A

Project Report
At

On

“A STUDY ON WORKING CAPITAL

MANAGEMENT OF BANK.”
IN
BHUBANESWAR.
(From 21/02/2011 - 10/05/2011)
Submitted by:-
BAILOCHAN SAHU
Roll No - 520951171
Registration No – 520951171
 Dedicated
To My
Parents,
Respected Teachers
&
Sincere Friends
 GYANABHARATI 2ND FLOOR

NILIMA COMPLEX DELTA SQUARE

BARAMUNDA BHUBANESWAR

PROJECT REPORT ON
WORKING CAPITAL MANAGEMENT OF BANK

Submitted in partial fulfillment of the requirement

For the award of the Degree
Of Master of Business Administration
By
BAILOCHAN SAHU
Reg no: 520951171

TO
SIKKIM MANIPAL UNIVERSITY OF
HEALTH MEDICAL AND TECHNOLOGICAL SCIENCES
 COMPANY CERTIFICATE

It is to certify that BAILOCHAN SAHU a final year student of Sikkim

Manipal University has completed the project work entitled. A PROJECT
REPORT ON WORKING CAPITAL MANAGEMENT OF BANK. For the
award of the partial fulfillment for the degree of Masters in Business
Application of Sikkim Manipal University of health Medical and
technological sciences.

During his working period of project he found to be hardworking and

sincere.

I wish her a better Future in the field of Management.

 Examiner’s Certificate

The project report of

BAILOCHAN SAHU
Entitled
A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT OF BANK
CHANNEL OF ICICI BANK.

Is approved and is acceptable in quality and form.

 CERTIFICATE

This is to certify that the report entitled A PROJECT REPORT

ON WORKING CAPITAL MANAGEMENT OF BANK CHANNEL OF ICICI
BANK IN BHUBANESWAR Submitted in partial fulfillment of the
requirements for the degree of Master of Business Administration
(MBA) of Sikkim Manipal University of health Medical and
Technological sciences. MR BAILOCHAN SAHU has worked under my
supervision and guidance and that no part of this report has been
submitted for the award of any other degree, diploma, fellowship or
other similar titles or prizes and then may has not been published in
any journal or magazine.

Certified

[Link] Dash.
Branch Head-Finance.
ICICI BANK
 CERTIFICATE

This is to certify that the report entitled A PROJECT REPORT ON

WORKING CAPITAL MANAGEMENT OF ICICI BANK Submitted in partial
fulfilment of the requirements for the degree of Master of Business Administration
(MBA) of Sikkim Manipal University of Health Medical and Technological Sciences. MR
BIDYADHAR DAS has worked under my supervision and guidance and that no part of
this report has been submitted for the award of any other degree, diploma, fellowship or
other similar titles or prizes and then may has not been published in any journal or
magazine.

Certified
 ACKNOWLEDGEMENT
It is my proud privilege to express my deep sense of gratitude to my Respected
Project-Head Mr. Saurav Kumar Dalabehera Faculty in Department of Management,
Gyanabharati, and Bhubaneshwar. For his wise concern, co-operation, inspiration,
valuable and scholarly guidance and consistent encouragement to undertake this
project work.

I am thankful to my loving friends for their help, encouragement, co-operation and kind
assistance to prepare this Project Report.

Finally my deep sense of gratitude to my loving parents.

 DECLARATION

I BAILOCHAN SAHU do here by declare that the project report entitled A PROJECT
REPORT ON WORKING CAPITAL MANAGEMENT OF BANK . Submitted by me for
the partial fulfillment of my MBA course to Sikkim Manipal University, India is of my own
efforts and has not been submitted for the award of any other degree, diploma,
fellowship, or any other similar title or prizes.
 Acknowledgement
At this stage I must thank God, the Professor of Majesty and Splendor, the
Omnipresent and the ever merciful. Whose invisible guidance helped me in each
and every moment of my life.
I would also like to thank my parent for allowing me to do whatever I liked, my
elder brothers who helped me in facing each and every problem of my life and
without their support I would not be able to reach at this stage.
In presenting this report I express my heartfelt thanks to Mr. Prayag samal (Bank
Manager of ICICI Bank), [Link] Raj Singh (Cashier Manager of ICICI
Bank) ,My warmest thank to Mr. Samuel Pradhan (Sn. Mgr Cashier of ICICI
Bank),Mr Amit Daruka (Branch Manager of ICICI Bank). who were always with
me with there valuable suggestion.

I am grateful to Mr. Sourav Kumar Dalbehera my internal guide who was always
for me and without his guidance the project could not have been completed.
My sincere gratitude to Center head Mr. Surendra kumar sahoo and faculties
whose constant help immense me to be in track throughout my project. Last but not
the least I would like to thank all friends and the entire person who helped me
directly or indirectly in making this report successful.

Bailochan sahu

Table of content
Chapte Name of Chapter Pag
r No. e
NO.
1. INTRODUCTION 01-
 BANK OVERVIEW 05

2. OBJECTIVE OF THE STUDY 06-

07

3. METHODOLOGY 08-
 Research design. 12
 Data source & Methodology.
 Tools Used.
 Scope of the Study.
 Significance of the study
4. LIMITATIONS OF THE STUDY 13
 Limitation of knowledge regarding the banking
Operations.
 Limitation to gather all the relevant information.
5. PRESENTATION AND ANALYSIS OF DATA. 14
 Risks in banking business. 15-
 Type of risk 17
 Decision making 18-
 Credit appraisal 20
 Credit appraisal procedures in ICICI BANK 21
 Methods of assessment of working capital 22-
 Assessment of term loan 28
 Credit risk assessment 29-
 Financial Ratio analysis 31
 What a credit analyst needs to ensure 32-
35
36-
44
45-
53
54-
63
64-
65

6. SUMMARY AND CONCLUSION 66-

67
7. APPENDIX 68
INTRODUCTIO
N
Its working capital financing consists mainly of cash credit facilities and bill
discounting. Under the cash credit facility, a line of credit is provided up to a pre-
established amount based on the borrower's projected level of inventories,
receivables and cash deficits. Up to this pre-established amount, disbursements are
made based on the actual level of inventories and receivables. The facility is
generally given for a period of up to 12 months, with a review after that period. Its
cash credit facility is generally fully secured with full recourse to the borrower. In
most cases, ICICI Bank has a first charge on the borrower's current assets, which
normally are inventory and receivables. Bill discounting involves the financing of
short-term trade receivables through negotiable instruments. These negotiable
instruments can then be discounted with other banks if required, providing us with
liquidity.

ICICI Bank provides letter of credit facilities to its customers both for meeting
their working capital needs as well as for capital equipment purchases. Lines of
credit for letters of credit are approved as part of a working capital loan package
provided to a borrower. These facilities, like cash credit facilities, are generally
given for a period up to 12 months, with review after that period. ICICI Bank
provides guarantees, which can be drawn down any number of times up to the
committed amount of the facility. ICICI Bank issue guarantees on behalf of its
borrowers in favor of corporations and Government authorities. Guarantees are
generally issued for the purpose of bid bonds, guaranteeing the performance of its
borrowers under a contract as security for advance payments made to its borrowers
by project authorities and for deferral of and exemption from the payment of
import duties granted to its borrowers by the Government against fulfillment of
certain export obligations by its borrowers. The term of these guarantees is
generally up to 36 months though in specific cases, the term could be higher. In
addition, as a

Working capital is the life blood and controlling nerve center of a business.

Working capital is vital to a business. The organizations have to make available of

funds to pay their day to day bills, wages and so on. The working capital is made
up of the Current assets net of the current liabilities. It is very important to a
company to manage its working capital carefully. This is particularly true where
there is a substantial time lag between making the product and receiving the money
for it. In this situation the company has paid out all the costs associated with
making the product (labour, raw materials and so on) but not yet got any money for
it. They must therefore ensure they have enough Cash to do this.

The way working capital moves around the business is modeled by the working
capital cycle. This shows the cash coming into the business, what happens to it
while the business has it and then where it [Link] each stage of this
working capital cycle there is a time lag. For some businesses this will be very
long where it takes them a long time to make and sell the product. They will need a
substantial amount of working capital to survive. Others though may receive their
cash very quickly after paying out for raw materials etc. Perhaps even before
they’ve paid their bills- they will need less working capital.

For all businesses though they need to plan how much cash they are going to have.
The best way of doing this is a CASH FLOW FORECAST.

“Working capital is a life blood and controlling nerve center of a business” Various
aspects of working capital determines the health and growth of an Organization.

Working Capital refers to Current assets mines current liabilities. Working capital
measures how much in liquid assets a company has available to build its business.
The number can be positive or negative, depending on how much debt the
company is carrying. In general, companies that have a lot of working capital will
be more successful since they can expend and improve their operations.
Companies with negative working capital may lack the funds necessary for growth.
The above information about working capital influence me for making a project on
working capital Management of the ICICI BANK.

Economy needs capital to move on. Without sufficient capital, the infrastructural,
industrial, and agriculture activities cannot be undertaken. These are essential for
economic growth of the economy on which GDP, and thereby the per capita
income of the people depends.

Only when the savings of the people are mobilized and channelized, they
can be used systematically for economic activity. Here comes the role of banks and
FI who are involved in mobilizing the savings of the public and lending it for
various economic activities.
 Financial Sector, especially, banking, is however, passing through a process
of radical change. De regulation in the financial sector has widened the
opportunities and threats for the entities financed by the banks. This calls for new
models of assessment of risks to which such entities are freshly exposed. The
deregulation has also resulted in introduction of a string of new products by the
banks. Many new products have also created multiple sources for banks to generate
higher profits, than the traditional financial intermediation, but they have also
opened up new areas of risk.

 BANK OVERVIEW
. ICICI Bank. ICICI Limited began diversifying its operations from project-based
lending to corporate financing at the time of appraisal. In addition, as a part of its
housing finance initiative, ICICI Limited set up ICICI Home Finance Company in
1999 as a wholly-owned subsidiary for provision of housing loans. During
implementation, based on opportunities in the
market, ICICI Limited merged with ICICI Bank and refocused its operations on
retail and commercial banking. The size of ICICI Bank’s housing finance portfolio
as of 31 March 2008 was Rs585 billion, of which loans to the relatively lower
income group (loans of less than Rs0.5 million) constituted 16%. The size of ICICI
Home Finance Company’s housing portfolio was Rs67 billion as of 31 March
2008. ICICI Home Finance Company has recently started focusing
on large ticket (non-priority sector) loans and home equity loans.
To un-bundle these risks, a step towards upgrading their risk assessment and
risk management has been undertaken by some banks. An important focus of these
efforts has been the development of new methodologies, and the introduction of
more rigorous practices, to measure and manage risk. The rapid growth and
increasing complexity of financial market activity, together with increasing
competition, have been important catalysts to these developments. However, this
step has highlighted the challenges associated with quantifying and ascertaining
risk, given the scarcity of historical loan performance data.

OBJECTIVE OF THE STUDY:-

 To assertion management of working capital and to calculate various ratio

relating to working capital.

 To suggest the steps to be taken to increase the efficiency in management of

working capital.

 To study the liquidity position of he organization by taking analyzing

important components of working capital.

 To study the general working of the company with relation to the decision
regarding managing working capital.

 To get exposure with practical field study with actual figures.

  To understand the various problems faced by the company and the industry
as a whole in proper implementation of Working capital Management. The
necessary precautions if possible to be undertaken to prevent and control
them.

 To study the past performance of the working capital management in the

company, its future prospects and achievable position in near future
considering changing position of industries.

