management Risk 25 25

TOTAL 100 100

(v) Qualitative Factors

(Negative Parameters) (-10) (-10)

QUANTITATIVE (Dynamic) – Industry comparison*

(A)

Ratios for

comparison

(B)

Company’s

ratio as per

their latest

audited

financials

(C)

Latest

Industry

Average

figures as per

CMIE

database

(D)

Comparative position

Of (B) vs (C)

Better At Par Worse

(i) Current Ratio

(ii) TOL/TNW

(iii) PAT/

NetSales(

%)

(iv)Inventory+

Receivables/ Net

sales

(Days)

SET 2:

A. Financial Risk



(a) Static Ratios

SL.No Ratios Score

(i) Current Ratio 5

(ii) TOL/TNW 5

(iii) PAT/Net sales (%) 10

(iv) PBDIT/Intt 5

(v) Trends in performance 3

(vi) Gross Average DSCR (for all loans) 10

TOTAL 38

Gross Average DSCR (for all loans)

Range Score

>=2.00 10

>=1.80 8

>=1.60 6

>=1.40 4

>=1.25 2

<1.25 0

(b) Future Prospects :


(i) Projected Profitability 3

(ii) Non-Achievement of Projected Profitability (-3)

TOTAL 3

© Risk Mitigation :Collateral Security/Financial Standing


(i) Collateral Security/Financial Standing 6



TOTAL 6

B. BUSINESS RISK:


(i) Technology 4

(ii) Capacity Utilization vs Break Even Point 2

(iii) Compliance of Environment Regulations 2

(iv) User/Product Profile 2

(v) Consistence in Quality 4

(vi) Distribution Network 2

(vii) Consistency of Cash Flows 4

TOTAL 20

C. INDUSTRY RISK


(i) Competition 2

(ii) Cyclicality/Industry Outlook 2

(iii) Regulatory Risk 2

(iv) Contemprorary Issues like WTO, etc. 2

TOTAL 8

D. MANAGEMENT RISK


(i) Integrity: Sole properitory firm / partnership firm / Pvt. Ltd.

Companies

Or

Integrity (for corporate) : corporate governance

(ii) Track Record 3

(iii) Managerial Competence/ Commitment 3

(iv) Expertise 2



(v) Structure & Systems 2

(vi) Experience in Industry 2

(vii) Credibility: Ability to meet Sales Projections 2

(viii) Credibility: Ability to meet Profit (PAT) Projections 2

(ix) Payment Record 2

(x) Strategic Initiatives 2

(xi) Length of relationship with bank 2

TOTAL 25

E. QUALITATIVE FACTOR


(i) Marks under Qualitative Factors (-10)

F. SUMMARY

Risk Category Sub-Total Score Total Score

(i) Financial Risk

a) Static Ratios 38

47 b) Future Prospects 3

c) Risk Mitigation:Collateral

Security/ Financial Standing

6

(ii) Business Risk 20 20

(iii) Industry Risk 8 8

(iv) Management Risk 25 25

TOTAL 100 100

(v) Qualitative Factors

(Negative Parameters) (-10) (-10)



QUANTITATIVE (Dynamic) – Industry comparison*

(A)

Ratios for

comparison

(B)

Company’s

ratio as per

their latest

audited

financials

(C)

Latest

Industry

Average

figures as per

CMIE

database

(D)

Comparative position

Of (B) vs (C)

Better At Par Worse

(i)Current Ratio

(ii)TOL/TNW

(iii)PAT/NetSales(%)

(iv)Inventory+

Receivables/ Net

sales

(Days)

RATING SCALE

The accounts would continue to be rated on a 8 point scale from SB1 to SB8 and SBTL1

to SBTL8 pertaining to working capital loan respectively.

The rating scale would however, correspond to the new band of marks as under:

SB1/SBTL1 >=90 SB5/SBTL5 >=45




HURDLE RATE /SCORE / GENERAL CONDITIONS



a. SB4/SBTL4 would the hurdle rate for new connections/enhancements in case of

existing accounts in terms of the new loan policy.

b. Minimum scores pertaining to financial, industry and management risks have

been redesigned. The new benchmark of minimum score under Business Risk has

been evolved.

c. The risk rating summary as per the format and pertaining to the type of facilities

availed would form an integral part of the risk assessment.

CRA STRUCTURE

FINANCIAL RISK- WORKING CAPITAL Static Ratios

(Maximum Score : 38)

(i) Current Ratio (CR) (Current Assets/ Current Liabilities)

(ii) TOL/TNW (Total Outside Liabilities / Tangible Networth)


Range Score

>=1.33 5

>=1.25 4

>=1.17 3

>=1.10 2

>=1.00 1

<1.00 0


(iii) PAT / Net Sales (%) (Profit after Tax / Net Sales)

(iv) PBDIT/INTT (Profit Before Depreciation, interest & Tax / Interest


Range Score

<=1.50 5

<=2.00 3

<=2.50 2

<=3.00 1

>3.00 0

Range Score

>=7.50 10

>=6.00 8

>=4.50 6

>=4.00 4

>=2.50 2

<2.50 0

Range Score

>=3.50 5

>=3.00 4

>=2.50 3

>=2.00 2

>=1.50 1

<1.50 0


(v) Return on Capital Employed (ROCE) (%) (PBDIT / Total Assets)

(vi)(Turnover of current assets)

INV /Net Sales + Receivables / Gross Sales (Days)

(vii) TRENDS IN PERFORMANCE: Maximum Marks (+03): Table 1


Range Score

>=15.50 5

>=12.50 4

>=10.00 3

>=8.50 2

>=7.00 1

<7.00 0

Range Score

<=90 5

<=120 4

<=150 3

<=180 2

<=210 1

>210 0


Sl.No Static Ratios as per

audited Financials

Score in past three years as per

static ratios score chart

Year 1 Year 2 Year 3

Latest Score

Year 4

i) Current Ratio

ii) TOL/TNW

iii) PAT/Net Sales (%)

iv) Return on capital employed

(ROCE) (%)

TOTAL SCORE

The total marks scored by a company in table 1 are to be put in the relevant brackets in

table 2 given below to indicate the aggregate score.

Range Score

Continuous improvement in performance compared to the base year 1 as

evidenced by continuous increase in score From Year 2 to Year 4 as per the

score table

03

Deterioration in performance in year 2 compared to base Year 1 but

improvement in the Year 3 & Year 4 (in comparison to Year 1 & Year 2)

as per the score table/ continous improvement for a company in existence

for only 03 years.

