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Appraisal of MSME proposals has four distinct stages:

  • Conducting Due Diligence about the promoters & the proposed activity.
  • Conducting Techno-economic Feasibility Study.
  • Undertaking Financial appraisal & assessing Credit Requirements.
  • Credit Risk Rating, Compliance of Takeover Codes & Decision Making.

Loan proposals falling within the delegation of the Branch are sanctioned and disposed off at Branch level.

The bank has set up SARAL / SARAL LITE CENTRES at its various Regional Offices, where all activities are attended under Single Window Concept in liaison with the concerned branch with a view to quicken the decision making process, For proposals above Branch Heads delegation, processing is done at Sarals, wherever they are operational.

Where Saral / SARAL Lite are not operational, the proposals are sent by branches through Credit Department of respective Regional Offices to Sanctioning Authority under copies to Controlling Offices.

Working Capital requirement of Micro & Small Enterprises borrower uptoRs 5.00 crores is assessed based on Turnover Method, in which 25% of the Projected Achievable Sales Turnover is computed as Working Capital Requirement, of which 20% is provided by the bank & balance 5% is to be brought by way of promoter's contribution towards margin money.

Working Capital requirement of MSE borrower above Rs 5.00 crores is assessed based on Flexible Bank Finance Method, which is an extension of Permissible Bank Finance Method with customer friendly approach in as much as the scope of Current Assets is made broad based and for evaluating projected liquidity, acceptable level of Current Ratio is taken at 1.15:1 against benchmark level of 1.33:1. The assessment of credit requirement is made based on the projected study of the borrowers business operations vis-a-vis the production / processing cycle of the industry. The projected levels of inventory & receivables are examined in relation to the past trend, market development & industry trend. An uniform Classification for Current Assets & Current Liabilities is adopted on the terms given in the CMA data Format.

In case of Specific Industries / Seasonal Industries such as Software Development, Construction Industry, Film Industry, Sugar, Fertilizers etc. assessment of Working Capital including Short Term Loans can be made based on Cash Budget Method. In such cases apart from projected profitability, liquidity, gearing & fund flows; projected cash flows are accounted for to compute Working Capital Finance.

Term Loans are appraised based on viability of projects after judging Debt Repayment Capacity, Break Even Capacity, Internal Rate of Return, Debt Equity Ratio, Fixed Assets Coverage Ratio etc.



Term Loan Appraisal

The primary task of a lending institutions before granting a term loan is to    assure itself that the anticipated rise in the income of the borrowing unit would  materialize, thus providing the necessary funds for repaying the loans according to the terms of amortization. The liquidity of term loans depends not so much on the short-run sale ability of the goods and commodities as on the increased term loan income of borrowing units resulting from a higher level of  utilization  of existing installed capacity. For assessing the risks involved in term lending, the normal criteria used for judging the soundness of short-term loans are often unreliable and inadequate. The methods of analysis and the standard to be adopted for appraisal of term loans are more similar to investment decisions than to short-term lending. Appraisal of term-loans requires a dynamic approach involving, inter alia, a projection of future trends of output, sales, and estimates of costs, returns and flow of funds. Appraisal of term loans depends to a large extent on estimates of forecasts. Its purpose is not to set down a categorical statement of the long-range prospects of an industrial unit but only to provide broad guide outlines to the financial institutions.

Term Loan Appraisal - Loan appraisal process

The practice of making an appraisal of term loan applications on modern scientific lines has not made much progress in India. This is partly due to the fact that mainly the larger banks give such loans to highly credit-worthy constituents and hence no elaborate enquiry is considered necessary. The need for such appraisals is now being increasingly felt with the expansion of term lending. There cannot be a fixed or  standardized  approach to appraisal. Numerous and diverse elements enter into the process. It is difficult to have a cut and dried formula with the help of which a loan proposal can be considered; straightaway as acceptable or unacceptable. While the same set of factors is taken into consideration in the scrutiny of individual applications. The weightage given to the several factors varies from case to case. The more important factors among these are: the type of organisation and activity of the borrowing unit, the nature of its’ product and its market potentiality, its size, the quality of its management, soundness of financial position, the amount and, term of the loan required and its repayment schedule.

Financial institutions are usually inclined to adopt the criterion of profitability rather than that of’ ‘development’ in extending term loans. In other words, they are concerned mainly with the commercial profitability of a project as determined by the level of prospective profits and its ratio to invested capital of the borrowing unit and not with its broad economic significance or importance in the development of the resources of the economy. Commercial profitability could sometimes be more apparent than real. The extent of state support and the manner in which it is made available in the form of import controls, protective duties, subsidies, tax rebates and other concessions have considerable bearing on the profit prospects of certain industries. To the extent that the profitability of a project is conditional in the continuance of such support, appropriate allowance has to be made by the lending institution in the appraisal of the project. A number of other aspects of the State policy such as transport rates, prices and wage limits, export promotion, exchange regulations require due attention of the lending institutions while appraising term loam.

