Summer Internship Project
To Study Credit Appraisal/Analysis
(A Project with Bank Of Maharashtra)
Submitted in partial fulfillment of the requirements for
Master Of Management Studies (MMS)
Academic Year: 2015
Pratik R. Parulekar
Roll No. 96
MMS II, Batch: 2014-16
Chetana’s R. K. Institute of Management and Research,
Bandra (E), Mumbai 400 051
I hereby declare that this report submitted in partial fulfillment of the requirement of the
award for the Master of Management Studies to Chetana’s R.K. Institute of Management
and Research, is my original work and not submitted for award of any degree or diploma
fellowship or for similar titles or prizes.
I further certify that I have no objection and grant the rights to Chetana’s Institute of
Management and Research to publish any chapter/ project if they deem fit in
Journals/Magazines and newspapers etc. without my permission.
Place : Mumbai
Name : Pratik R. Parulekar
Class : M.M.S. B; Sem. – II
Roll No. : 96
This is to certify that the project submitted in partial fulfillment for the award of Master Of
Management Studies at Chetana’s R.K. Institute of Management and Research is a result of
the bonafide research work carried out by Mr. Pratik R Parulekar under my supervision and
guidance, no part of this report has been submitted for award of any other degree,
diploma, fellowship or other similar titles or prizes. The work has also not been published in
Dr. Jayashree Bhakay Project Guide : Prof. Amit Kamkhalia
C R K I M R
I take this opportunity to express my sincere gratitude to my project mentor Mr. Krishnan S
(Chief Manager, Overseas Branch) at Bank Of Maharashtra for his constant guidance,
support and enlightenment during the entire internship. My interaction with Shahapurkar
sir made my presence at Bank of Maharashtra a very learning venture.
I am very much thankful to Mr. Amit Kamkhalia for engrossing me with the knowledge of
end-to-end credit appraisal process and consistently motivating me for taking complex live
Special thanks to the staff of Bank of Maharashtra with whom I got familiarized in small
span of time and the staff assisted me in carrying out entire project successfully.
Sincere thanks to Ms Madhumita Patil and Dr Jayashree Bhakay, C.E.O. and Director
Signature of the Student
Pratik R. Parulekar
TABLE OF CONTENTS
CHAPTER 1 EXECUTIVE SUMMARY 01
CHAPTER 2 INTRODUCTION 02-07
2.1 Introduction to the Subject 02
2.2 Introduction to the Industry 03
2.3 Introduction to the Company 04
2.4 Introduction to the Project 07
CHAPTER 3 STUDY/PROJECT DETAILS 08-13
3.1 Objective of the Project/Study 08
3.2 Library Reference / Literature Review 09
3.2 Study Methodology 12
3.3 Study Limitations 13
CHAPTER 4 ANALYSIS & FINDINGS 14-38
4.1 Overseas Branch 14
4.2 Bank Credit policy 15
4.3 International Trade Finance 16
4.4 Credit Risk Management 17
4.5 Credit Appraisal process 20
4.6 Credit Rating 22
4.7 KFI Analysis 24
4.8 Maximum Permissible Bank Finance 33
4.9 Concept of Drawing Power 35
4.10 Non-Fund Based lending 36
4.11 Letter of Credit 38
CHAPTER 5 CONCLUSIONS & RECOMMENDATIONS 40-42
5.1 Conclusions 40
5.2 Recommendations 42
ANNEXURES A-1 Data recording 44
A-2 Bibliography 45
I was given an opportunity to pursue my summer internship at Overseas Branch of Bank of
It is rightly said that finance is a backbone of every business so every business needs funds
for smooth running of its activities and bank is one of the sources from which the business
The title chosen for my summer project is “To study Credit appraisal/ analysis and have
hands on experience on live cases”. Credit management refers to end-to-end control and
monitoring of process of giving financial help to the customer in the form of loans till
recovery of principal and interest from them.
Rational behind choosing this topic for the study is that Credit risk management is a very
important area for the banking sector and there are wide prospects of growth and other
financial institution also face problems which are financial in nature.
A borrower places his request for availing credit facility by sending a letter of request or
filling the loan application form. Preliminary Information Memorandum is created as per
bank’s prescribed format based on the information provided by the borrower. This
information memorandum is used to carry out analytical study and a critical
recommendation is given for offering the credit facility. In case of a positive response, a
detailed proposal note is prepared. The proposal analyses various risks associated with
bank lending i.e. business risk, financial risk, management risk and market risk.
The proposal is further passed on to the credit approval committee which further
sanctions the loan stating various terms and conditions. After approving the loan, as a
responsible and a vigil credit manager, the loan portfolio should be monitored on an on-
going basis to determine if the performance meets the board’s expectations and the level
of risk remains within acceptable limits. In case of defaults or NPAs, the recovery process
2.1 Introduction to the Topic
It is rightly said What We Learn When We Learn By Doing. A student captures vivid
theoretical concepts in his theoretical curriculum. But the industry exposure
immediately after that rightly bridges the gap between what he knows and what
the expectations of the real world is.
Internship not only strengthens the knowledge but also helps in implementing that
knowledge in a professional manner. Walking on similar lines to pursue my career
in field of finance, getting the opportunity for doing training in Overseas Branch of
Bank of Maharashtra was the right stage for me.
2.2 Introduction to the Industry
Business has been the most niche way of earning livelihood since primitive time
and even in the present and ultimate future whatever a human race will be doing to
survive is nothing but exchanging the commodities or services only.
Only chunk of people are born with silver spoon and rest need to invest on their
own to carry out the trade. But when average fund requirement is way above lakhs
and crores, the finance lending institutions come into picture. To cater this
everlasting need of market the credit lending is done by banks. The title chosen for
my summer internship project was “To study Credit management and have hands
on experience on Domestic and FX live cases”.
Rational behind choosing this topic for our study is that Credit risk management is
a very important area for the banking sector and there are wide prospects of
growth and other financial institutions also face problems which are financial in
nature. Sound credit management is prerequisite for a financial institution’s
stability and continuing profitability, while deteriorating credit quality is the most
frequent cause of poor financial performance and condition, A client is of utmost
importance to a bank but understanding and assessing the risk factor involved is
also of equal importance.
