Professional Documents
Culture Documents
Bank of Boroda Rajib
Bank of Boroda Rajib
(BOB,
KOLKATA DOMAIN) 1
Determination of interest rate: This would entail the following sequence of actions.
Collect data regarding financial health evaluation
Noting down of credit rating
Referencing the banks’ interest rate guidelines circular
Choosing the interest rate from the circular on the basis of financial health and credit rating
To assess the financial health of organizations that approaches Bank of Baroda for credit for business
purposes. This would entail undertaking of the following procedures:
Bank of Baroda
Bank of Baroda
International business school, Kolkata
Credit Appraisal & Credit Rating
Priority of credit appraisal
Stages of credit analysis and rating
Evaluation of credit rating
India’s credit rating agencies
SEBI’s regulations
Basis of credit appraisal methodology
Risk management
Different types of risk
Need of sound credit appraisal and accurate risk assessment
INTRODUCTION
CHAPTER - I
KOLKATA DOMAIN) 2
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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securities. It tells investors the likelihood of default, or non-payment, by the issuer of its financial obligations.
Credit analysis is the financial analysis used to determine the creditworthiness of an issuer. It examines the
capability of a borrower, or issuer of financial obligations, to repay the amounts owing on schedule or at all.
Credit rating is a tool in the hands of financial intermediaries, such as banks and financial institutions that can
be effectively employed for taking decisions relating to lending and investments. Credit rating is the assessment
of a borrower’s credit quality. Credit ratings performs the function of credit risk evaluation reflecting the
Credit rating establishes a link between risk and return. An investor or any other interested person
uses the rating to assess the risk level and compares the offered rate of return with his expected rate of return.
Establishing the creditworthiness of borrowers is one of the oldest established financial activities known.
Through history, the act of lending funds has been accompanied by an examination of the ability of the
borrower to repay the funds. The most ancient civilizations and societies known to us often show development
of sophisticated trading and banking activities. As modern accounting and finance developed during the
industrial revolution, banking and lending grew to a larger scale and became more systematic.
The analysis of the creditworthiness involves preliminary study of the factors and pre-requisites which can
affect adversely the duly repayment of the credit. It is of high importance that bank specialists demonstrate
competence and conscientiousness. Banks have at their disposal various ways for choosing suitable borrowers
to be financed and for exercising control over the special purpose of the credit resources and their expedient
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 4
and efficient spending. Today Banks and NBFC’s use their own credit rating techniques as credit rating
agencies usually done, for appraisal of credit worthiness of borrowers and assessment of total risk.
Borrower rating
Bond
Equit
Short(individual & corporate)
Credit
Ratin
Term
y
Rating
Ratin
instrum
g
ents
g
rating
Traditional Approach:
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 5
There are five criteria (5 C Analysis) that most lenders use to assess a borrower’s creditworthiness:
capacity to generate sufficient cash flows to service the loan;
collateral to secure the loan in case the borrower defaults;
capital that shareholders have invested in the business;
conditions prevailing in the borrower’s industry and broader economy; and
character and track record of the borrower and the borrower’s management
This concept originated in the US in 1909 AD when the founder of Moody’s Investor Service, John
Moody, rated the US Rail Road Bonds. However, the relevance of this concept was realized only after the great
depression when investors lost all their money. lack of symmetric information and high costs of collecting
information increased the popularity of credit rating. The world’s biggest rating agencies are Moody’s investor
service and Standard and Poor’s(S&P).They have been into the rating business for decades(since 1916).The
rating giants have diversified their service portfolio in order to survive and grow. Besides rating bond issues –
their core rating business-they have diversified into rating asset backed securities, commercial papers, bank
loans, and other financial products.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 6
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 7
LB Risk prone
LC Substantial Risk
LD Default
CARE AAA - Best quality (high investment grade), CARE AA-High quality, CARE A-Adequate Safety,
CARE BBB-Moderate safety, CARE BB- Inadequate safety, CARE B- Risk prone, CARE C-High Risk, and
CARE D- Default.
These regulations are called the Securities and Exchange Board of India (Credit Rating Agencies)
Regulations, 1999.
Only commercial Banks, public financial institutions, foreign banks operating in India, foreign credit
rating agencies and companies with a minimum net worth of `.100 crore as per its audited annual
accounts for the previous 5 years are eligible to promote rating agencies in India.
Rating agencies required to have a minimum net worth of `.5 crore.
Rating agencies cannot assess financial instruments of their promoters who have more than 10% stake
in them.
Rating agencies cannot rate a security issued by an entity which is a borrower of its promoter or a
subsidiary of its promoter or an associate of its promoter.
Rating agencies cannot rate a security issued by its associate or subsidiary,if the credit rating agency or
the rating committee .
Appraisal of credit worthiness and rating are based on an indepth study of the industry and an evaluation of the
strengths and weakness of the company.The analytical framework for rating consists of the following four
broad areas.
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Risk Management
Definition of Risk: The Basel committee has defined the risk as “the probability of the unexpected
happening-the probability of suffering loss”. Risk is a probability of loss, may be direct or indirect.
Direct loss may be relating to loss of capital or earnings whereas indirect loss may be loss of business.
Banks often distinguish between expected loss and unexpected loss. Expected losses are those that the
bank knows with reasonable certainty will occur (e.g., the expected default rate of corporate loan
portfolio or credit card portfolio) and are typically reserved for in some manner. Unexpected losses are
those associated with unforeseen events (e.g. losses experienced by banks in the aftermath of nuclear
tests, Losses due to a sudden down turn in economy or falling interest rates). Banks rely on their capital
as a buffer to absorb such losses.
The four letter ‘Risk’ indicates that risk is an unexpected event or incident, which needs to be identified,
measures monitored and control.
R = Rare (Unexpected)
I = Incident (Outcome)
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ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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S = Selection (Identification)
Thus, the risk management is a sum of (1) Risk identification (2) Risk measurement (3) Risk monitoring and
(4) Risk control with a view to maximize Risk Adjusted on Capital Employed = (RAROCE).
During the about last five years period the subject of risk management in banks is gaining momentum with
Basel Committee on Banking Supervision and the Reserve Bank of India prescribing guidelines for
implementation of Risk Management System by banks. While the risk management has a number of potential
benefits, it does raise a number of conceptual and practical challenges. The effectiveness of implementation of
the Risk Management System in different categories of banks operating in India differs from each other
because banks are designing their risk management system keeping in view their own requirements dictated by
size and complexity of business, risk philosophy, market perception and the expected level of capital. The
Basel Committee on Banking Supervision is in the process of implementation of New Capital Accord in near
future, which requires substantial up gradation of the existing Risk Management Systems in banks. The New
Accord will have inbuilt provision for capital incentives for banks having advanced risk management systems
and it is imperative on banks to gradually improve their systems by removing the veil of secrecy.
My project mainly on Credit risk Management and Credit Worthiness/Appraisal. Credit risk is defined as the
possibility of losses associated with diminution in the credit quality of borrowers or counter parties. In a bank’s
portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to
meet commitments in relation to lending, trading, settlement and other financial transactions. In the backdrop, it
is imperative that banks have a robust credit risk management system, which is sensitive and responsive to
credit risk factors. Credit risk can be understood as the uncertainty associated with borrower’s loan repayments.
Credit Risk Management encompasses identification, measurement, monitoring and control of the credit risk
exposures.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 10
ta Capital
Derivative
External
Dedicated
Repository
Banking
Operational
Banks
Risk
data(Rating
CRM
Dashboard
Identification
Measurement
Mitigation
(internal
MIS
Application
riskAgency
& external)
Allocation
Credit risk
suite
Module
Market Risk
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1) MARKET RISK can be defined as the risk of losses in and off balance sheet positions arising from adverse
movement of market variables. Market risk may be relating to
Liquidity Risk: Potential inability of a bank to meet its repayment obligations in a timely and cost
effective manner. Mismatch of deposits and assets.
Interest Rate Risk: Risk due to change in market interest rate, which might adversely affect bank’s
financial position.NIM will reduce. This depends on types of assets such as fixed or floating rate,
quantum etc.
Interest risk of the bank is quantitatively measured by measuring the “Duration Gap” of the bank’s financial
assets.
D=Duration, F=Cash flow, Y=Discount rate, t-Time Period, PV-Present Value of the Security
Duration Gap= Dollar Weighted duration of asset portfolio- Dollar Weighted duration of bank’s liabilities
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ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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rate) ^t)] where t=1 to n All the above required fields (cash inflow, time period, discount rate (given by the bankers), to
calculate the duration are available in the Risk Analysis engine which are populated from bank’s MIS .
Foreign exchange Risk: Risk due to upward /downward movement in exchange rate when there is open
position, either spot or forward or both in an individual currency.
Commodity Price Risk: The price fluctuation in commodity, which are changed to the bank as security
etc. by way of hypothecation and /or pledge.
Equity Price Risk: is a loss in value of the bank’s equity investments and or equity derivatives, arising
out of change in equity price, price fluctuation in stock market where bank has invested fund.
2) OPERATIONAL RISK It is a risk relating to direct or indirect losses arising out of inadequate or failure
of people, process, system, business, management and /or external factors.
Operational Loss= Probability of loss event (PE)* Loss given that event (LGE)
3) CREDIT RISK It is a risk of potential loss arising out of inability or unwillingness of a customer or counter
party to meet its commitments in relation to lending. Hedging, settlement and other financial transactions. Thus
credit risk may be relating to;
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Defaulter risk: there is a one contract only between bank and borrowers may be due to unwillingness or
inability of the borrower.
Credit rating
Credit is considered as core business activity of the banking resulting into profit. Therefore, it is necessary to
increase the credit portfolio and also to mitigate the risk relating to credit.
Credit rating was the very first topic covered by me in the bank. An effective way to mitigate credit risks is to
have a robust rating system in place, which can identify potential risks in a particular asset, allow a bank to
maintain a healthy asset quality and at the same time impart flexibility in pricing assets to meet the required
risk return parameters. A robust credit rating system enables the bank in determining the probability of default
and the severity of default among its loan assets and thus allows the bank to build systems and initiate measures
to maintain its asset quality. Credit risk rating is basically assigned to borrowers based on their ability or
willingness to repay the debt.
Bank of Baroda also has a strong credit rating system. The bank earlier used the AAIPL method i.e M/S Arthur
Anderson (I) P Limited, which was the traditional method. Banks Consultants on Risk Management M/S
International business school, Kolkata
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KOLKATA DOMAIN) 14
Arthur Anderson (I) P Limited has suggested for introducing new credit rating model i.e. CRISIL rating
models, for adapting the current day techniques in credit risk management.
Before introducing the CRISIL rating models for credit risk rating, I want to give a small overview on credit
risk models of all commercial advances.
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KMV Model
KMV Corporation has built a credit risk model that uses information on stock prices and the capital structure of
the firm to estimate its default probability. The starting point of this model is the proposition that a firm will
default only if its asset value falls below a certain level (Default Point), which is a function of its liability. It
estimates the asset value of the firm and its asset volatility from the market value of equity and the debt
structure in the option theoretic framework. Using these two values, a metric (Distance from default or DD) is
constructed that represents the number of standard deviation i.e the number of times the firm’s assets value is
away from the default point.. However, this method was successfully commercialized by Moody’s KMV
(formerly KMV Corporation). Finally, a mapping is done between the DD value and the actual default rate,
based on the historical experience. The result probability is called Expected Default Frequency (EDF).
Moody’s KMV uses this theoretical framework to predict default and arrive at the expected default frequency
(EDF) of the firms. The starting point of the analysis is the proposition that when the value of a firm’s assets
falls below a threshold level, the firm defaults.
The EDF is found through the following steps:
• The market value of the assets and the volatility of the assets are derived using option pricing formulae with
the market value of the equity, the book value of the liabilities, and the volatility of the stock as input
parameters.
• The expected value of the assets at the horizon and the default point are determined from the firm’s current
value of the assets and the firm’s liability, respectively.
• Using the expected firm value, the default point and the asset volatility, the percentage drop in the firm value
is determined, which would bring the firm to the default point. The number of standard deviations that the asset
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value drops to reach the default point is called the distance to default. However, the distance to default is a
normalized ordinal measure of the default likelihood similar to the bond rating. KMV determines the expected
default frequency, which is a cardinal measure, by mapping the ‘distance to default’ to the ‘default rate’, based
on the historical experience of organizations with different ‘distance to default’ values. It is important to note
that the fundamental assumption behind this method is that the market values contain all the relevant
information about the factors, which determine the default probability. That is why no explicit recognition is
given to the differentiating factors like industry, size and economy. Another important thing to note regarding
this approach is that it is not a directly predictive approach unlike most other default prediction models. There
is no separate forecasting algorithm ingrained within the methodology. The predictive power of the model
hinges directly on the assertion that the current value of the firm provides a good prediction on the future value
of the firm.
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effectively. The banks may evaluate the utility of these models with suitable modifications to the country
specific environment for fine-tuning the credit risk management. The success of credit risk models impinges on
the times series data on historical loan loss rates and other model variables, spanning multiple credit cycles.
