Appraisal of Credit for Project Financing involves analysis of the following risks and mitigation thereof:
üIndustry Risk
üCompany Risk
üCompetition Risk
üMarket Risk
üProject Risk
üProduct Risk
üSupply Risk
üFunding Risk
üInterest Rate Risk
üCurrency Risk
Analysis of basic financial parameters may be considered as one of the strong pillars for mitigation of Credit Risk while appraising credit proposal.
1. OPERATING RATIO ANALYSIS (for each product group separately)
| Sl. No | Particulars | Units | Current Year | Previous Year-1 | Previous Year-2 |
| Ratio of Operating Expenses to Cost of Sales
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| 1 | Materials (incl. Process Materials) Cost | % |
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| 2 | Utilities Cost | % |
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| 3 | Direct Employees Cost | % |
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| 4 | Direct Expenses | % |
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| 5 | Consumable Stores & Spares | % |
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| 6 | Repairs & Maintenance Cost | % |
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| 7 | Depreciation/Amortization Cost | % |
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| 8 | Packing Cost | % |
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| 9 | Other Expenses | % |
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| 10 | Stock Adjustments | % |
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| 11 | Production Overheads | % |
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| 12 | Administrative Overheads | % |
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| 13 | Selling & Distribution Overheads | % |
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| 14 | Interest & Financing Charges | % |
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| 15 | Total | % |
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2. FINANCIAL POSITION AND RATIO ANALYSIS (for the Company as a whole)
| Sno | Particulars | Units | Current Year | Previous Year-1 | Previous Year-2 |
| A. | Financial Position | ||||
| 1 | Paid-up Capital | Rs/Lakh |
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| 2 | Reserves & Surplus | Rs/Lakh |
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| 3 | Loans (secured & unsecured) | Rs/Lakh |
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| 4 | (a) Gross Fixed Assets | Rs/Lakh |
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| (b) Net Fixed Assets | Rs/Lakh |
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| 5 | (a) Total Current Assets | Rs/Lakh |
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| (b) Less: Current Liabilities & Provisions | Rs/Lakh |
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| ( c) Net Current Assets | Rs/Lakh |
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| 6 | Capital Employed | Rs/Lakh |
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| 7 | Net Worth | Rs/Lakh |
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| B. | Financial Performance | ||||
| 1 | Cost of Production | Rs/Lakh |
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| 2 | Cost of Sales | Rs/Lakh |
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| 3 | Net Sales | Rs/Lakh |
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| 4 | Value Added | Rs/Lakh |
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| 5 | Profit before Tax (PBT) | Rs/Lakh |
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| C. | Profitability Ratios | ||||
| 1 | PBT to Capital Employed (B5/A6) | % |
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| 2 | PBT to Net Worth (B5/A7) | % |
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| 3 | PBT to Net Sales (B5/B3) | % |
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| 4 | PBT TO Value Added (B5/B4) | % |
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| D. | Other Financial Ratios | ||||
| 1 | Debt-Equity Ratio | % |
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| 2 | Current Assets to Current Liabilities | % |
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| 3 | Valued Added to Net Sales | % |
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| E | Working capital Ratios |
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| 1 | Net Working capital to Cost of Sales excl. depreciation | Months |
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| 2 | Raw Materials Stock to Consumption | Months |
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| 3 | Stores & Spares to Consumption | Months |
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| 4 | Work-in-Progress Stock to Cost of Production | Months |
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| 5 | Finished Goods Stock to Cost of Sales | Months |
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Thus it is evident that as a lender, Banks/FIs will be able to analyse more intricately the various financial parameters both product group wise and the Company as a whole if the above mentioned Annexure submitted by the Cost Auditor are considered for appraisal of Credit Proposal of a Company which falls under the purview of Cost Audit. Moreover, Performance Appraisal Report submitted by the Cost Auditor (FORM III) to the Board of Directors of the Company may be of immense help to the Banks/FIs to analyse the various facets of the Company for taking Credit decision ensuring a healthy credit delivery mechanism. The indicative lists of areas that are covered in the Performance Appraisal Report submitted by the Cost Auditor are as follows:
1 Capacity Utilization Analysis
2 Productivity/Efficiency Analysis
3 Utilities /Energy Efficiency Analysis
4 Key-Costs & Contribution Analysis
5 Product/Service Profitability Analysis
6 Market/Customer Profitability Analysis
7 Working Capital & Inventory Management Analysis
8 Manpower Analysis
9 Impact of IFRS on the Cost Structure, Cash-Flows and Profitability
10 Application of Management Accounting Tools
Moreover, discrete appraisal of project will further be facilitated if the Cost Audit Report and Compliance report are taken into its right perspective.
The following are relevant for both cost audit as also compliance report:
1. Profit Reconciliation: This analyses and presents the reasons for difference in profit between cost and financial records. A few reasons are given hereunder:
a) Forex gain/loss
b) Financial impact of under utilization of capacity
c) Improper valuation of Finished Good stock: This is one of the common, easiest and difficult to quantify accounting jugglery.
d) Impact of past period gains and losses. Bad debts, written off may be genuine, but generally they pertain to past periods.
Although a Company may show profit in accounts, the actual performance may be a loss if the above effects are applied. Similarly, a company may have posted a stellar operating performance, but end up in red due to past errors. Similarly, capacity utilization may be low due to w/cap shortage. The financial implications thereof are quantified in cost audit report and can be judiciously used to turn around a sick unit.
2. Unit wise Cost sheets for each product/pack :
This adds a new dimension to performance analysis. This helps in interunit comparison as also to guide management for improving performance through product mix, integration, benchmarking, and rationalization. The exact cause of failure as also comparison with past period is possible. With costing tool of Variance Analysis, we can get a medical report of company's ailments.
3. Above also helps in validating projections given by the company
4. Any abnormal variation over past period can be corroborated by quantitative data. If labour cost has gone down, labour hours booked can be verified as also can be correlated with production levels.
5. Capacity utilization: proper details of capacity available and reasons for underutilization thereof are quantified as per CAS 2.
6. Indirect taxes: details of amount payable vs recoverable for excise, service tax, VAT & CST can also help in identifying profit leakage.
Since Cost Auditor's report is a confidential document for a Company, it is not parted with any other by the Company as per law of the land. It is obvious that if such analytical report is made mandatory to be submitted to the bank by the regulator it can perform a crucial role in making the credit appraisal process more comprehensive and effective. It will help in judging the viability of a project more accurately which will ensure lesser NPAs for the banking system.
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--Presently, in case of a bad loan, the first action is to find out who is the culprit of extending helping hand to the borrower, somebody needs to be hanged. This results in bank employees shirking from taking responsibility of always being over cautious and negative. There should be a provision that say 2% of the loans are going to be bad debts and they should be accepted in natural course of action and written off and a provision for the same should be made in bank accounts while extending the loans.
Regards
Virendra Goel
From: join_mtc@googlegroups.com [mailto:join_mtc@googlegroups.com] On Behalf Of Mr. Govind Autee
Sent: Tuesday, October 28, 2014 10:55 AM
To: join_mtc@googlegroups.com
Cc: Munish Sharma
Subject: Re: [MTC Global] Increasing Bad loans in the banking sector in India
Dear Shri. B.N.V.Parthasarathi ji,
Thank you so much for the details regarding regulatory issues involved and the gaps in its realization.
- We are anticipating a favorable economic environment to set the pace for next industrial revolution and an opportunity to excel among global competitors with strong breeze of Entrepreneurial Eco-Systems, Flood of FDI, National Manufacturing and Investment Zones attracting PM's "Make in India" campaigns, providing single window clearances based on Trust, improvement in Labor welfare and relations, access to world-class infrastructure and technology.
- Having learn lessons from bad loans during old-economy phase and without affecting the positive sentiments, we may find Integrity Due Diligence guidelines quite important at this stage http://www.nib.int/filebank/1473-IDD-guidelines.pdf
Thanks and regards,
Prof. G.S.Autee
MIT, Aurangabad-431028 MS India
Tel: +912402375281; Mobile: +91 9689949953
http://www.mit.asia/engg-future.aspx
From: join_mtc@googlegroups.com <join_mtc@googlegroups.com> on behalf of 'PARTHA SARATHI' via Management Teachers Consortium, Global <join_mtc@googlegroups.com>
Sent: Monday, October 27, 2014 6:04 PM
To: join_mtc@googlegroups.com
Cc: Virendra Goel
Subject: Re: [MTC Global] Increasing Bad loans in the banking sector in India
Dear all,
I would like to submit my views as under-
Options to resolve the bad loans -
We have SARFASEI ACT (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002), DRTs ( Debt Recovery Tribunals) for recovery of bad loans through legal process.
We have CDR (Corporate Debt Restructuring) mechanism for reviving the business operations by restructuring the existing debt wherever there is a scope of viability.
We also have OTS (One Time Settlement) to wriggle out from the bad loans portfolio.
Resorting to SARFASEI ACT /DRT is done normally where there are tangible securities but there is no scope for recovery of loans from the cash flows of business operations. Willful defaulters and borrowers who are not able to review their business operations and are closing down the shutters are resolved by banks through SARFASEI ACT/DRT.
CDR mechanism is used for those bad loans where there is scope of revival of business operations with some additional support in the form of interest waiver/concessions, rescheduling the repayment with elongated tenure, etc.
OTS is used where both the borrower and the bank mutually agree to resolve the dues at an agreed one time settlement, obviously for a lower amount than the existing dues.
Issues-
Legal assistance is needed while resorting to SARFASEI ACT/DRT and it is also a time consuming process.
OTS requires good negotiating skills of the bankers to tactfully get the maximum amount from the deal as it involves a compromise settlement and banker has to forego some amount of the dues to be recovered. – There is an element of personal judgment in this regard, which prove to be either right or wrong on a later date.