The main objective of this study i.e. to ascertain the risk while investing in a
particular borrower and accounting beforehand for and any unprecedented change
displayed by him over the time period is accomplished by the following steps:

 Starting with brief overview of various risks in banking, and later emphasizing
on the credit risk management and the issues involved there in.

 A broad overview of the credit appraisal process of the banks and the risk
analysis done by them.

 A broad overview of the project finance process of the banks for financing
projects like infrastructure projects.

Using the credit risk rating framework to determine risk adjusted pricing for
exposures
METHODOLOGY

Research design.

The design chosen for this study is descriptive research design. The rationale
behind using the descriptive research design is that the study was carried on
working capital management for which the source is annual reports, and cost
reports etc. the financial analysis is done keeping special emphasis on balance
sheet profit and loss statement, cost report and ratio analysis.

Data Source and Methodology

The present study is based upon primary and secondary data. The sources of
primary data are the official records and discussion with the officers in the finance
dept. of the organization. The secondary sources of the data include various
publications of the organization and annual reports and audited financial
statements. The data, which are presented in this report, have been taken from
secondary sources.

For analyzing the performance of working capital management, simple

mathematical tools like Percentages, Averages, and Ratios have been used in this
project work. To know the financial performances of this division, calculation of
Operation Cycle, Earning before Interest & Taxes have been calculated.
The study was undertaken as a part of MBA curriculum during March- April in
the form of summer training.

The work was carried out in the office of ICICI BANK . Both primary and
secondary data were acquired for the smooth and successful completion of the
study. The primary report and interview and secondary data are collected from the
Balance sheet of the project and annual reports etc.
Tool used
Ratio analysis, current ratio, liquid ratio, inventory ratio, ratio of inventory to
working capital and graphs has been used as devices for analyzing the performance
of working capital management ICICI BANK..
Scope of the study
The study of the working capital helps someone to know about the position of the
current assets and current liability of an organization. This gives a clear picture that
how the firm is maintaining its day-to-day requirements by using the funds
available .the working capital requirements of the business are maintained
according to that.
Excess working capital more than its requirement is idle to the business point of
view. When the working capital is not sufficient that is also not good for the
business because it shows the weakness of liquidity. Above that if working capital
is not sufficient then it is difficult to maintain its day-to-day activities.

This project on “Credit Appraisal” involves a plethora of issues and aspects. To

undertake this project in its entirety involves more time, expertise, and in-depth
knowledge of banking functions. Thus, with limited knowledge, sincere efforts
have been made to evaluate the key elements.
The study is restricted to appreciate the system of Credit Appraisal the
banks undertake, how the risk –biased pricing is done and what all precautions
does the bank take before favorably considering any loan proposal

ICICI Bank also offer cash management services (such as collection, payment and
remittance services), escrow, trust and retention account facilities, online payment
facilities, custodial services and tax collection services on behalf of the overnment
of India and the governments of Indian states. Under cash management services,
ICICI Bank offer its corporate clients custom- made collection, payment and
remittance services allowing them to reduce the time period between collections
and remittances, thereby streamlining their cash flows. Its cash management
products include physical cheque-based clearing in locations where settlement
systems are not uniform, electronic clearing services, central pooling of country-
wide collections, dividend and interest remittance services and Internet-based
payment products. ICICI Bank also act as bankers to corporates for their dividend
pay out to their shareholders, as also for interest pay out to the company’s investors
and depositors which results in interest-free float balances for us. ICICI Bank also
offers custodial services to clients. At year-end fiscal 2007, total assets held in
custody on behalf of its clients (mainly foreign institutional investors, offshore
funds, overseas corporate bodies and depositary banks for GDR investors) were
Rs. 910.49 billion. As a registered depositary participant of National Securities
Depository Limited and Central Depository Services (India) Limited, the two
securities depositaries operating in India, ICICI Bank also provide electronic
depositary facilities to investors. Further, ICICI Bank generates fee income from
its syndication and securitization activities.

Significance of the Study

While Financial Institutions have faced difficulties over the years for a
multitude of reasons, the major cause continues to be directly related to the credit
standards for borrowers or a lack of attention to changes in economic or other
circumstances that can lead to deterioration in the credit standing of a bank’s
borrowers. Non-recovery of the dues form the borrower not only affects
profitability, but also necessitates maintaining of more owned funds by way of
capital and reserves and provisions to act as a cushion for the loan losses. In
consequence, disturbing the credit cycle and giving birth to other banking
problems.

Avoidance of these loan losses, rather reducing them to acceptable limits, is

one of the pre-occupations of managements of banks. Losses are inevitable, as the
risk is inherent in Credit, but banks should strive to see that what originates these
problems loan accounts and take steps to mitigate that in future. Picking up this
theme, this study charts the mechanism adopted by the banks in rating the credit
risks, in fixing the amount of credit to be extended during a financial year, the
industries to focus on, the geographical spread, the type of proposals to be
financed, the disbursal mechanism, and the collateral value, the method of pricing,
the repayment schedule, the monitoring and review process.

The significance of the studying these considerations gets reflected in knowing

that, lending is not just a matter of making the loan and waiting for payment .Loans
are to be properly rated, priced, monitored, and reviewed so as to effectively
measure the credit risk along the risk continuum, and foreseeing before hand of
any undesirable prospect of the borrower’s business.

Current accounts, which are non-interest bearing demand deposits. In addition to

deposits from Indian residents, ICICI Bank accept time and savings deposits from
non-resident Indians, foreign nationals of Indian origin and foreign nationals rking
in India. These deposits are accepted on a repatriable and a non-repatriable basis
and are maintained in rupees and select foreign currencies.

Following a strategy focused on customer profiles and product segmentation,ICICI

Bank offer differentiated liability products to various categories of customers
depending on their age group, such as Young Star Accounts for children below the
age of 18 years, Student Banking Services for students, Salary Accounts for alaried
employees and Senior Citizens Account for individuals above the age of 60 years.
During fiscal 2007, ICICI Bank launched special term deposit products for urations
of 390, 590 and 890 days. ICICI Bank have also segmented various categories of
customers to offer targeted products, like Private Banking for high net worth
individuals, Defence Banking Services for defence personnel, Special Savings
Accounts for trusts and Roaming Current Account for businessmen.
Limitations of the Study
 Limitation of knowledge regarding the banking Operations: As this was
first time I was exposed to the practical banking process scenario, it was nor
possible to know all the issues involved in the credit risk management of the
bank.
 ICICI Bank take deposits from its corporate clients with terms ranging from
15 days (seven days in respect of deposits over Rs. 1.5 million) to 10 years
but predominantly from 15 days to one year. RBI regulates the term of
deposits in India, but not the interest rates, with some minor exceptions.
Banks are not permitted to pay interest for periods less than seven days.
Also, pursuant to the current regulations, ICICI Bank are permitted to vary
the interest rates on its corporate deposits based upon the size range of the
deposit so long as the rates offered are the same for every customer of a
deposit of a certain size range on a given day. Its deposit products for
corporations include:
 Limitation to gather all the relevant information : As a trainee, it was not
possible to access all the important documents and circulars of the bank as
some of them as confidential and not supposed to be disclosed to the
outsiders. As a result, some of the bank specific information could not be
collected.
 ICICI Bank offer retail liability products in the form of a variety of
unsecured redeemable bonds. RBI has prescribed limits for issuance of
 bonds by banks. During the financial year ended March 31, 2007, ICICI
Bank did not issue any bonds to retail investors. While ICICI Bank expects
that deposits will continue to be its primary source of funding, ICICI Bank
may conduct bond issues in the future.

PRESENTATION AND ANALYSIS OF DATA

1. RISKS IN BANKING BUSINESS.

2. TYPE OF RISK
3. DECISION MAKING
4. CREDIT APPRAISAL
5. CREDIT APPRAISAL PROCEDURES IN ICICI BANK
6. METHODS OF ASSESSMENT OF WORKING CAPITAL
7. ASSESSMENT OF TERM LOAN
8. CREDIT RISK ASSESSMENT
9. RATIO ANALYSIS
10. WHAT A CREDIT ANALYST NEEDS TO ENSURE
Risk in Banking Business

Through its distribution network, ICICI Bank offer government of India savings
bonds, insurance policies from ICICI Prudential Life Insurance Company and
ICICI Lombard General Insurance Company and distribute public offerings of
equity shares by Indian companies. ICICI Bank also offers a variety of mutual fund
products from ICICI Prudential Asset Management Company and other select
mutual funds. ICICI Bank also levies services charges on deposit accounts. ICICI
Bank offer fee-based products and services including foreign exchange products,
documentary credits and guarantees to small and medium enterprises. As a
depositary participant of the National Securities Depository Limited and Central
Depository Services (India) Limited, ICICI Bank offer depositary share accounts to
settle securities transactions in a dematerialized mode. Further, ICICI Bank are one
of the banks designated by RBI for issuing approvals to non- resident Indians and
overseas corporate bodies to trade in shares and convertible debentures on the
Indian stock exchanges.

ICICI Bank provide a range of commercial banking products and services to

India’s leading corporations and growth-oriented middle market companies,
including loan products, fee and commission-based products and services, deposits
and foreign exchange and derivatives products. ICICI Bank serves its corporate
clients through two corporate relationship groups, the Global Clients Group and
the Major Clients Group. The Global Investment Banking Group and the Global
Project Finance Group focus on origination and execution of investment banking
and project finance mandates. The Transaction Banking Group focuses on
transaction banking and product development and sales. The Global Markets
Group provides foreign exchange and other treasury products to corporate as well
as small enterprise clients

Risk is inherent and absolutely unavoidable in banking. It is a variable which can

be calibrated, measured and compared. The degree of risk attached to an event is
generally linked to the likelihood of the occurrence of that event. The higher the
probability of the actual outcome being different from the expected outcome, the
higher is the risk attached to that event. Hence, risk is generally measured using the
concept of standard deviation.

It is the potential loss that an asset or a portfolio is likely to suffer due to a

variety of reasons .Since risk is accepted in business as a trade off between reward
and threat, it does not mean that taking risk brings loss only; it brings forth benefits
as well. In other words, it is necessary to accept risks, if the desire is to reap the
anticipated benefits.

Risk, in its pragmatic definition, therefore, includes both threats that can
materialize and opportunities that can be exploited. Stressing the downturn effect
of taking risks, there can be serious implications on banks when the various
explored /unexplored are not prudently managed.

The market where investment funds like bonds, equities and mortgages are traded
is known as the capital market. The primal role of the capital market is to
channelize investments from investors who have surplus funds to the ones who are
running a deficit. The capital market offers both long term and overnight funds.
The financial instruments that have short or medium term maturity periods are
dealt in the money market whereas the financial instruments that have long
maturity periods are dealt in the capital market. The different types of financial
instruments that are traded in the capital markets are equity instruments, credit
market instruments, insurance instruments, foreign exchange instruments, hybrid
instruments and derivative instruments.

In studying the capital market theory we deal with issues like the role of the capital
markets, the major capital markets in the US, the initial public offerings and the
role of the venture capital in capital markets, financial innovation and markets in
derivative instruments, the role of securities and the exchange commission, the role
of the federal reserve system, role of the US Treasury and the regulatory
requirements on the capital market.

The market where investment funds like bonds, equities and mortgages are traded
is known as the capital market. The financial instruments that have short or
medium term maturity periods are dealt in the money market whereas the financial
instruments that have long maturity periods are dealt in the capital market.