2.3 Introduction to the Company
Bank of Maharashtra
Known as a common man’s bank since inception, Bank of Maharashtra was
registered on 16th
September 1935 with an authorized capital of 10 lakh and
commenced business on 8th
Its initial help to small units gave birth to many of today’s industrial houses.
After nationalization in 1969, the bank expanded rapidly. During the year 2014-15,
the bank opened 26 new branches. As on 31.03.2015, the total branch network
comprises of 1880 branches spread over 29 states and 2 union territories.
The branch network includes specialized branches in the areas of foreign exchange,
government business, treasury and international banking, industrial finance, small-
scale industry and hi-tech agriculture, pension payment, pension processing, retail
credit, Self Help Groups and asset recovery.
The bank has largest network of branches by any public sector bank in the state of
Believing in the philosophy of technology with personal touch, Bank of Maharashtra
aims to cater all types of need to the entire family, in the entire country.
Its dream is “One Family, One Bank, Maharashtra Bank”.
To be a vibrant, forward looking, techno-savy, customer centric bank serving
diverse sections of the society, enhancing shareholders’ and employees’ value while
moving towards global presence.
• To ensure quick and efficient response to customer expectations
• To innovate products and services to cater to diverse sections of society
• To adopt latest technology on a continuous basis
• To build proactive, professional and involved workforce
• To enhance the shareholders’ wealth through best practices and corporate
• To enter international arena through branch network
The performance highlights of the Bank on major parameters in the
year 2014-15 are as under:
1. Total Business has increased from Rs 207171.76 crore as on 31.03.2014 to Rs
223329.21 crore as on 31.03.2015, registering a growth of 7.80% on Y-o-Y basis.
2. CASA has increased from Rs 41921.18 crore as on 31.03.2014 to Rs 45296.80 crore
as on 31.03.2015, registering a Y-o-Y growth 8.05% Share of CASA to total deposits
was 37.09% as on 31.03.2015
3. Containing NPAs was challenge for the entire banking sector and the Bank was not
an exception. Gross and Net NPAs were Rs 6402.06 crore (6.33%) and Rs 4126.57
crore (4.19%) as on 31.03.2015, as against Rs 2859.85 crore (3.16%) and Rs
1807.32 crore (2.03%) as on 31.03.2014.
4. Net Profit during the year ended 31.03.2015 stood at Rs 450.69 crore as against Rs
385.98 crore during the year ended 31.03.2014 showing an increase of 16.77%
5. Capital Adequacy Ratio (Basel – III) was 11.94% as on 31.03.2015 as compared to
10.79% as on 31.03.2014. The same under Basel II stood at 12.79 % as on
31.03.2015 as against 12.11% as on 31.03.2014
During the year 2015, the Bank had taken new business initiatives as
1. Started Credit Processing Cells in all zones for faster delivery of SME and retail
credit products, alongwith better evaluation.
2. Centralised Liability processing cell was started for smooth acquisition of new
customers and reduce load on branches.
3. Introduced “Purple Privileges” account for HNI’s, with assistance of dedicated
Relationship Manager, to bring in more HNI customers in our fold.
4. Launched “Maha Secure” –A next Generation Digital Banking Solution, secured by
REL-ID Technology, a high end product, to enable secure access to internet banking
5. Launched “MAHA e-SBTR” (e-Secured Bank & Treasury Receipt) facility for
payment of Registration Fee and Stamp Duty in the state of Maharashtra.
6. A Business Process Re-engineering initiative – “Utkarsha” was taken forward for
implementation for putting in place a seamless business process across the Bank’s
operations. Three pilot branches based on this concept were opened at Model
Colony, Camp and Erandawane in Pune for delightful banking experience for all
The Bank has contributed significantly in Financial Inclusion especially through
achievement over the targets under PMJDY and also as SLBC convener for
Maharashtra took full responsibility for implementation in Maharashtra.
Outlook for 2015-16
Better growth prospects in the emerging markets are projected to drive the global
growth to 3.8 percent in 2016. (WEO, April 2015) Assuming no major changes in
the economic structure and fiscal road map, normal monsoon and no major
external or policy shocks, the inflation will be contained at around 5%. Domestic
demand will guide the growth to 8.1 to 8.5% as per the Economic Survey.
2.4 Introduction to the Project
The intent working in Corporate finance domain under Treasury and International
Banking Division’s Overseas Branch was to understand what practically goes
behind sanctioning of finances by a bank. The learnings were in great detail and
thoroughly practical in approach towards clients, implications of audited final
accounts. The actual project was analyse accounts of corporates, assess the final
accounts with a view to consider and logically justify the amount and facilities
requested by the client.
Along with assessing client’s justified requirements in the financial year, analysis of
their capacity to repay, risk associated was another important part of the project.
1. To implement the learning of credit appraisal on live cases in Indian as well as
foreign currency and thereby contribute to the work at Bank of Maharashtra.
• To study and understand the import-export payment method (SWIFT) of
Bank of Maharashtra.
• To analyse the client’s project in terms of financial feasibility, its present and
future performance considering the market factors.
3.2 Library Reference / Literature Review
TYPES OF LENDING ARRANGEMENTS:
Business entities can have various types of borrowing arrangements. They are
• One Borrower – One Bank
• One Borrower – Several Banks (with consortium arrangement)
• One Borrower – Several Banks (without consortium arrangements – Multiple
A. One Bank/Sole Banking
The most familiar amongst the above for smaller loans is the One Borrower-One
Bank arrangement where the borrower confines all his financial dealings with only
Sometimes, units would prefer to have banking arrangements with more than one
bank on account of the large financial requirement or the resource constraint of his
own banker or due to varying terms & conditions offered by different banks or for
sheer administrative convenience. The advantages to the bank in a multiple
banking arrangement/ consortium arrangement are that the exposure to an
individual customer is limited & risk is proportionate. The bank is also able to
spread its portfolio. In the case of borrowing business entity, it is able to meet its
funds requirement without being constrained by the limited resource of its own
banker. Besides this, consortium arrangement enables participating banks to save
manpower & resources through common appraisal & inspection & sharing credit
The various arrangements under borrowings from more than one bank will differ
on account of terms & conditions, method of appraisal, coordination,
documentation & supervision & control.
