A

PROJECT REPORT
ON

SME FINANCE

Submitted For Partial Fulfillment Of The Requirement of

B.B.A. Programme 5th Semester
(2015-2018)

Submitted By
Subrat Ranjan Mohapatra
Roll No: UNBBA15029
Under the guidance of
Mr. Rasmi Ranjan Mishra
(H.O.D., Dept. of BBA)

U.N. (AUTO) COLLEGE OF SCIENCE AND TECHNOLOGY

PRACHI JNANAPITHA, ADASPUR, CUTTACK-754011
 DECLARATION

I do hereby declare that the summer project report entitled, “SME Finance in

Punjab National Bank” Submitted to UN (auto) College of Sc. & Tech.,Adaspur,

Cuttack in partial fulfillment of the requirement for the award of BACHELOR IN

BUSINESS ADMINSTRATION, is a record of original research during the period

of my study (2015-2018) at the department of BBA, UN (auto) College of Sc. &

Tech.,Adaspur, Cuttack, under the supervision & guidance of Mr. Rasmi Ranjan

Mishra that project has not formed the basis for award of any degree/

diploma/associate ship/fellowship/any other similar title .

Subrat Ranjan Mohapatra

: :
 Acknowledgement
This project has been a great learning experience for me and I
would like to express my gratitude towards all the people who guided
me throughout and without whose guidance and support, this project
would not have been completed successfully.

My sincere gratitude to my mentor, Mr. RASMI RANJAN

MISHRA(HOD, Dept. of BBA) who helped and gave his assistant to me
during my project.

Especially I want to give thanks to all of the faculty member of the

department for their timely help & guidance.

Special thanks to all my friends and family for their support and
encouragement which helped me lot for completion of this project
report.

Subrat Ranjan Mohapatra

 Certificate

This is to be certified that the summer project report entitled, “SME Finance
in Punjab National Bank” Submitted to U.N (auto.) College of Sc. & Tech. in
partial fulfillment of the requirement for the award of BACHELOR of BUSINESS
ADMINISTRATION is a record of original research work done by Subrat Ranjan
Mohapatra during the period of his study (2015-2018) in the department of
BBA,U.N (Auto.) College of Sc. & Tech., affiliated to Utkal University under my
supervision & guidance & that project has not formed the basis for award of any
degree/ diploma/associate ship/fellowship/any other similar title.

Mr. Rasmi Ranjan Mishra

Internal Guide
 TABLE OF CONTENT
Chapter-1

 Executive summary
 Objective of the report
 Research methodology

Chapter-2

 About Punjab National Bank

Chapter-3

 About SME.
 It’s Credit Rating
 Policies and Schemes
 CGTMSE
Chapter-4
 RBI guidelines for MSME sector

Chapter-5

 Credit appraisal

Chapter-6

 Case study

Chapter-7

 Conclusion

Chapter-8

 Bibliography
 EXECUTIVE SUMMARY

This Project “SME Financing in Punjab National Bank” is mainly based to know the practical
aspect of techniques and tools used for the sanction of credit to the small and medium
entrepreneurs by Punjab National Bank like

 Appraisal procedure of credit proposals.

 To study about the SME Sector, its importance and the various schemes provided to this
sector.
 Disbursement of advances.
 Follow up and monitoring the process for regulating of advances and sanctioned.
 The main objective of the project is to study credit appraisal of SME, to know what
method does Punjab National Bank follow for the credit appraisal of SME.
 To know about the bank guidelines and its requirements for appraisal.
 To study about the SME sector, its importance and various schemes provided to this
sector.
 To study about the method of sanction of proposal.
 To carry out a survey and do the analysis.
 REASEARCH METHODOLOGY

To complete my project I needed different data, those data were collected to sources like:

 Primary Sources
 Secondary sources.

Primary sources: The data are collected from primary sources through interacting with
different experts in the bank and also from my faculty.

Secondary sources: The data for research have been collected from secondary sources like:

 Circulars and guidelines issued by Punjab National Bank

 Annual Reports of the said Bank
 Websites Google, 123india.com, and yahoo.com.
 Different articles and magazines etc
 CHAPTER-2

ABOUT PUNJAB NATIONAL BANK

 PROFILE OF PUNJAB NATIONAL BANK

 Established in May 19, 1894 in Anarkali Bazaar at Lahore.

 The common objective of providing country with a truly national bank which would
further the economic interest of the country.
 The first branch outside Lahore was opened in Rawalpindi in 1900.
 The Bank made slow, but steady progress in the first decade of its existence.
 In 1913, the banking industry in India was hit by a severe crisis following the failure
of the Peoples Bank of India founded by Lala Harkishan Lal.
 As many as 78 banks failed during this crisis; Punjab National Bank survived
 Mr. JH Maynard, the then Financial Commissioner, Punjab, remarked...."Your Bank
survived...no doubt due to good management”.
 It spoke volumes for the measure of confidence reposed by the public in the Bank's
management.
 The five years from 1941 to 1946 were ones of unprecedented growth. From a
modest base of 71, the number of branches increased to 278. Deposits grew from Rs.
10 crores to Rs. 62 crores. On March 31, 1947, the Bank officials decided to leave
Lahore and transfer the registered office of the Bank to Delhi and permission for
transfer was obtained from the Lahore High Court on June 20, 1947.
 It was the first bank that was started with the Indian capital.
 In 1951, the Bank took over the assets and liabilities of Bharat Bank Ltd. and became
the second largest bank in the private sector 1969 when it was nationalised.
 In 1962, it amalgamated the Indo-Commercial Bank with it. From its dwindled
deposits of Rs. 43 crores in 1949 it rose to cross the Rs. 355 crores mark by the July
1969.
 Its number of offices had increased to 569 and advances from Rs. 19 crores in 1949
to Rs. 243 crores by July Nationalized in July 1969.
 Since inception in 1895, PNB has always been a "People's bank" serving millions of
people throughout the country and also had the proud distinction of serving great
national leaders like Sarvshri Jawaharlal Lal Nehru, Gobind Ballabh Pant, Lal Bahadur
Shastri, Rafi Ahmed Kidwai, Smt. Indira Gandhi etc. amongst other who banked with
us.
 With more than 120 years of strong existence and 6081 total branches including 5
foreign branches, 6940 ATMs as on Mar’14.
 Punjab National Bank is serving more than 8.9 crore esteemed customers. PNB, being one
of the largest nationalized banks, has continued to provide prudent and trustworthy
banking services to its customers. The Bank enjoys strong fundamentals, large franchise
value and good brand image and to meet the growing aspirations of the people and
compete in these tough conditions, the Bank offers wide range of products and services.

Vision

To evolve and position the bank as a world class progressive cost effective and customer
friendly institution providing comprehensive financial and related services. Integrating
frontiers of technology serving various segments of society especially for weaker
section. Committed to excellence in serving the public and also excelling in corporate
values.

MISSION

To provide excellent professional services and improve its position as a leader in the
field of finance and related services. Build and maintain a team of motivated and
committed.
 ORGANISATION STRUCTURE

HIERACHY

HEAD OFFICE

CIRCLE OFFICE (58)

BRANCH (4525)

CHAIRMAN

EXECUTIVE DIRECTOR

DEPUTY G.M.

ASSISTANT G.M.

CHIEF MANAGER

SENIOR MANAGER

MANAGER

AWARD STAFF

Profit
 Net profit of the Bank for the quarter ended March 2011 (Q4 FY’11) amounted to Rs. 1201
crore as against Rs.1135 crore last year, registering a YOY growth of 5.8%.

 Net profit of the bank for financial year ended march 2011 amounted to Rs. 4433 crore as
compared to Rs. 3905 crore last year, recording a y-o-y growth of 13.5%.
 Core Net profit (excluding treasury operations) in Q4 FY’11, amounted to Rs.1101 crore
last year, registering yoy growth of 10.8%.
 Core Net profit (excluding treasury operations) in FY 2010-11 amounted to Rs. 3987 crore
registering a stellar YOY growth of 31.4%.
 Operating profit for Q4 FY’11 stood at Rs.2508 crore in as against Rs.2332 crore in Q4 FY’10,
registering a yoy growth of 7.5%.
 Operating profit of the bank during financial year ended in March 2011 grew by 23.6% to
reach Rs.9056 crore from Rs. 7326 crore.
 Core operating profit (excluding treasury profit) in Q4 FY’2011 grew by 11.8% to reach
Rs.2455 crore.
 Core operating profit (excluding treasury profit) in FY’11 rose by robust 34.2% Rs. 8757
crore.

BUSINESS

 Total business of the bank reached Rs. 5, 55,005 crore as against Rs. 4, 35,931 crore in
March 2011, showing a y-o-y growth of 27.3%.
 Deposits of the bank rose to Rs. 3, 12,899 crore as on 31.03.2011 from Rs. 2, 49,330 crore as
on 31.03.2010, exhibiting a yoy growth of 25.5%.
 CASA deposits increase to Rs. 1, 20,325 crore in March’11 from Rs. 1, 01,850 crore in
March’10, recording a growth of 18.1%.
 CASA share stood at 39.16% at FY ended March’11.
 Saving deposits by 19.7% to Rs. 93,487 crore while current deposits rose by 13.2% to Rs.
26,838 crore.
 Advances of the Bank at Rs. 2, 42,107 crore at the end of March’11 grew by robust 29.7% as
against Rs. 1, 86,601 crore at the end of March’10.
 Credit Deposit Ratio increase to 77.38% as at March’11 from 74.8% in March’10.

INCOME

 Total income during Q4 FY’11 rose by 31.2% to Rs. 8586 crore due to healthy growth of
33.2% in interest income.
 Total income during FY 2011 increased to Rs. 30,599 crore, recording a growth of 22.2% on
account of 26% growth in interest income.
 Net interest income for financial year ended March’11 improved by 39.3% to Rs. 11,807
crore (Q4 FY’11: Rs. 3029 crore; Growth: 22.4%).
 Non-interest income in Q4 FY’11 amounted to Rs. 1145 crore (19.6% growth) and Rs. 3613
crore for FY ended March’11.
Retail credit

 Retail loans outstanding grew by 22.94% on YoY basis to cross Rs. 23,600 crore at end of
March’11 as against Rs. 19,214 crore in corresponding last year.
 Good y-o-y growth in Reserve Mortgage Scheme (42.56%), Pensioners loan portfolio (30.47%),
car/ vehicle loan (24.22%) and education loan (24.14%).
 Gold loan portfolio rose by robust 91.48% to Rs. 375.64 crore.

CSR initiatives

 Launched “PNB VIKAS”, scheme for integrating development of adopted villages on a

sustainable basis. Under this, the Bank has adopted 117 villages (60 in lead districts and 57 in
non lead districts) across India.

Micro, Small & Medium Enterprises

 Credit to MSME sector rose to Rs. 45,296 crore as at end of March’11 from Rs.35,034 crore last
year, recording a growth of 29.29%.
 Credit to micro &small Enterprises grew by over 25% to Rs. 35,032 crore as on
31.03.2011.
 As a result, share of MSME advances in total credit improved to 20.21% during the year.
 Credit to Micro Enterprises grew by robust 44.74% to Rs. 14,370 crore, accounted for
51.47% of MSE advances as against the stipulated ratio of 50%.

