Introduction 1.1 Rationale of Study A bank is a financial intermediary that accepts deposits and channels those depo sits into lending activities, either directly or through capital markets. A bank connects customer s with capital deficits to customers with capital surpluses. Without a sound and effective banking system in India it cannot have a healthy e conomy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achiev ements to its credit. The most striking is its extensive reach. It is no longer confined to on ly metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the r emote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividen ds with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for g etting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the mo st efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases 1.1.1 Functions of Bank (Source Elementary Banking by, John Franklin Ebersole) The most important functions of banking may be classified as follows: (1) To, assemble capital and make it effective; (2) To, receive deposits and make collections; (3) To, check out and transfer funds; (4) To, discount or lend; (5) To, exercise fiduciary or trust powers; (6) To, issue circulating notes.

Every bank which expects to succeed must first of all prove its value to the co mmunity. The services which a bank performs are so generally taken for granted that the publi c is unaware of the real extent of the facilities offered. Banks are equipped to utilize funds, for either a short or long period of time, safely, and with some profit. Depositors individually do no t enjoy the same ability. An individual's unused funds are perhaps small in amount, cannot be loa ned to advantage with the assurance of immediate return when desired, and the care o f the money involves worry and risk. The bank, on the other hand, possesses the ne cessary men, machinery and experience. By obtaining deposits, each perhaps small in itself, f rom many people, it acquires a large reservoir of funds. From this supply, which is const antly being increased by additional deposits and decreased by withdrawals according to the n eeds and circumstances of the depositors, the bank can now make loans and other investmen ts from time to time. It is known as a place where loans may be sought, and it is protected i n making these loans of funds which it has had left with it on deposit by the law of aver ages which usually operates in such a way that withdrawal and deposits about balance each other, th e normal tendency being in favor of a net increase. By receiving deposits and making coll ections the bank saves the depositor much personal effort. To receive or deposit in one city a ch eck made payable in another, hundreds or thousands of miles away, to convert that check in a rela tively short time into cash available for the depositor's use, and all this with no direct assista nce from the customer and at a very slight expense to him or none at all, is indeed service. Currently, Indian banks have compared favorably on growth, asset quality and pro fitability with other regional banks over the last few years. The banking index has grown at a c ompounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent gr owth in the market index for the same period. Policy makers have made some notable changes i n policy and regulation to help strengthen the sector. These changes include strengthening pr udential norms, enhancing the payments system and integrating regulations between commercial and cooperative banks.

BANKING SECTOR PROFILE 2.1 Introduction Banking is derived from the Italian word BANCOS, which means DESK. The Italians had a unique way of making monetary transactions. They used to do it over a desk with a green top. The history of banking is closely related to the history of money. As monetary p ayments became important, people looked for ways to safely store their money. As trade grew, me rchants looked for ways of borrowing money to fund expeditions. Banking defined as per Indian Banking Regulation ACT 1949: Accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, and order or otherwise. Functions of Indian banks: 1. Accepting deposits. 2. Making deposits available on demand. 3. Investing the deposits of customers. Without a sound and effective banking system in India it cannot have a healthy e conomy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credi t. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular p olicy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major pri vate banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for g etting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the mo st efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. T hey are as mentioned below: . Early phase from 1786 to 1969 of Indian banks. . Nationalization 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 & Banki ng Sector Reforms after 1991 2.2 Present Scenario of Banking Sector in India The banking scenario in India has already gained all the momentum, with the dome stic and international banks gathering pace. The focus of all banks in India has shifted their approach to 'cost', determined by revenue minus profit. This means that all the resources sh ould be used efficiently to better the productivity and ensure a win-win situation. To surviv e in the long run, it is essential to focus on cost saving. Previously, banks focused on the 'revenue' model which is equal to cost plus profit. Post the banking reforms, banks shifted their approac h to the 'profit' model, which meant that banks aimed at higher profit maximization. 2.2.1 Focus of Bank in India The banking industry is slated for growth in future with a more qualitative rath er than quantitative approach. The total assets of all scheduled commercial banks by end -March 2010 is projected to touch Rs 40, 90,000 crore. This is going to comprise around 65% of GDP at current market prices as compared to 67% in 2002-03. The bank's assets are estimated to grow at an annual composite rate of growth of 13.4% during the rest of the decade as agains t 16.7% between 1994-95 and 2002-03. Barring the asset side, on the liability perspective, there will be huge additio ns to the capital base and reserves. People will rely more on borrowed funds, pace of deposit growth sl owing down

side by side. However, advances and investments would not see a healthy growth r ate. 2.3 Banking Structure in India 2.3.1 Scheduled and Non Scheduled Banks Banks can be categorized according to their ownership patterns, functions, and o peration coverage. The Indian Banking system regulated by the Reserve Bank of India compr ises scheduled and non scheduled banks, and these are classified in various sub categ ories as follows: a) Scheduled Banks These are banks, which are listed in the second schedule of the RBI act 1934. Th ese banks have paid up capital and reserves of not less than Rs. 5 lakhs and they ar e successful in convincing the RBI that there affairs are not conducted in a manne r detrimental to their depositors. These banks have required maintaining certain a mount of reserves (CRR) with RBI against which these banks enjoy the facilities of financ ial accommodation and remittance facilities at concessionary rates. Scheduled banks are classified as: 1.1Co-Operative Banks 1.2Commercial Banks