Banks may therefore attempt building adequate database for switching over to credit risk modeling after a
specified period of time. Credit Risk modeling results in a better internal risk management. Banks’ credit
exposures typically are spread across geographical locations and product lines. The use of credit risk models
offer banks a framework for examining this risk in a timely manner, centralizing data on global exposures and
analyzing marginal and absolute contributions to risk. These properties of models may contribute to an
improvement in a bank’s overall ability to identify, measure and manage risk. Credit risk models may provide
estimate of credit risk (such as unexpected loss), which reflect individual portfolio composition; hence they
may provide a better reflection of concentration risk compared to non portfolio approaches. Loan review,
administration, and management (LRM) are an inherent process of credit management among banks. The
obvious and more serious banking problems arise due to lax credit standards, poor portfolio risk management,
or a lack of attention to changes in economic, or other circumstances that lead to a deterioration in the credit
standing of a bank’s portfolio. Therefore, the banking industry has been focusing more attention than ever on
risk management. At the same time, banking regulators from around the world are working out a complicated
set of rules for governing global banks accorded in the Basel II Accord. Many credit problems reveal basic
weaknesses in the credit granting and monitoring processes. While shortcomings in underwriting and
management of market-related credit exposures represent important sources of losses at banks, many credit
problems would have been avoided or mitigated by a strong internal credit process. Many banks find carrying
out a thorough credit assessment a substantial challenge. For traditional bank lending, competitive pressures
and the growth of loan syndication techniques create time constraints that interfere with basic due diligence.
Globalization of credit markets increases the need for financial information based on sound accounting
standards and timely macroeconomic and flow of funds data. When this information is not available or reliable,
banks may dispense with financial and economic analysis and support credit decisions with simple indicators of
credit quality, especially if they perceive a need to gain a competitive foothold in a rapidly growing foreign
market. Finally, banks may need new types of information to assess relatively newer borrowers, such as
institutional investors and highly leveraged institutions. Whilst refocusing of credit practices is essential,
certain credit rating models that are being adopted still follow the outdated practices of the past, which focus on
risk avoidance, rather than risk management and if banks seek to continually avoid risk, significant
opportunities will be lost. As a consequence the banks will lose out to more sophisticated competitors.
International business school, Kolkata
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ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 18
However, banks have now become more sophisticated in their hedging and pricing of interest rate risk. New
modeling methods are changing the way banks understand and handle credit risk. One has to wait and watch for
the implications.
4) Country Risk this risk is the possibility that a country will be unable to service and repay its debts to foreign
lenders in a timely manner. This risk arises due to exchange rate changes,due to restrictions on external
remittance, political risk, cross border risk(on account of borrower being resident of country other than the
country where the asset is booked).
Definition of Risk management : Risk management is the sum of (1) Risk identification (2) Risk measurement
(3) Risk monitoring and (4) Risk control with a view to maximize Risk Adjusted Return on Capital
Employed=(RAROCE).
I
K
R
Incident (outcome)
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Preparation of proposal
Sanction of proposal
Project Rejected Solve the queries
on various
Communication of
Sanction
Acknowledgement of
Sanction
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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of which will have to be borne by banks. Though most of the losses pertain to the US and Europe, the report
observes that emerging markets risks have risen the most in the last six months. If we speculate the causes
briefly,
We get:-
>Under pricing of risks :increase in subprime mortgages, >High prices lending to oversupply of housing in
US, >Role of credit rating agencies: faulty and inadequate, >Excessive leverage and weak risk-management
system, >Regulatory gaps and lax supervision >Inadequate information about the quality of assets in portfolios
heightened counterparty risk perception and led to extreme risk aversion > Assets held by non-depository
financial instruments (investment banks, hedge funds, etc) being largely financed by short term money market
instruments that could not be rolled over ,
It all started from USA housing crisis (sub-prime crisis). The USA financial institutions went on lending to
people for house construction without bothering to verify their repaying capacity. The houses were pledged
with the financial institutions. When the prices of house properties crashed n the loanees failed to repay the
loan, the financial institutions repossessed the properties but could not sell as prices had crashed. Many
financial institutions went bankrupt. Studies carried out on bank failures in the US show that credit risk alone
has accounted for 71% of large bank failures in this period.
Credit risk is the oldest and biggest risk that a bank due to its nature of business. As banks move into a
new globalised environment for financial operations and trading, with new risks the need is felt for better credit
risk management techniques with more sophisticated and versatile risk instruments for risk assessment,
monitoring and controlling risk exposures.
The credit risk rating can be a risk management tool for prospecting fresh borrowers in addition to
monitoring the weaker parameters and taking remedial action. It also provides a basis for Credit Risk Pricing
i.e. fixation of rate of interest on lending to different borrowers based on their credit risk rating there by
balancing risk &Reward for the bank and it gives the bank to maintain the level of capital in proportion to the
risk of the loan.
Basel capital accord and regulatory capital allocation requirements have also fuelled the demand for better
credit risk measurement. Regulatory impose minimum standards to estimate credit risk for the purpose of
capital allocation and performance measurement of banks .Adoption of sound risk based pricing mechanism
International business school, Kolkata
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ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 21
and RAROC(Risk Adjusted Return on Capital)concept for performance evaluation has also enhanced the need
of better credit management practices.
CHAPTER - II
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
Performance highlights
Awards and achievements
Types of credit offered by the bank
Bob’s internal credit appraisal system
Bank of Baroda
KOLKATA DOMAIN)
Vision
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 23
It has been a long and eventful journey of almost a century across 25 countries. Starting in 1908 from a
small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre in Mumbai, is a saga of vision,
enterprise, financial prudence and corporate governance.
Mission
To be a top ranking National Bank of International Standards committed to augmenting stake holders' value
through concern, care and competence.
Heritage
It all started with a visionary Maharaja Sayajirao Gaekwad 's uncanny foresight into the future of trade and
enterprising in his country. On 20th July 1908, under the Companies Act of 1897, and with a paid up capital of
Rs 10 Lacs started the legend that has now translated into a strong, trustworthy financial body, THE BANK
OF BARODA. India’s 3rd largest public sector bank.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 25
Bank of Baroda
PARTICULARS 31.03.200 31.03.20 31.03.200 31.03.2010
7 08 9
No. of employees 38086 36774 36838 38960
No of branches 2772 2899 2974 3148
Business per employee(Rs. in crore) 5.48 7.04 9.11 10.68
Net profit per employee(Rs. in lakh) 2.70 3.90 6.05 7.85
Bank of Baroda
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Financial Percentage
Year Growth
2007-08 31.11%
2008-09 24.18%
2009-10 43.98%
Total Business (Deposit + Advances) increased to Rs4,16,080 crore reflecting a growth of 24.0%.
Gross Profit and Net Profit were Rs 4,935 crore and Rs 3,058 crore respectively. Net Profit registered a
growth of 37.3% over previous year.
Credit-Deposit Ratio stood at 84.55% as against 81.94% last year.
Retail Credit posted a growth of 23.5% constituting 18.15% of the Bank’s Gross Domestic Credit in
FY10.
Net Interest Margin (NIM) in global operations as percent of interest earning assets was at the level of
2.74% and in domestic operations at 3.12%.
Net NPAs to Net Advances stood at 0.34% this year against 0.31% last year.
Capital Adequacy Ratio (CAR) as per Basel I stood at 12.84% and as per Basel II at 14.36%.
Net Worth improved to Rs 13,785.14 crore registering a rise of 20.6%.
Book Value improved from Rs 313.82 to Rs 378.44 on year.
Business per Employee moved up from Rs 911 lakh to Rs 1,068 lakh on year.
Bank of Baroda
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‘Bank of the Year Award' in India Leadership Conclave at Delhi by Wockhardt Foundation - 14th Sep.
2009.
SKOCH Challenger Award for ‘Bank of the Year’ - 18th March 2010.
Second Rank as ‘Best Nationalized Bank’ in ‘India’s Best Bank Survey 2009-10’ by Financial Express
Group.
Rank 34 [up from Rank 39 last year] - India’s Most Valuable Brand 2009 (Brand Finance, UK)
Rank 33 [up from Rank 36 last year] – ET 500 2009
Rank 4 [up from Rank 17 last year] – Business Today KPMG Survey 2009.
The Bank has also been awarded a ‘Gold Trophy’ for the Indian Language Publication, a ‘Silver
Trophy’ for the Corporate Website and a ‘Bronze Trophy’ for Bilingual Internal Magazine and
Chairman & Managing Director’s message (in Corporate Communications category) by the Association
of Business Communicators of India (ABCI).
Fund Based Facilities are those where outley of the bank’s funds is involved. Here the bank provides funding
and assistance to actually purchase business assets or to meet business expenses. Fund Based facilities are
facilities are generally granted by the way of overdrafts, Cash credit, Demand loans, Working Capital Term
Loans, Bill purchased/Discounted and Term Loans
Non-Fund Based Facilities are those where the bank has to meet the commitment/promise made by a borrower
and endorsed by the Bank, only if the borrower fails to honour it. Here the bank can issue letters of credit or
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ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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can give a guarantee on behalf of the customer to the suppliers, Government Departments for the procurement
of goods and services on credit.
The main types of facilities under fund based and non-fund based and the related guidelines for granting
advances against them are discussed below in brief.
The different fund based credit facilities offered by the bank are as follows:
1. Working Capital Loans: A firm’s working capital is the money it has available to meet current obligations
(those due in less than a year) and to acquire earning assets. The working Capital funding requirements for the
clients are partly made out of the short term funding provided by banks, the balance being funded out of long
term sources of the client. The primary security for working capital limits is normally hypothecation of the
current assets of the company. The bank offers Working Capital finance to meet the operating expenses,
purchasing inventory, receivables financing, either by direct funding or by issuing letter of credit.
2. Overdraft and Cash credit: In overdraft/cash credit, the borrower is allowed to carry out debit and credit
transactions up to a limit. These are more operative accounts and have cheque book facility. The term
“overdraft” is generally used for continuing limits granted against the security of term deposits and other
financial securities, occasional overdrawing /debits in current accounts and also for continuing limits granted
for working capital requirements of commercial establishments. Cash credit /overdraft limits are repayable on
demand.
3. Export Finance: According to RBI guidelines, the banks are required to provide loans to exporters at
concessional rates of interest as advised by RBI from time to time, for promoting export from our country. The
export credit / finance is provided by the bank in Rupees as well as foreign currencies for pre-shipment and
post-shipment requirement of the exporters. Pre –shipment facilities are extended against export orders and post
shipment facilities are extended by way of bill discounting and bill purchase.
4. Term Finance: Term finance/loans are primarily provided by bank for capital expenditure/acquisition of
fixed assets for starting / expanding a business or industrial unit. These loans are typically secured by the real
and personal property financed by the bank as well as other assets of the borrower. They are repayable by
specific number of installments spread over a period of 3 to 5 years or some times more.
5. Bill Finance: In order to ease the pressures on cash flow and facilitate smooth running of business, the bank
provides Bill Finance to its corporate / non corporate clients. It is normally meant for financing working capital
requirements in the post-sale part of the operating cycle of a unit. The facilities are for purchasing / discounting
bills drawn by the customer for goods sold.
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KOLKATA DOMAIN) 29
6. Demand Loans: As the name suggests, are repayable on demand. They are also at times referred to as loans.
Though technically repayable on demand, a repayment of the loan in installments spread over a period up to 3
years or so is generally stipulated. Composite loans given for working capital and for fixed assets as also the
loans for fixed assets where repayment period is stipulated up to 3 years are generally granted by the way of
Demand loans.
The two main types of non fund facilities are Letter of Credit and Bank Guarantees the details of which are
given as follows:
1. Letter of Credit: LC (letter of credit) is an arrangement where a bank, acting on the request of the customer
(importer/opener of letter of credit), gives an undertaking to a third party (exporter/beneficiary of the letter of
credit) that on submitting the shipping documents (drafts, invoices, insurance policy, bill of landing), the bank
will meet the trader’s commitment. In international trade, given the fact that the local trader might not be
known to the foreign supplier, such assurance from a bank facilitates the business.
2. Bank Guarantees: Issuing guarantees on behalf of customers is a major non-fund based business of banks. A
guarantee is a contract to perform the promise or discharge the liability of a third person in case of his/her
default. It constitutes a contingent liability that arises in the event of default by the customer.
Key benefits of Working capital finance (ANNEXURE-I shows the interest rate applicable for working capital
finance):
Funded facilities i.e. the bank provides funding and assistance to actually business assets or to meet
business expenses.
Non funded facilities i.e. the bank can issue letters of credit or can give a guarantee on behalf of the
customer to the suppliers, govt. departments for the procurement of goods and services on credit.
Available in both Indian as well as foreign currencies.
International business school, Kolkata
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Under term finance Bank of Baroda offers the following: (ANNEXTURE- II shows the interest rate applicable
for term loan finance)
>Fund based finance for capital expenditure/acquisition of fixed assets towards starting/expanding a
business or industrial unit or to swap with high cost existing debt from other bank / financial institution.
> Non fund based finance in the form of deferred payment, guarantee for acquisition of fixed assets towards
starting / expanding unit.
Under Project finance BOB provides its customers with the option of a loan to take care of the needs of an
ongoing project, whether it is in Indian or Foreign currency.
CHAPTER - III
Bank of Baroda
Steps invol
Bob’s inter
Credit Rati
Term loan
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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1) Obligor (Borrower) Rating – for credit worthiness indicating the Probability of Default. (PD)
2) Facility Rating - representing the Loss Given Default (LGD).Evaluation of riskiness of a facility;
3) Composite Rating – Indicative of the Expected Loss (EL).