FINANCIAL INCLUSION

 Opened 73.33 lakh “No Frill”/PNB Mitra accounts out of which 40.89 lac are ICT based accounts.
 Under FI plan, Bank has covered 2186 villages through BCs during FY 2010-11.

Empowerment initiatives

 Around 1.13 lakh people made enquires, 73,856 attended seminar and 74,861 availed facility
through 58 financial literacy credit counseling centers (FLCCs); Imparted free of cost training to
27,303 and 3.23 lakh persons by 30 PNBRSETI’s and 9 Farmers’ Training Centers, respectively.
 Formed “PNB Prena”, an association of the wives of the Top Executives, to take forward CSR
agenda of the Bank. The association undertook various initiatives like donation of books and
computers to facilitate empowerment of children from underprivileged segments.
New initiatives

 Launched customized offers for LIC agents, Doctors, Tour &Travel operators, etc for meeting
their specific requirements.
 Entered into Rupee Drawing Arrangements (RDA) with 29 Exchange Houses in Gulf countries
and one in Singapore to facilitate remittances from NRIs
 Branches equipped with Retail loan Appraisal-cum-approval Software for speedy processing
of loan applications and faster service to retail customers.
 Soft launch of Corporate Credit Card with Corporate Liability in January 2011.
 Developed web software called Fixed Assets Management System (FAMS) to centralize
upkeep and maintenance of Bank records of capital expenditure on fixed assets.

Recent awards and accolades

 Received gold trophy of SCOPE Meritorious Award for Best Managed Bank, Financial
institution or Insurance Company for the year 2009-10 y standing conference of public
enterprises, from the president of India.
 PNB adjudged as Top Indian Company under “Banks” category by Dun and Bradstreet –
Rolta corporate award 2010.
 “Golden Peacock Corporate Social Responsibility Award 2011” by institute of Directors.
 Best Corporate Social Responsibility Award, 2011 by Bombay Stock Exchange for second
year in a row.
 “BML Munjal Award for excellence in learning & knowledge Development by Hero
Mindmine Institute.
 “Golden Peacock National Training Award -2011” for the best Wind power project
Financier” 2011 by World Institute of Sustainable Energy.
 PRODUCTS & SERVICES

 CORPORATE BANKING

 PERSONAL BANKING

 INDUSTRIAL FINANCE

 AGRICULTURAL FINANCE

 FINANCEING OF TRADE

 INTERNATIONAL BANKING

 HOME LOAN

 AUTO LOAN

 ATM/DEBIT CARD

 DEPOSIT INTEREST RATES

 CREDIT INTEREST RATES

 FOREX

 OTHER SERVICES like- locker facilities, senior citizen schemes, merchant banks,
electronic fund transfer & clearing services, etc.

VALUES & ETHICS

 Bonding & Integrity
 Ethical Conduct
 Periodic Disclosures
 Compliances with rules & regulations
 Confidentiality & fair dealing
 CHAPTER-3

ABOUT MSME

IT’S CREDIT RATING

POLICIES AND SCHEMES

CREDIT GURANTEE FUND TRUST FOR MSME

RBI GUIDELINES FOR MSME SECTOR

INTRODUCTION OF SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA

In India, ‘Small and medium enterprises’ (SME) is a generic term used to describe Small Scale
Industrial (SSI) units and medium scale industrial units. An SSI unit should neither be a
subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial
unit. SSI units deal with a total investment in its fixed assets or leased assets up to Rs 10 million.
Medium unit is that unit which deals with investment up to Rs 100 million.

The SME sector produces a wide range of industrial product such as food products, beverages,
tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute products, wood
products, furniture and fixtures, paper products, printing publishing and electrical machinery. It
has also a large number of service industries.

The number of SSI working units (registered or unregistered) in India totaled 11.4 million in
2003-04- 80.5% of which are proprietary concerns and 16.8% are partnership firms and private
limited companies.

SMEs in India met the expectations of the government in this respect. SMEs developed in a
manner, which made it possible for them to achieve the following objectives:

 High contribution to domestic production

 Significant export earnings
 Low investment requirements
 Operational flexibility
 Location wise mobility
 Low intensive imports
 Capacities to develop appropriate indigenous technology
 Import substitution
 Contribution towards defense production
 Technology- oriented industries
 Competitiveness in domestic and exports market
SMALL AND MEDIUM ENTERPRISES:
In the Indian context, we have not so far defined medium enterprises clearly. What is neither
small nor large is being loosely defined as medium. Further, enterprise encompasses businesses,
services and industries. In the broadband of ‘Small’, the discussion extends to medium as well.

Small and medium enterprises, both in size and shape, are not uniform across the globe. This
asymmetry comes in the way of any effort of their integration. The way they are defining depends
on the stage of economic development and broad policy purposes for which the definition is used.
According to World Bank study, there are said to be more than 60 definitions of small and
medium industries used in 75 countries surveyed. The most commonly used definitions relate to
either size of employment and/or quantum of capital investment / fixed assets. As the process of
economic development leads to change in industrial sector shares in GDP and the contribution of
sub-sectors with in industry, the definition is extended to include not only manufacturing
industries but all enterprises which fall within or below they defined cutoff point.

SME financing is a part of priority sector lending in India.

MSMED ACT
In accordance with the provision of Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified into 2
classes:

(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production

of goods pertaining to any industries specified in the 1st schedule to the Industries
Development and Regulation act, 1951.
(b) Service Enterprises-The enterprises engaged in provided or rendering of services and
are defined in terms of investment in equipment.

The limit for investment in plant and machinery /equipment for manufacturing/
services enterprises, as notified, vide S.O. 1642(E) dated. 29-09-2006 is as under:
Manufacturing sector
Enterprises Investment in plant & machinery
Micro Does not exceed twenty five lakh rupees
Enterprises
Small More than twenty five lakh rupees but does not exceed
Enterprises five crore rupees
Medium More than five crore rupees but does not exceed ten crore
Enterprises rupees
Service sector
Enterprises Investment in equipments
Micro Does not exceed ten lakh rupees
Enterprises
Small More than ten lakh rupees but does not exceed two
Enterprises crore rupees
Medium More than two crore rupees but does not exceed five
Enterprises crore rupees

Importance of MSME

 Creates employment
 Sources of investment and revenue
 Boots personal wealth and talent
 Outlets for the talents of enterprising people
 Catalyze innovations and dynamism
 Stimulate personal savings
 Promotes community stability
 Less harm to the environment than large companies
 Raise level of people participation in the economy
 Vital engine of economy
 Earn foreign exchange
 Stimulate growth in rural areas
 Expand domestic markets/penetrate non-traditional markets
 Boosting industrial growth
 Inspiring consumption and Social Changes
 Discourages migration to urban areas
 Fuelling the local economy
STRENGTHS AND WEAKNESS
STRENGTHS:

 The MSME sector is often driven by industrial creativity. A major strength of the sector is its
potential for greater innovation both in terms of products and processes.
 An inherent strength of the sector is that these enterprises can be set up with very small
amounts of investments and have the locational flexibility to be located anywhere in the
country.
 Their employment potential is higher compared to large enterprises and are presently
estimated to employ 6 crore persons. They are amenable to ancilliarisation and thus have
natural linkages with large enterprises.

WEAKNESSES:

 A major weakness is a heritage weakness. Due to the protectionist, subsidy-driven, reservation

based regime, the mindset of sector continues to demanded similar legacy treatments.
 Most of the time, the equity is coming from savings and loans from friends and relatives rather
than through banking systems. Very, often the credit is coming from operations or domestic
savings rather than established systems of cheap banking credit for working capital. This
problem is particularly acute for the village industries as well as the lower end of micro
industries.
 While we have large pool of human resources, this sector continues to face shortage of skilled
manpower due to lack of paying capacity and poor managerial capabilities. Another major
weakness is absence of marketing channels and brand building capacity.
 A major weakness is a heritage weakness. Due to the protectionist, subsidy-driven, reservation
based regime, the mindset of the sector continues to demand similar legacy treatments.

CHALLENGES:
Despite its commendable contribution to the nation’s economy, SME sector does not get the is a
handicap in becoming more competitive in the national and international markets required support
from the concerned Government

Departments, Banks, Financial institutions and corporate, which is a handicap in becoming more
competitive in the National and International markets. The MSMEs face problems at every stage of
their operation.

These industries are therefore not in a position to secure the internal and external economies of scale.

The major problems confronting the sector have been identified as:
 1. INEFFECTIVE MARKETING STRATEGY:

Small scale units to face several difficulties in the marketing and distribution of
their products. Most of them do not have their own marketing network. They find it difficult to
sell their output at remunerative prices due to higher cost of production and non-standardized
quality of products. They cannot afford to spend much on advertising, sales, promotion, and
marketing research etc. They have to sell their products at throwaway prices due to weak
bargaining power and immediate need for money. They also face stiff competition from large
firms.

2. ABSENCE OF ADEQUATE AND TIMELY BANKING FINANCE:

All kinds of business enterprises require sufficient funds in order to meet their
fixed as well as working capital requirements. Finance is one of the critical inputs for growth and
development of the micro, small and medium enterprises. They need credit support not only for
running the enterprise and operational requirements but also for diversification,
modernization/upgradation of facilities, capacity expansion, etc. Inadequate access to credit is a
major problem facing micro, small and medium enterprises. Generally, such segments operate on
tight budgets, often financed through owner’s own contribution, loans from friends and relatives
and some bank credit. They are often unable to procure adequate financial resources for the
purchase of machinery, equipment and raw materials as well as meeting day-to-day expenses.
This is because, on account of their low goodwill and little fixed investments, they find it difficult
to borrow at reasonable interest rates. As a result, they have to depend largely on internal
resources.

3. SHORTAGE OF RAW MATERIALS:

Non-availability of quality raw materials on a timely basis in an adequate quantity

is one of the main problems faces by MSMEs. There is acuteStorage of even the basic raw
materials required by small scale units. These units are handicap in obtaining raw materials of
requisite quality and quantity at reasonable prices. They do not get the benefits of bulk buying.
For instance, the handloom industry is facing shortage of yarn. Small scale industries also face
shortage of power due to which they are unable to make full utilization of plant capacity. Majority
of them cannot afford to install their own power generating plants to ensure uninterrupted
operations.
 4. NON-AVAILABILITY OF SUITABLE TECHNOLOGY AND HIGH SKILLED

LABOR AT AFFORDABLE COST:

Majority of the small scale units use old techniques of production and outdated
machinery and equipment. Upgradation of the technology and achieving economies of scale is one
of the major problems facing the sector. There is lack of trained and experienced employees
because small firms can’t pay high salaries cannot spend much on training their employees. Small
scale firms find it difficult to recruit and motivate skilled managerial and technical personnel as
they look for better opportunities in the large scale industries. Therefore they get the second rate
talent or have to depend on family members who do not have diversified skills.
 With focus of growth now being on inclusive growth, the role of MSMEs sector in India’s socio
economic development also needs to be ascertained appropriately. With a view to address the
impediments for the sector’s growth, GOI has initiated various steps schemes. Adequate credit flow
being one of the bottlenecks, credit rating assists in rationalized lending decisions through proper
analysis of the credit risk.

The importance of MSMEs to the Indian economy has never been a content years issue for the
policy makers and the stakeholders likewise. What has, however, varied the approach and
prioritization for the development of the sector. The MSMEs are one of the constituents of our
economy in terms of their contribution to country’s industrial production, exports, employment
and creation of an entrepreneurial base.

