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SUMMER INTERNSHIP PRESENTATION- 2012 Creditto edit Master subtitle styleat PNB Click Appraisal and Risk Rating
Abhay Thakur PGDM (Gen) 7/7/12 Roll No. 111
FLOW OF PRESENTATIONCompany Profile Credit Appraisal Methods of Lending Risk Rating Of Borrower Post Sanction Follow-up Case Study Findings Suggestions Limitations Bibliography
7/7/12
COMPANY PROFILE Punjab National Bank (PNB) was set up in
1895 in Lahore - and has the distinction of being the first Indian bank to have been started solely with Indian capital.
Currently, PNB is a professionally managed
bank with a successful track record of over 110 years. The bank has the 2nd largest branch network in India, with 4525 branches .7/7/12
PNB was ranked as 248th biggest bank in
WHAT IS CREDIT APPRAISAL?qCredit
appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed.qProper
evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future7/7/12
WHAT IS CREDIT APPRAISAL? (CONTD)qFactors :-
Age Income Number of dependents Nature of employment Continuity of employment Repayment capacity Previous loans7/7/12
q
OBJECTIVES
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RESEARCH METHODOLOGYPrimary sources of InformationMeetings and discussion with the Chief
Manager and the Senior Manager of both Credit and Credit Risk Management Department
Meetings with the clients
Secondary sources of InformationLoan Policy and Internal Circulars of the
bankResearch papers, power point7/7/12
Overview of Loans
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METHODS OF LENDINGWorking Capital Simplified Method Simplified method based on turnover for
assessing working capital finance up to Rs.2 crore (upto Rs. 5 crore in case of SSI units)
MPBF SystemExisting MPBF system with flexible
approach shall be followed for units requiring working capital finance 7/7/12 exceeding Rs 2 crore
In case of infrastructure/mega projects,
proper Loan Termappraisal will be made by utilizing the services of specialized / Technical officers.
The term loans with remaining maturity
period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend.7/7/12
On Receiving Of ProposalFinancial statements, project report and other important documents are used to evaluate: Maximum permissible bank finance (in case of WC limit) Techno Economic Feasibility Analysis of the project Various risks associated. Various approvals of issues the borrower seeks (reduction of ROI,
processing fee etc)
Risk rating of the borrower Reasonableness of estimates/projection in regard to sales,
chargeable current assets, current liabilities (other than bank borrowings) and net working capital conformity with the guidelines issued by the Reserve Bank/HO. 7/7/12
Classification of current assets and current liabilities in Maintenance of minimum current ratio of 1.33:1 .
An undertaking by the borrower to submit his annual accounts
promptly. Further annual review is carried out regularly by the
Risk rating of the BORROWERCATEGORY Capital market perception of the group Management Evaluation Risk bearing capacity Track record in debt repayment
PARAMETERS / INPUTS Management Setup Integrity, commitment and sincerity Financial flexibility
Range of services Quality of service offered Business Evaluation Economies of operation Ambience of service outlet Effectiveness of distribution channels Quality of infrastructure available
Level of customer satisfaction Advertising / promotional strategies Brand equity Expected market growth Locational advantage Technology adopted in the process
Debt Equity Ratio Financial Evaluation Repayment Period (in yrs) Foreign exchange risk
Internal Rate of Return /TNW Working capital cycle (in months)
Project complexities Project Implementation Risk Evaluation Expected cost overrun Funding risk
Expected time overrun Status of obtaining clearances
7/7/12 Service period (in yrs)
ModelsModels Financials Business Managem Conduct and ent of A/c Industry 40% 40% 40% 40% 25% 25% 25% 20% 25% 35% 25% 20% 20% 25% 40%7/7/12
Large Mid Small NBFC EMBM
10% 15% 20% 10% NA
POST SANCTION FOLLOW UPPREVENTIVE MONITORING SYSTEM (PMS)PMS IndexPMS Index is a numerical index consisting
of 29 indicators Parameters grouped into 6 sections. Penalty rates (weights) in the form of numerical values have been assigned to each indicator (parameter) depending upon their degree of impact on health of an account. PMS Report7/7/12
PMS Report, which has eight parts,
QMS I
QUARTERLY MONITORING six weeks from close of the quarter to SYSTEM the gives information about which it relates. Itthe operations of the unit and its performance for the quarter, also giving reasons for non-achievement of sales/production targets.QMS II
This form is required to be submitted within
This form is required to be submitted within7/7/12 two months from the close of the half-year
Case Study : Rathi Steel and Power LtdNature Fund Based CC(H) Fund Based Ceiling Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling Term Loan TOTAL COMMITMENT NA 0 15.00Secured 5.00Secured 20.00 45.00 95.00 0.00 30.00 Secured 30.00 Existing Proposed Secured/Unsecured (as RBIs guideline) per
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Background :The Company is a profit making, dividend
paying and listed Company.
