A Project Report on Credit Risk Rating Analysis at SBI Commercial Branch by Babasab Patil

“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch EXECUTIVE SUMMARY The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India with deposits of Rs 3,67,000 crores as on March 31, 2005. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better, improve service levels, provide new delivery platforms, and improve operating efficiency to counter the threat of competition effectively. SBI will maintain a good earnings profile in the medium term despite high pressure on yields due to the increasing competition in the banking sector. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the past three years, and diverse income streams. To maintain yields and pursue credit growth, the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). The project was being undertaken at State Bank of India Commercial Branch, Belgaum. A study on Organisation, operations, products & services of State Bank of India was done. The project focuses upon the credit rating risk assessment practiced by State Bank of India. A brief study on M/s Margale Foundries was done. The Credit risk rating assessment mechanism, financial statements like Balance Sheet, Ratio Analysis of Margale Foundries was studied. The area covered for the study of credit Rating Risk Assessment of Margale Foundries by State Bank of India are the industrialists in and around Belgaum who have availed loan facilities from State Bank of India. The Title of the project is “A Study on Credit Risk Assessment of M/s Margale Foundries in State Bank of India” The important findings of the study are during the year 2004-2005, the current ratio was at 1.00 as against the estimate of 1.10. This is due to locking up of receivables with SAME deutz Fahr India P. Ltd. The delay in realization of receivables hindered the unit from producing upto the mark and selling more. Some of the suggestions are

the unit’s Current Ratio is 1, it should be improved by

infusing long term funds. As there was delay in realisation of receivables the unit should take steps to stop supplying to default customers & try to acquire new customers. Banks must have a MIS to enable them to manage and measure the credit risk inherent in all on and off-balance sheet activities. Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch CONCLUSION The banking system must be prepared to deal with the opportunities of higher growth, and the challenges of ensuring more equitable growth. In dealing with the needs of rural enterprises and of small and medium enterprises in urban areas, banks have to look for new delivery mechanisms. These must economise on transaction costs and provide better access to the currently under-served. To serve new rural credit needs, innovative channels for credit delivery will have to be found. The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services. RISK MANAGEMENT Risks are inherent in any financial intermediation and hence the bank is exposed to certain risks that arise from its business and the environment within which it operates. The bank has developed and is implementing various guidelines for managing risks like setting up exposure limits, systematic internal controls and risk management systems with consistent approach. In order to manage risks, organizations need to be able to measure those risks prospectively. They need to know, based on their current position, how much risk are they taking. Organizations are addressing this challenge with statistical risk measures.

OVERVIEW OF BANKING SECTOR The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch •

Early phase from 1786 to 1969 of Indian Banks

•

Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

•

New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

HISTORICAL PERSPECTIVE Bank

of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on

modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank carried out limited central banking functions also prior to establishment of RBI. It engaged in all types of commercial banking business except dealing in foreign exchange. Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision & control of banks. The Act also vested licensing powers & the authority to conduct inspections in RBI. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as State Bank of India. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states, making them as its 100% subsidiaries. RBI was empowered in 1960, to force compulsory merger of weak banks with the strong ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. In July 1969, government nationalised 14 banks having deposits of Rs.50 crores & above. In 1980, government acquired 6 more banks with deposits of more than Rs.200 crores. Nationalisation of banks was to make them play the role of catalytic agents for economic growth. The Narsimham Committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices.The amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks.Banking Segment in India functions under the umbrella of Reserve Bank of India the regulatory, central bank. This segment broadly consists of: Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch 1. Commercial Banks 2. Co-operative Banks Nationalisation Of Banks In India The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalised 14 banks then. These banks were mostly owned by businessmen and even managed by them. Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. INTRODUCTION TO BANKING Banks safeguard money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier's checks. With the passage of the Financial Modernization Act in 1999, banks also may offer investment and insurance products, which they were once prohibited from selling. As a variety of models for cooperation and integration between the financial services industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role in the financial system—accepting deposits and lending funds from these deposits

TYPES OF BANKS

BANKS State

1998-99 Bank

Associates

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India

and

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

Nationalized Banks

Domestic Private Sector Banks

New

Domestic

Private

Banks Foreign Banks

Sector

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TYPES OF BANKING SERVICES There are several types of banks, which differ in the number of services they provide and the clientele they serve. Although some of the differences between these types of banks have lessened as they begin to expand the range of products and services they offer, there are still key distinguishing traits. Commercial banks, which dominate this industry, offer a full range of services for individuals, businesses, and governments. These banks come in a wide range of sizes, from large global banks to regional and community banks. Global banks are involved in international lending and foreign currency trading, in addition to the more typical banking services. Regional banks have numerous branches and automated teller machine (ATM) locations throughout a multi-state area that provide banking services to individuals. Community banks are based locally and offer more personal attention, which many individuals and small businesses prefer. In recent years, online banks—which provide all services entirely over the Internet—have entered the market, with some success. However, many traditional banks have also expanded to offer online banking, and some formerly Internet-only banks are opting to open branches.

The Indian Banking System: Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks and non-scheduled banks. The scheduled banks are those, which are entered, in the Second Schedule of RBI Act, 1934. Such banks are those, which have a paid-up capital and reserves of an aggregate value of not less than Rs.5 lacs and which satisfy RBI that Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch their affairs are carried out in the interest of their depositors. All commercial banksIndian and Foreign, regional rural banks and state co-operative banks-are Scheduled banks. Non-Scheduled banks are those, which have not been included in the Second Schedule of the RBI Act, 1934. The organized banking system in India can be broadly divided into three categories: (i) Commercial banks, (ii) Regional Rural Banks and (iii) co-operative banks. The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all commercial banks and hence is known as the “Reserve Bank”. Commercial Banks has been in existence for many decades. Commercial banks mobilize savings in urban areas and make them available to large and small industrial and trading units mainly for working capital requirements. After 1969 commercial banks are broadly classified into nationalised or public sector banks and private sector banks. COMMERCIAL FINANCING The commercial financing model in Indian banking can be broadly categorized into project finance and working capital finance. These two segments form the pivot around which banks operate. PROJECT FINANCE Banks offer long term and short terms loans to business houses, corporations to set up their projects. These loans are disbursed after the approval from the banks’ core credit validating committee. In India, there are 11 national level land 46 state level financial and investment institutions that cater to long term funding

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch requirements of the industry. The project finance segment is highly competitive with various players offering innovative schemes to entice corporate. WORKING CAPITAL In order to meet the diverse needs and requirements of the business community, banks offer working capital funds to corporate. Working capital finance is specialized line of business and is largely dominated by the commercial banks. The Indian banking saw dramatic changes in the last decade or so ever since the advent of liberalization and India’s integration with the world economy. These economic reforms and the entry of private players saw nationalized banks revamp their service and product portfolio to incorporate new, innovative customer-centric schemes. The Indian banking finally woke up to the surging demands of the ever-discerning Indian consumer. The need to become highly customer focused (generated by high competitive levels) forced the slow-moving public sector banks to adopt a fast track approach. Taking a leaf out of the private sector banks, the public sector banks too went for major image changes (including corporate brand building exercises) and customer friendly schemes. Marketing and brand building programs were also given a new thrust in the new liberalized banking scenario. Promotional budgets were hiked to cater to the new and large discerning target audience. Banks were now keen on marketing their products and service though various mediums to reach their core customers. Direct marketing, Internet marketing, hoarding, press ads, television sponsorships, image makeovers etc. became an integral part of a bank’s marketing mix.

To meet the personalized needs of the customer and in order to

differentiate its services, banks repositioned themselves in specialized fields, like housing loans, car finance, educational loans etc. to optimally service the customer. Permission marketing became the new strategy that banks began to propound i.e. feeding the customer (with his or her consent) with product and service information and thereby enticing him towards the bank’s product service portfolio. NEW GENERATION BANKING

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch The liberalize policy of Government of India permitted entry to private sector in the banking, the industry has witnessed the entry of nine new generation private banks. The major differentiating parameter that distinguishes these banks from all the other banks in the Indian banking is the level of service that is offered to the customer. Verify the focus has always been centered around the customer – understanding his needs, preempting him and consequently delighting him with various configuration of benefits and a wide portfolio of products and services. These banks have generally been established by promoters of repute or by ‘high value’ domestic financial institutions.

The popularity of these banks can be

gauged by the fact that in a short span of time, these banks have gained considerable customer confidence and consequently have shown impressive growth rates. Today, the private banks corner almost four per cent share of the total share of deposits. Most of the banks in this category are concentrated in the high-growth urban areas in metros (that account for approximately 70% of the total banking business ). With efficiency being the major focus, these banks have leveraged on their strengths and competencies viz. Management, operational efficiency and flexibility, superior product positioning and higher employee productivity skills.

The private banks with their focused business

and service portfolio have a reputation of being niche players in the industry. A strategy that has allowed these banks to concentrate on few reliable high net Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch worth companies and individuals rather than cater to the mass market. These well-chalked out integrates strategy plans have allowed most of these banks to deliver superlative levels of personalized services. With the Reserve Bank of India allowing these banks to operate 70% of their businesses in urban areas, this statutory requirement has translated into lower deposit mobilization costs and

higher

margins

relative

public

sector

banks.

FUNCTIONING OF A BANK Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." Banks essentially perform the following functions: •

Accepting Deposits from public/others (Deposits)

•

Lending money to public (Loans)

•

Transferring money from one place to another (Remittances)

•

Acting as trustees

•

Keeping valuables in safe custody

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch •

Government business

BANKING PRODUCTS Banks in India have traditionally offered mass banking products. Most common deposit products being  Savings Bank  Current Account  Term deposit Account Lending products being  Cash Credit  Term Loans. In view of several developments in the 1990s, the entire banking products structure has undergone a major change. IT revolution has made it possible to provide ease and flexibility in operations to customers. Rapid strides in information technology have, in fact, redefined the role and structure of banking in India. Further, due to exposure to global trends after Information explosion led by Internet, customers - both Individuals and Corporates - are now demanding better services with more products from their banks. Financial market has turned into a buyer's market. Banks are also changing with time and are trying to become one-stop financial supermarkets. Market focus is shifting from mass banking products to class banking with introduction of value added and customised products. Products like debit cards, flexi deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle loans have been introduced by a number of banks.

COMMERCIAL BANKING IN INDIA India has a well developed banking system. Most of the banks in India were founded by Indian entrepreneurs and visionaries in the pre-independence era to provide financial assistance to traders, agriculturists and budding Indian industrialists. Indian banks have

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch played a significant role in the development of Indian economy by inculcating the habit of saving in Indians and by lending finance to Indian industry. The commercial banking structure in India consists of: Scheduled Commercial Banks and Unscheduled Banks. Scheduled commercial Banks constitute those banks, which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI includes only those banks in this schedule, which satisfy the criteria laid down vide section 42 (6) (a) of the Act.Indian banks can be broadly classified into nationalised banks/public sector banks, private banks and foreign banks. The commercial banking structure in India consists of: •

Scheduled Commercial Banks

•

Unscheduled Banks

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches.The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch STATE BANK OF INDIA INTRODUCTION OF BANK The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All the branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. Its business is more than banking because it touches the lives of people anywhere in many ways. SBI’s commitment to nation-building is complete & comprehensive State Bank of India (SBI) was nationalised in July 1955 under the SBI Act of 1955. Seven banks of SBI formed subsidiary and was nationalised on 19th July, 1960. The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services. HISTORY OF STATE BANK OF INDIA The Imperial Bank of India The origins of the State Bank of India go back to the early years of the nineteenth century. To Calcutta, then the capital of British India and a bustling city with an active mercantile community. It was in this environment that the Bank of Calcutta was established in 1806. Later renamed the Bank of Bengal, it was the first of the three Presidency Banks. The second, the Bank of Bombay, followed in 1840 and the third, the Bank of Madras, in 1843. Created out of the needs of the mercantile community the three Presidency Banks, nevertheless, introduced the banking habit to others and so helped to lay the foundation of a modern banking Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch system in India. In 1921, the three Presidency Banks were merged to form the Imperial Bank of India. Inevitably, the Imperial Banks role expanded. It became the premier bank in India .And till the creation of the Reserve Bank o India in 1935; it was entrusted with certain Government banking functions. Including the cash work of the Government. However, its growth was confined to commercial centers leaving almost three fourths of India untouched. In banking terms, while urban India progressed, rural India stagnated The State Bank of India In 1947 came Independence. And with the era of economic planning began. The development of industry, the building of the vast dams, giant steel plants, and essential thermal power plants heralded a shift from what, till then, had been traditionally an agriculture and trade based economy.With the metamorphosis of the economy, banking had even more of a key role to play. For if the industrialisation of the country was to keep in step with the upliftment of agriculture there was a need for a bank that could serve both .In 1955, by an Act of Parliament, the Imperial Bank of India was reconstituted. And so was born the State Bank of India. With a new sense of social purpose and over 130 years of banking experience.In 1959, eight banks of the former princely states became associates of the State Bank. And the State Bank Group was now poised for a Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch dynamic thrust forward in India’s banking scene. The first step was reaching more people. Especially in rural India. Though, by 1960, the State Bank had almost doubled the number of its offices to 882, the real breakthrough was not in the Bank’s size. There was a sea change in the very concept of banking; from banking for the classes to banking for the masses. It was a change that started a surge of growth that made the State Bank even more relevant in the context of the national economy. It was a change that evolved as a result of State Bank’s growing awareness of the problems that beset a developing nation’s economy. Through all this, of course, the Bank continued to be the premier banking institution in the country. For instance, as it did in its days as the Imperial Bank of India, the State Bank continues to conduct Government banking business. It acts as the agent of the Reserve Bank of India in places where the Reserve Bank has no offices. The State Bank also maintains currency chests in over 2000 offices all across the country to ensure an adequate and continuous circulation of currency notes and coins. And because of its vast and ever expanding domestic and global network, the Bank offers services that have few parallels

.ABOUT STATE BANK OF INDIA

The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India in terms of profits, assets, Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch deposits, branches and employees. With a network of over 9,000 branches in India and 51 foreign offices in 32 countries, the Bank commands about one-fifth of the total deposits and loans in all scheduled commercial banks in the country. State Bank of India is the successor to Imperial Bank of India. The latter was established in 1921 with the amalgamation of three Presidency Banks of Bombay, Bengal and Madras. State Bank of India came into being on 1.7.1955 through the State Bank of India Act, 1955. The Banks of erstwhile princely states of India joined the State Bank Group as subsidiaries under the State Bank of India (Subsidiary Banks) Act 1959. Over the years, the Bank has expanded rapidly. The Reserve Bank of India is the single largest shareholder of the Bank (with 59.73% stockholding followed by 14.1% NRI/FIIs, 11.8% financial institutions, 11.1% individuals and remaining with mutual funds and corporates). SBI's shares and bonds are listed for trading on all the major Indian stock exchanges. Its GDR is listed on the Luxembourg Stock Exchange. With a view to inculcating transparency in banking transactions and for providing information to customers, the Bank launched a Citizen's Charter in the form of the Code of Fair Banking Practices together with the General Terms and Conditions of Service. Appropriately named, 'Towards Excellence' Code reflects the Bank's commitment to provide service of the highest order and serves as a document of selfdiscipline. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

ASSOCIATE BANKS

State Bank of India has the following seven

Associate Banks (ABs) with controlling interest ranging from 75% to 100%. 1. State Bank of Bikaner & Jaipur (SBBJ) 2. State Bank of Hyderbad (SBH) 3. State Bank of Indore (SBIR) 4. State Bank of Mysore (SBM) 5. State Bank of Patiala (SBP) 6. Sate Bank of Saurashtra (SBS) 7. Sate Bank of Travancore (SBT) Branch Network Interactive branch locator allows

to establish contact with any of the over 8900

SBI branches in India.

Worldwide network of SBI Bank

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch SBI Bank India has 52 Foreign Offices in 34 countries. SBI India serves the international needs of its foreign customers, in addition to conducting retail operations. The focus of the offices of SBI is India-related business.

Location Headquartered in Mumbai, SBI has hundreds of branches all over the country. It also has 52 foreign offices in 34 countries

Sharing Social responsibilities 

Be it victims of earthquake at Lathur or Bhuj or the Tsunami State Bank of India has contributed to the Prime Minister and Chief Minister’s Relief Funds.



Funded socially oriented projects for health & education.



Conducted camps for blood donation, adult literacy, medical check up

•

Initiated awareness programmes for AIDS, Cancer, TB, Anti Drug-addiction and supported more than 100 organisations on an average, every year

SHAREHOLDING PATTERN FORM - A Name of the Company: State Bank of India Scrip Code - 112 Quarter Ended - 30.09.2005 Category Code

Category

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No. of Shares

% of Shareholding

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch held I A

CONTROLLING / STRATEGIC HOLDINGS BASED IN INDIA

Indian Individuals/HUFs & Relatives

Indian Corporate Bodies/Trusts/Partnerships

Persons acting in Concert (also include Suppliers/Customers)

Other Directors & Relatives ( other than in I above )

Employee Welfare Trusts/ESOPs (already converted into shares)

Banks/ Financial Institutions

Central / State Govt.