02

Improvement in performance only in Year 4 compared to earlier

years/improvement in performance for a company in existence for only 02

years /static performance for a company in existence for >=< 4 tears

01

Deterioration as evidenced by reduction in score over the years for

companies belonging to any existence range (minimum 02 years) to

facilitate comparison

0

Table 2



To score the maximum marks of 3, the borrowing company should be in existence for

atleast 04 years to facilitate the above comparison.

TOTAL SCORE: 38

CRA STRUCTURE

FINANCIAL RISK- TERM LOAN (Maximum Score: 25)

(i) Project D/E (ii) TOL / TNW

(iii)Gross Average DSCR of the project (iv) Gross Average DSCR for all

Loans


Range Score

<1.50 5

>=1.50 4

>=1.60 3

>=1.70 2

>=1.80 1

>=2.00 0

Range Score

<=1.50 5

<=2.00 3

>=2.50 2

>=3.00 1

>3.00 0

Range Score

>=2.00 5

>=1.80 4

>=1.60 3

>=1.40 2

>=1.25 1

<1.25 0

Range Score

>=2.00 5

>=1.80 4

>=1.60 3

>=1.40 2

>=1.25 1

<1.25 0


(v) Terms of Repayment

Range Score<5 5

>=5 4>=6 3>=7 2>=8 1>=10 0

TOTAL SCORE : 25 NEW CRA STRUCTURE

FINANCIAL RISK

A. FUTURE PROSPECTS PARAMETER

1A Projected Profitability (PAT/ Net Sales) (%)

(i) The profitability projections for the coming year is 6% more than the

immediate last financial year.

(ii) The profitability projections for the coming year are 3% to 4% more

than the immediate last financial year.

(iii) The profitability projections for the coming year exceeds by less than

3% than the immediate last financial year

1B Non-achievements of projected Profitability (PAT/Net Sales) (%) [Maximum Marks :(-3) ]

(i) The actual profitability >=90% of the projections(ii) The actual profitability >=80% but <90% of the projections(iii) The actual profitability <80% of the projections

TYPE (D) : VARIOUS COMBINATIONS OF CS/ FS FOR SCORING

(i) Tangible Collateral only;

(ii) Only Guarantees;



(iii) Only Financial Standing;

(iv) A combination of (a) Tangible Collateral & (b) Guarantees;

(v) A combination of (a) Tangible Collateral & (b) FS

(vi) A Combination of (a) Guarantees & (b) Financial Standing

CRA STRUCTURE BUSINESS RISK

To qualify for financial assistance, the company would have to secure full marks (02)

under the parameter, “Compliance of Environment Regulations.” In case of existing units

in the books of the bank do not secure full marks (02), the bank would explore all

possibilities for exercise of the exit option.

1. TECHNOLOGY

(i) World class technology and capability systems or tie up with a world class major. The

Company are capable to withstand competition

Or

The company have a proven technology to withstand competition

Or

The technological capability to be built up by the new company would enable it to

withstand competition.

(ii) The existing technology is adequate to a great extent and not subject to any vast

changes in medium term. The company can sustain competition sometime.

Or

The existing technology allows the company to meet the demands of competition to some



extent.

Or

The technological base designed for the new company would be sufficient enough to

enable them to compete in the market for sometime.

(iii) Obsolete technology. The company lacks the financial capability/ will to undertake

technology upgradation and hence are unable to withstand competition in the event

of even moderate fluctuations.

Or

The technological plan of the new company is obsolute and it would be difficult for

them to compete in the market to sustain their operations.

2. CAPACITY UTILIZATION vs BREAK EVEN POINT (BEP)

(i) The existing capacity utilization is 30% above BEP

Or

The capacity utilization projected for the new company is 30% above BEP.

(ii) The existing capacity utilization is 20% above BEP

Or

The capacity utilization projected for the new company is 20% above BEP

(iii) The existing capacity utilization is less than 20% over BEP.

Or

The capacity utilization projected for the new company is less than 20% above

BEP.



3. COMPLIANCE OF ENVIRONMENT REGULATIONS

(i) Full compliance of environment regulations.

Or

The project report of the new company envisages full compliance of the new

environment regulations before the start of commercial production.

(ii) Partial compliance of the environment regulations

Or

The new company is not expected to be fully compliant with the environment

regulations before the start of commercial production.

(iii) Lopsided compliance / utter disregard of Environment Regulations.

Or

The complince of environmental regulations has not been touched upon in the

project report of the mew company/ the project report is sketchy about the

compliance environmental regulations.



4. USER / PRODUCT PROFILE

(i) Product of wide acceptance/ users. The product is distinctive. There are no

complaints about rejection of the products. The delivery schedules of products are

adhered to

Or

The products of the company have an edge over others; the chances of rejection

are expected to be minimum.

(ii) User of the products have not many substitutes. There are only a few instances of

rejections and by and large the company are able to adhere to the delivery

schedules.

Or

The products of the new company are expected to be well accepted to sustain in

the market.

(iii) The product is custom made to specifications and has no alternative use. The

company is unable to meet the delivery schedule. Frequent rejection of

company’s product

Or

The proposed product profile of the new companies is of a general nature and the

user has other alternative substitutes in case of rejections.



5. CONSISTENCY IN QUALITY


(i) The record of the company in maintaining the quality of the product is

excellent. Sales rejection on account of poor quality are almost non-

existent

Or

The Company are having ISO certification

. Or

The proposed operations of the new company are geared towards

obtaining an ISO certification on account of their stress on maintaining

highest quality standards/ Consistency in quality is to be the hallmark of

their operations.

(ii) The record of the company in maintaining the quality of it’s products is

good. There are only a few cases of sales rejections. There is no ISO

certification.

Or

Although the proposal of the new company does not talk of obtaining ISO

certification as one of it’s goals, there is enough stress on maintaining

consistency in quality of its product.

(iii) There is no consistency in quality and there is no anxiety on the part of the

management to rectify the situation. Sales rejection on account of poor

quality are common. There is no ISO certification.

Or

There is neither adequate stress nor any mechanism designed to be built-in

for maintaining consistency in quality of the product of the new company.


6. DISTRIBUTION NETWORK

(i) Wide distribution for the Company’s products- either it’s own or in

conjunction with others.

Or

Although the company does not have a wide distribution network, the sales

are increasing tear after year.

Or

The management of the new company is optimistic about gradual increase

in sales year after year on account of the uniqueness of its products and its

quality even without a wide distribution network.