Company is engaged in the manufacture of
bars and wire rods which form part of the longer segment of the steel industry.Company also manufactures stainless steel
products having an installed capacity of 40000 TPA. completed the project for setting up a backward integration plant at Orissa.7/7/12
In the year 2007-08 the Company had
Purpose
For Term Loan :128.70 cr 93.50 cr
To Part Finance the Proposed
Cost of Project
Total Debt
Promoters contribution
35.20 cr
Proposed TL (our share)
45.00 cr
DER
2.66:1 cr
Repayment Period
8 years
Door to door tenor
10 years 6 months
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SecurityNature of limits Security Value of block assetsValue of block assetsExtent of first/ secondBalance/ residual value as on: 31.03.2012 excluding specificcharge holders as onof charge available to charge if any 31.03.2012 bank/ consortium
Term Loan
First Pari Passu Charge on Fixed Assets of the Company
347.82
347.82
226.26
121.56
Second Pari Passu 298. 22 Charge on Current Assets
298. 22
199.50
98.72
Working Capital
First pari passu charge on current assets of the Company
258.22
258.22
199.50
98.72
Second Pari Passu 347. 82 charge on Fixed Assets
347. 82
226.26
121. 5 6
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Justification for working capital sanction:The Company wants to change the product
mix.
There has been a surge in the demand of
Stainless steel products. The future demand for stainless steel is also likely to be determined favorably from all the sectors. Company has been able to improvise the
product mix from 10% in the year 2008-09 to 26% in the year 2010-11. Companys aim is to achieve 40-45% share of value added products in the overall product mix 7/7/12 which will help the company to maintain
Particulars
31.03.10 Audited
31.03.11 Audited
31.03.12 Estimated 31.03.13 Projected
1. Total Current Assets 2. Less Current Liabilities(other than Bank borrowing and installments due within 1 year)
117.43
144.23
182.52
235.01
39.67
43.79
37.33
45.96
3. Working Capital Gap 4. Actual / Projected bank borrowings 5. Total current liabilities (2+4) 6. NWC (1-5) 7. Minimum stipulated margin 25% of current assets 8. Item 3- Item 7 9. Item 3- item 6 10. MPBF(item 8 or 9, whichever is lower)
77.76 45.07 84.75 32.68 29.36
100.43 56.87 100.66 43.57 36.06
145.19 90.00 127.33 55.19 45.63
189.05 125.00 170.96 64.05 58.75
48.40 45.07 45.07
64.38 56.87 56.87
99.56 90.00 90.00 7/7/12
130.30 125.00 125.00
Justification for Non Fund based limitsLetter of creditThe Company has informed that they will
be procuring MS/SS Scrap and other Ferro alloys on a regular basis for manufacturing of higher grades of steels and accordingly require higher LC Limits(Inland/Foreign) and requested for RS.75.00 Cr limits for the year 2012-13.
Bank guaranteeCompany has informed that one or two 7/7/12
regular suppliers (TATA STEEL) who was
The Company is promoted by Late Shri
Management :Punam Chand Rathi.
Presently managed by Sh Pradeep Rathi
having experience of more than 40 years in Steel Melting and Rolling.All the family members are actively
involved in running of this Company. Pradeep Rathi is Managing Director and other directors are Shri Shree Kumar Daga, Shri Prem Narayan Varshney, Shri Dwarka 7/7/12 Das Lakotia and Shri Ranjit Khattar.
