PUNJAB NATIONAL BANK (HEAD OFFICE)

PROJECT TITLE : CREDIT APPRAISAL FOR TERM LOAN & WORKING CAPITAL FINANCING

SUBMITTED BY SHUCHITA BHUTANI MBA(G) CMF-10

INTRODUCTION

The study is undertaken to understand the process of project appraisal for Term loans and assessment for working capital requirements being followed at PNB. With a developing economy and many multinational companies coming up, new projects are being undertaken. These projects require huge amount of capital and thus banks come forward to finance these projects depending on the feasibility of the project. Credit appraisal is the process of evaluating a proposals worthiness of being provided with the type of credit facility the borrower has asked for. This includes the evaluation of current financial status, appraisal of projected cash flows, P&L and

Balance sheets, purpose for which the facility is availed, technical and financial feasibility of the project, credit history, managerial competence and past experience, etc. in case for a term loan. As part of the appraisal process, credit rating is done for the proposal and is conducted either by the bank itself or is get done by approves external agencies.

COMPANY PROFILE

With over 72 million satisfied customers and 6001 branches, PNB has continuously retained its leadership among the nationalized banks. Punjab National Bank (BSE: 532461, NSE: PNB) is the third largest bank in India. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of Indias top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card & debit card business; bullion business; life and non-life insurance business; gold coins and asset management business etc.

MISSION
Banking for the unbanked

VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo- Gangetic Plains providing entire range of financial products and services under one roof

OBJECTIVE
Primary: The main purpose of the study is the in depth study of the sanctioning and analysis of the term loan and its appraisal by PUNJAB NATIONAL BANK for Corporate. This includes the following: Judge whether the project is viable or not, i.e. whether it can generate adequate surplus for servicing its debts within a reasonable period of time and still is left with some funds for future development. This involves taking an over-all view of the strengths and weaknesses of the project. To see whether the management and organization can prove effective for successful implementation of the project.

Secondary:

To prepare CMA data for WC assessment in order to ensure optimum investment in current assets so that the normal operations are not affected adversely. To track & evaluate the health of borrower accounts on a continuous basis through PMS report that is to detect unsatisfactory/adverse signals/indicators at an early stage in a comprehensive manner and to propose speedy corrective/remedial actions/steps to prevent the account from becoming Non Performing Asset as well as to minimize the loan losses.

METHODOLOGY
METHODOLODY The sources to study the application and feasibility of various theories and concepts, the following sources of information are being used: Primary Sources: Discussions with the project guide and staff members. Discussions with other department heads. Secondary Sources: RBI guidelines regulating the activities of the banks. Banks Credit policy and related circulars and guidelines. Research papers, power point presentations and PDF files prepared by the bank and its related officials. Study of proposals and manuals. Website of Punjab National Bank and other secondary (published) sources.

WORKING CAPITAL
Working capital is defined as the total amount of funds required for day to day operation of a unit. It can also be referred as the current asset holding of an enterprise. It is often classified as gross working capital (GWC) and net working capital (NWC). Working capital finance is Utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). This is in contrast to term loans which are utilized for establishing or expanding a Manufacturing unit by the acquisition of fixed assets.

OPERATING CYCLE
AR converted to cash

Cash

Cash Account Recievable

Sales Order

Deliver Goods or Service

Produce Goods or Service

Cash converted to Prepaid Expenses and Inventory

Goods and Services converted to Account Receivables

Types of Lending Lending is broadly classified into two broad categories: fund based lending and non-fund based lending. Fund Based Lending: This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral security. The loan can be to provide for financing capital goods and/or working capital requirements. Non-fund Based Lending: In this type of facility, the Bank makes no funds outlay. However, such arrangements may be converted to fund-based advances if the client fails to fulfill the terms of his contract with the counterparty. Such facilities are known as contingent liabilities of the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of nonfund based credit.