The main function of the capital market is to channelize investments from the
investors who have surplus funds to the investors who have deficit funds. The
different types of financial instruments that are traded in the capital markets are
equity instruments, credit market instruments, insurance instruments, foreign
exchange instruments, hybrid instruments and derivative instruments. The money
market instruments that are traded in the capital market are Treasury Bills, federal
agency securities, federal funds, negotiable certificates of deposits

The issues that have been mentioned above to explain the capital market theory
may be discussed under the following heads:
Type of Risks
A bank faces a number of risks in the course of its regular operations. Some of the
important risks faced by bank are as under:

 Credit Risks
 Interest-rate Risks
 Operational Risks
 Liquidity Risks
 Market Risks
 Insurance Risks
 Business Risks
 Strategy Risks
 Reputation/Brand Risks

 Credit Risks: Whenever a bank acquires a loan asset, it assumes the risk that the
borrower may default –that is, not repay the principal and/or interest on time.
Different types of assets in the bank exhibit different probabilities of default.
Loans typically exhibit the greatest Credit risk. Bank’s investment securities
generally exhibit less Credit risk because the borrowers are predominantly
central, state, and local government units where the default percentage is Zero.
To assess the borrower’s creditworthiness, banks perform a credit analysis on
each loan request to assess the borrower’s capacity to repay.
 Interest-rate Risks: It is ascertained, basically, by comparing the sensitivity of
interest income to changes in assets yields with the sensitivity of Interest
expense to changes in a Interest costs of liabilities. In any integrated (Globalize)
economy, wild fluctuations in financial parameters are bound to have far-
reaching consequences for the bottom line of the banks and other Financial
Institutions. For instance, a change in the Interest rate can suddenly make
borrowed money very inexpensive or very costly. A variety of tools are now
available to help manage the risks of such events occurring. Some important
products include futures, forwards, options, and swaps. Mind-boggling
advances in information technology, the spread of personal computers and their
networking have considerably facilitated this task. But the organizations should
clearly understand the mechanism and their implications of these products,
failing which they might end up exposing themselves to greater risk.
 Liquidity Risks: Market liquidity risk is defined as the in ability of the bank to
conclude a large transaction in a particular instrument at any thing near the
current market price. Funding Liquidity risk is defined as the inability of the
bank to obtain the funds to meet cash flow obligations. Thus, Liquidity risk is
generally discussed in terms of assets, demonstrating the banker’s ability to
convert the asset into cash with minimal loss form price depreciation .banks
continuously compare the probable cash inflows with the future demands needs,
so as to meet the payment obligations and future expansion needs.
 Operational Risks: Operational Risk is the risk of unexpected losses arising
from deficiencies in a bank’s management information, support and control
systems and procedures. These deficiencies could lead towards offering
inappropriate financial products or incorrect advice to customers causing legal
exposure or loss of goodwill, or a systems failure could leave a bank or dealer
without the effective ability to trade or to assess its current portfolio. To take
 case of this risk, most banks have identified system vendors for a proper
workflow and process automation, which will help the banks in reducing and
detecting errors. But the success in controlling this risk through system vendors
is to be seen over a period.

 Market Risks: Market Risk is defined as the risk of a potential loss in fair
values arising form adverse changes in market rates and prices.

 Insurance Risks: The risk that the product pricing and reserves did not
appropriately cover claims.

 Business Risks: The risk that the businesses were not able to cover their
ongoing expense with ongoing income following a severe crisis(excluding
items already captured by other risk categories)

 Strategy Risks: The risk that business activities were not responsive to changes
in industry trends.
 Reputation/Brand risks: The risk that the bank’s market or service image might
decline.
Apart form the above mentioned risk, there are various types of risks like
exchange risk, country risk, off balance sheet risk etc. which add more intricacies
to the major head of default risk.

Nevertheless, the management of lending, the core businesses of most banks, is

mostly about granting of credit and managing the credit risk. Credit risks
management ought, therefore to be a core competency of the Financial Institution.
Decision Making

A decision on providing credit to an entrepreneur may be arrived at in a subjective

or objective manner. A subjective analysis is often impressionistic in character

An objective analysis instills a certain degree of certainty and

refinement. A credit functionary in a bank has always been undertaking risk
analysis in course of taking a lending decision, but the present day emphasis on
credit risk management is all about objective of a given scenario, quantifying the
risk and taking appropriate precautions.
Credit Appraisal

Low efficiency and high default rates are the major risks in lending. After a loan
has been disbursed, financing institutions rely on a punctual and complete
repayment of the amount granted. Thus, it is of utmost importance to carefully,
assess the acceptability of the promoter(s) and viability of the planned project at its
pre-investment stage (i.e before sanction of the loan)

Objectives of Credit Appraisal

To ensure healthy, productive and strong loan portfolio of the bank. Towards this:

 Avoid over-financing or under-financing

 Minimize interest risk and liquidity risk
 Maintain a balance between liquidity and profitability.
 Determine the required terms & conditions while lending.

Elements of Credit Appraisal

Risk is inherent in all credit appraisals. Analysis is to be done to assess whether it

is a fair banking risk or not. In fact, the ultimate aim of all appraisals is to assess
whether the loan proposal is fair banking risk or not. Sometimes, a proposal may
be considered a fair banking risk only with certain stipulations or pre-conditions.

The Appraisal by a credit analyst usually, involves the Five P’s model. The first P
is with regard to the acceptability of the person or the prospective borrower. This
involves ascertaining whether his integrity and capacity are as per banks norms.
If the first ‘P’ i.e. the “person” is found acceptable then only the appraiser should
go on to the next step i.e. he should checkout on the technical feasibility and
commercial viability of the “project”. This is second ‘P’ discussed in detail

If the project is also found acceptable per say, then the appraiser can go on to the
third ‘P’ i.e. Payment (re-payment), to determine the liquidity and interest risk
involved in the lending

If all the above P’s are found acceptable, the appraiser still needs to check out on
the “Protection” offered i.e. the security aspect of lending. This is the fourth P .In
other words, the appraiser examines whether the prospective borrower is offering
adequate collateral security. Collateral security is the ‘additional security’ offered
to the banker. The assets purchased out of the bank finance constitute the primary
security. Anything additional offered as a security is known as collateral security.
This is examined for the reason that the assumptions made while checking out the
first 3 P may not hold true in the changing scenario. Or the assessment on the first
3 P may turn to be incorrect, despite due to diligence.
In short as much as a banker basically, deals with funds borrowed from the public,
he is a Trustee of the public economy. He needs something to fall back upon if
things do not turnout as expected.

It is quite possible that a banker may decide not to finance even if all the four Ps
discussed above are acceptable in the case of a particular proposal. This could be
because of the fifth ‘P’ i.e. the perspective. In other words, a proposal has to fit
into the perspective i.e. the lending has to be in tune with the priorities and policies
of the Government, the RBI (which controls the functioning of the banks) and the
bank concerned. For instance the financing liquor related activities may be low
priority or prohibition may be in force. Some activity, even if viable, may not be in
the national interest. Of course, the perspective, or priorities, and policies, keep
changing form time to time and the perspective at what material time is what
matters.

The Five P Forces model of Credit Appraisal is as follows:

Perspective

Protection

Payment/Repayment

Project /Proposal

Person
The different P’s dealt with in more detail here under:

Person:

Person

Integrity Capacity

Managerial Financial

Experience Expertise.

Integrity is the most important of all the factors in assessing the credit worthiness
of the customer. Integrity refers to moral uprightness, honesty and soundness of the
person.

Capacity has two parameters-managerial and financial. Financial capacity or the

financial soundness of the person is the ability of the person to undertake a venture
of the size proposed, i.e. the ability to bring in the capital towards his margin (i.e
the contribution to the ventures). In fact, in the case of a new venture it should also
cover the ability to absorb possible initial losses.
Under ‘managerial capacity’ the experience an expertise of the person are
assessed. Expertise is the qualification a person has in activity concerned. While
expertise can also be hired, the promoter must have the basic business acumen.

Project
Project

Technical feasibility Economic Viability

Under Technical feasibility details pertaining to location lay-out equipment and
various production factors are studied in detail to determine the possibility of
realizing the proposed production schedules.

Economic Viability broadly refers to the possibility of carrying out the venture
profitably. Cost of the project, assessment of the production factors, past tends,
future projects ion of sale and profitability based on past trends or industry
averages and the emerging demands & supply position (gap), break –even analysis
& Sensitivity analysis and debt service charge ratio (DSCR) statement etc helps us
in assessing the techno –economic viability of the project per se, which is an
important component in the decision-making process.
Payment (Re Payment)

There are 2 different aspects to be taken care of with regard to the payment. They
are:
 Time (Liquidity Risks)
 Rate of interest (Interest-rate Risks)
Usually the credit risk rating (CRA), discussed in details in a subsequent chapter,
goes up if the credit is for a short term. This is because it does not block the
liquidity of the bank and there is less chance of interest rate risk or any other type
of risk materializing. This is mainly reflected in the facility –wise risk rating of the
banks. The risk rating will improve or deteriorate depending upon the tenor of the
facility. This is so because the banks cannot have a reliable future forecast for say
more than 3yeras.

The normal maximum tenor for term loans is 8years in SBI as well as in some
other banks. The banks may, however, grant loans for longer durations in some
special cases like agriculture (plantations) housing finance or educational loans.

Protection

Protection

Primary Security Collateral Security

Collateral Security is the additional security obtained by banks form the borrowers
as a cushion to fall back upon, in case of need i.e. in case the assumption goes
wrong. Especially, when the primary security is insufficient to cover the entire loan
with interest
The significance of collateral security is that it makes a good loan better but it
cannot make a bad loan good. In other word a proposal has to be first viable by
itself, without which a banker would never consider funding, even if 100%
collateral security cover is available.
Perspectives/Policies

Even if all the above 4 parameters are satisfactory, a loan can not be sanctioned
unless the following considerations are also taken care of:

 It should not be against the law of the land.

 It should not be against national interest
 Compliance of environmental regulations
 RBI Guidelines
 Bank’s own loan policies

The bank’s loan policy may prescribe exposure restrictions like industry/sector
exposure limits and the country exposure limit. These are monitored by the risk
management Department (RMD) of the bank concerned on an on-going basis.

Besides, some activities may be considered as low priority by a particular bank at a

particular point of time. For instance Commercial complex was considered low
priority by ICICI BANK about a decade back, but not so any longer. Even personal
loans (consumption Loans) which are a rage these days were not encouraged about
a decade back.
A proposal thus has to satisfy all the above parameters to become eligible for bank
finance.
Credit Appraisal Procedure in ICICI BANK
While sometimes the representatives of a company approach the bank to avail the
required credit, at other times, the relationship managers of the bank who call on
the potential customers and bring the loan proposals to the books of the bank. .In
either cases the Credit Appraisal/sanction process broadly as follows:

1) The bank requests the company to provide certain information and data
required to appraise the credit proposal. These are:

 Annual report (Balance Sheet) of past three years.

 CMA (Credit Monitoring Arrangement) data i.e. financials relating to
two immediately preceding years and the projections for the future
(current year and the next for looking working capital and up to the
last year of repayment in the case of the term loan).
 Business forecast (including financial projections as indicated above)
with assumptions made
 Management details
 Other details relevant to the specific proposal on hand.
2) The team of the credit processing cell (CPC) of the bank carries out a pre
sanction inspection of the site of the venture (existing or proposed)

3) The team holds discussions with the promoters/management team to

crystallize the requirements of the company and facilitates /pricing to be
sanctioned to meet such requirements. They also seek clarifications
regarding the observation made by them while going through the proposal or
during the pre sanction visit.
4) The relationship managers of the bank are, of course, also involved in the
interactions with the company.
5) On obtaining of all data/information, the CPC team members carry out the
appraisal with the help of a prescribed format of the bank, which naturally
covers the Five Ps of appraisal indicated earlier
6) The Appraisal /proposal, in the prescribed format, is put up into the
appropriate authority for sanction .on receipt of sanction the same is
conveyed to the application company.
7) Flow chart.
Flow Chart

Start

Company approaches bank or

Relationship manager
approaches the company.