Risk rating flowchart, under CRISIL New rating model as shown in this diagram:
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
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Facility
Post
Project
Obligorproject
Obligor Risk
Risk
Composite
implementati
Implementati
Rating
Rating(indicator
Rating
rating
on
>Project
(indicator
of LGD)
>Industry
Risk Impl.
>Industry
(indicatorofof
Risk
>Construction
>Post
PD)
Risk Project
EL)
>Business
Risk
Implementation
Evaluation
>Funding
>Business of
Risk
credit
Risk
>Financial
worthiness
>Financial
Risk
Risk
>Management
>Manageme
Risk
nt Risk
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The obligor (borrower) rating is indicative of creditworthiness of an obligor or the probability of default (PD)
and it is based on the assessment of past and projected cash flows of the company. For assessment of an
obligor, the rating structure consists of evaluation by way of four modules:
a) Industry Risk: The assessment of this module which is external to the Borrower and is done by
assessment of industry related macroeconomic parameters applicable to the specific industry and having
different risk weights.
b) Business Risk: The assessment of this module is based on internal working of the borrower and relates to
parameters such as after sales service, distribution set up, capacity utilization etc. The parameters which are
only relevant to a particular industry, are selected for scoring having different risk weights.
c) Financial Risk: The assessment of this module is based on internal working of the borrower and relates to
parameters such as past (not in case of a green field / infrastructure company under implementation stage) and
projected financials .The CMA based data input sheet is uploaded into the software and the same allows
computation of financial rating automatically based on the computation of financial ratios like net profit
margin, current ratio, DSCR, interest coverage etc.
d) Management Quality: The assessment of this module is based on internal working of the Borrowers
management and relates to parameters such as past repayment record, quality of information submitted, group
support etc.
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Bank of Baroda
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However depending upon the model used, the rating grades ranging from BOB-1 to BOB-10 or BOB-3 to
BOB-10 or BOB-6 to BOB-10 are generated as follows:
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projects categories
(service) categories.
b)
For existing and new borrowers under Trader
Category.
2. FACILITY RATING:
Facility rating involves assessment of the security coverage for a given facility and indicates the loss
given default (LGD) for a particular facility. Facilities proposed/sanctioned to a company are assessed
separately under this dimension of rating.
Facility Rating (FR) Grades: Facility Rating grades range from FR-1 to FR-8 (ANNEXURE-II)
3. COMPOSITE RATING:
Composite Rating(CR)- this is the matrix or the combination of PD and LGD; indicates the expected
loss in case the facility is defaulted. The Composite rating is worked out automatically by the software based on
the obligor (Borrower) Grade (BOB Rating) and Facility Rating grade(FR).
Composite Rating grades: CR grade ranges from CR-1 to CR-10 (ANNEXTURE-III)
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b) For borrowers /obligors eligible for rating under SME(manufacturing) / SME (service) and Traders
Models in case of existing borrowers :
The past financial data for these categories of borrowers are usually available. The acceptance grade for
these borrowers can be any grade ranging from BOB-3 to BOB-6.BOB-6 is having the score range of above
5.00 to 5.75 out of total 10.00 for these categories of borrowers. It may be noted that for these category of
borrowers, the highest creditworthiness works out to be BOB-3. (ANNEXTURE-V)
c) Obligors (borrowers) with new projects eligible for rating under infrastructure (build phase)/ and Green
Field projects(LCM/SME):
The past financial performances data in respect of these categories of borrowers are not available and
only future projections are available. These borrowers are initially rated under Project Risk rating and
assigned rating grades from BOBPR-1 to BOBPR-5 and subsequently converted into common
obligor(Borrower) rating grade from BOB-6 to BOB-10 automatically. Thus BOBPR-1 is equivalent to
BOB-6 and BOBPR-5 is equivalent to BOB-10.In other words ,BOBPR-1 under project rating is the
only investment grade being equivalent to obligor/Borrowers rating scale of BOB-6 applicable scenario
for these categories of borrowers are as follows:
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5. PRICING:
The composite rating or the combined rating(CR-1 to CR-10) is computed on the basis of matrix of obligor
rating for credit worthiness and the facility rating representing the expected loss in case of default. This loss has
to be recovered from the borrower by way of risk premium over the BPLR. For the purpose of fixing of rate of
interest the mapping of existing (AAIPL models) rating grades with the BOBRAM / CRISIL Rating Models is
as under:-
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maintain its assets quality. Bank of Baroda has a strong credit rating system. The bank earlier used the AAIPL
method i.e. M/S Arthur Anderson (I) P ltd. Which was the traditional method. Banks Consultants on risk
management M/S Arthur Anderson (I) P ltd. has suggested for introducing new credit rating model i.e. CRISIL
rating models, for adopting the current day techniques in credit risk management.
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Step2: Datasheet preparation (off line model): Having selected one of the applicable models for rating
purpose, only the prescribed CMA data based input sheet and/or project profitability data input sheet and /or
project profitability data input sheet downloaded from bank’s Intranet or provided through CD during the
training is to be used. The sheet is to be filled by credit officers in the offline mode after the due –diligence of
the CMA/project financials by the appropriate authority. We have to note that the prescribed input sheet has to
be used for the purpose of data entry and subsequent uploading during the rating process.
Bank of Baroda
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Step 7: Validation
The validator has to comply the following steps:
The validator is required to validate the credit risk rating based on the financial data(audited and
provisional) and other relevant records, which have been used during the credit risk rating process by
the rating officer. However all the proposals falling under the power of branch manager are to be
validated at the regional office or the reporting authority level as the case may be.
After due validation, the validator is required to take three hard copy printouts of the “interim
company report” and send one copy to the credit rating officer, the other copy to sanctioning
authority and third must be kept on records
Validator is required to submit the validated credit rating report to appropriate sanctioning authority
through the system.
8. Submission of validated credit risk rating report and other MIS reports to the sanctioning authority
The sanctioning authority has no role during the process of credit rating also during the process of validation.
After the completion of validation process, the concerned credit officer at the office of sanctioning authority
will receive the hard copy of the validated rating from the validator and also a soft copy through the system. A
copy of the validated rating report is to be attached to the proposal.
The following reports could also be generated through the system:
Company comparison report
Financial reports (all levels) via CMA financials, project financials, ratios
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MIS reports like ASCORM industry wise, borrower group wise etc. as desired by the authority
Strength and weakness report.
CASE STUDY
On Interim Company Rating Report
Model Name: SME – Service model.
Summary Table:
Rating Summary:
Borrower Rating Score Prv. score Rating RAROC (%) Rating Class
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Meaning: Companies rated BOB 5 are judged to offer moderates safety of timely payment of interest and
principal for the present. However changing circumstances are likely to lead to a weakened capacity to repay
interest and principal than for companies in higher rated grades.
Facility Rating:
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Type: Company
INDUSTRY RISK: 6.67 III
1) Competition 4
Comments: Lots of players with further scope of new players to enter the industry. Significant
threats from imports exist. There are so many construction companies/promoter/builders/players in
the market. Competition exists amongst them to procure work orders.
2) Demand Supply Scenario 8 S
Comments: Past growth rates relatively high and stable. Positive demand-supply gap scenario.
Relatively insulated from economic recession. Favourable growth rate likely to continue in the
medium term. However, product off take not as easily assured as higher grades. The industry
scenario is favourable and a lot of scope is available in the field of construction.
3) Availability of HR 8 S
Comments: HR are available, salaries are steady. The man power is easily available.
Risk Entity Name Value Score Grade Strengths/Weakness
BUSINESS RISK: 6.59 III
Market position 6.5
1) Assessment of immediate buyer 6
Comments: Mr. A and his group have successfully completed both govt. and non govt. jobs. At
present, the company’s bulk orders is from Chattisgarh Housing Board and it being a State govt.
undertaking, Score of 6 is justified.
2) Position of entry in its target market 4
Comments: Average the company is led by experienced and reputed promoter Mr. A, having
experience of more than 10 years.
3) Perceived Service Quality 8 S
Comments: The quality of service provided is very good; promoter has good reputation and is timely
service provider in the area of civil construction.
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Bank of Baroda
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Bank of Baroda
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Bank of Baroda
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Term loan proposal and appraisal:-Term loan are those loans which are payable within a period of more
than one year and up to ten years. It is availed for acquisition of fixed assets i.e. land, factory building,
warehouse, machineries etc. these are financed by way of term loan which is paid by the borrower in concern
out of the profits earned. The schedule of repayment and duration of loan are fixed on the basis of assessed
ability of the undertaking to generate surpluses for making repayment.
There are five sections which are duly considered while considering the proposal. They are:
In this section, there is a detailed proposal for fresh consideration of term loan, further extension of term loan
with any decrease or increase in the fund based and nonfund based limits. or any concession in upfront fees and
also mentioned about the details of the applicant company, details of the project, details of the personal
guarantees of the directors, details of the securities, previous rating done by the bank. etc. (ANNEXURE IV)
The financial performance is checked on the basis of balance sheet for last two years and projected next two
years. Also the profit and loss account provides with the operational data. There are also working capital
assessment data, assessment of sales, different profitability ratios are available.(ANNEXURE V)
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The term “Working Capital” denotes requirement of capital sum or amount of money business enterprises for
day to day activities like purchase of raw materials, stores and spares, payment of wages to employee, payment
of other expenses like energy, fuel, water consumption rates and taxes, carriage expenses.
The bank normally define the working capital as the sum total of inventory, receivables and other current assets
held by the business entity. It is computed by the banks through the concept of operating cycle i.e.it is taken by
the business entity to get the money released from its current assets.
1. Tandon committee/Chore committee: A committee headed by Shri P L Tandon was constituted with a
view to suggest improvement in the existing cash credit system. The committee has recommended three
methods of lending:
1st method of lending:- According to this method, banks would finance 75% of working capital gap
i.e.CA-CL
2nd method of lending:- According to this method ,banks would finance maximum up to 75% of the total
CA.
3rd method of lending:- It is the same as 2nd method, but excluding core CA from total assets and the
core assets is financed out of long term funds.
2. Nayak Committee/Turnover Method: The committee headed by Shri P R Nayak examined the adequacy
of institutional credit to SSI sector and gave its recommendation which is that bank should give preference to
village, tiny industries and other SSI units in that order. Under this method the 25% of the projected turnover is
computed as the working capital and out of this 25% the borrower needs to bring in 5% as margin.
3. Cash Budget System: By projecting future cash receipts and disbursements, the cash budget enables the
corporate to determine its cash needs. This method shall be followed in Sugar, Tea, Woolen garments industry
and other seasonal industries.
It indicates the overall environment in which the industry is operating. In industry profile various parameters on
which scores have been given. First and foremost all the details of the industry are given i.e. the various sub
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sectors of the industry, updates covering the analysis of the critical issues and recent developments. Details
regarding the industry are given in the following way:
Background consists of >Industry segmentation >Domestic industry size >Industry critical factors like
power/fuel cost, International competitiveness, cyclicality/ seasonality, input or raw material availability and
affordability, global scenario.
Major events in the industry consists of >Mergers and acquisitions >Announcements by industry associations
like FICCI/CCI/ASSOCHEM etc.
Bank experience/ Position on exposure: Over here the list of major borrowers along with their details has to be
mentioned.
The following parameters are looked into for an industry sub sector:
A) Background: This head contains details regarding the background of the sector like inputs used, production
process, quality of finished products and capacity utilization.etc.
B) Assessment under industry risk parameter: This head contains details like
Demand Supply gap:- This head contains details of the gap between demand and supply. It contains
details like the reasons for increasing or decreasing demand ,availability of raw materials, price
scenario, details of capacity utilization etc.
Government Policies:- This head contains details of the various of the Govt. policies implemented like
the increase or reduction in import duty, Govt. protection etc and its effect.
Input related risk:-This head gives us the details regarding the various inputs required and the risk
attached to them like the effect of increase or decrease in their domestic as well as international prices,
consequences of over and under supply.etc
Extent of competition: - this head tells us of the major players operating in the particular industry. It
also tells us about the threats of the new entrants, future scenario, impact of price and profitability.
Through this head a company can get important details which can help the company to divert risk.
Financial risk:- This is a very important section. It contains the key ratios like ROCE, operating profit
margin. It contains sector aggregates like current ratio, DE ratio, net profit margin etc and cost
aggregates like raw material cost. power cost, selling cost etc also through this head we can know about
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the various companies used for calculating the sector aggregates. All these information are taken from
CRIS INFAC.
Then a business risk evaluation is done (out of the total marks of 100).This is divided into two sections namely:
Parent Operating Efficiency: This head contains entity like capacity utilization, management of price volatility,
availability of raw material, integration of operation etc. On all these risk entity certain weight-age is assigned
and remarks are written.
Parent-Market Position: This head contains risk entity like longterm contracts, diversified market, proximity to
markets, financial ability to withstand price competition etc. Again on all these risk entity certain weights age is
assigned and remarks are written.
After a Credit Rating report is generated, the loan proposal is sent for TEV analysis. In TEV analysis the
project report submitted by the borrower is thoroughly studied by the industry manager. The TEV analysis
either done internally by the officers in the bank or it can be done externally also through some hired agency. In
this analysis each and every aspect of the proposal is verified and necessary documents are gathered. In case of
Green-Field or Brown-Field project the representative of the bank personally visits the site of the project and
verifies the details, according to the proposal submitted by the borrower. After going through the above
mentioned process the bank prepares a TEV analysis according to its prescribed format.