CDR mechanism needs expertise to basically understand the problems being faced by the borrowers and structure the CDR package appropriately so that the borrower is out of woods and revives his business. This involves specialized skills of not only the bank staff who handle this portfolio but especially of the sanctioning authorities as well. Gaps in the skill sets and lack of proper understanding of the market dynamics, industry scenario and conservative approach of bankers in general result in losing the effectiveness of CDR mechanism.
Gaps:
Effective monitoring of problem accounts at initial stages with timely detection of the symptoms of sickness is and taking positive proactive measures is found lacking, even though adequate information is readily available to the bankers.
Indian banking industry is facing challenges in recovery of bad loans mainly because of two reasons-
Due to power shortage in most of the States several manufacturing units, especially SMEs are adversely affected, adding to the woes of Non Performing Assets of banks.
Infrastructure industry has suffered a major jolt in the last decade due to policy paralysis of the Govt., leading to delays in completion of major projects in the sectors- Power, Roads, Railways, ports, which in turn has added to over dues of bank loans.
Financial health of Indian banking is not precarious (though not very healthy) since adequate provisions have been made on these Non Performing Assets.
As rightly said by other members of the group, in many cases even though there is scope for reviving the business operations with some additional support from the banks, the attitude of bankers in majority of the cases is – giving knee jerk reaction by pressing the red button, rather than being pragmatic and empathetic by giving additional support to give life to the project through CDR mechanism.
After all a banker is one who lends an umbrella and snatches it away when it rains heavily.
With warm regards,
B.N.V.Parthasarathi.
Ex-Vice President and Branch head,
Bank of Bahrain and Kuwait, Hyderabad.
On Sunday, 26 October 2014 12:42 PM, Dr. A Jagan Mohan Reddy <drjaganmohanreddy@gmail.com> wrote:
Goel saab, as a former development banker my take is that some how we tend to stress more on assessing the project thus neglecting in the process about the need to assess the person behind the project.
Further , not getting timely and adequate working capital is one of the main reason for the sickness of projects. Regular monitoring and timely help will prevent the units from becoming sick. I vaguely remember about SBI initiative in granting technology up gradation loans to the entrepreneurs in Rajasthan thereby helping them to turn around.
DrA Jagan Mohan Reddy
Sent from Samsung Mobile
-------- Original message --------
From: Virendra Goel
Date:26/10/2014 09:22 (GMT+05:30)
Subject: RE: [MTC Global] Increasing Bad loans in the banking sector in India
Banking industry and the government has been harping on recovery of loans rather than finding the cause for inability of buyer to pay. There are two types of defaulter:
1. Willful defaulter – who manipulates the things to take advantage of the banking system's weakness in monitoring the loan and loopholes the law governing the banking loans and recovery.
2. Defaulters who have incurred the losses. One major cause of entrepreneurs losing money is economic instability causing unexpected fluctuations in demand and supply and in costs. In such cases banks need to make a realistic assessment of situation to evaluate if there is any scope of recovery by further funding and do the need based funding instead of short funding or undesirable liberal funding . In such cases banks start focusing on recovering their loans rather than helping the borrower thus pushing the borrower in a corner resulting in increasing the volume of bad loans.
3. As Director of State Financial Corporation, I noted two more factors of loans going bad:
a. Every project has a kind of critical factor to ensure the success of project. Assessing authority need to identify such critical factor of the project and evaluate if this critical factor for the particular project is favorable and will continue to be favorable for a reasonable time till the projects' limbs are fully grown instead of focusing on DSCR and DE ratios or Margin Money availability.
b. Liaison is one tool that has been used by big and mighty to influence this decision making where instructions are passed from top to bottom to find ways to oblige instead of critically examining the requirement and possibility of its recovery – one will find this factor in case of almost all the large loans gone bad.
Regards
Virendra Goel
From: join_mtc@googlegroups.com [mailto:join_mtc@googlegroups.com]
Sent: Sunday, October 26, 2014 6:42 AM
Subject: [MTC Global] Increasing Bad loans in the banking sector in India
Dear friends,
Good morning.
================================================================
BAD LOANS
'At a time when the Government is trying their best to push through their various efforts and proposals to implement banking sector reforms like privatisation, mergers, etc., what is really required today is to address and tackle the problem of alarming increase in the bad loans in the Banks. The so called reform measures recommended by Committee after Committee are retrograde and regressive but recovery of the huge bad loans will alone make our Banks more viable, vibrant and effective.
In order to highlight this issue, AIBEA and AIBOA have decided to observe an exclusive All India Day on 25th September, 2014.
The following figures will reveal how alarmingly the bad loans in the Banks are increasing.
31.03.2008
39,030 crores
31.03.2009
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Warm Regards
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*"They alone live who live for others, rests are more dead than alive."-
Swami Vivekananda. *
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