Central / State Govt. Institutions

Venture Funds / Private Equity Funds Sub Total A

314338700

59.73

314338700

59.73

NIL

314338700

59.73

BASED OVERSEAS

Foreign Individuals ( including FDI )

Foreign Corporate Bodies ( including FDI )

Non Resident Indians (individuals)

Non Resident Indians Corporate Bodies Sub Total B

GDR,s/ADRs/ADSs

Sub Total C OTHERS ( Please specify here )

Sub Total D ANY OTHER SHARES LOCKED-IN ( except covered above) Sub Total E SUB TOTAL I

Category Category Code II FREE FLOAT A BASED IN INDIA 1 Indian Individuals/HUFs

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No. of Shares held

% of Shareholding

29886541

5.68

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch 2 3 4 5 6 7 8 9 10 11 12

Indian Corporate Bodies/Trusts/Parterships Independent Directors & Relatives Present Employees (Physical shareholdings ) Banks/Financial Institutions Central / State Govt. Central / State Govt.Institutions Insurance Companies Mutual Funds Venture Funds/Private Equity Funds Customers Suppliers

9107916 0 4095183 28089406 469514 0 4145516 31823315

1.73 0.00 0.78 5.34 0.09 0.00 0.79 6.05 0.00 0.00 0.00

107603244

20.45

0 175206 62443178 256565

0.00 0.03 11.86 0.05 0.00

62874769

11.95

41468018

7.88

41468018

7.88

Sub Total II

211960178

40.27

GRAND TOTAL

526298878

100.00

Sub Total A B 13 14 15 16 17

BASED OVERSEAS Foreign Individuals Foreign Corporate Bodies Foreign Institutional Investors (SEBI - registered ) Non Resident Indians ( Individuals ) Non Resident Indian Corporate Bodies Sub Total B

GDRs/ADRs/ADSs Sub Total C

OTHERS ( Please specify here ) Sub Total D

No. of Shares held

% Of Shareholding

Total Controlling / Strategic Holdings

314338700

59.73

Total Free-Float

211960178

40.27

526298878

100.00

BROAD SUMMARY OF HOLDINGS

GRAND TOTAL SUMMARY OF DOMESTIC/FOREIGN HOLDINGS Total Domestic Holdings

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No. of % of Shares held Shareholding 107617391

20.45

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Total Foreign Holdings GRAND TOTAL

104342787

19.83

211960178

40.27

CLAUSE 35: BOMBAY STOCK EXCHANGE Reporting Institution: State Bank of India For the quarter ended: 30.09.2005 Date of report: 08.07.2005 SHARES HELD

% to Total

- Indian Promoters

0.00

- Foreign Promoters

0.00

314338700

59.73

314338700

59.73

CATEGORY A 1

Promoter's Holdings Promoters

Persons acting in Concert Sub-Total

Non-Promoters Holdings

Institutional Investors

Mutual Funds & UTI Banks, Financial Instituions, Insurance Companies(Central/State Govt./Non-govt. Institutions)

31832695

6.05

32695056

6.21

FIIs

62443178

11.86

Sub-Total 126970929

24.13

8952860 33981724 256565 175026 155056 41468018

1.70 6.46 0.05 0.03 0.03 7.88

b c

4 a b c d e f

Others

Private Corporate Bodies Indian Public NRIs OCBs TRUST's OTHERS ( GDR'S)

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

Sub-Total GRAND TOTAL

84989249

16.15

526298878

100.00

FORM C: FREE-FLOAT HOLDERS (DISCLOSE ONLY HOLDINGS OF 1% & ABOVE) (List of holders categorywise) Reporting Institution: State Bank of India Scrip Code - 112 Quarter Ended - 30.09.2005

SL NO

HOLDER NAME

No. of Shares HELD

% of Category Shareholding Code

The Bank Of New York

41468018

7.88

Life Insurance Corporation Of India

28199611

5.36

Fidelity Management & Research Co. A/C Fidelity Investment Trust - Fidelity

7200000

1.37

GRAND TOTAL

77713732

14.77

Relationship, if any with anyone in I

STATE BANK FOREIGN OFFICES There are 52 Foreign Offices in 34 countries service the international needs of the bank's foreign customers, in addition to conducting retail operations. The focus of these offices is India-related business.

PROFILE The SBI’s powerful corporate banking formation deploys multiple channels to deliver integrated solutions for all financial challenges faced by the corporate universe. The Corporate Banking Group and the National Banking Group are the primary delivery channels for corporate banking products. The Corporate Banking Group consists of dedicated Strategic Business Units that cater exclusively to specific client groups or specialize in particular product clusters. Foremost among these specialized groups is the Corporate Accounts Group (CAG), focusing on the prime corporate and institutional clients of the country’s biggest business centers. The others are the Project Finance unit and the Leasing unit. The National Banking Group also delivers the entire spectrum of corporate banking products to other corporate clients, on a nationwide platform.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

PRODUCTS AND SERVICES INDUSTRIAL SECTOR Working Capital Financing SBI offers working capital finance to meet the entire range of short-term fund requirements that arise within a corporate’s day-to-day operational cycle.The SBI working capital loans can help your company in financing inventories, managing internal cash flows, supporting supply chains, funding production and marketing operations, providing cash support to business expansion and carrying current assets. SBI’s working finance products comprise a spectrum of funded and non-funded facilities ranging from cash credit to structured loans, to meet the different demands from all segments of industry, trade and the services sector. Funded facilities include cash credit, demand loan and bill discounting. Demand loans are considered also under the FCNR (B) scheme. Non-funded instruments comprise letters of credit (inland and overseas) as well as bank guarantees (performance and financial) to cover advance payments, bid bonds etc. Project Finance The SBI has formed a dedicated Project Finance Strategic Business Unit to assess credit proposals from and extend term loans for large industrial and infrastructure projects. Apart from this, project term loans for medium sized projects and smaller clients are delivered through the CAG and the NBG.In general, project finance covers industrial projects, capacity expansion at existing manufacturing units, construction ventures or other infrastructure projects. Capital intensive business expansion and diversification as well as replacement of equipment may be financed through the project term loans. Project finance is quite often channeled through special purpose vehicles and arranged against the future cash streams to emerge from the project. The loans are approved on the basis of strong in-house appraisal of the cost and viability of the ventures as well as the credit standing of promoters. SBI deferred payment guarantee

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch SBI can extend deferred payment guarantees to industrial projects for obtaining imported equipment. The DPG is a standby credit guaranteeing deferred payments, usually for payments for capital goods, turnkey contracts etc. Corporate Term Loan The SBI corporate term loans can support your company in funding ongoing business expansion, repaying high cost debt, technology upgradation, R&D expenditure, leveraging specific cash streams that accrue into your company, implementing early retirement schemes and supplementing working capital.Corporate term loans can be structured under the FCNR (B) scheme as well, with the option of switching the currency denomination at the end of interest periods. This will help you take advantage of global interest rate trends vis-à-vis domestic rates to minimize your debt cost. The bank’s corporate term loans are generally available for tenors from three to five years, synchronized with your specific needs.SBI corporate term loans may carry fixed or floating rates, as befits the exact requirement of the client and the risk context. Again, these rates will be linked to the bank’s prime lending rate.SBI corporate term loans can have a bullet or periodic repayment schedule, as required by the client. The repayment mode may be linked to the cash accruals of the company.The Bank’s expert credit crew gauges the applicant’s particular fund requirements and evaluates the company’s credit worthiness, factoring in the cash flows generated by it. Structured Finance SBI structured finance involves assembling unique credit configurations to meet the complex fund requirements of large industrial and infrastructure projects. Structured finance can be a combination of funded and non-funded facilities as well as other credit enhancement tools, lease contracts for instance, to fit the multi-layer financial requirements of large and long-gestation projects. SBI advantage in structured finance Being India’s largest bank and with the rich experience that it brings with it, SBI commands formidable expertise in engineering financial packages that address complex requirements with minimum risk. Further, SBI has firm relationships across the financial

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch map of the world, which can be leveraged to structure solutions that may necessitate the participation of several credit agencies. Dealer Financing SBI extends financial support to the corporate distribution networks, by providing both working capital finance and term loans to select dealers of identified companies. This gives dealers to leverage their business relationship with major corporates to avail low cost credit. Also, this type of financial solutions allows the corporate negotiate a better price with dealers. Dealer financing may be extended in the bill discounting form or simply as cash credit. Channel Financing Channel financing is an innovative finance mechanism by which the bank meets the various fund necessities along your supply chain at the supplier’s end itself, thus helping you sustain a seamless business flow along the arteries of the enterprise. Channel finance ensures the immediate realization of sales proceeds for the SBI client’s supplier, making it practically a cash sale. On the other hand, the corporate gets credit for a duration equaling the tenor of the loan, enabling smoother liquidity management.SBI has the world’s largest banking network of over 9,000 branches and this enables it to deliver the financial solution at your suppliers’ doorsteps, across the span of the country. Equipment Leasing The SBI’s has deployed a dedicated Strategic Business Unit for lease financing that is richly experienced in arranging lease contracts for procuring expensive equipment for your project or plant. At SBI, we arrange lease agreements as stand alone contracts or as part of a structured package. Loan Syndication The SBI leverages its vast network of relationships to arrange syndicated credit products for corporate clients and industrial projects. With its rich experience and strong reputation, SBI’s syndication desk can assemble large loan packages involving a ring of reputed financial entities, domestic and international,

that match the large credit

requirements of infrastructure projects. TRADE and SERVICES SECTOR Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch Eligibility Profit making Corporates/Non-corporates (surface transport operators) owning more than 10 well-maintained vehicles (including the proposed). Quantum of finance Minimum Rs. 10 lacs and maximum Rs. 10 crores. Repayment Term Loan: Maximum 5 years. Repayment will be in Equated Monthly Installments (EMI), starting two months after disbursement. Cash Credit: Repayable on demand, renewal every year. Eligible amount of finance Term Loan: 100 % of the cost of the chassis, inclusive of excise duty. Other expenses are to be borne by the borrower. Where body building is not required, 80 % of the cost of the vehicle will be financed. An additional Term Loan limit, subject to a maximum of 20% of the original limit may be sanctioned for repair of the vehicle, on or after the 3rd year if the loan account is regular. Cash Credit : 80% of receivables.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Prepayment Term Loan: Maximum 1% p.a. on the pre-paid amount, for the residual period. Rate of Interest For Term loans, 8.50% p.a. with monthly rests and for Cash Credit, 11.75% p.a. with monthly rests. Security Primary: Hypothecation of vehicles financed as well as book debts. Collateral: i)

At least 50% of the loan amount

ii)

Personal guarantee of promoters and two third-party guarantors.

Applicability Metro/urban/semi-urban centers

Bill Finance The bank’s bill finance product helps you bridge the fund gap between the date of sale of products to the receipt of payments. The bank purchases the bill of exchange your company receives against a product sale, at a discount, thus doing away with the delay in realizing the receivables.The extent of discounting Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch would amount to the interest calculated till the payments for the original sale are realized, and will be determined on the basis of market interest rates as well as the credit rating of the borrower. Cash Credit for Traders SBI cash credit can be in the form of a running account, similar to an overdraft secured by a charge on current assets, that meets the frequent cash requirements

your

trading

cycle.

Term Loan for Asset Acquisition The specialized product has been designed to help you purchase plant, machinery, land or other physical assets required during the growth and expansion of the your company. Letters of Credit The SBI offers Letters of Credit to facilitates your purchases of goods in trading operations, both domestic and international. Backed by the SBI’s strong reputation, you will be able to build better trust in trade and forge business relationships

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faster.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch The bank’s vast network of branches and correspondent banks enables your enterprise to sustain a seamless flow of business on a wide platform.Further, the bank’s informed trade finance crew can provide you with sophisticated credit and trade information and market knowledge, helping you extract more value from business.

Bank Gaurantees The SBI guarantees the creditworthiness or the business capacity of its clients through its financial and performance guarantees. Small and Medium Enterprise PROJECT UPTECH SBI extends consultancy services through PROJECT UPTECH for technology upgradation of small-scale industries. The bank's Consultancy Cells are trained for comprehensive technomanagerial studies and the bank offers financial packages as follow-up support for implementation of the upgradation ventures. Management Consultancy Services

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch The Bank's Consultancy Services Cells are established in the Bank's Local Head Offices and offer support to clients by:  Counseling young entrepreneurs  Organizing short-term Entrepreneurial Development and Industrial Management Programmes  Techno economic feasibility reports; project appraisals; short market survey  Techno managerial studies of individual firms for enhancing their competitiveness in key areas like marketing, costing and pricing, MIS and corporate delivery systems. Technology Upgradation As an extension of its Management Consultancy Services and for supporting client's efforts for modernization, the bank has set up an Industrial Technology Group engaged in the following tasks:  Enhancing technology awareness among industrialists  Catalyzing a step-up in quality, productivity and cost effectiveness  Disseminating technological/market information Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch GENERAL PURPOSE TERM LOANS State Bank of India grants term loans to small scale industries for meeting general commercial purposes like substitution of high cost debt, research and development, shoring up net worth and funding business expansion.The tenor of the loan is normally is 3 years, and the pricing is fine-tuned to suit the risk profile of the borrower. The repayment is structured in monthly or quarterly installments, according to the cash generation cycle. Eligibility criteria for these term loans The SSI unit that takes the loan should not have any history of defaults in payment of interest or installments of the principal. The unit should have a strong performance record and a respectable credit rating as per the bank’s own credit assessment scales ( In case of loan above Rs. 25 lakhs ) Type of security/guarantee required for the loan Extension of hypothecation charge over the current assets and fixed assets is required as primary security. Further, the borrower whose aggregate loans with the Bank exceed Rs 5 lakh may explore the possibility of collateralizing tangible security such as immovable property

and

third

party

guarantee.

all

cases,

personal

guarantees

proprietors/partners/promoters have to be furnished. Margins applicable A minimum margin of 25 per cent is applicable for acquisition of land and building, building construction, renovation of offices, showrooms, godowns, purchase of equipment, vehicles etc. In other words, the quantum of the loan will be restricted to 75 per cent of the total expenditure. LIBERALIZED CREDIT FOR SSI State Bank of India extends production-linked credit facilities to small-scale industries, ancillary industrial units and village and cottage industrial units on liberal terms and conditions. Under this scheme, the quantum of advances is not linked to the security furnished, but the genuine requirements of the unit. The pricing of the loan is based Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch on credit assessment, and the units with strong ratings may be given finer rates. No collateral security is required for loans up to Rs 5 lakh. Composite term loans can be sanctioned up to Rs 25 lakh combining term loan and working capital. Types of financial assistance under the Liberalized scheme A. The Liberalized scheme offers a range of financial products including the following: 1. Term loans for acquisition of fixed assets 2. Working capital loans financing current assets 3. Letter of credit for acquisition of machinery and purchase of raw materials 4. Bank guarantee in lieu of security deposits to be made with government department/other departments for execution of orders. 5. Deferred payment guarantees for purchase of machinery on deferred payment basis. 6. Bill facility for purchase of raw materials and for sale of finished goods. 7.

Composite loans (term loans plus working capital) up to Rs 25 lakh.

Margins applicable For requirements up to Rs 25,000, no margins are involved. For limits ranging from Rs 25,000 to Rs 5 crore, the margin is set at 20 per cent. For credit limits above Rs 5 crore, a 25 per cent margin may be applied. ENTREPRENEUR SCHEME State Bank of India grants financial assistance to technically qualified, trained and experienced entrepreneurs for setting up new viable industrial projects. Loans are extended to technocrats who are unable to meet the normal margin requirements under the

liberalized

schemes.

