sme development centre 1 credit appraisal- a banker’s perspective may 30, 2015 prafulla shenoy,...

SME Development CentreSME Development Centre 1

Credit Appraisal- A Banker’s perspective

May 30, 2015

Prafulla Shenoy, DGM & Aniket Mendhe, ManagerSIDBI, Rajkot

SME Development CentreSME Development Centre

Small Industries Development Bank of India [SIDBI]

• SIDBI is an Apex Financial Institution set up for promotion, financing and development of Micro, Small & Medium Enterprises (MSME) in the country.

• Set up by an Act of Parliament in April,2 1990

• SIDBI has successfully completed 25 years on April 1, 2015

• One among the Top 50 Development Banks in the world


Definition of MSME ?

AS PER MSMED ACT 2006 :

(Rs Lakh) EnterprEnterpr

isesisesManufacturingManufacturing

(Investment in (Investment in P&M) P&M)

Proposed Proposed revisionrevision

ManufacturinManufacturingg

(Investment (Investment in P&M)in P&M)

ServicesServices

(Investment (Investment in in

Equipment)Equipment)

Proposed Proposed revision in revision in services services sector sector

(investment (investment in equiment)in equiment)

MicroMicro 2525 5050 1010 2020

SmallSmall 500500 10001000 200200 500500

MediumMedium 10001000 30003000 500500 15001500


SIDBI : Sphere of Activities

• Direct Finance: Assistance to MSMEs, Service sector entities, Resource support to NBFCs/Other intermediaries, Infrastructure, etc.

• Indirect Finance : Refinance/STL to Banks, SFCs, etc.

• Micro Credit : Pioneers in micro credit movement in the country. Developed several leading MFIs. Assistance through MFIs

• Associate Institutions: SVCL, SMERA, CGTMSE, ISARC and MUDRA.

• Nodal Agency : For GoI schemes like CLCSS, TUFS and TEQUP.

• Promotional and Development Activities


Retail Credit Schemes – Fund based

Schemes

• Schemes for Energy Saving Projects

• Service Sector schemes

• Privileged Customer Scheme

• GROWTH CAPITAL FOR MSMEs (GEMs)

• Credit Delivery Arrangement with NBFCs

• SIDBI-IDBI Working Capital Arrangement

• MSME Receivable Finance Scheme


GROWTH CAPITAL FOR MSMEs (GEMs)

Growth Capital could be offered as mezzanine funding (between equity and secured debt)

• Objective : To provide risk capital to well performing SME units having high potential for growth.

• Eligibility : Existing MSME customers of SIDBI.

• Instruments: Equity/quasi equity type of instruments

• Assistance is Sub-ordinated (i.e lower or junior) in security & payments to senior lenders (i.e secured lenders).

• Cure period : in case of temporary cash tightness.

• Max Amount : Half of net-worth

• Benefits of equity : SIDBI treats it as Quasi equity for DER purposes. MSMEs can leverage sub-debt to borrow more secured loans from SIDBI.


GROWTH CAPITAL Product - Subordinate debt….

(improving leverage)

0

200

400

600

800

1000

1200

1 2

Securd loans

Sub-debt

Net Worth

Net Worth 250 250

Sub-debt 0 80

Secured loans 500 660

Total LT funds 750 990


MSME Receivable Finance SchemePurpose Mitigating the problem of delayed payments

to MSME vendors / eligible service providers in respect of their sales / services rendered to large purchaser companies by offering them finance against bills of exchange / invoices arising out of such sales

Eligible MSME vendors

Manufacturing units/ Service providers/ Transporters/ IT vendors

Form of assistance Discounting of Bills of Exchange / invoice accepted by purchasers

Advantage to seller Immediate payment against receivables. Improves cash flow cycle

Advantage to Purchaser

Several creditors replaced by one creditor (bank)

There might be instances of increase in credit period


MSME Receivable Finance Scheme

Secured limits

Considered for purchasers having :-•External rating Min BBB+ / CR3, •Turnover : Rs 30 crore relaxable upto Rs. 20 cr. Or •Networth : Rs 6 crore relaxable upto Rs. 4 cr.

Clean limits

Considered for purchasers of higher level having :- •External rating- Min A- (Long term rating)•Turnover : Rs 500 cr.•Networth : Minimum Rs 125 cr. •Internal rating : CR3. •7 years of commercial production and three years of •Profitable track record.