I went through a couple of life case file of a few companies, the TEV report of which was done by BANK OF
BARODA. The parameters which are generally looked into by the bank are to carry out a TEV analysis are:
Background: Over here details of the company and its group companies right from its address to its current
and proposed projects are looked into.
Detailed Project Report (DPR): The details of the project along with its constitutions, promoters and the
different phases of the project are looked into in details. Also details like the acceptability of project cost,
technology involved, and implementation schedule, basic assumptions in assessing cost etc. are looked into.
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Others: The details of the company, its management and other group companies are also looked into.
2) The proposed project, promoters, brief history of the company and group companies: This head contains
details like the –
Proposed project: It contains details like installed capacity, the products to be manufactured, the promoters of
the company etc.
Project cost and means of finance: This section contains the cost of the project in details and contains its
various means of finance which is either through share capital or term loan.
The Promoters: This leads every possible detail about the promoters and the directors are provided. Details
like name, age, qualification, experience, etc. are given. Through this information a lot can be known about the
capabilities of the promoters and directors.
Group companies: This head contains the names of the various group companies, their respective date of
incorporation, address, details of existing manufacturing capacity and financial position along with other
relevant details.
Location: This head gives us the details of the exact location of the land. It tells us about the various factors
which were kept in mind before choosing that particular location i.e. availability of raw material, transportation,
infrastructure and ready market. It also gives us the construction details.
3) Technology and Manufacturing process: This head gives us the details of the various technical consultants
with adequate experience adopted by the company in setting up the respective plants as mentioned above. It
gives us the details of both the technical consultants adopted and the plants set up by them. This head the
details of various machineries used along with their production capacities are mentioned. Through this head we
can also know about the various vendors with whom settlements have been made. This head also gives the
details regarding the manufacturing process being used along with the manufacturing capacity. The various
steps taken in manufacturing are also mentioned in this head.
4) Utilities and Service, Pollution Control: This head contains details like:-
Utilities: This head gives us the details of the man power planning which is very essential as it can help to
reduce the cost and time of production. It tells us about the labour requirement and availability. Through this
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head I also get other details like auxiliary facilities, power system, water system, fuel handling system, ash
handling system, compressed air system, dust extraction system, communication, quality control, working
capital requirement etc.
Service, Pollution Control: This head tells whether all the proper permission has been taken from the
competent authority or not. It also tells what steps has been taken by the company to prevent and control
pollution and what steps has been taken to fulfill its social obligations.
Licensing/Registration: There are certain Government rules and regulations which is necessary for every
company has fulfilled its licensing and registration obligations properly.
5) Marketing and Selling Arrangement: For earnings revenue a product should have a market and the
capability that it can be sold in that market. In this head a brief marketing and selling strategy of the company is
given. This head tells us about the company’s distribution network, pricing, promotion etc. which help in
assessing whether the company can earn projected profit or not.
6) Manpower Site Organization: This head contains details of various manpower requirements for various
activities like general, maintenance, operations and others
7) Risk factors and Mitigating factors: This head contains various risk factors which can pose a threat in the
various stages of the activity and it also contains the various mitigating factors or corrective measures which
are used to diverse those risks.
8) Project Implementation Schedule: This head gives us a scheduled and tells us about the timeline of when
the project will start and its completion time. It also shows us the breakup of each activity in between two
dates. It is helpful as it can be known when will actual production start and when inflow of revenue take place.
It gives the details of each and every activity along with its date of commencement and its date of completion.
Project cost: This section contains the cost of the project in details along with the breakup of various cost
factors and their percentage weight-age of the total cost.
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Means of Finance: This head contains the various means of finance used which is either through share capital
or term loan. It also contains details like how much of equity and term loan has been raised along with the
breakup of how it has been raised and the percentage of each.
Sensitivity Analysis: This is another important factor. It is carried out to ascertain the effect of various factors
and the change of those factors on the profitability and consequent debt servicing capacity of the company.
Profitability Projections: This head consists of the financials i.e. Profit and Loss Account and the Balance
Sheet, the important ratios, their assumptions and justifications. It also contains comments on all these
financials which helps in getting a clear picture and understanding of the financials of the company.
10) Raw material and consumables: This head provides the details regarding the raw material required and
the source from which it will be procured along with the rate per unit. It can also be known whether the
company can easily procure raw material from the market and what will be the lead time in procuring it.
11) Common Operating Assumptions: This head contains various details like:-
12) SWOT analysis: The banks generally do a SWOT (strength, weakness, opportunity and threat) analysis to
find out the strong or weak points of the project. Banks highlights the things which are good and also the things
which are a threat for the project. This is done to see future growth prospectus of the project.
13) General Review: This head tells about the important observations and then gives the comments on those
observations. Through this head we can know about the important information like whether there in under or
over capacity utilization, whether the production cost can be reduced or not, whether the price and volume
calculations taken appear to be reasonable or not, whether there was any delay observed in implementation of
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schedule etc. along with their reasons and comments. It tells us the critical areas and gives comments on those
critical areas. It also tells us of the specific issues included in the terms and conditions.
14) Conclusion: This is the concluding part of the report where the senior manager who prepares the report
gives the recommendation and his opinion regarding the project so that the person who sanctions the loan can
take his decision based on this report. This is a very important part of a TEV analysis because based on this
report. This is a very important part of TEV analysis because based on this information the decision of whether
to sanction the loan or not depends
If the TEV study is satisfactory then the project is approved as technically sound and financially viable. Based
on this study any further processing of the sanction of the term loan takes place.
If the credit rating is good and the techno-economic viability report is also favourable then the loan proposal is
sent to the sanctioning officer for the loan to be sanctioned. It is the sanctioning officer who also after some
evaluation finally sanctions the loan amount.
SECTION-V: CREDIT RATING REPORT
Comprehensive Credit Rating Model for rating borrowers enjoying facilities above Rs. 10 crores (except for
trading concerns):
Position in
the Industry
Module 2
Management
Borrower’s Facility
Quality
Financials
Rating
Module 4
Module 3
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Economy
And
Industry
Module 1
Rating Year
Date
Model Name
Company Code
Company’s name
Indystry’s name
Project Industry’s name
A. Borrower Rating:
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Industry Risk
Business Risk
Financial Risk
Management Risk
Facility Rating
% Effective LGD Rating RAROC(%) Combined Rating
Industry Risk
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CHAPTER - IV
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Comparison between Credit Risk Assessment prevalent in different Banks: In the lending operations , the
banks are primarily exposed to credit risk. Credit risk is the risk of loss that may occur from the failure of any
party to abide by the terms and conditions of any financial contract with the banks, principally the failure to
make the required payments on loans due to the bank. Various banks have a structured and standardized credit
approval process, which includes a well established procedure of comprehensive credit appraisal. In this
context the comparison of the credit risk assessment prevalent in different banks (PSB/Pvt banks/ Foreign
Banks) are given below:
Bank of India
The bank’s board had already approved the following credit risk models, developed by ICRA to rationalize the
cost of credit to SME sector by adopting a transparent rating system. The entry level requirements prescribed in
this new model would be applicable:
a) Large Corporate Model (Domestic/ ECBs/Syndicated Loans) (Fund/Nonfund based limits of Rs.500 Lakhs
and above or turnover Rs.5000 lakhs);
b) Mid segment Model (Fund/ Nonfundbased limits of Rs.100 lakhs and above not exceeding Rs.500 lakhs and
turnover below Rs. 5000 Lakhs);
c) SBS/SSI model (Fund/ Nonfund Based limits of Rs.10 lakhs and above but not exceeding Rs.100 lakhs)
scoring model);
The bank had already adopted rating models a & c above.The model for amounts between Rs.1 crore and Rs.5
crore is under the process of rollout.
Allahabad Bank
The rating of account may be done under In-House Module or Rating from outside rating Agencies.
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2 Above Rs.10 lacs upto Rs.1cr As per Credit Risk Management Policy of the Bank
Allahabad Bank has entered into MOU with CRISIL,ONICRA and SMERA, for getting the SME borrowers
rated by them.
Axis Bank
The Board of Directors establishes the parameters for risk appetite, which is defined quantitatively and
qualitatively in accordance with the laid down strategic business plan.This is dovetailed in the process through
a combination of governance structures and credit risk policies, control processes and credit systems embedded
in a Credit Risk Management Framework (CRMF) .The foundation of CRMF rests on the rating tool. The bank
has put in Place the following hierarchical committee structure for credit sanction and review:
➢ Zonal office Credit Committee (ZOCC)
➢ Central Office Credit Committee (COCC)
➢ Committee of Executives (COE)
➢ Senior Management Committee (SME)
➢ Committee of Directors (COD)
The bank has developed different rating models for each segment that has distinct risk characteristics viz. Large
corporate , MSME, small traders, Financial companies, Micro finance institutions ,project finance etc.
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EPS (Rs.)
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Comments:
Every bank more or less is using the credit rating system associated with external credit rating agencies. ICICI
bank divides the responsibility of loan appraisal process among several departments which are more time
consuming but less prone to default. Every bank emphasizes on the financial position of the borrower by
analyzing the quality of its financial statements, its past financial performance , its financial flexibility in terms
of ability to raise capital and its cash flow adequacy, the borrower’s relative market position and operating
efficiency .In comparison with other banks, BOB separately measures the risk factors dividing into different
segments which are highly justified and appropriate.BOB are holding the advance position in earnings per
share other than three banks, that means the market value of BOB share will be high and attractive to the
investors. As BOB’s growth in advances and deposits are good besides with CAR ratio 14.36% that means that
BOB are utilizing the capital most effectively and efficiently in comparison with other banks. The growth in
advances of Axis bank and IDBI bank are good than BOB. There is a huge difference in growth in deposits
between IDBI bank and BOB.Net NPA to Net Advances of BOB are very good in comparison with other banks
.From the annual reports of BOB we can see that this ratio are gradually decreasing that means the BOB NPA
recovery Dept. are performing exceptionally well and from provision coverage ratio we can see that BOB are
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maintaining 74% that means bank’s strategy is not to increase the NPA and not to hamper the financial position
in case NPA happens.
CHAPTER - V
Basel Guidelines
NPA Management
Risk Management
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NPA management: Credit risk management is not NPA management. It is much more than that. NPA
management is largely recovery management. It is a situation when default has already taken place. On the
other hand credit risk management I concerned more with the quality of credit portfolio before default rather
than in the post default situation. Credit risk management mainly consists of:
NPA management is the abbreviated form of management of Non Performing Assets, has become a critical
Performance area for all the public sector banks. Following are the major reasons for borrowal accounting
turning out eventually into non performing assets:
➢ Tardy judicial process > Internal and external diversion of loans funds by the promoters > Time and
cost over runs in project implementation > shortage of raw materials > Power shortage > Change in
Govt. policies like liberalized imports with lesser incidence of customs duties etc > poor recovery of
receivables especially by SSI units with respect to the dues from public sector >Industrial Recession
>Failure of the corporate to raise debt / equity from the market , to support bank debt > Business
failures >Dishonest management
PROVISIONING NORMS:
Sub standard Assets A general provision of 10% on total outstanding should be made
without making any allowance for ECGC and value of security.Any
unsecured portion of sub standard advances will attract additional
International business school, Kolkata
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Risk adjusted Assets- means degree of credit risk expressed as % weightage have been assigned to balance
sheet and off balance sheet items. Value of each asset is to be multiplied with this weighted will produce risk
adjusted value of balance sheet and off balance sheet items.RBI has assigned degree of risk to each of the assets
of the bank. Broadly it is as under:
>Cash and bank balance with RBI 0% >with other banks 20 % >Govt. approved securities 2.5%
>Secured loan to staff 20 % >Housing finance to individual 75% (for outstanding upto Rs. 20 Lacs 50%)
> Capital market exposure 125% > Commercial Real Estate 150%
Follow up of Advances: The followup of advances Is a small activities starting from the date of disbursement
to the date of recovery of last installment/ amount:
The important objectives of follow-up of credit facilities:
1. To ensure proper end use of funds. Funds should be used for the purpose, for which these are given.It should
not be used for any other purpose.
2. To ensure that the operations of the borrower are on expected lines both physically and financially,
3. To test the assumptions of lending .Advances is granted on the basis of projections. All projections depend
on bundle of assumptions. Many of such assumptions can and do wrong .Actual working only shows whether
the assumptions have proved correct or not. Most important are capacity utilization, costs incurred, price level.
Market conditions etc.
4. To ensure that the terms and conditions are satisfied .While sanctioning the advances, bank stipulates certain
conditions to be satisfied, such as restrictions on declaration of dividend, expansion in capacity , or acquisition
of fixed assets, repayment of private borrowings etc.
5. To ensure that the securities offered / charged are and continue to be in order .Physical existence , valuation,
quality turnover etc. are important.
6. to detect whether any danger signals are developing indicating sickness. Many a time warning signals are
thrown up indicating the existence/ emergence of a problem situation. Proper follow up action only can take
care of the situation.
International business school, Kolkata
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7. To see whether there is any change in management structure, reconstitution, death or resignation of a key
person leading to the possible failure of the firm,
8. To examine whether there is any change in the environment affecting the unit, like Govt. policies, Economic
situations, crop failures etc.
9. To evaluate the operations of the borrower in a constructive way and to advise/ devise measures for
correction/ improvement etc. This will require a total study of the operations, results and trends of the
borrower.
10. To formulate future programme / lines of action in the light of the operational results or records.
11. To anticipate problems and reorient plans of action in order to contain such problems effectively. This
requires the banker to take a futureistic view of things and advise the borrower suitably.
