APPRAISAL OF THE PROPOSAL

A detailed assessment of the credit request based on the various parameters of appraisal is carried out
to understand the company, the business, the industry, the viability of funding the company etc.
Credit assessment is the quintessential part, as it leads to making a business decision as to sanction
credit facilities to the company or otherwise. The appraisal of proposal involves the following: -

Management Analysis:

Management analysis involves analyzing past performance record, code of ethics, vision, strategic
and operational competence, innovativeness and team building and succession plan.

Industry Analysis:

While funding a business it is essential to analyze the performance of the industry that it functions in.
This involves analyzing the demand/supply situation, identifying key success factors, demand
outlook and margin outlook. Also, the global competitiveness of the industry is examined in view of
falling tariff barriers.

Business Analysis:

The analysis involves evaluation of the sustainability, scalability and robustness of the business
model of the company through an assessment of configuration of elements comprising the
company’s goals, strategies, processes, technologies and structure that enable the company to create
value for the customers and compete successfully in the market place.

Competitive Analysis:

This involves evaluating the competitive positioning of the company with respect to the key success
factors of the industry and identifying the distinct competitive advantages available with the
company and assessment of its overall competitive strategy.

Financial Analysis:

The main analysis on the basis of which a proposal is scrutinized by credit department is

 Ratio Analysis
 Cash Flow Analysis
 Fund Flow analysis
 Balance Sheet Analysis
Ratio Analysis

Ratio analysis has gained wide acceptance as a quantitative technique of financial management and
is used widely by banks and financial institutions all over the world. This tool helps in assessing the
financial health of a unit and is also considered as an important tool for credit/project appraisal by
banks and financial institutions.

This tool helps in measuring the past performance of an organization and helps in projecting future
trends. Analysis and interpretation of various ratios, gives the credit analyst a better understanding of
the financial condition and performance of the firm than what the analyst would have obtained from
the analysis of the financial data alone.

Cash Flow Analysis

Cash flow statement gives details of Inflows and Outflows of cash during a particular period. It is
also called statement of Receipts of Cash and Payments of Cash for a given period. Information
about the cash flows of an enterprise is useful in providing the users of financial statements with a
basis to assess the ability of enterprise to generate cash and the needs of the enterprise to utilize the
cash. The economic decisions that are taken by users require an evaluation of the ability of an
enterprise to generate cash and cash equivalents and the timing and certainty of the generation.

Cash is ready money on hand or in the bank. For the purpose of Cash flow statement, Cash includes
cash and cash equivalents. Cash equivalents are readily marketable highly liquid securities, and
which are subject to insignificant risks of changes in value. Cash flow refers to the flow of cash into
and out of a business over a period of time. Cash coming into the business are termed as ‘Cash
Inflows’ and cash going out of the business are termed as ‘Cash Outflows’. Cash inflows are
normally cash received by the enterprise from its customers (cash sales), debtors, lenders and
investors and Cash outflows are normally the payments made for purchases, salaries, rent and other
overheads. The cash flows may be either positive or negative cash flows. Whenever the cash inflows
are more than the cash outflows the enterprise is said to have positive cash flows and conversely
whenever the cash outflows of the enterprise are more than the cash inflows it is said to have
negative cash flows.
Fund Flow Analysis

A funds flow statement is a statement of Sources and uses of funds for a given period. It is also
known as – Statement of Changes in Financial Position or Statement of Sources and Application of
funds, or Where Got and Where Gone Statement.

While Balance Sheet shows the position of sources and uses of funds as on a given date, funds flow
statement, shows flow of funds during a specific period. Similarly while a profit and loss account
shows flow of only revenue nature transaction during a period, funds flow statement shows flow of
funds both capital and revenue nature during a period.

Uses Of Fund Flow Statement

The funds flow statement are used by the bankers to detect both internal and external diversion of
funds, with drawl of entire or substantial profit earned by the constituent, for sanction of term loan
and working capital facilities, monitoring of both term loan and working capital facility sanctioned to
the constituent.

Usefulness In Sanction Of Loan Disbursement And Monitoring

Projected Funds Flow Statements are obtained both for the implementation period of the project and
the entire period of re- payment of the Term Loan. The Funds Flow Statement for the
implementation period gives information on some important areas like: 1) How much and when
funds are required for the project, 2) From where funds will be coming, and 3) when the term loan
disbursements are to be made.