1.2.1Foreign Scheduled Banks (38), 1.2.2Indian Scheduled Banks (a) Private Sector Scheduled Banks : Old and New (31) (b) Public Sector Scheduled Banks, a. State Banks and its 7 banking subsidiaries (8) b. Nationalized Banks (19) c. Regional Rural Banks (196)

b) Non Scheduled Banks These are those, not included in the 2nd schedule of RBI act. Their number has progressively declined over the years. 2.3.2 Public Sector Banks

a) State Bank Group and Nationalized Banks This group of 27 banks has the largest no. of branches in urban and rural areas throughout the country. The group contributes about 75% of the total deposits and 70% of to tal advances of all commercial banks in India. The erstwhile Imperial Bank of India was nationalized in 1955 to create State Ba nk of India, in accordance with SBI act 1955. SBI is the largest bank in the India in terms of branch networks, asset size, capital and profits. SBI.s 7 subsidiaries were crea ted in 1959 by nationalizing the regional banks as per the SBI subsidiaries banks act 1959. The remaining 19 banks in public sector were nationalized by the banking company act 1970. After 1994, most of these banks have made public issues of their shares, thus di luting the govt. share holding much below 100%, but above 51%. b) Regional Rural Banks These are small localized banks operating in rural areas limited to specified di stricts. They provide banking facilities to small farmers, agricultural labors and small entrepreneurs. Their ownership capital is provided jointly by central govt. (50% ), the concerned state govt. (15%), and the sponsor public sector banks (35%). 2.3.3 Private Sector Banks These are incorporated in India and there shares/ ownership is held by business houses and individuals. These banks have small balance sheet size, limited regional ope rations and traditional style of management. New generation private sector banks, incorp orated post 1994, are technology driven and have a modern style of functioning, and thu s achieving a level of parity with that of foreign banks.

2.3.4. Foreign Banks These are the banks incorporated abroad but granted license by RBI to conduct ba nking business in India through their Indian braches. These banks have limited branch network confined mostly to the metropolis/ big commercial centers. Their operations are technology driven. 2.3.5. Co-Operative Banks These are registered under the registrar of co-operatives and their main regulat ors are state govt. or central govt. in case the bank is operating in more than one stat e. These banks are operated on No Profit- No Loss principle of co- operation. The size of assets/ liabilities of the co- operative banks are much smaller in comparison to commerc ial banks. 2.4 Major Players in Banking Sector (2009) Ranking Name of Bank Deposits (Rs in Crore) Advances (Rs in Crores) 1 State Bank of India 742073 542503 2 HDFC Bank 142812 98883 3 Axis Bank 117374 81557

4 Bank of India 189708 142909 5 Punjab National Bank 209760 154703 6 Bank of Baroda 192397 143986 7 ICICI Bank Limited 218348 218311 8 Union bank of India 138703 96534 9 Citibank 51677 39920 10 Canara Bank 186893 138219

(Table 2) (Source: www.businessmapofindia.com)

3. Company Profile Introduction Citi is today.s pre-eminent financial services company, with some 200 million cu stomer accounts in more than 100 countries. Our history dates back to the founding of C itibank in 1812, Bank Handlowy in 1870, Smith Barney in 1873, and Banamex in 1884, and Salomon Br others in 1910. Committed to India for over 106 years, Citi prides itself in being a premi er locallyembedded financial institution backed by its global network across 100 countries . With over 10,000 employees and US$3.1 billion capital invested, Citi is the single largest foreign direct investor in the financial services industry in India. Citi is a dominant provide r of banking and financial services in India and offers a comprehensive suite of products and ser vices to over 1,500 large corporate and multinationals, over 2,500 small and medium enterprise s and over 7 million retail customers. Citi India's operations encompass corporate and invest ment banking, consumer banking, private banking, and banking services to the international Ind ian community. The breadth of Citi.s activities in India includes: 3.1.1 Institutional Clients Group . A leading corporate bank with a 106-year history of serving Indian corporate s ector and financial institutions . Enjoys a dominant market share in key products like cash management, FX and Cu stodial Services . Has a fast growing SME franchise with a dominant share of market in many key v erticals 3.1.2 Investment Banking & Capital Markets - Citi . . . . . Dominant Investment Bank across both fund raising and advisory services Leading advisor on Equity and Equity-linked transactions Top-notch local currency debt house Pioneers in Securitization Leading issuer of G3 bonds

. A top-notch Research team providing top quality research & international exper tise to trading oriented investors through comprehensive coverage of the Indian markets across sectors . Leading equity trading house 3.1.3 Alternate Investments - Citi Venture Capital International . A leading private equity player over the last decade . Investments in multiple sectors in the country in sectors including auto compo nents, financial services, ITES and real estate. 3.1.4 Consumer Banking & Global Cards Citibank . Pioneered consumer banking and was the first to introduce credit cards and con sumer finance. Significant investments in technology have enabled Citi to maintain its edge through alternative distribution channels ATM, online banking, phone banking, mo bile banking . Retail network includes 40 branches in 28 cities and over 450 ATMs CitiFinancial . Consumer finance services for Personal Loans, Home Loans, and third-party insu rance . Over 350 branches across 180 geographic locations Citi Wealth Advisors . Financial planning and investment advisory based on a retail brokerage platfor m to serve wealth management needs of retail investors 3.1.5 Global Wealth Management Citi Private Bank . A holistic approach to wealth management for both individuals and businesses throughout the wealth creation cycle . Provides the full range of finance, banking, investment, trust and advisory se rvices for wealth creators