DATA REQUIRED FOR ASSESMENT

For assessing the working capital needs of an organization, bank follows CMA (Credit Monitoring Arrangement). It is required by banks and other financial institutions, to introspect or study the minutes of balance sheet and other financial statements of a body corporate for financing their projects. In other words it is the detailed explanation of the balance sheet and other financial ratios of the firm or any other corporate. The CMA includes analysis of following six documents: FORM I: Break up of facility FORM II: Operating statement or Profit and Loss statement FORM III: Analysis of Balance sheet FORM IV: Comparative Statement of Current assets and current liabilities FORM V: Maximum permissible bank finance FORM VI: Fund flow statement

TERM LOAN
Before a term loan gets sanctioned it has to go through a well defined appraisal process where it is evaluated on the basis of various parameters. In order to mitigate the risk of default and fraud inherent in the lending process, due diligence is followed. The process of appraisal followed is reviewed regularly to account for new guidelines from the RBI and changes in banks credit policies. Various components of the appraisal process are as detailed below: 1 Financial Evaluation a. Cost of Project & Means of Financing b. Projections of Sales, Profits, Cash Flows and Balance Sheet c. Calculating key Financial Ratios 2 Sensitivity Analysis 3 Techno-Economic Viability (TEV) 4 Technical Appraisal 5 Economic Viability 6 Financial Viability 7 Risk Analysis

CASE STUDY
GIST OF THE PROPOSAL Sanction of Working Capital Limits Existing Proposed FB 20.00 20.00 NFB (5.00) (5.00) For Term Loan: Purpose: To part finance companys project including: Setting up a new unit at Bhiwadi, Rajasthan Expansion / modernisation at its Pantnagar unit New office premises

Cost of Project Rs.94.91crore Total Debt Rs.65.00crore Promoters contribution Rs.29.91crore Proposed TL (our share) Rs.25.00crore DER 2.17 Repayment Period 5 years Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such rating.
AGENCY RATING DATE OF RATING 26.10.2010 SIGNIFICAN CE OF RATING MODERATE RISK PURPOSE VALIDITY DATE 25.10.2013

CARE

CARE BBB

BANK LOAN

THE DETAILS OF THE CASE ARE PRESENTED IN THE PROJECT

FINDINGS
For Sanction of Working Capital: PIL proposes for sanction of working capital Of Rs.20crores. D.E. R.( Debt-Equity ratio)- for the company as a whole is 2.17:1 , and the ideal DE Ratio is 2:1,so it is satisfactory. Current Ratio- for the period 31.03.2013 is 1.61 and the ideal C.R is 1.33 :1 , also earlier records of C.R. are satisfactory. TNW (Total Net Worth)- TNW of Rs.65.06crore as at 31.03.2013 is considered at satisfactory level.

For Term Loan: Proposed Term Loan requirement is Rs.65crores, out of which PNBs share is Rs.25crores. SENSITIVITY ANALYSIS- According to Sensitivity Analysis , the DSCR (Debt Service Coverage Ratio) is above unity. It is expected that the company will be able to pass on the hike in raw materials to its customers. DSCR- Further, DSCR under stress testing is also considered acceptable in view of overall promoters strength to infuse fresh capital if reqd. Average DSCR is 1.66. DSCR is at comfortable level. Incase DSCR goes below 1, promoter shall bring additional funds to meet shortfall in cash accruals.

FINACIAL INDICATORS
SALES- The company has achieved sales of Rs. 474.66 crore as per provisional balance sheet as at 31.03.2013 against projections of Rs. 400 crore for 2012-2013 thus surpassing the target by over 18%. Thus, the projected sales of Rs. 501crore are considered reasonable and achievable. PBT- As against projected PBT of Rs.22.53 crore for 2012-13, the companys actual PBT is Rs.19.98 crore, which works out to 88.68% of the target and is considered satisfactory. The company has projected PBT of Rs.22.50 crore for the current year, which is considered achievable. Current ratio/Debt Equity Ratio-The current ratio of the company has improved from 1.53 as at 31.03.2012 to 1.61 as per provisional balance sheet as at 31.03.2013. Its Debt Equity Ratio is 0.16 as at 31.03.2013.

CONCLUSION
Sanction of Working Capital: Working capital can be sanctioned to the company; As the companys Financial position seems satisfactory. Projected sales of the company justify the renewal of the present working capital limit. The requirement for the NFB limit 20 crores is justified on the basis of projections and calculations given in the report. Provision of Term Loan: Proposed term loan of Rs.25crore can be sanctioned to the company; As it has fulfilled timely its earlier installments of previous sanctioned loan also. Thus, proposed loan can be assumed to be paid timely.

THANK YOU