The document provides an introduction and background to a study on the sanctioning of term loans. It discusses the importance of the financial system and SME sector for economic development. The objectives of the project are to study the credit appraisal process for sanctioning term loans and working capital loans, understand the CMA data and financial analysis, and learn about the procedures at Bank of Baroda. It outlines the methodology, scope, limitations and structure of the banking industry in India. The major players, operations, and drivers of growth of the banking sector are also summarized.
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FINANCING UNDER SME & CGTMSE
1. Page | 1
1. INTRODUCTION
Finance is the bridge between the present and the future whether be it the mobilization of
savings or their efficient, effective and equitable allocation for investment, it is the success with
which the financial system performs its functions that sets the pace for the achievement of broader
national objectives.
The financial system is a set of inter related activities/services working together to achieve
some predetermined purpose or goal. It includes different markets, the institutions, instruments,
services and mechanism which influence the generation of savings, investment capital formation
and growth. Financial system is possibly the most important institutional and functional vehicle
for economic transformation. Supervision, control and regulation are very essential for the system
to function efficiently. Thus, financial management is an integral part of the system. The
organized financial system comprises of an impressive network of banks, other financial and
investment institutions and a range of financial instruments, which together function in fairly
developed capital and money markets.
Small and medium enterprises (SMEs) are critical for the economic and social
development of emerging markets. They play a major role in creating jobs and generating income
for low income people; they foster economic growth, social stability, and contribute to the
development of a dynamic private sector. As such, access to financial services is vital in
developing a vibrant SME sector in any economy. In many emerging markets, however, access to
financial services for SMEs remains severely constrained. Credit Appraisal is the line of activities
carried out by financial institutions before extending credit to individuals as it is necessary to
appraise the credibility of the borrower in order to mitigate the risk.
1.1 BACKGROUND
Capital expenditures for acquisition of land, building and plant and machinery, setting up
new industrial undertaking or expansion/diversification of an existing one and acquisition of
movable fixed asset are usually financed through term loans. Even for modernization, renovation,
improvement of the product quality or increase the productivity and profitability, term loans are
given.
Normally term loans are granted for medium periods of time varying from 3 to 7 years.
The circumstances of the case are the deciding factor for the sanctioning of these loans. Short
term facilities and term loans can be differentiated as per the fact that the former are granted to
meet the working capital gap and are intended to be liquidated by realization of asset, whereas
term loans are given for the acquisition of fixed assets and have to be liquidated from the surplus
cash generated from earnings.
This project focuses on the study and analysis of the sanctioning of the term loans.
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The aim of the study would be to know:
How the loans are given and sanctioned.
The terms and conditions on which term loans are provided.
How banks come together in a consortium to finance a large loan and their security
margin.
Along with this, the project covers the analysis of a working capital loan which mainly
comprises of the preparation of CMA data. Working capital can be defined as the total amount of
funds required for day-to-day operations of a business unit. It is often classified as gross working
capital & net working capital. Gross working capital refers to the funds required for financing
total current assets of a business unit. Net Working Capital (NWC), on the other hand, is the
difference between the current assets and current liabilities (including bank borrowing) which is
simply the surplus of long term sources over long term uses.
1.2 PURPOSE OF THE PROJECT
To study the Credit Appraisal Process used in Bank of Baroda for sanctioning of loan
under SME & CGTMSE Scheme.
To study the Credit Appraisal in sanctioning the Term Loan & Working Capital.
To understand the CMA data and analyse the company’s Financial strength.
To understand the procedure of loan sanctioning from the branch under SME & CGTMSE
Scheme.
To understand the guidelines and procedures used in Bank of Baroda.
After learning, analysis and evaluation of the whole Credit Appraisal system at BoB
provided certain suggestions and recommendations which may helpful to improve the
Appraisal system in BoB group.
To understand the commercial, financial and technical viability of the proposal proposed
and it’s finding pattern.
To understand the companies which have taken loans, their dealings with the bank, their
performance over the years & how efficiently they are functioning.
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1.3 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 BANK OF BARODA for Corporates. 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 study CMA data for Term loan & 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 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.
To understand the importance of appropriate and effective risk management along with
maintenance of comprehensive risk policies.
To study the treatment of sick units either by their restructuring or by bifurcating the units.
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1.4 METHODOLOGY
Sources of data collection:
a.) Primary data collection:
The primary data will be collected through personal observation in the banking system and
interviewing project guide, managers and under personnel guidance of employees working in the
organization.
b.)Secondary data collection:
The Secondary data will be collected from balance sheet and income statement, Bank
circulars, case study of different customers, bulletin of the Bank, Bank’s website and RBI site.
Bank reports
Banks loan circulars on micro and small enterprises
Bank and ministry of MSE website
Books and Journals
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1.5 SCOPE & LIMITATIONS OF THE STUDY
Scope:
With ours being an open economy, rapid changes are taking place in the technological and
financial sector, exposing banks to greater risks. Thus, efficient project appraisals have taken up
huge importance as they can keep a check on and prevent induction of weak accounts to a bank’s
loan portfolio. All possible steps need to be taken to strengthen the pre-sanction appraisal as
“prevention is better than cure”.
This report seeks to present an overall picture of credit management in the bank as its
effectiveness is highlighted by the quality of its loan portfolio. The study also stands to
understand the process of preparation of CMA data for WC assessment as well as credit risk
management. Both of these are vital for any financial business.
In Indian financial context, it becomes important to keep a track on the borrower’s
accounts in order to prevent them turning into NPA. This requires a continuous evaluation.
Furthermore, the sick units shall be suggested to undergo restructuring and/or bifurcation.
Limitations of study
Assumptions and forecasting are based on the current market conditions where volatility
in prices is quite high. Also, some industries are cyclic in nature and are subject to govt. policy.
All the aspects cannot be included as a large chunk of the information is confidential and not
approachable. The study is done keeping in mind the policies of the head office.
The data availability is proprietary and not readily shared for dissemination. Though the
staff is very helpful, but is unable to give much of their time due to their own job responsibilities.
The study is not exhaustive and many concepts could not be covered as they were not available.
The data used in the study is secondary, thus some kind of discrepancy, anomaly or biasness in
the study may be witnessed.
Due to the on-going process of globalization and increasing competition, no single model
or method can suffice over a long period of time and constant up gradation is an obvious
requirement.
The financial statements of the proposed project that will be appraised are subject to risks
and uncertainties which may cause actual results to differ materially from those expressed in the
statements. Such risks and uncertainties include, but are not limited to, the following:
1. Changes in Indian laws.
2. Changes in India or global economic conditions.
3. The availability, hiring and retention of qualified human resource pool.
4. Management of patent and trademark growth.
5. Government regulations; disputes with labour organizations
6. Deployment of new technologies
The efficiency of the credit risk rating tools depends upon the decisive skills of the
officials using the tool. Thus some biasness in rating is a possibility.
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Although the study was carried out with extreme enthusiasm and careful planning there
are several limitations, which handicapped the research via,
Time Constraints: The time stipulated for the project to be completed is less and thus there
are chances that some information might have been left out, however due care is taken to
include all the relevant information needed.
All the information cannot be included as most of the information is confidential and not
approachable.
The data used in the study is secondary which can lead to biasness in the study.
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2. BANKING INDUSTRY
Financial banking is the science of managing money and other assets pertaining to a
specific business. The Banking industry plays a dynamic role in the economic development of a
country. The growth story of an economy depends on the robustness of its banking industry.
Banks act as the store as well as the power house of the country’s wealth.
2.1 GENESIS OF BANKING IN INDIA
In India the banking industry originated in the last decades of the 18th century. The first
banks were and Bank of Hindustan (1770-1829) and The General Bank of India, established 1786
and since defunct.
The largest bank, and the oldest still in existence, is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of
Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and
the Bank of Madras, all three of which were established under charters from the British East India
Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India in 1955. For many years the presidency
banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India was
established in 1935.
In 1969 the Indian government nationalized all the major banks that it did not already own
and these have remained under government ownership. They are run under a structure known as
'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as
commercial banks. The Indian banking sector is made up of four types of banks, as well as the
PSUs and the state banks; they have been joined since 1990s by new private commercial banks
and a number of foreign banks.
With the famous LPG policy adoption by India in 1990s, the private sector banks came
into Indian market which elevated the banking standards and practices in India. This step fuelled
the competition between banks and steered the economic growth of the country. Today the Indian
banking industry is known for its robustness all over the world.
2.2 STRUCTURE OF INDUSTRY
The banking system, largely, comprises of scheduled banks (banks that are listed under
the Second Schedule of the RBI Act, 1934). Unscheduled banks form a very small component
(function in the form of Local Area Bank). Scheduled banks are further classified into
commercial and cooperative banks, with the basic difference in their holding pattern.
Cooperative banks are cooperative credit institutions that are registered under the
Cooperative Societies Act and work according to the cooperative principles of mutual assistance.
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The structure of Indian Banking Industry is as follows:
Fig 2.1 Structure of Banking Industry in India
2.3 MAJOR PLAYERS IN INDUSTRY
The major players in the industry are as follows:
Type Of Commercial Major Shareholders Major Players
Banks
Public Sector Banks The Government of India SBI, PNB, Bank of Baroda,
Bank of India, Canara Bank,
Union Bank of India, etc.
Private Sector Banks Private Individuals or groups HDFC Bank, Axis Bank,
Yes Bank, Kotak Mahindra
Bank, etc.
Foreign Banks Foreign Entities Standard Chartered Bank,
HSBC Bank, Deutsche
Bank, Citi Bank, etc.
Table 2.1: Major players of Banking Industry in India
Scheduled
Banks in India
Scheduled
Commercial
Banks
Public Sector
Banks
Nationalized
Banks
State Bank of
India & its
Associates
Private Sector
Banks
Old Private
Sector Banks
New Private
Sector Banks
Foreign Banks
in India
Regional
Rural Banks
Scheduled
Co-operative
Banks
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2.4 THE WORKING OF INDUSTRY
The Banking Industry is back bone of the economy of any country and in India it is
highly regulated by RBI. The core operating income of a bank is interest income (comprises 75-
85% in the total income of almost all Indian Banks). Besides interest income, a bank also
generates fee-based income in the form of commissions and exchange, income from treasury
operations and other income from non-banking activities.
The main components of cost and income of a bank are as follows:
Main Cost Components Main Income Components
Interest paid on deposits Interest earned on lending
Interest paid on bonds issued by Fee Income, brokerages And
banks and borrowing made by the commission
Bank Income from treasury operations –
Provisioning cost for NPAs Selling of investments
Employee cost
Table 2.2: Cost and Income Components of a Bank
The business of a bank can be broadly segmented into following activities:
Retail Banking Loans to Individuals include Housing Loan, Education
Loan, Auto Loan, and Personal Loan.