. Trusted advisors for designing insightful solutions customized to individual c lient needs, with an emphasis on personalized, confidential service 3.1.6 Outsourcing India is a key outsourcing hub for Citi: . Provides software development for over 50 countries . Offers knowledge outsourcing services to Citi's Investment Bank and Research t eams across the globe ( Source: www.citigroup.com) 3.2 Citibank India Branches The wide reach of the Citibank India can be gauged in terms of its presence in a round 28 locations. The branches are operational at Mumbai, Delhi, Noida, Gurgaon, Chandi garh, Jalandhar, Ludhiana, Nashik, Surat, Bhopal, Indore, Vadodara, Ahmedabad, Auranga bad, Vapi, Pune, Kolkata, Faridabad, Lucknow, Bhubaneshwar, Jaipur, Akola, Chennai, Bangalo re, Hyderabad, Coimbatore, Cochin (Kochi), and Pondicherry. 3.3 Products of CitiBank Products

CASH MANAGEMENT

INVESTMENT BANKING SECURITIES AND FUND SERVICES MARKET LOANS TRADE

SOLUTION

3.3.1 Cash Management . Account Services and Liquidity Management Liquidity management is quintessential for effective working capital management. At Citi, we understand that liquidity management requires visibility control and optimization of balances across your accounts. A wide range of Corporate, Financial Institutions and Small / Medium Enterprises choose Citi as the preferred partner for meeting their account management requirements. Corporate can hold the following types of accounts . Current Account It is a plain vanilla, non-interest bearing account and the withdrawals to the account are permissible only up to the amount of deposits in the account. . EEFC Account Exchange Earner's Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorized Dealer. This account is for Exporters to hol d their Foreign Currency Inward Remittance in foreign currency. . Cash Credit Account Cash Credit account is a form of current account with overdraft facility with fi xed limit. This account is also non-interest bearing account. . Escrow As an Escrow Agent, Citibank provides customized solutions by receiving, safekeeping, investing and disposing of escrowed assets. . Payment . Collection 3.3.2 Trade Solution . Trade Services . Trade Finance

. Structured Trade . Export and Agency Finance 3.3.3 Loan At Citi, you can get all the financial products and services your growing compan y needs. As the leading bank for business, we have the right financial solution for each step of your growth, so when you want to upgrade your facilities or pursue an attractive growth opportun ity, availability of finances will be the least of your concerns. Citi provides you comprehensive lending facilities encompassing: . Rupee Loans . Foreign Currency Loans . External Commercial Borrowings Citi led the financing facility in Tata Steel's $8 billion acquisition of Corus - the largest-ever cross-border acquisition by an Indian firm. When you partner with Citi, you can expect best-inclass financing solutions. 3.3.4 Market . . . . . . Managing Financial Risk Foreign Exchange Derivatives Commodity Fixed Income Interest Market Special Situation Group

3.3.5 Securities and Fund Services . Custody Services . Fund Services . Derivatives Clearing

3.4 Board of Directors Alain J.P. Belda Managing Director, Warburg Pincus Timothy C. Collins Chief Executive Officer and Senior Managing Director, Ripplewood Holdings LLC Jerry A. Grundhofer Chairman Emeritus, U.S. Bancorp Robert L. Joss, Ph.D. Professor of Finance and Former Dean, Stanford University Graduate School of Business Andrew N. Liveris Chairman and Chief Executive Officer, The Dow Chemical Company Michael E. O'Neill Former Chairman and CEO, Bank of Hawaii Corporation Vikram Pandit Chief Executive Officer, Citi Richard D. Parsons Chairman, Citi and Special Advisor, Providence Equity Partners Inc. Lawrence R. Ricciardi Senior Advisor, IBM Corporation, Jones Day and Lazard Freres & Co. Judith Rodin President, Rockefeller Foundation Robert L. Ryan Chief Financial Officer, Retired, Medtronic Inc. Anthony M. Santomero Former President, Federal Reserve Bank of Philadelphia Diana L. Taylor Managing Director, Wolfensohn Fund Management, L.P. William S. Thompson, Jr. Chief Executive Officer, Retired, Pacific Investment Management Company

(PIMCO) Ernesto Zedillo Director, Center for the Study of Globalization and Professor in the Field of International Economics and Politics, Yale University

Literature Survey 4.1 Credit Appraisal Appraisals are typically used either for taxation purposes or to determine a pos sible selling price for the property in question. The appraiser can use any number of valuation meth ods in order to determine the appropriate value to assign, including the current market value of similar properties, quality of property and valuation models. Credit Appraisal is the process by which a lender appraises the technical feasib ility, economic viability and bankability including creditworthiness of the prospective borrower . Credit appraisal process of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time, or not. Here bank has their own methodology to determine if a b orrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. However, the borrower alone doesn.t have to do all the hard work. The banks need to be cautious, lest they end up increasing their risk exposure. All banks employ their own unique objective, subjective, financial and non-financial techniques to eval uate the creditworthiness of their customers. 4.1 Components of Credit Appraisal Process While assessing a customer, the bank needs to know the following information: In comes of applicants and co-applicants, age of applicants, educational qualifications, pro fession, experience, additional sources of income, past loan record, family history, empl oyer/business, security of tenure, tax history, assets of applicants and their financing patter n, recurring liabilities, other present and future liabilities and investments (if any). Out of these, the incomes of applicants are the most important criteria to understand and calculate the cr edit worthiness of the applicants. As stated earlier, the actual norms decided by banks differ grea tly. Each has certain norms within which the customer needs to fit in to be eligible for a loa n. Based on these parameters, the maximum amount of loan that the bank can sanction and the custom er is eligible for is worked out. The broad tools to determine eligibility remain the same for all banks. We can tabulate all the conditions under three parameters.