Collection of Data

Preparation of
credit proposal
 Proposal sent to
sanction authority

Does
Queries to be
Sanction No
answered
authority
approve?

Yes No

If
Proposal sent to approve
loan sanctioning s?
authority

Yes

Stop
Methods of Assessment of Working Capital

1) Operating Cycle Method:

 For units enjoying Working Capital Limits up to Rs2lacs.
2) Simple or Traditional Method:
 For Working Capital limits greater than Rs2lacs & less than Rs25lacs

3) Turnover Method (Nayak Committee Method):

 Up to Rs5 Crores for small scale industries (SSI) units. Now similar
assessment for commercial units also

4) Projected Balance sheet (PBS) Method:

 For non-SSI units: Rs25lacs & above
 For SSI units: Rs5crs and above

5) Cash Budgeted Method:

 For seasonal industries, concentration units, ad-hoc limits, sick units
under rehabilitation, establishment of letters of credit.

6) Maximum Permissible bank finance (MPBF) Method:

 For non-banking financial companies (NBFC)
Various Methods of Assessing Working Capital

1) Operating Cycle Method: Operating cycle of a manufacturing unit is the

process of converting cash into raw materials, goods in process and finished
goods, and arranging for sale of the finished goods so that the cash is eventually
realized. Operating cycle is the sum of the following components of time:

 Time taken to acquire raw materials and average period for which
they are in store.
 Conversion process time.
 Average Period for which finished goods are in store, and
 Average collection period of the receivables
The quantum of working capital required by the unit from a bank deposit
depends on the time taken to complete an operating cycle. Working capital
required is equal to operating expenses divided by the number of operating
cycles in a year. Under this method, the working capital required is a function
of Operating expenses and length of operating cycle.
2) Simple or Traditional Method: Under this method, the average level of
different current assets (raw materials, Stock-in process, finished goods, and
receivables) required for completing one production cycle is reckoned as the
total working capital required. The total working capital net of credit available
in respect of raw materials supply is reckoned as the ‘Working capital
Gap’(WCG). After stipulating a margin(borrower’s own contribution) of 20-
25% of the WCG, the balance is made available as bank finance(working
capital limit)
3) Turnover Method: (Nayak Committee recommendations on credit to SSI
sector)
The working capital assistance to all SSI units must be computed on the basis of
a minimum 20% of the projected annual turnover (PAT). For new/existing units
enjoying/ requiring aggregate fund-based working capital limits up to Rs5
Crores. The total working capital requirement, working capital loan and
(borrower’s) margin must be 25%, 20%, and 5% respectively of the PAT. The
above norm is also used for commercial(C&I) and Small business finance
(SBF) segment for appraising limits up to Rs25lacs. The projected annual
turnover means gross sales inclusive of excise duty.

 Projected Balance sheet (PBS) Method:

As the name suggests, the assessment is based on the analysis of the borrower’s
projected balance sheet, funds flow and critical parameters like profitability,
liquidity, gearing etc. The quantification will be carried out in a flexible manner
with proper examination of all relevant parameters and acceptability in each
case. Unlike in the MPBF method which is done with projected balance sheet,
the minimum margin stipulation is not insisted upon. The Working Capital
finance assessed under this method is therefore known as Assessed bank
Finance (ABF) instead of MPBF. MPBF method is now being used for
financing only the NBFC’s.

 Cash Budgeted Method: Cash Budget is a projected cash flow statement

showing the forecast of the cash receipts, cash disbursements and net cash
balance over a period of time. No credit or transfer transactions are reported in
cash budget. Cash Budget is a prepared, at short intervals, in advance to ensure
efficient management of cash as cash is an idle asset.
The Cash Budget Method is in use for assessing working capital finance for
seasonal industries (Sugar, tea etc) for construction activities and also for
sanction of Ad-hoc working capital limits, i.e. temporarily additional limits
during the run of a year Bankers also obtain Cash Budget while issuing usance
Letter of Credit and in case of sick units under rehabilitation. The basic
information required for preparing cash budget is:

 Production & Sales Budget

 Terms of Sale- Cash Sales and credit sales with their respective shares
(%)
 Period of credit allowed on sales and period of actual realization of
sundry debtors (receivables)
 Details of other definite receipts, if any
 Period of credit available for purchases
 Terms of payment for other expenses/payables
 Opening cash balance
 Opening cash credit balance
Assessment of Term loan

The following parameters are examined for appraisal/ assessment of term loan.

 Purpose of the term loan:

 Details about the purpose of the term loan. Whether it is for
purchase of land, building or machinery or any other reason?

 Cost of Project:
It gives the components of cost included in the project viz,
 Plant
 Land &Building
 Machinery
 Generator set
 Other equipment
 Preliminary & Pre –operative Expenses
 Provision for contingencies
 Working capital margin

 Means of Finance:
It gives the detailed idea about different means of financing i.e.
 Internal accruals
 Unsecured loans
  Term Loan required from bank

 Project Implementation Schedule:

Project implementation schedule gives the idea about the expected
schedule of
completion of the project up to commencement of commercial
production.(in
case of new unit)
 Production factors- Land, building, raw materials, labor power,
water etc
 Marketing Strategies
 Commercial viability including Debt service coverage
ratio(DSCR)
 Break even analysis (refer to the decision making tools for the
detailed description)
 Sensitivity Analysis (refer to the decision making tools for the
detailed description)
 Security margin (refer to the decision making tools for the detailed
description)

Automobile finance generally involves the provision of retail consumer credit for
an average maturity of three to five years to acquire specified new and used
automobiles. Automobile loans are secured by a charge on the purchased
automobile. ICICI Bank has a strong external distribution network and a strong in-
house team to manage the distribution network which has been instrumental in
achieving this leadership position. ICICI Bank also has strong relationships with
automobile manufacturers and is a “preferred financier” with several automobile
manufacturers in India. ICICI Bank also provides two wheeler loans.

Personal loans are unsecured loans provided to customers who use these funds for
various purposes such as higher education, medical expenses, social events and
holidays. Recently ICICI Bank has experienced rapid growth in its portfolio of
personal loans. Its portfolio of personal loans includes micro-banking loans, which
are relatively small value loans to lower income customers in urban areas.

ICICI Bank has a credit card base of over 7.5 million cards. As the Indian economy
develops, ICICI Bank expect that the retail market will seek short-term credit for
personal uses, and its offering of credit cards will facilitate further extension of its
retail credit business. ICICI Bank also earns fee incomes from card transactions as
the issuing bank and as the acquiring bank where the transaction occurs on a point
of sale terminal installed by us.

Project Financing:

A funding structure that relies on future cash flows form a specific

development as the primary source of repayment with that development assets,
rights and interests legally held as collateral security

 It already has similar tie ups with ICICI Bank,Punjab National Bank, IDBI,
Oriental Bank of Commerce, Bank of Rajasthan and Karur Vysya Bank
Union Bank of India, with its network, ethos and customer-centric approach
plan, is attempting to address the fast-growing phenomenon of internet
 trading and seamlessly cater to the convenience and value-seeking, cash-rich
and time-poor new-age consumers.

 The integrated portal ICICI Bank [Link] will allow customers of

the bank to seamlessly execute their transactions as per their needs and
demands.

 Any customer of Union Bank of India at any of its CBS branches can use
this online trading platform from any place having an internet connection.
When the customer indicates an intention to purchase any security, his
account is earmarked with the amount. The amount is debited from his
account only when the transaction is put through and his demat account is
credited in due course.

 Similarly when he desires to sell securities, lien is marked on the securities.

When the transaction is concluded his demat account is debited and his
account is credited in due course

 This new alliance is in line with ICICI Capital’s strategy of increasing its
reach and penetration across the country.

 This also facilitates the creation of new business opportunities and seamless
customer centricity by leveraging the core competencies of both the
organizations. Both organizations will work closely and leverage each
other’s strengths to eventually ensure “customer delight
 Commenting on the tie up with ICICI Bank , Union Bank of India, said, This
tie up takes Union Bank one step closer towards its vision of becoming a
one stop shop for financial services offering technology based products for
its customers

 An advanced online trading portal, ICICI BANK paisa builder in is built

with a core objective to provide easy and informed investing experience to
investors.

 This association will provide customers of the bank with a world class
online investing platform with the backing of two very reputed and
established financial institutions of the country.

 This strong alliance will help us to expand our services to the consumers on
a larger platform; ICICI Bank paisa builder in is targeted mainly at the retail
investors.

 The site will enable the investors to make an informed decision by

minimizing risk involved in equity investment support the investor
throughout the entire investment process including faster trade executions

 ICICI Bank paisa builder in is a portal designed to empower the common

investor with the information and analytical tools needed to take charge of
their investing needs.

 The portal enables online investing in Equities, Mutual Funds and IPO’s.
  ICICI Bank paisa builder in helps investors make the right investment
decisions by providing them with pertinent news, information and analysis
along with company specific fundamental analysis. Facilities of investing
online in Equity (NSE & BSE), Mutual Funds (including SIP facility) and
IPOs, portfolio tracker, choice of equity trading platforms and custom stock
screener are some of the other unique features, apart from the
comprehensive information and analytical tools that are showcased on ICICI
Bank paisa builder in

 The portal has been designed keeping a retail investor in mind for easier
comprehension and very easy navigation within the site

 ICICI Bank is a leading provider of financial services and is a 100%

subsidiary of ICICI Bank.

 with the objective of catering to specific financial requirements of financial

institutions, banks, mutual funds and corporate houses.

ICICI Bank is seeking to extend its reach to the growing small enterprises sector
through segmented offerings. ICICI Bank provides supply chain financing,
including financing of selected customers of its corporate clients. ICICI Bank also
provide financing on a cluster-based approach that is financing of small enterprises
that have a homogeneous profile such as apparel manufacturers, auto ancillaries,
pharmaceuticals and gems & jewellery. ICICI Bank has launched smart business
loans to meet the working capital needs of small businesses. ICICI Bank also
provides short term loans to small businesses for a period of up to 36 months. The
funding under this facility is unsecured and the loan amount varies from more than
Rs. 0.2 million to Rs. 2.5 million per customer.

ICICI Capital provides a complete range of financial products and services that
includes Stock Broking for Institutional and Retail clients, Depository

Types of Project financing-

 Project finance with recourse ---to sponsors

 Non recourse ------------- recourse only to project cash flows and project
assets
 Limited cash flows----------- recourse to sponsors under certain defined
circumstances

Types of Projects:

 BOT: Build –operate- Transfer: Private sector finances, constructs and

operates the facility and transfers to govt. after the expiration of the contract
period.
 BOOT: Build –own--operate- Transfer: Private sector finances, constructs,
owns
and operates the facility and transfers the ownership upon expiration of the
contract period.