ISSUES IN SME FINANCING

 Unstructured information flow

 Lack of evaluation expertise with limited information and diverse nature of operations
 High risk perception resulting in avoidance by many institutions and banks
 High transaction cost
 High operational risk due to inability to attract capable management and technological
personnel
 Lack of collateral
 Historically high default rates
 Diverse clients with diverse needs
 Credit Rating dimension

The Advantages of credit rating for MSMEs include:

 Increased funding options as credit ratings are widely recognized by banks, financial
institutions and other investors
 Faster processing of loan application by banks/FIs
 Assist in capability assessment by exiting/prospective clients
 Credibility and favorable trade terms with suppliers and customers
 Meet regulatory requirements

Credit rating for the MSMEs segment is generally segregated three product offerings:

1. SME ratings;
2. SSI ratings through NSIC; and
3. Bank facility ratings.
1. SME Ratings
The SME Rating assigned by CARE is an issue specific, onetime assessment of the
credit risk of the rated entity in comparison with credit risk of other SMEs. The rating incorporates
credit risk over a one year horizon and the reflection of the overall debt management capability of
the entity without any differentiation amongst various credit facilities availed by the SME unit. The
rating may be reviewed in case of developments of substantial importance regarding the entity or
its environment. This rating is applicable to business enterprises, viz. public/private limited
companies, partnership/ sole proprietorship firms, co-operative societies etc.

The Rating scale for SME ratings is presented below:

Rating scale Definition

 CARE SME 1 Highest credit quality with negligible credit risk
CARE SME 2 High Credit Quality with Very Low Credit Risk
CARE SME 3 Above Average credit quality with low credit
risk
CARE SME 4 Average credit quality with average credit risk
CARE SME 5 Below Average Credit Quality with Above
Average Credit Risk
CARE SME 6 Low Credit quality with High Credit Risk
CARE SME 7 Very poor Credit Quality with Very High Credit
Risk
CARE SME 8 Lowest Credit Quality with Highest Credit Risk

SSI Ratings
The salient features of the NSIC –CARE performance and credit rating for SSI units are:
 All registered SSIs eligible
 75% subsidy from NSIC for rating fees
 15-point rating scale indicating performance capability and financial strength
 

Rating Matrix Financial strength

High Moderate Low
Highest SE SE 1B SE
1A 1C
High SE SE 2B SE
2A 2C
Performance Moderate SE SE 3B SE
Capability 3A 3C
Weak SE SE 4B SE
4A 4C
Poor SE SE 5B SE
5A 5C

Like SME Ratings, the rating assigned by CARE is an issuer specific onetime assessment of the performance
capability and credit risk of the rated entity in comparison with that of other SSI units. The rating has a
validity of one year and may be reviewed in case of developments of substantial importance. The rating is
applicable to all types of business enterprises, viz., public/private limited companies, partnerships/sole
proprietorship firms, co-operative societies etc.

2. Bank Facility Ratings

With the BASEL II guidelines in place and credit rating being one of the
requirements for all bank exposures above Rs. 10 crore, large number of MSMEs have come under
the preview of credit rating. However , because of the fact that the reserve bank of India (RBI)
guidelines for BASEL II framework for banks recognize the long term (AAA to D) and short term
(PR1+ to PR5) instrument rating scales of recognized rating agencies such as CARE, large number
of SMEs have been rated on that scale.

 Outlook :
The importance of MSMEs for the overall economy cannot be overstated. Besides the
growth potential of the sector and its critical role in the manufacturing and value chains, the
heterogeneity and the unorganized nature of the Indian MSMEs are important aspects that need to
be factored into credit decisions. With focus of growth now being on inclusive growth, the role of
MSME sector in India’s socio economic development also needs to be ascertained appropriately.
With a view to address the impediments for the sector’s growth, GOI has initiated various steps
and schemes. Adequate credit flow being one of the bottlenecks, credit risk. Gradually , the
coverage of MSMEs for credit rating is expected to increase.
 POLICY FOR MICRO, SMALL & MEDIUM ENTERPRISES:

1. The bank shall continue to lay emphasis on financing Micro, Small &Medium Enterprises and our
existing SME credit portfolio shall be enlarged. Policy Package of Govt. of India 2006 shall be
supported and popularized amongst our branches.
2. In line with GOI policy directives to achieve 20% YoY growth in credit to micro, small & medium
sector, the bank under vision 2013 documents envisages growth of more than 25%.
3. Endeavour will be to achieve high growth in SME advances and to increase the share of the Micro
Enterprises advances (i.e. manufacturing\ service enterprises having investment in plant and
machinery / equipment up to Rs.25/Rs.10 lakh) in the advances to Small Enterprises to 60%.
4. The reserve bank of India guidelines on financing SMEs. These guidelines on timely sanctioning of
SME applications, margin, rate of interest, collateral security, etc shall continue to be adhered to.
5. Disposal of Loan Applications within the prescribed time limit is to be ensured. Up to Rs.2.00 lakh
within 2 weeks (against RBI prescribed norms for loans up to Rs 25000/-), above Rs.2 lakh & up
to Rs 5.00 lakh within 4 weeks and above Rs 5.00 lakh within 8-9 weeks.
6. The bank has specialized SME branches to support finance to SME units. The bank has plans/
approvals to open more such branches during 2008-09. These branches shall be developed as
centers of excellence in SME financing.
7. The various service sector enterprises shall be financed taking advantages of the new investment
limits in equipment under MSMED act 2006.
8. The bank has approved independent rating agencies like SMERA, CRISIL, ICRA & ONICRA etc. for
rating the SME units.
9. With the revised policy guidelines on definition of Medium Enterprises under Micro, Small &
Medium Enterprises Development Act 2006, Bank shall focus on these units for financing and
increasing our share.
10. The bank shall continue to work with SIDBI, Ministry of Micro Small & Medium Enterprises
(MSME) to better serve the SME Sector.
 1. SARTHAK UDYAMI – SCHEME FOR FINANCING MICRO AND SMALL
ENTERPRISES
Purpose of the Loan

For setting up new units; expansion, modernization & renovation of existing units;
purchase of land, construction of building, machinery, equipment etc; and working capital
facilities.

Eligibility

Micro Enterprises: Enterprises engaged in the Manufacturing or production, Processing or

Preservation of goods with investment in plant & machinery above 25 lakh upto 500 lakh.

Small Enterprises: Enterprises engaged in the Manufacturing or Production, Processing or

Preservation of goods with investment in plant & machinery above 25 lakh upto 500 lakh.

Loan amount

Need based. However Credit requirement upto 100 lakh for working Capital and Term loan can
also be provided as Composite loan.

Margin*

Upto Rs. 2,00,000/- NIL

Above Rs. 2.00 lakh upto Rs. 5 lakh 15%
Above Rs. 5 lakh 20%

Repayment

Upto 7 years (for term loan) depending upon projected profitability, over and above the gestation
period of 6 to 12 months.

Collateral security- No Collateral security and/or Third Party Guarantee for loans upto Rs. 100
lakh covered under Guarantee Scheme of Credit Guarantee Fund Trust for Micro & Small
Enterprises (CGTMSE).

2. PNB PRAGATI UDYAMI:

(Scheme for financing industry related services/ Business Enterprises)
The
financial assistance to both new and existing units, for acquiring fixed assets i.e. land, factory, building,
plants, machinery and working capital facilities for Service industry like Advertising Agencies, Marketing /
Industry Consultancy, Typing/ Xerox Centre, Industrial Testing Labs, Cyber Café, Auto-repair, Laundry &
Dry Cleaning, ISD/STD Booths, Cable TV Networks, Beauty Parlor etc.
 ELIGIBILITY

Unit with investment in fixed assets excluding the cost of land and building not exceeding Rs. 10 lakh,
irrespective of location of the unit.

NATURE OF LIMIT: Need based.

MARGIN

For term loan

(i) Upto Rs 25000/- NIL
(ii) Above Rs. 25000/- Upto Rs. 5 lakh 15%
(iii) Above Rs. 5 lakh 20%
(iv) For old machinery minimum life of 5 years. In 25%
case of gold Gen-set it would not be older than
3 years

For working capital

For Stock
(v) Upto Rs. 25000/- NIL
(vi) Above Rs. 25000/- upto Rs. 5 lakh 15%
(vii) Above Rs. 5 lakh 20%
For book Debts
(viii) Upto Rs. 5 lakh 20%
(ix) Above Rs. 5 lakh 25%

FOR WOMEN
BENEFICIARIES MARGIN REQUIREMENT IS ONLY 10%. REPAYMENT 5 to 7 year (for term loan)
excluding moratorium period depending upon the earning capacity of the earning capacity of the unit.

COLLATERAL SECURITY – No collateral security for loans upto Rs 10 lakh. For loans in excess of Rs. 10 lakh
and upto Rs 25 lakh no collateral security required, if the unit is having good track record & financial position.
No Collateral security & third party guarantee for Loans upto Rs. 100 lakh covered under Credit Guarantee
Fund Trust for micro and small industries scheme.
3. PNB GARAGE YOJANA
For technology upgradation of automobile garage (Workshops)
PURPOSE
To meet the expenditure on:
 Purchase of capital equipment, need based civil works and acquisition of additional land;
 Acquisition of technical know-how , designs, drawings;
 Upgrading process technology Quality Management (TQM) and acquisition of ISO 9000 series
certification; and
 Preliminary and pre operative expenses to the extent of 10% of project cost.

PROJECT OUTLAY
The project outlay on fixed assets already created & items indicated above should not exceed Rs. 10 lakh
(as per investment in equipments ceiling of service industries under Micro Enterprises).

ELIGIBILITY
 Small Scale Services units including those which go in for modernization/ technology upgradation;
 The outlay on land and building should not exceed 25% of the outlay on modernization/ technology
upgradation programme ;
 The units should be in operational for at least one year and not default to bank.

SALIENT FEATURES

 Need based extent of the loan

 Minimum promoter’s contribution required is 10% of the costs of the project.
 Repayment period – of 5 to 7 years (excluding moratorium period).
 Working capital facilities will be of continuing nature subject to review/ renewal every year.

COLLATERAL SECURITY

 No collateral security & Third Party Guarantee for loans up to Rs. 100 lakh covered under Credit
Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE).
 In other cases, collateral security and/ or third party guarantee is asked only in cases where
primary security is inadequate or for other valid reasons and not as a matter of routine.
4. PNB VIKAS UDYAMI (Loans for ISO-9000 certification)
PURPOSE OF THE LOAN
For acquiring ISO-9000 certification, Expenses on consultancy, documentation, audit certification fees,
equipment and calibrating instruments required would be taken into account for determining loan
equipment.

ELIGIBILITY
Existing SSI units (Micro & Small Enterprises) that have been in operation for a period of at least four years;
have earned profit and/or declared dividend during the preceding two financial year; not be in default to
any acquisition/ banks in payment of their dues, and have been exporting their products, directly or
indirectly or have plans to manufacture products for exports.

LOAN AMOUNT
Need based, by way of Term Loan

MARGIN
15% of the project cost. (margin for women beneficiaries 10 %)

REPAYMENT
Not exceeding 5 years including moratorium period up to 1 year.