Term Loan Appraisal Procedure

There are four broad aspects of term loan appraisal, namely, technical feasibility, economic feasibility, managerial competence and financial or commercial feasibility. A brief account of each of these aspects follows.

1. Technical Feasibility

The examination of this aspect requires an assessment of the goods and services needed for the project-land, housing, transportation, raw materials, supplies, fuel, power, water, etc. The financial institution has to satisfy itself that these requirements are available. Where they are not domestically available and have to be imported, conditions foreign market as well as government policy at home in terms of availability of foreign exchange calls for a review. The location of the project is highly to its technical feasibility and hence special attention is paid to this feature. In fact, the accessibility to the various resources has meaning only with reference to location. Another important feature of technical feasibility relates to the type of technology to be adopted for the project. In case new technical processes are adopted from abroad, attention is paid to the differences in conditions. The dangers of hasty adoption of new techniques are quite substantial in an underdeveloped country. It is, therefore, desirable for lending institutions to make use of the services of technical personnel.

2. Economic Feasibility

This aspect relates to the determination of the extent of absorption of the output of the new unit or the additional production from an established unit at given prices. In other words, it takes account of the total output of the product concerned and the existing demand for it with a view to establishing whether there is an unsatisfied demand for the product. Two general indicators of the existence of unsatisfied demand are the price level and the prevalence of controls. It is necessary to know specifically whether the unsatisfied demand is ephemeral or genuine. The study goes beyond immediate prospects. Possible future changes In the volume and pattern of supply and demand will have to be estimated in order to assess the long-run prospects of the industry as well as earning capacity of the unit.

Projection or forecasting of demand is a complicated matter though of vital importance. The demand for a product is affected by a variety of factors and it may be difficult to take account of all these. If information concerning the demand for a product in the past is available, projections of demand over a period of years can be made on the basis of assumptions concerning future trend of all prices and incomes, particularly in the case of consumer goods industry. The projection of demand for intermediate goods (goods used as inputs for further production) and capital goods is more complicated because the demand for such goods is affected by changes in incomes and prices only indirectly. Often intermediate and capital goods have multiple uses, being needed in several lines of production, and hence it is necessary to take into account inter-industry relationships also.

Estimations of demand can never be wholly accurate or absolutely reliable; they can at best be considered as approximations.

3. Managerial Competence

The confidence of the lending institution in repayment prospects of a loan is largely conditioned by its opinion of the borrowing unit’s management. It has, therefore, been remarked that appraisal of management is the touchstone of term credit analysis. Where the technical competence, administrative ability, integrity and resourcefulness of the management are well established, the loan application gets the most favorable consideration.

4. Financial or Commercial Feasibility

The financial appraisal is designed to seek answers to the following questions:

1.     Whether the estimates of the cost of the project fully cover all items of expenditure and are realistic.

2.     Whether the sources of finance contemplated by the sponsors of the project will be adequate and the necessary finance will be available during the period of construction as per their schedule.

3.     What is the likely impact of the project on the level of production, sales, net earnings, borrowings, costs, etc. of the borrowing unit? Or, when can the project be expected to break-even (with offsetting expenditure) and start yielding profit?

4.     What time should be fixed for starting of repayment over a period to be determined in the light of the financial capacity of the borrowers ” arising from increased output and income?

The magnitude of the available surplus and other cash accruals to meet the interest and principal repayments (called as debt service coverage) is an essential point for investigation in deciding the period of amortization.

The financial position of the concern has to be examined during the sanctioning of the loan. For having a proper perspective of the financial position of the concern, it is not sufficient to consider a single year’s performance as revealed in the balance sheet and profit and loss account. On the other hand, a dynamic view has to be taken of the organisation in the next few years.

Term lending institutions follow different methods in obtaining the financial data. Some use comprehensive application form calling for particulars of different aspects of the projects presented for financing, others use a simple preliminary application form to judge whether the schedule of the application is prima facie feasible and later on follow-up by a comprehensive form. Quite often, the lending institutions adopt the interview method for eliciting as many details and particulars of the schedule as possible.

The basic data required for a financial analysis can be grouped under the following heads:

1.     Cost of the project.

2.     Cost of production and profitability.

3.     Cash-flow estimates during the currency of loan.

4.     Pro-forma balance sheets.

Term lending institutions have to critically analyse the data obtained from the borrowers with a view to ensuring that:

1.     The estimated cost of the project is reasonable and the project has a fair chance of  materializing;

2.     The financial arrangement is comprehensive without leaving any gaps and ensures cash availabilities as and when needed;

3.     The estimates of earnings and operating costs are as realistic as circumstances permit; and

4.     The borrower’s repaying ability, as judged from the project operations, exists with a reasonable margin of safety .


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