Parameter DOCUMENTS Technical feasibility Field Investigation, Market value of asset Economic viability LTV(Loan to Value), IIR Bankability Past month bank statements, Asset and liabilities of the applicant

(Table 1) (Source www.iba.com) Besides the above said process, profile of the customer is studied properly. The ir CIBIL (Credit Information Bureau (India) Limited) score is checked. Parameter components & How bank asses your creditworthiness through it: Serial No Technical Feasibility What is Bank Looking for 1 Living standard Decent living standard with some tangibles like T.V. & fridge will provide assurance to bank regarding their residential status. 2 Locality Presence of some undesirable elements like local goons or controversial areas adversely affects your loan appraisal process. 3 Telephonic Verification At least one response is needed from person to establish the identity of the person from contact point of view. 4

Educational Qualification Not an essential barrier but essential to understand the complex terms & conditions of bank loan. 5 Political Influence An interesting reference point in the sense that they are one of major category of loan defaulters 6 Reference To establish residential identity of person from human contact point of view & cross check of their loans.

(Table 2) (Source www.iba.com)

Working Capital 4.2 Working Capital: Net working capital of a business is its Current Assets less its Current Liabili ty Positive working capital means that the company is able to pay off its short-ter m liabilities. Negative working capital means that a company currently is unable t o meet its shortterm liabilities with its current assets (cash, accounts receivable and inventor y). It is also known as "net working capital", or the "working capital ratio". Every business needs adequate liquid resources in order to maintain day-to-day c ash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditor s if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is not just important in the short-term. Su fficient liquidity must be maintained in order to ensure the survival of the business in the long-t erm as well. Even a profitable business may fail if it does not have adequate cash flow to meet it s liabilities as they fall due. Therefore, when businesses make investment decisions they must not onl y consider the financial outlay involved with acquiring the new machine or the new building, et c, but must also take account of the additional current assets that are usually involved with any expansion of activity. Increased production tends to engender a need to hold additional stock s of raw materials and work in progress. An increased sale usually means that the level of debtors will increase. A general increase in the firm.s scale of operations tends to imply a need for gre ater levels of cash. 4.2.1 Need for Working Capital Different industries have different optimum working capital profiles, reflecting their methods of doing business and what they are selling. Businesses with a lot of cash sales and few credit sales should have minimal tra de debtors. Supermarkets are good examples of such businesses; Businesses that exist to trade in completed products will only have finished goo ds in stock. Compare this with manufacturers who will also have to maintain stocks of raw mat erials and work-in-progress.

Some finished goods, notably foodstuffs, have to be sold within a limited period because of their perishable nature. Larger companies may be able to use their bargaining strength as customers to ob tain more favorable, extended credit terms from suppliers. By contrast, smaller companies, particularly those that have recently started trading (and do not have a track record of cred it worthiness) may be required to pay their suppliers immediately. Some businesses will receive their monies at certain times of the year, although they may incur expenses throughout the year at a fairly consistent level. This is often known a s seasonality of cash flow. For example, travel agents have peak sales in the weeks immediately f ollowing Christmas. 4.2.2 Working capital needs also fluctuate during the year The amount of funds tied up in working capital would not typically be a constant figure throughout the year. Only in the most unusual of businesses would there be a con stant need for working capital funding. For most businesses there would be weekly fluctuations. Many businesses operate in industries that have seasonal changes in demand. This mean s that sales, stocks, debtors, etc. would be at higher levels at some predictable times of the year than at others. In principle, the working capital need can be separated into two parts: A fixed part, and A fluctuating part The fixed part is probably defined in amount as the minimum working capital requ irement for the year. It is widely advocated that the firm should be funded in the way shown in the diagram

http://tutor2u.net/business/images/workingcapital_fluctuations.gif (Chart 1) (Source: Bank Financial Management by Saxena and Vashist) The more permanent needs (fixed assets and the fixed element of working capital) should be financed from fairly permanent sources (e.g. equity and loan stocks); the fluctu ating element should be financed from a short-term source (e.g. a bank overdraft), which can b e drawn on and repaid easily and at short notice. 4.3 Tondon Commitee The study group headed by Shri Prakash Tandon, the then Chairman of Punjab Natio nal Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from le ading banks, financial institutions and a wide cross-section of the Industry with a view to s tudy the entire gamut of Bank's finance for working capital and suggest ways for optimum utilisa tion of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporates i n the light of methodology recommended by the Group. As per the recommendations of Tandon Committee, the corporates should be discour aged from accumulating too much of stocks of current assets and should move towards very l ean

inventories and receivable levels. The committee even suggested the maximum leve ls of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate these levels were termed as inventory and receivable no rms. Depending on the size of credit required, the funding of these current assets (w orking capital needs) of the corporates could be met by one of the following methods: . First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less curre nt liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-ter m funds, i.e., owned funds and term borrowings. This approach was considered suitable onl y for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs . Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilitie s will be available to fund the buildup of current assets and the bank will provide the ba lance (MPBF). Consequently, total current liabilities inclusive of bank borrowings cou ld not exceed 75% of current assets. RBI stipulated that the working capital needs of a ll borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. . Third Method of Lending: Under this method, the borrower's contribution from l ong term funds will be to the extent of the entire CORE CURRENT ASSETS, which has be en defined by the Study Group as representing the absolute minimum level of raw mat erials, process stock, finished goods and stores which are in the pipeline to ensure con tinuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings. (Source: banknetindia.com)