COLLATERAL SECURITY
No Collateral Security & Third Party Guarantee is asked only in cases where primary security is inadequate
or for other valid reasons and not as a matter of routine.
5. PNB SME SAHAYOG SCHEME
Financial assistance to meet unforeseen expenditure of SME Enterprises having good track record.

PURPOSE
For contingencies like additional purchase of raw material including packing material/ handling charges
for the execution of bulk orders, taking part in national/ international trade exhibition, payment of
consultancy charges, machinery repair, labor payments, etc.

EXTENT OF LOCATION
The facility is extended by way of clean cash credit limit. Special credit limit for an amount equal to 20% of
the aggregate working capital limits (i.e. fund based and non fund based separately), subject to a maximum
of Rs.25 lakh.

ASSESSMENT
A simple assessment will be made by computing 20% of the aggregate cash credit working capital limits
(i.e. limits against stock and bills put together) or Rs.25 lakh whichever is lower.

REPAYMENT
The borrowers are free to utilize the facility up to 12 times in a year. Each amount of withdrawal is
repayable within maximum period of two months and there should be a gap of 15 days between the date
of complete repayment of outstanding and the next withdrawal.

SECURITY
Collateral security to be obtained as per bank’s extant guidelines. The charge on available security by way
of primary / collateral to the existing sanctioned limits will be extended to cover the clean cash credit
limit.
6. PNB ARTISAN CREDIT CARD
(Simplified Loan delivery mechanism to provide hassle free financial support to Artisans)

OBJECTIVE

 To provide hassle free financial support to Artisans

 To make credit delivery simple and easy

SECURITY
Secured by Hypothecation of stocks in trade, receivables, machinery, office equipment, etc. no collateral
security required.

REPAYMENT
Term loans will be repayable in monthly/ quarterly installments within 3 to 5 years depending up to the
project.

NATURE OF LIMIT
Term loan & Cash Credit Limit

MARGIN
EXTENT OF LIMIT MARGIN
(I) Up to Rs. 200000 Nil

VALIDITY card is valid for three years Nature of limit Term loan and working capital (both up to Rs.2 lakh)

ELIGIBILITY
 All artisans (Existing & New) involved in production / manufacturing process (and otherwise
eligible for credit facilities for carrying out the proposed activities under any of the existing bank
schemes).
 Preference is given to artisans registered with Development Commissioner (handicrafts).
 Thrust on financing in clusters of artisans and artisans who have joined to form Self
Held Groups (SHGs).
 All existing/ new artisan borrowers of the bank enjoying credit facilities up to Rs. 2 lakh and
having satisfactory dealings with the bank.
 Beneficiaries of other Government sponsored loan schemes are not eligible.

REPAYMENT
Term loans will be repayable in monthly/ quarterly installments within 3 to 5 years
depending up to the project.

COLLATERAL SECURITY- No collateral security required.

7. PNB LAGHU UDYAMI CREDIT CARD
A Simplified Loan Delivery Mechanism

OBJECTIVE:

To provide hassle free financial support to Small Business units, Retail Traders, artisans, village
Industries, Micro & Small Enterprises (manufacturing & services) & tiny Units, professionals and
Self Employed Persons, etc.

ELIGIBILITY

Borrowers belonging to aforesaid categories enjoying Cash Credit limits up to Rs. 10 lakh and
having satisfactory dealings with the bank for the last three years.

LOAN AMOUNT

Extent of limit maximum up to Rs . 10 lakh . Nature of limit Cash Credit.

ASSESMENT OF CREDIT CARD LIMIT

Credit Card Limit.

Small business, retail traders, etc up to 20% of the annual turnover.

Professional and self-employed persons 50% of their gross annual income as per Income Tax
Return

Micro & Small Enterprises units as per simplified turnover method.

MARGIN

Extent of limit Margin

(i) Up to Rs. 2.00 lakh Nil
(ii) Above Rs. 2.00 lakh up to Rs. 5 lakh 15%
(iii) Above Rs. 5.00 lakh 20%
SECURITY
Hypothecation of stock in trade, receivable, machinery, office equipment, etc .

COLLATERAL SECURITY (For Micro & Small enterprises)

No Collateral Security & Third Party Guarantee for Loans up to Rs. 100 lakh covered under CGTMSE. In
other cases, collateral security is inadequate or for other valid reasons and not as a matter of routine.

8. PNB KUSHAL UDYAMI

(LOANS TO CRAFTSMEN & TECHNICALLY QUALIFIED ENTREPRENEURS)

To set up Micro and Small units, for purchase of fixed assets and meeting working capital needs.

PURPOSE

 For acquisition of fixed assets (plant, machinery, land, building, tools, etc.)
  For working capital requirements within the ceiling limits of Rs. 3 lakh/ Rs 5 lakh as the
case may be.

ELIGIBILITY – Technically qualified entrepreneurs and/ or those having adequate technical practical
experience in a particular field of technology.

MARGIN

AMOUNT OF LOAN

Maximum Rs. 3 lakh in case of individuals and Rs. 5 lakh in case of partnership firms or joint stock
companies. (In case of ancillary unit or industry with joint financing of SF/Bank higher assistance of Rs. 20
lakh for groups).

REPAYMENT

5 to 7 years for term loan including moratorium period.

COLLATERAL SECURITY

No Collateral Security for loans up to Rs. 10 lakh. For loans in excess of Rs. 10 lakh and up to Rs. 25 lakh, no
Collateral Security required, if the unit is having good track record & financial position. In other cases
collateral security or Third Party Guarantee is asked only in case where primary security is inadequate or
for other valid reasons and not as a matter of routine.

LOCATION OF THE PROJECT

Preferably the unit should be set up in an industrial estate where there is provision for suitable
accommodation with the requisite facilities such as water, power, transport and communication. Project
set up in industrial areas, zones or sites specifically declared as undeveloped by the State Government,
concerned as far as
For Term loan
possible, be acquired on
(i) Up to Rs. 2 lakh Nil
rental or hire-
(ii) Above Rs. 2 lakh up to Rs. 3 lakh 10%
purchase basis. This
(iii) Above Rs. 3 lakh up to Rs 4 lakh 15%
will ensure that the
(iv) Above Rs. 4 lakh up to Rs. 5 lakh 20%
investment in fixed assets is
made for purchase of the required machinery and equipment, thereby enabling entrepreneurs to make the
best use of our financial assistance.
CREDIT FACILITIES ELIGIBLE UNDER THE SCHEME
 Micro and Small enterprises sector for credit facility not exceeding Rs. 50 lakh (Regional Rural
Banks/Financial Institutions)
 Not exceeding Rs. 100 lakh (Scheduled Commercial Banks and select Financial Institutions) by way
of term loan and/ or working capital facilities
 The proposal should be lodged in the CGTMSE website within the next quarter i.e. proposals
sanctioned in April-June should be got covered prior to expiry of the following quarter viz. July-
September.

GURANTEE FEE AND ANNUAL SERVICE FEE

One-time guarantee fee at specified rate

 Currently 1.00% in the case of credit facility up to Rs. 5 lakh

 1.5% in the case of credit facility above Rs. 5lakh of the credit facility sanctioned (comprising term
loan and/ or working facility)
 The fee shall be paid upfront to the Trust by the institution availing of the gurantee within 30 days
from the date of first disbursement of credit facility (not applicable for working capital) or 30
days from the date of Demand Advice (CGDAN) of guarantee fee whichever is later or such
date as specified by the Trust.

The annual service fee at specified rate

 Currently 0.50% in the case of credit facility up to Rs. 5 lakh

 0.75% in the case of credit facility above Rs. 5 lakh) on pro-rata basis for the first and last year
and in full for the intervening years on the credit facility sanctioned (comprising term loan
and/or working capital facility)
 Shall be paid by the lending institution within 60 days i.e. on or before May 31, of every year.
CLAIMS

INVOCATION OF GUARANTEE

 The lending institution may invoke the guarantee in respect of credit facility within a maximum
period of one year from date of NPA, if NPA is after lock-in period or within one year of lock-n
period, if NPA is within lock-in period; T guarantee in respect of that credit facility was in force at
the time of account turning NPA.
 Before claiming for the first installment ensure that :
The lock-in period of 18 months from either the date of last disbursement
of the loan to the borrower or the date of payment of the guarantee fee in respect of credit quality to
the borrower, whichever is later, has elapsed;
The credit facility has been recalled and the recovery proceedings have been initiated under due
process of law. Mere issuance of recall notice under SARFAESI Act 2002 cannot be constructed as
initiation of legal proceedings for purpose of preferment of claim under CGS. MLIs are advised to
take further action as contained in Section 13 (4) of the above act wherein a secured creditor can
take recourse to any one of the recovery measures out of the four measures indicated therein before
submitting claims for first installment of guaranteed amount. In case the MLI is not in a position to
take any of the action indicated in Section 13 f, they may initiate (4) of the aforesaid Act, they may
initiate fresh recovery proceeding under any other applicable law and seek the claim for first
installment from the Trust.
The Trust shall pay 75% of the guaranteed amount on preferring of eligible claim
by the leading institution, within 30 days, subject to the claim being otherwise found in order and
complete in all respects. The trust shall pay to the lending institution interest on the eligible claim
amount at the prevailing Bank Rate for the period of delay beyond 30 days. The balance 25% of the
guaranteed amount will be paid on conclusion of recovery proceedings by the lending institution.
On a claim being paid, the Trust shall be deemed to have been discharged from all its liabilities on
account of the guarantee in force in respect of the guarantee in force in respect of the borrower
concerned.

In the event of default the lending institution shall exercise its rights, if any, to take over the assets of the
borrowers and the amount realized, if any, from the sale of such assets or otherwise shall first be credited
in full by the lending institutions to the Trust before it claims the remaining 25% of the guaranteed
amount.

The Guarantee Claim received directly from the branches or offices other than respective
operating officer of MLIs will not be entertained.
 Chapter-4

__________________RESERVE BANK OF INDIA_________________

www.rbi.org.in
Common Guidelines / Instructions for Lending to MSME Sector

 Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks have been advised to mandatorily acknowledge all loan applications, submitted manually or online,
by their MSME borrowers and ensure that a running serial number is recorded on the application form as
well as on the acknowledgement receipt. Banks are further encouraged to start Central Registration of
loan applications. The same technology may be used for online submission of loan applications as also for
online tracking of loan applications.

 Collateral
Banks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units
in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units
financed under the Prime Minister Employment Generation Programme of KVIC. Banks may, on the basis
of good track record and financial position of the MSE units, increase the limit of dispensation of collateral
requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority).
Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee
Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

 Composite loan
A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE
Entrepreneurs to avail of their working capital and term loan requirement through Single Window.