Eligibility criteria for the Entrepreneur schemeThe borrower has to be a technically qualified person (a degree/diploma holder in engineering or technology), a craftsman with adequate experience or training or a person possessing a degree in business or industrial management, a chartered accountant or a cost accountant with relevant

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch experience. Types of financial assistance under the Entrepreneur scheme The bank provides: •

term loans,

•

working capital and

•

equity fund finance

Margins applicable For requirements up to Rs 5 lakh, no margins are involved. For needs ranging from Rs 5 lakh to Rs 20 lakh, the margin is set at 10 per cent. EQUITY FUND SCHEME Under the Equity Fund scheme, the SBI grants financial assistance to entrepreneurs who are not able to meet their share of equity fully, by way of interest-free loans repayable over a long period.This type of assistance fills in the gap between the margin requirements in the project and the capital contributed by the promoter. The Equity Fund assistance can be normally repaid over 5 to 7 years after the moratorium period. Eligibility criteria for the Equity Fund scheme The bank extends Equity Fund assistance only to new projects, which are also eligible for the SBI’s Liberalized scheme and the Entrepreneur scheme. The project cost has to be more than Rs 25,000. Type of security is required for the equity fund assistance Security available for other loans should be extended to cover equity assistance also. STREE SHAKTI PACKAGE The Stree Shakti Package is a unique scheme run by the SBI, aimed at supporting entrepreneurship among women by providing certain concessions. An enterprise should have more than 50% of its share capital owned by women to qualify for the scheme. The concessions offered under the Stree Shakti Package are: 1. The margin will be lowered by 5% as applicable to separate categories. Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch 2. The interest rate will be lowered by 0.5% in case the loan exceeds Rs 2 lakh. 3. No security is required for loans up to Rs 5 lakh in case of tiny sector units BUSINESS ENTERPRISES An individual or a firm (partnership or proprietorship) who has established a business venture for the purpose of providing any services like restaurants, Xerox copy centers, computer centers, STD Booths are eligible for this scheme. Original cost of the equipments (including land, building, machinery, furniture and fixture, etc. should not exceed Rs.10 lakh.Extent of assistance is normally capped at Rs 10 lakh out of which working capital limit sanctioned can be up to Rs 5 lakh. For requirements of up to Rs 25000, the margin is nil. For requirements between Rs 25000 and Rs 50000 the margin is 20 per cent. For requirements more than Rs 50,000 the margin is 50 per cent. For loans up to Rs 25000 and more than Rs 25000, the primary security is the charge over the assets purchased out of the Bank's finance. The collateral for loans up to Rs 25000 is nil, for more than Rs 25000, it is the charge over the immovable or movable assets or third party guarantee. STATE BANK OF INDIA COMMERCIAL BRANCH BRIEF INTRODUCTION The industrialists and big customers felt difficult to transact in small banks and also much attention was not being paid to customers. Hence for easy transaction and personal care to the customers they started the commercial branch on 1411-98. this bank deals mainly with big customers who want to borrow Rs25 lakhs and above come here.

COMPANY PROFILE Area profile District population Babasabpatilfreepptmba.com

Belgaum About 10.00 lakhs Page 33

“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Major Industries  Foundries  Machine shops  Hydraulics  Textiles (sarees)  Dairy  Sugar Financial Institutions Total Nationalised branches in Belgaum

432

District State Bank of India Branches in Belgaum district

SBI Branches in Belgaum City

Branch details Location

Halgekar Building Goaves Hindwadi Belgaum-590011

Premises

Leased Area: 8740 SQFT Rent:@Rs.5.85 per Sq ft Monthly Rent: Rs. 51,000/-

Date of opening Incumbany Facilities

14-11-98 SMG V 1. Fully Computerised 2. Trade Finance 3. Forex – “B” category 4. SWIFT / SFMS

Inspection Rating

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A + (December 2003)

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Staff Strength Field officers

Foreign Exchange

Bill Transaction

Accountant

In 1st Floor 2nd Floor

Advances Department Accounts & Foreign Exchanges Department

Important Customers 1. M/s Vishwanath Sugars 2. M/s Shri Renuka Sugar Ltd 3. M/s Ashok Iron Works Group 4. M/s Jinabakul Group 5. M/s Manickbag Group 6. Gudi Family 7. M/s Polyhydron Group 8.

Vega Group

9. M/s Hind Group Top 10 Depositors 1. M/s Vishwanath Sugars 2. M/s BT Patil & Sons 3. M/s Oilgear Towler Polyhydron (PVT) 4. M/s Shri Renuka Sugar Ltd 5. M/s Jinabakul Group 6. M/s Reliance Industries 7. M/s Hind Auto Cranks (Pvt) 8. M/s Fiarfield Atlas (PVT) 9. M/s Ashok Iron Works 10. M/s KLS Society

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch ORGANISATION STRUCTURE

Chief Manager Narendra.D.Tele

Dileep A. Bankapur Deputy Manager (Advances)

Ashok. Patvardhan Deputy Manager (Advances)

Narasimhan Deputy Manager (Advances

Sheena Mathur Concurrent Auditor

Chief Manager is overall incharge of all the bank transactions. He also handles the Foreign Exchange. Under him comes the Manager Credit who manages and controls all the credit related transactions. In absence of chief Manager the Manager Credit is incharge of all the bank related activities. Under him are three deputy managers. Each deputy Manager handles 20 to 25 customers & 80 to 100 accounts among which some maybe manufacturers or traders or builders. Individually they manage their work. The work is allotted equitably to each Deputy Manager. RESEARCH METHODOLOGY Project Idea The purpose of the project is to study and understand Credit Risk Assessment and Rating Mechanism of State Bank of India, Commercial Branch, Belgaum. The study focuses on credit Rating Analysis of M/s Margale Foundries, which is in the line of activity of castings and also manufacturers of auto components. As loans are Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch subject to default in their repayment. SBI tries to assess the repayment capacity of various firms through a tool called Credit Risk Assessment and Rating. Credit rating is necessary for loans and advances of high volume to ensure their prompt repayment and to minimize NPA’s. Title of the Project: “Credit Risk Rating Analysis of M/s Margale Foundries” Objectives Main objective – •

Assess the credit rating of M/s Margale Foundries

•

To study the comparative analysis of Balance sheet of the company and the credit risk rating summary of the company for the financial year 2004-05.

Sub objectives – •

Organization study of State Bank of India, its products, achievements, and future trends in the company.

•

To understand Indian banking sector in general and commercial banking in particular.

•

To understand the Credit Risk Assessment and Rating methodology practiced by State bank of India.

•

To find out whether it is safe to lend high volume loan of more than Rs.25 lacks to M/s Margale Foundries.

•

Conduct analysis of Balance Sheet, Ratio analysis, risk assessment verification to arrive at rating.

•

To understand in brief the SMERA (Small & Medium Rating Agency) agency guidelines followed by SBI

Sample area The area covered for the study is Belgaum district’s State Bank of India where Industries in & around Belgaum city have availed loan facilities from State Bank of India. Duration of the Project is 60 days. (15th May to 14th July 2006) Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Scope of the project 1. To interact with employees and understand the working of State bank of India, Commercial Branch, Belgaum. 2. Detailed in depth interaction with credit managers to understand the risk assessment and rating mechanism of SBI. 3. To Work Within SBI And Study Financial Statements, Reports, Etc., 4. To study the performance of the client company and SBI’s credit rating Model based on the nature of activities of company. 5. Assess the credit rating of Margale Foundries through credit rating analysis with the use of financial results and calculated ratios. Data collection Data obtained for the first time and used specifically for the particular Primary Data: Primary data is the data obtained for the first time and used specifically for the research study. Primary data is collected through in depth interview and discussion with SBI credit managers. This will help me to get qualitative information for analysis of credit rating. Secondary Data: Secondary data are the data that have already been collected by and are readily available from other sources Secondary data is collected through: •

Magazines, Books and literature study

•

Internet and websites.

•

SBI’s Manuals, Reports, and circulars.

This will help be useful to collect quantitative data required for analysis of performance and rating. Project methodology

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch The study is mainly based on risk assessment, ratio analysis and Balance sheet and other financial statements analysis. The data of quantitative nature such as financial statements, ratios etc., are collected from State Bank of India Belgaum Branch’s Records and Reports submitted to SBI by Margale Foundries. Techniques used for quantitative analysis are, 1. Comparative Financial Statements: The comparative analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance. 2. Common sized Statements: Common sized Statement expresses assets and liabilities as per cent of total assets and expenses and profits as per cent of sales. 3. Ratio Analysis: Ratio Analysis is a systematic use of ratios to interpret/assess the performance and status of the firm. Qualitative data is collected through questionnaire filled by credit managers of bank to understand the rating mechanism and other qualitative facts and their effects on CRA model and ratings. Limitations •

Restrictions regarding disclosure of financial information from banks.

•

Detailed analysis was not possible due to limitation on project time.

•

Limited exposure to banking sector in our course module and related topics.

•

Statistical analysis tools could not be used.

•

There were time constraints.

Credit Risk Management What is Risk? The word risk is derived from an early Italian word “resicare” which means “to dare” Risk can be defined as emanating from a situation as something which throws a challenge to a person to act or not to act with regard to an event or happening. These challenges (or risks) under the different walks of life may take various forms. A soldier may run the risk of life in a battle and a traffic police may run the risk of being hit by an automobile on the road. Thus, the concept of risk is synonymous with the uncertainties in a preposition and the degree of risk may be computed in terms of probability of an Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch outcome that is not desired. Every event or situation has some element of associated risks. It is possible to reduce them to a manageable level but these cannot be wiped out together. In short we cannot think of a zero-risk situation, whether in our work environment or in our personnel lives.Risk taking is a deliberate action in the process of financial decision making. The action results from an optimal choice made by the decision maker, which in turn, emanates from a systematic analysis of the various alternatives available. Risk taking is calculated decision and phrases like outcome of “fate” or “come what may” etc do not find a place in the process of risk assessment. Subjective vs objective assessment of risk Though lending bankers have traditionally been taking decisions only after weighing all the inherent risks in credit proposal, there is a renewed thrust today on the importance of laying down a structured system of assessment and management of risk in banks. The credit analysts have indeed been assessing all the underlying risks as perceived by a banker through the process of assessing all the underlying risks as perceived by a banker though the process of assessment was highly subjective. As a result, lending bankers used to denote the risk content in a credit proposal by using statements such as fair banking risk, high banking risk or acceptable banking risk etc. on the basis of which credit decisions were taken. However subjective evaluation of risk serves a limited purpose. The fast changing economic scenario which has perhaps affected the banking system the most, has generated the new kinds of risks, besides bringing about a sea change in the concept of risk management. In order to manage these risks, we need to set a limit for ourselves for risk absorption. In financial parlance, this limit is known as risk appetite. This can be done only if the various elements of risks in a preposition are quantified and aggregated. The new age risk assessment process therefore relies heavily on objective or quantified assessment of risk. In a risk management process, today’s lending banker does not stop with his findings that a credit proposal has an acceptable or fair banking risk. He goes a step further and finds out the degree of acceptability of such risk elements. Thereafter, he may then take a credit decision in favor of the proposal if the degree of acceptability lies within his risk appetite limit.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

CREDIT RISK The degree of credit risk is the probability that a loan lent to a borrower may not be repaid. The extent of repayment likely to be made and the time taken in the process are important factors in the computation of probability of default. Probability of the occurrence of counterpart default determines the extent of credit risk in a business preposition. Credit risk of an activity has a dual perspective- business specific and management specific. The business specific risk may further be bifurcated into systematic and non-systematic risk components. System risks are those posed to the business proposition by factors like recession or depression in the business, government regulation, political unrest, environmental issues etc. over which the management of the business may not have control. Thus though an enterprise is healthy and efficient in operation, the extraneous risk factors, may, at times prove to be significantly challenging. Fortunately, these risks have historically been around 25% to 30% of the entire risk spectrum, the rest 70% to 75% emanating from the enterprise specific risk elements. The non-system risks i.e. the enterprise specific risk components are therefore the most vital factors in the evaluation and assessment of credit risks in a credit appraisal proposal. The term credit risk is defined, “as the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms”. In simple terms it is the probability of loss from a credit transaction. Loans are the largest and most obvious source of credit risk. Loans are given by banks in the form of corporate lending, sovereign lending, project financing and retail lending. However other sources of credit risk exists throughout the activities of banks, including in the banking book and in the trading book and both on and off the balance sheet. Banks are increasingly facing credit risk in various instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options and in the extension of commitments and guarantees, and the settlement of transactions.Credit risk encompasses both default risk and market risk. Default risk is the objective assessment of the

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch likelihood that counterparty will default. Market risk measures the financial loss that will be experienced should the client default. Credit risk includes not only the current replacement value but also the potential loss from default. The components of credit risk are: 

Credit growth in the organization and composition of the credit folio in terms of sectors, centers and size of borrowing activities so as to assess the extent of credit concentration.



Credit quality in terms of standard, sub-standard, doubtful and loss-making assets.



Extent of the provisions made towards poor quality credits.



Volume of off-balance-sheet exposures having a bearing on the credit portfolio.

According to Reserve Bank of India, the following are the forms of credit risk: Non-repayment of the principal of the loan and/or the interest on it. Contingent liabilities like letters of credit/guarantees issued by the bank on behalf of the client and upon crystallization – amount not deposited by the customer. In the case of treasury operations, default by the counter-parties in meeting the obligations. In the case of securities trading, settlement not taking place when it is due. In the case of cross-border obligations, any default arising from the flow of foreign exchange and/or due to restrictions imposed on remittances out of the country.

Credit risk-rating framework: A credit risk-rating framework deploys a number/alphabet/symbol as a primary summary indicator of risks associated with a credit exposure. These rating frameworks are logicbased, utilize responses made on a specified scale and promote the accuracy and consistency of the judgement exercised by the banks. For loans to individuals or small businesses, credit quality is typically assessed through a process of credit scoring. Prior to extending credit, a bank or other lender will obtain information about the party requesting a loan. In the case of a bank issuing credit cards, this might include the party's annual income, existing debts, whether they rent or own a home, etc. A standard formula is applied to the information to produce a number, which is called a credit score. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Based upon the credit score, the lending institution decides whether or not to extend credit. The process is formulaic and highly standardized. Many forms of credit risk— especially those associated with larger institutional counterparties—are complicated, unique or are of such a nature that that it is worth assessing them in a less formulaic manner. The term credit analysis is used to describe any process for assessing the credit quality of counterparty. While the term can encompass credit scoring, it is more commonly used to refer to processes that entail human judgement. One or more people, called credit analysts, review information about the counterparty. This might include its balance sheet, income statement, recent trends in its industry, the current economic environment, etc. They may also assess the exact nature of an obligation. For example, secured debt generally has higher credit quality than does subordinated debt of the same issuer. Based upon their analysis, they assign the counterparty (or the specific obligation) a credit rating, which can be used for making credit decisions. Credit risk limits: For managing credit risk, a bank generally sets an exposure credit limit for each counterparty to which it has credit exposure. This is standard procedure in many contexts. It could be a corporate loan, individual loan or a derivative dealer transacting with counterparties. All entail credit risk. All are contexts where credit exposure limits are used. A bank may also use aggregate credit exposure limits. A bank might set credit exposure limits by industry. It might also set a total exposure credit limit for all its corporate lending activities. Exposures are calculated with the help of credit risk models. Depending on the assessment of the borrower (commercial as well as retail) a credit exposure limit is decided for the customer, however, within the framework of a total credit limit for the individual divisions and for the company as a whole. Also within the limit as per RBI, i.e. not more than 20% of capital to individual borrower and not more than 40% of capital to a group borrower. Threshold limit is set depending on the: •

Credit rating of the borrower

•

Past financial records

•

Willingness and ability to repay

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch •

Borrower’s future cash flow projections.

RBI GUIDELINES ON CREDIT RISK MANAGEMENT A counterparty risk arising from non-performance of trading partners is, however the most important factor significantly contributing towards credit risk. The non performance generally arises from refusal or inability to perform by the counterparty due to adverse price movements or from external constraints that were not anticipated by the principal. The steps in the process of management of credit risk include the following. It is necessary that the process of credit risk management and the following steps are articulated in the approved loan policy of a lending bank. Steps: 1. Measurement of risk through credit rating/scoring; 2. Quantification of risk through;  Estimating expected loan losses over a chosen time horizon (through tracking portfolio behavior over 5 or more years), and  Unexpected loan losses i.e. the amount by which actual losses exceed the expected loss (through statistical measurement tools like standard deviation of losses etc. 3. Pricing the risk on a scientific basis; and 4. Controlling the risk through effective Loan Review Mechanism and portfolio management.

SETTING UP PRUDENTIAL LIMITS An important aspect of instituting a framework of credit risk management is the process of laying down the prudential limits on various aspects of credit, which itself is a mechanism to restrict the magnitude of credit risk. The process may involve the following: I. Setting up benchmarks on liquidity ratios (viz Current Ratio), gearing ratios (viz Debt Equity Ratio), Profitability ratios, Debt Service Coverage Ratios or other ratios, with flexibility for deviations. The necessary conditions in which Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch deviations may be permitted and the approving authority for such deviations should be clearly spelt out in the loan policy of the banks. II. Setting up of single group borrower limits, which maybe lower than the limits prescribed by the RBI to provide a filtering mechanism. III. Setting up of exposure limit ie. sum total of exposures assumed in respect of those single borrowers enjoying credit limits in excess of a threshold limits, say 10% to 15%

of capital funds. The substantial exposure limit may be

fixed at 600% or 800% of capital funds, which depends on the degree of concentration risk to which the bank is exposed. IV. Setting up of maximum exposure limits to industry, sector etc. Proper systems for evaluation of the exposures at reasonable intervals is necessary in this regard. The limits may also require adjustments especially when a particular sector or activity faces slow down or encounters specific problems, other sector/industry specific problems. The exposure limits to sensitive sectors, which are subject to a high degree of asset price volatility e.g. advances against equity shares, real estates etc. and credit facilities provided to specific industries, which are subject to frequent business cycle movements, would necessarily be required to be restricted. Similarly lower portfolio limit should be set for high-risk industries and any excess exposure should be fully backed adequate collaterals or strategic considerations. V. Evaluation of the maturity profile of the loan book of the bank is necessary, keeping in view the various factors viz. market risk, risk evaluation capability, liquidity etc.