4.4 Basel II The Basel Committee consists of representatives from central banks and regulator y authorities of the Group of Ten countries, plus others (specifically Luxembourg and Spain). The committee does not have the authority to enforce recommendations, although most member cou ntries (and others) tend to implement the Committee's policies. This means that recommendati ons are enforced through national (or EU-wide) laws and regulations, rather than as a re sult of the committee's recommendations - thus some time may pass between recommendations an d implementation as law at the national level. On 4 July 2006, the Committee issue d a comprehensive version of the Basel II Framework. the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accor d to Incorporate Market Risks, and the 2005 paper on the Application of Basel II to T rading Activities and the Treatment of Double Default Effects. No new elements have bee n introduced in this compilation. The Basel Accord(s) or Basle Accord(s) banking supervision Accords Basel I and B asel II issued by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settl ements in Basel, Switzerland and the committee normally there. 4.4.1 Basel I is the round of deliberations by central bankers from around the w orld, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minim al capital requirements for banks, enforced by law in the Group of Ten (G-10) countries in 1992. Basel I is now widely viewed as outmoded, by more comprehensive set of guidelines, Basel II and these are in the process of implementation by several countries. Since 1988, this fram ework has been progressively introduced in member countries of G-10, currently comprising 13 co untries, namely, Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States of America. The Basel I accord dealt with only parts of each of these pillars of Basel-II. For example: with re spect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner w hile market risk was an afterthought; operational risk was not dealt with at all. Basel I, that is, t he 1988 Basel Accord, primarily focused on credit risk. Assets of banks were classified and grouped in five categories

according to credit risk, carrying risk weights of zero (for example home countr y sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Banks with international presence are required to hold capital equal to 8 % of the risk-weighted assets. 4.4.2 Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The p urpose of Basel II, which was initially published in June 2004, is to create an internatio nal standard that banking regulators can use when creating regulations about how much capital bank s need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the internationa l financial system from the types of problems that might arise should a major bank or a series of b anks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and c apital management requirements designed to ensure that a bank holds capital reserves, through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguar d its solvency. Basel II uses a "three pillars" concept . Minimum capital requirements (addressing risk). . Supervisory review and . Market discipline to promote greater stability in the financial system.

4.4.2.1 First pillar The first pillar deals with maintenance of regulatory capital calculated for thr ee major components of risk that a bank faces: . The credit risk component can be calculated in three different ways of varying degree of sophistication, namely . Standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach".

. For operational risk, there are three different approaches . Basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA, the internal measurement approaches an advanced form. . For market risk the preferred approach is VaR (value at risk). 4.4.2.2 Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal ri sk, which the accord combines under the title of residual risk. It gives banks a power to review thei r risk management system. There are four Principals of Second Pillar Principle 1: Bank should have a process for accessing their overall capital adeq uacy in relation to their risk profile and strategy for maintaining their capital levels. Principle 2: Supervisors should review and evaluate banks Internal Capital Adequ acy Assessment Strategy and their ability to monitor ensures compliance, and takes a ppropriate supervisory Action if not satisfied. Principle 3: Supervisors should expect banks to operate about the minimum Regula tory Capital Ratio. Banks should hold capital in access of minimum requirements Principle 4: Supervisors should seek to intervene at early stage to prevent capi tal from falling below the minimum levels. Rapid Remedial Actions is required to restore smooth f unctioning.

4.4.2.3 Third Pillar Committee believes that it is rationale for pillar three is sufficiently strong warrant the introduction of disclosure requirement for the banks using the Basel II framewor k. The purpose of Pillar three is guiding principles of market discipline is to complement the minimum capital requirement and the supervisory review process. The committee aims to encourage market discipline by developing a set of disclosure requirement which will allow market participants to access key information on scope of Application, Capital Risk Exposure, Risk Acce ptance Processes and hence Capital Adequacy of the institution. (Source: www.bis.org)

Objective of the Project 1. To study the various products available for working capital Citibank. 2. To study the existing Credit Appraisal System at Citibank. 3. To analyze the various parameters considered for evaluating of the corporate clients for working capital financing. 4. To review the credit risk assessment methodology adopted at 5. To analyze the loan disbursement procedure and the Remedial adopted by banks for working capital loans. finance in the credibility Citibank. measure

RESEARCH METHODOLOGY 6.1 Introduction Research methodology is a way to systematically solve the research problem. Rese arch is an art of scientific investigation and refers to a search for knowledge. It can be also defined as scientific search for pertinent information specific topic. It consists of sever al steps that need to be implemented in a sequential order for achieving objectives of research effect ively. 6.2 Type of Research The project is about analysis of the function of the bank & also how the Credit appraisal is done in the bank for working capital. So the project is of Analytical type of Researc h which is a style of qualitative inquiry, it is non-interactive document research which describes and interprets the past or recent past from selected sources. 6.3 Sampling Unit: This is that element or set of elements considered for selection in some stage o f sampling (same as the elements, in a simple single-stage sample). In a multi-stage sample, the sampling unit could be blocks, households, and individuals within the households. 6.4 Sampling Technique: Non Probability Purposive/Judgmental sampling is where the sample is selected on the basis of knowledge of the research problem to allow selection of "typical" persons for in clusion in the sample. 6.5 Data Collection A research study may require primary data or secondary data. In simple words, th e secondary data already exists, which may be available within the organization or may be co llected from outside agencies. This type of data saves time & money of the researcher. Howeve r, secondary data should be properly evaluated because they are collected for a variety of pu rposes.