Willful Defaulter:
Based on recommendations of working group on willful defaulter RBI has w.e.f. Mar 2002 instructed
as under: The willful Defaulter will broadly cover-
1. A Borrower who is having adequate resources/ cash flow/ net worth to pay out the dues but
deliberately not paying the dues,
2. Siphoning of the funds to the detriment of defaulting unit,
3. Non creation of the assets, disposal or misutilization of assets financed, without the knowledge of the
bank,
4. Misrepresentation or falsification of records,
5. Fraudulent transactions by the borrower,
6. Where companies within the group has been issued guarantee in favour of the defaulting unit and
guarantees are not honoured when invoked , the group will be called willful defaulter,
7. Diversion of the fund to subsidiaries and associate company.This includes routine of fund through
another bank other than lending bankers, deploying fund for creation of other assets.
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1. Banks have been advised to devise one time settlement schemes for resolution of NPAs. As per this scheme ,
for NPA upto Rs. 10 crore the minimum amount that should be recovered should be 100 percent of the
outstanding balance in that account.For NPAs over 10 crore the CMDs of the respective banks should
personally supervise the settlement of NPAs on a case to case basis.
2.Lok Adalats help banks to settle disputes involving accounts in “doubtful “ and ‘ loss’ category with an
outstanding balance of Rs. 5 lakh.
3. Debt Recovery Tribunals (DRTs) were set up under the Recovery of Debts due to Banks and Financial
Institutions Act,1993.DRTs have been empowered to decide on cases of advances of Rs. 10 lakh and above.
4. Corporate Debt Restructuring (CDR) applies to outstanding multiple banking accounts / consortium accounts
of Rs.20 crore and above. Restructuring of debt through financial restructuring, Business restructuring and
operational restructuring.
5. The Govt. enacted SARFAESI Act, 2002 for enforcement of security interest for realisation of dues without
the intervention of courts or tribunals.This act enables to strengthen the creditors right of recovery, , speedy
NPA recovery, bringing down the level of risk in the system and to empower ARCs (Asset Reconstruction
Company) .Benefits of sale of NPAs to ARCs are
> enable banks/ FIs to remove NPAs from the loan books > to enable banks/ FIs to focus on their core
activities >fuster implementation of resolution strategy by ARCs >Reduces expenditure of banks/ FIs on NPA
maintenance.
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has prescribed a set of norms for the capital requirement for the banks in 1988 known as Basel Accord I. These
norms ensure that capital should be adequate to absorb unexpected losses or risks involved. If there is higher
risk ,then it would be needed to backed up with capital and vice versa. All the countries establish their own
guidelines for risk based capital framework known as Capital Adequacy Norms. Capital Adequacy measures
the strength of the bank. Capital Adequacy Ratio is also known as Capital Risk Weighted Assets
Ratio(CRAR) .In India this risk based capital standard came into force in 1992-93.
Basel II is the revised capital accord of Basel I. Basel II accord is a broad spectrum of risk management.
The Basel II is more risk sensitive in capital allocation which not only includes credit risk but the market and
operational risks as well. Banks are capable of applying more risk sensitive methodologies through Basel II
norms. This structure is based on three reinforcing pillars which together are expected to contribute to the
safety and soundness of the financial system which is shown and described below:-
3 PILLARS OF
BASEL II
MINIMUM SUPERVISORY
MARKET
CAPITAL REVIEW
DISCIPLINE
REQUIREMENT PROCESS
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the objective risk characteristics of the rating. A bank’s rating system must have two dimensions. The first must
be oriented to the risk of the borrower default. The second dimension will take into account transaction specific
factors. This requirement may be taken care of by a facility rating which factors in borrower and transaction
characteristics or by an explicit quantifiable LGD rating dimension.
For the purpose, banks will need to estimate facility-specific LGD by capturing data on historical recoveries
effected by them in the various assets that have default. The recoveries will have to be adjusted for all expenses
incurred and discounted to the present value at the time the corporate default. Clarity and consistency in the
implementation of the bank-wide rating system is integral to a bank to relate its credit scores to objective loss
statistics and convince the regulator that its internal rating system is suitable for calculating regulatory capital.
Human judgment is central to the assignment of a rating. Banks, therefore, should design the operating flow of
the process towards promoting accuracy and consistency of ratings, without hindering the exercise of judgment.
While designing the operating framework, banks should include the organizational division of responsibility of
rating the nature of reviews to detect errors and inconsistencies, the location of ultimate authority over rating
assignment, the role of models in the rating process and the specificity of rating definitions. Banks must have a
mechanism of bank testing the rating system and the loss characteristics of their internal ratings. This is
essential to evaluate the accuracy and consistency of the rating criteria, accurately price assets and analyse
profitability and performance of the portfolio, monitor the structure and migration of the loan portfolio and
provide an input to credit risk models and economic capital allocation process. The PD will allow the back
testing of bank’s rating system by comparing the actual default performance of entities in a particular grade to
the rate of default predicted by the bank rating. Back testing against internal data and benchmarking the
performance of the internals ratings system against external rating systems will be a key part of the general
verification process.
There are certain limitations, however, in using such an external mapping. First, would be the significant
difference in the quality and composition of the population of corporate rated by rating agencies and those in a
bank’s portfolio. Second, would be the time lag in which the agencies would be putting out their data on default
probabilities/migration frequencies – with this time lag there is a likelihood that the adverse changes in default
probabilities is factored into the rating system well after a recession in the economy. Third, there would be
potential inconsistencies in mapping a point-in-time rating with a Through-the-cycle rating fourth, statistics
available relate to developed markets and emerging markets and do not reflect representation of varying degree
of economic reforms and globalization.
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Any improved internal risk internal rating system will need to have operational for some time before either the
bank or the regulators can amass data needed to back test the system and gain confidence in it. The Basel paper
on the IRB approach states that bank will be required to collect and store substantial historical data on borrower
default, rating decisions, rating histories, rating migration, information used to assign the ratings, the model that
assigned the ratings, PD histories, key borrower characteristics and facility information. Banks seeking
eligibility for the IRB approach should move to develop and warehouse their own historical loss experience
data. Although data constraints remain a challenge and data collection is costly, many banks have recognized
its importance and have begun projects to build databases of loan characteristics and loss experience. The
internal rating of a bank is not just a tool for judicious selection of credit at business unit level. Thanks to rapid
developments taking place worldwide in a risk management practices, internal ratings are being put to uses that
are more progressive. Internal ratings are used as a basis for economic capital allocation decision at the
portfolio level and the individual asset level. Having allocated this capital and in vie of the average risk of
default assumed by the bank, the bank needs to appropriately price the asset to compensate for the risk through
a risk premium and also generate the required shareholder return on the economic capital at stake. Construction
and validation of a robust internal credit risk rating system is just the first step toward sophisticated credit risk
management. For an ambitious bank, the bank the IRB approach promoted by Basel will form the platform for
the risk management measures that are more sophisticated such as risk based performance measurement.
Drivers of effective credit risk management:
Basel II was highlighted as one of the main drivers in shaping the banks’ approach to credit risk management.
It imposes disciplinary capital charges for procedural errors, limit violations and other operational risks. It also
creates new pressures to ensure that effective credit risk management controls are in place. A leading
investment bank, for example, commented that regulations drive its credit risk management procedures. The
bank is forced to provide more detailed disclosures in its annual reports. These may include
information on its strategies, nature of credit risk in its activities and how credit risk arises in those activities,
as well as information on how it manages credit risk. Basel II will affect a number of key elements in another
European bank, including a more rigorous assessment of the bank’s credit risk appetite, more technical
approach toward its counterparties and better portfolio risk management. Another bank mentioned that the
impact of Basel II is largely dependent on the environment it is regulated under, as it is different for each
region. In one U.S. bank, regulatory pressures raise the status of the risk group, while in another, these
pressures can distract from strategic business projects. While regulatory compliance is indeed a significant
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driver, most banks’ credit risk management aspirations span beyond this. Key players also seek to gain
competitive advantage through effective credit risk management. The objective of best practices in credit risk
management is to provide comprehensive guidance to better address credit risk management. The findings from
Lepus' survey illustrate that credit risk management practices differ among banks, as they are dependent upon
the nature and complexity of an individual bank’s credit activities. Sound practices should generally address the
following areas:
1) Establishing an appropriate credit risk environment.
2) Operating under a sound credit-granting process.
3) Maintaining an appropriate credit administration, measurement and monitoring process.
4) Ensuring adequate controls over credit risk. The feedback from banks demonstrates that centralization,
standardization, consolidation, timeliness, active portfolio management and efficient tools for exposures are the
key best practice in credit risk management. A Tier One American bank is considering having more efficient
tools for “what if” analysis and tools to provide transparency to the business. This is particularly important for
counterparty exposure at a firm wide level. Another U.S. institution is focusing on stress testing, concentration
risk, macro hedges and capital risk market management. Moreover, the firm has consolidated market risk and
credit risk. In 25 percent of the interviewed banks, achieving best practice involves having an active portfolio
management in the lending book along with real-time credit risk management. A leading investment bank
identifies best practice as having good quality data, for example, identifying processes that induce data errors.
Timeliness is another contributing factor. Real-time pre-deal checking, effective credit limits management and
country risk management are key to good credit risk practice at another bank. However, this is largely
dependent on the market the bank is targeting.
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implement various enterprise-wide credit risk strategies including lending policies and also to monitor Bank’s
credit risk management functions on a regular basis. Operational Risk Management Committee (ORMC) has
the responsibility of mitigation of operational risk by creation and maintenance of an explicit operational risk
management process.
Risk management policy: The Bank has Board approved policies and procedures in place to measure, manage
and mitigate various risks that the Bank is exposed to. In order to provide ready reference and guidance to the
various functionaries of the Risk Management System in the Bank, the Bank has in place Asset Liability
Management and Group Risk Policy, Domestic Loan Policy, Mid Office Policy, Off Balance Sheet Exposure
Policy (domestic), Business Continuity Planning Policy, Pillar III Disclosure Policy, Stress Test Policy and
Stress Test Framework, Operational Risk Management Policy, Internal Capital Adequacy Assessment Process
(ICAAP), Credit Risk Mitigation and Collateral Management Policy duly approved by the Board.
In compliance with the Pillar–II guidelines of the Reserve Bank of India under Basel II framework, the Bank
formulated its Policy of Internal Capital Adequacy Assessment Process (ICAAP) to assess internal capital in
relation to various risks the Bank is exposed to. Stress Testing and scenario analysis are used to assess the
financial and management capability of the Bank to continue to operate effectively under exceptional but
plausible conditions. Such conditions may arise from economic, legal, political, environmental and social
International business school, Kolkata
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factors The Bank has a Board approved Stress Testing Policy describing various techniques used to gauge their
potential vulnerability and the Bank’s capacity to sustain such vulnerability. The Bank conducted its ICAAP
tests on semiannual frequency along with stress tests as per the ICAAP Policy of the Bank.
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Comments
In BOB-1 category there is a increasing trend right from the beginning. There is a sharp decline in
BOB-3 category after January,2010.The low risk category have got their highest point after a momentum
growth in January,2010.The outstanding amount in BOB-2 category has also declining trend in 2010.
The outstanding amount of loan in the medium risk category has increased for BOB-4 category
from October 09 to January 2010 and then a sharp decline is noticed. In BOB-5 category there is a sharp
increase from Jan 10 till march,10. BOB-6 category has a slight increase in the exposure.
There has been a lesser amount of exposure in the high risk category.Only BOB-7 has some
negligible amount of outstanding.
B) Comparison between Large Borrower Advances (10 crore and above) of the Kolkata Metro
Region (KMR) with that of the Eastern Zone
Comment: On an average around 92 % of the total large borrower advances in the Eastern Zone are
contributed by the KMR during this period.
C) Comparison between the outstanding credit exposures ( Fund based & Non fund based ).
(Amount in crores)
Credit Rating Outstanding Exposures
31.03.2008 31.03.2009
FB NFB FB NFB
BOB-1 27.52 0.13 99.82 0.28
International business school, Kolkata
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Comments: The analysis shows that the larger borrower accounts are graded mostly between BOB-2 & BOB-
5.( investment grade high safety and investment grade moderate safety).
D) Comparison between the exposures in various segments
The advances or a credit exposure of a bank constitutes a large part of its assets. The following table exhibits
the net advances of Bank of Baroda during 6 months:
Advances
Dates Wholesale SME Others Net Advances % increase in
(Rs. In crore) (Rs. In crore) (Rs.in crore) (Rs. In Crore) Net Advances
31-10-2009 2389.01 551.94 198.31 3139.26 ---
30-11-2009 2563.62 583.62 175.99 3323.23 5.86
31-12-2009 2734.78 611.53 177.03 3523.34 6.02
31-01-2010 2734.78 585.50 292.72 3615.25 2.61
28-02-2010 2550.06 540.61 321.18 3411.85 (5.63)
31-03-2010 2380.17 528.17 161.69 3070.03 (10.02)
Comments
Wholesale sector holds the maximum net advances. The net advances of BoB have increased
till 2009.But then there is a decline. On an average wholesale sector holds 76%, SME holds 18% and other
holds the rest 6% of total net advances.
Limitations:
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1) Less time duration: It is very difficult to get knowledge about such an important and huge domain of banking
sector in two months.