RISK RATING In order to facilitate taking credit decision in a consistent manner, a decision maker would look for a risk rating system which serves as a single point indicator of diverse risk factors of a counterparty and reflect the underlying credit risk of a loan book as well. For a the purpose, a substantial degree of standardization is required in ratings across borrowers, which should be designed so as to reveal the overall risk of lending, the Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch critical inputs of setting pricing and non-price terms of loans. Such standardized risk rating systems should also present meaningful information for review and management of loan portfolio and provide a reasonable degree of comfort to the decision makers in its knowledge of loan quality at any moment of time

LOAN REVIEW MECHANISM (LRM) Setting up a proper loan review mechanism for large value accounts with responsibilities designed in various areas is one of the most important ingredients of credit risk management process. LRM is effective tool for continuous evaluation of the quality of loan book and bringing about qualitative improvements in credit administration. The main objective of LRM include:  Prompt identification of loans, which develop credit weaknesses, and initiation of timely corrective action.  Evaluation of portfolio quality and isolating the problem areas.  Providing information for determining adequacy of loan loss provision.  Assessment of the adequacy of and adherence to loan policies and procedure and monitoring of the compliance with relevant laws and regulations and  Providing top management with information on credit administration, including credit sanction process, risk evaluation and post sanction follow up. The loan reviews should focus on:  Approval process  Accuracy and timeliness of credit ratings assigned by loan officers  Adherence to internal policies and procedures, and applicable laws/regulations  Compliance with loan covenants  Post sanction follow up, sufficiency of loan documentation  Portfolio quality, and  Recommendation for improving portfolio quality.

Credit Risk in off-balance sheet exposure

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Banks provide off-balance sheet credit facilities, which include Bank Guarantees, Letters of Credit, Forex forward contracts, Swaps, Options etc. Decision on providing these offbalance sheet facilities are taken after examining the proposal in terms of the normal credit appraisal process. The off-balance sheet exposures may be divided into three broad categories 1. Full risk (credit substitutes)- stand by letters of credit, money guarantees etc. 2. Medium risk (not direct credit substitutes, which do not support existing financial obligations) – bid bonds, letters of credit, indemnities and warranties, and 3. Low risk-reverse repos, currency swaps, options, futures, etc. The important ratios used for credit risk rating assessment are as follows: Sl.No. 1. 2. 3. 4. 5. 6.

Ratio Category Liquidity Ratios Gearing Ratios Profitability Ratios Return Ratios Coverage Ratios Inventory and receivables holding Ratios

Selected ratios Current Ratio TOL/TNW PAT/Net Sales PBDIT/Total assets PBDIT/Interest Inventory + receivables/ net sales.

Credit Rating A credit rating agency is a company that rates the ability of a person or company to pay back a loan. The rating given by a credit rating agency is important because it affects the perceived risk element incorporated into interest rates that are applied to loans. Perhaps the most difficult task in this world is to make a man part with his money. It is slightly lesser difficult when you instantly provide something in exchange (like normal shopping or eating out). But when a common man is asked to “lend” his money to group of people (read company) whom he hardly knows, or does not have time to enquire about, it demands more than a casual reassurance. Safety and return are the two most important criteria for any investor. While returns are easy to understand in terms of interest rates or dividends paid, the safety part is very fuzzy, based on perceptions rather than facts. The need for credit rating Credit rating firms can help lenders derive meaning out of the plethora of information Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch and understand the uncertainties that surround lending relationships. Further, by providing the service of information generation and making available the information and its interpretation to everyone, the specialized credit raters do away with the need for each and every investor to do this himself. It thus allows small investors to avoid the high per unit costs associated with doing the analysis themselves. The rating agencies gather information about the borrower from a variety of reliable sources, like bankers, borrower from a variety of reliable sources, like bankers, auditors and other important stakeholders, which ensures that their views are unbiased and fair. The fairness and reliability is further enhanced by the fact that it is a committee of professionals who are not connected with the borrower. The analysis is based on an all-round analysis of quantitative as well as qualitative factors like past performance, economic environment, market positioning, quality of management and predictions about future, and is thus as complete as can be.

What exactly is Credit Rating The credit rating is a symbolic (using letters, ‘+’, ‘-‘) indicator of the current opinion of the relative capability of the issuer to service its debt obligation in a timely fashion, with specific reference to the instrument being rated. The rating is generally divided in two broad categories, Investment Grade and Non-Investment grade. It is focused on communicating to the investors, the relative ranking of the default loss probability for a given fixed income investment, in comparison with other rated instruments. It is based upon the relative capability and willingness of the issuer of the instrument to service the debt obligations (both principal and interest) as per the term of the contract. The process starts with a request made by the company that wants its instrument rated. The rating team then develops a list of information requirements. After a round of management meetings and plant visits, a preview, followed by a review committee meeting happens, where the final rating is decided, and thereafter communicated to the company. An important activity, called “surveillance” continues even after this, whereby the rating agency monitors the accepted ratings over the tenure of the instrument. Ratings Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch are revised over the tenure of the instrument. Ratings are revised over time based on changing circumstances. A whole gambit of factors affecting the company’s capability to service its debt obligation are considered, like industry characteristics, market position, operational efficiency, funding policies, financial flexibility and management quality. Credit Rating in India In India, there are four major credit rating agencies: CRISIL, ICRA, CARE and FITCH (formerly Duff & Phelps). The first three are promoted by financial institutions lDBI, ICICI and IFCI. These rating agencies mainly rate debt instruments, but some, like ICRA, also rate equity offerings. On the regulatory front, credit rating is mandatory for Non-Banking Finance Companies (NBFCs) who accept fixed deposits as also corporates that issue debentures or bonds whose tenure exceeds 18 months. Credit rating is optional for the rest.

The role of Credit Rating The potential power in the hands of rating firms, to make a surrogate decision for investors, begs a logical next-step question: ‘How does the non-specialist bondholder come to trust the judgment of a rating firm?’ Here, the long-run reputation of the rating firm in its assessments of large numbers of bonds over time -- which surely is a broader experience and exposure than any individual bondholder is likely to have – must be the crucial element in conveying trust to the bondholder. It being their very field of expertise, the word of rating agencies is taken as the bible, and most of the commonplace investors are happy with their investment decision as long as they can back it up with these ratings. Factors involved in credit rating Credit rating depends on several factors, some of which are tangible/numerical and some of which are judgmental and intangible. Some of these factors are listed below: •

Overall fundamentals and earnings capacity of the company and volatility of the same

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch •

Overall macro economic and business/industry environment

•

Liquidity position of the company (as distinguished from profits)

•

Requirement of funds to meet irrevocable commitments

•

Financial flexibility of the company to raise funds from outside sources to meet temporary financial needs

•

Guarantee/support from financially strong external bodies

•

Level of existing leverage (borrowings) and financial risk

As mentioned earlier ratings are assigned to instruments and not to companies and two different ratings may be assigned to two different instruments of the same company eg a company may be in a fundamentally weak business and may have a poor rating assigned for 5 year debentures while its liquidity position may be good, leading to the highest possible rating for a 3 month commercial paper. Very few companies may be assigned the highest rating for a long term 5 or 7 year instrument eg CRISIL has only 20 companies rated as AAA for long term instruments and these companies include unquestionable blue chips like Videsh Sanchar Nigam, Bajaj Auto, Bharat Petroleum, Nestle India apart from institutions like ICICI, IDBI, HDFC and SBI.

FUNCTIONS OF CREDIT RATING Credit rating serves following functions: 1) Provides superior Information: Provides superior information on credit risk for three reasons: (i) An independent rating agency, unlike brokers, financial intermediatories, underwriters who have vested interest in an issue, is likely to provide an unbiased opinion; (ii) Due to professional and highly trained staff,

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch their ability to assess risk is better, and finally, (iii) the rating firm has access to a lot of information which may not be publicly available. 2) Low cost information: Rating firm gathers, analyses, interprets and summarizes complex information in a simple and readily understood formal manner. It is highly welcome by most investors who find it prohibitively expensive and simply impossible to do such credit evaluation of their own. 3) Basis for a proper risk and return: If an instrument is rated by a credit rating agency, then such instrument enjoys higher confidence from investors. Investors have some idea as to what is the risk associated with the instrument in which he/she is likely to take, if investment is done in that security. 4) Healthy discipline on corporate borrowers: Higher credit rating to any credit investment tends to enhance the corporate image and visibility and hence it induces a healthy discipline on corporate. 5) Greater credence to financial and other representation: When credit rating agency rates a security, its own reputation is at stake. So it seeks financial and other information, the quality of which is acceptable to it. As the issues complies with the demands of a credit rating agency on a continuing basis, its financial and other representations acquire greater credibility. 6) Formation of public policy: Public policy guidelines on what kinds of securities are eligible for inclusions in different kinds of institutional portfolios can be developed with greater confidence if debt securities are rated professionally.

BENEFITS OF CREDIT RATING For different class of persons different benefits accrue from use of rated instruments. Such benefits directly accruing to investors through rated instruments are: (A) Benefits to Investors

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch Investors are benefited in very many ways if the corporate security in which they intend to invest their saving has been rated by credit rating agency. Some of the benefits are as: (1) Safeguards against bankruptcy: Credit rating of an instrument done by credit rating agency gives an idea to the investors about degree of financial strength of the issuer company which enables him to decide about the investment Highly rated instrument of a company gives an assurance the investors of safety of instrument and minimum risk of bankruptcy. (2) Recognition of risk: Credit rating provides investors with rating symbols which carry information in easily recognizable manner for the benefit of investors to perceive risk involved in investment. It becomes easier for the investors by looking at the symbol to understand the worth of the issuer company because the instrument is backed by the financial strength of the company which in detail cannot be provided at the minimum cost to each and every one and at the same time they cannot also analyse or understand such information for taking any investment decisions. Rating symbol gives them the idea about the risk involved or the expected advantages from the investment. (3) Credibility of issuer: Rating gives a clue to the credibility of the issuer company. The rating agency is quite independent of the issuer company and ahs no business connections or otherwise any relationship with it or its Board of Directors, etc. Absence of business links between the rater and the rated firm establish ground for credibility and attract investors. (4) Easy understandability of investment proposal: Rating symbol can be understood by an investor which needs no analytical knowledge on his part Investor can take quick decisions about the investment to be made in any particular rated security of a company. (5) Saving of resource: Investors rely upon credit rating. This relieves investors from the botheration of knowing about the fundamentals of a company, its actual strength, financial standing, management details, etc. The quality of credit rating done by professional experts of the credit rating agency reposes confidence in him to rely upon the rating for taking investment decisions. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (6) Independence of investment decision: For making investment decisions, investors have to seek advice of financial intermediaries, the stock brokers, merchant proposal, but or rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggest the credit worthiness of the instrument and indicates the degree of risk involved in it. (7) Choice of investments: Several alternative credit rating instruments are available at a particular point of time for making investment in the capital market and the investors can make choice depending upon their own risk profile and diversification plan. (8) Benefits of rating surveillance: Investors get the benefit of credit rating agency’s on-going surveillance of the rating and rated instilments of different companies. The credit rating agency downgrades the rating of any instrument if subsequently the company’s financial strength declines or any event takes place, which necessitates consequent dissemination of information on its position to the investors. In addition to above, investors have other advantages like: Quick understanding of the credit instruments and weigh the rating with advantages from instruments; quick decisions making for investment and also selling or buying securities to take advantages of market conditions; or, perceiving risk by the company. (B) Benefits of Rating to company Company which had its credit instrument or security rated by a credit rating agency is benefited in many ways as summarized below: 1. Lower cost of borrowing: A company with highly rated instrument has the opportunity to reduce the cost of borrowing from the public by quoting lesser interest on fixed deposits or debentures or bonds as the investors with low risk preference would come forward to invest in safe securities though yielding marginally lower rate of return. 2. Wider audience for borrowing: A company with a highly rated instrument can approach the investors extensively for the resource mobilization using the press Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch media. Investors in different strata of the society could be attracted by higher rate instrument, as the investors understand the degree of certainty about timely payment of interest and principal on a debt instrument with better rating. 3. Rating as marketing tool: companies with rated instrument improve their own image and avail of the rating as a marketing tool to credit better image in dealing with its customers feel confident in the utility products manufactured by the companies carrying higher rating for their credit instruments. 4. Reduction of cost in public issues: A company with higher rated instrument is able to attract the investors and with least efforts can raise funds. Thus, the rated company Can economies and minimize cost of public issues by controlling expenses on media coverage, conferences and other publicity stunts and gimmicks. Rating facilitates best prancing and timing of issues. 4. Motivation for growth: rating provides motivation to the company for growth as the promoters

feel confident in their own efforts and are encouraged top

undertaken expansion of their operations or new projects. With better image created though higher credit rating the company can mobilize funds from public and instructions or banks from self assessment of its own status, which is subject to self-discipline and self-improvement, it can perceive and avoid sickness. 6. Unknown issuer: Credit rating provides recognition to a relatively unknown issuer while entering into then market through wider investor base who rely on rating grade rather than on name recognition. 7. Benefits to brokers and financial intermediaries: Highly rated instruments put the brokers at an advantage to make fewer efforts in studying the companyâ&#x20AC;&#x2122;s credit position to convince their clients to select an investment proposal. This enables brokers and other financial inter-mediaries to save time, energy, costs and manpower in convincing their clients about investment in any particular instrument.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Company in many cases would not be identical. Such differences are likely to occur because of value judgment differences on qualitative aspects of the analysis in tow different agencies.

SMERA SME Rating Agency of India Ltd (SMERA), the dedicated rating agency for SME sector in India was formally launched at the hands of Union Finance Minister, Shri P. Chidambaram, at a ceremony at Coimbatore. SMERA has been set up by Small Industries Development Bank of India (SIDBI) in association with Dun & Bradstreet (D&B), Credit Information Bureau (India) Limited and leading public and private sector banks. SMEs are critical to the nation’s economy – they contribute approximately 40% of the country’s domestic production, almost 50% of India’s total exports and 45% of India’s industrial employment. Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. A major obstacle in SME development is its inability to access timely and adequate finance. There are several reasons for low SME credit penetration, key among them being insufficient credit information on SMEs, low market credibility of SMEs (despite their intrinsic strengths) and constraints in analysis. This leads to sub-optimal delivery of credit and services to the sector. Rating Agencies can play an important role in addressing some of these concerns. In this context, SMERA is wholly committed to facilitating the overall growth and development of Indian SMEs. The agency’s primary objective is to provide SME ratings that are comprehensive, transparent and reliable. SMERA aims to be the country’s premier agency that is focussed primarily on providing ratings to SMEs so as to reflect their intrinsic strength, with a view to facilitate faster and easier access to credit. The SME policy recently announced by Government of India also lays emphasis on using this as a tool for increasing credit to the sector. At the launch of SMERA, the Finance Minister highlighted the three major benefits that would accrue to the rated SME units, viz., adequate and timely credit, low collaterals and lower rate of interest. Mr. Chidambaram stated that his confidence in SMERA’s long-term success stemmed from the fact that major public and private sector banks would be stakeholders in the Rating

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Agency. The Finance Minister also delineated a 4-pronged strategy adopted by the Government of India, to promote the SME sector: a. Doubling the flow of credit to the SSI and tiny sector in 5 years b. Enactment of an SME bill. Currently a draft of the bill is under consideration c. Launch of SMERA, a rating agency dedicated to the SME sector d. Enhancement of Credit Linked Capital Subsidy (CLCS) limit from Rs.40 lakhs term loan to Rs.100 lakhs and simultaneously enhancing the percentage of subsidy from 12% to 15%, the notification of which is expected shortly In his address, Mr. Chidambaram requested the bankers to adopt a more considerate approach towards SMEs that have experienced difficulties in repayments due to circumstances beyond their control, and only adopt a strict approach towards willful defaulters. SMERA is driven by institutions that are leaders in their respective spheres of activity: •

SIDBI is the principal financial institution for the promotion, financing and development of industry in the SME sector in the country. Over the last 15 years of its existence, it has developed a suite of products and services for the SME sector. SMERA will be able to draw upon SIDBI’s longstanding experience in dealing with Indian SMEs and its strong relationships with public & private sector banks.