(ii) Distribution network in important areas but not large enough to penetrate

the entire market

Or

Despite a small distribution network, the sales are not declining

significantly/show a marginal increase / remain roughly at the same level.

Or

The new company proposes a small distribution network for its products.

Or

The new company expects a marginal increase

(iii) A feeble distribution structure / no structure of its own and the sales show a

declining trend.



7. Consistency of Cash Flows

(i) Cash inflows adequate to meet company’s requirements ( seldom needs

overdrawings) and/or on account of a well laid out policy to take care of

their unhedged portion of forex risk, their cashflows are not going to be

affected.

Or

The cash inflows projected by the new company seem to be adequate and



request for overdrawings is not envisaged and / or on account of a well laid

out policy to take care of their unhedged portion of forex risk, their

cashflows are not going to be affected.

(ii) Cash inflows slightly short of company’s projections (sometimes needs

overdrawings ) and / or the policy to contain the unhedged portion of forex

risk has not been firmed up.

Or

The cash inflows projected by the new company falls slightly short of the

requirements and hence would require additional assistance to meet this gap

and / or the policy to contain the unhedged portion of forex risk has not

been firmed up.

(iii) Cash inflows are not consistent with the projections (often needs

overdrawings) and/or no policy in place to contain unhedged forex risk

CRA STRUCTURE

INDUSTRY RISK

1. COMPETITION

(i) Turnover growth faster than the industry growth.

Or

The turnover growth higher than the industry growth projected for

the new company.

(ii) Turnover growth remains faster but it is at the level of the industry

growth rate

Or



Turnover growth at par with the industry growth projected for the

new company.

((iii) Turnover growth remains static, though there is recession in the

market.

Or

Static turnover growth projected for the new company in new

company in view of recession at present in the market.

(iv) Turnover growth declining.

Or

It would be difficult for the new company to compare in view of

the poor turnover growth projected

2. INDUSTRY OUTLOOK

(i) Long term prospects of industry are excellent.

(ii) Outlook stable except for some critical factors

(iii) Susceptible to unfavourable changes in the economy

(iv) Industry in declining phase

3. REGULATORY RISK

(i) Business operations (BO) remain unaffected by Regulatory Risk

(ii) Effect of regulatory Risk can be contained

(iii) Delicately balanced, Business Operations can be affected if

immediate steps not taken

(iv) Unable to cope with the situtation

4. CONTEMPORARY ISSUES LIKE WTO, ETC.

(i) Adequate capability to handle the effects of contemporary issues 2

(ii) Adequate capability but it requires to be translated into action.

Complacency evident.

1.5

(iii) Adhoc response to industry issues. 1



(iv) Not able to cope with. 0

CRA STRUCTURE

MANAGEMENT RISK Maximum Score :25

INTEGRATING / CORPORATE GOVERNANCE ‘TRACK RECORD ‘ AND

MANAGERIAL COMPETENCE / COMPETENCE / COMMITMENT’are crucial

management risk factors carrying maximum 3 marks each. In case a company scores

zero (0) and the proposal would be declined . In case, the existing units in the books of

the bank would explore all possibilities for the excercise of exit option to protects its

interests.

1.A INTEGRITY : Sole Proprietary Firm / Partnership Firm / Pvt. Ltd. Companies

i) The integrity and character of the management is beyond reproach.

ii) The management is having good reputation about integrity in the market.

iii) Features revealed by reports on conduct of account / stock audit /

periodic inspection reports go against the integrity of the company / The

company is a defaulter under RBI’s willful defaulters list and hence the

Bank should exercise exit option.

1.B INTEGRITY (for Corporate): CORPORATE GOVERNANCE



2. TRACK RECORD


(i) Corporate governance (CG) systems are in place and adhered to fully.

Or

The new company has envisioned to fully comply with CG systems.

(ii) Corporate governance systems are not fully functional / operational .

Or

The new company does not have a specific plan to fully comply with

CG system / plans for CG systems need futher concretization

(iii) There is a partial implementation of corporate governance system;

sufficient effort is not made

Or

There seems to be absolutely no plan for implementation of CG

system in the new company.


3. MANAGERIAL COMPETENCE /COMMITMENT


(i) Maintains financial discipline, absolutely no irregularity in the

account. The Management is very sincere and open to any

suggestions to bring excellence in the financial management.

Or

Although the new company does not have any borrowing

arrangement with any bank / FI’s , it’s other accounts say, current

account etc, are conducted as per norms and they are open to any

suggestions to conform to the rules.

(ii) On a few occasions, repayment of loans is delayed. The

Management tries to set things right but professional approach in

adherence to financial discipline is lacking.

Or

By and large the conduct of other accounts of the new company is

satisfactory. Professional approach in adherence to financial

discipline is lacking.

(iii) Accounts are rendered frequently irregular and the companies do

not respond to counsel to enforce financial discipline. Diversion of

funds by routing of sale proceeds through other banks on record.

Or

The conduct of other accounts of the new company is not

satisfactory and the management is also not responsive to any

suggestions for improvement in the same.


4. EXPERTISE

(i) Eminently qualified professionals are working as a cohesive team.(ii) Company has few professionals on its roll and is basically run/

managed by non-professional owners.(iii) The management centres around one or two persons only. Professional

expertise is lacking.


(i) An exceptionally high level of competence & competence &

commitment evidenced by their record in timely execution of projects

as gathered from various market sources including banks/ PSUs /

Govt. Depts./ Multinational Companies

Or

An exceptionally high level of competence & Commitment in respect

of new company as gathered from market sources.

(ii) Although managerial competence / commitment exists, but due to

lack of proper planning / strategy, execution of projects / work

undertaken are delayed.

Or

Although managerial competence / commitment in the new company

exists, market reports suggests lack of proper plan / strategy for

execution of a project/ work. A cohesive thrust is lacking.

(iii) There is total chaos in the execution of projects/ works undertaken,

the completion of which are either inordinately delayed or not

completed at all. The managerial competence is totally lacking and

there is no commitment on the part of management to bring an

improvement in the affairs of the company.

Or

Market reports suggest lack of managerial competence / commitment

in the new company set up to continue any venture.


5. STRUCTURE AND SYSTEMS

(i) Excellent budgeting and costing system are in place. MIS is perfect and working.

Or

Design of an excellent budgeting and costing system proposed in the project of the

new

company.

(ii) Although budgeting, costing and MIS are in place, proper implementation efforts are

lacking.

Or

Although the design of an excellent budgeting & costing system are proposed in the

project of the new company but given the profile of the personnel, there seems to be

a

concern about their actual implementation.