B. Consortium Lending
Where the entire credit needs of the borrower is financed by a group of banks by
forming a consortium. It promotes collective application of banking resources.
Merits: To bank:
1. A single bank carries a disproportionate credit risk when it finances single
handedly a huge sum to a large borrower. Consortium financing helps to spread this
risk among a number of banks who are members of the consortium.
2. Consortium financing leads to a better credit appraisal in as much as the expertise
of all the member banks can be contributed for appraising the proposal.
3. Smaller banks which cannot alone finance huge limits to the large borrowers can
still join in financing by becoming the member of consortium. Financing large
borrowers being a profitable proposition helps in increasing their profitability.
4. It stops unhealthy practices of snatching good large borrowal accounts by one
bank from other by offering unwanted counter offers with respect to interest and
5. All banks lend on same terms and conditions regarding the security, rate on
interest, margin, etc. i.ee no one has superior rights or more favorable propositions.
1. A borrower availing credit from a consortium does not suffer from scarcity of
credit due to credit squeeze of its sole banker.
2. Internal competition among the participating banks to have larger share in the
consortia enables a borrower having good fundamentals to enjoy lower interest and
3. Borrower enjoys same interest and service charges from all the banks normally
set at a level below prevailing rates.
Demerits: To Bank
1. Bank is under an obligation to share information with other lending institutions.
2. Bank does not have superior rights in case of a default.
3. Bank has to fall in line w.r.t. terms and conditions set out by the lead bank
although adequate propositions are made for its reservations.
4. Bank cannot move out of consortia within first 2 years without approval of other
members of the consortia and existing/new member is willing to take its share.
5. In case of a dispute Lead Bank or the bank having 2nd highest share in the
consortium will be the final authorities in cases of differences of opinion and their
views will prevail in all cases of disputes among the members relating to terms and
1. Borrower cannot negotiate terms and conditions with individual banks depending
upon the size of business it is providing to them.
2. All members of the consortium have superior rights than other lenders which
affects it borrowing capacity in the open market.
C. Multiple Banking
Where the credit requirements of a borrower are met by more than one bank and
each bank lends independently on its own terms and conditions, regarding the
security, rate of interest, margin etc., this system of financing is called Multiple
Advantages: To bank:
1. Bank lends under its own terms and conditions regarding the security, rate of
interest, margin, etc. and may ask for superior rights.
2. The bank is independent of other lending institution.
3. The bank is under no obligation to share proprietary data with other lending
1. Borrower can decide the level of business it wants to give to a particular bank
depending upon the services provided.
2. Borrower has the possibility of getting surplus credit facility from the banks
3. Borrower can negotiate for terms and condition.
Demerits: To Bank
1. There is a possibility of over financing to the borrower.
2. More vigilant and robust monitoring mechanism has to be in place to have better
control over excessive financing cases.
3. Bank is unknown to the conduct of the borrower with other lending banks and
thus not in the position to take preventive steps.
Points to be noted in case of multiple banking arrangements:
• Though no formal arrangement exists among the financing banks, it is
preferable to have informal exchange of information to ensure financial
• Charges on the security given to the bank should be created with utmost care
to guard against dilution in our security offered & to avoid double financing
Certificates on the outstanding with the other banks should be obtained on
the periodical basis & also verified from the Balance sheet of the unit to avoid
Methodology that was followed in conducting the study on the credit management
process was by means of regular discussion with my mentor and demonstration
given by him on the associated cases. Every discussion was followed by assigning
the work on prevailing live cases related to the discussed topic. Thus hands on
implementation strengthened the learnt concepts and helped in uncovering various
aspects pegged to it.
Following techniques were used for the analysis:
a) Ratio Analysis
b) Financial Indicator Analysis
c) SWOT and Porter five Forces Model
d) MPBF and Drawing Power calculations
e) Projection of balance sheet
Primary Source of Data
a) Balance Sheet, Profit & Loss statement and cash flow of clients
b) Project Information Memorandum given by client
c) Auditors report on annual financial statement
d) Discussions carried out with manager at Bank of Maharashtra
e) Credit monitoring Appraisal Data (CMA)
f) Meeting with client
Secondary Source of Data
a) RBI circulars
b) Bank of Maharashtra credit lending policy and rate of interest slab
c) Reference documents on previously closed cases of Bank of Maharashtra
1) The credit assessment method of Bank of Maharashtra may vary with other
2) Rating given by Crisil and other agencies on clients project has been questioned
as a part of our study
3) Auditors report and projected balance sheet, profit & loss statements and cash
flows has been considered as sacrosanct for our study
4) Secondary source of data has been assumed to be true
3.4 Limitations of the Report
1) The project is limited to credit assessment process and techniques used by Bank
2) There can be many variations in scenarios and complexity of cases. But the
project shows the learnings involved only to the cases given to me by the bank
3) Due to confidentiality reasons, the name of client and specific details related to
credit facility has not been shown
Analysis & Findings
4.1 Overseas Branch
The branch network includes specialized branches in the area of foreign exchange,
Government business, Treasury and International Banking, Industrial Finance,
Small Scale Industry and Hi-tech agriculture, Pension Payment, Self Help Groups
The Overseas branch (Treasury and International Banking) of the bank caters to
the needs of industries & MSMEs through many funded and non-funded facilities.
The function of this branch is to provide credit facility to large, medium and small
scale enterprises in rupee and foreign currency denomination. The bank finances
the corporate sector for its Export, Import and for setting up units , modernization,
diversification and upgradation.
4.2 Bank extends credit facility to its clients in two ways:
a) Funded facilities
b) Non-funded facilities
4.2.1 Funded facilities
a. Term Loans
Re-payment in the form of instalments over a fixed time.