•

Dun & Bradstreet (D&B) is the world’s leading provider of business information and Risk Management Solutions with a database covering over 95 million business entities. Over the past 164 years, D&B has built up an impressive track record in SME Risk Evaluation & Rating and has over 70 million SMEs in its global database.

•

Credit Information Bureau (India) Ltd [CIBIL] is a composite credit bureau catering to both the commercial and consumer segments. It therefore serves as a

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch repository of valuable payment information, which plays a major role in reducing information asymmetries and credit risk. •

SMERA is also supported by several leading public and private sector banks that are active in the SME space. The recognition and acceptance of SMERA’s ratings within the banking sector will help SMEs save time, effort and money while approaching different banks for credit. It will also simplify and quicken the process of lending to SMEs, while simultaneously reducing lending costs to the sector as a whole.

SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI , Dun & Bradstreet Information Services India Private Limited (D&B), Credit Information Bureau (India) Limited (CIBIL) and several leading banks in the country. SMERA is the country's first rating agency that focuses primarily on the Indian SME segment. SMERA's primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs. MISSION OF SMERA To empower the sector through ratings by providing a credible assessment of their strengths in a transparent report from enabling faster decision and increased flow of formal credit. We are aware that new generation entrepreneurs though with sound business ideas are not so lucky in obtaining bank finance. We feel that independent rating and assessment from a specialized and professional rating agency would help them in obtaining credit facilities at fair terms. What is SMERA rating? •

SMERA Rating is an independent third-party comprehensive assessment of the overall condition of the SME, conducted by SME Rating Agency of India Limited

•

It takes into account the financial condition and several qualitative factors that have bearing on creditworthiness of the SME

•

SMERA Rating consists of 2 parts, a Composite Appraisal/Condition indicator and a size indicator

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch •

SMERA Rating categorises SMEs based on size, so as to enable fair evaluation of each SME amongst its peers

•

An SME unit having SMERA Rating would enhance its market standing amongst trading partners and prospective customers.

BENEFITS 1. Wide Recognition and Acceptance With

each

bank

having

separate

rating

processes

and

disclosure

requirements for the purpose of disbursing loans, SMEs find themselves spending significant time, effort and money while approaching different banks for credit. As SMERA has adopted a comprehensive, transparent and reliable rating process, it would have a wider acceptance within the banking system of the country. In addition to this, SMERA would be supported by SIDBI and a large number of public and private sector banks in the country Such wide acceptance would result in, SMERA Ratings becoming a key requirement in the loan application process. It will also simplify the process of credit requests and make the process more cost-effective. 2. MOU with Banks SMERA has taken the initiative of entering into MOUs with 14 Banks, viz., State Bank of India, Punjab National Bank, Syndicate Bank, Canara Bank, State Bank of Bikaner & Jaipur, Dena Bank, Corporation Bank, Union Bank of Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch India, UCO Bank, CitiGroup, Bank of India, Vijaya Bank, Allahabad Bank and Bank of Baroda. Further a number of banks have announced favorable credit terms including reduction in interest rates to units rated by SMERA. Andhra Bank, Bank of India & SIDBI has already announced reduction in interest rates

for

units

rated

SMERA.

3. Favorable borrowing terms Better ratings from SMERA has already started benefiting units by way of more favorable credit terms in terms of interest rebates. •

Lower collateral requirements

•

Reduced Interest Rates

•

Simplified lending norms

4. Faster Access to Credit SMERA Ratings facilitate banks/lending institutions in reducing the turnaround time in processing credit applications, thereby providing SMEs access to timely and

adequate

credit.

5. Lower Rating Fees

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch The rating fees charged by SMERA are very competitive, and the rating fee is subsidised upto 75 % for eligible SSI units. i.e. Units having a valid Small Scale Industries Registration Certificate (Permanent / Provisional). Units can get rated as low as Rs 4209/- all taxes included. 6. SMERA: An initiative of leaders SME Rating Agency of India Limited (SMERA) is a joint initiative by Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B), Credit Information Bureau (India) Limited (CIBIL) and several leading banks in the country. SMERA is the country's first & only dedicated rating agency that focuses primarily on the SME segment. SMERA's primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs .7.Fair evaluation amongst peers SMERA Ratings categorise SMEs based on size, so that each SME is evaluated amongst its peers. This enables rational comparison of companies of the same size, thus ensuring that the smaller companies are not at a disadvantage while applying for credit.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch 8. Benefit to SME & SSI Units

•

SMERA Rating adds credibility to the status of the SME unit

•

It also helps opens doors to deal with large companies esp. those who deal with a big number of vendors

•

SMERA Ratings serve as motivation to adopt good governance practices which are beneficial in the long run

•

SMERA Ratings also help in international trade and commerce and serve as first point to generate interest among potential trading partners

•

Ratings also acts as an tool for self correction.& self improvement

In event of a 0.25 % interest reduction to a unit getting rated by SMERA the reduction in interest cost comes to Rs. 25000/- on a loan of Rs 1 cr for 1 year thereby outweighing the cost of rating from SMERA. 9. Benefit to Banks •

SMERA Ratings facilitates Pricing of loan products / attractive terms

•

It is also useful in compliance with regulatory and capital adequacy norms

•

Helping the banker through Early warning signals through review ratings as mandated by it

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch 10.

Industry-benchmarked ratings SMERA Ratings take into account industry dynamics by factoring in a system through which an SME could compare its strengths and weaknesses with those of other companies in the same line of business. This is done through statistically derived industry benchmarks for various ratios.

SMERA in pact with SBI The SME Rating Agency of India Limited (SMERA) signed an agreement with State Bank of India recently to encourage the small and medium enterprises (SME) clients of the bank to get rated by SMERA. It is in talks with more banks and financial institutions in

this

regard.

The inaugural offer of rating fees at Rs. 7,500 (plus taxes) was valid till October 31. The agency had appealed to the Centre to grant 75 per cent of rating expenses as subsidy to the units.

SMERA TO EMPOWER SMEs WITH RATINGS SME Rating Agency of India Ltd. [SMERA] has been setup with the very purpose of Rating of the Small and Medium Enterprises segment As we know, SME sector is the key driver of any economy and Indian Economy is no exception. The 551sector alone contributes over 40% of India's industrial output and, one third of India's exports. However, the share of this sector in the Net. Bank Credit [NBC] has not been upto the desired level. This is one upto the desired level. This is one of the main reasons hindering the prospects of growth of this sector. In the absence of timely and adequate credit from the Formal financial system, the sector has to depend on informal credit or wait for sufficient build up of own capital for investment in the business. Often good business Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch opportunities are lost as units in the sector can't cope up with the requirements for want of funds. Coming back on the low share of formal credit to the sector, there could be several reasons for the same. One of the biggest factors being non-availability of enough reliable data to facilitate effective decision making. To put it succinctly, the information asymmetry in respect of this sector, if plugged could create a suitable environment for the lenders and remove the hesitation or reluctance in lending to this sector. Thus need for agency to specifically cater to address this gap was always felt and as a result SMERA was born. SMERA is an initiative to create a suitable environment with the aim of aiding in the overall growth of the sector by making available reliable and credible opinion on the SMEs. SMERA rates an enterprise in entirely and also takes into account the relative industry benchmarks and the operating environment of the enterprise. In other words, SMERA not only analysis the financial performance of the unit it also takes into consideration several qualitative, parameters ascertained through a site visit and interview of the promoters / key personnel of the SME unit before “arriving at the final rating for an enterprise.” SMERA believe that, looking at the nature of the sector, rating them requires a different orientation, specialized approach. Today, SMERA is the only rating agency focused and dedicated for Rating SME units. SMERA has been promoted SIDBI, Dun & Bradstreet, CIBIL and commercial banks. With the stakeholders in SMERA being largely banks, the acceptance of rating given by SMERA is likely to be high amongst the banks. Further SMERA is working jointly towards making SMERA ratings useful to banks in thier credit delivery process to SMEs. Towards this it has entered into MOUs with Bank of India, Canara Bank, Corporation Bank, Punjab National Bank, and State Bank of India, Syndicate Bank, United Bank of India and Vijaya Bank and is in talks with several other banks for rating of their SME clients. SME ratings could be used by banks to validate their internal risk rating of SME clients and or reduce the turn around time in the credit delivery process of the SME clients. In fact benefits, by way of lower interest rates are already being felt by few SME units who have obtained rating from SMERA. Some of the leading banks have started offering benefits from ratings by indicating linking interest rate to SMERA ratings, offering cash subsidy for ratings from SMERA offering better credit terms to SME units. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Pertinent to mention here that reduction in interest rates is only one such benefit that may accrue to an SME unit other benefits being availability of D-UN-S number, making it possible for benchmarking with other units and over all improvement in the performance and health of the units. The concept of rating is new, though there was a felt need for transparent and independent assessment of SMEs, Hence, they are reaching out to the SMEs and the response of the SMEs towards rating would be directly linked to the benefits perceived from getting a rating. Towards this, support from the banks in the form of interest rate reduction, faster. Credit dispensation would go a long way in inducing SME units to opt for rating in around 4 months of its existence, SMERA has assigned ratings more than 70 SMEs has over 200 units at various stages of assessment.

CREDIT RISK ASSESSMENT MODEL OF STATE BANK OF INDIA INTRODUCTION The Credit Rating System (CRS) in vogue since 1992 was replaced by the Credit Risk Assessment (CRA) System in 1996, applicable to the commercial accounts under C & I Segment. Later on it’s scope was enlarged by the introduction of various models to include commercial accounts in SSI and AGL segments in 1998, C & I Trade Advances in 1999 and lastly the Non-Banking Financial Companies (NBFCs) in 2000. In between, a review of the basic model (since introduced in 1996) was done in 1998. The world financial sector has been on the roll since the late ‘90s and the pace of this motion has become more pronounced with the passage of time. In the aftermath of WTO and related developments, the integration of the Indian economy with the world economy is a natural corollary. But such a development has totally altered the basics of market dynamics. The scale of competition has become sharper and more focused day by day- the essence of a comfortable margin in venture has become history and the companies are required to operate on a slender margin to keep the business afloat. The Bank is not sheltered from this intense competition. Booking of the business is the compulsion for the survival, this, in turn, means quoting a very competitive pricing of our loan lest the business is lost. In essence, the relevance of ratings linked pricing is Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch nebulous. In such a scenario, the parameters for measurement of risk dimension has to be enlarged/made broad-based so that only the businesses do not go past the bank but the extent of risk itself is mirrored into our risk assessment system. The extant CRA structure therefore, needs fine tuning from time to time to meet challenges posed by the prevailing market realities. Given the rapid changes in the methodology for the assessment of risk which would become more pronounced in the near future with the advent and enforcement of New Capital Accord entailing a drastic overhauling of the system, an attempt has been made for an empherical review of the CRA structure Basics of CRA MODEL Any model, more so a financial model is a time dependent entity. This entity is always a combination of quantifiable and unquantifiable parts commonly referred to as objective and subjective elements an assessment. The degree of subjectivity/techniques developed and employed to map the particular scenario is dependent on the level of mathematical techniques developed and employed to map that particular state. In financial institutions, the judgmental input at the operating level has a matching role to play to supplement the quantitative methods applied to assess the risks associated with a credit proposal. The risk equivalence can be expressed as under: Risk in a financial proposal = (Fixed part) + (Pertubative Fluctuations) -

Quantifiable + Unquantifiable parts = Objectivity + Subjectivity

In the line with this argument, the present Credit Risk Assessment model is a combination of objective as well as subjective elements. At any point of time, in any model, there would be a variation in the degree of pertubative fluctuations part only if the basic structure is designed to sustain/ absorb maximum shocks/volatility within a modern range. Fluctuations of a very high intensity call for a specialized event specific frame to deal with and no generalizations can be made on this score. The risk Dimensions There are two dimensions to the question of risk fluctuations: a. Even the fixed part has its elements of uncertainty, which can be termed as an aberration/interruption on the system. Measurement of such an aberrations indeterminate to the extent of limitations of the observer in a particular framework.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch b. The subjectivity of the course swings from one extreme to the other. The observer/ appraiser at the operating level (branch etc) measures the risk/identifies the gaps based on his own assessment. The extent of risk and process of which there may be four types: •

Future risk unlimited and human capability unlimited.

•

Future risk unlimited and human capability limited.

•

Future risk limited and human capability unlimited.

•

Future risk limited and human capability limited.

LOGICAL CORROLLARIES: THE COLLATERAL DIMENSION A risk dimension puts a limit on the human capability matrix and in a way various types of possibility and unpredictability affect measurement of various risks- credit risk included. In many cases, these uncertainties put a limit on our ability to predict a future horizon of impossibility, which would bring on the curtain down on the Banker’s efforts to understand the credit risk and the associated risks. The uncertainties therefore cannot be deterministic and these oscillate in a domain dictated by various dimensions of economy, the capability of the company management as well as their willingness to perform in the frame in which the company operates. Such an argument leads to the following: a. Assuming that a quantifiable dimension of risk yields results to a fairly good approximation, subjectivity would still remain but an effort can be made to reduce it’s degree in all Credit Risk Assessment efforts. b. The appraiser at the operative level would have to take responsibility for the subjective portion of the risk assessment. c. Such a crucial responsibility may act as a drag on the efforts of the bank to increase the quantum of credit off-take and hence improve the market share. d. Such a change can be met resolutely by putting in place a committee system in decision making right from a medium size branch. e. Also it would be accepted that a CRA framework can yield result upto a certain degree Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch of approximation and any notion of complete mapping of risk is only a theoretical proposition burdened with uncertainty, limits of human capability, inadequacy of complete mathematical formalism and hence impossibility. f. Such an understanding would ultimately also help in minimizing the risk avoidance behavior which is best tackled in a negative way at present by not entertaining a proposal. CRA MODEL: A SUMMARY a. A single unified model for all the bands of C & I, SSI and AGL segments ( excluding Trade and NBFC sectors) for exposure (FBL+NFBL) above Rs.25 lacs. b. Single rating for a company enjoying both working capital and term loan facilities. c. Rationalisation of Value statements with reduction in sub-brackets wherever found necessary. d. Decrease in the financial score from 66 to 47. e. A new set of parameters identified and collectively put under ‘Business Risks’ carrying 20 marks. To qualify for financial assistance the company would have to secure full marks (02) under the parameter, “Compliance of Environment Regulations”. Incase the existing units in the books of the bank do not secure full marks (02), the bank would explore all possibilities for exercise of the exit option. f. Reduction in the Industry Risk score from 24 to 08 g. Increase in Management Risk score from 10 to 25 h. Maintaining the negative marks for Qualitative score at 10. i. The Quantitative (Dynamic) – Industry comparison under Financial Risk only to be commented upon as a collateral tool for recommendation/sanction of a proposal. j. The Quantitative (Dynamic)- Historical comparison deleted and the parameters aligned with ‘Trends in Performance’ under Financial Risk. k. In case a company scores zero in any of the three parameters of Management Risk i.e. (i) ‘Integrity/Corporate Governance’, (ii) ‘Track Record’ and (iii) Managerial Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch l.

Competence/Commitment’, there would be no need for further assessment of risk and the proposal would be declined. As a corollary to this, the management risk factors would be the first risk bracket to be assessed and only in the event of the company meeting the sub hurdle requirements in the above three parameters , other types of Risk Assessments would follow. In case the existing units in the books of bank score zero, the bank would explore all the possibilities for the exercise of exit option.

m. To conform to the new loan policy SB4/SBTL4 would be the hurdle rate for new connections/enhancement in the limits of existing accounts. The Detailed Structure of the CRA Framework SET 1: A. Financial Risk (a) Static Ratios SL.No (i) (ii) (iii) (iv) (v) (vi) (vii)

Ratios Current Ratio TOL/TNW PAT/Net sales (%) PBDIT/NET Sales (Times) ROCE (%) Inventory/ Net Sales+Recievables/Gross Sales (Days) Trends in performance TOTAL

Score 5 5 10 5 5 5 3 38

(b) Future Prospects : SL.No (i) (ii)

Parameters Projected Profitability Non-Achievement of Projected Profitability TOTAL

Score 3 (-3) 3

Parameters Collateral Security/Financial Standing TOTAL

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

B. BUSINESS RISK: SL.No (i) (ii) (iii) (iv) (v) (vi) (vii)

Parameters Technology Capacity Utilization vs Break Even Point Compliance of Environment Regulations User/Product Profile Consistence in Quality Distribution Network Consistency of Cash Flows TOTAL

Score 4 2 2 2 4 2 4 20

Parameters Competition Cyclicality/Industry Outlook Regulatory Risk Contemprorary Issues like WTO, etc. TOTAL

Score 2 2 2 2 8

C. INDUSTRY RISK SL.No (i) (ii) (iii) (iv)

D. MANAGEMENT RISK SL.No (i)

Parameters Integrity: Sole properitory firm / partnership firm / Pvt. Ltd.

