Summer Internship Report

TERM LOAN & WORKING CAPITAL FINANCE (state bank of Patiala)

Submitted to: Ms. Meenakshi Malhotra (faculty guide)

Submitted by: Mehak Mehta A1802011304

A Term Loan is an advance which is granted usually against the security of the borrowers Fixed Assets for a fixed term of not less than 3 years, is intended normally for financing acquisition of Fixed Assets, with a repayment schedule normally not exceeding 8 years. An element of risk is inherent in any type of loan because of the uncertainty of the repayment. Risk involved in Term Loans is greater. RBI treats only loans granted for periods exceeding 3 years as Term Loans. Although the SBI Act provides for grant of Term Loan for any period, the Bank usually restricts the repayment period of Term Loans for Commercial projects upto 7 to 10 years . As a Term Loan is granted for a fixed term, it is not payable on demand. In exceptional cases like infrastructure project where project life is much higher, the Bank considers grant of Term Loans with repayment periods even for more than 10 years.

PRE SANCTION CREDIT PROCESS

KEY ELEMENTS OF KYC( know your customers) Customer Acceptance Customer Identification Monitoring of Transactions Risk Management KYC norms applicable for all Customers, including Borrowers KYC Critical, especially for new customers. KYC norms applicable for LC bill discounting too

INDIVIDUALS (exemptions credit summation upto Rs 1 lakh p.a.in

circular, applicable for Proprietorship firms too)

(a) Proof of identity (i) Passport. (ii) Voter ID card (iii) PAN Card (iv) Govt./ Defence ID card (v) ID cards of reputed employers (vi) Driving License B) Proof of current address (any of the following) (i) Credit Card Statement (ii) Salary slip (iii) Income/Wealth Tax Assessment Order (iv) Electricity Bill (v) Telephone Bill (vi) Bank account statement (vii) Letter from reputed employer (viii) Letter from any recognized public authority ADDITIONAL DOCUMENTS Copy of latest Income Tax return Nature of Business Activity/Profession

Partnership Firms: KYC NORMS :

Partnership deed Partnership letter Introduction from a person known to the bank Registration Certificate (in case of Registered firm) Any officially valid document identifying the partners And the persons having Power Of Attorney and their addresses Telephone bill in the name of firms/partners.

COMPANIES : KYC NORMS

Memorandum and Articles of Association Certificate of Incorporation, Certificate of commencement of business ( wherever applicable) A copy of the resolution of the Board of Directors for opening of the account and Identification of those who have authority to operate the account

KYC GUIDELINES CUSTOMER ACCEPTANCE Branches should not open accounts of persons whose identity can not be verified by them. Greater care to be exercised in respect of the following: Thorough checking of antecedents to avoid opening of accounts in fictitious/ benami name CLOSURE OF ACCOUNTS (in event of non compliance of KYC) Where a branch is unable to apply appropriate KYC measures, the branch may consider closing the account .

CUSTOMER PROFILE
For the purpose of exercising control on individual transactions in accounts, Customer Profile of individual account holders should be compiled in the account opening forms, covering the following information:(i) ( ii) (iii) (iv) (v) Occupation Source of funds Monthly Income Annual turnover Date of Birth

(vi) (vii) (viii)

Educational qualification Details of existing credit facilities, if any Assets (approximate value).

RISK CATEGORIZATION
All accounts (both liabilities and assets) to have a risk categorization The categorization has to be Low Medium and High Risk.

Asset accounts risk categorization

{High risk are NPAs and accounts (other than PSUs etc)with limit > Rs 10 crores}

MONITORING OF TRANSACTIONS
It is important to recognize that the KYC process does not start and end with opening of accounts Cash withdrawals and deposits for Rs.10.00 lakhs and above in deposit, cash credit and overdraft accounts to be recorded in a separate register and reported to controlling office every month. Integrally connected to each other which have taken place within a month and the aggregate value of such transactions exceeds Rupees Ten Lakh

VARIOUS FACTORS WHICH BANK LOOKS BEFORE PROVIDING LOAN TO COMPANY /INDUSTRY

Industry Risks : Industry Rating, Industry Scenario & Outlook,

Technology Upgradation ,availability of inputs, product obsolescence, etc.

Business Risks: operating efficiency, competition faced from the

units engaged in similar products, demand and supply position, cost of labour, cost of raw material and other inputs like water and electricity, pricing of product, surplus available, marketing, etc.

Financial Risks: Financial strength/standing of the promoters, reliability, past

financial performance, reliability of operational data and financial ratios. Qualifying remarks of auditors /inspectors.

Following are the aspects, which need to be scrutinised and analysed while appraising:
A) MARKET (DEMAND & POTENTIAL) The market demand and potential is to be examined for each product item and its variants/substitutes

Critical analysis is required regarding size of the market for the product(s) both local and export Competition from imported goods, Government Import Policy and Import duty structure also need to be evaluated.