Whole Sale Banking Loans to small, medium and large Corporate.
Treasury Operations Investment in bonds, equity, commodities, mutual funds,
Derivatives; trading and forex business.
Other Activities Hire Purchase, Leasing, Merchant banking, etc.
Table 2.3: Business Segmentation of a Bank
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2.5 OPERATIONS OF BANK
The main operations of a bank can be segregated into three main areas:
Fig 2.2: Operations of Bank
Balancing Profitability with Liquidity Management: Banks are commercial concerns
which provide various financial services to customers in return for payments in one form
or another, such as interest, discount fees, commission and so on. Their main objective is
profit generation. However, what distinguishes them from other business concerns is the
degree to which they balance the principle of profit maximization with certain other
principles. Banks in general, have to pay much more attention on balancing the
profitability with liquidity. Banks deal in people’s money, a substantial part of which is
repayable on demand. That is why, for banks unlike other business concerns liquidity
management is as important as profitability management.
Management of Reserves: Banks are expected to hold voluntarily a part of their deposits
in the form of ready cash which is known as cash reserves and the ratio of cash reserves to
deposits is known as Cash Reserve Ratio (CRR). The Central Bank in every country is
empowered to prescribe a reserve ratio that all banks must maintain. The Central Bank
also undertakes the role of the lender of last resort, to supply reserves to banks in times of
urgency. Since the banks are required to maintain a fraction of their deposit liabilities as
reserves, the modern banking system is also known as the fractional reserve banking.
Credit Creation: Banks are not merely financial intermediaries like other financial
institutions, but also can create as well as transfer money. Banks have the ability to create
deposits or credit or money or as it can be stated that every loan sanctioned by bank
creates a deposit. This has given rise to the concept of deposit multiplier or credit
multiplier. The importance of this is that banks add to the money supply in the economy
and hence, banks become responsible for changes in the economic activities, in a major
way. The two most important constituents of the money market in India are the modern
banks and the indigenous bankers. Modern banking became an effective force only after
1910. Before that the indigenous bankers dominated the credit scene.
Funds are required for various purposes, at various intervals and thus there are different ways
of disbursing funds. The broad objective of credit appraisal is to ascertain the worthiness of the
borrower and various methodologies are used for appraising different methods of fund
disbursement which is discussed in this project.
Operations of
Bank
Balancing
Profitability with
Liquidity
Management
Management of
Reserves
Creation of Credit
11. Page | 11
2.6 DRIVERS OF INDIAN BANKING INDUSTRY
Growth of Indian Economy: The growth of the banking industry is closely linked with
the growth of the overall economy. India is one of the fastest growing economies in the
world and is set to remain on that path in future as well. This will be backed by the stellar
growth in infrastructure, industry, services and agriculture. This is expected to boost the
corporate credit growth in the economy and provide opportunities to banks to lend to full
fill these requirements in the future.
Rising per capita income: The per capita income drives the growth of retail credit.
Indians have a conservative outlook towards credit except for housing and other
necessities. However, with an increase in disposable income and increased exposure to a
variety of products, consumers are showing a growing will towards taking credit,
especially, the young customers. A study of the customer profiles of different types of
banks reveals that foreign and private banks share of younger customers is over 60%
whereas public banks have only 32% customers under the age of 40. Private Banks also
have a much higher share of the more profitable mass affluent segment.
New channel – Mobile banking is expected to become the second largest channel for
banking after ATMs: The new channels being introduced to provide better and efficient
banking services drive the growth of banking industry exponentially at present and will in
the future, by increasing productivity and capability of acquiring new customers. During
the last decade, banking through ATMs and internet has shown a tremendous growth,
which is still in the growth phase. After ATMs, mobile banking is expected to give
another push to this industry growth in a big way; with the help of new 3G and smart
phone technology mobile usage has grown tremendously over the years. This can be
looked at as branchless banking and will also reduce the overall costs as there is no need
for physical infrastructure and human resources. This will help in acquiring new
customers, mainly who live in rural areas (though this will take time due to technology
and infrastructure issues). The IBA-FICCI-BCG report predicts that mobile banking
would become the second largest channel of banking after ATMs.
Financial Inclusion Program: Currently, in India, 41% of the adult population doesn’t
have bank accounts, which indicates a large untapped market for banking players. Under
the Financial Inclusion Program, RBI is trying to tap this untapped market and the growth
potential in rural markets by voluminous growth of banks. Financial inclusion is the
delivery of banking services at affordable costs to the vast sections of disadvantaged and
low income groups. RBI has also taken many initiatives such as Financial Literacy
Program, promoting effective use of development communication and using Information
and Communication Technology (ICT) to spread general awareness of the banking
concepts to people in these areas. All these initiatives of promoting rural banking are taken
with the help of mobile banking, self-help groups, microfinance institutions, etc. Financial
Inclusion, on one hand, helps corporate in fulfilling their social responsibilities and on the
other hand is fueling growth in other industries and thus the whole economy.
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3. COMPANY ANALYSIS
BANK OF BARODA (BOB)
3.1 COMPANY LOGO
Fig 3.1: Bank of Baroda’s logo
Bank of Baroda’s new logo is a unique representation of a universal symbol. It comprises
dual ‘B’ letterforms that hold the rays of the rising sun called the Baroda Sun. The single-colour,
compelling vermillion palette has been carefully chosen, for its distinctiveness as it stands for
hope and energy.
The sun is an excellent representation of what the bank stands for. Sun is the single most
powerful source of light and energy – its far reaching rays dispel darkness to illuminate
everything they touch. Bank of Baroda; seek to be the sources that will help all stakeholders
realize their goals. To customers, it seeks to be a one-stop, reliable partner who will help them
address different financial needs. To its employees, it offers rewarding careers and to its investors
and business partners, maximum return on their investment. The bank is characterized by
diversity. Its network of branches spans geographical and cultural boundaries and rural-urban
divides. Its customers come from a wide spectrum of industries and backgrounds. The Baroda
Sun is a fitting face for the brand because it is a universal symbol of dynamism and optimism – it
is meaningful for many audiences and easily decoded by all.
3.2 BRIEF ABOUT BANK OF BARODA
Bank of Baroda is one of the leading commercial banks in India. The Bank's solution
includes personal banking, business banking & corporate banking. Personal banking includes
deposits, gen-next services, retail loans, credit cards, debit cards, services and lockers. Business
banking includes deposits, loans and advances, services and lockers. On the other hand corporate
banking includes wholesale banking, deposits, loans and advances and services, and international
business, which includes non-resident Indian (NRI) services, foreign currency credits, ECB,
offshore banking, export finance, import finance, correspondent banking, trade finance and
international treasury. The Bank also offers services, such as domestic operations and Forex
operations. They also offer rural banking services, which include deposits, priority sector
advances, remittance, collection services, pension and lockers. They also offer fee based services
such as cash management and remittance services. The Bank is having their head office located at
Baroda and their corporate office is located at Mumbai.
Based on 2014 data it is ranked 801 on Forbes Global 2000 list. BoB has total assets in
excess of 3.58 trillion (short scale), 3,583 billion (long scale), total sales in excess of $7.53
billion, a network of 5089 branches with over 43000 employees and over 6900 ATMs.
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3.3 BOARD OF DIRECTORS OF BOB
3.4 COMPANY SPECIFIC ANALYSIS
3.4.1 Mission Statement
“To be a top ranking National Bank of International Standards committed to augmenting stake
holders' value through concern, care and competence.”
3.4.2 Values of the Bank
Management Team-The core strength of the bank
Technology and Growth initiatives
Strategic initiatives
Corporate banking and Credit
3.4.3 Subsidiaries
BOB Capital Markets (BOBCAPS) is a SEBI-registered investment banking company
based in Mumbai, Maharashtra. It is a wholly owned subsidiary of Bank of Baroda. Its financial
services portfolio includes Initial Public Offerings, private placement of debts, corporate
restructuring, business valuation, mergers and acquisition, project appraisal, loan syndication,
institutional equity research, and brokerage.
3.4.4 International presence
In its international expansion, the Bank of Baroda has 100 branches/offices in 24 countries
including 61 branches/offices of the bank, 38 branches of its 8 subsidiaries and 2 representative
offices in Thailand and Australia. The Bank of Baroda has a joint venture in Zambia with 16
branches. Among the Bank of Baroda’s overseas branches are ones in the world’s major financial
centres (e.g., New York, London, Dubai, Hong Kong, Brussels and Singapore), as well as a
number in other countries.
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The bank is engaged in retail banking via the branches of subsidiaries in Botswana,
Guyana, Kenya, Tanzania, and Uganda. The bank plans to upgrade its representative office in
Australia to a branch and set up a joint venture commercial bank in Malaysia. It has a large
presence in Mauritius with about nine branches spread out in the country.
3.4.5 Affiliates
India First Life Insurance Company is a joint venture between Bank of Baroda (44%) and
fellow Indian public sector bank Andhra Bank (30%), and UK’s financial and investment
company Legal & General (26%). It was incorporated in November, 2009 and has its
headquarters in Mumbai. The company started strongly, achieving a turnover in excess of Rs. 2
billion in its first four and half months.
3.4.6 Global Presence-Overseas Branches
BRANCHES
Australia
Bahamas
Bahrain
Belgium
China
Fiji Islands
Hong Kong
Mauritius
Republic of South Africa
Seychelles
Singapore
Sultanate of Oman
United Arab Emirates
United Kingdom
United States Of America
SUBSIDIARIES
Botswana
Ghana
Guyana
Kenya
New Zealand
Tanzania
Trinidad & Tobago
Uganda
JOINT VENTURE
Zambia
Malaysia
REPRESENTATIVE OFFICES
Thailand
15. Page | 15
3.4.7 Areas of Operation
BoB has a wide variety of products and services that meet diverse requirements of its vast
customer base. Some of the products provided by bank of Baroda in banking services are as
follows:
PERSONAL:
• Deposits.
• Gen-Next Service
• Retail Loans
• Credit Cards
• Debit Cards
• Services
• Lockers
BUSSINESS:
• Deposits
• Loans and Advances
• Services
• Lockers
CORPORATE:
• Wholesale Banking
• Deposits
• Loans and Advances
• Services
INTERNATIONAL:
• Foreign Currency Credit
• External Currency Bonds
• FCNR (B) Loan
• Export Finance
• Import Finance
NRI SERVICES:
• Products and Services
• Deposits Account
• Taxation
• Facilities to returning Indians
• General Information
TREASURY:
• Domestic Operation
• Forex Operation
RURAL:
• Deposits
• Priority Sector Advance
• Services
• Lockers
OTHER SERVICES:
• Internet Banking
• Mobile Banking
• ATM/Debit Cards
• DEMAT
• Rail Ticket.