(ii) Systems not in place. All decisions centre around one person takes

adhoc decisions.Reporting systems are non-existent.

Or

All systems in the new company are designed with only one person as the fulcrum

without any proper structured set-up to carry out the planning work in his absence. No

reporting system envisaged.

6. EXPERIENCE IN THE INDUSTRY

(i) The management has a long experience in the industry (>=10 years)

(ii) The management has a moderate experience in the line.(>= 5 years)

(iii) The management has relatively less experience in the line. <5 years)

7. CREDIBILITY; ABILITY TO MEET SALES PROJECTIONS

(i) The management’s ability in meeting sales projections is beyond doubts as is

evidenced by their past record of three years (projected vs actuals ). There is a



negative variance of less than 10% in the comparison of the actual vs the

projected

sales figure.

Or

The management of the new company seems to be capable of meeting sales

projections with a negative variance of les than 10 % as per the plan drawn up by

them.

(ii) There is a negative variance of 10 % and above but less than 20% in the actual v/s

the projected sales as is evidenced by their record of past 03 years.

Or

The management of the new company seems to be capable of meeting sales

projections with a negative variance of less than 20% or so as per the discussions

held with the promoter in the event of their operations getting affected by external

factors beyond their control.

(iv) The record of the management in achieving sales projections in the past three

years is poor (actual sales less than 80% of projections.)

Or

A perusal of the project plan of the new company shows that it would not be able

to meet even 80% of its sales projections given the type of products, their pattern

as also its average market penetrating capabilities as extrapolated from the profile

of the Personnel/ poor marketing structure.

8. CREDIBILITY ABILITY TO MEET PROFIT (PAT) PROJECTIONS

(i) The management’s ability in meeting profit projections is excellent. In the last three

years record every year, actuals have either exceeded projections or have shown a

negative variance of less than 10%

Or

The management of the new company seems to be capable to meet profit

projections



with a negative variance of less than 10% or so as per its plan to meet the sales

projections and the corresponding margin of profit in the venture.

(ii) The management’s ability in meeting profit projections may be rated as good. In

the last three years record every year, actuals have shown a negative variance of

either 10% or more but less than 20%

Or

The management of the new company seems to be capable to meet profit

projections with a negative variance of less than 20% or so even in a not too

favorable environment as per the plan drawn up by the promoters to meet the sales

projections and the margin of profit in the venture.

(iii) The management’s ability in meeting profit projections is poor. In the last three

years

record, every year actual profit has always been less than 80% of projections.

Or

A perusal of the proposal of the new company shows that it would not be able to

achieve even 80% of the profit projections.

9. PAYMENT RECORD

(i) The record of meeting commitments to lenders and creditors is excellent. The

company have rarely defaulted on this score.

Or

Market reports suggested that the new company have an impeccable record in

meeting their financial commitments.

(ii) The record of meeting commitments to lenders and creditors is good. The company

have defaulted only once/ twice on this score.

Or

Market reports suggested that by and large, the new company have a good record

in meeting their financial commitments.



(iii) The record of meeting commitments to lenders and creditors is poor. The

Company

have rarely met their commitments in time.

Or

Market reports suggest that the promoters of the new company lack in their resolve

in meeting their financial commitments in time.

10 STRATEGIC INITIATIVES

(i) The management is proactive in taking well thought out initiatives for creating

leadership position for the company.

Or

The management of the company/ new company has the requisite capability to

make it one of the leading ventures in its line of business.

(ii) The management is capable of taking initative but the necessary thrust is lacking/

seems to be lacking. The leadership position at a particular time is on account of a

probability factor and not due to any concerted efforts in this regard.

Or

Although the promoter is capable but the necessary thrust seems to be lacking. The

leadership position at a particular time is on account of a probability factor and not

due to any concerted efforts in this regard / the project & the personnel profiles do

not contain any leadership statement.

(iii) Both the will and capacity to take any strategic initiative are non-existent. The

survival of the company in the market is merely on account of its past reputation

and

not on account of any ongoing effort of the management in this regard/ the current

downswing in the market allows such complacency to survive.

Or

A perusal of the project does not yield any vision/ capability/ strategic statement for

transforming the company to a leadership position.

11.LENGTH OF RELATIONSHIP WITH THE BANK



(i) Dealing with the bank for more than 10 years and their conduct is fully satisfactory.

(ii) Dealing with the bank for more than 5 years and their conduct is fully satisfactory.

(iii) Dealing with the bank more than 10 years/ 5 years and their conduct is by and large

satisfactory.

(iv) Dealing with the bank for more than 10 years / 5 years / less than 10 to 5 tears and

their conduct is not satisfactory.

CRA STRUCTURE

QUALITATIVE FACTORS: NEGATIVE PARAMETERS Maximum Score : (-10)

Details Amount as

per Balance

Sheet

Probability of

Invocation

Amount assessed

to be at Default

A. Contingent Liabilities 1 2 3=1*2

(a) Claims against disputed tax

liabilities/ Excise Duties

(b) Claims against the company

not acknowledged as debts

© Corporate guarantee given

without bank’s permission/

approval

B. Auditors qualifying remarks

having impact on financials

/profitability

B. Accounting policies

a. valuation of inventory,

b. capitalization, c.

depreciation and



d. revaluation

D. Any other factors

Total

Linkages between total marks (negative) and the effect on the TNW of the company to be

graded as under:

If total amount under 3 is -ve marks to be given

>10% of TNW 10

>8% of TNW 8

>6% of TNW 6

>4% of TNW 4

>2% of TNW 2

<=2% of TNW 0

GENERAL CONDITIONS a. Apart from the risk rating of the credit exposure done at the time of the first

sanction, the risk rating under CRA system should normally be reviewed

annually, The CRA exercise would be independent of renewal; in other words,

risk rating need not necessarily be done only annually based on the audited

financial results as soon as these are available. The renewal exercise can proceed

simultaneously or follow subsequently.

b. Below the hurdle rate of SB4/ SBTL4, the risk assessment is to be undertaken at

half-yearly intervals and in critical cases, at quarterly intervals.

c. The assets classified as ‘Sub-standard’ and below, are outside the purview of this

Credit Risk Rating.

Procedure of Credit Rating

Analysis of Audited B/S, P & Loss A/c, various schedules every year



Credit rating is revised every year

Above Rs2500000 Credit rating is compulsory

Securities Covered under credit rating

Primary Securities: Hypothecation charge over the Current Assets and Fixed

assets. Where finance is extended for acquisition of land and building, building

construction, up gradation and renovation of offices, showrooms and godowns

etc. equitable mortgage of relative fixed assets will be considered as the primary

security.