Analysis Of Balance Sheet & Profit And Loss Account

Balance Sheet and profit and loss account are the key financial statement of a company / firm /
organization. The ability of those managing a business is often reflected in Balance Sheet. It is also
indicated in the income (profit and loss) statement.

The main objective of analysis of Balance Sheet and profit and loss account is to find out the
solvency and profitability of continuing solvency and trend of fortunes of the business enterprise.
Study of Balance Sheet and Profit and Loss account over a period of few years gives appropriate idea
of the financial position of the enterprise.
Sensitivity Analysis:

Sensitivity analysis indicates the degree of cushion available in the profitability of the project to
withstand changes with assumed conditions.

Fixation Of Limit:

For running any business activity the unit/firm requires mainly two types of assets i.e. Current Assets
and Fixed Assets. For financing Fixed Assets, Term Loan or Deferred Payment Guarantees (DPG)
are generally sanctioned. and for Current Assets, Cash Credit Limit, Bills Purchase/Discounting
and/or Over Draft against Book Debts Limits are sanctioned. In case of Trading concerns, Current
Assets comprise Stocks, Debtors, Receivables and Advance paid to supplier of stocks. Where as in
service activity, Current Assets comprise, expenses on Wages, Rent, Electricity etc., In case of
manufacturing units, Current Assets comprise Raw Materials, Semi Finished goods, Finished Goods,
Receivables, cash etc., These assets go through the operating cycle of the business units and based on
operating cycle requirement/quantum for working capital are decided. Working capital Assessment is
to ensure that genuine day-to-day business needs of the borrower are met. This is based on Accepted
Project Production/Sales, Margin available with the party, accepted holding level of
stocks/Inventories.

METHODS FOR ASSESSMENT OF WORKING CAPITAL

1. TURN OVER METHOD (Fund Based Working Capital Requirement)
a. For SSI Borrowers-Limit upto Rs.5 crores
b. For Non-SSI borrowers-Limit upto Rs.1 crore.
Under Turn Over Method the Bank Finance Maximum 20% of the projected Sales of the Borrowers
and the borrower has to contribute 5% of the Projected Sales as Margin.
2. TRADITIONAL METHOD (Fund Based Working Capital Requirement)
a. For SSI Borrower- Limit of above Rs.5 crores but less than Rs.50 crores.
b. For Non-SSI Borrowers- Limit of above Rs. 1 crore and but less than
Rs.50 crores.
Under this method the borrower’s requirement is assessed based on the past Practices / holding levels
while the projections should be reasonably conformity with the past trends, deviations can be
accepted subject to satisfactory justification. This method is called as Tandon Committee Method of
lending.
 3. CASH BUDGET METHOD
a. For borrowers dealing in cyclical industries (Seasonal) like Tea, Sugar etc.
b. For borrowers availing Fund Based Working Capital limits of Rs.50 crores
and above from the banking industry.
Under this method the borrower is required to submit the Cash Budget to the bank along with actual
as well as projected Financial Statements. The Budget in the prescribed format is to be prepared
for a period of one year and then split into forecasts for shorter periods say monthly or quarterly.
The budget will provide the following information.
1. The Peak Level of bank finance requirement during the course of the year.
2. The current level of bank finance requires as forecast by the split budget
(on monthly / quarterly) basis.

ASSESSMENT OF WORKING CAPITAL REQUIREMENT AS PER

TRADITIONAL METHOD/TANDON COMMITTEE METHOD/ MPBF METHOD
CREDIT PROPOSAL OF M/S DURGA FOOD PROCESSING (P) LTD.

COMPANY BACKGROUND :
The company was incorporated under Indian Company’s Act, 1956, in June, 2003 as a closely held
private company. The company has set up a rice mill at village: Singpur (P.O. Chatra) Hooghly
district. The company has been enjoying the credit facilities, as under, since 2006 for par
boiling/processing based rice mill unit which was provisionally registered as an SSI unit with DIC,
Hooghly.

MANAGEMENT ANALYSIS :
Name Status No. of shares held % of Holding Whether
Guarantor
Sri Deb Dutta MD 9999 33.33% Yes
Sri Bijoy Dutta Director 9999 33.33% Yes
Sri Kumar Dutta Director 10002 33.34% Yes
Total Director 30,000

The company is promoted by Sri Deb Dutta, Sri Bijoy Dutta and Sri Kumar Dutta. The company
though family managed has experience of professional handling of various functions. The company
is highly growth oriented.