• Baroda eShopee
• Baroda Instapay
• Baroda easy pay
Table 3.1: Area of Operations of BoB
16. Page | 16
3.5 COMPANY FINANCIAL ANALYSIS
3.5.1 Balance Sheet as on 31st March, 2014 (Rs in 000’s)
As on 31st
Mar,2014 As on 31st
Mar,2013
Rs. Rs.
CAPITAL & LIABILITIES
Capital 430,67,63 422,51,75
Reserves and Surplus 35554,99,88 31546,92,10
Deposits 568894,38,85 473883,33,75
Borrowings 36812,96,88 26579,28,18
Other Liabilities and Provisions 17811,50,10 14703,38,25
T O T A L 659504,53,34 547135,44,03
ASSETS
Cash and Balances with Reserve Bank of India 18629,09,39 13452,07,83
Balances with Banks and Money at Call and Short Notice 112248,81,84 71946,82,60
Investments 116112,66,14 121393,72,44
Advances 397005,81,08 328185,76,49
Fixed Assets 2734,12,26 2453,11,60
Other Assets 12774,02,63 9703,93,07
T O T A L 659504,53,34 547135,44,03
3.5.2 Profit & Loss Account as on 31st March, 2014 (Rs in 000’s)
As on 31st
Mar,2014 As on 31st
Mar,2013
Rs Rs
I. INCOME
Interest Earned 38939,70,95 35196,65,44
Other Income 4462,74,41 3630,62,49
T O T A L 43402,45,36 38827,27,93
II. EXPENDITURE
Interest Expended 26974,36,32 23881,38,91
Operating Expenses 7137,06,56 5946,73,63
Provisions and Contingencies 4749,94,18 4518,43,39
T O T A L 38861,37,06 34346,55,93
III. PROFIT
Net Profit for the period 4541,08,30 4480,72,00
Available for Appropriation 4541,08,30 4480,72,00
Appropriations
a) Statutory Reserve 1135,27,08 1120,18,00
b) Capital Reserve 8,69,02 81,44,81
c) Revenue and Other Reserves
I) General Reserve 1401,37,88 1369,46,69
II) Special Reserve u/s 36 (1) Income Tax Act, 1961 912,06,65 850,00,00
d) Proposed Dividend (including Dividend Tax) 1083,67,67 1059,62,50
T O T A L 4541,08,30 4480,72,00
17. Page | 17
3.5.3 Financial Graphs
3.5.3.1 PAT & PBT:
PBT stands for Profit Before Tax, and PAT stands for Profit After Tax. The graph visually shows
how the net profit of the company stand reduced due to the impact of Tax.
3.5.3.2 TOATAL ASSETS & ASSET TURNOVER RATIO
Total Assets is the sum of all assets, current and fixed. The asset turnover ratio measures
the ability of a company to use its assets to efficiently generate sales. The higher the ratio
indicates that the company is utilizing all its assets efficiently to generate sales. Companies with
low profit margins tend to have high asset turnover.
18. Page | 18
3.5.3.3 NETWORTH
Networth is the difference between a company's total assets and its total liabilities. It is
also known as shareholder`s equity.
3.5.3.4 DEPOSITS & ADVANCES
Deposits are liability to banks, which need money to lend. It is the amount that any citizen
(resident or no-resident) keep with the bank subject to some regulatory compliance. In turn, banks pay
interest on deposits. It is considered the safest form of investment. Deposits are of two types current and
savings deposits (CASA) as well as term deposits.
Advance is the amount that banks lend to individuals and companies. They charge interest on
loans. Interest rates vary depending on the terms and conditions of such credit. Banks raise money to
lend through different sources like deposits, money market and so on.
The difference between credit and deposits is expressed as CD ratio in banking parlance. Neither
an extreme lower nor higher CD ratio is good for banks. Generally, a high CD ratio means credit growth is
higher than deposit growth. Alternatively, it also suggests, banks may be hiring more from debt market
than deposits. A lower CD ratio means, deposit growth is higher than credit expansion
19. Page | 19
3.5.3.5 BOOK VALUE
Book value is a company's assets minus its liabilities. In simple terms it would be the
amount of money that a shareholder would get if a company were to liquidate.
3.5.3.6 Dividend
Dividend is a payment made by a company to its shareholders usually as a distribution of
profits. When a company makes profit it can either re-invest it in the business or it distributes it to
its shareholders by way of dividends. The dividend payout ratio is the amount of dividends paid to
shareholders relative to the amount of total net profit of a company.
A reduction in dividends paid is not appreciated by investors and usually the stock price
moves down as this could point towards difficult times ahead for the company. On the other hand
a stable dividend payout ratio indicates a solid dividend policy by the company's management.
20. Page | 20
3.6 BOB’s RESULT AT A GLANCE
3.6.1 Key Parameters for FY 14
Performance Parameter Rs crore Growth (y-o-y)
Net Profit 1,048 3.6%
Operating Profit 2,182 -2.8%
Total Business 8,56,218 19.9%
Total Deposits 5,03,772 21.5%
Total Advances 3,52,446 17.8%
Total Assets 5,47,135 22.3%
Net Worth 34,576 14.6%
Total Capital (Basel II) 41,925 15.6%
Tier 1 Capital (Basel II) 30,158 12.9%
Business per Employee 16.82 11.6%
Table 3.2: Key Parameters Performance
3.6.2 Key Ratios
Mar’14 Mar’13 Mar’12 Mar’11 Mar’10
Current Ratio 0.02 0.02 0.03 0.02 0.02
Quick Ratio 24.05 23.90 28.00 26.51 21.88
Capital Adequacy Ratio 12.28 13.30 14.67 14.52 14.36
Advances / Loans Funds (%) 71.78 72.22 78.07 78.56 77.38
Net Profit / Total Funds -- 0.90 1.24 1.33 1.21
Face Value 10.00 10.00 10.00 10.00 10.00
Dividend Per Share 21.50 21.50 17.00 16.50 15.00
Interest Expended / Total Funds -- 4.80 4.80 4.11 4.25
Operating Expense / Total Funds -- 1.14 1.21 1.38 1.77
Asset Turnover Ratio 0.07 0.07 0.08 0.07 0.08
Table 3.3: Key Ratios Performance
3.6.3 SECTOR WISE NPA
Sector Gross NPA (%)
End-June, 2013
Gross NPA (%)
End-Sept, 2013
Gross NPA (%)
End-Dec, 2013
Agriculture 5.29 5.76 5.77
Large & Medium Industries 5.06 5.56 6.03
Retail 2.24 2.52 2.11
Housing 1.52 1.91 1.47
MSME 4.26 4.63 4.95
Overseas Operations 1.56 1.77 1.75
Table 3.4: Sector wise NPA
21. Page | 21
3.6.4 RESTRUCTURE OF ACCOUNTS
Year Outstanding as on 31st December, 2013 (Rs
crore)
Standard Category NPA Category Grand total
No. of A/Cs Amount No of
A/Cs
Amount No of A/Cs Amount
Up to 2008 122 276.49 177 71.93 299 348.42
2008-09 5,232 841.68 4,530 465.39 9,762 1,307.07
2009-10 2,694 1,603.07 1,742 491.21 4,436 2,094.28
2010-11 569 1,480.07 378 198.08 947 1,678.15
2011-12 1,613 6,497.33 538 1,100.55 2,151 7,597.88
2012-13 12,978 6,451.20 2,385 1,822.94 15,363 8,274.14
2013-14 28,377 4,675.24 1,806 209.81 30,183 4,885.05
Total 51,585 21,825.08 11,556 4,359.91 63,141 26,184.99
Less standard
restructured
accounts that
ceased to attract
higher provisions
and/or additional
risk weight at end-
Dec, 2013
6,568 3,863.88 6,568 3,863.88
TOTAL 45,017 17,961.20 11,556 4,359.91 56,573 22,321.11
Table 3.5: Restructuring of Accounts
3.6.5 SECTORAL DEPLOYMENT OF CREDIT
Sector % share in Gross Domestic Credit
Agriculture 10.8
Retail 17.6
SME 22.4
Large & Medium 31.9
Misc. including Trade 17.3
Total 100.0%
Table 3.6: Sector wise Contribution to GDP
3.6.6 PERFORMANCE HIGHLIGHTS IN FY14
Total Business (Deposit+Advances) increased to Rs 9,65,900 crore reflecting a growth of
20.43% (y-o-y).
Gross Profit and Net Profit were Rs 9,291 crore and Rs 4,541 crore respectively. Net
Profit registered a growth of 1.35% over the previous year.
Credit-Deposit Ratio stood at 86.15% as against 82.03% last year.
Retail Credit posted a growth of 20.96% constituting 16.6% of your Bank’s Gross
Domestic Credit in FY14.
MSME Credit posted a growth of 21.21% constituting 20.3% of your Bank’s Gross
Domestic Credit in FY14.
22. Page | 22
Net Interest Margin (NIM) as per cent of interest earning assets in global operations was at
the level of 2.36% and in domestic operations at 2.87% during FY14.
Net NPAs to Net Advances stood at 1.52% this year against 1.28% last year.
Capital Adequacy Ratio (CAR) as per Basel II stood at 12.87%.
Capital Adequacy Ratio (CAR) as per Basel III stood at 12.28%
Net Worth improved to Rs 34,933 crore registering a rise of 13.7%.
Book Value improved from Rs 729.11 to Rs 813.50 on year.
Business per Employee moved up from Rs 1,689 lakh to Rs1,865 lakh on year.
3.7 COMPANY PESTEL & SWOT ANALYSIS
3.7.1 PESTEL Analysis – Impact of Economic Policies
A PESTEL analysis is a framework or tool used by marketers to analyse and monitor the
macro-environmental (external marketing environment) factors that have an impact on an
organization. The result of which is used to identify threats and weaknesses which is used in a
SWOT analysis.
PESTEL stands for: Political Economic Social Technological Environmental and Legal.
3.7.1.1 Political Factors
These are all about how and to what degree a government intervenes in the economy. This
can include – government policy, political stability or instability in overseas markets, foreign
trade policy, tax policy, labour law, environmental law, trade restrictions and so on.