 BOO: Build –own—operate: Private sector finances, constructs and operates

the facility
Major Risks involved:

 Technology risk
 Promoter /management risk
 Construction
 Raw material/input supply risk
 Marketing /off-take
 Operation
 Political
 Legal
 Environment
 Force majeure risk
 Interest rate risk
 Inflation
Mechanism for control of cash

 TRA mechanism
 Lockbox Arrangement
 Build up of various reserves such as maintenance reserves
 Debt service reserve

CMA Data

As indicated earlier the bank calls for certain information and data for processing a
loan request. The data referred to earlier is primarily what is known as ‘CMA
data’. This is so known as it was developed by the RBI under its Credit monitoring
Arrangement. The CMA data consists of the following:

 Operating Statement (Profit & Loss)

 Analysis of assets and Liabilities
 Fund flow statement
 Comparative Statement of current assets & current Liabilities

The data relating to the last two years and the next year is incorporated in the
statement.
The Steps involved in the preparation of CMA:

 Preparation of operating statement form the profit & Loss a/c and balance
sheet of the firm for the past two years, the estimates for the current year and
the projections for the next year.

 Analysis of balance sheet i.e. re-arranging the balance sheet items (assets
and liabilities) under the respective heads to enable analysis as per bank’s
norms
 Generation of fund flow Statement –to analyze the movement of funds
between 2 balance sheet items
 Preparation of the comparative statement of current assets and current
liabilities to delineate the trend which is necessary for projections
 Current year estimates and future year’s projections are made based on the
trends of net sale figure and the profitability ratios

The CMA helps in quantifying and analyzing the financial risk of the company.
 Credit Risk Assessment (CRA)

Start

Prepare the
financials CMA
data

Quantification of
financial Risk

Quantification of
management Risk

Quantification of
Risk Risk
Industry

Comparison with
SBI thresholds
 Whether threshold
level & overall Check if
No
deviations are
rating acceptable?
justifiable

Yes

Evaluation Process
Completed Stop

Borrowers’ accounts are rated through the Credit Risk Assessment (CRA) process.
The Credit Risk Assessment (CRA) system is an essential ingredient of the credit
appraisal exercise.

CRA takes into account the various types of risks associated with borrower unit/
loan proposal .The CRA rating is a one point risk indictor of an individual credit
exposure and is used to identify, measure and monitor the credit risks of individual
proposals. At the corporate level, CRA is used to track the quality of Bank’s credit
portfolio.

The CRA exercise quantifies the various types of risks involved in a loan proposal
and assigns a Credit Risk rating – CRA is rating. This rating is done with two
major objectives in view
The project formulation process appears to have been deficient in some respects.
For instance, the success of NHB’s CFI refinance scheme1 3 (launched in January
1999) was limited by capacity constraints among CFIs and NGOs, and the high
intermediation cost of HFI lending through these institutions. These issues were
subsequently highlighted in the HF I PCR.1 4 The processing mission failed to
address these issues in the project design; doing so might have
resulted in more rapid implementation and better achievement of outcomes of
components involving CFIs and NGOs. Furthermore, the appraisal mission carried
out a financial review of the Borrowers, but did not address the fact that the
refinance operations of NHB lacked a system to track detailed end-borrower data
(including income levels). This emerged as a major implementation bottleneck. In
addition, an appropriate definition of what constitutes a LIH should have been
determined at appraisal, and the income threshold adjusted appropriately for
inflation

It is necessary to appraise and rate the credit exposure to determine whether it

meets the risk criteria (i.e. the minimum risk rating, less than which the bank will
not consider the request for sanctioning a loan.)
 The second objective is to ensure a fair relationship b/w the risk and
reward; that is to price the loan in accordance with the risk rating (CRA rating) that
it receives.

The CRA Process:

The broad categories of Credit related risks that are assessed under the CRA
process are:
 Financial Risks
 Industry risks
 Management risks

These are individually measured, through a set of processes, to arrive at an

integrated value of credit risk.

1. Financial Risks: An assessment of financial risks is done through an appraisal

of the financial strengths of the company based on its performance and
financial indicators relating to liquidity, profitability, gearing (borrowings to own
funds) and turn-over ratios.
Positive and negative signals that emanate from or
perceived form the movement of the indicators over the past/years future
projections and from inter-firm comparison are also factored into such analysis.

The following financial ratios, derived from the balance sheet, are generally
applied in the case of working capital advances:

 Current ratio: As indicator of liquidity

  Solvency ratio: Structural Strength
 Interest coverage: capability of servicing interest
 Profitability: Scope for profit generation form the business.
 Return on capital employed (ROCE): efficiency in the use of capital
 Inventory& receivables/sales (days): efficiency in the turnover of inventory
and in collection of bills.
For long term loans the above ratios, with the following additions are used:

 Project/Debt Equity: To assess risk in term exposures.

 Average Gross debt service Coverage ratio (DSCR)

These two ratios reflect the company’s repayment capability .Each ratio is given in
a weight as per the bank’s norms and aggregated.

An analysis of one year financial may not be very reliable, the financials of the
past 3-4 years are also studied to know the trends in the financials strengths of the
company and used for vetting those projected.

2. Industry Risks: The basic strengths of the company get imparted by it market
environment and the type of industry it is involved in:

The latter involves in factors like:

 Competition & market demand fluctuations
 Industry cyclicality
 Government policy and regulations impacting that industry
 Technology levels
  Inputs profile, their availability and price
 Products: User characteristics, alternatives/ substitutes
Each parameter is rated on a certain scale with designated weights and is reduced
to mathematical score

3. Management Risks: The borrower’s efficiency and the manner in which it

management it’s functions are managed.

Parameters used to assess management risks include integrity, expertise, track

record, and competence and capital market perceptions. Assessment of industry
and management risks is to some extent, subjective as they can’t be fully based on
numeric. The proximity to company and initiative skills is important in such
assignments.

Over-All Rating: The overall credit risk rating is a total of the above three major
risk aggregates
Credit Risk and Pricing: One of the key parameters to pricing is the perception of
the credit risk by lending banks. Banks link their rate of interest to the credit rate
score, with the borrower with the highest score being levied the lowest rate and
vice versa. The principle is “Higher the risk, higher the price”. Low Credit Risk
Assessment (CRA) score indicates high risks.
Salient Points of Credit Risk Assessment (CRA) System

 Credit Risk Assessment (CRA) is done for Small Scale Industries/AGL

advantages with-fund based limits of Rs 25 lakhs and above and for all C& I
advances
 The Overall score for risk rating is to be rated on a 8-point scale

 The ratings are ICICI/ICICI L1 (lowest risk) through ICICI 8/ICICI L8

(highest risk)

 ICICI 4/ICICI L4 would be minimum rating required for financing, which

is also referred to as the hurdle rate for new connections as well as
enhancements in case of existing accounts

 In case of take over of advances from other banks/financial institutions, the

rating should fall under ICICI 3/ICICI L3.

 A firm with risk rating below ICICI 5/ICICI L5 is not financed generally.

 There is a minimum cut-off score under each of the parameters for the
company to qualify for lending

Rating Agencies in India

In India, We have the following rated agencies:

 CRISIL
 ICRA
 CARE
 FITCH Earning Ltd.
 All these agencies undertake to appraise the credit quality
of various debt instruments like debentures, fixed deposits, and Commercial papers
(CP). They do not rate the company but only a debt instrument issued by a
company to raise money. The company’s track record in meeting its commitment
and it’s liability to service debts promptly both towards interests and repayment of
principal is rated by these agencies.
The main objective of such exercise is to provide a guide to potential
investors on the risk potential in a given debt instrument. The rating agencies
examine all aspects of a company that have a bearing on its credit worthiness. The
rating process of these agencies is explained in the appendix-II in details. Broadly,
three major factors are scrutinized in depth. They are:

 Business Parameters like industry profile, operating efficiency and market

position of a company
 Financial Position covering adequacy of cash flows, accounting quality and
profitability
 Managerial competence, reflected by corporate governance, board members,
track record, philosophies, strategies

To improve the mortgage registration system, NHB and ICICI Bank formed a
working group and submitted a draft report to the Government in 2006. The
recommendations of the draft report included that (i) states reduce the stamp duty
for equitable mortgages, (ii) the Government consider making registration of
equitable mortgages compulsory, (iii) registration charges be reduced to facilitate
and encourage registration; and (iv) state governments notify additional areas
where equitable mortgage may be used. The project completion review mission
could not obtain information on the status of implementation of the draft report,
however. With respect to India’s MBS market, it may be noted that after the pilot
securitization by NHB, there have been several issuances by market participants.
However, the MBS market has had limited success and the number of issues has
decreased in recent years, due in part to legal and regulatory hurdles and a lack of
long-term investors. In addition, MBS issues in India do not typically meet the
“true sale” criteria under the Basle II norms.2 5 A study is being undertaken as
part of ADB TA (footnote 6) to NHB and HDFC that will include ecommendations
for policy and regulatory development and establishment of an agency to enable
issuance of “true sale” residential MBSs.

The rating by these agencies may also be factored into in the decision making
of the lending bank but their ratings are no substitute for Credit Risk
Assessment (CRA) rating of the bank.
 Financial Ratio Analysis

1. Profitability Ratios:

a.) Return on Capital Employed = Profit before Depreciation,

Interest & taxes(PBDITA)
(ROCE) Net Assets

Return on Capital Employed (ROCE) is used as a measure of the returns that a

company is realizing from its capital employed. The ratio can also be seen as
representing the efficiency with which capital is being utilized to generate revenue.
It is commonly used as a measure for comparing the performance between
businesses and for assessing whether a business generates enough returns to pay
for its cost of capital.
ROCE compares earnings with capital invested in the company.
It is similar to Return on Assets, but takes into account sources of financing. In the
denominator we have net assets or capital employed instead of total assets (which
is the case of Return on Assets). In the numerator we have Pre-tax operating profit
or EBDIT.

b.) Interest Coverage Ratio = Profit before Interest & Taxes

(PBITA)
Interest Expenses

Also known as the Times interest earned ratio, it indicates a firm’s long-term debt
–paying ability from the income statement view and tells us how many times the
firm can cover or meet the interest payments associated with debt. “High times
interest earned ratio indicates the greater ability to pay”.
A high and stable interest coverage ratio indicates
the good performance of the company and indicates the company is able to
refinance the principal when it comes due. In effect, the funds will probably never
be required to pay off the principal if the company has a good record of covering
the interest expense. A company with high interest coverage ratio can finance high
amount of debt at a low rate of interest from the market.

2. Liquidity Ratios:

a) Current Ratio = Current

Assets
Current
Liabilities

It measures the excess value of current assets over Current Liabilities. Higher
current ratio indicates that higher the amount of current assets in relation to current
liabilities and greater assurance to meet the current liabilities. For creditors the
excess of current assets over current liabilities provide a buffer against losses that
may be incurred in disposition or liquidation of the current assets other than cash.
So we can say that current ratio measures the merging of
safety for the creditors. It measures the level of safety against uncertainty. The
current ratio is considered to be more indicative of the short-term debt-paying
ability than the working capital. Current ratio also depends on the operating cycle
of the company. The longer the operating cycle, the higher the current ratio and
vice versa.

b) Quick Ratio = Current Assets –

Inventory
Current Liabilities

This ratio is considered to be more reliable indicator of a company’s ability to meet

its short-term financial obligations. This ratio deducts inventory from the assets
before computing the ratio. The reasons for removing the inventory are that
inventory may be slow-moving or possibly obsolete, and parts of the inventory that
may have been pledged to specify creditors can sometimes be difficult to liquidate.
Potential creditors like to use this ratio because it reveals a company’s ability to
pay-off under the worst possible conditions.