Collateral Securities: This is extra security provided by a borrower to back up

his/her intention to repay a loan.

Agency norm followed by SBI

SMERA – Small & Medium Enterprise Rating Agency of India

Documents required for credit rating

Audited B/S, Profit & Loss Account Schedules & Annexures

Company’s Memorandum of Understanding, Articles of Association, Board of Directors, Board Resolution

Registration of Company (ROC) Certificate

Incase of Limited Company



Stock Market certificate – Authorised person to operate account Company’s can take loans Authorised by Articles of Association & Memorandum of Understanding

In case of Partnership – Partnership deed is required.

Benefits of credit rating to SBI

Financial health of the company can be known through credit rating. A good rated company gets acceptability in the industry and

market.

Helps to determine rate of interest on loans.

Factors considered while rating by SBIThe bank sees all the items of Balance Sheet and also considers off-balance sheet parameters for rating. Which are,

Managerial Skill of the person if he wants to start a new business based on his earlier positions

Industry Scenario

International Market

Money Market

Symbols used in credit rating

SB1 to SB7 – For Working Capital SBTL1 to SBTL7 – For Term Loans

(1 being Highly rated and 7 being Low rated)

Type of Industries covered by SBI



Manufacturing Industries Trade & Service Industries

Builders

Educational Institutions

MARGALE FOUNDRIES

INTRODUCTIONIn the year 1976,the founder, Late Shri. M. V. Margale established a unit Margale

Engineering Works with machining activities. The experience, dedication & the

teamwork, led the expansion of MARGALE FOUNDRIES on April 11th 1994, to

manufacture & supply Gray Iron Castings, to meet the requirement of customers.

Today, the unit is equipped with modern machine shop to produce the total finish

products in house. The team of capable Engineers gives the Total Quality Assurance

& ready to mark on Global way, with an achievement of ISO 9001-2000 Quality

Certification.

PRODUCTS Pulleys

Fly Wheels

Bell housing

OBJECTIVES Customer Satisfaction.

Up-gradation in work culture & work Technology.

Continuous Improvement.

Optimum utilization of Resources.

Employee Satisfaction

COMMITMENTSThe Quality Control procedure is followed with Total Quality Management Philosophy



and ISO 9001-2000 quality management ensure, Total Customer Satisfaction.Margale Foundries are always on the toes to take up the Challenges of new Development & Technologies. They ensure the Product delivery on time and all time with 100% Quality. With this commitment, they are striving for the achievement of QS 9000.QUALITY POLICY

They manufacture and supply the Product to the Customer’s Satisfaction in totality.

Their work culture ensures delivery in time with best quality and precise quantity with continuous improvement.

They up-grade ourselves with new technology of resources and keeping the good environment.

MANUFACTURING ACTIVITYThey manufacture Gray Iron Castings in various grades, mainly used in the

Automobile, Air Conditioning Industry, Transmission & Machine Tools.

CUSTOMERSSome Of the Customers are :-

Disa India Limited

Same Deutz-fahr India Ltd

Lombardini India Private Ltd.

Kirloskar McQuay Ltd.

Greaves Cotton Limited.



STUDY OF THE CREDIT RISK RATING ANALYSIS OF MARGALE

FOUNDRIES

INDUSTRY SCENARIO: Due to the revival of automobile industry, the activity at the foundries has picked up. The

orders and payment position of foundries have improved substantially. MF was not able to

catch this benefit as the unit supplied to M/s SAME deutz Fahr India Pvt.Ltd. who have

defaulted in payment to the tune of Rs.15.00 lacs. Of late the unit has been diversifying it’s

customer base and will be able to make higher sales and profit during next year.

BRIEF BACKGROUND:The unit is in the line of activity of castings for the past 10 years. Mr. Vishwanath Margale,

a qualified diploma holder in Mechanical Engineering is having good experience in the line

of activity, manages it. His father Shri.Marutirao Vishnu. Margale started with a small unit

by name M/s Margale Engineering Works (MEW) in the year 1975 and he is banking with

State Bank of India since 1975.On 01.11.2001 Mew was merged with Margale Foundries.

The unit is producing auto components like Fly wheel, oil sump, Manifold Pulleys etc.

The overall management of the unit is satisfactory.

Name of the Partners Profit sharing Ratios

1) Shri. Vishwanath. M.Margale 25%

2) Shri. Ravi. M. Margale 25%

3) Shri Mandakani. M. Margale 25%

4) Shri Sanjivani. M. Margale 25%



ASSESSMENT OF WORKING CAPITAL REQUIREMENTS

OPERATING STATEMENT

Name: MARGALE FONDRIES As per profit and loss account actuals/

Estimates for the year ended/ending [Rs in lacs]

2004 2005 2006 2007

YR.BEFORE LAST.YEAR CURR.YEAR FOLLOWINGLAST

AUDITED AUDITED ESTIMATED YEAR-PROJ1.Gross sale[i] Domestic sales 151.96 128.29 190.00 227.00[ii] Export salesAdd other revenue income

13.03 11.73 13.00 15.00

Total 164.99 140.02 203.00 242.00

2. Less Excise Duty 16.32 17.69 26.20 31.30Deduct other items3. Net Sales [item1-item 2]

148.67 122.33 176.80 210.70

4. % rise [+] or fall [-] in NA -17.72% 44.53% 19.17%



net sales as compared to last year[annualised]

5.Cost of salesi] Raw materials [including stores and other items used in the process of manufacture]

82.95 71.76 105.50 126.04

[a] Imported[b] Indigenous 82.95 71.76 105.50 126.04

ii] Other spares 1.68 0.38 0.40 0.41[a] Imported[b] Indigenous 1.68 0.38 0.40 0.41

iii] Power and fuel 11.21 12.93 16.00 19.12

iv] Direct labour [factory wages]

12.67 9.13 13.35 16.00

v] Other mfg.expenses 12.92 8.25 12.00 14.30

vi] Depreciation 6.25 5.79 5.00 4.50

vii] SUB-TOTAL [i to vi]

127.68 108.24 152.25 180.37

viii] Add:Op.stocks-in-process

13.42 21.02 31.12 34.00

Sub-total 141.10 129.26 183.37 214.37

ix] Deduct: Cl.stocks –in-process

21.02 31.12 34.00 35.00

x] Cost of production 120.08 98.14 149.37 179.37

xi] Add: Op.stock of FG 0.00 0.00

Sub- Total 120.08 98.14 149.37 179.37

xii] Deduct: Cl.stock of FG



xiii] Sub-total [total cost of sales]