In view of the sharp deceleration in growth, the government has been introducing several
corrective measures and reforms since mid-Sept, 2012 to help revive the economy. The reform
measures pertained to Fiscal Sector (upward adjustment in the administered prices of fuels to curb
energy subsidies, expenditure control, medium-term fiscal consolidation plan, launching of direct
cash transfer Programme, etc.); to Balance of Payments sector (Liberalization of FDI in multi-
brand retail, domestic airlines, power exchanges, insurance & pension companies, etc.,
liberalization of ECBs & a reduction in the withholding tax on interest payments from 20.0% to
5.0% for three years, increase in import duty on gold from 4.0% to 6.0% and hike in the limit of
foreign holdings of domestic government & non-infrastructure corporate bonds, etc.); to
Investment (Creation of Cabinet Committee on Investment to fast track major infrastructure and
other projects, deferment in the implementation of GAAR by two years to Apr 1, 2016); to
Financial Sector (Encouragement to Mutual Fund industry outside of top 15 cities by allowing
higher commissions and passing of Banking Bill raising voting caps & allowing new banking
licenses to be issued while strengthening the RBI’s role). Furthermore, in the Union Budget for
FY14, the government was successful in containing the fiscal deficit as a percentage of GDP at
5.2% and set a target of 4.8% for FY14 and hence it was the mix experience shared by Bank of
Baroda with other Banking Institutions.
3.7.1.2 Economic Factors
Economic factors have a significant impact on how an organization does business and also
how profitable they are. Factors include – economic growth, interest rates, exchange rates,
23. Page | 23
inflation, disposable income of consumers and businesses and so on. Recently global recovery
gained some traction, led by the strength of the US economy, but growth is still uneven in Euro
area & Japan. Moreover, China has been slowing down. Fiscal tightening throughout Q3 of
financial year14 exacerbated the weakness in aggregate demand. In addition to this retail inflation
(CPI) declined sharply in Dec’13 and remained elevated at close to double digits, thus the RBI
had to increase its policy rates three times during Sep-Jan, FY14. And all these factors created
huge pressure tough time for Bank of Baroda’s operation.
3.7.1.3 Social Factors
IT includes the cultural aspects and includes health consciousness, population growth rate,
age distribution, career attitudes and emphasis on safety. The rising self-esteem and self-
actualization of new generation with the rise of income have drove people towards investments
and building of assets. Moreover moving towards the nuclear family system, it has increased the
wants and needs and the favourable government policies have encouraged them to avail the
facilities from the bank. Bank of Baroda also enjoyed the social factors which were positive for
them.
3.7.1.4 Technological Factors
These are the factors which keep the Bank technically updated and make the work feel
easier to both employees and customer. These are the factors which don’t much depend on
external environment or policies, these policies are taken by firm itself. Bank of Baroda has taken
many efforts in these aspects. Under various alternate delivery channels (like ATM, Internet
Banking, Mobile Banking etc.) the Bank had the following value additions during Q2, FY14.
E-Banking
Online transaction information sharing with a valued client RSGSM (Rajasthan
Sriganganagar Sugar Mill)
Online Recurring Deposit Account opening with Standing Instruction enabled through E-
Banking
Puduchery Excise tax collection through E-Banking
Enabled Delhi VAT offline payments for branches
ATM
Bunch Note Acceptor implementation for account based - Phase II completed.
Non personalized card product stabilization completed successfully
In-house customization completed for Cheque Book request on ATM
Online Hot listing between Card Management System and Base24 switch completed
Online charges for Rupay KCC completed
Mobile Banking
Mobile Banking application (Baroda M-Connect) is now provided for Blackberry Z10 OS
24. Page | 24
SMS Banking
SMS alerts are being activated as and when a cheque is received in “Inward Clearing” for
amount exceeding Rs 1 lakh.
Other Initiatives during FY14
Activated online Fund Transfer to other country through SWIFT message for UAE
territory.
Enabled VAT collection through E-Banking for Daman & Diu.
Created module for sale of RBI Inflation Index Bond
National Automated Clearing House (NACH): Both Debit and Credit processing
completed.
Cheque Truncation System (CTS) implemented in important centres like Bhopal, Baroda,
Surat, Indore, Rajkot, Bhavnagar, Pune, etc.
3.7.1.5 Environmental Factors:
It includes ecological and environmental aspects such as weather, climate, and climate
change, which may especially affect industries like tourism, farming and insurance. In recent
years the climatic change has become unpredictable and thus agriculture and health has suffered
most. India being agro based country, the unpredictability of climate has increased the risk and
these conditions have also encouraged the Banks to offer their products accordingly. And Bank of
Baroda enjoys it by giving advances on crops and by insuring medical needs by Baroda Health
insurance policy.
3.7.1.6 Legal Factors:
Legal factors include discrimination law, consumer law, antitrust law, employment law
and health and safety law. These factors can affect how a company operates, its cost, and the
demand for its product.
25. Page | 25
3.7.2 SWOT ANALYSIS OF BANK
Bank of Baroda
Category Banking Services
Sector Banking, Financial Services, Investment services
Tagline/ Slogan India’s International Bank
USP One of the best PSU Banks with service matching that of Private Banks
STP
Segment People who wish to invest their money in banking activities
Target Group Middle income group individuals, HNIs, Corporates
Positioning Bank with International product and services served the Indian way
SWOT Analysis
Strength
1. One of the biggest names in public sector banking
2. No. of services and products offered by the bank
3. CBS implementation in its branches
4. International presence adds to the credibility
5. A strong capital base ensures that it is well placed for growth of
business.
Weakness
1. Lesser branches across the country when compared with SBI and
PNB
2. Due to focus on international branches, local focus sometimes gets
diluted
3. Late on introducing latest products in the market.
Opportunity
1. International branches give scope to expand in other economies
2. Expansion in the rural areas to include the unbanked and under banked
3. BoB Caps can contribute more to the revenues
26. Page | 26
Threats
1. New banking licenses by RBI
2. Foreign banks
3. NPA levels could rise as there is over reliance on corporate and SME’s.
Competition
Competitors
1. SBI
2. PNB
3. ICICI
Table 3.7: SWOT Analysis
3.8 SHAREHOLDING PATTERN OF BANK OF BARODA
The shareholding pattern of Bank of Baroda is given below
(in %)
Promoter & Group
Foreign
Indian
Total of Promoters
Non Promoter
Institutions
Financial Institutions / Banks
Foreign Institutional Investors
Insurance Companies
Mutual Funds / UTI
Non-Institution
Indian Public
Others
Total Non-Promoter
Total Promoter & Non Promoter
Custodians
Grand Total
Mar 2015
0.00
57.53
57.53
34.28
1.25
16.53
9.57
6.93
8.19
4.74
3.45
42.47
100.00
0.00
100.00
Dec 2014
0.00
56.26
56.26
35.93
1.06
17.96
9.67
7.24
7.81
4.29
3.52
43.74
100.00
0.00
100.00
Sep 2014
0.00
56.26
56.26
35.65
1.17
18.00
10.19
6.28
8.10
4.45
3.65
43.75
100.01
0.00
100.00
Jun 2014
0.00
56.26
56.26
34.64
1.29
16.95
10.07
6.32
9.11
4.66
4.45
43.75
100.01
0.00
100.00
Mar 2014
0.00
56.26
56.26
34.20
1.23
15.62
10.54
6.81
9.55
4.65
4.90
43.75
100.01
0.00
100.00
Table 3.8: Shareholding Pattern of Bank of Baroda
28. Page | 28
3.10 ACHIEVEMENTS & REWARDS
Some of the important rewards received by the bank in last 2 years are as follows:
Bank of Baroda was awarded for “Excellence in Banking (PSU Sector)” at the 5th
My FM Stars of the Industry Awards recently held in Mumbai.
Bank of Baroda Awarded as “The Most Efficient Public Sector Bank” of the year 2014
Bank of Baroda has won National Prize – First Rank in Innovative Training Practices for
the year 2014
Bank of Baroda won First Prize under Indira Gandhi Rajbhasha Shield Scheme for Bank’s
Bank of Baroda conferred as the winner of Golden Peacock National Training Award for
the year 2014
Bank of Baroda has won the Champion of Champions Award at the 54th annual ABCI
Awards 2015.
Bank of Baroda has won 3 Awards at ‘The IBA Banking Technology Awards 2014 - 15’.
Bank of Baroda awarded ‘FE India’s Best Bank’ by The Financial Express (FE)
Bank of Baroda awarded as ‘Best PSU Bank’ at 5th Dalal Street Investment Journal
Bank of Baroda conferred “Best Bank - Global Business Development (Public Sector)”
Bank of Baroda conferred 3 awards at 'The IBA Banking Technology Awards 2014 - 15.
Bank of Baroda conferred Best Public Sector Bank Award
Best Public Sector Bank under the category ‘Global Business Development’ by Dun &
Bradstreet – Polaris Financial Technology Banking Awards 2013.
Banking Technology Excellence Award 2013 among PSBs by IDRBT.
The Sunday Standard Best Banker’s Award – Best Banker-HR constituted by The New
Indian Express Group.
ASSOCHAM 9th Annual Banking Summit –cum-Social Banking Award 2013-Winner in
Public Sector Banks Category in the field of ‘Social Banking’.
“Excellence in Home Loan Banking” Award by My FM Stars of the Industry.
3.11 INITIATIVES BY THE BANK
The important initiatives taken during Q3, FY 13-14 were ….
Conversion of 20 more metro and urban branches into Baroda Next branches.
Around 612 more branches were linked to the Regional Back Office for the opening of
CASA accounts [Total No. of branches linked were 3,653]
More than 7,500 CASA accounts are observed to be opened per day.
Around 190 more branches were linked to the Regional Back Office for issuance of
Personalized Cheque Books [Total No. of branches linked were 4,263]
A new RBO was opened at Ahmedabad (North Gujarat Zone) on 7th October, 2013 taking
the total tally of RBOs to 12.
E-Lobbies were launched in 30 locations. These lobbies operate 24X7 providing facilities
for cash withdrawal, cash deposit, and cheque deposit; pass book printing and phone
banking.
29. Page | 29
3.12 FUTURE OF THE BANK
Bank of Baroda looks confidently into the future to face & thrive intense competitive
environment that is emerging in global era.
3.12.1 Projects implemented during FY14
The construction of office building cum currency chest at Varanasi.
Construction of residential complex at Janakpuri, New Delhi.
The construction of multi-storey integrated office building at Jaipur.
Construction of BSVS at Ajmer, Dunga rpur, Banswada and Pratapgarh.
The setting-up of e-lobbies at 45 various locations in the country.
Your Bank purchased residential flats at various places for newly transferred officers.
3.12.2Projects under implementation
Construction of BSVS at Alirajpur, Jaipur, Surat, Bharuch and Jhabua.
Construction of administrative and residential buildings at New Raipur.
Construction of residential cum commercial complex at Indore (MP).
Construction of own building for Disaster Recovery Site at Hyderabad.
Renovation of Bank of Baroda Institute of Information Technology at Gandhinagar
(Gujarat).