Purpose: For acquisition of fixed assets/ machinery or for financing projects
Amount of Loan: 75% of the cost for maintaining a margin of 25%
Security: Charge on assets
b. Cash Credit
Running account facility
Purpose: To meet the working capital requirements
Amount of facility: Based on the bank’s assessment of WC requirement
Security: Charge on current assets, collaterals if required
c. Bill Discounting
In the nature of post sales limit.
Amount of facility: Upto a specified percentage of the value of the bill in €,¥,£,$ as
Discounting under: L/C or firm order
Security: Charge on the bill, collateral if required
4.2.2) Non-funded facilities
1) Letter of Credit facility to facilitate purchase of material/ goods in India and
2) Letter of Guarantor facility for the issuance of Guarantee in the nature of bid
bonds, performance bonds etc.
4.3 International Trade Finance
The bank provides working capital facility to exporters and importers.
4.3.1 For Exporters
Working capital finance can be availed at following stages:
At the pre-shipment stage, finance is provided in the form of Packing Credit
Purpose for procuring goods meant for export.
Amount of Packing Credit: Upto 90% of FOB value of goods
Security: Charge on assets created out of finance
Repayment: From export proceeds, proceeds of negotiation/ discounting of export
At the post-shipment stage, export finance is provided by the way of
* Negotiation/ discounting of export bills
* Rupee advances against collection bills
* Advance against export incentive
The advances are repayable from export proceeds or receivable and carry interest
rate in conformity with RBI guidelines.
4.3.2 For Importers
Funded working capital finance is provided by the way of cash credit facility and
non-funded working capital finance is provided by the way of Import Letter of
4.4 Credit Risk Management
Credit risk management, is the practice of mitigating those losses by understanding
the adequacy of both a bank's capital and loan loss reserves at any given time – a
process that has long been a challenge for financial institutions including banks.
Credit from bank’s point of view refers to the monetary facility extended to the
client in the form of loans and advances, the repayment of which will be delayed,
but will be accompanied by interest and principal.
Credit risk refers to the degree of inability or chances of default residing in the
repayment capacity of client of bank.
In other words, it is the potential for loss due to failure of a borrower to meet its
contractual obligation to repay a debt in accordance with the agreed terms.
Credit management refers to end-to-end control and monitoring of process of
giving financial help to the borrowers in the form of loan till the recovery of
principal and interest from them.
Credit refers to
• Short term loans and advances
• Medium/ long term loans
• Off-balance sheet transactions
Management refers to
• Pre-sanction appraisal
• Disbursement and Disbursal
• Post-lending supervision and control
Sound credit management is a pre-requisite for a financial institution’s stability and
continuing profitability, while deteriorating credit quality is the most frequent
cause of poor financial performance and condition.
The Bank has its Risk Management Framework in accordance with the RBI
Guidelines and it benchmarks itself against the industry best practices. This enables
it to identify, measure, monitor and manage risk efficiently.
It has put in place Risk Management Policies and Strategies and establishes control
systems in line with the Bank’s aggregate Risk Appetite.
The Bank has constituted Risk Management Committee at Board level to monitor
the risk at Bank level. Bank has also constituted sub-committees known as Credit
Risk Management Committee (CRMC), Market Risk Management Committee
(MRMC), Operational Risk Management Committee (ORMC) and Asset Liability
Management Committee (ALCO) to monitor the specific risk areas.
These Committees are headed by Chairman and Managing Director. Executive
Directors and General Managers are the members of the Committees
RBI defines credit risk as:
The possibility of losses associated with diminution in the credit quality of
borrowers or counterparties. In a bank’s portfolio, losses stem from outright
default due to inability or unwillingness of a customer or counterparty to meet
commitments in relation to lending, trading, settlement and other financial
transactions. Alternatively, losses result from reduction in portfolio value arising
from actual or perceived deterioration in credit quality
Credit appraisal is conducted to find out the credit worthiness of the customer
borrower. The proposal note on credit appraisal is prepared to depict the credit
requirement and the rationale behind the recommendation.
Bank of Maharashtra has in place a well-defined framework for approving credit
limits of different sector and size of industries. Whenever a client borrower places
his request for availing credit facility by sending a letter of request or by filling the
loan application form, it has to accompany the request by project information
memorandum, auditor’s report on financial statements, past and projected financial
statements, buyer-seller purchase agreement if any and other related important
Preliminary Information Memorandum is created as per bank’s prescribed format
based on information provided by borrower. This information memorandum is
used to carry out analytical study on information provided by customer. A critical
recommendation has to be made on giving or not giving the credit facility.
In case of a positive response, a detailed proposal note is prepared. The proposal
analyses various risks associated with bank lending i.e. business risk, financial risk,
management risk and market risk and clarifies the process by which such risks will
be managed on an ongoing basis.
Proposal is further passed on to the credit approval committee which further
sanctions the loan stating various terms and conditions. After approving the loan,
as a responsible and a vigil credit manager, the loan portfolio should be monitored
on an ongoing basis to determine whether the performance meets the board’s
expectations, and the level of risk remains within the acceptable limits. In case of
defaults or NPA/ bad debts, recovery process is initiated.
4.6 Credit Rating
Bank of Maharashtra has an in-house application for credit risk rating calculation
for accounts below Rs 5 crore. Credit risk rating is given to the borrower in order to
assess various aspects of projects and assigns them rating thereby determining the
risk level involved with the project.
Following risks are taken into account:
1. Financial Risk
2. Business Risk
3. Management Risk
4. Industry Risk
5. Project Risk (if applicable)
Future Risk is assessed by following indicators:
1. Ability to promote funding
2. Total Operating Leverage (TOL) / Tangible Net Worth (TNW)
3. Current Ratio
4. Debt Service Coverage Ratio
Past financial performance is assessed by following indicators:
1. Ability to achieve sales target
2. Net profit
3. Net Profit / Sales
4. TOL / TNW
5. Current Ratio
The in-house developed software system assesses and calculates individual score
corresponding to a particular risk factor. This is called component weighted score.
Component weighted score is compared to maximum weighted score and a
percentage is calculated. The sum total of weighted score is taken and the system
assigns risk rating to certain score.