Service sector activities eligible for assistance

• Hotels, Resorts, Convention halls, Shopping malls, • Hospitals, Nursing Homes, • Cinema theater, Multiplex, etc. ;• IT / IT enabled services ; • BPO & other knowledge based activities like, call centres• Bioinformatics ; • Contract research ; • Telecom services like setting up of mobile/ radio frequency

transmission/ receiver towers, • Stand alone service sector projects, promoted by existing

companies/groups in the following areas are also covered : – Organized retailing – Logistics, including supply chains, material handling,

warehousing, storage etc ; – Project Developers / Construction contractors – Transport operators ;


Subsidy Schemes of Government

Assistance under Govt. of India Schemes - Credit Linked Capital Subsidy Scheme (CLCSS):

• To facilitate technology upgradation • Capital subsidy for induction of proven technologies in 49 sectors.• Subsidy will be limited to 15% of the purchase price of P & M with a

ceiling of Rs.15 lakh per unit. Technology & Quality Upgradation Programme for MSMEs (TEQUP) :

• To sensitize the manufacturing MSME sector in India to the use of energy efficient technologies and manufacturing processes.

• The second objective will be to improve the product quality of MSMEs and to encourage them towards becoming globally competitive by obtaining Certification of products

• The Government of India will provide financial support to the extent of 25% of the project cost for implementation of Energy Efficient Technologies (EET). The maximum amount of GOI assistance from the scheme will be Rs.10 lakhs.

TUFs:-Technology Upgradation Fund Scheme• 10% capital subsidy and 5% interest reimbursement


SIDBI : initiative – SmallB.in

– Virtual mentor & handholding forum for budding entrepreneurs

– Informative , interactive & exhaustive web site –encourages entrepreneurship as an alternate avenue to job seeking

– Demystifies & simplifies process of setting up a MSME.– Fills information gap– List out Business ideas for small businesses– Details of Franchise opportunities in India– Particulars of financing schemes of various banks – Checklist for starting a new business– Details relevant to women entrepreneurship


MUDRA

• Micro Units Development Refinance Agency [MUDRA] – corpus of Rs 20,000 crore, and credit guarantee corpus of Rs

3,000 crore.– Refinance to Micro-Finance Institutions through a Pradhan

Mantri Mudra Yojana. – Banking the un-banked, also funding the un-funded.

Sr. Scheme For Amount (Rs)

1 Shishu Starters 50,000/-

2 Kishor Mid Stage Finance 50,000/- to 5,00,000/-

3 Tarun Growth Seekers 5,00,000/- to 10,00,000/-


Application Form

• Fully filled (half filled application form creates confusion and consumes executive time which leads to delay in sanction)

• SIDBI application form is a complete project report, no need to submit separate project report

• Signed on all pages


Application Form

• Project Cost– Clearly defined with all heads and final

contractors / machinery suppliers. – Major changes in project items are very painfull

for Banker• Means of finance

– Internal accruals (availability?) – Interest Free Unsecured loan (ratio 3:1)

• Details such as– Associate concern, its Bankers, Power

requirement, Raw Material, Capacity, Management, Shareholding, Repayment Schedule


SL No

Cost of the project SL No Means of finance

1 Land including registration cost

1 Additional Partners / Share Capital

2 Building & Civil construction 2 Interest free unsecured loans

3 Plant & Machinery 3 Internal Accruals

4 Misc. Fixed Assets 4 Term Loan from SIDBI

5 Preliminary & Pre Op expenses

6 Contingency provisions

7 Margin Money for WC

8 Others

16


Application Form

– Product and Process– Marketing and Selling arrangement

•Main buyer, order in hand , competitors etc

– Pending litigation, Tax proceeding, contingency etc. has to be reported upfront

– Realistic estimate of expected date of commencement of commercial operations (Concern of technical NPA)


CMA data / Profitability Projections/Cash Flow

– No absurd increase in sales or profit, it should be inline with past data.

– In most of the cases, we find the projections submitted by the applicant as highly optimistic.

– DSCR : up to 1.5 to 2 is ok– Projected cash flow should be in tandem with the industry

norms in terms of revenue vs capacity as well as profit margins.

– Before lending we always compare the projected cash flows in a project with industry trends and wherever differences are found, we prepare fresh cash flows to align it with the industry and present market trend.

– We use only two methods to assess the WC limit ie., 2nd method of lending for all limits and Nayak Committee (turnover method) method for limits upto Rs.5 crore.