Construction of Regional Office Building at Faizabad.
Renovation of residential building and flats at Nehru Enclave, Lucknow.
3.12.3 Future Plans for Estate Management
To facelift the Bank’s Building at Parliament Street, New Delhi.
To redevelop the Bhandup Staff Quarters building, Mumbai, thereby to construct about
138 residential flats for transferred officers/executives.
The redevelopment of Jogeshwari Staff Quarters, Mumbai, to construct a building for
residential and commercial use.
To construct the training centre at Bangalore.
Construction of BSVS at various centres across India as per the directives from the
Government of India.
To set up the Baroda Academy (i.e., training Centre) at Gandhinagar (Ahmedabad),
Bangalore, Greater Noida and Bhubaneswar.
30. Page | 30
4. FINANCING UNDER SME
OBJECTIVES: To understand how financing in done in SME sector and understand
various issues regarding SME sector as under:
4.1 OVERVIEW
Small and Medium Enterprises (SMEs) have played a significant role world over in the
economic development of various countries. Over a period of time, it has been proved that SMEs
are dynamic, innovative and most importantly, the employer of first resort to millions of people
in the country. The sector is a breeding ground for entrepreneurship. The importance of SME
sector is well-recognized world over owing to its significant
contribution in achieving various socio economic objectives, such as employment generation,
contribution to national output and exports, fostering new entrepreneurship and to provide depth
to the industrial base of the economy.
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a
key source of economic growth, dynamism and flexibility in advanced industrialized countries,
as well as in emerging and developing economies. SME constitute the dominant form of business
organization, accounting for over 95% and up to 99% of enterprises depending on the country.
They are responsible for between 60-70% net job creations in Developing countries.
Small businesses are particularly important for bringing innovative products or techniques
to the market. Microsoft may be a software giant today, but it started off in typical SME fashion,
as a dream developed by a young student with the help of family and friends. Only when Bill
Gates and his colleagues had a saleable product were they able to take it to the market place and
look for investment from more traditional sources.
SMEs 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.
4.2 IMPORTANCE OF SMEs
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a
key source of economic growth, dynamism and flexibility in advanced industrialized countries, as
well as in emerging and developing economies. SMEs constitute the dominant form of business
organization, accounting for over 95% and up to 99% of enterprises depending on the country.
They are responsible for between 60-70% net job creations in Developing countries.
Small businesses are particularly important for bringing innovative products or techniques
to the market. Microsoft may be a software giant today, but it started off in typical SME fashion,
as a dream developed by a young student with the help of family and friends. Only when Bill
Gates and his colleagues had a saleable product were they able to take it to the marketplace and
look for investment from more traditional sources.
31. Page | 31
SMEs 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 SMEs when they need
new investment to expand or innovate further. That is where they often run into problems,
because they find it much harder than larger businesses to obtain financing from banks, capital
markets or other suppliers of credit.
4.3 DEFINING SMEs
Fig 4.1: SME’s defined in different ways
In India, the enterprises have been classified broadly into two categories:
(i) Manufacturing; and
(ii) Those engaged in providing/rendering of services.
Both categories of enterprises have been further classified into micro, small and
mediumenterprises based on their investment in plant and machinery (for manufacturingenterprise
s) or on equipment’s (in case of enterprises providing or rendering services). The classification on
basis of investment is as under:
Particulars Investment in plant and
machineries in case of
manufacturing Enterprises
Investment in Equipment in
case of Service Enterprises
Micro Enterprises Up to Rs. 25 lacs Up to Rs. 10 Lacs
Small Enterprises Above Rs. 25 lacs and
Up to Rs. 500 lacs
Above Rs. 10 lacs and
Up to Rs. 200 lacs
Medium
Enterprises
Above Rs. 500 lacs and
Up to Rs. 1000 lacs
Above Rs.200 lacs and
Up to Rs. 500 lacs
Table 4.1: Classification of Enterprise on basis of investment
32. Page | 32
4.4 SMEs IN INDIA
India has a vibrant SME sector that plays an important role in sustaining economic
growth, increasing trade, generating employment and creating new entrepreneurship in India.
In keeping in view its importance, the promotion and development of SMEs
has been an important plank in our policy for industrial development and a well-
structured program me of support has been pursued in successive five-year plans for. SMEs in
India have recorded a sustained growth during last five decades. The number of SMEs in India is
estimated to be around 13 million while the estimated employment provided by this sector
is over 31 million.
The SME sector accounts for about 45 per cent of the manufacturing output and over 40
percent of the national exports of the country. India embarked on the path of opening up its
economy and integrating it with the global economy in 1991.
The liberalization of economy, while offering tremendous opportunities for the growth
and development of Indian industry including SMEs, has also thrown up new challenges in terms
of fierce competition. The very rules which provide increased access for our products in the
global markets also put domestic industry under increased competition from other countries. In
today’s world, access on a global basis to modern technology, capital resources and markets have
become the most critical determinants of international competitiveness.
Fig 4.2: SME’s performance in different states in India
33. Page | 33
Fig 4.3: SME’s by Geographical regions (in %)
4.5 COMPOSITION OF SME SECTOR
4.5.1 Manufacturing Sector
The SME Sector includes Micro Enterprises, Small Enterprises, Artisans & Village Industries,
Medium Enterprises, Service Sector units & individual sub-sector units.
Micro Enterprise (Manufacturing) is an enterprise engaged in manufacture/production
or preservation of goods and whose investment in plant and machinery (original cost
excluding land and building and the items specified by the Ministry of Small Scale
Industries) does not exceed Rs. 25.00 lacs irrespective of location of the unit.
Small Enterprise (Manufacturing) is an enterprise engaged in manufacture/production
or preservation of goods and whose investment in plant and machinery (original cost
excluding land and building and the items specified by the Ministry of Small Scale
Industries) is more than Rs. 25.00 lacs but does not exceed Rs. 5.00 crores.
Medium Enterprise (Manufacturing) is an enterprise engaged in
manufacture/production or preservation of goods and whose investment in plant and
machinery (original cost excluding land and building and the items specified by the
Ministry of Small Scale Industries is more than Rs.5.00 crores but does not exceed
Rs.10.00 crores.
4.5.2 Service Sector
Enterprises engaged in providing or rendering services whose investments in equipment
(original cost excluding land & Building and Furniture, Fittings and other items not directly
related to the service rendered or as may be notified under MSMED Act, 2006) are as detailed
here under:
Micro Enterprise (Service) is an enterprise where the investment in equipment does not
exceed Rs. 10.00 lacs;
Small Enterprise (Service) is an enterprise where the investment in equipment is more
than Rs.10.00 lacs but does not exceed Rs. 2.00 crores and
Medium Enterprise (Service) is an enterprise where the investment in equipment is more
than Rs. 2.00 crores but does not exceed Rs. 5.00 crores.
34. Page | 34
4.6 THE REALITY – THE INDIA SME GROWTH STORY SO FAR
Numbering over 48 million (see graph below); Indian SMEs have grown at a stable pace
of 4.5% in the last 5 years. According to the latest Annual Report3 issued by the Ministry of
Micro, Small and Medium Enterprises, there are over 6,000 products, ranging from traditional to
high-tech, which are being manufactured by the MSME sector for domestic as well as
international markets.
According to the latest Economic Survey, Indian SMEs employ close to 40% of India’s
workforce. After the agriculture sector, SMEs rank second in fostering employment opportunities.
Over 3.25 lakh jobs were generated in the SME sector during the period between April 2011 and
February 2012.
YEAR No of SMEs(in millions)
2008 39.1
2009 40.9
2010 42.7
2011 44.7
2012 46.7
2013 48.8
Table 4.2: SME’s growth over years
Fig 4.4: Total number of SME’s in India
However, in January-February 2013, SMEs saw a decline of 51% in investments through
the Private Equity (PE) route in just one year. The sector fell from USD 306.27 million to USD
151 million. Funds focusing on SMEs are having difficulties in raising money because of the
prevailing conditions. The total gap in MSME funding is estimated at USD 126 million. Although
banks have been slowly trying to bridge this gap, stringent reforms from the government are
required.
The reality hereby is that although this sector plays a vital role in giving a boost to the
overall Gross Domestic Product (GDP), it is still overlooked by the government, corporate sector
and the financial sector. Thus, the commendable efforts and support of this sector do not receive
the required attention.
0 10 20 30 40 50 60
2008
2009
2010
2011
2012
2013
35. Page | 35
4.7 SME’s CONTRIBUTION TO GDP
Small and medium enterprises (SMEs) have been the backbone of the Indian economy.
That is both a good and a bad thing.
The good part first. Employing close to 40% of India's workforce and contributing 45% to
India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially
at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports.
The bad thing is that SMEs in India, due to their low scale and poor adoption of
technology, have very poor productivity.
Although they employ 40% of India's workforce, they only contribute 17% to the Indian
GDP. Why? Too many firms stay small, unregistered and un-incorporated in the unorganised
sector so that they can avoid taxes and regulations.
Fig 4.5: SME’s contribution to GDP
At 48 million, India has the second largest number of SMEs in the world. China leads with
50 million.
4.8 CHALLENGES TO SME SECTOR
Despite its commendable contribution to the Nation's economy, SME Sector does not get
the required support from the concerned Government Departments, Banks, Financial Institutions
and Corporate, which is a handicap in becoming more competitive in the National and
International Markets.
SMEs face a number of problems. They are as follows:
Absence of adequate and timely banking finance
Limited capital and knowledge
Non-availability of suitable technology
Low production capacity
Ineffective marketing strategy
Identification of new markets
Constraints on modernisation & expansions
Non-availability of highly skilled labour at affordable cost
36. Page | 36
Fig 4.6: Reasons for Sickness of SME’s
4.9 VARIOUS WAYS TO FINANCE SME’s
Fig 4.7: SME Finance in various ways
Thus it is clear that the most common source of finance for SMEs is Bank Financing.
There are no. of banks that help in assisting the SMEs for financing. The main channel used by
the SMEs via Banks is specialized loans by various Banks. The Main reason for choosing bank
loans by SMEs compared to other sources of financing like venture capital, PE funding etc. is
there is only interest to be paid no stake is to be diluted thus the whole command of the SME is
with the owner only.
37. Page | 37
Fig 4.8: Sources of Finance for SME’s
4.10 PERFORMANCE OF SME BY BANK OF BARODA IN FY 2014
FY14 was a challenging year for overall industry which ended with some signs of revival
in the last quarter. MSME (Micro, Small and Medium Enterprises) sector, which is characterized
as under-financed segment had also witnessed pressures on demand and profitability with
increased working capital requirements. Bank credit had been the major external source of
financing for MSMEs in past. So for FY14, with access to credit being a major challenge for
MSMEs, has the situation improved or worsened from bank credit perspective?