 Specialized MSME branches

Public sector banks have been advised to open at least one specialized branch in each district. Further,
banks have been permitted to categorize their MSME general banking branches having 60% or more of
their advances to MSME sector in order to encourage them to open more specialized MSME branches for
providing better service to this sector as a whole. As per the policy package announced by the Government
of India for stepping up credit to MSME sector, the public sector banks will ensure specialized MSME
branches in identified clusters/centers with preponderance of small enterprises to enable the
entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite
expertise.
The existing specialized SSI branches may also be redesignated as MSME branches. Though their core
competence will be utilized for extending finance and other services to MSME sector, they will have
operational flexibility to extend finance/render other services to other sectors/borrowers.
 Delayed Payment

Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and Ancillary Industrial
Undertakings, penal provisions have been incorporated to take care of delayed payments to MSME units.
After the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the
existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial
Undertakings, have been strengthened as under:

(i) The buyer has to make payment to the supplier on or before the date agreed upon
between him and the supplier in writing or, in case of no agreement, before the appointed day.
The period agreed upon between the supplier and the buyer shall not exceed forty five days from the date
of acceptance or the day of deemed acceptance.
(ii) In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay
compound interest with monthly rests to the supplier on the amount from the appointed day or, on the
date agreed on, at three times of the Bank Rate notified by Reserve Bank.
(iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the
interest as advised at (ii) above.
(iv) In case of dispute with regard to any amount due, a reference shall be made to the
Micro and Small Enterprises Facilitation Council, constituted by the respective State
Government. Further, banks have been advised to fix sub-limits within the overall working capital limits to
the large borrowers specifically for meeting the payment obligation in respect of purchases from MSMEs.

 Revised Guidelines for Rehabilitation of Sick Micro and Small Enterprises

In view of the recommendations of Working Group on rehabilitation of potentially viable sick units
(Chairman: Dr. K. C. Chakrabarty), regarding changing the definition of sickness and the procedure for
assessing the viability of sick MSE units, a Committee was set up by the Ministry of MSME to look into the
issue. Based on the recommendation of the Committee, revised guidelines for rehabilitation of sick units in
the MSE sector have been issued vide our circular RPCD.CO.MSME & NFS.BC.40/06.02.31/2012-2013
dated November 1, 2012.
The objective of the revised guidelines is to hasten the process of identification of a unit as sick, early
detection of incipient sickness, and to lay down a procedure to be adopted by banks before declaring a unit
as unviable.
As per the new guidelines, a Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to
have become Sick, if (a) any of the borrowal account of the enterprise remains NPA for three months or
more OR (b) there is erosion in the net worth due to accumulated losses to the extent of 50% of its net
worth during the previous accounting year. The revised guidelines also provide the procedures to be
adopted by the banks before declaring any unit as unviable. Banks have been advised that the decision on
viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any
circumstances and the rehabilitation package should be fully implemented within six months from the
date the unit is declared as 'potentially viable' / 'viable'.

 Micro and Small Enterprises Sector – The imperative of Financial Literacy and
consultancy support

Keeping in view the high extent of financial exclusion (92 per cent) in the MSME sector, it is
imperative for banks that the excluded units are brought within the fold of the formal banking sector. The
lack of financial literacy, operational skills, including accounting and finance, business planning etc.
represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these
critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of
scale and size. To effectively and decisively address these handicaps, Scheduled commercial banks have
been advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 that
the banks could either separately set up special cells at their branches, or vertically integrate this function
in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff
should also be trained through customised training programs to meet the specific needs of the sector.

 Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an Indian
Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a
structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues
pertaining to the sector. Based on the recommendations of the Committee, banks have been advised to:

 strengthen their existing systems of monitoring credit growth to the sector and put in place a
system-driven comprehensive performance management information system (MIS) at every
supervisory level (branch, region, zone, head office) which should be critically evaluated on a
regular basis;

 put in place a system of e-tracking of MSE loan applications and monitor the loan application
disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions.
The position in this regard is to be displayed by banks on their websites; and

 Monitor timely rehabilitation of sick MSE units. The progress in rehabilitation of sick MSE units is
to be made available on the website of banks.
Detailed guidelines have been issued to the scheduled commercial banks vide our circularRPCD.
MSME&NFS.BC.No. 74 /06.02.31/2012-13 dated May 9, 2013.

 Revised General Credit Card (GCC) Scheme

In order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all
productive activities within the overall Priority Sector guidelines and to capture all credit
extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines have been
revised on December 2, 2013.
 State Level Inter Institutional Committee
In order to deal with the problems of co-ordination for rehabilitation of sick micro and small units, State
Level Inter-Institutional Committees (SLIICs) were set up in the States. However, the matter of
continuation or otherwise, of the SLIIC Forum has been left to the individual States / Union Territory. The
meetings of these Committees are convened by Regional Offices of RBI and presided over by the Secretary,
Industry of the concerned State Government. It provides a useful forum for adequate interfacing between
the State Government Officials and State Level Institutions on the one side and the term lending
institutions and banks on the other. It closely monitors timely sanction of working capital to units which
have been provided term loans by SFCs, implementation of special schemes such as Margin Money Scheme
of State Government and reviews general problems faced by industries and sickness in MSE sector based
on the data furnished by banks. Among others, the representatives of the local state level MSE associations
are invited to the meetings of SLIIC which are held quarterly. A sub-committee of SLIIC looks
into the problems of individual sick MSE unit and submits its recommendations to the forum of SLIIC for
consideration.

 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, at the Regional Offices of Reserve Bank
of India, Empowered Committees on MSMEs have been constituted under the Chairmanship of the
Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having
predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of
Industries of the State Government, one or two senior level representatives from the MSME/SSI
Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee will meet
periodically and review the progress in MSME financing as also rehabilitation of sick Micro, Small and
Medium units. It will also coordinate with other banks/financial institutions and the state government in
removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the
need to have similar committees at cluster/district levels.
  Debt Restructuring Mechanism for MSMEs

(i) As part of announcement made by the Hon'ble Finance Minister for stepping up credit to small and
medium enterprises, a debt restructuring mechanism for units in MSME sector has been formulated by
Department of Banking Operations & Development of Reserve Bank of India and advised all commercial
banks vide circular DBOD.BP.BC.No. 34/21.04.132/2005-06 dated September 8, 2005. These detailed
guidelines have been issued to ensure restructuring of debt of all eligible small and medium enterprises.
These guidelines would be applicable to the following entities, which are viable or potentially viable:
(a) All non-corporate MSMEs irrespective of the level of dues to banks.
(b) All corporate MSMEs, which are enjoying banking facilities from a single bank, irrespective of the level
of dues to the bank.
(c) All corporate MSMEs, which have funded and non-funded outstanding up to Rs.10 crore under
multiple/ consortium banking arrangement.
(d) Accounts involving willful default, fraud and malfeasance will not be eligible for
restructuring under these guidelines.
(e) Accounts classified by banks as “Loss Assets” will not be eligible for restructuring.

For all corporate including MSMEs, which have funded and non-funded outstanding of Rs.10 crore and
above, Department of Banking Operations & Development has issued separate guidelines on Corporate
Debt Restructuring Mechanism vide circular DBOD. No.BP.BC.45/ 21.04. 132/2005-06 dated November
10, 2005.
Prudential Guidelines on MSME Debt Restructuring by banks have been formulated and advised to all
commercial banks by Department of Banking Operations & Development vide circular
DBOD.No.BP.BC.No.37 /21.04.132/2008-09 dated August 27, 2008 read with circular
DBOD.BP.BC.No.99/21.04.132/2012-13 dated May 30, 2013 and DBOD Mail Box clarification dated June 6,
2013.

(ii) In the light of the recommendations of the Working Group on Rehabilitation of Sick MSEs (Chairman:
Dr. K.C. Chakrabarty), all commercial banks were advised vide our circular ref. RPCD. SME &NFS.BC.No.
102/06.04.01/ 2008-09 dated May 4, 2009 to:
(a) put in place loan policies governing extension of credit facilities,
Restructuring/Rehabilitation policy for revival of potentially viable sick units/enterprises and non-
discretionary One Time Settlement scheme for recovery of non-performing loans for the MSE sector, with
the approval of the Board of Directors and
(b) Implement recommendations with regard to timely and adequate flow of credit to the
MSE sector.
(iii) Banks have been advised to give wide publicity to the One Time settlement scheme
implemented by them, by placing it on the bank’s website and through other possible modes of
dissemination. They may allow reasonable time to the borrowers to submit the application and also make
payment of the dues in order to extend the benefits of the scheme to eligible borrowers.

 Cluster Approach

(i) 60 clusters have been identified by the Ministry of Micro, Small and Medium Enterprises, Government
of India for focused development of Small Enterprises sector. All SLBC Convenor banks have been advised
to incorporate in their Annual Credit Plans, the credit requirement in the clusters identified by the
Ministry of Micro, Small and Medium Enterprises, Government of India.
As per Ganguly Committee recommendations banks have been advised that a full-service
approach to cater to the diverse needs of the MSE sector may be achieved through extending banking
services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control,
Cross sell and Contain risk. A cluster based approach to lending may be more beneficial:

(a) In dealing with well-defined and recognized groups;

(b) Availability of appropriate information for risk assessment and
(c) Monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects
and/or other cluster specific data.
(ii) As per announcement made by the Governor in paragraph 157 of the Annual Policy
Statement 2007-08, all SLBC Convener banks have been advised vide letter RPCD.PLNFS.No.
10416/06.02.31/ 2006-07 dated May 8, 2007 to review their institutional arrangements for delivering
credit to the MSME sector, especially in 388 clusters identified by United Nations Industrial Development
Organisation (UNIDO) spread over 21 states in various parts of the country. A list of SME clusters as
identified by UNIDO has been furnished in Annex III.

(iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters
under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small
Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts.
Accordingly, appropriate measures have been taken to improve the credit flow to the identified clusters of
micro and small entrepreneurs from the Minorities Communities residing in the minority concentrated
districts of the country.
(iv) In terms of recommendations of the Prime Minister’s Task Force on MSMEs banks
should open more MSE focused branch offices at different MSE clusters which can also act as Counseling
Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

 Credit Linked Capital Subsidy Scheme (CLSS)

Government of India, Ministry of Micro, Small and Medium Enterprises has conveyed their
approval for continuation of the Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation
of Micro and Small Enterprises from X Plan to XI Plan (2007-12) subject to the following terms and
conditions:
(i) Ceiling on the loan under the scheme is Rs.1 crore.
(ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at Sr. No. (i)
above.
(iii) Calculation of admissible subsidy will be done with reference to the purchase price of
plant and machinery instead of term loan disbursed to the beneficiary unit.
(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.

 Committees on flow of Credit to MSE sector

 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

Reserve Bank of India had appointed a one-man High Level Committee headed by Shri S L Kapur, (IAS,
Retd.), Former Secretary, Government of India, Ministry of Industry to suggest measures for improving
the delivery system and simplification of procedures for credit to SSI sector. The Committee made 126
recommendations covering wide range of areas pertaining to financing of SSI sector. These
recommendations have been examined by the RBI and it has been decided to accept 88 recommendations
which include the following important recommendations:
(i) Delegation of more powers to branch managers to grant ad-hoc limits;
(ii) Simplification of application forms;
(iii) Freedom to banks to decide their own norms for assessment of credit requirements;
(iv) Opening of more specialized SSI branches;
(v) Enhancement in the limit for composite loans to Rs. 5 lakh. (since enhanced to Rs.1 crore);
(vi) Strengthening the recovery mechanism;
(vii) Banks to pay more attention to the backward states;
(viii) Special programmes for training branch managers for appraising small projects;
(ix) Banks to make customers grievance machinery more transparent and simplify the
procedures for handling complaints and monitoring thereof.
 A circular was issued to all scheduled commercial banks vide RPCD.No. PLNFS.BC.22/06.02.31/98-99
dated August 28, 1998 thereby advising implementation of the Kapur Committee Recommendations.