The bank has following ranks of risk rating starting from low risk to high risk:
AAA, AA, A, BBB, BB, B, C
Example of Rating Score Card:
Financial Risk 124.50 202.50 61.48 A
Risk 114 150 76 AAA
Industry Risk 29 50 58 BBB
(if applicable) 35 50 70 AA
Total 302.50 452.50 66.85 A
Overall Rating A (Medium)
The risk rating for a particular proposal is calculated with the help of in-house
software of the bank. Various components of the risks are taken into consideration
by the software to calculate the overall rating for the credit proposal. The
comments on adverse rating are put after the discussion with the management of
the company from which the bank has got the credit proposal.
4.7 KFI Analysis
Credit rating exercises undertaken by the banks and external credit rating agencies
play a major role in determining a business’s ability to borrow and the cost of
Typical domains that are factored into a credit rating are industry risk, government
policy, market position, operating efficiency, financial risk and management
Of all the factors that influence a credit rating, financial risk carries the highest
weightage in the rating model and influences the credit rating of a business the
Therefore, it is important for financial managers to understand the factors that
influence credit rating and work to continually improve the credit rating of a
business, by reducing risk. In this article we look at some of the key financial
indicators that influence credit rating the most.
The KFI analysis is performed as follows. Following is the example of an XYZ
2013 2014 2015 2016 2017 2018
Aud. Aud. Prov. Proj. Proj. Proj.
Loan Book 527.64 819.13 1694.93 2246.62 3005.08 3878.5
% increase in Loan
Book 36.18% 55.24% 106.92% 32.55% 33.76% 29.06%
Total Income 137.40 177.40 293.4 411.41 541.47 693.99
% Increase 30.06% 29.96% 65.39% 40.22% 31.61% 28.17%
EBDT 38.92 48.2 64.4 85.64 109.85 138.53
Net Profit After Tax 25.91 31.37 41.09 55.19 71.46 90.73
% to Total Income 18.98% 17.68% 14.00% 13.41% 13.20% 13.07%
Depreciation 0.62 0.57 3.08 3.27 3.19 3.12
Cash Accruals 26.53 31.94 44.17 58.46 74.65 93.85
Tangible Net Worth 143.91 165.43 295.36 387.33 495.58 673.09
TOL/TNW Ratio 4.33 5.43 6.15 6.23 6.54 6.10
Net Working Capital 20.26 98.69 273.04 328.83 508.64 711.08
Current Ratio 1.04 1.14 1.17 1.16 1.19 1.21
Gross NPA % 1.99% 1.83%
Net NPA % 1.69% 1.49%
Capital Adequacy % 21.97%
Comments in brief on key financial Indicators
4.7.1 Finance Book/Assets Under Management(AUM) :
The company is an NBFC engaged in retail and individual MSME lending activity
mainly in Gujarat, Maharashtra, Rajasthan, Tamil Nadu, Madhya Pradesh. The
customer base of the company has grown substantially and it has catered to over 8
lakh customers. The company could achieve the disbursement of Rs. 1429 crores
during FY 2014 as compared to Rs.1078.11 crore during FY 2013 registering the
growth of 32.55%. The company has estimated the total disbursement of Rs. 1850
crores during FY 2015.
Perusing the past track record it is observed that customer base as well as the
average ticket size of the loans has increased as under:
PARTICULARS FY 2012 FY 2013 FY 2014
No. of borrowers as on March 31 340729 280043 298404
Average Ticket Size (in Rs) 24000 32500 45000
Disbursement (Rs. crore) 599.08 1078.11 1429
Owned portfolio (Rs. in crore) 416.18 557.26 823.562
Managed portfolio (Rs. in crore) 271.24 460.52 562.847
Asset Under Management (Rs. in crore) 687.41 1017.78 1386.41
For the current year FY15, MAS has disbursement plan of around Rs. 1850 Crore as
against actual disbursement of Rs. 1429 crore during FY14. The details of same are
Rs. in Crores
Particulars Disbursement (%) Disbursement (%)
MSE & SME Loans
A) Business Loans [secured
+unsecured] 303 21.19% 400 21.62%
B) Loans to intermediaries
(MFIs) 659 46.11% 750 40.54%
C) Secured Against Vehicle
& Machinery 216 15.12% 335 18.11%
Agriculture Loans 121 8.46% 185 10.00%
Small Road Transport
Operators (SRTO) 91 6.38% 120 6.49%
Two Wheeler Loans
(Salaried) 39 2.74% 60 3.24%
Total Disbursement 1429 100.00% 1850 100.00%
Ideally, the disbursement pattern of the company is such that its Q1 disbursements
contribute 15% of total annual disbursement and additional 25 % in the Q2. The Q3
& Q4 remains highest contribution to the total disbursements on account of most of
the festive seasons falling in these quarters.
The company’s business model comprises build-up of MSME portfolio directly as
well as indirectly, through well managed MFIs.
The company has arrangement with couple of international developmental banks
like FMO from Netherlands and DEG, the subsidiary of KFW, Germany, who are
interested in developing MFI portfolio as one of the products due to role of MFI in
financial inclusion. For the purpose, the company has identified well capitalized and
well managed MFI to take exposure. To name few, they are Cashpor, Satin, Janlaxmi,
Ashirvad, Gramvidyal, Disha etc.
These MFI customers of the company have demonstrated capability of raising capital
from developmental institutes or private equity funds from time to time and have
attained break even in their operation. The company proposes to keep this portfolio
at around 35% of its total disbursement.
Further, the company has entered into new markets during the year i.e. Bangalore,
Bhopal and Jabalpur.
In the view of increased customer base, higher penetration in existing markets and
introduction of new products and looking at the past performance, increased
customer base and higher penetration in existing markets, the company is confident
of achieving the disbursement of Rs. 1850 crore in FY 2015.
4.7.2 Total Income:
Total income comprises the income component as under:
Rs. In Crores
2012 2013 2014 Average
Aud. Aud. Aud.
Total Income (A) 109.26 137.40 177.4 141.35
Interest on Loans to Customers 94.32 121.87 161.7
Revenue from operations [processing fees,
service charges, stamp & documentation
charges] 12.08 12.9 14
Other income 2.88 2.64 1.64
Total disbursement (B) 599.08 1078.1 1429 1035.40
Income to disbursement (A)/(B) 13.65%
The income generated by the company from interest on Loans to customers was
increased by 32.73% in FY 13-14 as compared to 29.21% in FY 12-13. Revenue
from operations was also marginally increased to Rs. 14 Cr. in FY 13-14 as
compared to Rs. 12.9 Cr. in FY 12-13. The total income increased by 29.96% in FY
13-14 as compared to 30.06% in FY 12-13.
The company has estimated the total income of Rs. 293.4 Cr. during FY 2015 with
increase in loan book size. The average income to total disbursement during last
three years is 13.65%, where in current it is estimated at 15.86%, which is seems to
PAT of the company has increased to Rs. 41.09 crores in FY 14-15 from Rs. 31.37
crores in the previous year. The percentage of total profit to net income has
marginally decreased to 14% in FY 14-15 from 17.47% over the previous year.
Further, the company has entered into new markets during the year i.e. Bangalore,
Bhopal and Jabalpur.
In the view of increased customer base, higher penetration in existing markets and
introduction of new products, the company has achieved revenue income of Rs.
293.4 crore in FY 2015 as compared to Rs. 177.40 crore in FY 2014. In current year
the company has PAT of Rs.41.09 crore.
4.7.4 Paid-up Capital:
TNW of the company increased from Rs. 165.43 crores as of March 2014 to Rs.
295.36 crores as of March 2015 due to the retention of profit in the business. In
current year the company has estimated to infuse fresh share capital of Rs.108.00
crore. TOL/TNW is increased to 6.15 as on 31st
March, 2015 from 5.43 as on 31st
March, 2014, which is above the benchmark level, which can be accepted taking
into account that it is a NBFC having adequate capital adequacy.
4.7.5 Current Ratio:
Current ratio for FY 2015 is at 1.17 is below bench mark level. The company has
clarified that their loan portfolio term period ranges between 18 months to 36
months. On account of revised schedule-VI of Companies Act the assets period more
than 12 months classified as noncurrent assets. However their large amount of
assets falls within range of more than 12 month, resulting non-current assets have
On the other side majorly they have availed working capital finance, which is
classified as current liability. This has led to decrease in the assets and increase in
the current liabilities leading to overall decrease in the current ratio.
The current ratio is estimated to be improved to 1.17 with further projected
infusion the share capital of Rs. 50 Cr. in FY 2016.The estimated capital infusion
over next 3 years has resulted in maintaining the current ratio in the range of 1.17
4.7.6 Capital adequacy ratio
As the CRAR is above the 20% it is considered to be healthy and is also above the
stipulated RBI norms of 15%.
CRAR 2010-11 2011-12 2012-13
CRAR % 27.79 24.02 21.97
CRAR- Tier I Capital
17.90 15.98 14.28
CRAR- Tier II
9.89 8.04 7.69
2011-12 2012-13 2013-14
Gross NPA 635.98 1047.98 1511.93
Net NPA 547.18 893.18 1221.89
Gross NPA % 1.64 1.99 1.83
Net NPA % 1.41 1.69 1.49
4.7.8 Net Working Capital & Current Ratio:
The net working capital of the company has decreased to Rs. 273 Cr in the FY 2015
as against Rs. 98.64 Cr in the FY 2014. The company has clarified that their loan
portfolio term period ranges between 18 months to 36 months. On account of
revised schedule-VI of Companies Act the assets period more than 12 months
classified as noncurrent assets. However their large amount of assets falls within
range of more than 12 month, resulting non-current assets have increased. On the
other side majorly they have availed working capital finance, which is classified as
current liability. This has led to decrease in the assets and increase in the current
liabilities leading to overall decrease in the current ratio. The current ratio is
improved to 1.17 with infusion of fresh share capital Rs. 108 Cr. The company has
further projected to infuse the share capital of Rs. 50 Cr. in FY 2016.The estimated
capital infusion over next 3 years has resulted in maintaining the current ratio in
the range of 1.17 to 1.21.
Further, the assets liability position of the company in different bucket is
satisfactory as on 31st
March, 2014. The maturity pattern of assets and liabilities is
Rs. in Cr
1 to 2
2 to 3
3 to 6
1 to 3
g NCDs) 2.79 7.38 4.16 48.96 18.75 41.67 - - 123.7
g - - 1.25 1.25 2.50 7.50 - - 12.50
2.79 7.38 5.41 50.21 21.25 49.17 - - 136.2*
39.1 34.74 30.03 86.03 162.9 189.2 7.51 0.6 550.4
nts - - - - - 0.08 - - 0.08
39.1 34.74 30.03 86.06 162.9 189.3 7.51 0.6 550.5
Liability 36.3 27.36 24.62 35.82 141.7 140.1 7.51 0.6 414.2
*Excluding Bank Borrowing in the Form of Cash Credit.
It shows the satisfactory management of assets and liability so as to ensure proper
liquidity in the system as on March 2013. The Company has a favorable assets and
liability management (ALM) profile.
The ageing analysis of AUM under various time buckets as on 31st
March 2014 is as
BUCKET NO. OF
CURRENT 252758 0.00 1280.64 1280.64 92.37
1 -30 DPD 17546 3.88 38.78 42.66 3.08
31 - 60 DPD 11495 3.23 24.55 27.78 2.00
61 - 90 DPD 3990 1.80 7.91 9.71 0.70
91 - 150 DPD 3775 3.41 7.84 11.25 0.81
> =151 DPD 8840 9.03 5.34 14.38 1.04
Grand Total 298404 21.35 1365.06 1386.41 100.00
4.7.9 Net Working capital
2013 2014 2015 2016 2017
Aud. Aud. Prov. Proj. Proj.