Score

Companies Or (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)

Integrity (for corporate) : corporate governance Track Record Managerial Competence/ Commitment Expertise Structure & Systems Experience in Industry Credibility: Ability to meet Sales Projections Credibility: Ability to meet Profit (PAT) Projections Payment Record Strategic Initiatives Length of relationship with bank TOTAL

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E. QUALITATIVE FACTOR SL.No (i)

Parameters Marks under Qualitative Factors

Score (-10)

F. SUMMARY Risk Category (i) Financial Risk a) Static Ratios b) Future Prospects c) Risk Mitigation:Collateral

Sub-Total Score

Security/ Financial Standing (ii) Business Risk (iii) Industry Risk (iv) Management Risk TOTAL (v) Qualitative Factors (Negative Parameters) (-10)

Total Score

38 3 6

20 8 25 100

20 8 25 100 (-10)

QUANTITATIVE (Dynamic) – Industry comparison* (A)

(B)

(C)

(D)

Ratios for

Company’s

Latest

Comparative position

comparison

ratio as per

Industry

Of (B) vs (C)

their latest

Average

audited

figures as per

financials

CMIE

Better

At Par Worse

database (i) Current Ratio Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (ii) TOL/TNW (iii)

PAT/NetS ales(%)

(iv)Inventory+ Receivables/

Net

sales (Days) SET 2: A. Financial Risk (a) Static Ratios SL.No (i) (ii) (iii) (iv) (v) (vi)

Ratios Current Ratio TOL/TNW PAT/Net sales (%) PBDIT/Intt Trends in performance Gross Average DSCR (for all loans) TOTAL

Score 5 5 10 5 3 10 38

Gross Average DSCR (for all loans) Range >=2.00 >=1.80 >=1.60 >=1.40 >=1.25 <1.25

Score 10 8 6 4 2 0

(b) Future Prospects : SL.No (i) (ii)

Parameters Projected Profitability Non-Achievement of Projected Profitability TOTAL

Score 3 (-3) 3

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch SL.No (i)

Parameters Collateral Security/Financial Standing TOTAL

Score 6 6

B. BUSINESS RISK: SL.No (i) (ii) (iii) (iv) (v) (vi) (vii)

Parameters Technology Capacity Utilization vs Break Even Point Compliance of Environment Regulations User/Product Profile Consistence in Quality Distribution Network Consistency of Cash Flows TOTAL

Score 4 2 2 2 4 2 4 20

C. INDUSTRY RISK SL.No (i) (ii) (iii) (iv)

Parameters Competition Cyclicality/Industry Outlook Regulatory Risk Contemprorary Issues like WTO, etc. TOTAL

Score 2 2 2 2 8

D. MANAGEMENT RISK SL.No (i)

Parameters Integrity: Sole properitory firm / partnership firm / Pvt. Ltd.

Score

Companies Or (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)

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E. QUALITATIVE FACTOR SL.No (i)

Parameters Marks under Qualitative Factors

Score (-10)

F. SUMMARY Risk Category (i) Financial Risk a) Static Ratios b) Future Prospects c) Risk Mitigation:Collateral

Sub-Total Score

Security/ Financial Standing (ii) Business Risk (iii) Industry Risk (iv) Management Risk TOTAL (v) Qualitative Factors (Negative Parameters) (-10)

Total Score

38 3 6

20 8 25 100

20 8 25 100 (-10)

QUANTITATIVE (Dynamic) – Industry comparison* (A)

(B)

(C)

(D)

Ratios for

Company’s

Latest

Comparative position

comparison

ratio as per

Industry

Of (B) vs (C)

their latest

Average

audited

figures as per

financials

CMIE

Better

At Par Worse

database (i)Current Ratio (ii)TOL/TNW Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch (iii)PAT/NetSales(%) (iv)Inventory+ Receivables/

Net

sales (Days)

RATING SCALE The accounts would continue to be rated on a 8 point scale from SB1 to SB8 and SBTL1 to SBTL8 pertaining to working capital loan respectively. The rating scale would however, correspond to the new band of marks as under: SB1/SBTL1 >=90

SB5/SBTL5 >=45

SB2/SBTL2 >=75

SB6/SBTL6 >=35

SB3/SBTL3 >=65

SB7/SBTL7 >=25

SB4/SBTL4 >=50

SB8/SBTL8 >=25

HURDLE RATE /SCORE / GENERAL CONDITIONS a. SB4/SBTL4 would the hurdle rate for new connections/enhancements in case of existing accounts in terms of the new loan policy. b. Minimum scores pertaining to financial, industry and management risks have been redesigned. The new benchmark of minimum score under Business Risk has been evolved. c. The risk rating summary as per the format and pertaining to the type of facilities availed would form an integral part of the risk assessment.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

CRA STRUCTURE FINANCIAL RISK- WORKING CAPITAL Static Ratios (Maximum Score : 38) (i) Current Ratio (CR) (Current Assets/ Current Liabilities) Range >=1.33 >=1.25 >=1.17 >=1.10 >=1.00 <1.00

Score 5 4 3 2 1 0

(ii) TOL/TNW (Total Outside Liabilities / Tangible Networth) Range <=1.50 <=2.00 <=2.50 <=3.00 >3.00

Score 5 3 2 1 0

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

(iii)

PAT / Net Sales (%) (Profit after Tax / Net Sales) Range >=7.50 >=6.00 >=4.50 >=4.00 >=2.50 <2.50

(iv)

Score 10 8 6 4 2 0

PBDIT/INTT (Profit Before Depreciation, interest & Tax / Interest

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch Range >=3.50 >=3.00 >=2.50 >=2.00 >=1.50 <1.50

Score 5 4 3 2 1 0

(v) Return on Capital Employed (ROCE) (%) (PBDIT / Total Assets) Range >=15.50 >=12.50 >=10.00 >=8.50 >=7.00 <7.00

Score 5 4 3 2 1 0

(vi)(Turnover of current assets) INV /Net Sales + Receivables / Gross Sales (Days)

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

Range <=90 <=120 <=150 <=180 <=210 >210

Score 5 4 3 2 1 0

(vii) TRENDS IN PERFORMANCE: Maximum Marks (+03):

Table 1

Sl.No

Latest Score

Static Ratios as per

Score in past three years as per

audited Financials

static ratios score chart Year 1

i) ii) iii) iv)

Year 2

Year 3

Year 4

Current Ratio TOL/TNW PAT/Net Sales (%) Return on capital employed (ROCE) (%) TOTAL SCORE

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch

The total marks scored by a company in table 1 are to be put in the relevant brackets in table 2 given below to indicate the aggregate score. Table 2 Range Continuous improvement in performance compared to the base year 1 as

Score 03

evidenced by continuous increase in score From Year 2 to Year 4 as per the score table Deterioration in performance in year 2 compared to base Year 1 but

improvement in the Year 3 & Year 4 (in comparison to Year 1 & Year 2) as per the score table/ continous improvement for a company in existence for only 03 years. Improvement in performance only in Year 4 compared to earlier

years/improvement in performance for a company in existence for only 02 years /static performance for a company in existence for >=< 4 tears Deterioration as evidenced by reduction in score over the years for

companies belonging to any existence range (minimum 02 years) to facilitate comparison

To score the maximum marks of 3, the borrowing company should be in existence for atleast 04 years to facilitate the above comparison. TOTAL SCORE: 38

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

CRA STRUCTURE FINANCIAL RISK- TERM LOAN (Maximum Score: 25) (i)

Project D/E Range <1.50 >=1.50 >=1.60 >=1.70 >=1.80 >=2.00

(ii) Score 5 4 3 2 1 0

(iii)Gross Average DSCR of the project

Range <=1.50 <=2.00 >=2.50 >=3.00 >3.00

TOL / TNW Score 5 3 2 1 0

(iv) Gross Average DSCR for all Loans

Range >=2.00 >=1.80 >=1.60 >=1.40 >=1.25 <1.25

Score 5 4 3 2 1 0 Range >=2.00 >=1.80 >=1.60 >=1.40 >=1.25 <1.25

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Score 5 4 3 2 1 0

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (v) Terms of Repayment Range <5 >=5 >=6 >=7 >=8 >=10

Score 5 4 3 2 1 0

TOTAL SCORE : 25

NEW CRA STRUCTURE FINANCIAL RISK A. FUTURE PROSPECTS PARAMETER 1A (i)

Projected Profitability (PAT/ Net Sales) (%) The profitability projections for the coming year is 6% more than the

(ii)

immediate last financial year. The profitability projections for the coming year are 3% to 4% more

(iii)

than the immediate last financial year. The profitability projections for the coming year exceeds by less than 3% than the immediate last financial year

1B (i) (ii) (iii)

Non-achievements of projected Profitability (PAT/Net Sales) (%) [Maximum Marks :(-3) ] The actual profitability >=90% of the projections The actual profitability >=80% but <90% of the projections The actual profitability <80% of the projections

TYPE (D) : VARIOUS COMBINATIONS OF CS/ FS FOR SCORING (i)

Tangible Collateral only;

(ii)

Only Guarantees;

(iii) Only Financial Standing; (iv) A combination of (a) Tangible Collateral & (b) Guarantees; (v)

A combination of (a) Tangible Collateral & (b) FS

(vi) A Combination of (a) Guarantees & (b) Financial Standing Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

CRA STRUCTURE BUSINESS RISK To qualify for financial assistance, the company would have to secure full marks (02) under the parameter, “Compliance of Environment Regulations.” In case of existing units in the books of the bank do not secure full marks (02), the bank would explore all possibilities for exercise of the exit option. 1. TECHNOLOGY (i)

World class technology and capability systems or tie up with a world class major. The Company are capable to withstand competition Or The company have a proven technology to withstand competition Or The technological capability to be built up by the new company would enable it to withstand competition.

(ii)

The existing technology is adequate to a great extent and not subject to any vast changes in medium term. The company can sustain competition sometime. Or The existing technology allows the company to meet the demands of competition to some extent. Or The technological base designed for the new company would be sufficient enough to enable them to compete in the market for sometime.

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch

(iii)

Obsolete technology. The company lacks the financial capability/ will to undertake technology upgradation and hence are unable to withstand competition in the event of even moderate fluctuations. Or The technological plan of the new company is obsolute and it would be difficult for them to compete in the market to sustain their operations.

2. (i)

CAPACITY UTILIZATION vs BREAK EVEN POINT (BEP) The existing capacity utilization is 30% above BEP Or

(ii)

The capacity utilization projected for the new company is 30% above BEP. The existing capacity utilization is 20% above BEP Or

(iii)

The capacity utilization projected for the new company is 20% above BEP The existing capacity utilization is less than 20% over BEP. Or The capacity utilization projected for the new company is less than 20% above BEP.

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COMPLIANCE OF ENVIRONMENT REGULATIONS (i)

Full compliance of environment regulations. Or The project report of the new company envisages full compliance of the new

(ii)

environment regulations before the start of commercial production. Partial compliance of the environment regulations Or The new company is not expected to be fully compliant with the environment

(iii)

regulations before the start of commercial production. Lopsided compliance / utter disregard of Environment

Regulations. Or

The complince of environmental regulations has not been touched upon in the project report of the mew company/ the project report is sketchy about the compliance environmental regulations.

4. USER / PRODUCT PROFILE Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (i)

Product of wide acceptance/ users. The product is distinctive. There are no complaints about rejection of the products. The delivery schedules of products are adhered to Or The products of the company have an edge over others; the chances of rejection are expected to be minimum. User of the products have not many substitutes. There are only a few instances of

(ii)

rejections and by and large the company are able to adhere to the delivery schedules. Or The products of the new company are expected to be well accepted to sustain in (iii)

the market. The product is custom made to specifications and has no alternative use. The company is unable to meet the delivery schedule. Frequent rejection of company’s product Or The proposed product profile of the new companies is of a general nature and the user has other alternative substitutes in case of rejections.

CONSISTENCY IN QUALITY

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

(i)

The record of the company in maintaining the quality of the product is excellent. Sales rejection on account of poor quality are almost nonexistent Or The Company are having ISO certification .

The proposed operations of the new company are geared towards obtaining an ISO certification on account of their stress on maintaining highest quality standards/ Consistency in quality is to be the hallmark of (ii)

their operations. The record of the company in maintaining the quality of it’s products is good. There are only a few cases of sales rejections. There is no ISO certification. Or Although the proposal of the new company does not talk of obtaining ISO certification as one of it’s goals, there is enough stress on maintaining

(iii)

consistency in quality of its product. There is no consistency in quality and there is no anxiety on the part of the management to rectify the situation.

Sales rejection on account of poor

quality are common. There is no ISO certification. Or There is neither adequate stress nor any mechanism designed to be built-in for maintaining consistency in quality of the product of the new company.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

DISTRIBUTION NETWORK

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

(i)

Wide distribution for the Company’s products- either it’s own or in conjunction with others. Or Although the company does not have a wide distribution network, the sales are increasing tear after year. Or The management of the new company is optimistic about gradual increase in sales year after year on account of the uniqueness of its products and its

(ii)

quality even without a wide distribution network. Distribution network in important areas but not large enough to penetrate the entire market Or Despite a small distribution network, the sales are not declining significantly/show a marginal increase / remain roughly at the same level. Or The new company proposes a small distribution network for its products. Or

(iii)

The new company expects a marginal increase A feeble distribution structure / no structure of its own and the sales show a declining trend.

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Consistency of Cash Flows

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (i)

Cash inflows adequate to meet company’s requirements ( seldom needs overdrawings) and/or on account of a well laid out policy to take care of their unhedged portion of forex risk, their cashflows are not going to be affected. Or The cash inflows projected by the new company seem to be adequate and request for overdrawings is not envisaged and / or on account of a well laid out policy to take care of their unhedged portion of forex risk, their

(ii)

cashflows are not going to be affected. Cash inflows slightly short of company’s projections (sometimes needs overdrawings ) and / or the policy to contain the unhedged portion of forex risk has not been firmed up. Or The cash inflows projected by the new company falls slightly short of the requirements and hence would require additional assistance to meet this gap and / or the policy to contain the unhedged portion of forex risk has not

(iii)

been firmed up. Cash inflows are not consistent with the projections (often needs overdrawings) and/or no policy in place to contain unhedged forex risk

CRA STRUCTURE INDUSTRY RISK 1. COMPETITION (i) Turnover growth faster than the industry growth. Or The turnover growth higher than the industry growth projected for Babasabpatilfreepptmba.com

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(ii)

the new company. Turnover growth remains faster but it is at the level of the industry growth rate Or Turnover growth at par with the industry growth projected for the

((iii)

new company. Turnover growth remains static, though there is recession in the market. Or Static turnover growth projected for the new company in new

(iv)

company in view of recession at present in the market. Turnover growth declining. Or It would be difficult for the new company to compare in view of the poor turnover growth projected

2. INDUSTRY OUTLOOK (i) (ii) (iii) (iv) 3.

Long term prospects of industry are excellent. Outlook stable except for some critical factors Susceptible to unfavourable changes in the economy Industry in declining phase REGULATORY RISK

(i) (ii) (iii)

Business operations (BO) remain unaffected by Regulatory Risk Effect of regulatory Risk can be contained Delicately balanced, Business Operations can be affected if

(iv)

immediate steps not taken Unable to cope with the situtation

4. CONTEMPORARY ISSUES LIKE WTO, ETC. (i) (ii) (iii) (iv)

Adequate capability to handle the effects of contemporary issues Adequate capability but it requires to be translated into action. Complacency evident. Adhoc response to industry issues. Not able to cope with.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

CRA STRUCTURE MANAGEMENT RISK Maximum Score :25 INTEGRATING / CORPORATE GOVERNANCE ‘TRACK RECORD ‘ AND MANAGERIAL COMPETENCE / COMPETENCE / COMMITMENT’are crucial management risk factors carrying maximum 3 marks each. In case a company scores zero (0) and the proposal would be declined . In case, the existing units in the books of the bank would explore all possibilities for the excercise of exit option to protects its interests. 1.A INTEGRITY : Sole Proprietary Firm / Partnership Firm / Pvt. Ltd. Companies i) ii) iii)

The integrity and character of the management is beyond reproach. The management is having good reputation about integrity in the market. Features revealed by reports on conduct of account / stock audit / periodic inspection reports go against the integrity of the company / The company is a defaulter under RBI’s willful defaulters list and hence the Bank should exercise exit option.