6.5.1 Primary data Primary data are those which are collected for the first time & they are origina l in the character. Primary data may pertain to demographic, socio-economic; characteristics of cons umers, attitude &opinion of people their awareness & knowledge & other similar aspects. Primary data are collected through survey & in survey method researcher doing a sample survey & i n sample survey researcher conducts a personal interview. 6.5.2 Secondary data The process of secondary data collection & analysis is called desk research. Sec ondary data are those data which are collected from earlier work & are applicable or usable in t he study of research. Secondary data are collected through 1) Company.s Credit Manual 2) Annual report etc. 3) Books & article But in this report only the secondary data are taken into consideration for data analysis & interpretation. 6.6 Data analysis: Analysis of data is a process of inspecting, cleaning, transforming, and modelin g data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making. Data analysis has been done using Graphs, Charts, Tables, and Financial Ratio.s like DSCR, Current Ratio etc.

Data Analysis 7.1 Products available at Citibank for Working Capital Finance

Funded Facilities Non Funded Facilities

1. Sight Letter of Credit 2. Usance Letter of Credit 3. Bank Guarantee 4. Bill Discounting 7.1.1 Cash Credit: This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the acc ount. Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter pa rt of demand deposits of the Bank. 7.2.2 Working Capital Demand Loan: A short-term loan to finance day-to-day opera tions of a business. It is normally a loan for a comparably small amount, and is not used f or longterm investment purposes. Rather, it funds immediate needs, such as payroll and accounts payable. 1. Cash Credit 2. Working Capital Demand Loan 3. Export Finance

7.2.3 Export Finance: The exporter may require short term, medium term or long t erm finance depending upon the types of goods to be exported and the terms of statement offe red to overseas buyer. The short-term finance is required to meet working capital needs. The working capital is used to meet regular and recurring needs of a business firm. The regu lar and recurring needs of a business firm refer to purchase of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc. Export finance is short-term wor king capital finance allowed to an exporter. Finance and credit are available not only to hel p export production but also to sell to overseas customers on credit. 7.2.4 Sight Letter of Credit: A is a document issued mostly by a financial insti tution, used primarily in trade finance, which usually provides an irrevocable payment undert aking made payable to a beneficiary upon presentation to the opener of conforming documents . 7.2.4 Usance Letter of Credit: Letter of credit requiring payment a certain numb er of days after the appropriate documents are presented. It is also called a Usance letter of cr edit. 7.2.4 Bank Guarantee: A type of guarantee in which a bank or other lending organization promises to repay the liabilities of a debtor in the event of failu re of the debtor to make payment of the same. 7.2.5 Bills Discounting: A commercial bill discount is an act by which the legal holder of a commercial bill (including banker's acceptance draft and commercial acceptance d raft) transfers it to Bank to acquire cash before its maturity date for which banks charges a no minal discounting charge.

7.3.1 Credit Program Classification Credit Program are classified into two parts 1. Classical Small Ticket Fast Track Program 2. Business Lending Program

7.3.1 Classical (STFT) Program Small Ticket Fast Track targets smaller Obligors (mainly Tier 0) with approved f acilities of lower than INR 40MM and endeavors to facilitate bulk customer acquisition and as set growth by building a granular Portfolio. The Program primarily uses a template- based a pproach to customer selection, while keeping exception to a minimum. 1. Cash/ Liquid Asset Backed finance 2. Product Enables Loans (PEL) 3. Clean Door Opener (CDO) 4. Cash Management Services (CMS) 5. PSE Sub- Program 6. Downgraded /UN graded Existing Customers 7. Temporary Overdraft (TOD.s) /Line Excesses

Products of Small Ticket Fast Track Program 7.3.1.1 Cash/ Liquid Asset Backed finance: Customers providing cash/Liquid Assets approved elsewhere/ post shipment under c lean or bank accepted LC.s covering full facilities would be reported as Liquid Asset Backed an d KYC, CIBIL/Dedupe and SDN checks would be done as due diligence for the same for these customer, only 1 year audited financials(less than 20 months old) would be requi red. The requirement of audited financials can be waived by a CO with covering limits and will not be an exception. These facilities could also be offered to start up companies.

7.3.1.2 Product Enables Loans (PEL): PEL envisages self- Liquidating Post shipment loan against accepted invoices or GRN linked invoices of TTLC/GRB/MME buyers; the same being treated as clean. since without c harge on current assets or collateral. However, the TTLC/GRB/MME buyer has to undertake t o credit payments directly to account with Citibank. Therefore, the PEL offered will be c apped at Program Limits of INR 48MM; the same being treated as Clean.. TTLC/GRB/MME names should be current customers and not classified names to qualify for the offering . 7.3.1.3 Clean Door Opener (CDO): Clean Door facilities will be offered selectively under the STFT Program. Based on the feedback on time taken and difficulty in convincing prospects to bank with Citib ank, they will offer clean door opener subject to the following additional conditions are met : a) Tenor will be capped at 6 months extension for another 3 months will be subje ct to approval of Risk Manager. b) Mandatory customer meeting by Credit VP. c) CDO.s to be capped at 20% of incremental customers booked each month across l ocation. d) Security PDC for the CDO amount from main Working Capital Account. 7.3.1.4 Cash Management Services (CMS): Citiclear, Citispeed, Citicheck are the approved CMS products. For Non- credit C MS customer.s Citicheck facility will extend only if Citispeed and/or Citiclear facility are a lso offered. All Credit customers are eligible for CMS facility. For Non- Credit customers- n o credit visit/site visit, call- back on customer and trade reference check will be required. The fo llowing CSC will be applicable for offering various CMS Products to non credit customers. 7.3.1.5 PSE Sub- Program: This Sub- Program seeks to provide short tenor forward cover and option products to customers and prospects, up to a maximum PSE amount of Rs. 13.5MM which could be increased to INR 48MM for larger obligors meeting more rigorous selection criteria. The PSE Propo sition seeks to