3. Solvency Ratios

a.) Debt Ratio = Total Outstanding

Liabilities
Tangible Net-Worth

It indicates the firm’s long-term debt paying ability and indicates the percentage of
assets financed from debt fund. Debt Ratio is used to measure long term solvency
of the company. Generally the creditors are the users of the ratio as it helps to
determine how well they are protected in case of solvency. Creditors prefer low
debt ratios because lower the ratio, the greater the cushion against creditors losses
in the event of liquidation. If the debt ratio is higher it means creditors are not well
protected and company may find difficulties in issue of additional debt.

b.) Debt/ Equity Ratio = Total Debt

Total
Equity

This ratio helps determine how well creditors are protected in case of solvency.
Normally, the debt component includes all the liabilities including current. And the
equity component consists of net-worth and preference capital. It includes only the
preference shares not redeemable in one year. From the perspective of long-term
debt-paying ability, the lower this ratio is, the better the company’s debt position.

4. Debt-Service Coverage Ratios (for Long-term Loans)

a.) Net Debt-Service Coverage Ratio = PAT + Depreciation + Non-cash

Expenditure
Annual Term Loan Repayment
Obligation

b.) Gross Debt-Service Coverage Ratio = PAT + Depreciation + Non-

 cash Expenditure+ Interest on Term Loan
Annual
Term Loan Repayment Obligation + Interest on Term Loan

Debt-Service Coverage Ratio is mostly used by term-lending financial institutions

to measure the interest payment ability of the firm.

Break-Even Analysis

Break-even analysis is a technique widely used by production management and

management accountants. It is based on categorizing production costs between
those which are "variable" (costs that change when the production output changes)
and those that are "fixed" (costs not directly related to the volume of production).

The break even point for a product is the point where total revenue received equals
total costs associated with the sale of the product (TR=TC). A break even point is
typically calculated in order for businesses to determine if it would be profitable to
sell a proposed product, as opposed to attempting to modify an existing product
instead so it can be made lucrative. Break-Even Analysis can also be used to
analyze the potential profitability of an expenditure in a sales-based business.

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at
various levels of activity shown on the same chart as the variation of income (or
sales, revenue) with the same variation in activity. The point at which neither profit
nor loss is made is known as the "break-even point" and is represented on the chart
below by the intersection of the two lines:

In the diagram above, the line OA represents the variation of income at varying
levels of production activity ("output"). OB represents the total fixed costs in the
business. As output increases, variable costs are incurred, meaning that total costs
(fixed + variable) also increase. At low levels of output, Costs are greater than
Income. At the point of intersection, P, costs are exactly equal to income, and
hence neither profit nor loss is made.
Sensitivity Analysis:

Sensitivity analysis is the study of how the variation in the output of a model
(numerical or otherwise) can be apportioned, qualitatively or quantitatively, to
different sources of variation

Overview
A mathematical model is defined by a series of equations, input factors,
parameters, and variables aimed to characterize the process being investigated.
Input is subject to many sources of uncertainty including errors of measurement,
absence of information and poor or partial understanding of the driving forces and
mechanisms. This uncertainty imposes a limit on our confidence in the response or
output of the model. Further, models may have to cope with the natural intrinsic
variability of the system, such as the occurrence of stochastic events.

Good modeling practice requires that the modeler provides an evaluation of the
confidence in the model, possibly assessing the uncertainties associated with the
modeling process and with the outcome of the model itself. Uncertainty and
Sensitivity Analysis offer valid tools for characterizing the uncertainty associated
with a model.

Methodology
There are several possible procedures to perform uncertainty (UA) and sensitivity
analysis (SA). The most common sensitivity analysis is sampling-based. A
sampling-based sensitivity is one in which the model is executed repeatedly for
combinations of values sampled from the distribution (assumed known) of the
input factors. Other methods are based on the decomposition of the variance of the
model output and are model independent.

In general, UA and SA are performed jointly by executing the model repeatedly for
combination of factor values sampled with some probability distribution. The
following steps can be listed:

 Specify the target function and select the input of interest

 Assign a distribution function to the selected factors
 Generate a matrix of inputs with that distribution(s) through an appropriate
design
 Evaluate the model and compute the distribution of the target function
 Select a method for assessing the influence or relative importance of each
input factor on the target function.

Business Context
In a decision problem, the analyst may want to identify cost drivers as well as other
quantities for which we need to acquire better knowledge in order to make an
informed decision. On the other hand, some quantities have no influence on the
predictions, so that we can save resources at no loss in accuracy by relaxing some
of the conditions.
Sensitivity analysis can help in a variety of other circumstances which can be
handled by the settings illustrated below:

 To identify critical assumptions or compare alternative model structures

 Guide future data collections
 Detect important criteria
  Optimize the tolerance of manufactured parts in terms of the uncertainty in
the parameters
 Optimize resources allocation
 Model simplification or model lumping, etc.

Activity-Wise Cash-Flow Statements

Components of a Cash Flow

1) Cash flow from operating activities: It is the cash generated from the operations of
a company, generally defined as revenues less all operating expenses, but calculated
through a series of adjustments to net income. The OCF can be found on the statement of
cash flows. It is also known as "cash flow provided by operations" and calculated as :

OCF= EBIT + Depreciation -

Taxes

Operating cash flow is the cash that a company generates through running its
business. It's arguably a better measure of a business's profits than earnings
because a company can show positive net earnings (on the income statement)
and still not be able to pay its debts. It can also be used as a check on the
quality of a company's earnings. If a firm reports record earnings but negative
cash, it may be using aggressive accounting techniques

2) Cash flow from financing activities: A category in the cash flow statement
that accounts for external activities such as issuing cash dividends, adding or
changing loans, or issuing and selling more stock. The formula for cash flow
from financing activities is as follows:
 FCF = Cash Received from Issuing Stock or Debt - Cash Paid as
Dividends and for Re-
Acquisition of Debt/Stock

This section of the statement of cash flows measures the flow of cash between a
firm and its owners and creditors. Negative numbers can mean the company is
servicing debt, but it can also mean the company is making dividend payments
and stock repurchases, which investors might be glad to see

3) Cash flow from investing activities: An item on the cash flow statement that
reports the aggregate change in a company's cash position resulting from any
gains (or losses) from investments in the financial markets and operating
subsidiaries, and changes resulting from amounts spent on investments in
capital assets such as plant and equipment. When analyzing a company's
cash flow statement, it is important to consider each of the various
sections which contribute to the overall change in cash position. In many
cases, a firm may have negative overall cash flow for a given quarter, but if
the company can generate positive cash flow from its business operations,
the negative overall cash flow may be a result of heavy investment
expenditures, which is not necessarily a bad thing

What a Credit Analyst needs to ensure?

The following are the salient points that a credit analyst needs to ensure:

 Depreciation
 Sales
 Interest Cost of Borrowing
 Previous Year’s Expenses
 Investments & advances in associates/Subsidiaries
 Fixed assets
 Frequency of change in accounting policies
 Balance sheet manipulations
 Off- Balance sheet items

Check Points that the banks need to be Careful of

 All the information provided by the prospective customers may not be

true. So, the addresses and other details furnished by the applicant needs
to be verified.

 The applicant may deposit false document of land and other properties in
order to avail the credit facilities. There have been instances of the same
property being mortgaged to more than one bank/Financial Institutions.

 The position of any evasion of tax payment or other statutory dues

(liabilities towards the government) by the applicant, as these will have
priority over bank dues.
 The stock which may be offered as security, may be moved out of the
position may not be updated, which may effect the interest of the bank.

 The Letter of credit (LC) may be drawn in favor of non-existing equity.

 The company may obtain payment of bills directly through another bank.
 Summary and Conclusion
1. Conclusion of the study

 Conclusion

Credit risk is primarily financial risk in banking systems and exists in virtually all
industries/ income-producing activities. How a bank selects and manages its credit
risk is critical to its performance over time; indeed capital depletion through loan
losses has been the proximate cause of most institutional failures. Identifying and
rating credit risk is the essential first step in managing it’s effectively.

Examiners should ideally rate credit risk based more on borrower’s

expected performance, i.e. likelihood that the borrower’s will be able to service it’s
obligations in accordance with term. Payment performance is a future event; so
examiners credit analysis should focus primarily on borrower’s ability to meet its
future debt service obligation.

Generally, a borrower’s expected performance is based on borrower’s financial

strength as reflected by its historical & projected balance-sheet and Profit-loss
statements, i.e. its performance and its future prospects in light of condition that
may occur during the term of the loan. By doing so, the examiners shouldn’t focus
on “Yes/No” approval decisions but on the borrower rating and transaction risk
characteristics that determines a loan value. The question dealt should be “Whether
this risk should be taken, if yes, how much risk at what price; rather than “Is this
good or bad loan”
Now to ascertain the risk of investing in a particular borrower and pricing it
appropriately it is not so easy but at the same time, it is of critical importance
because low quality borrowers are more likely to default, their demand for credit is
less sensitive to interest rates than high quality borrowers. Thus, borrowers willing
to accept a high interest rate will tend to be of lower quality than average. Larger
and more profitable firms are able to borrow on better terms on all the three
dimensions of price, collateral and contractual maturity.

The banks have to strike the right balance between reward and risks. This can
happen if the risk management systems are in place and are working effectively
enough. Each bank may however, have its own risk appetite, irrespective of
effectiveness of its risk management systems. Some banks may not maximize the
returns as they allow lot of business to go past them because of their low risk
appetite while other may not maximize because of too high a risk appetite.

Again, the credit risk rating/Credit Risk management systems should be constantly
revised to factor in ever changing environmental threats and opportunities.
APPENDIX PAGE NO.

I. Appendix 1 69-72
II. Appendix 2 73-78
III. Appendix 3 79-83
IV. Appendix 4 84-100
V. Referrence 101
 APPENDIX-I

What is Individual Credit Rating (ICR)?

Individual Credit Rating (ICR) is an objective assessment of the risk attached to a

financial transaction with respect to an individual at a given point of time, based on
the quantification of parameters influencing credit risk. There is need for credit
ratings of individuals who not only borrow form banks, but also form various other
creditors. Individual Credit Rating (ICR) is necessary in countries like the US and
the UK. No loan is sanctioned to an individual without a certification form the
rating agency.

Utility of Individual Credit Rating (ICR)

The concept of Individual Credit Rating (ICR) is useful for personal transactions
like credit card membership, leasing and hire purchases, housing finance, trade
advances, consumer durables financing and personal bank loans.
The agencies which extend credit to individuals are banks, finance companies that
have expertise in credit assessment. Hence, the rating by an agency may not be of
great values unless it is found that it is more cost-effective. If the rating agency has
large databases so as to provide instant service, then the service may become
attractive to the lender.
ONICRAs Model

Onida Individual Credit Rating Agency (ONICRA), a subsidiary of Onida Finance

was launched by Onida to give ratings to the individuals.
ONICRA’s methodology is somewhat different. To begin with, an individual
cannot approach ONICRA directly. It is the finance firm that will insist on its
customer obtaining an individual credit rating to reduce its risk exposure. Thus,
ONICRA sign tie-ups with several finance firms. Service charge will depend upon
on the nature of assignment. Rating for the purpose of a credit card will be charged
on a case-to-case basis, depending upon the nature of work involved. After
obtaining and cross checking the information and documentary evidence furnished,
the rating process begins. The information is fed into an automated credit rating
model and the rating generated is sent back to the finance company.

Methodology
The three vital parameters adopted at ONICRA are the individual, the transaction,
and the environment. By adopting a top-down approach, the broad parameters are
successively broken into focused sub-divisions, which minimize biases that arise in
performing the credit assessment of individuals.

Various Characteristics also play a determining role in the rating process. Each
parameter also has a certain weight age associated with it. Information collected
and evaluated about an intricate network of parameters ultimately determines the
rating.