1.B INTEGRITY (for Corporate): CORPORATE GOVERNANCE

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(i)

Corporate governance (CG) systems are in place and adhered to fully. Or

(ii)

The new company has envisioned to fully comply with CG systems. Corporate governance systems are not fully functional / operational . Or The new company does not have a specific plan to fully comply with

(iii)

CG system / plans for CG systems need futher concretization There is a partial implementation of corporate governance system; sufficient effort is not made Or There seems to be absolutely no plan for implementation of CG system in the new company.

TRACK RECORD

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

(i)

Maintains financial discipline, absolutely no irregularity in the account. The Management is very sincere and open to any suggestions to bring excellence in the financial management. Or Although the new company does not have any borrowing arrangement with any bank / FI’s , it’s other accounts say, current account etc, are conducted as per norms and they are open to any

(ii)

suggestions to conform to the rules. On a few occasions, repayment of loans is delayed. The Management tries to set things right but professional approach in adherence to financial discipline is lacking. Or By and large the conduct of other accounts of the new company is satisfactory. Professional approach in adherence to financial

(iii)

discipline is lacking. Accounts are rendered frequently irregular and the companies do not respond to counsel to enforce financial discipline. Diversion of funds by routing of sale proceeds through other banks on record. Or The conduct of other accounts of the new company is not satisfactory and the management is also not responsive to any suggestions for improvement in the same.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

MANAGERIAL COMPETENCE /COMMITMENT

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(i)

An exceptionally high level of competence & competence & commitment evidenced by their record in timely execution of projects as gathered from various market sources including banks/ PSUs / Govt. Depts./ Multinational Companies Or An exceptionally high level of competence & Commitment in respect

(ii)

of new company as gathered from market sources. Although managerial competence / commitment exists, but due to lack of proper planning / strategy, execution of projects / work undertaken are delayed. Or Although managerial competence / commitment in the new company exists, market reports suggests lack of proper plan / strategy for

(iii)

execution of a project/ work. A cohesive thrust is lacking. There is total chaos in the execution of projects/ works undertaken, the completion of which are either inordinately delayed or not completed at all. The managerial competence is totally lacking and there is no commitment on the part of management to bring an improvement in the affairs of the company. Or Market reports suggest lack of managerial competence / commitment in the new company set up to continue any venture.

4. EXPERTISE (i) (ii)

(iii)

Eminently qualified professionals are working as a cohesive team. Company has few professionals on its roll and is basically run/ managed by non-professional owners. The management centres around one or two persons only. Professional expertise is lacking.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

5. STRUCTURE AND SYSTEMS (i) Excellent budgeting and costing system are in place. MIS is perfect and working. Or Design of an excellent budgeting and costing system proposed in the project of the new company. (ii) Although budgeting, costing and MIS are in place, proper implementation efforts are lacking. Or Although the design of an excellent budgeting & costing system are proposed in the project of the new company but given the profile of the personnel, there seems to be a concern about their actual implementation. (ii)

Systems not in place. All decisions centre around one person takes adhoc decisions.Reporting systems are non-existent. Or

All systems in the new company are designed with only one person as the fulcrum without any proper structured set-up to carry out the planning work in his absence. No reporting system envisaged.

EXPERIENCE IN THE INDUSTRY (i)

The management has a long experience in the industry (>=10 years)

(ii)

The management has a moderate experience in the line.(>= 5 years)

(iii)

The management has relatively less experience in the line. <5 years)

7. CREDIBILITY; ABILITY TO MEET SALES PROJECTIONS (i) The management’s ability in meeting sales projections is beyond doubts as is evidenced by their past record of three years (projected vs actuals ). There is a Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch negative variance of less than 10% in the comparison of the actual vs the projected sales figure. Or The management of the new company seems to be capable of meeting sales projections with a negative variance of les than 10 % as per the plan drawn up by them. (ii) There is a negative variance of 10 % and above but less than 20% in the actual v/s the projected sales as is evidenced by their record of past 03 years. Or The management of the new company seems to be capable of meeting sales projections with a negative variance of less than 20% or so as per the discussions held with the promoter in the event of their operations getting affected by external factors beyond their control. (iv) The record of the management in achieving sales projections in the past three years is poor (actual sales less than 80% of projections.) Or A perusal of the project plan of the new company shows that it would not be able to meet even 80% of its sales projections given the type of products, their pattern as also its average market penetrating capabilities as extrapolated from the profile of the Personnel/ poor marketing structure. 8. CREDIBILITY ABILITY TO MEET PROFIT (PAT) PROJECTIONS (i) The management’s ability in meeting profit projections is excellent. In the last three years record every year, actuals have either exceeded projections or have shown a negative variance of less than 10% Or The management of the new company seems to be capable to meet profit projections with a negative variance of less than 10% or so as per its plan to meet the sales projections and the corresponding margin of profit in the venture. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (ii)

The management’s ability in meeting profit projections may be rated as good. In the last three years record every year, actuals have shown a negative variance of either 10% or more but less than 20% Or The management of the new company seems to be capable to meet profit projections with a negative variance of less than 20% or so even in a not too favorable environment as per the plan drawn up by the promoters to meet the sales projections and the margin of profit in the venture.

(iii) The management’s ability in meeting profit projections is poor. In the last three years record, every year actual profit has always been less than 80% of projections. Or A perusal of the proposal of the new company shows that it would not be able to achieve even 80% of the profit projections. 9. (i)

PAYMENT RECORD The record of meeting commitments to lenders and creditors is excellent. The company have rarely defaulted on this score. Or Market reports suggested that the new company have an impeccable record in meeting their financial commitments.

(ii) The record of meeting commitments to lenders and creditors is good. The company have defaulted only once/ twice on this score. Or Market reports suggested that by and large, the new company have a good record in meeting their financial commitments. (iii)

The record of meeting commitments to lenders and creditors is poor. The

Company have rarely met their commitments in time. Or Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch Market reports suggest that the promoters of the new company lack in their resolve in meeting their financial commitments in time. 10

STRATEGIC INITIATIVES

(i)

The management is proactive in taking well thought out initiatives for creating leadership position for the company. Or The management of the company/ new company has the requisite capability to make it one of the leading ventures in its line of business.

(ii) The management is capable of taking initative but the necessary thrust is lacking/ seems to be lacking. The leadership position at a particular time is on account of a probability factor and not due to any concerted efforts in this regard. Or Although the promoter is capable but the necessary thrust seems to be lacking. The leadership position at a particular time is on account of a probability factor and not due to any concerted efforts in this regard / the project & the personnel profiles do not contain any leadership statement. (iii) Both the will and capacity to take any strategic initiative are non-existent. The survival of the company in the market is merely on account of its past reputation and not on account of any ongoing effort of the management in this regard/ the current downswing in the market allows such complacency to survive. Or A perusal of the project does not yield any vision/ capability/ strategic statement for transforming the company to a leadership position. 11.LENGTH OF RELATIONSHIP WITH THE BANK (i) Dealing with the bank for more than 10 years and their conduct is fully satisfactory. (ii) Dealing with the bank for more than 5 years and their conduct is fully satisfactory. (iii) Dealing with the bank more than 10 years/ 5 years and their conduct is by and large satisfactory. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch (iv) Dealing with the bank for more than 10 years / 5 years / less than 10 to 5 tears and their conduct is not satisfactory.

CRA STRUCTURE QUALITATIVE FACTORS: NEGATIVE PARAMETERS Maximum Score : (-10) Details

Amount as

Probability of

Amount assessed

per Balance

Invocation

to be at Default

3=1*2

Sheet A. Contingent Liabilities (a) Claims against disputed tax

liabilities/ Excise Duties (b) Claims against the company not acknowledged as debts © Corporate guarantee given without bank’s permission/ approval B. Auditors qualifying remarks having impact on financials /profitability B. Accounting policies a. valuation of inventory, b. capitalization, c. depreciation and d. revaluation D. Any other factors Total Linkages between total marks (negative) and the effect on the TNW of the company to be graded as under: If total amount under 3 is >10% of TNW >8% of TNW Babasabpatilfreepptmba.com

-ve marks to be given 10 8 Page 101

“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch >6% of TNW >4% of TNW >2% of TNW <=2% of TNW

6 4 2 0

GENERAL CONDITIONS a. Apart from the risk rating of the credit exposure done at the time of the first sanction, the risk rating under CRA system should normally be reviewed annually, The CRA exercise would be independent of renewal; in other words, risk rating need not necessarily be done only annually based on the audited financial results as soon as these are available. The renewal exercise can proceed simultaneously or follow subsequently. b. Below the hurdle rate of SB4/ SBTL4, the risk assessment is to be undertaken at half-yearly intervals and in critical cases, at quarterly intervals. c. The assets classified as ‘Sub-standard’ and below, are outside the purview of this Credit Risk Rating. Procedure of Credit Rating  Analysis of Audited B/S, P & Loss A/c, various schedules every year  Credit rating is revised every year  Above Rs2500000 Credit rating is compulsory Securities Covered under credit rating  Primary Securities: Hypothecation charge over the Current Assets and Fixed assets. Where finance is extended for acquisition of land and building, building construction, up gradation and renovation of offices, showrooms and godowns etc. equitable mortgage of relative fixed assets will be considered as the primary security. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch  Collateral Securities: This is extra security provided by a borrower to back up his/her intention to repay a loan. Agency norm followed by SBI SMERA – Small & Medium Enterprise Rating Agency of India Documents required for credit rating  Audited B/S, Profit & Loss Account  Schedules & Annexures  Company’s Memorandum of Understanding, Articles of Association, Board of Directors, Board Resolution  Registration of Company (ROC) Certificate

Incase of Limited Company  Stock Market certificate – Authorised person to operate account Company’s can take loans Authorised by Articles of Association & Memorandum of Understanding  In case of Partnership – Partnership deed is required.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Benefits of credit rating to SBI  Financial health of the company can be known through credit rating.  A good rated company gets acceptability in the industry and market.  Helps to determine rate of interest on loans. Factors considered while rating by SBI The bank sees all the items of Balance Sheet and also considers off-balance sheet parameters for rating. Which are,  Managerial Skill of the person if he wants to start a new business based on his earlier positions  Industry Scenario  International Market  Money Market Symbols used in credit rating  SB1 to SB7 – For Working Capital  SBTL1 to SBTL7 – For Term Loans (1 being Highly rated and 7 being Low rated) Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Type of Industries covered by SBI  Manufacturing Industries  Trade & Service Industries  Builders  Educational Institutions

MARGALE FOUNDRIES INTRODUCTION In the year 1976,the founder, Late Shri. M. V. Margale established a unit Margale Engineering Works with machining activities. The experience, dedication & the teamwork, led the expansion of MARGALE FOUNDRIES on April 11th 1994, to manufacture & supply Gray Iron Castings, to meet the requirement of customers. Today, the unit is equipped with modern machine shop to produce the total finish products in house. The team of capable Engineers gives the Total Quality Assurance & ready to mark on Global way, with an achievement of ISO 9001-2000 Quality Certification.

PRODUCTS •

Pulleys

•

Fly Wheels

•

Bell housing

OBJECTIVES •

Customer Satisfaction.

•

Up-gradation in work culture & work Technology.

•

Continuous Improvement.

•

Optimum utilization of Resources.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch •

Employee Satisfaction

COMMITMENTS The Quality Control procedure is followed with Total Quality Management Philosophy and ISO 9001-2000 quality management ensure, Total Customer Satisfaction. Margale Foundries are always on the toes to take up the Challenges of new Development & Technologies. They ensure the Product delivery on time and all time with 100% Quality. With this commitment, they are striving for the achievement of QS

9000.

QUALITY POLICY They manufacture and supply the Product to the Customer’s



Satisfaction in totality. Their work culture ensures delivery in time with best quality and



precise quantity with continuous improvement. They up-grade ourselves with new technology of resources and

 keeping

the

good

environment.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

MANUFACTURING ACTIVITY They manufacture Gray Iron Castings in various grades, mainly used in the Automobile, Air Conditioning Industry, Transmission & Machine Tools.

CUSTOMERS Some Of the Customers are :•

Disa India Limited

•

Same Deutz-fahr India Ltd

•

Lombardini India Private Ltd.

•

Kirloskar McQuay Ltd.

•

Greaves Cotton Limited.

STUDY OF THE CREDIT RISK RATING ANALYSIS OF MARGALE FOUNDRIES INDUSTRY SCENARIO: Due to the revival of automobile industry, the activity at the foundries has picked up. The orders and payment position of foundries have improved substantially. MF was not able to catch this benefit as the unit supplied to M/s SAME deutz Fahr India Pvt.Ltd. who have defaulted in payment to the tune of Rs.15.00 lacs. Of late the unit has been diversifying it’s customer base and will be able to make higher sales and profit during next year.

BRIEF BACKGROUND: The unit is in the line of activity of castings for the past 10 years. Mr. Vishwanath Margale, a qualified diploma holder in Mechanical Engineering is having good experience in the line of activity, manages it. His father Shri.Marutirao Vishnu. Margale started with a small unit by name M/s Margale Engineering Works (MEW) in the year 1975 and he is banking with State Bank of India since 1975.On 01.11.2001 Mew was merged with Margale Foundries. The unit is producing auto components like Fly wheel, oil sump, Manifold Pulleys etc. The overall management of the unit is satisfactory. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

Name of the Partners 1) Shri. Vishwanath. M.Margale 2) Shri. Ravi. M. Margale 3) Shri Mandakani. M. Margale 4) Shri Sanjivani. M. Margale

Profit sharing Ratios 25% 25% 25% 25%

ASSESSMENT OF WORKING CAPITAL REQUIREMENTS

OPERATING STATEMENT Name: MARGALE FONDRIES As per profit and loss account actuals/ Estimates for the year ended/ending 2004 YR.BEFORE AUDITED 1.Gross sale [i] Domestic sales [ii] Export sales Add other revenue income Total 2. Less Excise Duty

2005 2006 LAST.YEAR CURR.YEAR LAST AUDITED ESTIMATED

[Rs in lacs] 2007 FOLLOWING YEAR-PROJ

151.96

128.29

190.00

227.00

13.03

11.73

13.00

15.00

164.99

140.02

203.00

242.00

16.32

17.69

26.20

31.30

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Deduct other items 3. Net Sales [item1-item 2]

148.67

122.33

176.80

210.70

-17.72%

44.53%

19.17%

82.95

71.76

105.50

126.04

82.95

71.76

105.50

126.04

ii] Other spares [a] Imported [b] Indigenous

1.68

0.38

0.40

0.41

1.68

0.38

0.40

0.41

iii] Power and fuel

11.21

12.93

16.00

19.12

iv] Direct labour [factory wages]

12.67

9.13

13.35

16.00

v] Other mfg.expenses

12.92

8.25

12.00

14.30

vi] Depreciation

6.25

5.79

5.00

4.50

vii] SUB-TOTAL [i to vi]

127.68

108.24

152.25

180.37

viii] Add:Op.stocks-inprocess

13.42

21.02

31.12

34.00

Sub-total

141.10

129.26

183.37

214.37

ix] Deduct: Cl.stocks – in-process

21.02

31.12

34.00

35.00

x] Cost of production

120.08

98.14

149.37

179.37

0.00

4. % rise [+] or fall [-] in net sales as compared to last year[annualised] 5.Cost of sales i] Raw materials [including stores and other items used in the process of manufacture] [a] Imported [b] Indigenous

xi] Add: Op.stock of FG Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

Sub- Total

120.08

98.14

149.37

179.37

xiii] Sub-total [total cost of sales]

120.08

98.14

149.37

179.37

6.Selling, Genl.& Admn.expenses

21.02

15.05

17.50

21.00

7.Sub-total[5+6]

141.10

113.19

166.87

200.37

8. Op.Profit before Interest[3-7]

7.57

9.14

9.93

10.33

9.Interest

6.15

6.86

7.00

10. Op.Profit after Interest[8-9]

1.42

2.28

2.93

3.33

0.23

0.03

0.05

0.23

0.03

0.05

0.00 0.23

0.00 0.03

0.00 0.05

1.65

2.31

2.98

3.38

xii] Deduct: Cl.stock of FG

11.[i] Add other nonop.income [a] int on rd/td/it/discount [b] Cenvat receipts Sub –total[income] [ii]Deduct other non op.exp. [a] [b] Sub –total[expenses] [iii] Net of nonop.income/exp [iv] Expenses Amortised 12.Profit before tax/loss [10+11(iii)] 13.[a] Provision for taxes [b]Provision for deferred

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch tax 14. Net Profit/loss [1213]

1.65

2.31

2.98

3.38

16. Retained Profit[1415]

1.65

2.31

2.98

3.38

17.Retained profit/Net Profit[%]

100.00

15. [a] Equity dividend paid-amt [Already paid+B.S.Prov] [b] Dividend rate

ANALYSIS OF BALANCE SHEET Name: MARGALE FOUNDRIES As per balance sheet as at: LIABLITIES

CURRENT LIABLITIES 1. Short term borrowings from banks [incld bills purchased, discounted & excess borrowings placed on replacement basis] [i] From applicant Bank

2004 YR.BEFORE LAST AUDITED

2005 LAST YEAR AUDITED

2006 CURRENT YEAR ESTIMATED

[Rs. In lacs] 2007 FOLLOWING YEAR PROJECTED

35.61

39.98

35.00

35.61

39.98

35.00

[ii] From other Banks [iii] [of which BP & BD] Sub-Total [A]

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch

2. Short term borrowings from others 3. Sundry creditors [Trade]

18.10

21.13

23.51

26.65

14.99

1.44

9. Other Current liabilities & Provisions [due Within 1 year]

0.84

1.47

Sub-Total [B]

38.37

26.44

28.82

31.96

10. TOTAL CURRENT LIABLITIES [total of 1 to 9 excld 1 [iii]]

73.98

66.42

63.82

66.96

4. Advance payment from customers/deposits from dealers 5. Provision for taxation

6. Dividend payable 7. Other statutory liablities [due within one year] 8. Deposits/Installments Of term loans/DPGs/ Debentures,etc. [payable wihin one year]

TERM LIABLITIES 11. Debentures [not Maturing within one Year] 12. Preference shares Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch [Redeemable after one Year] 13. Term Loans [excld Installments payable

16.93

12.58

10.18

7.78

17. TOTAL TERM LIABLITIES

16.93

12.58

10.18

7.78

18. TOTAL OUTSIDE LIABLITIES [Item 10 Plus item 17]

90.91

79.00

74.00

74.74

30.46

43.30

1.65

3.96

6.94

10.32

within one year] 14. Deferred Payments Credits [excluding Installments due within One year] 15. Term deposits [repayable after one year] 16. Other term liabilities

NET WORTH 19. Ordinary share capital 20.General Reserve 21. Revaluation Reserve 22. Other reserves [excluding provisions] 23. Surplus (+) or Deficit (-) in Profit & Loss Account 23 a. Deferred Tax Liability [DTL] b. others [specify] Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch

24. NET WORTH

32.11

47.26

50.24

53.62

25. TOTAL LIABLITIES

123.02

126.26

124.24

128.36

0.47

0.09

0.10.