INDUSTRY ANALYSIS :

The market for the product is experiencing good growth on account of higher growth in the economy
particularly in food processing industry. More over the industry has been hit by less monsoon shower
showing almost 20% increase in price of rice which will also affect the cost of raw material.

BUSINESS MODEL :

Raw paddy is the only raw material required for the unit. Paddy is abundantly available in Burdwan
& Hooghly and adjoining districts. Out of total rice production by a unit, about 30% is sold to Govt.
Food & Supply Deppt. (D.C.F. & S) as contract levy at a rate (presently Rs. 8,760 per MT)
determined by the Govt. 70% of the rice produced is sold in the open market. Apart from domestic
market, Govt. has been exporting rice to Bangladesh through F.C.I. This has opened a new
opportunity to rice producers. In the process of production, rice bran is available as by-products
which is sold in the open market @ nearly Rs. 6500 MT. Further, boiled rice is the staple food in the
eastern part of India & Burdwan / Hooghly area is known not only as granary of Bengal but also for
the quality of rice it produces almost in the three agricultural seasons.
FINANCIAL ANALYSIS :

Ratios Estimated Estimated Projected Projected

2009 2010 2011 2012
Current ratio 1.247002398 1.052969 1.217284456 1.346061

Debt equity ratio 3.38 4.3581 3.21 2.3826

Net profit/ Net 5.27% 2.15% 2.07% 2.15%

sales
DSCR 1.57 1.89 1.84 1.59
Avg.
NOTE – Long term debt = unsecured loan + term loan + outside liabilities

Shareholder;s fund = equity capital + preference capital + reserve

ANALYSIS ON THE BASIS OF DIFFERENT PARAMETERS :

Profitability

Profitability margins have improved over the past 2 years but it is estimated to decrease in coming
years.

Tangible Net Worth

TNW is also showing an increasing trend in the last two years, due to plough back of a major portion
of profits.

Current Ratio

The ratio has been increased from 0.37 to 1.25 from previous year which shows increase in current
assets and hence the liquidity position of the company has become better.

Interest coverage ratio

Interest coverage ratio of the company is typical of the industry, which is considered satisfactory.
Here this ratio is estimated to increase in coming years. DSCR of 1.5 is satisfactory. But this ratio is
constantly higher than 1.5. So the term loan can be extended according to the proposal.

OPERATIONAL ANALYSIS :
In operational analysis it analyses the installed capacity, production and capacity
utilization. By this the actual increase or decrease in operation is determined through
it.Quality performance details are as shown under : As per project report, installed capacity
of the rice mill plant is 18MT/ shift with 300 days single shift operation per year. The company
proposes to augment output through multiple shift operation as follows:

parameter 2006-07 07-08 08-09 09-10 10-11 11-12 12-13

Installed 5400 5400 5400 5400 5400 5400 5400
Capacity(MT)
Capacity 134.26 161.10 179.63 199.10 216.67 240.74 250.00
Utilization%
Production(MT 7250 8700 9700 10750 11700 13000 13500
)

DETAILS OF THE PROPOSAL

 Renewal of Term Loan

The present proposal envisages the increase of the existing term loan at Rs. 50 Lac. This can be
accepted on the basis of satisfactory repayment history and satisfactory DSCR in projected years.
But as the debt equity ratio is more than 2.5% it is high risk lending for bank.

 Enhancement of working capital limit to 40 Lac from existing 30 Lac.

1. Turnover method – (in Rs Lac)- 2009

Estimated sales for the year 281.72

20% of estimated sales 56.334

Less 5% margin -14.087

Total permissible limit 42.247

2. MPBF Method – (in Rs Lac)-2009

Current asset 57.85

Less current liabilities excluding -14.55

Bank loan for WC ( 41.70 – 30 )

WC gap 43.30

Less 25% of CA -14.46

MPBF 28.84

So if bank adopts turnover method then, the permissible limit is Rs 42.247 Lac but if bank adopts the
MPBF method then the maximum limit is Rs28.84 Lac for working capital.

 CREDIT RATING :

According to credit rating agency

Assessment of financial risks

Particulars Score Maximum marks marks

Liquidity ratio 1.24 10 10
Solvency ratio 2.07 10 8
Profitability 0.68 7.5 4.5
Interest coverage ratio 1.57 7.5 6
Projected debt-equity 3.38 5 0 (highest risk)
ratio
Net sales 478.48 % 5 5
Total 45 33.5