With growing importance of MSMEs in India’s growth story for sustainable development,
Government of India (GoI) and Reserve Bank of India (RBI) had taken steps to increase credit
flow to MSMEs. In July 2013, RBI had increased its limits of loans to MSE (Micro and Small
Enterprises) under priority sector lending scheme and set high growth target of 20% in credit to
MSE for banks. Furthermore, in November 2013, loans to medium enterprises were included
under priority sector lending scheme.
This had led to increased credit flow to MSME which grew by 28% in FY14 on y-o-y
basis compared to mere 10% in FY13. The share of Bank credit to MSME had grown to 16% as
on March 21, 2014 compared to 14% as on March 22, 2013. Overall credit growth was 14% in
FY14 compared with 13.6% in the previous year. Thus, credit to MSME segment had in fact
aided banks to maintain their overall credit growth.
The growth in MSME segment was driven by credit growth to MSE segment compared to
medium enterprises in manufacturing segment.
4.10.1 MSME Business of Bank of Baroda
The micro, small and medium enterprise (MSME) sector is crucial to India’s economy. A
recent IFC study on MSME finance in India indicates there are 29.8 million enterprises in various
industries, employing 69 million people. This sector accounts for 45% of Indian industrial output
and 40% of exports. Although 94% of micro, small and medium firms are unregistered, the
contribution of the sector to India’s GDP has been growing consistently at 11.5% annually, which
is much higher than the average GDP growth of the nation.
38. Page | 38
Considering the importance of the MSME sector to Indian economy and to facilitate this
business, your Bank rationalized interest rate structure for MSME borrowers in June 2013. Your
Bank comfortably achieved all the regulatory targets pertaining to this segment during FY14.
Moreover, your Bank has a rich set up of 52 SME Loan Factories (SMELFs), which sanctioned
loans to the tune of Rs 19,999 crore during the financial year under review.
In addition to the MSME units under the regulatory category, your Bank also considers
financing the units in manufacturing and services activity which have investments in plant &
machinery and equipments, respectively, in excess of regulatory guidelines and have turnover up
to Rs 150 crore on the same footing as MSME units. This is done internally to give preferred
attention to this “expanded” sector along the lines of regulatory MSME enterprises.
However, for reporting to regulators, the performance of your Bank is reckoned on
regulatory lending i.e. to units/ borrowers who comply strictly with definition of Micro, Small and
Medium Enterprises.
It may be noted that during the year FY14, the performance of your Bank under the
regulatory category of MSME business has been very encouraging despite the overall slow-down
in the economy.
4.10.2 Growth of MSME Business in BoB
The total outstanding in MSME Sector works out to Rs 57,426 crore as on 31st March
2014. The growth in lending to MSME Sector during the last three years is given in the table
below.
Year Growth (%, YoY)
2011-12 26.11%
2012-13 30.31%
2013-14 21.21%
Table 4.3: Growth in MSME’s Business over years
4.10.3 Major Achievements in FY14
The MSME advances of Rs 56,634 crore as of end-Mar 2014 reflected a growth of Rs
9,912 crore (21.21%) over the MSME advances in the previous year.
The advances of Rs 27,756 crore to Micro Enterprises in the total credit of Rs 40,873
crore to MSE sector (as of the previous year) stood at 67.90% in FY14, comfortably
reaching the mandatory target of 60.0% fixed by the RBI.
The MSME advances as on 31st Mar, 2014 contributed 20.16% to the gross domestic
advances of your Bank.
The advances to Micro & Small enterprises reached the level of Rs 50,300 crore as against
the Government set mandatory target of Rs 45,900 crore by end-Mar, 2014.
Your Bank introduced a New Product named as “MSME Capex Loan and Capex Card”
during FY14 to further promote its MSME business.
4.10.4 Initiatives in MSME Financing during FY14
Bank reduced the spread in the rate of interest charged to the MSME borrowers to
encourage investment spending.
Bank approved scoring type credit rating model for small value loans worth Rs 2 lakhs up
to Rs 2 crore.
39. Page | 39
Bank held the SME conclave with Heads of SME Loan Factories in the months of June
and October 2013 to deliberate on the issues pertaining to MSME businesses.
Bank celebrated MSME Festival from 1st November 2013 to 28th February 2014.
Bank arranged MSME Round Table conference at Nasik, Indore, Rajkot and Coimbatore.
Bank aggressively focused on collateral free lending under the CGTMSE scheme.
Bank participated in several exhibitions, seminars, etc., to build its Brand image.
Besides, Bank introduced MSME CAPEX LOAN and CAPEX CARD for MSME
borrowers. It financed units in Hosiery industry in Kanpur Region and leather & leather products
in Kanpur and Agra regions. It financed Tea Processing units in West Bengal and Sikkim regions.
It extended financial support to units engaged in Rerolling mills, Machine Tools and Textile
printing activity across the country. It financed units engaged in manufacturing of Hand Tools &
Sports goods in Punjab-Jamu-Kashmir Region. It financed Hotel/Motel/Resorts in Haldwani and
Deharadun regions. It financed agro-based units across the nation. It entered into MOU with
Mahindra Trucks & Buses P. Ltd. under its scheme for financing Road Transport Operators for
purchase of commercial vehicles manufactured by various commercial vehicle manufacturers.
It also entered into MOU with Development Commissioner, MSME for Technology up-
gradation and for providing quality support to MSMEs with respect to energy efficient projects.
Under its MSME segment, Bank has various Area Specific Schemes for certain pockets,
where there is a concentration of units with same or similar activity and with good business
potential. These schemes have yielded satisfactory results for your Bank. The cluster development
is also being undertaken with lead district branches having a larger role to play in the ensuing
year. Furthermore, directed programmes of the Government of India, particularly the Weavers
Credit Card (WCC) and lending under Prime Minister’s Employment Generation Programme
(PMEGP) received focused attention during the year FY14.
In particular, Bank renewed the following area-specific schemes during the year FY14.
Financing of Marble units in Rajasthan.
Financing of Textiles units on pan India basis.
Financing of Brass Manufacturing Units in Jamnagar, Junagadh & Kutch Region.
Financing of collateral free loans/educational loans to persons with disabilities promoted
by National Handicapped Finance and Development Corporation.
Financing of three-wheelers manufactured by Piaggio Vehicles Pvt. Ltd.
4.11 SME PRODUCT & SERVICESS OFFERED BY BANK OF BARODA
In addition to Working Capital Finance and Term Finance, Bank of Baroda has laid out a
comprehensive suite of products specifically catering to SME Borrowers. Loans and Advances
offered by Bank are as follows
Baroda Professionals
Scheme for Textile Industry
Working Capital Finance
Term Finance
Baroda SME Loan Pack
Baroda Vidyasthali Loan
Baroda Arogyadham Loan
Baroda Laghu Udhyami Credit Card
40. Page | 40
Baroda Artisans Credit Card
Technology Upgradation Fund Scheme (TUFS) for Textile & Jute Industries
Credit Linked Capital Subsidy Scheme (CLCSS) for SSI Units
Composite Loans
Collateral Free Loans under Guarantee Scheme of Credit Guarantee Fund
Trust for Micro and Small Enterprises
SME Short Term Loans
SME Medium Term Loans
Baroda SME Gold Card
Scheme for Financing Energy Efficiency Projects
Baroda Overdraft against Land & Building
Prime Minister Employment Generation Programme (PMEGP)
Baroda MSME Capex Loan & Capex Card
4.12 STEPSFORSMELOANSINBANKOFBARODA
Fig 4.9: Steps for SME loans in Bank of Baroda
The above figure shows the steps for availing finance through Public sector Banks
using loans. Here is the brief description of the above shown procedure:
Inspection/Survey of SME by Executives
of local branch
Sending the documents of survey by local
branch to SMELF (SMECC) Branch
Preparing credentials of promoters and
firm by SMECC branch and investigating
the same
Estimating the amount of loan to be
sanctioned and fowarding the documents
for sanctioning
If the loan is being sanctioned by the
central authority then disbursement of
loan ammount into account of SME
41. Page | 41
First of all the SME who wants to avail loan has to visit the local branch office of the bank
of their area, where by the loan application is been filled by the SME.
After that the executives of that branch check whether all the necessary documents are
provided by the SME or not, then if all necessary documents
aresubmitted the next step comes whereby the officials of that local branch go tothe
premises of that SME and just have a brief survey of promoter as well as the premises.
After they are satisfied they send the file of necessary documents to the SMECC branch,
which is a special branch for SME loans. Where by the credit appraisal takes place,
which consist of credit appraisal of promoter, financial appraisal, determining cost
of project, understanding various means of finance used, profitability estimate, cash flow
projections, marketing appraisal etc., which is explained in next session. This step brings
the clear picture whether the loan should be given to SME or not!
If the SMECC branch is satisfied with the details then it forward the request of granting
loan to sanctioning authority.
And finally after the verification by sanctioning authority, the disbursement of loan
amount takes place in the account of that SME
This whole procedure right from application to disbursement of loanamount tak
es approximately 20-25 days as the procedure involves analysis of documents by various
branches and thus the movement of documents amongst them, if all this procedure
would have taken place at single place then it would take only 10-12 days for
disbursement.
4.13 WORKFLOW FOR SANCTION & DISBURSEMENT PROCESS IN
BOB
42. Page | 42
Fig 4.10: Workflow for Sanction & Disbursement process in BoB
The above process shows the sanction & Disbursement of loan process followed in Bank
of Baroda.
Initially this is the internal process of how the Sanctioning of loan takes place.
This whole process consists of 14 steps as showed above which is followed in sequence to
sanction the loan.
This process takes atleast a 1 month for a Branch to disburse the loan.
As we know that Branch cannot disburse the loan by itself, the file is sent to SME Loan
Factory where the whole process takes place in sequence & then the Sanctioning authority
sanctions the file and then preparation of documents takes place & after vetting the
documents by the Advocate then the sanction of loan takes place as shown in the above
procedure.