0.12

27. Investments [other Than long term Investments] [i] Government & other Trustees securities [ii] Fixed deposits with banks

0.31

0.32

0.35

0.40

0.31

0.32

0.35

0.40

28. [i] Receivables other Than deferred & exports Incld. Bills purchased & Discounted by banks] [ii] Export receivables [including bills purchased & discounted by banks]

36.02

32.53

32.95

40.50

21.02

31.12

34.00

35.00

21.02

31.12

34.00

35.00

ASSETS CURRENT ASSETS 26. Cash and bank balances

29. Installments of Deferred receivables [due within one year] 30. Inventory: [i] Raw Materials [including stores and other Items used in the mfg.] [a] Imported [b] Indegenous [ii] Stocks in process [iii] Finished goods [iv] Other consumable Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Spares [a] Imported [b] Indegenous 31. Advances to suppliers Of raw materials & stores/spares

0.63

0.16

0.15

32. Advance payment Of taxes

0.35

0.02

33. Other current assets [specify]

1.52

2.10

1.75

34. TOTAL CURRENT ASSETS [Total of 26 to 33]

60.32

66.34

69.32

77.94

84.84

85.48

36.Dpreciation to date

23.21

29.00

34.00

38.50

37. NET BLOCK [35-36]

61.27

56.48

51.48

46.98

1.43

3.44

subsidiary Co’s/affiliates (b) Others

0.82

2.83

[ii] Advances to suppliers Of capital goods & contractors [iii] Deferred receivables [maturity exceeding 1 yr] [iv] Others

0.61

FIXED ASSETS 35. Gross Block [land & Building machinery, Work-in-progress]

OTHER NON-CURRENT ASSETS 38. Investments/book Debts/advances/deposits Which are not Current Assets [i] (a) Investment in

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch 39.Non-consumable Stores & spares 40. Other non-current Assets including dues From directors 41. TOTAL OTHER

1.43

3.44

123.02

126.06

124.24

128.36

32.11

47.26

50.24

53.62

-13.66

-0.08

5.50

10.98

46. Current Ratio

0.82

10..

1.09

1.16

47. Total Outside

2.83

1.67

1.47

1.39

0.53

0.27

0.20

0.15

NON-CURR. ASSETS 42.a. Intangible assets (patents, goodwill prelim.Expenses, bad/doubtful expenses not provided for etc. b. Deffered Tax Assets [DTA] 43. TOTAL ASSETS [34+37+41+42] 44. TANGIBLE NET WORTH [24-21-42] 45.NET WORKING CAPITAL [(17+24)(37+41+42)]

Liablities/TNW 48. Total Term Liablities/TNW

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

FUND FLOW ANALYSIS As per Balance sheet as at

[Rs. In lacs]

2005 LAST

2006 CURRENT

2007 FOLLOWING

YEAR

Audited [1]

ESTIMATED [2]

PROJECTED [3]

SOURCES a. Net Profit [after tax]

2.31

2.98

3.38

b. Depreciation

5.79

5.00

4.50

c. Increase in capital

12.84

d. Decrease in term liabilities Including term deposits e. Decrease in i] Fixed assets ii] Other non-current assets f] Others g] TOTAL

0.00 20.94

7.98

7.88

4.35 2005

2.40 2006

2.40 2007

2.USES a] Net Loss b] Decrease in term liabilities Including public deposits c] Increase in i] Fixed assets ii] Other non-current assets

1.00 2.01

d] Dividend payment e] Others f] TOTAL

7.36

2.40

3. Long Term Surplus/Deficit

13.58

5.58

5.48

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

4. Increase/Decrease in current assets as

6.02

2.98

8.62

5. Increase/Decrease in current Liabilities other than bank borrowing 6. Increase/Decrease in working capital gap

-11.93 17.95

2.38 0.60

3.14

7. Net surplus [+]/ deficit [-]

-4.37

4.98

8. Increase/decrease in bank borrowing

4.37

-4.98

-26.34

54.57

33.90

10.10

2.88

1.00

-3.49

0.42

7.55

[vi] Increase/Decrease in other Current assets

-0.59

-0.32

0.07

TOTAL

6.02

2.98

8.62

per details given below

INCREASE / DECREASE – NET SALES Break up of [4] [i] Increase/Decrease in Raw Materials [ii] Increase/Decrease in Stocks-inprocess [iii] Increase/Decrease in Finished Goods [iv] Increase/Decrease in Receivables [a] Domestic [b] Export [v] Increase/Decrease in stores and Spares

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

IMPORTANT RATIOS/ KEY FINANCIAL PARAMETERS MARGALE FOUNDRIES

PAT/ Net sales [%] Net Working Capital Current Ratio PBDITA / Interest ROCE (%) Paid up capital Tangible Net Worth Adjusted Tangible Net Worth TOL/TNW TOL/ Adjusted TNW

2004 YR. BEFORE

2005 LAST

2006 CURRENT

2007 Following Year

LAST

YEAR

PROJECTED

AUDITED 1.11 -13.66 0.82 2.28 11.42 30.46 32.11 32.11 2.83 2.83

1.89 -0.08 1.00 2.18 11.85 43.30 47.26 47.26 1.67 1.67

1.69 5.50 1.09 2.14 12.06 43.30 50.24 50.24 1.47 1.47

1.60 10.98 1.16 2.13 11.59 43.30 53.62 53.62 1.39 1.39

CRA-RISK RATING SUMMARY Unit Name : Financials as on:

MARGALE FOUNDRIES 2005 [Audited]

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch A. FINANCIAL RISK PARAMETERS [a] STATIC RATIOS Current Ratio TOL/TNW PAT/Net sales (%) PBDIT/NET Sales (Times) ROCE(%) Inventory/ Net Sales+ Receivables/Gross Sales (Days) Trends in performance Sub-Total [b] FUTURE PROSPECTS Projected Profitability Non-Achievement of Projected Profitability Sub-Total Score (out of 6) [c] Risk Mitigation :Collateral Security/Financial Standing Sub-Total TOTAL FINANCIAL RISK SCORE QUALITATIVE RISK FACTORS [NEGATIVE PARAMETERS B. BUSINESS RISK PARAMETERS Technology Capacity Utilization vs Break Even Point Compliance of Environment Regulations User/Product Profile Consistence in Quality Distribution Network Consistency of Cash Flows TOTAL BUSINESS RISK SCORE C. INDUSTRY RISK PARAMETERS Competition Industry Outlook Regulatory Risk Contemporary Issues like WTO, etc. Aggregate Ind.Risk Score (Out of 8) MANAGEMENT RISK PARAMETERS Integrity Track Record Managerial Competence/ Commitment Expertise Babasabpatilfreepptmba.com

VALUE

MAX

UNIT’S

SCORE

1.00 1.67 1.89 2.18 11.85 178

5 5 10 5 5 5

1 3 0 2 3 2

3 38

0 11

3 (-3) 3 6

3 -3 0 6

6 47 (-10)

6 17 0

4 2 2 2 4 2 4 20

2 1 2 1 4 1 0 11

2 2 2 2 8

1.5 2 2 2 7.5

3 3 3 2

3 2 2 2 Page 120

“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch Structure & Systems Experience in Industry Credibility: Ability to meet Sales Projections Credibility: Ability to meet Profit (PAT)

2 2 2 2

Projections Payment Record Strategic Initiatives Length of relationship with bank TOTAL MANAGEMENT RISK SCORE AGGREGATE SCORE RISK RATING

2 2 2 25 100

2 2 1 1 1 2 2 20 55.5 SB-4

FINDINGS 1. Sales:   The unit could sell Rs.122.33 lacs. The unit was sourcing its major portion of sales to one customer M/s SAME Deutz-Fahr India Pvt Ltd.  The unit faced problems in realization of sale proceeds from. M/s SAME DeutzFahr India Pvt Ltd which caused liquidity crisis in the unit and the production too suffered during the last year.  The unit has achieved sales of Rs. 145.00 lacs during the current year up to February 2006 and is likely to achieve the target of Rs 176.80 lacs for the year.

2. Net Profit  The unit has achieved a net profit a Net Profit of Rs. 2.31 lac as and has fallen short of the estimate of Rs. 2.70 lacs during the last year.  The delay in realization of receivables hindered the unit from producing upto the mark and selling more, ending up short of targeted sales and net profit.  The unit has taken steps to stop supplying to the defaulting customers, thus avoiding the danger of dependency on a single one.

3. TNW & Gearing Ratio  The TNW of the unit has improved from Rs. 32.11 lacs to 42.26 lacs over the year due to bringing in capital to the tune of Rs. 12.84 lacs by the partners.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch  The gearing ratio improved from 2.83 as on 31.03.2004 to 1.67 as on 31.03.2005.  With the plough back of profits the TNW and the gearing ratio is likely to improve further to 1.47 during the year ending 31.03.2006

4. Current Ratio  During the year 2004-2005, the current ratio was at 1.00 as as against the estimate of 1.10. This is due to locking up of receivables with SAME deutz Fahr India P. Ltd., the unit’s major customer.  The position is expected to improve to 1.09 during the current year and further to 1.16 during the next year.  The unit’s current ratio was lower at 1.00 as against the benchmark of 1.33  The unit faced liquidity crunch during the last year due to non realization of receivables from a major customer, effecting the operations.

5. Credit Risk Assessment (CRA) Model •

The bank carries the credit risk assessment based on the norms of SMERA agency and the Credit Risk Assessment (CRA) model.

•

Risk Rating is done annually based on the audited financial results as they are available to the bank.

•

Below the risk hurdle rate of SB4 / SBTL4, the risk assessment is undertaken at half yearly intervals & in critical cases, at quarterly intervals.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

SUGGESTIONS TO M/S MARGALE FOUNDRIES 1. The CRA (Credit Risk Assessment) Rating of M/s Margale Foundries is SB4, which is just the hurdle rate and needs to improve by improving upon the following:  The current ratio can be improved by addressing individual current assets like holding the inventory for a minimum period, by managing the bills receivables promptly.  As there was delay in realisation of receivables the unit should take steps to stop supplying to default customers & try to develop new customers. 2. The unit faced liquidity crisis due to non realisation of receivables from M/s Same Deutz Fahr Pvt Ltd., a major customer effecting the operations hence the unit should take steps to diversify its customer base & put necessary efforts to collect from such default customers by offering discounts and allowances.

SUGGESTIONS ON CREDIT RISK RATING ASSESSMENTS Credit policies and procedures should necessarily have the following elements:  Banks should have written policies that define target markets, risk acceptance criteria, credit approval authority, credit origination and maintenance procedures and guidelines for portfolio management and remedial management.  Sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the relevant lending and credit officers.

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch  Banks should establish proactive CRM practices like annual/half yearly industry studies and individual obligor reviews, periodic credit calls that are documented, periodic plant visits, and at least quarterly management reviews of troubled exposures/weak credits.  Procedures and systems, which allow for monitoring financial performance of customers and for controlling outstanding within limits.  Banks should have a consistent approach towards early problem recognition, the classification of problem exposures, and remedial action and maintain a diversified portfolio of risk assets in line with the capital desired to support such a portfolio.  The banks should have systems in place for reporting and evaluating the quality of the credit decisions taken by the various officers.  Banks must have a MIS to enable them to manage and measure the credit risk inherent in all on and off-balance sheet activities.

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch

CONCLUSION The past decade and a half has been a challenging time for the banking sector in India. The Banks have coped well with these challenges and have emerged stronger from difficult times. While the banking sector has responded well so far, there are several challenges that lie ahead. The banking system needs to equip itself to deal with emerging challenges. State Bank of India is the largest bank in India with deposits of Rs 3,67,000 crore as on March 31, 2005. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. The increasing Babasabpatilfreepptmba.com

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better, improve service levels, provide new delivery platforms, and improve operating efficiency to counter the threat of competition effectively. Competition from new private sector and foreign banks remains a key challenge for public sector banks. They need to reorient their staff and effectively utilise technology platforms to retain customers and reduce costs.

RISK MANAGEMENT Risks are inherent in any financial intermediation and hence the bank is exposed to certain risks that arise from its business and the environment within which it operates. The bank has developed and is implementing various guidelines for managing risks like setting up exposure limits, systematic internal controls and risk management systems with consistent approach. Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. The bank is already measuring credit risk through credit rating / scoring. The rating of borrowers takes into account various factors like current ratio, DER, achievement of sales projections, compliance with terms and conditions, submission of stock statements etc, timely renewal, current profit/projected profit, availability of security, regular payment of interest/ instalments, submission of financial statements etc Exposure limits to various industries are reviewed periodically and reviews on various industries are also undertaken separately. Based on risk perception, the bank will endeavour to obtain sufficient and suitable tangible collateral securities wherever

possible.

these risks has become a crucial role in modern-day banking. The quality of a bank's risk management has become one of the key determinants of a success of a bank. The bank carries the credit risk assessment based on the norms of SMERA agency and the Credit Risk Assessment (CRA) model. Risk Rating is done annually based on the audited financial results, as they are available to the bank. M/s Margale Foundries is a good unit which has a well equipped modern machine shop. It is having low credit rating. Hence it must try to improve its credit rating. Babasabpatilfreepptmba.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

BIBLIOGRAPHY Books Referred •

Credit Appraisal, Risk Analysis Decision Making

•

A Quarterly House Magazine of State Bank Group

•

Financial Services

D. D. Mukherjee

- M.Y.Khan

Websites Refereed •

www. Sbi.co.in

•

www. Indiaifoline.com

•

www.google.com

•

www.margalefoundries.com

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

QUESIONNAIRE Explain the credit rating mechanism followed by SBI?

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â&#x20AC;&#x153;Credit Risk Rating Analysis of M/s Margale Foundriesâ&#x20AC;? at SBI Commercial Branch 1. What is the procedure followed for credit risk assessment rating mechanism by SBI?

3. What are the securities covered under credit rating by the bank?

4. Which agency norms does SBI follow?

5. What are the information to be submitted by the clients for credit rating?

6. What are the symbols used in credit risk assessment rating?

7. What are the benefits of credit rating to SBI?

8. What are the factors considered for credit rating?

9. What are the types of industries covered by SBI for credit rating?

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“Credit Risk Rating Analysis of M/s Margale Foundries” at SBI Commercial Branch

10. Explain in brief Credit Risk Rating of M/S Margale Foundries?

11 What techniques you use for credit risk analysis?

12.Explain in brief SMERA’s rating adopted by SBI?

13. How do you assess the credit worthiness of M/S Margale Foundries?

Thank you

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