Capital 53.47 59.47 167.47 217.47 267.47
Debentures 49.98 49.98 49.98 49.98 49.98
Reserves & Suplus 40.55 56.04 77.91 119.88 178.13
Debentures 0.00 0.00 0.00 0.00 0.00
Term Loans from our bank 0.00 0.00 0.00 0.00 0.00
Term Loan from other banks/FI 100.18 170.04 234.21 336.76 537.63
Other Term Liabilities 2.58 0.01 0 0 0
LONG TERM SOURCES (A) 246.76 335.54 529.57 724.09 1033.21
NET FIXED ASSETS 6.06 5.78 27.7 29.43 28.74
Investment in associate concern 10.75 10.83 10.83 25.83 50.83
Loan Receivables (matured after 1
198.78 219.1 218 340 445
Other NonCurent assets 10.49 0.00 0.00 0.00 0.00
Other Intangible Asssets 0.093 0.06 0.00 0.00 0.00
LONG TERM USES (B) 226.173 235.77 256.53 395.26 524.57
NET WORKING CAPITAL (A-B) 20.587 99.77 273.04 328.83 508.64
4.7.10 Comments on adequacy of NWC
Net working Capital has improved to Rs.99.77 Crore against FY 2014. The company
has estimated to improve in next year by infusion of fresh share capital.
4.7.11Treatment proposed to meet shortfall if any:
The current ratio is estimated to stand at 1.17 as on 31.03.2015 on account of
projected increase of Rs. 108 Cr. in the share capital. The company has further
estimated to infuse the share capital of Rs. 50 Cr. in FY 2016.The current ratio of
1.17 indicates comfortable liquidity position of the company.
4.8 Maximum Permissible Banking Finance
As per the recommendations of Tandon Committee, the corporates are discouraged
from accumulating too much of stocks of current assets and are recommended to
move towards very lean inventories and receivables level. Depending on the size of
credit required, three methods are in practice to fund the working capital needs of
First Method of Lending:
Banks can work out the working capital gap i.e. the total current assets less current
liabilities other than bank borrowings (called Maximum Permissible Bank Finance
or MPBF) and finance a maximum of 75% of the gap; the balance to come out of
long-term funds i.e. owned funds and term borrowings. This approach was
considered suitable only for very small borrowers i.e. where the requirements of
credit were less than Rs. 10 lacs.
Second Method of Lending:
Under this method, it was thought that the borrower should provide for a minimum
of 25% of total current assets out of long-term funds i.e. owned funds and term
borrowings. A certain level of credit for purchases and other current liabilities will
be available to fund the build up of current assets and the bank will provide the
balance MPBF. Consequently, total current liabilities inclusive of bank borrowings
could not exceed 75% of current assets. RBI stipulated that the working capital
needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs
should be appraised under this method.
Third Method of Lending:
Under this method, the borrower’s contribution from long term funds will be to the
extent of the entire core current assets, which has been defined by the Study Group
as representing the absolute minimum level of raw materials, process stock,
finished goods and stores which are in the pipeline to ensure continuity of
production and a minimum of 25% of the balance current assets should be financed
out of the long term funds plus term borrowings.
Example of MPBF calculation:
SUMMARIZED WORKING CAPITAL BASED ON ACCEPTED LEVELS
Rs. In Crores
2013 2014 2015 2016 2017
Aud. Aud. Prov. Proj. Proj.
1.Total Current Assets 540.7 826.82 1856.35 2405.37 3210.43
2.Other Current Liabilities
(Excluding bank finance) 32.54 55.09 41.68 51.01 61.91
3.Working Capital Gap 508.16 771.73 1814.67 2354.36 3148.52
4.Min. NWC Required (25%
of TCA) 135.175 206.705 464.0875 601.3425 802.6075
5.Actual NWC 20.587 99.77 273.04 328.83 508.64
6. (3-4) 372.985 565.025 1350.583 1753.018 2345.913
7. (3-5) Lower of 6 or 7 487.573 671.96 1541.63 2025.53 2639.88
5 1350.583 1753.018 2345.913
The maximum permissible banking finance is calculated with the help of guidelines
provided by Reserve Bank of India. It represents the maximum amount that can be
disbursed to the credit request in the form of any credit facility.
4.9 Concept of Drawing Power
The drawing power that a borrower enjoys at any one point depends on each
components of working capital. The bank for each component, which the borrower
must hold as his contribution to finance working capital, prescribes margins. The
drawing power of the borrower can be best explained with the following
Suppose a borrower has Rs. 100 lacs as working capital limit sanctioned to him by a
The security provided by the borrower to the bank is the hypothecation of
inventory. Suppose the borrower needs to hold an inventory level of Rs. 130 lacs in
order to enjoy Rs. 100 lacs as his working capital limit.
The actual level of inventory with the borrower at a point is say Rs. 100 lacs. The
inventory margin prescribed by the bank is say 25%.
Therefore with this inventory level, the borrower enjoys only Rs. 82.5 lacs as his
working capital limit against Rs. 100 lacs.
Inventory level (Required): Rs. 130 lacs
Drawing power of the borrower: Rs. 100 lacs
Inventory level (Actual): Rs. 110 lacs
Margin prescribed by the bank: 25%
Drawing power of the borrower is 110 – (0.25*110) = Rs. 82.5 lacs
Therefore in this case the borrower would enjoy Rs. 100 lacs as his working capital
limit as against Rs. 112.5 lacs inventory level.
4.10 Non-Fund based Lending
In case of non-fund based lending, the lending bank does not commit any physical
outflow of funds. As such, the funds position of the lending bank remains intact. The
non-fund based lending can be made by the banks in two forms:
4.10.1 Bank Guarantee:
Suppose company A is the selling company and company B is the purchasing
company. Company A does not know company B and as such is concerned whether
the company B will make the payment or not.
In such circumstances, D who is the bank of company B, opens the bank guarantee
in favour of company A in which it undertakes to make the payment to company A
if company B fails to honour its commitment to make the payment in future. As
such, interests of company A are protected as it is assured to get the payment either
from company B or from its bank D. Bank guarantee is the mode which will be
found typically in the seller’s market. As far as bank D is concerned, while issuing
the guarantee in favour of company A, it does not commit any outflow of funds. It is
a non-fund based lending for bank D. If on due date, bank D is required to make the
payment to company A due to failure on account of company B to make the
payment, this non-fund based lending becomes the fund-based lending for bank D
which can be recovered by the bank D from company B.
