18-08-2012, 10:16 AM
A STUDY ON CREDIT APPRAISAL FOR WORKING CAPITAL FINANCE FOR SMEs AT FEDERAL BANK (RO) CHENNAI.
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ABSTRACT
The project undertaken is credit appraisal of industrial finance for SMEs. The project emphasis on understanding the procedure and process used by union bank of India to assess the credit worthiness of the borrower. Small scale industry in India is booming and contributing to 40% of GDP, many banks are focusing their attraction towards this sector.
The credit appraisal process is the scientific way of giving the credit to corporate client by analyzing the credit worthiness of the company through different parameters. The first step in credit appraisal project is to understand the Indian banking industry and the performance of the few Indian banks in the previous financial years since project undertaken is in banking industry a glance on union bank of India and small scale industry in India is given and the steps taken by the banks to development and welfare of SSI.
The credit appraisal for SME starts with Understanding the need of loan to the borrower i.e. for which purpose the loan is required. After this next step is to analyse the financial statement of the company to whom the loan is to be sanctioned. The main things which are taken into consideration while analyzing the financial statement are type of statement, nature of activity ,accounting policy, qualities of assets and liabilities , unit wise performance result of the company & director’s report.
INTRODUCTION TO THE STUDY
FEDERAL BANK offers working capital finance to meet the entire range of short-term fund requirements that arise within a corporate’s day-to-day operational cycle. The FEDERAL working capital loans can help company in financing inventories, managing internal cash flows, supporting supply chains, funding production and marketing operations, providing cash support to business expansion and carrying current assets. FEDERAL’s working finance products comprise a spectrum of funded and non-funded facilities ranging from cash credit to structured loans, to meet the different demands from all segments of industry, trade and the services sector. Funded facilities include cash credit, demand loan and bill discounting. Demand loans are considered also under the FCNR (B) scheme. Nonfunded instruments comprise letters of credit (inland and overseas) as well as bank guarantees (performance and financial) to cover advance payments, bid bonds etc. Lending continues to be a primary function in banking. In the liberalized Indian economy, clientele have a wide choice. External Commercial Borrowings and the domestic capital markets compete with banks. In another dimension, retail lending- both personal advances and SME advances- competes with corporate lending for funds and for human resources. But lending by nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be competitive without compromising on the basic integrity of lending. The quality of the Bank’s credit portfolio has a direct and deep impact on the Bank’s profitability.
NEED AND IMPORTANCE OF THE STUDY
Lending continues to be a primary function in banking. In the liberalized Indian economy, clientele have a wide choice. External Commercial Borrowings and the domestic capital markets compete with banks. In another dimension, retail lending- both personal advances and SME advances- competes with corporate lending for funds and for human resources. But lending by nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be competitive without compromising on the basic integrity of lending. The quality of the Bank’s credit portfolio has a direct and deep impact on the Bank’s profitability.
RESEARCH METHODOLOGY
Since the research carried out for this project is descriptive in nature, the various documents and official files would require for understanding the methodology used by the banks. The data collection can be done by personal interview or direct observations. At the same time, related articles, newspapers, magazines, in-house journals of banks, etc were referred. Also I went through various files and the official correspondence of the bank for better understanding the topic under the study. The methodology also include finding out the financial ratio, understanding the credit rating and assessment of working capital of SMEs by making the fresh proposal for working capital.
THEOROTICAL REVIEW OF THE CONCEPT
Apart from financing for investing in fixed assets, every business also requires funds on a continual basis for carrying on day to day operations. These include amounts expenses incurred for purchase of raw material, manufacturing, selling, and administration until such goods are sold and the monies. While part of the raw material maybe purchased by credit, the business would still need to pay its employees, meet manufacturing & selling expenses (wages, power, supplies, transportation and communication) and the balance of its raw material purchases. Working capital refers to the source of financing required to by businesses on a continual basis for meeting the short term needs. Limits to the various borrowers are assessed depending upon their requirements and their line of activity
FINDINGS OF THE STUDY
Methods of lending
Like many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon.
The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporates in the light of methodology recommended by the Group.
CONCLUSION
The study at FEDERAL gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how.
The credit appraisal for working capital finance system has been devised in a systematic way.
There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal.