21-11-2012, 04:28 PM
CREDIT APPRAISAL AND CREDIT RISK ASSESSMENT FOR SMALL AND MEDIUM ENTERPRISES
APPRAISAL AND CREDIT RISK ASSESSMENT.docx (Size: 51.87 KB / Downloads: 53)
The project undertaken is “Credit Appraisal and Credit Risk Assessment for Small and Medium Enterprises”. The project emphasizes on understanding the procedures and process adopted by State Bank of India in evaluating a project proposal and assessing the credit worthiness and credit risk inherent in the proposed transaction. The project further extends by assessing working capital loans and term loans.
The main objective of this study is to understand the classification of SME’s and also issues regarding their financing. Banks lend money to these enterprises in the form of term loans and offer various products catering to an assortment of SME customers. This report explicitly discusses how the State Bank of India evaluate the loan proposals submitted by small and medium enterprises based on their financial performance and how the bank are able to rate them and assess the credit risk inherent in the proposed transaction. This report also documents the details of financial records that are needed for the evaluation of credit rating and credit risk assessment.
After assessing and rating, the working capital loans and term loans are assessed as to know the limits of the loans that are to be sanctioned. Working capital is the capital required by an industrial unit to carry out its day-to-day operations, particularly towards completing a working or operating cycle. A term loan is an advance which is granted usually against the security of the borrower’s Fixed Assets for a fixed term of not exceeding 8 years.
A few case studies were discussed where the Credit Monitoring Assessment (CMA) has been prepared through a software and then the ratios are been analyzed. Credit rating and risk assessment is done finally. After rating, working capital and term loans are being assessed to know the limits of the loans that have to be sanctioned.
INTRODUCTION
NEED FOR THE STUDY
Small and Medium Enterprises, India needs several small pills such as adequate credit delivery to SMEs, better risk management, technological up gradation of Banks esp. Public Sector Banks, attitudinal change in Bankers and so on. Among them, the major problem of inadequate financing to SMEs needs an urgent attention. However considering the level of appetite for credit facilities of Indian small and medium enterprises, private and public sector banks in India need to work out an unique and innovative model of financing to this vital sector (SME) of Indian Economy.
The importance of the SME sector is well recognized all over the world and its contribution is relevant in achieving several socio-economic objectives, such as employment generation, contribution to national output and exports, and fostering new entrepreneurship. SMEs’ access to finance, however, is rather limited. Financing has been a problem that troubles SMEs for a long time, which restrains them from sustainable development and international competitiveness in the long run. As a result, it is a common challenge for all the governments and financial institutions to address the issues of, how to provide sufficient financial support, expand access to finance, innovate financing pattern, and promote sustainable development for SMEs. The problem is being exacerbated by the most severe financial and economic crises in decades.
The recent economic crisis has seen a spate of defaults on loans across banks and one of the key reasons behind this seems to be inadequate credit appraisal process. There has been an increased focus on credit appraisal with an emphasis on acquiring a thorough understanding of all aspects of the customer and his business
SME’s are vital for economic growth and development in both industrialized and developing countries, by playing a key role in creating new jobs. Financing is necessary to help them set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea from one or two people, who invest their own money and probably turn to family and friends for financial help in return for a share in the business. But if they are successful, there comes a time for all developing SME’s when they need new investment to expand or innovate further.
SME SECTOR
The MSMED Act 2006, which came into force on 02/10/2006, defines the Micro, Small, and Medium Enterprises. As per the Act, the activities are classified into Manufacturing and Service Category. Initially, the MSMED Act 2006 had not defined the ‘Services Sector’ and RBI’s guidelines were awaited. However, subsequently RBI has defined the services sector and the activities that can be covered under the SME sector.