For issuing bank guarantee, bank D charges the bank guarantee commission from
company B which gets decided on the basis of two factors- what is the amount of
bank guarantee and what is the period of validity of bank guarantee.
In case of this conventional bank guarantee, both company A and B get benefited as
it is able to make the credit purchases from company A without knowing company
A. Bank guarantee transactions will be applicable in case of credit transactions.
In some cases, interests of purchasing company are also to be protected.
Suppose that the company A which manufactures capital goods takes some advance
from the purchasing company B. If company A fails to fulfil its part of contract to
supply the capital goods to company B, there needs to be some protection available
to company B. In such circumstances, bank C which is the banker of company A
opens a bank guarantee in favour of company B in which it undertakes that if
company A fails to fulfil its part of the contract, it will reimburse any losses
incurred by company B due to this non-fulfilment of contractual obligations.
4.11 Letter of Credit
A letter of credit is a document from a bank that a seller will receive payment in full
as long as certain delivery conditions have been met. In the event that the buyer is
unable to make payment on the purchase, the bank will cover the outstanding
The non-fund based lending in the form of letter of credit is very regularly found in
the international trade in case the exporter and the importer are unknown to each
Under these circumstances, exporter is worried about getting the payment from
the importer and importer is worried as to whether he will get the goods or not.
In this case, the importer applies to his bank in his country to open a letter of credit
in favour of exporter whereby the importer’s bank undertakes to pay the exporter
or accepts the bills or drafts drawn by the exporter on the exporter fulfilling the
terms and conditions specified in the letter of credit.
Estimated Annual purchase of raw material Rs. 38.4 crores
Estimated credit purchase LC (90%) Rs. 34.56 crores
Average monthly credit purchase Rs. 2.88 crores
Usance period of 3 months and average lead time of 1 month 4 months
2.88*4= Rs. 11.52 crores
Rs. 12 crores
Conclusions & Recommendations
5.1.1 Credit Monitoring
The financial crisis has shown in dramatic fashion why banks need to monitor
credit risk. Credit risk costs for Indian banks have sky rocketed and continue to
rise. Loan loss provisions for credit books have reached record high levels.
Banks exposed to deteriorating credit portfolios often react by deleveraging. The
International Monetary Fund warned in April 2012 of a vicious circle in which
deleveraging further shrinks the supply of credit, worsening customers’ credit
worthiness even more. Nervous external stakeholders-from investors and
regulators to media and activists-increasingly want reassurances that banks know
the drill in lending and are developing sound credit-monitoring and risk mitigation
5.1.2 NPA Recovery Process
A classification used by financial institutions that refer to loans that are in jeopardy
of default. Once the borrower has failed to make interest or principal payments for
90 days the loan is considered to be a non-performing asset.
NPAs reduces the profitability of a bank. Banks normally classify loans into four
categories, i.e. pass(standard) , sub-standard, doubtful, and loss asset.
Normally, restructuring the loan is the first phase to recover the loan before it
becomes default, if the loan is default then, banks try to sell the NPAs through
If the asset is not sold then they can turn into banking asset. They can write off the
loan from their balance sheet. Troublesome pressure from the economy can lead to
a sharp increase in non-performing loans and often results in massive write-downs.
Methods of recovery from NPA followed in India
1. Asset sale at a discounted rate to ARCIL at discounted rate.
2. Use of SARFEASI Act 2002 and impounding the securities for auctioning.
3. Restructuring the loans for recovery like in case of Kingfisher Airlines.
4. Use of SPV i.e. Collateral debt obligation and credit default swap.
5. Write off from provisions created for the specific reason of NPA.
During the Financial Year (FY) 2014-15, total cash recovery in NPAs was Rs 620.41
crore (last year Rs706.41 crore). Of this, recovery in Ledger balance was Rs430.84
crore (Rs 646.46 crore) including, recovery in sale of assets of Rs 32.99 crore
(242.16), recovery in written off accounts was Rs113.69 crore (Rs 303.32 crore)
and recovery in cases of unapplied interest was Rs75.88 crore (`38.22 crore). This
was besides up gradation of NPAs to the tune of Rs395.23 crore (Rs101.39 crore)
This year’s achievement was possible due to intensive follow up with the defaulting
borrowers through letters, notices, recovery camps, Lok Adalatas, actions under
SARFAESI and through DRTs. Bank has also set up Asset Recovery Cells at Zonal
offices, to improve recovery in NPAs. The Gross NPA ratio of the bank is at 6.33% as
against 3.16% as of 31.03.2014 due to rise in fresh slippages. Similarly the ratio of
Net NPAs stood at 4.19% as on 31.03.2015 as against 2.03% a year ago as provision
could not keep up pace with slippages.
Bank of Maharashtra meets these expectations both through early detection and
effective mitigation of Credit risk. With sound credit monitoring practices and
effective early warning systems, the bank identifies risky customers six to nine
months before they face serious problems. Being a good bank credit monitoring
practice, the unsecured exposures for customers on watch list is reduced by about
60% in nine months.
An early warning system can be created by using the following six key factors
No bank will ever be able to identify all of its risky customers before they default.
However, in today’s volatile economic environment, it is more important than ever
for banks to establish as comprehensively and quickly as possible a prudent system
and processes to identify and monitor problematic accounts.
This not only minimizes individual losses and satisfies increased regulatory
scrutiny but also reduces capital demand, thereby better equipping banks to
continue issuing credit to the real economy-and doing so with confidence based on
increased risk insights about their customers. In addition, troubled borrowers can
benefit early on from banks experience in helping businesses overcome their
difficulties. Establishing state-of-the-art monitoring is one building block in
creating a more resilient banking sector and ultimately a more stable economy.
A. Data Recording Format
Data was sourced from Live cases of Credit proposals, the bank requested the data
to be kept confidential since it covered personal information about their clients.
All the References used during the Project. Includes the following, as the case may
• Books referred
1. Fundamentals of Corporate Finance, Standard Edition By Ross Jordon
Edition Page 13,55,92
2. Corporate Finance : Theory and Practice by Pascal Quiry, Page
• Exact Internet site/Portal referred