2) Conservativeness: From the bank’s perspective, sometimes it is very difficult to get the data and information
due to the maintenance of the secrecy of the customers profile and Bank itself.
Risk management activities will be more pronounced in future banking because of liberalization, deregulation,
and global integration of financial markets. This would be adding depth and dimension to the banking risks, As
the risks are correlated, exposure to one risk may lead to another risk, therefore management of risks in a
proactive, integrated and efficient manner will be the strength of the successful banks. The forward looking
banks would be in process of placing their MIS for the collection of the data required for the calculation of PD,
LGD and EAD. The banks are expected to have at a minimum PD data for five years and LGD and EAD data
for seven years. Presently most Indian banks do not possess the data .Also the personal skills, the IT
infrastructure and MIS at the banks need to be upgraded substantially if the banks want to migrate to the IRB
approach. Development of MIS, Human Resource,, proper risk based pricing in the increased competition from
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foreign banks and domestic banks, maintaining the Basel II norms and CAR are going to be the future
challenges of the risk management of Indian Banking Industry.
CHAPTER - VI
CASE STUDY
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Case study
M/S XYZ Ltd.
The directors hails from business family and are attached with several business. Sri Keshav Chand Padia and
Sri Bijay Padia are also associated with Jaraikela Lumberman (India) Pvt. Ltd. engaged in similar type of
business and have acquired sufficient experience in the line of manufacturing of plastic containers, PVC pipes
and other plastic products for industrial uses.
The company was originally promoted by Sri Biswanath Kedia and others in the name of M/S Bala Shah
Industries Ltd, which was incorporated on 2nd July, 1997 and the certificate for commencement of business was
obtained on 15th July, ’97. The company was incorporated with the main object to carry on the business as
timber merchant, Shaw mill, Vencer and plywood manufacturer etc. on 9 th Dec ’97, the company purchase land
measuring 1.62 acres (98 kottahs) of P.S. Bhadreswar, Mouza – Bighati, Dist – Hooghly with a total
consideration of Rs. 7.13 lacs. Factory shed was constructed during 98-99 for which 20.13 lacs was invested.
The main objects of the company were changed to carry on the business of manufacturing and dealing all kind
of plastic materials. The name of the company was also subsequently changed to M/S Eastern Polycraft
Industies Ltd. on 13th July ’99.
Under the initiative of the new promoters the company took initiative for setting up of a plastic container
manufacturing unit with a total cost of Rs. 195.38 lacs by availing financial assistance from BOB, Brabourne
Rd. Branch. The company was initially sanctioned a term loan limit of Rs. 134.95 lacs to part finance the cost
of the project. The commercial production was to start from 2000-2001. Though The company installed one
machine as against two originally planned the production could not be started effectively due to defect found in
the moulds. Though several attempts were made to repair the moulds it could not be repaired. As a result the
sales of the company failed to pick-up as projected. The company postponed the idea of purchasing the second
machine, out of the loan of Rs. 134.95 lacs. Sanctioned to the company. They only availed loan upto Rs.
72.33lacs. Rest of the limit was surrendered. Subsequently during 2002-2003 the company purchased new
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moulds. Their product were approved by various major oil and paint companies and their sales started peaking
up. The company there after went for manufacturing of containers with one injection moulding machine in the
year April,2000. The company continuously improve its performance and added additional capacity by way of
purchase of new machines.
The company is regular in repayment of loan installment of bank. Encouraged by success and looking at
increasing demand the company has now decided to go for further expansion of capacity of their concerning
division.
Marketability:
Main users of the products (moulded plastic containers) manufactured by the company are as under:-
Indian oil Corporation Ltd.
Dainippon Inks and chemicals India Ltd.
HPCL
BPCL
IBP Co. Ltd. etc.
Major suppliers of basic raw material (plastic granules and master batch) are as under:-
Haldia Petro Chemical Ltd.
India Petro Chemical Ltd.
Reliance Industries Ltd. etc.
Security Coverage:
Sr.
Particulars of Fixed Security Existing Proposed
No.
Hypothecation of Plant &Machinery of the Company as per
1 373.06 373.06
ABS as on 31.3.13 (WDV)
Fresh addition of Plant & Machinery for the proposed fresh
2 - 490.5
project (Term Loan)
Equitable mortgage of factory, land and building at
3 175.48 175.48
Dobapukur
Addition of proposed factory shed & building as per the
4 - 110.00
fresh project (term loan)
5 Equitable mortgage of 32 units of SDF flats at Uluberia 86.56 86.56
International business school, Kolkata
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a) B/S Data:
Share capital 240.5 241.5 266.5 291.5 291.5
General Reserve - - - - -
Share application money 1.00 25.00 25.00 - -
Accumulated surplus 88.16 101.27 131.8 240.39 398.39
Tangible Networth 329.66 370.77 423.3 531.89 690.45
Term Liabilities 251.01 928.55 784.94 602.71 429.68
Capital Employed 581.67 1299.32 1208.24 1134.6 1120.13
Net Block 572.78 1148.57 977.18 837.91 722.81
Funds invested outside business 24.74 3.74 3.74 3.74 3.74
Current Assets 579.74 983.42 1329.88 1533.76 1705.3
(-) Current Liabilities 596.58 836.42 1102.56 1240.82 1311.73
Net Current Assets (-16.85) 147.00 227.32 292.94 393.57
Capital deployed 580.67 1299.32 1208.24 1134.6 1120.15
b) Operational Data:
Net Sales
1409.2 2554.27 3975.78 4699.72 5110.34
Other operating income
- - - - -
Total Operating income
1409.2 2554.27 3975.78 4699.72 5110.34
Other income
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 83
c) Important Ratio:
Net Profit/Net Sales (%)
PAT/TNW (%) 0.84 0.61 0.69 2.31 3.13
Operating Profit margin 3.57 4.2 6.5 20.42 22.96
Net Profit/ Capital Employed 16.05 15.48 13.77 13.77 13.75
Stock Turnover ratio 2.03 1.20 2.28 9.57 14.16
61 46 43 43 43
Notes: - Manufacturing expenses includes raw material, power and fuel, other manufacturing expenses.
Administration & selling expenses includes sales promotion & publicity, salaries & wages and other
admin expenses.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 84
As seen from the table above, there is no diversion of short term fund for long purposes except during 08-09,
the amount being Rs. 35.78 lacs which is a meager amount considering the scale of operation? Here it may also
be mentioned that the company had purchased machinery worth Rs. 28.39 lacs from own source for which
reimbursement was sought. As the term-loan was sanctioned on 29.4.09, subsequent to which term-loan was
disbursed, there has been a mismatch in the fund flow during 08-09, which has been rectified.
Comments on performance:- Sales: Sales of the company is showing increasing trend. The company has
achieved Gross Sales of Rs. 1649.99 lacs and Net sales of Rs. 1513.20 lacs during the last FY 08-09 against the
earlier estimated gross sales of Rs. 1664.00 lacs and estimated Net sales of Rs. 1532.81 lacs thereby achieving
99.16% of the Gross sales and 98.36% of the Net sales. The variance is negligible and is hence accepted.
During the course the company registered growth in Gross sales by 54.81% and in Net sales by 54.54% against
the previous year (PY)07-08 Sales when the Gross sales of the company was Rs. 1385.85 lacs and Net sales
was Rs. 913.84 lacs. During the Current year (CY) the company has already registered Gross sales of Rs.
1308.25 during the period 1.4.09 to 20.8.09. The company also has orders worth Rs. 3347.36 lacs from various
respected companies as on date, the break-up of which is as under:-
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 85
TOTAL 3347.35
The company gets continuous work order from IOC Ltd., IBP Co. Ltd., HP Corporation. Ltd., etc. The
company has now estimated/ projected gross sales of Rs. 2640.61 lacs / Rs. 4131.20 lacs during 08-09/ 09-10
which seem to be reasonable and acceptable under normal business conditions due to the under mentioned
reasons:-
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 86
Present orders in hand and the continuous orders received by the company from reputed companies, due
to the expertise and product quality of the company.
The company has proposed for expansions / increase in capacities of the existing manufacturing unit
during the year which will increase the production level of the company.
Cost of the raw material / consumables have increased, the cost of which will be passed onto the
customers, thereby increasing the value of the product.
Increase in demand of the product due to improvement in the domestic economy.
The company has also projected Gross sales of Rs. 4859.36 lacs, Rs. 5283.43 lacs & Rs. 5697.05 lacs during
2010-11,11-12,12-13 respectively which seems to be reasonable and acceptable under normal conditions.
Net Profit:
The company had earlier earned NP of Rs. 30.46 lacs during the year 07-08 with NP margin of 4.22% and
operating profit margin of 20.52%. However as per the ABS as on 31.3.08 the NP of the company reduced to
Rs. 10.23 lacs during 07-08 registering Net profit margin of 1.13% & operating profit margin of 18.21%. The
main reason for the reduced profit is explained as increase in the cost of sales, owing to increase in the price of
the raw materials. Besides there was an increase in selling & administration expense and interest paid to bank
expenses.
The company had earlier also estimates NP of Rs. 32.37 lacs during 08-09 but as per ABS as on 31-3-09 the NP
registered by the company is Rs. 13.78 lacs, while recording NP margin of 0.84% and the operating profit
margin of 16.05%. Reduced operating profit is explained by the company is due to procurement of raw
materials by the company on the basis of delivery challans, (credit purchase) during 08-09, but the relevant bills
for which was submitted by the suppliers to the company for payment during the FY 08-09. Reduction in the
NP margin during 08-09 is due to increase in the selling & administration expenses (main components being –
trading expenses, truck expenses & discount allowed to customers) and interest paid to bank on account of
increase in bank exposure obtained for the expansion project of the company. In continuation of the above
trend the company has estimated as conservative NP for the FY 08-09 at Rs. 15.57 lacs while working out the
operating profit margin at 15.48% and NP margin at 0.61% which is acceptable. The company has projected
NP of Rs.27.53 lacs, Rs. 108.59 lacs, Rs. 158.56 lacs & Rs. 206.92 lacs for the FYs 08-09, 09-10, 10-11, and
11-12 respectively. T he operating profit margin for the future projection works out in the range of 13 – 14%
while the NP margin has been projected to increase ranging from 2.31% to 4.78% mainly due to stable increase
in the selling & administration expenses, while the bank interested has been projected to reduce on a/c of
repayment of the term loans availed/ to be availed which seems to be reasonable and is acceptable.
Net worth
The NW of the co has increased gradually due to plough bach of profit into the business as well as due to fresh
introduction of equity. The tangible network of the company as per ABS as on 31.08.09 has increased to Rs
329.66 has as against Rs 272.27 lacs as on 31.3.08 mainly due to fresh introduction of equity of Rs 49.00 lacs.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 87
The TWW of the Co. has been estimated at Rs 370.77 Lacs for the current financial year 09 – 10 due to further
introduction of capital.
(figs. in lacs)
Increase/Decrease in - - - - -
share premium
Increase/Decrease in - - - - -
deferred tax liability
Closing TNW 329.66 370.77 423.3 531.89 690.45
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 88
Ratios
Current Ratio
CR of the Company as on 31.3.09 reduced to 0.97 from 1.04 as on 31.03.08 mainly due to increase in short
term bank borrowings, of the term loan installment liabilities are not considered as part of current liabilities
then the CR daily 08 -09 and 09- 10 works out to 1.16 and 1.03 respectively.
The Company has estimated CR of 1.18 during the current year 09- 10. Here again if the term loan installment
liabilities are not considered as part of CL then the CR works out to 1.33 which is acceptable.
The Company being a medium enterprise as per circular no – Bcc/ BR / 2005 of SME policy, CR of 1.20 is
acceptable, CR for the future projection have been worked out above the benchmark level and the same is
acceptable.
TTL / TNW of the company as on 31.3.09 is 0.76 which is estimated to increase to 2.5 as on 31.03.09 on a/c
of increase in term loan expense availed/ to be availed from the bank, but the same is within the acceptable
benchmark level. TTl/ TNW in the future preparation is projected to improve gradually due to repayment of the
term loan installment.
Similarly, TOL / TNW of the company, was 2.57 as on 31.3.09 which is estimated to increase to 4.76 on a/c of
increase in bank exposer TOL/ TNW in the future preparation has been projected to increase due to repayment
of the term loan installments.
Last assessment on what sales and for which year proposed: Last assessed based on projected sales of
Rs.1715.62 lacs for the FY 2009-10.
Whether company has achieved last accepted sales, if not, reasons: The Financial Year 09-10 is not yet
over and hence achievement of the projected sales does not arise. However the company’s total earnings
for the year 2008-09 as per ABS as on 31.3.09 is Rs 1469.99 lacs against the earlier estimated revenue
of Rs.1428.02 lacs.
Net sales / Export achieved up to the date of assessment / half yearly / quarterly sales: Company has
achieved sales of Rs. 1007.25 lacs during the current financial year from 1.4.09 to 20.8.09.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 89
Justification for Working capital: As per guidelines, working capital limit has been worked out on the
basis of 1st method lending as well as turnover method as per table given here under –
(figs. in lacs)
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 90
The company has requested for review of cash credit limit at the existing level of Rs.360.00 lacs for the FY 2010-11
which is justified under 1ST method of lending as well as Turnover method and the same is proposed for sanction.
Comments on inventory holding/creditors/debtors level/ reasons for accepting large variance in inventory/creditors/
debtors level.