 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector(now
MSE) and Related Aspects (Nayak Committee

The Committee was constituted by Reserve Bank of India in December 1991 under the
Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the issues confronting SSIs (now
MSE) in the matter of obtaining finance. The Committee submitted its report in 1992.
All the major recommendations of the Committee have been accepted and the banks have
been inter-alia advised to:

(i) Give preference to village industries, tiny industries and other small scale units in that order,
while meeting the credit requirements of the small scale sector;
(ii) grant working capital credit limits to SSI (now MSE) units computed on the basis of minimum
20% of their estimated annual turnover whose credit limit in individual cases is upto Rs.2 crore [
since raised to Rs.5 crore ];
(iii) Prepare annual credit budget on the `bottom-up’ basis to ensure that the legitimate
requirements of SSI (now MSE) sector are met in full;
(iv) Extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial requirements
(both working capital and term loan) of SSIs(now MSE);
(v) Ensure that there should not be any delay in sanctioning and disbursal of credit. In case of
rejection/curtailment of credit limit of the loan proposal, a reference to higher authorities should
be made;
(vi) Not to insist on compulsory deposit as a `quid pro-quo’ for sanctioning the credit;
(vii) Open specialized SSI (now MSE) bank branches or convert those branches which have a fairly
large number of SSI (now MSE) borrowal accounts, into specialized SSI (now MSE) branches;
(viii) Identify sick SSI (now MSE) units and take urgent action to put them on nursing programmes
;
(ix) Standardize loan application forms for SSI (now MSE) borrowers; and
(x) Impart training to staff working at specialized branches to bring about attitudinal change in
them.
A circular was issued to all scheduled commercial banks vide RPCD. PLNFS/ BC. No. 61/06.0262/ 2000-
01 dated March 2, 2001 thereby advising implementation of the Nayak Committee Recommendations.
 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

As per the announcement made by the Governor, Reserve Bank of India, in the Mid-Term Review of the
Monetary and Credit Policy 2003-2004, a “Working Group on Flow of Credit to SSI sector” was constituted
under the Chairmanship of Dr. A S Ganguly.
The Committee made 31 recommendations covering wide range of areas pertaining to
financing of SSI sector. The recommendations pertaining to RBI and banks have been examined and RBI
has accepted 8 recommendations so far and commended to banks for implementation vide circular
RPCD.PLNFS.BC.28/06.02.31(WG)/ 2004-05 dated September 4, 2004 which are as under:
(i) Adoption of cluster based approach for financing MSME sector;
(ii) Sponsoring specific projects as well as widely publicising successful working models of
NGOs by Lead Banks which service small and tiny industries and individual entrepreneurs;
(iii) sanctioning of higher working capital limits by banks operating in the North East
region to SSIs (now MSE) , based on their commercial judgment due to the peculiar
situation of hilly terrain and frequent floods causing hindrance in the transportation
system;
(iv) Exploring new instruments by banks for promoting rural industry and to improve the
flow of credit to rural artisans, rural industries and rural entrepreneurs, and
(v) revision of tenure as also interest rate structure of deposits kept by foreign banks with
SIDBI for their shortfall in priority sector lending.
 Policy Package for Stepping up Credit to Small and Medium Enterprises -

Announcements made by the Union Finance Minister on August 10, 2005

The Hon'ble Finance Minister, Government of India had announced on August 10, 2005, a Policy
Package for stepping up credit flow to Small and Medium enterprises. Some of the salient features of
the policy package are as under:

• Definition of Small and Medium Enterprises (MSMEs)

• Fixing of self-targets for financing to MSME sector by banks
• Measures to rationalize the cost of loans to MSME sector
• Measures to increase the outreach of formal credit to the MSME sector
• Cluster based approach for financing MSME sector
• Constitution of Empowered Committees for MSMEs in the Regional Offices of Reserve
Bank
 • Steps to rationalize the cost of loans to MSME sector by adopting a transparent rating
system with cost of credit being linked to the credit rating of enterprise.
• Banks to consider taking advantage of Credit Appraisal & Rating Tool (CART), Risk
Assessment Model (RAM) and the comprehensive rating model for risk assessment of
MSME proposals, developed by SIDBI for reduction of their transaction costs.
• Banks to consider the ratings of MSE units carried out through reputed credit rating
agencies under the Credit Rating Scheme introduced by National Small Industries
Corporation.
• Wider dissemination and easy accessibility of the policy guidelines formulated by Boards
of banks as well as instructions/guidelines issued by Reserve Bank by displaying them on
the respective banks’ web sites as well as web site of SIDBI and also prominently displaying
them at the bank branches.
 Major Instructions issued to Public Sector banks subsequent to the policy
Announcements

On the basis of the Policy Package as announced by the Union Finance Minister, some of the
major instructions issued by Reserve Bank to all public sector banks were as under:
 Public sector banks were advised to fix their own targets for funding SMEs in order to
achieve a minimum 20% year on year growth in credit to SMEs.
 The objective is to double the flow of
credit from Rs. 67,600 crore in 2004-05 to Rs. 1,35,200 crore to the SME sector by 2009-
10, i.e. within a period of 5 years.
 Public sector banks were advised to follow a transparent rating system with cost of credit
being linked to the credit rating of the enterprise.
 All banks, may make concerted efforts to provide credit cover on an average to at least 5
new small/ medium enterprises at each of their semi-urban/ urban branches per year.
 The banks may ensure specialized MSME branches in identified clusters/ centres with
preponderance of small Enterprises to enable the entrepreneurs to have easy access to the
bank credit.

(The circulars issued by Reserve Bank in this regard are vide RPCD.PLNFS. BC.No.31/
06.02.31/200506 dated August 19, 2005 and RPCD.PLNFS. BC.No.35/ 06.02.31 / 2005 -06 dated August
25, 2005)
 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

In the light of the recommendations of the Working Group on Rehabilitation of Sick MSEs
(Chairman: Dr. K.C. Chakrabarty, the then CMD of Punjab National Bank), all commercial banks were
advised vide our circular RPCD. SME & NFS.BC.No. 102/06.04.01/ 2008-09 dated May 4,2009 to:
 a) put in place loan policies governing extension of credit facilities,
Restructuring/Rehabilitation policy for revival of potentially viable sick units/enterprises
and non- discretionary One Time Settlement scheme for recovery of non-performing loans
for the MSE sector, with the approval of the Board of Directors and
 b) Implement the recommendations with regard to timely and adequate flow of credit to
the MSE sector as detailed in the aforesaid circular. Banks were also advised vide above
circular dated May 4, 2009 to consider implementation of the recommendations, inter alia,
that lending in case of all advances up to Rs 2 crores may be done on the basis of scoring
model. Banks have further been advised vide circular DBOD.

Dir. BC. No. 106/ 13.03.00/ 2013-14 dated April 15, 2014 to undertake a review of their loan policy
governing extension of credit facilities to the MSE sector, with a view to using Board approved credit
scoring models in their evaluation of the loan proposals of MSE borrowers.

 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

 A High Level Task Force was constituted by the Government of India (Chairman: Shri T K A
Nair) to consider various issues raised by Micro, Small and Medium Enterprises
(MSMEs).The Task Force recommended several measures having a bearing on the
functioning of MSMEs, viz., credit, marketing, labour, exit policy,
infrastructure/technology/skill development and taxation.
 The comprehensive recommendations cover measures that need immediate action as well
as medium term institutional measures along with legal and regulatory structures and
recommendations for North-Eastern States and Jammu & Kashmir.
 Banks are urged to keep in view the recommendations made by the Task Force and take
effective steps to increase the flow of credit to the MSE sector, particularly to the micro
enterprises.
 A circular was issued to all scheduled commercial banks vide RPCD. SME & NFS BC. No.
90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the Prime
Minister’s task Force on MSMEs.
The report of the Prime Minister’s Task Force on Micro, Small and Medium Enterprises is available on the
website of Ministry of Micro, Small and Medium Enterprises (msme.gov.in)
 Working Group to Review the Credit Guarantee Scheme for Micro and Small
Enterprises

 A Working Group was constituted by the Reserve Bank of India under the Chairmanship of
Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme
of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of
collateral free loans to MSEs .
 The recommendations of the Working Group included, inter alia, mandatory doubling of
the limit for collateral free loans to micro and small enterprises (MSEs) sector from Rs.5
lakh to Rs.10 lakh and enjoining upon the Chief Executive Officers of banks to strongly
encourage the branch level functionaries to avail of the CGS cover and making performance
in this regard a criterion in the evaluation of their field staff, etc. have been advised to all
banks.
 A circular was issued to all scheduled commercial banks vide
RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010 mandating them not to
accept collateral security in the case of loans upto Rs 10 lakh extended to units in the MSE
sector and advising them to strongly encourage their branch level functionaries to avail of
the CGS cover, including making performance in this regard a criterion in the evaluation of
their field staff.
 Necessary action is being taken to implement the other recommendations of the Group
which would result in enhanced usage of the Guarantee Scheme and facilitate increase in
quality and quantity of credit to the presently included, as well as excluded, MSEs, leading
eventually, to sustainable inclusive growth.

 Banking Codes and Standard Board of India (BCSBI)

 The Banking Codes and Standard Board of India (BCSBI) has formulated a Code of Bank's
Commitment to Micro and Small Enterprises.
 This is a voluntary Code, which sets minimum standards of banking practices for banks to
follow when they are dealing with Micro and Small Enterprises (MSEs) as defined in the
Micro Small and Medium Enterprises Development (MSMED) Act, 2006.
 It provides protection to MSE and explains how banks are expected to deal with MSE for
their day to-day operations and in times of financial difficulty.
 The Code does not replace or supersede regulatory or supervisory instructions issued by
the Reserve Bank of India (RBI) and banks will comply with such instructions /directions
issued by the RBI from time to time.
 Objectives of the BCSBI Code
 The Code has been developed to

(a) Give a positive thrust to the MSE sector by providing easy access to efficient banking
services.
(b) Promote good and fair banking practices by setting minimum standards in dealing with
MSE.
(c) Increase transparency so that a better understanding of what can reasonably expected
of the services.
(d) Improve understanding of business through effective communication.
(e) Encourage market forces, through competition, to achieve higher operating standards.
(f) Promote a fair and cordial relationship between MSE and banks and also ensure timely
and quick response to banking needs.
(g) Foster confidence in the banking system.
The complete text of the Code is available at the BCSBI's website (ww.bcsbi.org.in).
 Annex I
 MINISTRY OF SMALL SCALE INDUSTRIES NOTIFICATION
(New Delhi, the 5th October, 2006)

S.O. 1722(E) – In exercise of the powers conferred by sub-section (1) of 2006) herein referred to as the
said Act, the Central Government specifies the following items, the cost of which shall be excluded
while calculating the investment in plant and machinery in the case of the enterprises mentioned in
Section 7(1)(a) of the said Act, namely:
(i) Equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and then
cost of consumables stores;
(ii) Installation of plant and machinery;
(iii) Research and development equipment and pollution controlled equipment
(iv) Power generation set and extra transformer installed by the enterprise as per
regulations of the State Electricity Board;
(v) Bank charges and service charges paid to the National Small Industries Corporation or
the State Small Industries Corporation;
(vi) Procurement or installation of cables, wiring, bus bars, electrical control panels (not
mounded on individual machines), oil circuit breakers or miniature circuit breakers which
are necessarily to be used for providing electrical power to the plant and machinery or for
safety measures;
(vii) Gas producer’s plants;
(viii) Transportation charges (excluding sales-tax or value added tax and excise duty) for
indigenous machinery from the place of the manufacture to the site of the enterprise;
(ix) charges paid for technical know-how for erection of plant and machinery;
(x) such storage tanks which store raw material and finished produces and are not linked
with the manufacturing process; and
(xi) firefighting equipment.