The flow chart is as follows:

Individual

Potential Capability Strength

  Potential Strength • Income
• Financial Assets
- Qualification
- Occupation • Future Job Prospects
• Discipline

 Stability
• Willingness to pay
- Job Tenure
- Duration of stay in present
Place of residence
Transaction

Risk Modalities of payment

 Security • Direct
deduction from salary
 Ownership of the asset • Post-dated
cheques
 Control over the use of funds •
Automated debiting of bank A/c
 Collateral • Payment
on due date
 Exposure • Payment
on demand
 Environment

Generally Prevalent Economic Situation

Figure: ONICRA’s Model

Can Banks take-up individual credit rating?

While making advances, banks do not rely on the credit ratings of other
agencies, but make a detailed credit appraisal of the proposals as per their lending
norms to assess the need for facilities and viability for repayment. All bank
branches are best suited for the credit ratings of individuals who keep account in
the branches. The modus operandi could be like this:

Every individual should be given a Credit rating card (CRC) by the branch, where
he/she has an account. No bank branch should give a CRC to a person not holding
an account in that branch. Whether it is the bank or the outside agency,
maintenance of individual files is a must. The file contains collection of all details
about the individual to work out his net worth. Copies of ration card, gas
connection card, passport identity card etc. must be filed in besides details of assets
and liabilities. The net worth is worked out by deducting total liabilities form total
assets. The net worth with previous annual income as against projected yield
should determine the level of credit entitlement for an individual in cash or in kind
to repay with interest. The Individual Credit Rating (ICR) could also take into
considerations the status of the relatives of the individual, his educational
background, his reputation in his field and reference letters from two respectable
persons in the society.
 APPENDIX-II
Indian Credit Rating Agencies

In India, the credit rating service is offered by four agencies which include:

 The Credit Rating Information Services of India (CRISIL)

 Credit Analysis and Research Limited (CARE)
 Investment Information and Credit Rating Agency of India Limited
(ICRA)
 Duff and Phelps Credit Rating India Private Limited (DCR India)
 ONICRA Credit Rating Agency of India Limited
Credit Rating Information Services of India Limited (CRISIL)
CRISIL was the first credit rating agency established in India during 1987. It is
being promoted initially by ICICI, UTI, HDFC and its shareholders include ADB,
LIC, GIC and some nationalized banks and foreign banks. In 1993, CRISIL made
its first public offer of equity.
Services offered by CRISIL as a Credit Rating Agency include corporate bond
ratings, CP ratings, Rating Municipal debt, Infrastructural bond ratings, Utilities
ratings, State government ratings, Rating of asset backed securities, Rating of
structural obligations etc.
CRISIL Ratings

Capacity Debentur Fixed Short- Real Structure Bond

for timely es Deposit Term Estate d Fund
repayme /Bonds s Instrumen Project Obligatio Portfolio
nt of ts s ns s
interest
 &
Principal
Highest
AAA FAAA P-1 PA1 AAA(so) AAAf
Safety
High
AA FAA P-2 PA2 AA(so) Aaf
Safety
Adequate
A FA P-3 PA3 A(so) Af
Safety
Moderate
BBB - - - BBB(so) BBBf
Safety
Inadequat
BB FB P-4 PA4 BB(so) BBf
e Safety
High Risk B FC - - B(So) -
Substantia
C - - - C(So) -
l Risk
Vulnerabl
e to - - - - - Cf
default
In Default D FD P-5 PA5 D(so) -
CRISIL’s Rating Methodology:

CRISIL’s rating methodology includes an analysis of the following risk exposures

of the corporate/ borrower:

 Industry Risk Analysis

 Business Risk Analysis
 Financial Risk Analysis
 Management Risk Analysis
 Fundamental Risk Analysis

CRISIL’s Rating Process:

Borrower/Corporate CRISIL

Request for rating Assigns Analytical

team,
Conducts basic research

Document Preparation
Collection of
Information
Management meeting & Plant Visits

Rating committee assigns rating

Appeal for review

Communication of rating to Issuers

Dissemination of rating

Surveillance and annual review

Investment Information and Credit Rating Agency of India Limited (ICRA)
ICRA has been promoted by industrial finance corporation of India and other
financial institutions. The objective of ICRA is to provide guidance to investors/
creditors in determining the credit risk associated with debt instrument.

ICRA Ratings

Capacity for
Debentures Commercial
timely Commercial
/Bonds/Preference Deposits/Fixed
repayment of Paper
Shares Deposits
interest & (Short Term)
(Long term) (Medium Term)
Principal
Highest Safety LAAA MAAA A1/A1+
High Safety LAA MAA A2/A2+
Adequate Safety LA MA A3/A3+
Moderate Safety LBBB - -
Inadequate
LBB MB -
Safety
Risk Prone LB MC A4/A4+
Substantial Risk LC - -
Default LD MD A5
(Source:
[Link])

Credit Analysis and Research Limited (CARE)

CARE is a credit rating and information service company promoted by Industrial
Development Bank of India jointly with investment institutions, banks and finance
companies. Its shareholders include IDBI, UTI, Canara Bank, Kotak Mahindra
Finance Limited etc. It commenced its credit rating operation in October, 1993.

CARE credit rating covers all types of debt instruments such as debentures, fixed
deposits, Certificate of Deposits, commercial Paper, Structured Obligations,
Convertible preference shares and redeemable preference shares.
Credit Analysis Rating

Rating Symbol Meaning

Excellent debt management capability. Characterized
CARE-1
as leaders in the respective industries.
Very good debt management capability. Normally
CARE-2 regarded as close to CARE-1 but with lower
capability to withstand changes in assumptions.
Good debt management capability. Assumptions that
CARE-3 do not materialize may impair debt management
capability in future.
Barely Satisfactory capability for debt management.
CARE-4 Capability to be adversely affected by short-term
adversity.
Poor debt management capability. Such companies
CARE-5 are in default or are likely to default in meeting their
obligations.

APPENDIX-III
NPA: The Unbridled Virus and an Emerging Challenge to Indian Banking
System

Non-performing Asset (NPA) has emerged since over a decade as an alarming

threat to the banking industry in our country sending distressing signals on the
sustainability and en-durability of the affected banks. The positive results of the
chain of measures affected under banking reforms by the Government of India and
RBI in terms of the two Narasimhan Committee Reports in this contemporary
period have been neutralized by the ill effects of this surging threat. Despite
various correctional steps administered to solve and end this problem, concrete
results are eluding. It is a sweeping and all pervasive virus confronted universally
on banking and financial institutions. The severity of the problem is however
acutely suffered by Nationalized Banks, followed by the SBI group, and the all
India Financial Institutions.

Table1: Non-Performing Assets of Private Sector Banks- Sector Wise

(As at ended March’06)
(Amou
nt in Crore)
Na Small
Non-
me Agricult Scale Priority Public Tota
Others Priority
of ure Industrie Sector Sector l
Sector
the s
Ban Am % Am % Am % Am % Am % Amo %
k ount to ount to ount to ount to ount to unt to
to tot tot tot to tot
 tal al al al tal al
Priv
ate
Sect 514. 6. 807. 10. 961. 12. 228 29. 0. 5541 70. 7,82
4.02
or 60 57 44 31 99 29 4.03 17 05 .37 78 9.42
Ban
ks
Old
Priv
ate
265. 7. 655. 17. 710. 19. 163 43. 0. 2078 3711
Sect 1.23 56
.07 14 55 66 .93 16 1.55 96 03 .33 .11
or
Ban
ks
Ne
w
Priv
ate 249. 6. 151. 3.6 251. 652. 15. 0. 3,46 84. 4,11
6.1 2.79
Sect 53 06 .89 9 .05 48 84 07 3.04 09 8.30
or
Ban
ks

Table2: Non-Performing Assets of Public Sector Banks- Sector Wise

(As at ended March’06)
(Amou
nt in Crore)
 Small
Non-
Agricult Scale Priority Public Tot
Nam Others Priority
ure Industri Sector Sector al
e of Sector
es
the
% % % % % %
Ban
Am to Am to Am to Am to Am to Am to
k
ount tot ount tot ount tot ount tot ount tot ount tot
al al al al al al
Publ
ic
14 16 22 22,3 54 186 45 41,3
Sect 6,20 691 925 340. 0.
.9 .7 .3 73.7 .0 63.9 .1 78.2
or 2.92 7.40 3.43 5 82
9 2 6 4 7 9 1 3
Ban
ks
Nati
onali 13 18 20 151 53 128 45 281
3,89 532 590 215. 0.
zed .8 .8 .9 23.9 .6 45.3 .5 84.8
8.88 4.83 0.20 58 76
Ban 3 9 3 2 6 5 8 5
ks
State
Ban 17 12 25 54 44 13,1
230 159 3,35 7,24 124. 0. 581
k .4 .0 .4 .9 .1 93.3
4.03 2.47 3.23 9.83 .92 95 8.64
Gro 6 7 2 5 0 8
up
Gross and net NPA of different sector of bank

Table I:-
(in Percentage)
Gross NPA/ Gross Advance
Category
2001 2002 2003 2004
Public Sector
12.37 11.09 9.36 7.79
Banks
Private Sector
8.37 9.64 8.07 5.84
Banks
Foreign Banks 6.64 5.38 5.25 4.62

Table II:-
(in Percentage)
Net NPA/ Gross Advance
Category
2001 2002 2003 2004
Public Sector
6.74 5.82 4.53 2.98
Banks
Private Sector
2.27 2.49 2.32 1.32
Banks
Foreign Banks 1.82 1.89 1.76 1.49

The table I and II show that the percentage of gross NPA/ gross advance and net
NPA/ net advance are in a decreasing trend. This shows the sign of efficiency in
public and private sector banks but still if compared to foreign banks Indian private
sector and public sector banks have a higher NPA.
The table I&II shows that during initial sage the percentage of NPA was higher.
This was due to show ineffective recovery of bank credit, lacuna in credit recovery
system, inadequate legal provision etc. Various steps have been taken by the
government to recover and reduce NPA. Some of them are as follows:

 One Time Settlement/ Compromise Scheme

 Lok Adalats
 Debt recovery Tribunals
 Securitization and reconstruction of financial assets and enforcement of
Security Interest Act 2002
 Corporate Reconstruction Companies
 Credit information on defaulters and role of credit information bureaus

The Indian banking sector is facing a serious problem of NPA. The extent of NPA
is comparatively higher in public sectors banks. (Table I&II). To improve the
efficiency and profitability, the NPA has to be scheduled. Various steps have been
taken by government to reduce the NPA. It is highly impossible to have zero
percentage NPA. But at least Indian banks can try competing with foreign banks to
maintain international standard

APPENDIX-IV
  CALCULATION OF WORKING CAPITAL
 RATIO ANALYSIS
 CURRENT RATIO
 LIQUID RATIO
 RATIO OF INVENTORY TO WORKING CAPITAL
 ABSOLUTE LIQUID RATIO
 INTERPRETATION

ANALYSIS OF WORKING CAPITAL

Its working capital financing consists mainly of cash credit facilities and bill
discounting. Under the cash credit facility, a line of credit is provided up to a pre-
established amount based on the borrower's projected level of inventories,
receivables and cash deficits. Up to this pre-established amount, disbursements are
made based on the actual level of inventories and receivables. The facility is
generally given for a period of up to 12 months, with a review after that period. Its
cash credit facility is generally fully secured with full recourse to the borrower. In
most cases, ICICI Bank has a first charge on the borrower's current assets, which
normally are inventory and receivables. Bill discounting involves the financing of
short-term trade receivables through negotiable instruments. These negotiable
instruments can then be discounted with other banks if required

Working capital of different years (2001 – 2006) of ICICI BANK can be found
out by considering current assets and current liabilities. It is calculated and
illustrated in the following table and graph.