(figs in days)
The inventory holding during 08-09 increased to 61 days from 52 days during 07-08. It has however been explained by
the company that the increase in holding level is due to increase in the cost of raw materials (plastic granules) towards the
end of FY 08-09 and not on account of holding of higher level of inventory. However the holding level is at acceptable
level. The company has estimated/projected the holding level in the range of 42-46 days which is reasonable and
acceptable.
The main customers of the company are the Navaratna PSU oil companies and other big reputed companies. It has been
observed in the past that payment for the same is received within 2-3 months of sales. However the holding level of the
company improved from 83 days during 2007-08 to 60 days during 08 -09. The debtors level has been estimated at 76
days for the current year 09-10 and projected to stabilize at 61 days in the future which is reasonable and acceptable.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 91
Major portions of the company’s creditors are the creditors under Letter of Credit. The creditor’s level of the company
has increased from 42 days during 07-08 to 48 days during 08-09 due to increase in letter of credit exposure the creditors
level has been further estimated/projected to increase and stabilize in range of 56-57 days on account of the letter of
credit exposure , but the same is reasonable and adaptable
Term loan:
Demand for the company’s product is encouraging. In order to the situation in the company has envisaged carrying out
expansion of its production capacity. The company has therefore approached the bank to part finance the cost of the
expansion of the project.
The total cost of the expansion project has been estimated at Rs 623.00lacs by the company. The company has requested
for fresh term loan of Rs 490.5lacs to part finance the proposed expansion project whereas the promoter’s contribution
will be 25% of the total project cost. The breakup of the cost of the project and mean of finance is given hereunder.
Total cost of the expansion as per the project report submitted by the company will be as under:
Total 623.00
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 92
As requested by the company we have recommend for waiving of TEV study as it is only an expansion project and the
company is in this line of activity since long and is also having satisfactory dealing with BOB.
1) Factory shed & Building – The said cost has been estimated based on the offer for civil construction work from M/S
ABC Commerce & Construction Company Pvt. Ltd., as ISO 9001:2000 certified company having its office at 5A, Orient
Row, Kolkata-700017, vide their offer letter No. AMCON/CIVIL/SG-131/513 dated 4.6.09. The breakup of the civil
construction cost is as under:-
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 93
TOTAL 10906395
2) 6 new SDF Flats: The Company has now been further offered 6 nos. of SDF buildings by WBIIDC based on the merit
of the project. The SDF flats are adjacent to the recently acquired 32 SDF flats at Uluberia Growth Centre. The Company
has informed that the said buildings will initially be acquired by the Company from own sources and thereafter sanctions
of the Term loan, the Company will seek for reimbursement of the same. The cost of each flat has been informed to be
3.75 lacs each as per the project report.
Based on the above information and the project report submitted by the company, Debt Service Coverage Ratio (DSCR)
has been calculated as under:-
The DSCR of the company as a whole has been worked out as under:
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 94
As per Domestic Loan Policy Guidelines 2008. Average DSCR of – with a minimum DSCR of 1.25
in any given year is acceptable.
SENSITIVITY ANALYSIS:
Based on various situations sensitivity analysis has been carried out, the summary of which is as per chart given
below:-
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 95
The above sensitivity analysis shows that the operations of the company are satisfactory and is not very susceptible to the
various scenarios we can see from the above table that all parameters of project are comfortable enough to withstand
adverse variations even in critical situation. Moreover, the company is dealing in supply of its product to public sector oil
companies so chances of drop in sale price more than 2% is a remote possibility.
Bank Guaranties – Bank Guaranties are required by the company for uninterrupted supply of module plastic containers to
IOCL, HPCL, and in lieu of security deposit to be submitted favouring WBSEB. All these guarantees are performance in
nature. The present outstanding balance in the BG Limit is Rs. 40.29 lacs.
Normally, Bank Guarantees issued on behalf of the company have not been invoked in the past except for the instance the
3 BGs aggregating Rs. 8.37 lacs were invoked by BSNL during 05-06 due to non-execution of supply orders of polythene
pipes as there was some dispute over specification and cost of materials. However, the same was adjusted in full through
the cash credit account of the company and hence no crystallization for the same was made.
The company has now requested for review with increase of the BG Limit from Rs.50 to Rs. 60 lacs at 25%. We propose
increase in the BG Limit from Rs.50.00 lacs to Rs. 60.00 lacs at 25% margin as the company has not any further
collaterals for the increase in exposure. Assessment of the BG Limit is as under: -
(figs. in lacs)
Particulars Amount
(Rs.)
Present outstanding BGs 40.29
Less: Amount of BG to expire during the next 12 months 15.00
Sub total 25.29
Add: Estimated requirement of BGs during the next 12 months for 20.00
participation in various tenders.
Add: Estimated requirement of BGs for submitting to WBSEDCL in lieu 15.00
of the security deposit.
Estimated requirement of BG Limit for the next 12 months 60.29
Say, (whole figure) 60.00
BG Limit requested by the company 60.00
BG Limit recommended for sanction. 60.00
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 96
Considering the turnover projected by the company, the above assessed BG Limit is justified.
Letter of credit facility is required by the company for procurement of raw material. Raw material is procured by the
company from the domestic as well as the international market as per requirement. The company is presently enjoying
inland / imports LC Limit of Rs. 50.00 lacs present outstanding of which is Rs. 48.96 lacs as on date. Cash margin for the
said facility has been reduced from 25% to 10% by the GM(EZ) as per modification proposal dated 2.7.09.
The company has also been sanction Ad-Hoc inland / Import LC Limit of Rs. 64.00 lacs at a cash margin of Rs.64.00 lacs
at a cash margin of 10% by the DGM (KMR) on 3.7.09 for 3 months due to increase in the cost of plastic granules and
basic raw materials. Ad-Hoc limit was also required due to short supply of the raw materials, while there are huge work
orders received for which sufficient raw materials holdings is required. The o/s Balance of the Ad-Hoc inland / import LC
Limit is Rs. 66.43 lacs as on date, (excess of Rs. 1.43 lacs has been opened against 100% cash margin).
Due to regular expansion measures adopted by the company owing to increased demand of the product, the company
envisages enhanced requirement of raw materials procurement under LC. The company has therefore requested for
increase in the regular LC Limit from the existing level of Rs. 50.00 lacs to Rs. 325.00 lacs. On sanction of the regular
LC Limit of Rs.325.00 lacs the Ad-Hoc LC Limit of Rs.64.00 lacs is proposed to be regularized and the o/s balance of the
same will form part of the proposal enhanced regular LC Limit of Rs. 325.00 lacs.
Out f the total raw material procured by the company, 85% of the raw material procurement is made under LC. Based on
the above estimations / projections submitted by the company LC Limit has been assumed as under:-
(Figs. in lacs)
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 97
SWOT Analysis:
Strength:
Weakness:
1) Low margin of profit but the same is proposed to improve due to the proposed expansion profit.
2) The price of basic raw materials i.e. HDPE granules is subject to fluctuating being a petro product but
the same is at a manageable level.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 98
Opportunities:
1) With the opening of economy and privatization of Government sector oil companies; there is vast scope
of increase of demand of companies’ product.
Threat:
1) Competition from other manufactures which can be managed by the company due to its expertise in the
field, reputation built in the market and the standing of the promoter in the market.
CHAPTER - VII
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 99
The net large borrower advances of Bank of Baroda in the Eastern Zone have increased over the period.
The advances include loans to wholesale sector, SME sector and others. The SME lending has a
declining trend.
More than 63% of the funds allocated to the large borrower advances have been given to medium risk
category of borrowers (especially BOB-5).Fund based exposures are high. Approximately 34% of the
funds have been provided to the low risk category of borrowers.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 100
Study reveals that the KMR alone accounts for more than 88% of the large borrower advances in the
Eastern Zone.
Efforts were also made to improve the speed of decision making. The average turnaround time for
sanction of a proposal was reduced considerably to less than 30 days during FY10 as against 45 days
during FY09. With the continued thrust on faster delivery through efficient channels and adoption of
better practices in credit administration, the Bank plans to reduce the turnaround time in according a
sanction further to less than 20-25 days. The number of Fast-track proposals sanctioned during FY10
was 230 amounting to Rs 32,933.23 crore compared to 122 amounting to Rs 16,525.99 crore last year.
The strengthening of fast track clearance of large credit helped in brining qualitative change in the
credit dispensation.
The internal rating methodology of the bank reliable and it is reviewed from time to time. While
following the internal rating process, the bank also considers the rating given by the other professional
rating agencies whenever possible in order to avoid risk.
LIMITATION
Making the credit rating comparison is not possible with its competitors, the major players like HDFC
Bank, IDBI Bank, Axis Bank, ICICI Bank, Nationalized Banks like SBI, Bank of India, and Allahabad Bank
etc. are taken into consideration, because of inadequate data. These financial institutions have been selected
because these are the major players in today’s market. An analysis with these players will help to know better
the reason why they are standing at front or at back Bank of Baroda.
Recommendations/ suggestions
The other two regions except KMR are not properly explored by the bank. Therefore the strategy for the
bank should be more and more financial inclusion in those unexplored parts of the region.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 101
Some of the parameters under the head Industry risk and Business risk are compulsory and some are
optional. These affect the overall rating of any company. If the credit rating are intentionally or
neglectfully done, some good company will be deprived of good rating as well as good facility and
some company are upgraded wrongly. So, this optional rating parameters should be omitted/ avoided to
rectify the errors.
For any International Company and export-import based company the rating procedure or system
should be different from domestic ones, any international credit rating system should be adopted taking
into consideration the international factors.
SME sectors should be priorities. The SMEs sector is considered to be an untapped market for financial
institutions in India. We just need to combat certain obstacles.
NPA in Commercial Banks have gone up to an alarming level, most of it caused due to restructuring of
loans to the Real estate and Textile sector. CRISIL just came up with a paid rating service for real
estate projects. The key objective of CRISIL real estate star rating is to empower consumers. They will
also fill a gap by providing credible verified information on projects. CRISIL Star rating is an attempt
to empower consumers in their investment decisions. Consequently, quality projects and developers
will be able to differentiate themselves more efficiently. This will leads to branding in real estate
industry. If Bank of Baroda adopts some special credit rating system for these two sectors, then NPA
can be minimized.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 102
CHAPTER VIII
CONCLUSION
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 103
Conclusion:
Credit risk is the biggest risk which a bank faces and can arise through many facets of banking operations.
Credit risk management has acquired a greater significance in the recent past for various reasons. Topmost
among them is the financial liberalization across the globe and on-going economic reforms, which has changed
the complexion of the markets. The post liberalization years have put significant pressure on banks in India
with many banks showing signs of distress, only reason is lack of effective credit risk management systems.
With increase in new segments of risks, the need is felt for credit risk management techniques with more
sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposure.
The guidance note issued by the RBI is a comprehensive document in which the RBI has identified further
steps which are required to be taken by banks for upgrading their risk management systems. The systems,
procedures and tools prescribed in the guidance note are, therefore, only indicative in nature and risk
management systems in banks should be adaptable to changes in business size, the market dynamics and the
introduction of innovative products by banks in future.
As per the views expressed in the note, with the adoption of new Accord, banks will require substantial up
gradation of the existing credit risk management systems and to adopt suitable credit risk / risk rating models to
meet the requirement of credit risk management and risk based pricing. While selecting or developing the
model the prevailing conditions end commonly acceptable framework for the banking system as a whole need
to be kept in view. As lack of availability of proper MIS/representative data is one of the main problems,
suitable models for collection and analysis of data will also have to be developed. Banks may adopt any model
depending on their size, complexity, risk bearing capacity and risk appetite etc. which should, at least, achieve
the following:
Result in differentiating the degree of credit risk in different credit exposures of a bank;
Identify concentrations in a portfolio;
Identify problem credits before they become NPAs;
Identify adequacy/inadequacy of loan provisions;
Help in pricing of credit.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 104
Bibliography
1) Annual Report of Bank of Baroda,
2) Internal Circulars of Bank of Baroda
3) RBI guidelines note-credit risk
4) Risk management in Banks: Role of rating agencies
Websites
1) www.bankofbaroda.com
2) www.icai.com
3) www.creditriskmeasurement.com
4) www.crisil.com
5) www.rbi.org.in
6) Different pdf files
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 105
ANNEXURE-I
ANNEXURE II
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 106
ANNEXURE-III
A) Borrowers /obligors eligible for rating under LCM, Banks, NBFCs, Broker Models, infrastructure project
under operations phase and expansion / diversification projects in case of existing companies
Broker model
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 107
B) Borrowers / obligors eligible for rating under SME (Manufacturing)/ SME (Services) and Trader Models in
case of existing companies:
C) Project Borrowers / Obligors eligible for rating under Infrastructure (Build phase) / and Green Field projects
(LCM/ SME):
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 108
ANNEXURE IV
APPRAISAL NOTE TO DEPUTY GM, BOB KOLKATA METRO REGION
Branch
Region
Zone
1.2) Increase/ decrease in fund based and non fund based limits:
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 109
Date
Authority
Due Date of Review
2) Basic Data
Asset Classification
Bank’s credit Rating
External Credit Rating
Constitution
Date of establishment
Location (Registered office)
Factory
Group
Industry and nature of Activity
Exposure to industry
a) Sectoral Cap for industry
b) Bank’s exposure
c) zone’s exposure
d) NPA(bank)/(Zone)
Collaboration/Joint venture if any
Dealing with the bank since
MPBF
Our bank’s share
Rate of interest
a) working capital limits
Term loan
Security available Primary:
Collateral:
Additional:
Average drawings during the year
a) term loan
b)working capital
Yield in the account
Major inspection irregularities
Internal audit
Concurrent audit
Statutory audit
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 110
Credit audit
Auditors of the company
Qualification remarks of the auditors as on
Pollution clearance
Whether statutory dues have been paid
Whether names of the company / associates or
Directors appear in RBI’s defaulter’s list/caution list
Whether company/ firm/ promoters and associates
on ECGC caution list/ special approvals list
Compliance for earlier sanctioned terms
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 111
A)1.a.Indian Promoters
b.Foreign Promoters
Sub total
B) FIs/Banks/MFs
C) Public
D) Others
TOTAL
Term finance:
F.B.