assist customers in managing risks inherent within Loan/Fx transaction. Derivati ve products would be mainly Category A transactions. Category B deals are not anticipated to be offered to Asia Commercial Clients Exceptions require approval of HCRO with notification to the GCGCRO, before entering into conversations with customer. The target market would b e the liability customers and prospects as well as customers not under negative TM of STFT Progr am and those covered under approved segments under the Classifiable Managed Program. 7.3.1.6 Downgraded /UN graded Existing Customers: For existing customers, who do not meet Primary CSC grade or have scores below U S, a result of which the facilities provided are higher than the eligibility or the collater al available is lower, such facilities need to be approved by an approval level which is one level high er than the original approval level and renewed every 6 months thereafter. 7.3.1.7 Temporary Overdraft (TOD s) /Line Excesses: Temporary overdraft/excess over approved lines can be approved as per the below grid. The SRM may approve changes to the limits mentioned below. Limit Approvals INR 12MM Credit Officer (CO) / Business Officer and STFT Risk Manager or SME Risk Manager.s Designee.

(Table 3) (Source: Collected from the SME software manure of Citibank) TOD/Excess up to a tenor of 14days would be approved as per the grid above. Subs equently, the TOD would be consolidated with the total facility and approved at the original l evel by a credit officer with the initials covering the aggregated exposure. The Risk Manager wil l review TOD reports on a monthly basis.

7.3.2 Business Lending Program Business Lending Program focuses on small manufacturers, distributors, services entities, retailers and other small businesses worth turnover of less than Rs 500 MM, wher e the lending is Pre-dominantly amortizing in nature. Its Sub- Program SME light addresses the Liquid Asset backed requirement of customers up to Rs 40MM. The customer will be categorized as follows:Tier 0:- Customers with sales of more than INR 5 MM and less than INR 90 MM. Tier 1:- Customers with sales of more than INR 90MM and less than INR 450MM. 7.3.2.1 Customer Service Criteria: Legal Entities Customer Location Min No. of Years in business Sole Proprietorship where the proprietor is a citizen of India Only customer who are located at the Branch Location of Citibank 3 Years Partnership firms where the partners are Citizen of India, Private Limited Companies under Companies Act, 1956 Hindu United Families where all the CoPartners are Majors

(Table 4) (Source: Collected from the SME software manure of Citibank) New Entity: Where the Partners/ Promoters of a business have opened a new branch /outlet, but in a new firm/company and the new entity has completed at least 1 year of operat ion and in profitable on a net profit basis. The No. of operation and in Profitable (Net pr ofit basis), the year of existence of the parent business entity started by the partners/promoters man y be considered. However, a guarantee by the parent business entity would be mandatory.

7.3.2.2 Credit Program applicable to both Classical (STFT) and Business Lending Program Less than 3 years of Existence? No Cost of credit or ROA worse than 25% below plan No Current ARR rating of satisfactory, no unresolved MBI, and overall RCSA of satisfactory Yes In a country with a Central Government ORR of 4- or worse Yes Portfolio Classification and rationale for classification: High Risk, Rationale as above Yes

(Table 5) (Source: Collected from the SME software manure of Citibank) 7.3.2.3 Credit Risk Measurement Criteria Serial No. Particulars Tier-1 Tier-2 1. Sales Turnover More than INR 90MM and less than INR 450MM Profitable in each of the last three years. More than INR 5MM and less than INR 90MM 2. Cash Profit Profitable in each of the last three years Profitable in latest year and at least two out of the

last three years. 3. Net Worth Min INR 4.4 MM Min INR 2.2 MM 4. Net Income Min INR 2.20 MM Min INR .90MM 5. DSCR Min 1.25 times Min 1.25 times 6. Debt Equity Max of 3:1 Max 2:1 7. Current Ratio Minimum of 1 time for manufacturing and 0.75 times for trading enterprise. While these are minimum standards, where as experience of lending suggests that these vary from segment to segment. Business shall identify and Minimum of 1 time for manufacturing and 0.75 times for trading enterprises. While these are minimum standards our experiences of lending

obtain specific approvals from Risk Manager for Current Ratio less than 1 times. in various segments suggest that these vary from segment to segment. Business shall identify and obtain specific approvals from Risk Manager for Current Ratio less than 1 time.