43. Page | 43
5. FINANCING UNDER CGTMSE
5.1 INTRODUCTION
Entrepreneurs in the State face much difficulty in starting a venture as they are not able to
access bank credit because of their inability to provide adequate collateral security to the money
lending agencies. Availability of bank credit without the hassles of collaterals / third party
guarantees has been a major source of support to the first generation entrepreneurs to realize their
dream of setting up a of their own Micro and Small Enterprise (MSE). Keeping this objective in
view, Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched
Credit Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate flow of
credit to the MSE sector. To operationalize the scheme, Government of India and SIDBI set up
the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Under the Credit
Guarantee scheme (CGS), the Trust covers credit facilities extended by Member Lending
Institution(s) to a single eligible borrower in the Micro and Small Enterprises sector for credit
facility
(i) not exceeding Rs. 50 lakh (Regional Rural Banks/Financial Institutions) and
(ii) not exceeding Rs.100 lakh (Scheduled Commercial Banks and select Financial
Institutions)
By way of term loan and/or working capital facilities on or after entering into an agreement with
the Trust, without any collateral security andor third party guarantees or such amount as may be
decided by the Trust from time to time. The Credit Guarantee scheme (CGS) seeks to reassure the
lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails to
discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by
the lender up to 75 / 80/ 85 per cent of the credit facility. Under this scheme the lending
institution from where the entrepreneur availed assistance, has to be pay to the Trust a onetime
guarantee fee and annual service fee. The amount equivalent to the guarantee fee and/or the
service fee payable by the eligible lending institution may be recovered by it, at its discretion
from the eligible borrower.
Kerala has got a distinction of having the maximum number of units of MSME covered
under the Guarantee scheme of CGTMSME. During the third quarter of the financial year 2010-
11 banks in Kerala sanctioned an amount of Rs.147.96 crores in 5120 cases under CGTMSME
coverage. While analyzing this figure it can be ascertained that the average loan sanctioned under
this scheme to a unit is only Rs.2.89 lakhs whereas the maximum loan allowable is Rs.100 lakhs.
This shows that only the very small enterprises are getting the benefits under the scheme and most
of the enterprises that require a big amount as loan are not getting the assistance. While discussing
the point in the SLBC it was clarified that such units are not willing to take the facility as they
have to pay a big amount as guarantee fee both the one-time fee and the annual service fee. This
proposal is to assist micro and small enterprises to avail loan under CGTMSME by providing the
guarantee fee including the annual fee to be paid by them.
44. Page | 44
5.2 OBJECTIVE & NEED OF CGTMSE
Availability of bank credit without the hassles of collaterals / third party guarantees would
be a major source of support to the first generation entrepreneurs to realise their dream of setting
up a unit of their own Micro and Small Enterprise (MSE). Keeping this objective in view,
Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit
Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate flow of credit to
the MSE sector. To operationalize the scheme, Government of India and SIDBI set up the Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
The main objective is that the lender should give importance to project viability and
secure the credit facility purely on the primary security of the assets financed. The other objective
is that the lender availing guarantee facility should endeavour to give composite credit to the
borrowers so that the borrowers obtain both term loan and working capital facilities from a single
agency. The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a
MSE unit, which availed collateral free credit facilities, fails to discharge its liabilities to the
lender, the Guarantee Trust would make good the loss incurred by the lender up to 75 / 80/ 85 per
cent of the credit facility.
5.2.1 Objective: To know about detailed criteria of the CGTMSE scheme.
Shift from collateral to merit based lending
Act as mechanism of entrepreneurship promotion
Facilitate institutional credit flow to MSE sector
Address growth constraints of MSE sector
Enable financial inclusion / employment generation
Revive confidence in credit guarantee mechanism
5.2.2 Need of Credit Guarantee
Banks are exposed to various risks while lending
Default Risk factor - deterrent in MSE lending
Collateral - conventional risk mitigation tool
Lack of Collateral – commonly stated obstacle
Micro & Small Enterprises are normally affected from economic shocks
Need for alternate risk mitigation mechanism
5.2.3 Overview
The scheme was originally launched from 1st August 2000 known as Credit Guarantee Fund
Scheme for Small Industries (CGFSI) covering eligible credit facilities from 1st June 2000.
Subsequent to the enactment of MSMED Act-2006 the Trust was renamed as Credit Guarantee
Fund Trust for Micro and Small Enterprises and scheme as Credit Guarantee Scheme for Micro
and Small Enterprises.
PURPOSE: To provide collateral free loans upto Rs.100/- lacs to Micro & Small Enterprises, as
defined under MSMED Act, 2006.
ELIGIBILITY: The coverage of the Scheme is extended to all new and existing Micro and
Small Enterprises (both in the Manufacturing Sector as well as in the Service Sector) as defined
under MSMED Act, 2006.
45. Page | 45
LIMIT: The eligible loan limit under the Scheme is Rs.100 lacs. A borrower, who has availed
certain credit facilities secured by collaterals and/or third party guarantees and is sanctioned
distinct/separate credit facility without collateral security/third party guarantee, can be covered
under CGTMSE scheme.
SECURITY: "Primary security" in respect of a credit facility shall mean the assets created out of
the credit facility so extended and/or existing unencumbered assets which are directly associated
with the project or business for which the credit facility has been extended. This means if a
borrower is sanctioned working capital facility only, a charge can be created on the fixed assets of
the unit even though the same are not financed by the Bank and the same will not be treated as
collateral security. Similarly in case of sanction of Term/Demand loan on standalone basis, charge
taken on current assets will not be treated as collateral security.
MARGIN: The credit guarantee cover is available up to 75% of the amount in default in respect
of credit facilities up to Rs. 50/- lacs extended by the Lending Institution to an eligible borrower
subject to maximum guarantee cover of Rs. 37.50 lacs and 50% for the facilities over Rs. 50/- lacs
and up to a limit of Rs. 100/-, i.e. maximum of Rs. 62.50 lacs. In case of following categories of
borrowers, guarantee cover is available up to 80% of the amount in default.
a) Loans to Micro enterprises up to Rs. 5 lacs (85%).
b) Loans to Micro and Small enterprises operated and/ or owned by women.
c) All loans in North East Region including the State of Sikkim.
5.3 CGTMSE LOGO - What does it depict?
Fig 5.1: CGTMSE Logo
Three light blue stripes connecting the word CGTMSE indicate sources of 'comfort', 'hope'
and 'inspiration' the Trust provides and the Flame indicates the continuous support being provided
by the Trust to the entrepreneurs in realising their dream of setting up units of their own.
Yellow colour around flame indicates source of energy given by the Trust to the
entrepreneurs for setting up units in the MSE sector without having to worry about providing
collateral security and / or third party guarantees.
The blue triangular shape resting on the word CGTMSE indicates the shed of an industrial
unit and growth of MSEs in upward direction.
All above things lead to believe that both the word CGTMSE & its LOGO ensure assured
help for the entrepreneurs to set up MSE units.
46. Page | 46
5.4 CGS- OPERATIONAL HIGHLIGHTS
PERIOD ACTIVE
MLI
NO OF
PROPOSALS
APPROVED
CREDIT AMOUNT
APPROVED(IN CRORES)
FY 2000-01 9 951 6.06
FY 2001-02 16 2296 29.52
FY 2002-03 22 4955 58.67
FY 2003-04 29 6603 117.60
FY 2004-05 32 8451 267.46
FY 2005-06 36 16284 461.91
FY 2006-07 40 27457 704.53
FY 2007-08 47 30285 1055.84
FY 2008-09 57 53708 2199.40
FY 2009-10 82 113029 5110.09
FY 2010-11 93 137645 6234.67
FY 2011-12 115 178453 7865.87
Table 5.1: Operational Highlights of CGTMSE Scheme
Source: Compiled from SIDBI Annual Report (2012)
Fig 5.2: Active Member Lending Institutions
Member Lending Institutions comprise of various commercial banks and Regional Rural
Banks that are involved in sanctioning the loan under the CGS scheme of CGTMSE.
Figure 5.2 highlights the increase in the total number of Member Lending institutions that
sanction collateral free loans to the budding entrepreneurs. The number of MLIs increased from 9
in 2001-02 to 115 in 2011-12, reflecting an increase of 1177.77% over the last decade. Almost all
the private sector and public sector banks are covered under this scheme.
47. Page | 47
Fig 5.3: Number of Proposals Approved
Fig 5.4: Credit Amount Approved (Rs. in Crore)
5.5 CREDIT GUARANTEE FUND SCHEME FOR MICRO & SMALL
ENTERPRISES
The Board of Trustees of Credit Guarantee Fund Trust for Small Industries, having
decided to frame a Scheme for the purpose of providing guarantees to a substantial extent in
respect of credit facilities to borrowers in Micro and Small Enterprises, hereby make the
following Scheme:
1. Title and date of commencement
i) The Scheme shall be known as the Credit Guarantee Fund Scheme for Small Industries
(CGFSI)
ii) It shall come into force from August 1, 2000.
iii) It shall cover eligible credit facility extended by the lending institutions to eligible
borrowers effective June 1, 2000.
Series1
0
2000
4000
6000
8000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15YEARS
NO OF
PROPOSALS
APPROVED
Series1
0
2000
4000
6000
8000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
YEARS
CREDIT
AMOU
NT
APPRO
VED
CREDIT
AMOUNT
APPROVE
48. Page | 48
Subsequent to the enactment of MSMED Act-2006 the Trust was renamed as Credit Guarantee
Fund Trust for Micro and Small Enterprises and scheme as Credit Guarantee Scheme for Micro
and Small Enterprises.
2. Guarantees by the Trust
i) Subject to the other provisions of the Scheme, the Trust undertakes, in relation to credit
facilities extended to an eligible borrower from time to time by an eligible institution
which has entered into the necessary agreement for this purpose with the Trust, to provide
a guarantee on account of the said credit facilities.
ii) The Trust reserves the discretion to accept or reject any proposal referred by the lending
institution which otherwise satisfies the norms of the Scheme.
3. Credit facilities eligible under the Scheme:
The Trust shall cover credit facilities (Fund based and/or Non fund based) extended by Member
Lending Institution(s) to a single eligible borrower in the Micro and Small Enterprises sector for
credit facility not exceeding Rs.100 lakh by way of term loan and/or working capital facilities on
or after entering into an agreement with the Trust, without any collateral security andor third
party guarantees provided that the lending institution applies for guarantee cover in respect of
credit proposals sanctioned in the quarter April-June, July-September, October-December and
January-March prior to expiry of the following quarter viz. July-September, October-December,
January-March and April-June respectively. Provided further that, as on the material date:
The dues to the lending institution have not become bad or doubtful of recovery; and / or
The business or activity of the borrower for which the credit facility was granted has not
ceased; and / or
The credit facility has not wholly or partly been utilized for adjustment of any debts
deemed bad or doubtful of recovery, without obtaining a prior consent in this regard from the
Trust.
Credit facilities extended by more than one bank and/or financial institution jointly and/or
separately to eligible borrower up to a maximum up to Rs.100 lakh per borrower subject to ceiling
amount of individual MLI or such amount as may be specified by the Trust.