 2. While calculating the investment in plant and machinery refer to paragraph 1, the
original price thereof, irrespective of whether the plant and machinery are new or second
handed, shall be taken into account provided that in the case of imported machinery, the
following shall be included in calculating the value, namely;

(i) Import duty (excluding miscellaneous expenses such as transportation from the port to
the site of the factory, demurrage paid at the port);
(ii) Shipping charges;
(iii) Customs clearance charges; and
(iv) Sales tax or value added tax.
Chapter- 5
Credit Appraisal

Meaning - The process by which a lender appraises the creditworthiness of the prospective borrower is
known as Credit Appraisal. This normally involves appraising the borrower’s payment history and
establishing the quality and sustainability of his income. The lender satisfies himself of the good
intentions of the borrower, usually through an interview.

 The credit requirement must be assessed by all Indian Financial Institutions or specialised
institution set up for this purpose.
 Wherever financing of infrastructure project is taken up under a consortium / syndication
arrangement – bank’s exposure shall not exceed 25%
 Bank may also take up financing infrastructure project independently / exclusively in respect of
borrowers /promoters of repute with excellent past record in project implementation.
 In such cases due diligence on the inability of the projects are well defined and assessed. State
government guarantee may not be taken as a substitute for satisfactory credit appraisal.

The important thing to remember is not to be overwhelmed by marketing or profit centre reasons to book
a loan but to take a balanced view when booking a loan, taking into account the risk reward aspects.
Generally everyone becomes optimistic during the upswing of the business cycle, but tend to forget to
see how the borrower will be during the downturn, which is a short-sighted approach. Furthermore
greater emphasis is given on financials, which are usually outdated; this is further exacerbated by the
fact that a descriptive approach is usually taken, rather than an analytical approach, to the credit. Thus a
forward looking approach should also be adopted, since the loan will be repaid primarily from future
cash flows, not historic performance; however both can be used as good repayment indicators.

Procedure for providing Bank Credit-

Banks offers different types of credit facilities to the eligible borrowers. For this, there are several
procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring and Asset Recovery
Management comprise the entire gamut of activities in the lending process of a bank which are clearly
shown as below:
 Credit
Appraisal

Sanctions

Monitoring & Asset

recovery
Management

From the above chart we can see that Credit Appraisal is the core and the basic function of a bank before
providing loan to any person/company, etc. It is the most important aspect of the lending procedure and
therefore it is discussed in detail as below.

CREDIT APPRAISAL AT PNB

With a view to ensuring a healthy loan portfolio, PNB has taken various steps to bring its policies
and procedures in line with changing scenario which also aims at effective management and dispersal of
credit risks, strengthening of pre-sanction appraisal and post sanction monitoring systems. Further, bank
has been continuously endeavoring to strengthen the organizational set-up by opening specialized
branches to meet the credit requirements of specific type of borrowers, imparting intensive credit
management training to staff and deployment of trained staff at branches/offices having potential for credit
growth.

There are two distinct phases of credit appraisal:

A. Pre-transaction credit appraisal.

B. Post transaction supervision & follow up of loans.

Pre-sanction credit appraisal

Before granting any advance under their own delegated powers or while forwarding proposals for sanction
to a higher authority, managers must satisfy themselves or provide such of the following information as
may be necessary to take a prudent credit decision and give their own definite recommendations.

While considering the credit proposals, the guidelines to be followed are:

1. All loan facilities should be considered after obtaining loan application(s) from the borrower(s) and
compilation of confidential reports on him/ them and the guarantors. The borrowers should have
the desired background, experience/ expertise to run their business successfully.
2. Project for which the finance is granted should be technically feasible and economically/
commercially viable i.e. it should be able to generate enough surplus so as to service the debts
within a reasonable period of time.
 3. Cost of the project and means of financing the same should be properly assessed and tied up. Both
under-financing and over financing can have an adverse impact on the successful implementation
of the project.
4. Borrowers should be financially sound, enjoy good market reputation and must have their stake in
the business i.e. they should posses adequate liquid resources to contribute to margin
requirements.
5. Loan should be sanctioned by the competent sanctioning authority as per the delegated loaning
powers and should be disbursed only after execution of all the required documents.
6. Projects financed must be closely monitored during implementation stage to avoid time and cost
overruns and thereafter till the adjustments of the bank loan.

Bank extends loan facilities by way of fund- based facilities and/or non-fund based facilities. The fund
based facilities are usually allowed by way of term loans, cash credit, bills discounted/purchased, demand
loans, overdrafts, etc. Further, the bank also provides non-fund based facilities by way of issuance of foreign
letters of credit, issuance of guarantees, etc.

The appraisal methodology should keep pace with ever changing economic environment. The appraisal
system aims to determine the credit needs/requirements of the borrower taking into account the financial
resources of the client. The end objective of the appraisal system is to ensure that there is no under-
financing or over-financing.
B. Post sanction supervision & follow up of loans

Supervision and follow up of bank credi6t has assumed considerable significance particularly after
introduction of new norms of assets classification, provisioning and derecognition of interest income on
NPA’s affecting profitability. System of supervision and follow up can be defined as the systematic evaluation
of the performance of the borrowal account to ensure that it operates at viable level and if problems arise, to
suggest practical solutions. The goals and objectives of monitoring may be classified into fundamental and
supplementary goals. Fundamental goals help a bank to ensure safety of funds lent to an enterprise, while
supplementary goals are directed towards keeping abreast of problems arising out of changes in both the
internal and external environment for initiating timely corrective actions.

System of supervision and monitoring of credit as laid down by the bank needs to be meticulously
followed by the branches/ controlling offices which, interlaid, covers the following:

Conveying of sanction: after the loan is sanctioned, branch communicate the terms and conditions of
sanction to the borrower in a letter as per draft available, containing therein the details of the facilities
sanctioned and respective terms and conditions. He borrowers will convey his/their acceptance of the
terms and conditions as per the draft available in case of a company necessary resolution authorizing the
signing officials to give such a letter, besides execution of documents be obtained and kept on record.

Profile of borrowers: Branch should maintain profile of each borrower separately specifically mentioning
complete name, contact address, telephone no. , activity of borrowers, assets of borrowers, guarantors and
other obligants, details of primary and collateral securities as per the format available. The profile should
be updated on quarterly intervals, on an ongoing basis and preferably be updates as the first page in the
file of the borrower. The controlling authorities i.e. RM/SRM/ZM and other inspecting officers during their
visit to branches should that profile on borrowers is maintained an updated regularly.

Maintenance of loan documents file: In order to maintain safety of the loan document, the branch
should ensure proper paging of all the loan documents. The page no. should be legibly written on the paper
right side of each paper document and the files should be kept in orderly manner.

System of legal compliance certificate: The branch is required to submit legal compliance certificate to
respective controlling office for credit limit of Rs. 10 lakhs and above(fund-based & non-fund based) in
respect of fresh sanction/ enhancement to respective controlling office within 7 days from the end of the
month in which the facilities are disbursed. The certificate is also required to be submit in the case of
renewal of the credit limit of Rs. 10 lakhs and above provided there are changes in terms and conditions.
Chapter-6
TECHNO-ECONOMIC ACTIVITY VIABILITY STUDY REPORT OF M/S ABC PRIVATE
LTD.
1. BACKGROUND-

M/S ABC Pvt. Limited, a company incorporated on 27.112006 and promoted by Shri P is planning to set up
project for Re-cycling of Waste Oils as per guidelines laid down by Central Pollution Control Board (CPCB) at
Kalagarh, Orissa. The cost of project estimates at Rs. 444.64 lakh (including total working requirement of Rs.
131.13 lakh) has been proposed to be met through external financial assistance by way of fresh Term Loan of
Rs. 200.00 lakh and Working Capital borrowing of Rs. 80.00 lakh and the balance through promoters’
contribution of Rs. 164.64 lakh. The company has approached PNB through BO: Y for sanction of above
mentioned financial facilities for meeting a part of the cost of project. As desired by the authorities at Circle
Office Orissa, the undersigned visited project site on 13.01.2009 and held discussions with the promoter and
incumbent in charge of BO: Y and has to report as under.

2. PROMOTERS-

Shri P and Shri Q are the promoters of the company. It is informed that Shri P is involved in operating oil
tankers for transporting of Petroleum Products for the Public Sector Oil companies like Indian Oil etc. It also
advised that the promoters are also involved in the activity recycling of Waste Oil on a very small scale. Shri Q
is a Chartered Accountant.

3. PROJECT DETAILS-
(i) Product & Installed Capacity- ABC Pvt. Ltd proposes to undertake manufacture of Light Oils and Base
Oils by refining Crude Oil Spills, Tank Bottom Sludge, Slope Oils generated from Petroleum Refineries,
Installation or Ships and is un-suitable for Re-refining but can be used as fuel in furnaces. For
production of Light Oils and Base oils, the company has proposed to install a Vacuum Distillation plant
with a capacity of 5000 kilo meters per annum.
(ii) Land- The Company has procured under 2 acres of land at Kalagarh, Orissa for setting up the unit.
During the visit to the project site, it was observed that site development work was in progress.
(iii) Building - In the project report, a total amount of Rs. 35.50 lakh has been provided in the cost of
project toward cost of construction of civil and factory building of the project. The detailed estimate
regarding the proposed area of construction from Govt. Approved Architect has not been submitted by
the company and as such the reasonableness of the cost of construction cannot be commented upon.
The approved plan for the proposed construction has also not been submitted by the company.
(iv) Plant and Machinery- the following items of plant & machinery has been proposed to be installed
section-wise:

(1) Process plant

-Raw Oil Pump
-Dehydration vessel
-Condenser
-Receiver
(2) Utilities
-Heating system
-Vacuum system
Cooling power system
 The cost of plant & machinery has been estimated at Rs. 198.01 lakh. The promoter has yet to submit
quotation/ other documents of individual items in support of the cost of plant & machinery provided in the cost
of project. Since the cost of the individual items of the above are not backed by supporting documents like
quotations etc., the same has to be submitted before disbursement of term loan in the event that the proposal
for term loan is considered for sanction.

(v) Electrical Installations, Furniture & Fixture and Misc. Equipments-

Since cost of the individual items of the above are not backed by supporting documents like quotations etc.,
the same has to be submitted before disbursement of term loan in the event that the proposal for term loan
is considered for sanction.
(vi) Raw materials-
Raw materials for manufacture of Lights Oils and Base Oils is transformer Oils, while the raw material
required for manufacturing oil for fuel furnaces are mainly obtained Crude oil spills, Tank Bottom sludge ,
Slope Oils generated from Petroleum Refineries, installation or Ships.
So far ABC Pvt. Ltd has not entered into any arrangement for producing Transformer Oil from any
source on long term basis for using as feedstock in proposed plant. During the discussion, the
promoter informed that raw material for the unit shall be sourced from oils available from ships
undergoing repairs at Paradeep port. However, no linkage for making this material available to the
unit on regular basis available with the company.
(vii) Utilities –
Power - The power requirement is to the extent of 20 KW. The company has deposited security money to
the concerned authorities for obtaining the requisite power load.
Fuel – Light Diesel Oil shall be used in the Thermic Heater. Average consumption of Light Diesel Oil shall be
400 Liters per day.
Water –Water is mainly used for cooling the water circulation system. Make up water will be needed to
cover the evaporation of water has been estimated at around 400 Liters per day. Water shall be available
from Tube-wells to be sunk in the unit.