120.08 98.14 149.37 179.37

6.Selling, Genl.& Admn.expenses

21.02 15.05 17.50 21.00

7.Sub-total[5+6] 141.10 113.19 166.87 200.37

8. Op.Profit before Interest[3-7]

7.57 9.14 9.93 10.33

9.Interest 6.15 6.86 7.00 7.00

10. Op.Profit after Interest[8-9]

1.42 2.28 2.93 3.33

11.[i] Add other non-op.income[a] int on rd/td/it/discount

0.23 0.03 0.05 0.05

[b] Cenvat receiptsSub –total[income] 0.23 0.03 0.05 0.05

[ii]Deduct other non op.exp.[a][b]Sub –total[expenses] 0.00 0.00 0.00 0.00[iii] Net of non- op.income/exp

0.23 0.03 0.05 0.05

[iv] Expenses Amortised

12.Profit before tax/loss [10+11(iii)]

1.65 2.31 2.98 3.38

13.[a] Provision for taxes[b]Provision for deferred tax

14. Net Profit/loss [12-13]

1.65 2.31 2.98 3.38



15. [a] Equity dividend paid-amt [Already paid+B.S.Prov][b] Dividend rate

16. Retained Profit[14-15]

1.65 2.31 2.98 3.38

17.Retained profit/Net Profit[%]

100.00 100.00 100.00 100.00

ANALYSIS OF BALANCE SHEET

Name: MARGALE FOUNDRIES

As per balance sheet as at: [Rs. In lacs]LIABLITIES 2004 2005 2006 2007

YR.BEFORELAST

AUDITED

LAST YEARAUDITED

CURRENTYEAR

ESTIMATED

FOLLOWING YEAR

PROJECTEDCURRENT LIABLITIES1. Short term borrowings from banks [incld bills purchased, discounted & excess borrowings placed on replacement basis][i] From applicant Bank

35.61 39.98 35.00 35.00

[ii] From other Banks

[iii] [of which BP & BD]

Sub-Total [A] 35.61 39.98 35.00 35.00

2. Short term borrowings



from others

3. Sundry creditors [Trade]

18.10 21.13 23.51 26.65

4. Advance payment fromcustomers/deposits from dealers

5. Provision for taxation

6. Dividend payable

7. Other statutory liablities 14.99 1.44 1.44 1.44

[due within one year]

8. Deposits/Installments

Of term loans/DPGs/

Debentures,etc.

[payable wihin one year]

9. Other Current liabilities 0.84 1.47 1.47 1.47

& Provisions [due

Within 1 year]

Sub-Total [B] 38.37 26.44 28.82 31.96

10. TOTAL CURRENT 73.98 66.42 63.82 66.96

LIABLITIES

[total of 1 to 9 excld 1

[iii]]



TERM LIABLITIES

11. Debentures [not

Maturing within one

Year]

12. Preference shares

[Redeemable after one

Year]

13. Term Loans [excld 16.93 12.58 10.18 7.78

Installments payable

within one year]

14. Deferred Payments

Credits [excluding

Installments due within

One year]

15. Term deposits

[repayable after one year]

16. Other term liabilities

17. TOTAL TERM 16.93 12.58 10.18 7.78

LIABLITIES

18. TOTAL OUTSIDE 90.91 79.00 74.00 74.74

LIABLITIES [Item 10



Plus item 17]

NET WORTH

19. Ordinary share capital 30.46 43.30 43.30 43.30

20.General Reserve

21. Revaluation Reserve

22. Other reserves

[excluding provisions]

23. Surplus (+) or Deficit 1.65 3.96 6.94 10.32

(-) in Profit & Loss

Account

23 a. Deferred Tax

Liability [DTL]

b. others [specify]

24. NET WORTH 32.11 47.26 50.24 53.62

25. TOTAL 123.02 126.26 124.24 128.36

LIABLITIES

ASSETS



CURRENT ASSETS

26. Cash and bank 0.47 0.09 0.10. 0.12

balances

27. Investments [other 0.31 0.32 0.35 0.40

Than long term

Investments]

[i] Government & other

Trustees securities

[ii] Fixed deposits with 0.31 0.32 0.35 0.40

banks

28. [i] Receivables other 36.02 32.53 32.95 40.50

Than deferred & exports

Incld. Bills purchased &

Discounted by banks]

[ii] Export receivables

[including bills purchased

& discounted by banks]

29. Installments of

Deferred receivables

[due within one year]

30. Inventory: 21.02 31.12 34.00 35.00

[i] Raw Materials

[including stores and other

Items used in the mfg.]



[a] Imported

[b] Indegenous

[ii] Stocks in process 21.02 31.12 34.00 35.00

[iii] Finished goods

[iv] Other consumable

Spares

[a] Imported

[b] Indegenous

31. Advances to suppliers 0.63 0.16 0.15 0.15

Of raw materials &

stores/spares

32. Advance payment 0.35 0.02 0.02 0.02

Of taxes

33. Other current assets 1.52 2.10 1.75 1.75

[specify]

34. TOTAL CURRENT 60.32 66.34 69.32 77.94

ASSETS [Total of 26 to

33]

FIXED ASSETS

35. Gross Block [land & 84.84 85.48 85.48 85.48

Building machinery,



Work-in-progress]

36.Dpreciation to date 23.21 29.00 34.00 38.50

37. NET BLOCK [35-36] 61.27 56.48 51.48 46.98

OTHER NON-CURRENT

ASSETS

38. Investments/book 1.43 3.44 3.44 3.44

Debts/advances/deposits

Which are not Current

Assets

[i] (a) Investment in

subsidiary Co’s/affiliates

(b) Others 0.82 2.83 2.83 2.83

[ii] Advances to suppliers

Of capital goods &

contractors

[iii] Deferred receivables

[maturity exceeding 1 yr]

[iv] Others 0.61 0.61 0.61 0.61

39.Non-consumable

Stores & spares

40. Other non-current

Assets including dues

From directors



41. TOTAL OTHER

NON-CURR. ASSETS

1.43 3.44 3.44 3.44

42.a. Intangible assets

(patents, goodwill

prelim.Expenses,

bad/doubtful expenses not

provided for etc.

b. Deffered Tax Assets

[DTA]

43. TOTAL ASSETS

[34+37+41+42]

123.02 126.06 124.24 128.36

44. TANGIBLE NET

WORTH [24-21-42]