(Table 6) (Source: Collected from the SME software manure of Citibank) 7.3.2.4 Mandatory Pre-Screening Criteria Serial No. Parameters Requirements Source of Verification 1. Selected Segment To be a part of CRB Target Market CRB Target Segment 2. RBI Negative List/Defaulter List Not on these List RBI Negative list on compliance Site. 3. SDN Check Not on SDN List SDN list on Compliance Site. 4. CIBIL Check

To be Positive CIBIL Website 5. Location of Customer Customer to be located at Citibank Branch Location

(Table 7) (Source: Collected from the SME software manure of Citibank)

7.4 Industry Specific Key Success Factors (All Points Below are Mandatory) Serial No. Particulars Grade A Grade B Grade C Grade D A. Pharmaceuticals:

1. Established Sales Network Yes Yes Yes Yes B. Paper & paper packing:

1. No. of Years in Business >12 years

>9 Years >6 Years >6 Years 2. Profitability Run during last 5 years All 5 years At least 4 Years At least one Block of 2 Years At least one Block of 2 Years 3. Access to Raw materials Satisfactory Satisfactory Satisfactory Satisfactory C. Pharmaceutical Formalities

1. No. of Years in Business >10 Years >7 Years

>5 Years > 5 Years 2. Sales Turnover MIN INR 90 MM MIN INR 90 MM MIN INR 90 MM MIN INR 90 MM 3. Revenue from Branded Products as a Percentage of total Revenue > 50% >50% >50% >50% 4. Market Share Rank of one brand in the therapeutic Top 20 Top 20 Top 20 Top 20

category as per ORG report 5. Established Sales 7 distribution network Yes Yes Yes Yes D. Branded Consumers

1. No. of Years in business >10 years >7 years >5 years >5 years 2. Sales Turnover MIN INR 225MM MIN INR 225 MM MIN INR 225 MM MIN INR 225 MM

3. Revenues from Branded Products as a % of total Revenue >67% >67% >67% >67% 4. Years in Business for Brand Minimum 10 Years Minimum Years Minimum 5 years Minimum 5 years 5. Sales growth of Major Brand 3 years CAGR of higher than 10% 3 Years CAGR of 5%-10% 3 years CAGR of +5% up to 5% 3 years CAGR of +5 up to 5% 6. Established Sales

& Distribution Network Yes Yes Yes Yes

(Table 8)(Source: Collected from the SME software manure of Citibank)

7.4.1 Selection Criteria for Distributors Serial No. Particulars Grade A Grade B Grade C Grade D A. Mandatory Criteria

1. No. of Years in Business > 7 years > 5 years > 3 years >3 years 2. References- Trade (Minimum 2) Bank (At least 1) No Adverse Comment No Adverse Comment No Adverse Comment No Adverse Comment 3.

Tangible Net Worth Positive Positive Positive Positive 4. DSCR >2.0 >1.5 >1.2 >1.2 B. Secondary

1. Liquidity (Current Ratio) >1.25 >1.1 >1.0 >.8 2. Stock Turnover Period < 45 Days < 75 Days < 100 Days

< 120 Days 3. Leverage (TOL/TNW) Max 4 Max 5 Max 9 Max 14 4. Sales Growth(CAGR)Existing Customer Positive -5% to 0% -5% to 10% --5. % of STO from TTLC/GRB/TM Linkage > 50% > 40% > 20% __ 6. Account Receivable Aging < 45 days < 75 days 1.35 >1.2 B. Secondary

1. Leverage (TOL/TNW) Max 4 Max 5

Max 7 Max 12 2. Sales Growth(CAGR) > 5% 0% to 5% -5% to 0% __

(Table 10) (Source: Collected from the SME software manure of Citibank) 7.4.3 Selection Criteria for Service Serial No. Customer Selection Criteria Grade A Grade B Grade C Grade D A. Mandatory

1. No. of Years in Business > 7 Years > 5 Years > 3 years >3 years

2. References- Trade (Minimum 2) Bank (At least 1 No Adverse Comment No Adverse Comment No Adverse Comment No Adverse Comment 3. Trade Net Worth Positive Positive Positive Positive 4. DSCR >2.0 >1.5 >1.2 >1.2 5. Operating Margin Positive Positive Positive Positive B. Secondary

1. Liquidity (Current Ratio >1.25 >1.1 >1.0 >.5 2. Leverage (TOL/TNW) Max 3 Max 4 Max 5 Max 7 3. External Debt /EBITDA = 8% >= 8% >= 8% >= 8% 1. PBIT margin >= 8% >= 8% >= 8% >= 8%

2. Sales Growth(CAGR) >= 8% >= 8% >= 8% >= 8%

(Table 12) (Source: Collected from the SME software manure of Citibank) For Customers with PBIT margin between 5% - 8% At least 50% of TFA should be cov ered b market value of commercial/ residential property For Retail services, Inventory days should be < 104 days for Grade A.

7.4.5 Selection Criteria for Information Technology Serial No. Customer Selection Criteria Grade A Grade B Grade C Grade D A. Mandatory

1. No. of Years in Business > 7 Years > 6 Years > 5 years >5 years 2. References- Customer (Minimum 2); Bank (At least 1, if funded by bank); Venture Capitalist(1, if funded through venture capital) No Adverse Comment No Adverse Comment No Adverse

Comment No Adverse Comment 3. Trade Net Worth(INR) Tier 2: >90 MM Tier 3:>180MM Tier 2: >67 MM Tier 3:>112MM >45 MM > 45 MM 4. DSCR >3.0 >2.5 >2.0 >2.0 B. Secondary

1. Net Margin (excluding extra ordinary income/ expenses Net Margin (excluding extra ordinary income/expenses >10% for the last

year, positive for last 3 years >8% for the last year, positive for last 2 years > 6% > 3% 2. Liquidity (Current Ratio >2 >1.75 >1.5 >1.1 3. Leverage (TOL/TNW) Max 1.0 Max 1.5 Max 2 Max 4 4. External Debt /EBITDA