N.F.B.
Inland/Import L/CS
DA/DP
Inland/Foreign guarantees
(performance/Financial)
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 112
TOTAL EXPOSURE
Interest on credit
facilities(WC/TL)
Bill purchased
Note:
3.3) Concession:
3.4)Confirmation:
Primary
Collateral
Additional
Note:
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 113
8.0) Justification:
ANNEXURE V :
FINANCIAL PARAMETERS AND ASSESSMENT
1.0) Financial performance:-
c) snap shot of balance sheet for the last 2 years and estimate/projections for next 2 years
d) Operational data
(Rs. In lacs)
Particulars 2009-10 2010-11 2011-12 2012-13 2013-14
a)balance sheet/ Capital Structure Projected Projected Projected Projected Projected
Paid up capital
c.Equity Share capital
d.Preference share capital
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 114
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 115
Sales/Receipts:
Profits:
Net worth:
Ratios:
Balance Sheet:
Comments on inventory holding/ creditors/debtor’s level/reasons for accepting large variance n inventory/
creditors/ debtors level
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 116
• Term loan requirements: (in case of term loan mention name of the project appraisal agency)
(projected and cash flow as per annexure)
• D.P.Guarantee:
• B.D.(IDBI) limits:
• Cost and means of finance-whether appraisal done by any financial Institution/ our project Finance
Dept. whether full tie up is made. A) Proposal B)Project/Purpose:
Project cost:
S NO. Particulars Total Cost
Total
DSCR calculation:
Particulars Year1 Year2 Year3 Year4 Year5
Cash Accurals
Interest payable of term loan
Term loan repayment
DSCR
Average DSCR
Letter of credit
Doc.LC (inland/Foreign) -----Sight /DA (days)
----- For Capital Goods
----- For raw materials
Note:
Calculation of LC requirement to be given taking into account consumption of raw materials – imported /
indigenous- lead period- credit available et.
3.3) Any other matter which in the opinion of branch / zone is important to decide the proposal:
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 117
CMA Format
SME INPUT
Value in lacs
BASIC INFORMATION
Please Enter Data in Blue Coloured Cell
Last year of audited/ provisional 2007
results
Company Code
Name of the company
Industry (as per ASCROM Other industry
classification)
Currency INR
Auditors
2005 2006 2007 2008 2009
Year ended (DD-Mon-YYYY) 31.03.2005 31.03.2006 31.03.2007 31.03.2008 31.03.2009
No. of Months 12 12 12 12
Exchange Rate
Cost of sales
Raw materials consumed
i) imported 0.00 0.00 0.00 0.00 0.00
ii) Indigenous 0.00 0.00 0.00 0.00 0.00
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 118
Depreciation 0.00
Sub total 0.00 0.00 0.00 0.00 0.00
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 119
Dividend Paid
On Equity Capital
On Preference Sh.Capital
Dividend Tax
Partner’s withdrawal
Dividend(%)
Retained Profit
Cash Accruals
Provisions
-Tax
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 120
-Others
Dividend payable
Term Liabilities
0.00 0.00 0.00 0.00 0.00
Debentures 0.00 0.00 0.00 0.00 0.00
Preference share capital 0.00 0.00 0.00 0.00 0.00
Dealer’s Deposit 0.00 0.00 0.00 0.00 0.00
Deferred tax liability 0.00 0.00 0.00 0.00 0.00
Term loans- from Banks 0.00 0.00 0.00 0.00 0.00
Term Loans- from FIs 0.00 0.00 0.00 0.00 0.00
Term Deposits 0.00 0.00 0.00 0.00 0.00
Borrowings from subsidiaries 0.00 0.00 0.00 0.00 0.00
/Affiliiates (Quasi Equity)
Unsecured Loans (Quasi Equity) 0.00 0.00 0.00 0.00 0.00
NET WORTH
Equity share capital
Share capital (Paid up) 0.00 0.00 0.00 0.00 0.00
Share Application (finalized for 0.00 0.00 0.00 .0.00 0.00
allotment)
Sub Total (share capital) 0.00 0.00 0.00 0.00 0.00
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 121
CURRENT ASSETS
Investments
Govt. and other trustee securities 0.00 0.00 0.00 0.00 0.00
Fixed Deposits with Banks 0.00 0.00 0.00 0.00 0.00
others 0.00 0.00 0.00 0.00 0.00
Receivables
Receivables other than Deferred & 0.00 0.00 0.00 0.00 0.00
exports (Domestic)
Export Receivables 0.00 0.00 0.00 0.00 0.00
Note:
1.All receivables upto 180 days
only to be included.
2.Sale bills negotiated underLC to
be excluded.
Deferred receivable (due within one 0.00 0.00 0.00 0.00 0.00
year)
Inventory
Raw materials -imported
Raw materials –Indigenous
Work in process
Finished goods (incl Traded
Goods)
Other consumable spares-Imported 0.00 0.00 0.00 0.00 0.00
Other consumable spares- 0.00 0.00 0.00 0.00 0.00
indigenous
Sub total (inventory) 0.00 0.00 0.00 0.00 0.00
FIXED ASSETS
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 122
ADDITIONAL INFORMATION
Arrears of depreciation
International business school, Kolkata
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 123
CONTINGENT LIABILITIES
Arrears of cumulative Dividends
Guarantees issued(relating to
business)/(for group companies)
Graturity liability not provided for
Disputed excise/ customs/ tax liability
LCs
All other contingent liabilities (incld.
Bills purchased – under LC)
Installments of term loans/Deferred
payment credits/Debentures/deposits
(due within one year)
Preference share capital (due in less
than a year)
ANNEXURE-VI
1.For the illustrative purpose , a complete set of parameters which are to be scored under different modules
for large corporate model (LCM) listed as under.However, during the rating process only selected parameters-
depending upon the industry characteristic would appear for scoring.
2. For other models SME (Mfg), SME (Services), Trader ,Banks,NBFCs Infrastructure projects etc separate
set of parameters are to be scored and the same are available in details at the relevant model descriptions
uploaded at the risk management page of our bank’s internet:
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 124
ROCE
PAT/ Net sales
Total Outside Liabilities/ Total Net worth
Net Cash Accruals / Total Debt
Current Ratio
Past Financials Accounting Quality
Interest Coverage
DSCR
Net worth
Contingent Liabilities
Management of foreign exchange and fund reputation risk
Interest Coverage
PAT/ Net sales
Net cash Accruals / Total debt
Total Outside liabilities / Total Networth
Future Financials ROCE
DSCR
Effectiveness of projection
Current Ratio
Net Worth
Financial Flexibility
Ability to raise Debt Ability to raise debt from Banks / Financial Institutions
Ability to raise debt from Market
Ability to raise Equity Ability to raise equity from own source
Ability to raise equity from Capital Market
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 125
MODULE - III
FINANCIAL RISK
1. Upload the basic input CMA data sheets / templates provided duly approved by the credit officer / branch Manager.
2. The following financial rations are calculated automatically and the final Financial Risk score for the company is
computed and gets integrated with the final Rating.
Financial Risk is evaluated through a combination of the following ratios (both past & projected):
Interest Coverage
Return on Capital Employed
PAT / Net Sales
DSCR
Total Debt /Tangible Net worth
Net cash accruals / Total debt
Current Ratio
Net worth
Accounting Quality – Past Financials
Effectiveness of Projections – Future Financials
1. Interest Coverage
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 126
This ratio calculates the coverage for interest payable by the company from the cash generated from the operations. The
unit for measurement of this ratio is times.
Interest Coverage = Profit before interest, depreciation and tax (PBDIT) / (Interest and Finance Charges)
Score 1 2 3 4 5 6 7 8
• Where capital employed = (Capital + Reserves + Short term debt + Long term debt +Deferred Tax Liability–
Intangible Assets – Deferred Tax Asset - Miscellaneous Expenditure not written off- Accumulated Losses-
Revaluation reserves – Capital work in progress)
• ROCE is scored as a weighted average of the least three years.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 127
Score 1 2 3 4 5 6 7 8
The ratio is defined as PAT after Extraordinary & Prior period items / Net sales
Score 1 2 3 4 5 6 7 8
It is imperative to ascertain the safety of the debt facility or loan quantitatively in terms of the coverage of profits or cash
flows for debt obligations like interest and debt repayment. Traditionally, the safety of debt facilities has been assessed
on the basis of profitability, in terms of coverage of interest and debt repayments by the profits earned by the business.
But this method does not capture the ability of the business to generate adequate or more than adequate cash flows for
coverage of debt obligations. This means that though a business may be making adequate or more than adequate profits
for debt coverage, the business may not be generating enough cash for servicing debt obligations. Such situations may
arise when the working capital management of the business is not strong, or when a substantial amount of cash gets tied
up in current assets. Therefore, to conservatively assess a business’s ability to meet debt obligations, cash flows
generated from operations should be used instead of profits earned from the business. The cash flows generated from
operations should not take into account inflows like non-operating income or extra-ordinary income or expenditure
because such inflows are non-recurring in nature
DSCR = (PAT after extraordinary & prior period items + depreciation + interest)/(interest + Current portion of long term
debt)
(DSCR is taken only for the latest year)
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 128
Score 1 2 3 4 5 6 7 8
TOL / TNW = (Long term debt + Short term debt + Other current liabilities) / (Equity Capital + Preference Capital > 12
yrs + Share premium + Revaluation Reserves + General Reserves + Other Reserves & surplus - Intangible Assets -
Revaluation reserves)
Total Debt Less 0.54 to 0.98 to 1.22 to 1.91 to 2.90 to 5.00 to Above
/ Tangible than 0.98 1.22 1.91 2.90 5.00 10.00 10.00
Net worth 0.54
Score 8 7 6 5 4 3 2 1
(PAT after Extraordinary & Prior period items + Depreciation + Pre expenses w/off - equity dividend - preference
dividend)/ (Short Term Debt + Long Term Debt)
Net cash Less 0.04 to 0.06 to 0.07 to 0.09 to 0.11 to 0.26 to Above
accruals / than 0.06 0.07 0.09 0.11 0.26 0.47 0.47
Total debt 0.04
Score 1 2 3 4 5 6 7 8
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 129
5. Current Ratio
The current ratio is an important measure of liquidity as it measures a borrower’s ability to meet short-term obligations.
It compares short-term obligations (or current liabilities) to short term (or current resources) available to meet these
obligations. A lot of insight can be obtained about the immediate cash solvency of the borrower and the borrower’s
ability to remain solvent in the event of adversity, by measuring the current ratio. Current assets mainly comprise
inventories, receivables (also called debtors) and other items like cash and bank balances, loans and advances to other
organisations / borrower’s affiliates etc. Current liabilities mainly comprise bank borrowings, payables (or creditors) and
other liabilities like security deposits; payments accrued to government agencies etc.
Generally, a high current ratio indicates a high level of liquidity for the borrower. Banks in India have fixed a benchmark
of 1.33 times for an indicative current ratio, based on the Tandon Committee Recommendations.
Current Ratio = (Total Current Assets - Debtors > 6 months – Loans & Advances to group concerns) / (Total Current
Liabilities & Provisions + Preference Capital payable in the next year + Secured & Unsecured loans payable in the next
year)
Score 1 2 3 4 5 6 7 8
6. Net worth
Net worth = Equity Capital + Preference Capital > 12 yrs + Share premium + Revaluation Reserves + General
Reserves + Other Reserves & surplus - Intangible Assets - Revaluation reserves.
Net Worth Less 150 to 300 to 450 to 700 to 900 to 2020 to >13410
than 150 300 450 700 900 2020 13410
Score 1 2 3 4 5 6 7 8
7. Accounting Quality
Accounting Quality measures the quality of financial statements. Poor financial accounting practices will result in
inflated results.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 130
Marks Attributes
10 Subjected to very high forex risk, which is not hedged. There is no focus on
hedging the risk.
8 Subject to significant forex risks that might be unhedged.
4 Subjected to some forex risks but hedging used to mitigate any substantial
effects.
2 Not subjected to any significant forex risks. Hedging issued to protect from
risks related to forex fluctuations.
0 Not subjected to any forex risk. Any such risks are totally hedged.
Bank of Baroda
ASSESSMENT OF SEGMENTED RISKS AND CREDIT WORTHINESS UNDER BOBRAM MODEL. (BOB,
KOLKATA DOMAIN) 131
FINANCIAL FLEXIBILITY
Financial Flexibility attempts to evaluate the ability of a company to comfortably raise funds to meet its future
requirements (both planned as well as unplanned). The company is evaluated on the basis of its ability to raise the
required funds either via debt or via equity route. The qualitative parameters considered are:
Bank of Baroda