B) TECHNICAL ASPECTS Location and Site Plant & Machinery, Plant Capacity and Manufacturing Process

C) FINANCIAL ASPECTS Cost of Project & Means of Financing : The major cost components of any project are land and building including transfer, registration and development charges as also plant and machinery, equipment for auxiliary services, including transportation, insurance, duty, clearing, loading and unloading charges etc. Besides Banks loan, the project cost is normally financed by bringing capital by the promoters and shareholders in the form of equity, debentures, unsecured long term loans and deposits raised from friends and relatives which are not repayable till repayment of Bank's loan. Resources are raised for financing project by raising term loans from Institutions/Banks which are repayable over a period of time, deferred term credits secured from suppliers of machinery which are repayable in instalments over a period of time

Profitability Statement

The profitability statement which is also known as `Income and Expenditure Statement' is prepared after considering the net sales figure and details of direct costs/expenses relating to raw material, wages, power, fuel, consumable stores/spares and other manufacturing expenses to arrive at a figure of gross profit. Thereafter, all other expenses like salaries, office expenses, packing, selling/distribution, interest, depreciation and any other overhead expenses and taxes are taken into account to arrive at the figure of net profit Break-Even Analysis

Analysis of break-even point of a business enterprise would help in knowing the level of output and sales at which the business enterprise just breaks even i.e. there is neither profit nor loss.
Break-even point = (Volume or Units) Total Fixed Cost . (Sales price _ Variable Cost per unit)

Break-even point = (Sales in rupees)

Total Fixed Cost x Sales . (Sales) - (Variable Costs)

Balance Sheet Projections The financial appraisal also includes study of projected balance sheet which gives the position of assets and liabilities of a unit at a particular future date. Financial Ratios
i) Debt-Equity Ratio = share) Debt (Term Liabilities) . Equity (Share capital, free reserves, premium on

*Large Projects Power - independent power (Thermal, Hydro, Gas based) Iron & Steel Infrastructure (excl. power) and capital intensive projects not specified otherwise Real Estate producing plants 2.33:1

2.25:1 2.00:1

1.75:1

Mid/small projects

2:1

Debt-Service Coverage Ratio

Net Profit (After Taxes) + Annual interest on long term debt + Depreciation /. Annual interest on long term debt + Amount of instalments of principal payable during the year

The ratio of 1.5 to 2 is considered reasonable. A very high ratio may indicate the need for lower moratorium period/repayment of loan in a shorter schedule

Current Ratio

Current Assets . Current Liabilities

Higher the ratio greater the short term liquidity.

Profit-Sales Ratio

= Operating Profit * ______________________ Sales

(Before Taxes and excluding Income from other Sources) This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure.

Internal Rate of Return (IRR) IRR is that rate of discount which makes the discounted value of the net cash flow from a project just equal to the amount which has to be invested to obtain that net cash flow. CASE STUDY : THIS IS THE PROPOSAL WHICH I READ THIS WEEK
1.a) Name of the Borrower and Constitution Address of Regd. Office Works/Factory Date of incorporation/ establishment Dealing with SOBP since Business Activity Installed Capacity Branch Office/CO Directors/Partners/Proprietors (Name, Address, Phone No., e0.00mail ID of main Directors/Key persons) Whether any of them, in RBIs Caution advices/ECGC Caution list/Wilful defaulters' list. If yes, the reasons for considering the proposal. If any of them, related to Directors/ Sr. Officers of PNB Management Change since last sanction, if any Whether Memorandum of (Product)/ M/s Anant Swaroop Narinder Kumar (PROPRIETORSHIP CONCERN) Kalsia Road,Saharanpur Kalsia Road,Saharanpur 1995

b) c) d)

e) f)

1998 Rice Milling & export with capacity of I MT per hour(Rice Sheller) SME Saharanpur Muzaffaranagar Shri Mukesh Kumar Jain(Prop.

2. 3.a)

b)

NO

c)

NO

d)

No change it is a proprietorship concern

e)

NA

Association permits the Activity & Powers for borrowings f) g) Shareholding Pattern Whether the profile of the borrower, its Director/Partners/Promoters and its Group Cos./Associate Firms has been verified through CIBIL database/other credit information bureaus If No please give reasons. NA Yes

If Yes please give details.

NA (No Adverse Report)

Credit Appraisal Format for limits upto Rs.2 crore (for SME upto Rs.5 crore) Date of proposal Whether fresh/renewal/ enhancement/ In0.00principle Asset Classification as on 31.03.2012 Credit Risk Rating based on ABS .. (Previous and current with scores and reasons for degradation, if any) Last PMS Score, if applicable Customer ID No. Activity Code Whether sensitive sector Real estate/Capital market Applicable risk weight Date of last sanction & Sanctioning Authority No 651373536 21.5.2012 Renewal

Standard

10.03.2011 Chief Manager

Financial Position of the borrower

31.03.2009 AUDITED GROSS SALES 148.48 31.03.2010 AUDITED 273.67 31.03.2011 AUDITED 276.04 31.03.2012 PROVISIONAL 304.07 31.03.2013 PROJECTED 350.00 31.03.2014 PROJECTED 400.00