4. Credit facilities not eligible under the Scheme
The following credit facilities shall not be eligible for being guaranteed under the Scheme: -
i) Any credit facility in respect of which risks are additionally covered under a scheme
operated/ administered by Deposit Insurance and Credit Guarantee Corporation or the
Reserve Bank of India, to the extent they are so covered.
ii) Any credit facility in respect of which risks are additionally covered by Government or by
any general insurer or any other person or association of persons carrying on the business of
insurance, guarantee or indemnity, to the extent they are so covered.
iii) Any credit facility, which does not conform to, or is in any way inconsistent with, the
provisions of any law, or with any directives or instructions issued by the Central
Government or the Reserve Bank of India, which may, for the time being, be in force.
iv) Any credit facility granted to any borrower, who has availed himself of any other credit
facility covered under this scheme or under the schemes mentioned in clause (i), (ii) and (iii)
above, and where the lending institution has invoked the guarantee provided by the Trust or
under the schemes mentioned in clause (i), (ii) and (iii) above, but has not repaid any portion
of the amount due to the Trust or under the schemes mentioned in clause (i), (ii) and (iii)
above, as the case may be, by reason of any default on the part of the borrower in respect of
that credit facility.
49. Page | 49
v) Any credit facility which has been sanctioned by the lending institution against collateral
security and / or third party guarantee.
vi) Any credit facility which has been sanctioned by the lending institution with interest rate
more than 3% over the Prime Lending Rate (PLR) of the lending institution.(Branches to
link this corresponding to Base Rate)
5. Responsibilities of lending institution under the scheme:
The lending institution shall evaluate credit applications by using prudent banking
judgment and shall use their business discretion / due diligence in selecting commercially
viable proposals and conduct the account(s) of the borrowers with normal banking prudence.
The lending institution shall closely monitor the borrower account.
The lending institution shall safeguard the primary securities taken from the borrower in
respect of the credit facility in good and enforceable condition.
The lending institution shall ensure that the guarantee claim in respect of the credit facility
and borrower is lodged with the Trust in the form and in the manner and within such time as
may be specified by the Trust in this behalf and that there shall not be any delay on its part to
notify the default in the borrowers account which shall result in the Trust facing higher
guarantee claims.
The payment of guarantee claim by the Trust to the lending institution does not in any way
take away the responsibility of the lending institution to recover the entire outstanding amount
of the credit from the borrower. The lending institution shall exercise all the necessary
precautions and maintain its recourse to the borrower for entire amount of credit facility owed
by it and initiate such necessary actions for recovery of the outstanding amount, including
such action as may be advised by the Trust.
The lending institution shall comply with such directions as may be issued by the Trust,
from time to time, for facilitating recoveries in the guaranteed account, or safeguarding its
interest as a guarantor, as the Trust may deem fit and the lending institution shall be bound to
comply with such directions.
6. Composite all-in Guarantee Fee
Composite all-in Guarantee Fee as under:
Credit
Facility
Annual Guarantee Fee
(AGF) [% p.a.]
Women, Micro
Enterprises and units in North East Region (incl.
Sikkim)
Others
Upto Rs.5 lakh 0.75 1.00
Above Rs.5 lakh and
upto Rs.100 lakh
0.85 1.00
Table 5.2: Annual Guarantee Fee
of sanctioned credit facility shall be paid upfront to the Trust by the institution availing of
the guarantee cover within such period as may be specified by the Trust. In the event of non-
payment fee by the MLI within such period or any other specified date, the guarantee under
the scheme shall not be available to the lending institution unless the Trust agrees for
continuance of guarantee and the lending institution pays penal interest on the fee due and
unpaid, with effect from the due date, at four per cent over Bank Rate, per annum, or at such
rates specified by the Trust from time to time, for the period of delay.
50. Page | 50
7. Extent of the guarantee: The Trust shall provide guarantee as under:
Category Maximum extent of Guarantee where credit facility is:
Upto Rs.5 lakh Above Rs.5 lakh upto Above Rs.50 lakh upto Rs.100
Rs.50 lakh Lakh
Micro Enterprises 85% of the amount in 75% / Rs.37.50 lakh plus 50% of amount
default subject to a
Rs.37.50 lakh
in default above Rs.50 lakh subject
maximum of Rs.4.25 to overall ceiling of Rs.62.50 lakh
lakh
Women entrepreneurs/ Units Rs.40 lakh plus 50% of amount in
located in North East Region default above Rs.50 lakh subject
(incl. Sikkim)other than credit to overall ceiling of Rs.65 lakh
facility upto Rs.5 lakh to micro
80% of the amount in default subject to a
enterprises
maximum of Rs.40 lakh
All other category of borrowers 75% /Rs.37.50 lakh Rs.37.50 lakh plus 50% of amount
in default above Rs.50 lakh subject
to overall ceiling of Rs.62.50 lakh
Table 5.3: Extent of Guarantee
All proposals for sanction of guarantee approvals for credit facilities are to be rated as per
the extant guidelines wherever required and should be acceptable to Bank.
The guarantee cover will commence from the date of payment of guarantee fee and shall
run through the agreed tenure of the term credit in respect of term credit / composite credit. Where
working capital alone is extended to the eligible borrower, the guarantee cover shall be for a
period of 5 years or a block of 5 years, or for such period as may be specified by the trust in this
behalf.
5.6 ELIGIBILITY CRITERIA
Eligible Lending Institutions: All scheduled commercial banks and specified Regional
Rural Banks, NSIC, NEDFi, SIDBI, which have entered into an agreement with the Trust
for the purpose. The eligible lending Institutions, on entering with an agreement with
CGTMSE become Member Lending Institution (MLI) of CGTMSE.
Eligible Borrower: New as well as existing Micro and Small Enterprises.
Maximum Risk Cover: Of the credit facilities extended by MLIs, Trust shall guarantee,
in case of default by the borrower, up to 75 per cent (85% for select category of
borrowers), of the defaulted principal amount in respect of term credit including interest
on principal for one quarter and / or outstanding working capital advances (inclusive of
interest), as on the date of account becoming NPA, or as on the date of filing the suit,
whichever is lower. Other charges such as penal interest, commitment charge, service
charge, or any other levies/ expenses shall not qualify for the guarantee cover.
Rehabilitation assistance: For the unit covered under CGTMSE and becoming sick due
to factors beyond the control of management, assistance for rehabilitation extended by the
51. Page | 51
lender could also be covered under the scheme provided the overall assistance is within
the credit cap of Rs.100 lakh.
Non-Eligibility: Any facility given on the basis of collateral security or third party
guarantee shall be disqualified for coverage under the scheme. The Trust also reserves the
right to reject any application for the guarantee cover, if it deems necessary.
5.7 FEES
Guarantee fee: For credit facility upto Rs.5 lakh, an upfront Guarantee Fee (GF) of 1% of
the amount sanctioned will have to be paid to the Trust by the MLI. For amounts
sanctioned beyond Rs.5 lakh and upto Rs.100 lakh, the GF is 1.5%, while for credit
facility upto Rs. 50 lakh for units in the North Eastern Region including Sikkim, the GF is
0.75%. The GF will have to be paid within 30 days from the date of first disbursement of
credit facility by the MLI to a borrower.
Annual service fee: Guarantee cover extended by CGTMSE in respect of any specific
borrower shall be valid provided the MLI concerned pays an Annual Service Fee (ASF) of
0.50% on the amount guaranteed for credit facilities upto Rs.5 lakh and 0.75% on the
amount guaranteed for credit facilities beyond Rs.5 lakh and upto Rs.100 lakh. Such ASF
is to be paid by the MLI on or before 31st May of that year. The Trust reserves the right to
revise the guarantee fee / annual service fee from time to time.
Cost to the borrower: The Credit Guarantee Scheme leaves it to the discretion of the
MLIs to decide about passing on the incidence of Guarantee Fee and Annual Service Fee
to the borrower or alternatively they may decide to bear it themselves.
Interest rate payable by borrower: The MLI shall follow the guidelines issued by RBI.
However, interest rate shall not exceed 3 per cent over and above the Prime Lending Rate
of the MLI, excluding the annual service fee.
5.8 CLAIMS SETTLEMENT
Prior to lender (also referred to as MLI) preferring any claim on the Trust, there shall be a
lock-in-period of 18 months from either the date of last disbursement of loan to the borrower or
the date of the guarantee cover coming into force in respect of the particular credit facility,
whichever is later.
The lender shall, however, prefer a claim on the defaulted account, which has become
NPA, immediately after recall of loan and initiation of recovery proceedings by way of legal
action as specified by the Trust from time to time. The Trust shall honour 75 per cent of the
guaranteed portion in default subject to maximum of 75 per cent of the guaranteed cap amount
(85% for select category of borrowers), immediately on preferring of claim by the lender. The
balance 25 per cent of the defaults or guaranteed cap amount, as the case may be, will be paid on
conclusion of recovery proceedings by the lender.
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Lender's responsibilities
The lender shall evaluate the loan applications and conduct the account of the borrowers
with normal banking prudence and shall use their business discretion in selecting commercially
viable proposals. This includes closely monitoring the account as also safeguarding the primary
securities taken in good and enforceable condition. In order to ensure continuance of guarantee
cover, MLI concerned should pay the annual service fee to CGTMSE latest by 31st May of every
year. The lender should ensure that the claim is filed within the prescribed time limit and there is
no delay on the part of lender to notify the defaults, which result in Trust facing a higher claim.
The payment of claim by the Trust under question does not in any way take away the
responsibility of the borrower to repay the entire amount of outstanding to the lender. The lender
shall exercise all caution and maintain its recourse to the borrower for full amount owed by him
and effective action for recovering the amount including such action as may be suggested by the
Trust.
5.9 CGTMSE SCHEME PERFORMANCE
The cumulative coverage for the year ending March, 2009 was Rs. 4824.34 crores for over
150,034 proposals. The split of the loan disbursements against each of these lending categories
are depicted in figure 5.5.
Out of the total 4 lending institutions, namely, National Small Industries Corporation Ltd.,
SIDBI, North Eastern Development Finance Corporation and The Tamil Nadu Industrial
Investment Corporation, only the first two of them have disbursed loans under this scheme.
Others haven’t done any disbursements yet. The PSU Banks, as expected, have done extremely
well. In fact, it is the State Bank of India & associates along with Canara Bank have disbursed
around 30% of the total loan disbursements. RRB’s have disbursed only 4.5% of the total
disbursements. The figure 5.6 below shows the slab wise loan disbursements. The maximum
number of disbursements, that is, 90997 of them constitute about 60% of the total number of
disbursements have been in the sub- 1 Lakh category.
Fig 5.5: Split of the Loan Disbursements against each of these lending categories
67%
3%
6%
24%
0%
psu
private
lending institutions
SBI Associates
Regional Rural Banks