• Application form of SIDBI is very thorough and covers almost all the aspects of the unit. It gives opportunity to promoters to present itself on firsthand basis

• Some aspects may not be applicable

– Write ‘Not applicable’.


Retail Credit Schemes – Term LoansBenchmark norms

Sr. No. BenchmarkFinancial norms

Desirable norms [wherever applicable]

A Applicable for term loans

1 DER (For the company as a whole, incl. proposed assistance)

2:1

2 Projected DSCR 1.5:1

3 Promoter’s contribution

(a) New Projects 33%

(b) Others 25%

4 Overall asset coverage

(a) New Entity 1.4

(b) Existing Entity 1.3

(c) Service Sector 1.75

(d) CRE 2.00


Other documents

• Audit report– Not only P&L and B/S but also all the annexure including

IT returns – Signed– Provisional report to be CA certified

• Net worth Statement of promoters and guarantors– Complete description of property with supporting

documents– Surrender Value of insurance policy

• CA certificate– Simple format– IBA clause


Other documents

• Status of various statutory approvals – GPCB, RUDA, RMC, various other licenses

• Right to Access• MOA-AOA - Borrowing powers and Business of

company• DIC Regn. / CA certificate certifying MSME

status


Due Diligence

• Valuation and Title Investigation of collateral properties (if any)

• KYC documents – Low Risk, Medium Risk, High Risk

(Guidelines of RBI)• Due diligence of machinery

suppliers/contractors involved in the project

23


Documentation

• All documents are prepared by SIDBI• CA certificate for non pendancy of

taxes or litigation• PAS 3, SH 7,CHG 1 (erstwhile form

2,5 and 8) to be filed properly with ROC

• Registration of mortgage with Sub-registrar


Disbursement

– All pre-disbursement conditions to be complied before disbursement (All terms and conditions are already discussed before sanction)

– CA certificate for project cost and means of finance supported by documentary proof to ensure the required investment by promoters in the project.

– Disbursement request letter should be signed by proper authority

– Change in project heads should be kept at minimum level as possible

– Utilization certificate after disbursement to be submitted within one month for advance disbursement made in the account of customer


Post Disbursement

– Stock statement to be submitted before 10th day of each and every month

– Audit observation to be complied, if any– Filing of Subsidy

•Implementation of project•Documents such as tax invoices, visit

report•Time limit is crucial for filling the

subsidy – List of final plant and machinery


What is Credit Appraisal

• Credit appraisal is a process of collecting relevant information of customer and projects to undertake risk assessment exercise by the bank prior to providing any loans/advances.

• It also checks the technical, economical & financial viability of the project proposed.

• Credit Appraisal thus ascertains the risks associated with lending functions in banks.

• In general, it is the process of appraising the credit worthiness of the loan applicant and the project.

27


Credit Appraisal…….

• Financial analysis and preparation of projected cash flow based on industry trend.

• Assessment of Management, Business, Industry in addition to the financial position.

• A banker must look into 3 C’s before lending; that are “Character”, “Capacity”, and “Collateral”.

28


Rating - Credit Appraisal tool

• Rating of the applicant and project by assigning scores to each parameters under Industry, Business, Financials and Management risks.

• Rating the proposed facility by assessing the proposed securities to arrive at a combined rating.

• Propose the pricing based on the risk rating and stipulate terms and conditions for sanction which includes certain risk mitigants as proposed in the credit appraisal. Submit the case to respective Sanctioning Authority.

29


Credit Appraisal…..

• Thus, Credit Appraisal is a tool toa)Understand the customerb)Assess the capacity to repay (Viability of

the project)c)Understand the risks involved in lending.d)Appropriately price the financial

assistance to match with the risk involved.e)Propose the risk mitigants including that

by way of adequate collateral security.

30


With whom we would like to deal

• Background, Reputation, Market Standing,

• Experience of promoters• Profitable Business Model• Increasing Turnover• No earlier bad track record with Banks• No tendency to default• Transparency and Honesty


Please avoid

• Promoters with malafide intentions• Promoters with Fraudulent reputation• Cooked-up Financial reports• Diversion of funds


What is at stake

• Reputation of CA• Career of an honest hardworking people• Relationship with Bank

– CA relationship does not end with sanction of loan

– It continues with disbursement and till entire loan is repaid.

– CA should inform bankers about the conduct of the account.

• CA should play a role of whistle blower