32.11 47.26 50.24 53.62

45.NET WORKING

CAPITAL [(17+24)-

(37+41+42)]

-13.66 -0.08 5.50 10.98

46. Current Ratio 0.82 10.. 1.09 1.16

47. Total Outside

Liablities/TNW

2.83 1.67 1.47 1.39

48. Total Term

Liablities/TNW

0.53 0.27 0.20 0.15



FUND FLOW ANALYSIS As per Balance sheet as at [Rs. In lacs]

2005 2006 2007

LAST

YEAR

Audited

CURRENT

YEAR

ESTIMATED

FOLLOWING

YEAR

PROJECTED

[1] [2] [3]

SOURCES

a. Net Profit [after tax] 2.31 2.98 3.38

b. Depreciation 5.79 5.00 4.50

c. Increase in capital 12.84

d. Decrease in term liabilities

Including term deposits

e. Decrease in

i] Fixed assets

ii] Other non-current assets

f] Others 0.00

g] TOTAL 20.94 7.98 7.88

2.USES

a] Net Loss



b] Decrease in term liabilities

Including public deposits 4.35 2.40 2.40

2005 2006 2007

c] Increase in

i] Fixed assets 1.00

ii] Other non-current assets 2.01

d] Dividend payment

e] Others

f] TOTAL 7.36 2.40 2.40

3. Long Term Surplus/Deficit 13.58 5.58 5.48

4. Increase/Decrease in current assets as

per details given below

6.02 2.98 8.62

5. Increase/Decrease in current

Liabilities other than bank borrowing -11.93 2.38 3.14

6. Increase/Decrease in working capital 17.95 0.60

gap

7. Net surplus [+]/ deficit [-] -4.37 4.98

8. Increase/decrease in bank borrowing 4.37 -4.98



INCREASE / DECREASE – NET

SALES

-26.34 54.57 33.90

Break up of [4]

[i] Increase/Decrease in Raw Materials

[ii] Increase/Decrease in Stocks-in- 10.10 2.88 1.00

process

[iii] Increase/Decrease in Finished Goods

[iv] Increase/Decrease in Receivables

[a] Domestic -3.49 0.42 7.55

[b] Export

[v] Increase/Decrease in stores and

Spares

[vi] Increase/Decrease in other -0.59 -0.32 0.07

Current assets

TOTAL 6.02 2.98 8.62



IMPORTANT RATIOS/ KEY FINANCIAL PARAMETERSMARGALE FOUNDRIES

2004 2005 2006 2007

YR. BEFORE

LAST

AUDITED

LAST

YEAR

CURRENT

YEAR

Following Year

PROJECTED

PAT/ Net sales [%] 1.11 1.89 1.69 1.60

Net Working Capital -13.66 -0.08 5.50 10.98

Current Ratio 0.82 1.00 1.09 1.16

PBDITA / Interest 2.28 2.18 2.14 2.13

ROCE (%) 11.42 11.85 12.06 11.59

Paid up capital 30.46 43.30 43.30 43.30

Tangible Net Worth 32.11 47.26 50.24 53.62

Adjusted Tangible Net Worth 32.11 47.26 50.24 53.62

TOL/TNW 2.83 1.67 1.47 1.39

TOL/ Adjusted TNW 2.83 1.67 1.47 1.39

CRA-RISK RATING SUMMARY



Unit Name : MARGALE FOUNDRIES

Financials as on: 2005 [Audited]

A. FINANCIAL RISK PARAMETERS VALUE MAX

SCORE

UNIT’S

SCORE

[a] STATIC RATIOS

Current Ratio 1.00 5 1

TOL/TNW 1.67 5 3

PAT/Net sales (%) 1.89 10 0

PBDIT/NET Sales (Times) 2.18 5 2

ROCE(%) 11.85 5 3

Inventory/ Net Sales+ Receivables/Gross Sales

(Days)

178 5 2

Trends in performance 3 0

Sub-Total 38 11

[b] FUTURE PROSPECTS

Projected Profitability 3 3

Non-Achievement of Projected Profitability (-3) -3

Sub-Total Score (out of 6) 3 0

[c] Risk Mitigation :Collateral

Security/Financial Standing

6 6

Sub-Total 6 6

TOTAL FINANCIAL RISK SCORE 47 17

QUALITATIVE RISK FACTORS [NEGATIVE

PARAMETERS

(-10) 0

B. BUSINESS RISK PARAMETERS

Technology 4 2

Capacity Utilization vs Break Even Point 2 1

Compliance of Environment Regulations 2 2

User/Product Profile 2 1



Consistence in Quality 4 4

Distribution Network 2 1

Consistency of Cash Flows 4 0

TOTAL BUSINESS RISK SCORE 20 11

C. INDUSTRY RISK PARAMETERS

Competition 2 1.5

Industry Outlook 2 2

Regulatory Risk 2 2

Contemporary Issues like WTO, etc. 2 2

Aggregate Ind.Risk Score (Out of 8) 8 7.5

MANAGEMENT RISK PARAMETERS

Integrity 3 3

Track Record 3 2

Managerial Competence/ Commitment 3 2

Expertise 2 2

Structure & Systems 2 2

Experience in Industry 2 2

Credibility: Ability to meet Sales Projections 2 1

Credibility: Ability to meet Profit (PAT)

Projections

2 1

Payment Record 2 1

Strategic Initiatives 2 2

Length of relationship with bank 2 2

TOTAL MANAGEMENT RISK SCORE 25 20

AGGREGATE SCORE 100 55.5

RISK RATING SB-4

FINDINGS

1. Sales:



The unit could sell Rs.122.33 lacs. The unit was sourcing its major portion of

sales to one customer M/s SAME Deutz-Fahr India Pvt Ltd.

The unit faced problems in realization of sale proceeds from. M/s SAME Deutz-

Fahr India Pvt Ltd which caused liquidity crisis in the unit and the production

too suffered during the last year.

The unit has achieved sales of Rs. 145.00 lacs during the current year up to

February 2006 and is likely to achieve the target of Rs 176.80 lacs for the year.

2. Net Profit The unit has achieved a net profit a Net Profit of Rs. 2.31 lac as and has fallen

short of the estimate of Rs. 2.70 lacs during the last year.

The delay in realization of receivables hindered the unit from producing upto the

mark and selling more, ending up short of targeted sales and net profit.

The unit has taken steps to stop supplying to the defaulting customers, thus

avoiding the danger of dependency on a single one.