Presently has five Directors on it. Shri
Reconciliation of TNW :2010-11178.45 Cr
2011-12 188.85 Cr
201213(projected) 214.62 Cr
Keeping in view of the past trend of profitability of Group concerns and financial strength of the promoters of the company, the estimates/projections 2010-11 2011-12 2012-13 of TNW can be accepted.
845.3 Cr Sales
954.6 , 1171.53 Cr 905.9(estimat ed)7/7/12
Profitability2011-12 12.55 , 11.44 (expected) PBT 2012-13 23.73 PBT 2013-14 32.10
The profit of the company will increase
constantly with the increase in the turnover of the company.7/7/12
Current ratio2010-11 1.37 2011-12 1.40 2012-13 1.39
Lead banks note current ratio (considering
the installments of TL due within one year as part of Current Liab.) was 1.22 as at 31.03.2010 and 1.24 as on 31.03.2011 and at 1.24 as at 31.03.2012 which is below the benchmark level of 1.33. Current ratio for the financial year 2012-13 & 2013-14 has 7/7/12 been estimated at 1.22:1 & 1.25:1.
Long Term Debt Equity RatioCurrent DER-1.16 Projected for 2012-13-1.32:1 The debt equity ratio of the company in all
the years under consideration is below the acceptable bench mark of the bank i.e. 2:1 and proves the long term solvency of the company.Keeping in view the industry scenario and
financial strength and experience of the promoters of company into consideration estimates/ projections of Debt Equity ratio 7/7/12 of the company can be accepted.
Summary of cost of The Company has got the TEV study of the project and means of proposed expansion done by ITCOT finance and Services Limited, an Consultancyapproved agency.The Company has estimated the total
capital expenditure for the scheme at Rs. 125.17 crore, which is proposed to be funded by way of long term loan of Rs. 93.50 crores and balance of Rs.31.67 crores by way of internal accruals/promoters contribution.7/7/12
Particulars
DSCR2012 2013 8.36 16.07 7.87 10.79 34.73 18.42 10.79 29.21 1.19
Projections 2014 2015 2016
PAT 23.32 13.27 20.58 57.17 20.05 20.58 40.63 1.41 32.57 13.39 18.01 63.97 17.80 18.01 35.81 1.79 34.70 13.50 15.35 63.56 19.90 15.35 35.25 1.80 Add Depreciation 7.03 Add Interest 10.27 A. Total accrual Cash 25.66 10.86 Interest on TL 10.27 B. Total 21.13 DSCR (A/B) Average DSCR 1.21
TL Installments
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SummaryStand Alone ProjectDebt-Equity Ratio 2.95 Company as a whole 1.02
Average DSCR
1.95
8.0
Minimum DSCR
1.10
Interest coverage ratio (ISCR)
1.95
Internal Rate of Return (Pre Tax)
17%
Break Even Point
49.97
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StrengthsStrong Management team with professional
background and rich industrial experience of the promoters. indigenous machinery.
Latest technology based imported as well Location on which proposed expansion will
be implemented is in an industrial area and by the side of National Highway-24 and all types of Infrastructure facilities are available nearby.7/7/12 Power Grid and presently power in the unit
The factory premise is within 1KM from
WeaknessOther big player in the steel industry can
give tough competition.
Change in the govt. policy for steel industry
may affect the profitability unit.Rolling Mill industry is high turnover and
low margins industry.Fluctuating prices of raw materials and
finished goods.
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OpportunitiesThe unit is already set in 1971 and has a
strong network of dealers. The Rathi brand is an established brand for the last more than 50 years. The unit after expansion will not face any problem in marketing its products.
The focus of the Central government on
road projects and the emphasis of the government on irrigation and water supply projects are expected to give fillip to the construction industry. 7/7/12
ThreatsFrequent fluctuation in prices of Steel which
may affect the profitability of the Projects. ramping up the Capacity of SS Products.