Calculation of Working capital of for the year 2000 to 2006.

Sl.
Particulars 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
No.
 Current
1
Asset

Cash &
i Bank 3327.35 2658.08 3870.28 3031.42 2279.02 4009.69
Balance

Sundry
ii 1854.60 2172.92 2731.79 5607.41 5611.13 7873.67
Debtors

Iii Inventories 3283.28 3473.54 3771.75 10022.22 11913.43 23745.18

Loans
v Advances 6218.45 4899.00 6199.13 9112.46 8822.57 5713.49
& Deposits

Other
v Current -- -- -- -- 236.42 422.22
Asset

Total Current
14683.68 13203.54 16572.95 27773.51 28862.57 44764.25
Assets A

i Liability 1534.43 1922.87 2480.56 7065.79 8963.95 16782.95

ii Provision 740.56 1039.47 1059.94 1474.50 1573.23 8398.98

Total Cur
2274.99 2962.34 3540.50 8540.29 10537.18 25181.93
Liabilities B

Net Working
12408.69 10241.20 13032.45 19233.22 18325.39 19582.32
capital (A-B)
From the above diagram it is observed that the wotking capital of the company is
always fluctuating in the tear 2001 it is 12408.69 but in the year 2001 it is
decreased to 10241.20 due to decrease in Current Assets and increased to 19233.22
due to increase in current Assets at higher rate comparing to liability. The working
capital is at higher position during the year 2002 at 19582.32 million. It is due to
increase in current assets.

RATIO ANALYSIS
Current Ratio :

Current ratio may be defined as the relationship between current assets and current
liability. This ratio also known as working capital ratio, is measure of general
liquidity and is most widely used to make the analysis of a short –term financial
position or liquidity or a firm. Thus,

Current Ratio = Current Ratio

Current Liability

Interpretation
1. High current ratio indicate that the firm is in a liquid position.
2. Low current ratio indicate that the firm is not in a position to pay its current
liability in time.
A ratio 2 :1 is treated to be satisfactory.
Calculation of Current Ratio
Particulars 2001 2002 2003 2004 2005 2006
Current Asset 14683 .
13203.59 16572.95 27773.51 28862.57 44764.25
68
Current
2274.99 2962.34 3540.50 8540.29 10537.18 25181.93
Liability
Current Asset
Current 6.45:1 4.45:1 4.68:1 3.25:1 2.73:1 1.77:1
Liability
Findings :

 From the above analysis it is observed that the current ratio of the
organisation is so high which is undesirable.
 During the year 2001 the ratio is 6.45 that means the Asset is sis times
higher than liability so for the concern. It is an indication of idle of funds till
2004.
 The figure of debtors goes up because debt collection is not satisfactory.
 The cash and bank balance lying idle.
 But the year 2005 the ratio 2.73 is quite satisfactory. Due to increase in
liability the ratio comes close to 2:1 the satisfactory position.
 The year 2006 indicate low current ratio 1.77 which is lower than 2:1
increase in liability make the situation that the ratio comes down which is
satisfactory but not the best for organisation.
 Liquid Ratio

It shows a firm ability to meet current liability with its most liquid asset (quick
asset) liquid asset are those asset which are readily converted into cash and will
include cash balance, Bill receivable, sundry debtors and short-term investment.

Liquid Ratio = Current asset – (Inventories + prepaid exp

Current liability – Bank overdraft)

Important :
The ratio 1:1 is considered to ideal for the concern.

CALCULATION

Particulars 2001 2002 2003 2004 2005 2006

Current asset 13203.5 16572.9 27773.5 28862.
14683 .68 44764.25
less 9 5 1 57
Investments 10022.2 11913.
3283.28 3473.54 3771.75 23745.18
2 43
Liquid Asset A 17751.2 16949.
11400.4 9730.0 12801.2 21019.07
9 14
Liquid Ratio A/\
5.01:1 2.2:1 3.61:1 2.07:1 1.60:1 0.83:1
b
From the data it is observed that
The ratio is on a decreasing situation from the year 2001
In the year 2001 the ratio is 5.01 that means the liquid asset is more. The firm
ability to meet current liability is more.

Increase in liability and increase in inventories decrease the ratio till the year 2004.
In these period the firm is in a high liquidity position.

In the year 2005 the ratio comes down to 1.60, nearer to the satisfactory situation
1.1.
In the year 2006 due to heavy increase in inventories the current asset comes down
below to current liability so the ratio in this year is 0.83. There is not sufficient
liquid asset for payment of its current liability.
RATIO OF INVENTORY TO WORKING CAPITAL
In order to ascertain that there is no overstocking, the ratio of inventory to working
capital should be calculated. It is worked out as follows :
Inventory / Working capital

Increase is volume of sales requires increase in size of inventory but from a sound
financial point of view, inventory should not exceed amount of working capital.
Desirable Ratio = 1:1

Particulars 2001 2002 2003 2004 2005 2006

Inventory 3283.28 3473.54 3771.75 10022.22 11913.43 23715.18
Working
12408.69 10241.20 13032.45 19233.22 18325.39 19582.32
Capital
Ratio 0.26:1 0.33:1 2.28:1 0.52:1 0.65:1 1.21:1
 It is observed from the above figure that :
 The desirable ratio is not achieved in any year.
 From the year 2001 to to 2006 the inventory never exceed the working
capital.
 In the year 2006 the inventory exceed working capital The ratio in this year
is 1.21.
 In the year 2006 due to expansion there is increase is size of inventory.

4. Absolute liquid Ratio

It is calculated to get idea about the absolute liquidity of a concern.
i. Receivables and inventories are excluded from current asset.
ii. Cash in hand, Bank and readily realizable securities are taken into
consideration.
ii. The desirable norm for the ratio is 1:2.
 CASH IN HAND AND AT BANK + SHORT –TERM MARKETABLE
SECURITIES.
Calculation
Particulars 2001 2002 2003 2004 2005 2006
Current asset 14683 .
13203.59 16572.95 27773.51 28862.57 44764.25
less 68
Less Inventory 3283.28 3473.54 3771.75 10022.22 11913.43 23715.18
Sundry
1854.60 2172.92 2731.79 5607.41 5611.13 7873.67
debtors-
Absolute
9545.80 7557.08 100069.41 12143.88 11338.01 13145.4
liquid asset
Current
2274.99 2962.34 3540.50 8540.29 10537.18 25181.93
Liabilities
Absolute
4.19:1 2.55:1 2.84:1 1.42:1 1.07:1 0.52:1
liquid ratio
From the above calculation it is observed that
i. From the year 2001 to 2005 the absolute current asset is more than liability
so in these year cash in hand and Bank is more than liability so in these year
cash in hand and Bank is more comparing to liability.
ii. As per absolute liquid ratio norms the year 2006 is good because in this
year the ratio 1:2 is established. The ratio for this year is 0.52. Therefore not
much cash is laying unnecessarily idle. The current liability of this year is
increased more.

INTERPRETATION

 After analyzing various data from the year 2001to 2006 it is found that :
 During the year 1999 there is sufficient working capital. In this year the
short term deposit of the organisation is more. Cash & Bank balance is also
more.
 In the year 2002 the working capital decreased due to decrease in Bank
balance and deposit and increase in liability. Sundary debtors also increased
due to defective credit policy.
 During the year 2003 there is an increase is working capital due to increase
in bank balance and deposits. The liability has increased as compared to last
year. But the proportion of increase in current asset than current liabilities is
more.

 During the year 2004 and 2006 there is an increase in working capital due to
increase in current asset. In this period the inventory is more. But during the
year 2005, there is decline in working capital due to decrease in Bank
balance and increase in liability. From the whole picture of the organization
it is said that the organization maintain stability in working capital.

 During the year 2001 the current ratio of the organisation is more than the
satisfactory level. The ratio in this year is 6.45. The current asset is more due
to idleness of funds in this year. In this year due to insufficient investment
opportunities the Bank balance remains idle. It continue s till the year 2008.
In the year 2005 and 2006 it comes down nearer to the satisfactory level
2:1. During the year 2006 it is 1.77. It decreases due to high short term
investment.
  The liquid ratio of the organisation is also high during the year 2001 to
2004. In the year 2005 and 2006 it comes near to the satisfactory level 1:1.
During the year 2006 it is 1.60 and during the year 2010 it is 0.83.
 The inventory of the organisation is not overstocking in these period. The
inventory of the organisation is below the satisfactory level expect the year
2006. (i.e.) 1.21)

 The absolute liquid ratio is more than the satisfactory level except the year
2006 when it is near to the satisfactory level 1:2 in the year 2006 it is 0.52.

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH, 2006

31st March 31st March

2006 2005

Rs. Rs.

INCOME

Sale 1,217,278,156 1,613,546,315

Other Income 64,371,493 393,151,600

Carbon Credit Accured (Net) 86,891,137 ____

1,368,540,768 1,636,989,655
EXPENDITURE

Materials Expenses 666,536,158 795,084,582

Manufacturing and Other Expenses 374,962,784 356,213,451

Excise Duty 157,857,135 159,837,173

Interest and other Financial Charges 105,538,941 79,397,454

Depreciation 48,212,910 41,11,345

Miscellaneous Expenditure written off :

Preliminary Expenses __ 1,52,282

(Appreciation) / diminution in value of 42,008 (329.656)

long term investment

1,353,149,936 1,431,470,631

Profit / (Loss) for the year before tax 15,390,850 205,519,024

Current Tax 1,295,140 16,150,000

Deferred Tax (5,567,831) 79,782,504

Fringe Benefit Tax 1,174,647 -------

Profit / (Loss) after tax 18,488,894 109,586,520

Profit brought forward 16,751,673 102,794,643

 Amount available or appropriation 35,240,567 212,381,163

APPROPRIATION

Proposed Dividend ------ 17,828,976

Income tax thereon ------ 2,500,514

General Reserve. ------ 175,300,000

SURPLUS CARRIED TO BALANCE SHEET 35,240,567 16,751,673

Earning per share 1.53 9.22

BALANCE SHEET AS AT 31ST MARCH 2006

Rs. 31st March 31st March

2006 2005

SOURCES OF FUNDS

Shareholders’ Funds

Share Capital 130,900,000 118,905465

Reserve & Surplus 393,151,600 340,524,694

524,051,600 459,430,159
Loan Funds

Secured Loans 2,060,149,602 767,753,100

Unsecured Loans 47,154,744 21,921,985

2,107,304,346 789,675,085

Deferred Taxation

(Refer Note 25 in schedule 148) 175,814,245 181,382,076

TOTAL 2,807,170,191 1,430,487,320

APPLICATION OF FUNDS

Fixed Assets

Gross Block 1,984,325,562 1,968,325,920

Less : Depreciation 1,176,435,917 1,104,219,336

Net Block 807,889,645 864,106,584

Capital Work-in-progress 1,345,071,083 253,235,622

2,152,960,728 1,117,342,206

18,763,592 12,855,700

Investments

Current Assets, Loans and Advance

Inventories 463,037,219 246,173,014

 Sundry Debtors 162,938,312 80,850,462

Others Current Assests 86,891,137

Cash and Bank Balances 21,164,391 21,746,063

Loans and Advances 394,016,442 311,497,481

1,128,047,501 660,267,020

Less : Current Liabilities and Provisions 492,601,630 359,997,606

Net Current Assets 635,445,871 300,289,414

Total 2,807,170,191 1,430,487,320

References:

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 [Link]
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 [Link]/garpriskreview/Issues/[Link]
 [Link]
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 [Link]

 Management of Financial Institutions: ICFAI Publications