(viii) Manpower –
The following man power has been proposed for the unit:

DESIGNATION NO SALARY TOTAL

Workshop 1 20,000.00 20,000.00
Manager
Chemist 1 10,000.00 10,000.00
Supervisor 3 7,500.00 22,500.00
Plant operator 3 7,500.00 22,500.00
Skilled Worker 10 4,000.00 40,000.00
Unskilled 20 3,000.00 60,000.00
worker
Accounts clerk 2 5,000.00 10,000.00
Peon/guard 4 2,500.00 10,000.00
Total salary per 195,000.00
month
Salary per 2,340,000.00
Annum
Fringe benefit 351,000.00
Total salary 2,691,000.00
per annum
Say Rs. 26.91 lakh
(ix)Manufacturing process- Vacuum Distillation Method shall be adopted for refining of used/waste
lubricating oil. This process is replacing the traditional process of Acid Treatment which results in serious
environmental degradation and has been banned throughout the world.

4. COST OF PROJECT & MEANS OF FINANCE

Cost of project (Rs. Lakh)

Land incl. land development 25.00
Building-civil 13.00
Building Factory 22.50
Plant & Machinery 198.01
Electrical Installation 15.00
Furniture & Fixture 1.50
Misc. Equipments 5.00
Computer & Printer 1.50
Prelim. & Pre-op. Expenses 32.00
Margin for working capital 46.89
360.40
Means of Finance
Promoter’s contribution 160.00
Term loan from bank 200.00
360.40
5. STATUS OF INVESTMENT IN THE PROJECT

As per certificate given by Chartered Accountant, the details of investment made in the project up to Rs.
31.1.2009 is as under :

Sl.no Particulars Amount (Rs.)

1. Land & sand filling, Sinking of Tube well 1825450.00
2. Civil construction (foundation of building, outhouses etc.) 5106000.00
3. Building (Factory) Foundation (Pilling) 984730.00
4. Power supply provision(including deposit with SESU) 915000.00
5. Advance for Machinery(Fabrication work of industrial 900000.00
components)
6. Consultancy fees 300000.00
Total 5435780.00

6.PROJECT IMPLEMENTATION SCHDULE

Particulars Start Finish

Civil and Plant construction September 2009
Installation of Machinery August 2009 December 2009
Trial Production January 2010
Commercial Production March 2010

7. APPROVAL FROM POLLUTION CONTROL BOARD

In consideration of the application of M/s ABC Pvt. Ltd, State Pollution Control Board of Orissa dated 28.8.2008
conveyed their consent under section 25 of water (Prevention & Control Pollution) Act 1974 and Section 21 of Air
(Prevention & Control of Pollution) Act 1981 for used oil reprocessing unit by adopting an environmental sound
technology as per CPCB, Delhi guidelines for manufacture/ production of Base Oil-2520 KL/ Month and Light Fuel
Oil- 540 KL/ Month.
However that consents to establish the unit is subject to statutory and other clearances from Govt. of Orissa
and /or Government of India as and when applicable.
Special condition inter alia has been stipulated that the industry shall adopt environmental sound
technology as per CPCB, Delhi guideline and proposal submitted in consent to establish application for
reprocessing used oil.

8. MARKETING- The promoters have not specified the detailed strategy for marketing the products. However it
has been informed that they have been involved the same activity in the past and does not foresee any problem
regarding the same.

9. VIABILITY- The commercial operation from the project is envisaged from April 2010. Based on the
assumption made the profitability has been worked out from 2010-11 to 2016-17. The repayment of Term
Loan has been proposed to commence from April 2010 and end on March 2015. Carrying interest
@13.50%p.a... Interest rate on working capital assistance for the new project has also been assumed @
13.50%p.a… The average DSCR has been worked out has 2.01 and BEP at optimum Capacity Utilization at
42.56%.
10. SENSITIVITY ANALYSIS- The project were subjected to sensitivity and the results are observed as under.

Impact on DSCR

Sensitive Factors
Av.
DSCR
Base case 2.11
Raw material price increased by 5%.
1.26
Selling price decreases by 5%. 1.11

Impact on IRR (Post tax)

Sensitive factor IRR (Post tax)

Base case 22.58%
Raw material price increased by 5% 11.81%
Selling price decreased by 5 % 9.85%

The table shows that if the projections are subjected to sensitive analysis with adverse changes made in crucial
parameters like raw material cost and selling price by 5%, the Average DSCR & IRR of the company falls to unacceptable
levels. The project is more sensitive to adverse movements in the selling price as compared to that with respect to raw
material prices.

11. CONCLUSION
ABC is planning set up a project for Re-Cycling of Waste Oils as per guidelines laid down by Central Pollution Control
Board (CPCB) at Kalagarh, Orissa. The company has started implementing the project. In view of the available
infrastructure and proposed arrangement for the same project is considered technically feasible. However the
company has to make necessary arrangement to obtain all necessary approvals for setting up and run the unit.
Moreover the company has yet to tie the necessary linkage regarding raw material for the unit. The average DSCR of
the project has been computed as 2.01:1 making the project to be financially viable subject to sensitive analysis as
detailed above.
 1. RATIO CALCULATION & ANALYSIS:
CURRENT RATIO-

Current ratio = current assets/current liabilities

YEAR 2011 2012 2013 2014 2015 2016

Current Assets 202.13 262.52 340.92 432.23 539.53 619.29
Current Liabilities 140.69 172.44 201.15 229.83 258.52 259.41
Current Ratio 1.44:1 1.54:1 1.69:1 1.88:1 2.09:1 2.34:1

current ratio
2.5
2
1.5
1
0.5 current ratio
0
0 1 2 3 4 5 6 7

INTERPRETATION-

This ratio is indicative of short term financial position of a business enterprise. It provides margin
as well as it measure of the business enterprise to pay-off the current liabilities as they mature and its capacity
to withstand sudden reverse by the strength of its liquidity position. As per RBI stipulation, the minimum
current ratio of a firm should not be less than 1.33:1 so that current assets will be reasonably higher than
current liabilities to take care of the firm’s short term liquidity. Current ratio represents margin of safety for
creditors.

It is seen that there is a gradual increase in current ratio from 1.44:1 to 2.39:1 over the projected years. The
projected current liability is growing but there is growth in projected current assets at an increasing rate which
leads to increase in current ratio. This shows the improvement in time without facing difficulties.
2. DEBT- EQUITY RATIO:

DEBT-EQUITY RATIO = DEBT/EQUITY

YEAR 2011 2012 2013 2014 2015 2016

DEBT 166.67 133.33 100 66.67 33.33 0
EQUITY 195.41 247.51 314.67 397.67 496.84 596.17
DEBT-EQUITY 0.85:1 0.54:1 0.32:1 0.17:1 0.07:1 0
RATIO

DEBT-EQUITY RATIO
1.2

0.8

0.6
DEBT-EQUITY RATIO

0.4

0.2

0
1 2 3 4 5 6

INTERPRETATION-

There cannot be a rigid to a satisfactory debt-equity ratio, lower the ratio higher is the degree of protection
enjoyed by the creditors. Normally banks/ financial institutions do not accept the debt-equity ratio more than
2:1 barring certain exceptions.

The projected debt-equity ratio decreases from 0.85:1 in year 2011 to 0 in 2016 as a result of projected debt
becoming 0 in 2016. The decrease is a result of increase in tangible net worth and decrease in term loan
outstanding on account of repayment of loan. It shows sign of a good business concern that tries to bring down
debt-equity ratio through periodic payment of installments and interest ploughing back the generated profit.
3. PROFIT SALES RATIO-

PROFIT SALES RATIO = OPERATING PROFIT/SALES

YEAR 2011 2012 2013 2014 2015 2016

OPERATING PROFIT 40.77 70.60 95.68 121.64 147.41 149.10
SALES 1034.66 1285.93 1501.73 1717.53 1933.33 1942.20
PROFIT SALES RATIO 3.94% 5.49% 6.37% 7.08% 7.62% 7.67%

PROFIT SALES RATIO

10.00%

8.00%

6.00%

4.00% PROFIT SALES RATIO

2.00%

0.00%
1 2 3 4 5 6

INTERPRETATION-

This ratio gives the margin available after meeting the cost of manufacturing. It provides a yardstick to
measure the efficiency of production and margin on sale price i.e. the pricing structure.

There is an increase in this ratio from 3.94% to 7.67% over the years. It is due to increase in projected
sales and due to increase in projected operating profit. This increasing trend speaks of the good
competitive operational strength of the firm.
4. TOTAL OUTSIDER LIABILITIES / TANGIBLE NET WORTH RATIO :

YEAR 2011 2012 2013 2014 2015 2016

TOL 307.36 305.77 301.15 296.5 292.16 259.41
TNW 195.41 247.51 314.67 397.96 496.84 596.17
TOL/TWN RATIO 1.57:1 1.24:1 0.96:1 0.74:1 0.59:1 0.44:1

TOL/TWN RATIO
3
2.5
2
1.5
TOL/TWN RATIO
1
0.5
0
1 2 3 4 5 6

INTERPRETATION –

This ratio gives a view of the borrower’s capital structure. A gradual decrease in the ratio is seen from
1.57:1 in 2011 to 0.44:1 in 2016. It indicates that the projected TNW of the company is growing over the
years on account of plough back of profits and reduction in projected TOL on account of regular repayment
of loans.
 CHAPTER-7

Worldwide, the wind has been changing in the finance sector in general and banking-investment sector in
particular. In today’s changing world, retail trading, SME financing, rural credit and overseas operations
are the major growth drivers for Indian banking industry. Small and medium enterprises (SME) had not
kept pace with the country’s economic growth because of their inability to access finances, as pointed out
by the industry experts. Therefore, the increasing strength of the financial system in the country started
helping Indian SMEs to continue on their growth path. This journey would be ensuring enhanced global
visibility to these SME firms.

The importance of SME sector is now being well-recognized world over owing to its significant contribution
in achieving various socio-economic objectives, such as employment generation, contribution to national
output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the
economy. India has a vibrant SME sector that plays an important role in sustaining economic growth,
increasing trade, generating employment and creating new entrepreneurship in India.

With the opening up of the economy, rapid changes are taking place in the technology and financial sector
exposing banks to greater risks. Efficient management of loans and advances portfolio has assumed greater
significances as it is the largest asset of the bank having direct impact on its profitability. In the light of the
foregoing risks, the banks appraisal methodology should keep pace with ever changing economic
environment. The end objective of the appraisal system is to ensure that there is no under-financing or over-
financing and rather financing should be need based in order to meet the genuine financial needs of the
borrower.
 CHAPTER-8

 PUNJAB NATIONAL BANK website:

 www. Pnbindia.com
 Website for credit appraisal and SME data:
 Google .co.in
 Cgtmse .com
 PUNJAB NATIONAL BANK: ( DOCUMENTS)
 Circulars of bank
 Handout