Big Players like SAIL and Jindals are The Fortunes of the Steel Industry are
closely linked to that of the economy in general and infrastructure in particular.Industry is highly cyclic in nature with high
mortality rates.Change in the government policies related
to the construction/infrastructure industry 7/7/12 will have direct impact on Companys
Risk RatingBenchmark Values Category Parameter CO Value 0 1 2 3 4 Rate
Growth Rate
16.31
6 mnths old are rs 4.41 cr which 5.22% of 7/7/12 total receivables
3.00
Reliability of Debtors
3.00
Market position evaluationParameter Competitive position Expected sales growth The firm has achieved a sales growth of around 8.6% during FY 2010 11. & expected to be in position growth Comments Rate 2.00 2.00
Input related risk Availability of raw material and otherIndia is endowed with large reserves of iron critical inputs ore Proximity to raw material Company is not in advantageous position due to location of plant Proposed to setup backward integration plant at Orissa
2.33 3.00
2.00
Backward Integration Production related risk State of technology used
2.00 3.00
The firm has adopted Thermax technology
4.00
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Parameter Product related risk Product range
Comments
Rate 2.5
Firm is mainly engaged in the manufacturing of MS bars and Wire rods Quality of product is reported to be better than the peers
2.00
Product quality
3.00
Marketing Distribution network Firm has800 dealer network spread over north India. Prices are at par with the peers
2.00 2 .00
Price Competitiveness
2.00
Industry risk evaluation for Iron and Steel Products industry
50%
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Management EvaluationS. No. 1 Parameter Management set up Comments Listed Company managed by experienced and professional promoters and directors The management is reported to be reliable and sincere Existing Plant at Ghaziabad and Orissa are running satisfactory The account is running satisfactorily with us Management is capable of arranging funds but with a time lag Rate 3.00
2
Commitment and sincerity Track Record in execution of projects Track record in debt payment
2.00
3 4
2.00 2.00
5
Financial strength/ flexibility
2.00
6
Capital Market Perception
The share is trading at a lower value .
1.00
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TOTAL SCOREFactor % score obtained 53.95 54.75 Financial Evaluation Business Evaluation Management Evaluation 48.75 & Industry
Weight 40.00% 25.00%
Weighted Score 21.58 13.69
25.00%
12.19
Conduct of Account AGGREGATE SCORE
NA
0.00%
NA 52.73
Rating
BB
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DETERMINATION OF ROIFacility Existing Proposed Derived rate Applicable Rate BR+3.5% Rate of interest CC NA BR+3.25% BR+4.50% PC
TL
NA
BR+2.25%+TP
BR+4.50+0.50
BR+2.5%+TP As per Banks clause
Processing Fee
As per Banks clause
As per Banks clause
Upfront Fee
Nil
Nil
Nil
Lead Bank Fee
NA
NA
NA
Commission on NFB LC/BG
NA
In line with Lead Bank**
Other charges, if any
NA
NA
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NA
FindingsRisk is the center most part of the analysis
and basis for the decision of the bank.
All the analysis is being done to generate a
grade, which represents the intensity of risk, that helps in determining the condition of the corporate applying for loan.The whole process of credit appraisal helps
in providing a suitable measure to minimize the risk due to non repayment of loan to the bank.7/7/12
SUGGESTIONSIn the rating model there are constant
parameters with constant weightages irrespective of the company and the industry in which it operates. Weightage should be assigned to parameters according to the industry in which the company operates. calculating the worthiness of the client since the previous rating does not take into account the short term drastic changes such as price level changes etc.7/7/12
Rating should be performed when
The rating model should have some sort of
Limitations Data availability as the data is proprietary
and not readily shared for dissemination.
Geographical scope of the project was
limited to PNB Circle Office and the loans studied were of solely of businesses established majorly in NCR
The credit appraisal decision are more of
intuition and experience and since the time period was limited, hence best7/7/12 efforts were made to grasp the process as much as
BibliographyBooksCirculars and manuals from bank. PNBOA manual for Banks and RBIs policies
on lending.Credit appraisal, risk analysis and decision
making by DD Mukherjee.
Annual reports of the company.
Internetwww.pnbindia.in en.wikipedia.org7/7/12
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