3. TNW & Gearing Ratio The TNW of the unit has improved from Rs. 32.11 lacs to 42.26 lacs over the

year due to bringing in capital to the tune of Rs. 12.84 lacs by the partners.

The gearing ratio improved from 2.83 as on 31.03.2004 to 1.67 as on

31.03.2005.

With the plough back of profits the TNW and the gearing ratio is likely to

improve further to 1.47 during the year ending 31.03.2006

4. Current Ratio During the year 2004-2005, the current ratio was at 1.00 as as against the

estimate of 1.10. This is due to locking up of receivables with SAME deutz Fahr

India P. Ltd., the unit’s major customer.

The position is expected to improve to 1.09 during the current year and further

to 1.16 during the next year.

The unit’s current ratio was lower at 1.00 as against the benchmark of 1.33



The unit faced liquidity crunch during the last year due to non realization of

receivables from a major customer, effecting the operations.

5. Credit Risk Assessment (CRA) Model The bank carries the credit risk assessment based on the norms of SMERA agency

and the Credit Risk Assessment (CRA) model.

Risk Rating is done annually based on the audited financial results as they are

available to the bank.

Below the risk hurdle rate of SB4 / SBTL4, the risk assessment is undertaken at

half yearly intervals & in critical cases, at quarterly intervals.



SUGGESTIONS TO M/S MARGALE FOUNDRIES 1. The CRA (Credit Risk Assessment) Rating of M/s Margale Foundries is SB4,

which is just the hurdle rate and needs to improve by improving upon the

following:

The current ratio can be improved by addressing individual current assets like

holding the inventory for a minimum period, by managing the bills receivables

promptly.

As there was delay in realisation of receivables the unit should take steps

to stop supplying to default customers & try to develop new customers.

2. The unit faced liquidity crisis due to non realisation of receivables from M/s Same

Deutz Fahr Pvt Ltd., a major customer effecting the operations hence the unit

should take steps to diversify its customer base & put necessary efforts to collect

from such default customers by offering discounts and allowances.

SUGGESTIONS ON CREDIT RISK RATING ASSESSMENTS Credit policies and procedures should necessarily have the following elements:

Banks should have written policies that define target markets, risk acceptance

criteria, credit approval authority, credit origination and maintenance procedures

and guidelines for portfolio management and remedial management.

Sound procedures to ensure that all risks associated with requested credit facilities

are promptly and fully evaluated by the relevant lending and credit officers.

Banks should establish proactive CRM practices like annual/half yearly industry

studies and individual obligor reviews, periodic credit calls that are documented,

periodic plant visits, and at least quarterly management reviews of troubled

exposures/weak credits.

Procedures and systems, which allow for monitoring financial performance of

customers and for controlling outstanding within limits.

Banks should have a consistent approach towards early problem recognition, the

classification of problem exposures, and remedial action and maintain a

diversified portfolio of risk assets in line with the capital desired to support such a

portfolio.



The banks should have systems in place for reporting and evaluating the quality

of the credit decisions taken by the various officers.

Banks must have a MIS to enable them to manage and measure the credit risk

inherent in all on and off-balance sheet activities.

CONCLUSIONThe past decade and a half has been a challenging time for the banking sector in India.

The Banks have coped well with these challenges and have emerged stronger from

difficult times. While the banking sector has responded well so far, there are several



challenges that lie ahead. The banking system needs to equip itself to deal with emerging

challenges.

State Bank of India is the largest bank in India with deposits of Rs

3,67,000 crore as on March 31, 2005. It dominates the Indian banking sector with a

market share of around 20% in terms of total banking sector deposits. The increasing

focus on upgrading the technology back-bone of the bank will enable it to leverage its

reach better, improve service levels, provide new delivery platforms, and improve

operating efficiency to counter the threat of competition effectively.

Competition from new private sector and foreign banks remains a key challenge for

public sector banks. They need to reorient their staff and effectively utilise technology

platforms to retain customers and reduce costs.

RISK MANAGEMENT Risks are inherent in any financial intermediation and hence the bank is exposed to

certain risks that arise from its business and the environment within which it operates.

The bank has developed and is implementing various guidelines for managing risks like

setting up exposure limits, systematic internal controls and risk management systems

with consistent approach.

Credit risk or default risk involves inability or unwillingness of a customer or

counterparty to meet commitments in relation to lending, trading, settlement and other

financial transactions. The bank is already measuring credit risk through credit rating /

scoring. The rating of borrowers takes into account various factors like current ratio,

DER, achievement of sales projections, compliance with terms and conditions,

submission of stock statements etc, timely renewal, current profit/projected profit,

availability of security, regular payment of interest/ instalments, submission of financial

statements etc Exposure limits to various industries are reviewed periodically and

reviews on various industries are also undertaken separately. Based on risk perception,

the bank will endeavour to obtain sufficient and suitable tangible collateral securities

wherever possible.

these risks has become a crucial role in modern-day banking. The quality of a bank's risk

management has become one of the key determinants of a success of a bank.



The bank carries the credit risk assessment based on the norms of SMERA

agency and the Credit Risk Assessment (CRA) model. Risk Rating is done annually

based on the audited financial results, as they are available to the bank. M/s Margale

Foundries is a good unit which has a well equipped modern machine shop. It is having

low credit rating. Hence it must try to improve its credit rating.

BIBLIOGRAPHYBooks Referred

Credit Appraisal, Risk Analysis Decision Making - D. D. Mukherjee

A Quarterly House Magazine of State Bank Group

Financial Services - M.Y.Khan



Websites Refereed

www. Sbi.co.in

www. Indiaifoline.com

www.google.com

www.margalefoundries.com


http://www.google.com/


QUESIONNAIRE

Explain the credit rating mechanism followed by SBI?

1. What is the procedure followed for credit risk assessment rating mechanism by

SBI?

3. What are the securities covered under credit rating by the bank?

4. Which agency norms does SBI follow?

5. What are the information to be submitted by the clients for credit rating?

6. What are the symbols used in credit risk assessment rating?

7. What are the benefits of credit rating to SBI?



8. What are the factors considered for credit rating?

9. What are the types of industries covered by SBI for credit rating?

10. Explain in brief Credit Risk Rating of M/S Margale Foundries?

11 What techniques you use for credit risk analysis?

12.Explain in brief SMERA’s rating adopted by SBI?

13. How do you assess the credit worthiness of M/S Margale Foundries?

Thank you


a project report on credit risk rating analysis at sbi commercial branch

Documents

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credit delivery

credit growth

credit risk inherent

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deutz fahr india

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indian banking sector