DOMESTIC EXPORT

148.48

273.67

276.04

304.07

350.00

400.00

NET SALES

148.48

273.67

276.04

304.07

350.00

400.00

OTHER INCOME

0.00

0.00

0.00

0.00

0.00

0.00

OPERATING PROFIT

3.88

4.08

3.69

2.05

4.48

5.31

PBT

3.88

4.08

3.69

2.05

4.48

5.31

PAT

3.88

4.08

3.69

2.05

4.48

5.31

DEPRECIATION

0.80

0.69

0.87

0.96

0.87

0.72

CASH PROFIT

4.68

4.77

4.56

3.01

5.35

6.03

PBIDTA

14.70

19.27

20.22

19.54

24.57

25.88

PAID UP CAPITAL

5.22

7.50

11.25

11.02

15.35

18.50

RESERVE AND SURPLUS

0.00

0.00

0.00

0.00

0.00

0.00

MISC EXP.

0.00

0.00

0.00

0.00

0.00

0.00

ACC LOSSES

0.00

0.00

0.00

0.00

0.00

0.00

DEFFERED TAX

0.00

0.00

0.00

0.00

0.00

0.00

ASSETS/LIABILITIES

0.00

0.00

0.00

0.00

0.00

0.00

NET WORTH

5.22

7.50

11.25

11.02

15.35

18.50

TOTAL BORROWINGS

131.41

155.11

133.44

173.03

196.10

201.35

SECURED

78.52

97.59

87.09

109.33

120.00

120.00

52.89

57.52

46.35

63.70

76.10

81.35

UNSECURED

TOTAL ASSETS

177.11

241.96

223.34

232.64

227.04

240.51

NET FIXED ASSETS

45.06

44.37

46.77

45.81

44.90

44.18

CURRENT RATIO

1.12

1.12

1.07

1.18

1.34

1.40

DEBT EQUITY RATIO

10.30

7.67

4.12

5.78

4.96

4.40

LONG TERM SOURCES

58.98

65.02

57.60

74.72

91.45

99.85

LONG TERM USES

45.06

44.37

46.77

45.81

44.90

44.18

SURPLUS

13.92

20.65

10.83

28.91

46.55

55.67

SHORT TERM SOURCES

118.14

176.94

165.74

157.92

135.59

140.66

SHORT TERM USES

132.05

197.59

176.57

186.83

182.14

196.33

DEIFICIT

-13.92

-20.65

-10.83

-28.91

-46.55

-55.67

This data was provided by bank. LAST 3 YEARS AUDITED BALANCE SHEET WAS PROVIDED BY BANK. AND COMING 2 YRS PROJECTED BALANCE SHEET 2013 -2014 WAS PROVIDED BY COMPANY TO BANK. Comments on Financial Indicators Sales During F.Y. 2011-12 the firm has achieved turnover of Rs 304.06 lacs. The demand of the product is increasing in the market and keeping in view the past trend and future projections, the estimated sale of Rs 350.00 lacs for the F Y 2012-013 seems to be realistic and very much achievable.. Profitability The firm has been running continuously in profits. However during last two years, the net profit of the firm has declined .This is due to increase in interest burden. However the net profit is likely to improve during the current year with the increase in turnover of the firm. Debt equity ratio Companys debt equity ratio in 2012 has been increased to 5.78 from 4.12 in 2011.this indicates company has less short term liquidity. The company has taken more loans and borrowings. Current ratio companys cuurent ratio in 2012 is 1.18 which indicates company is highly liquid. It can meets it short term payment capacity easily.

The companys paid up capital has descreased this yr to 11.02 from 11.25 .however this is likely to improve during the current year to 15.35

CONDITIONS AND NORMS BY BANK BEFORE PROVIDING LOAN TO COMPANY: 1) The firm to submit detailed stock statements along with a list of creditors within 10 days on the close of each month, which should be checked on monthly basis by Branch Official. Book Debts be got verified from the CA once in a quarter. 2) No DP to be allowed against :

a) Unpaid, obsolete, depleted, defective stocks and stocks older than 12 months, though the same shall remain hypothecated to bank. b) Book Debts in the name of allied/associate concern. 3) The stock to be properly stored and proper records to be maintained, which should be checked by branch officials at the time of checking of inventory invariably. 4) Netting of debtors/creditors shall be permitted as per bank norms. 5) The company to submit age wise details (within and beyond the cover period) of Book debts in the monthly stock statement as under : Book Debts upto 90 days Book Debts 910.00180 days Book Debts more than 181 days The company shall deal with our bank, shall not open current account/s with any other bank without prior permission and shall route all sale transactions through accounts. 6) Company to display name board inside/outside of the factory/godown/office etc. Common seal of the company shall be affixed on the documents to be executed in terms of the provisions of the Memorandum and Articles of Association of the company. 7) The account will be collaterally secured by following : i) Hypothecation/ Mortgage of Block Assets Immovable Properties