Internship Project Report

Credit Appraisal System of SME

HDFC Bank

Submitted By
Akhand Pratap Singh

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 Executive Summary

Classroom learning demonstrates helpfulness when connected to the pragmatic field. Each
idea, which is taught in the classroom, is drilled diversely in the business. A study on the roles
and knowledge practiced in the organization gives a deep insight into the practical aspects of
functioning. Banks play an important role in the economic development. Banks are the
backbone of the economic growth and also provide financial stability.

In any economy, banks have three major roles to play; firstly, they fulfill the financing needs
of the corporate sector. Secondly, they cater to the needs of household savers by providing
assured returns on their surplus funds while maintaining liquidity and safeguarding them
from financial risks. Thirdly, they act as a support for the development of financial markets
and it's participants.

I was given the opportunity to work in the credit department. The report will reveal the
overview of the HDFC bank, description of the loans, borrowers and the Credit Appraisal
Process.

This project titled “Credit Appraisal for an SME” studies the credit appraisal methodology
at HDFC Bank for a proposal received either for fund or non-fund based facility. Credit
appraisal is the process of evaluating the worthiness of a proposal and deciding whether to
provide the type of credit facility the borrower has asked for. The process includes evaluating
the current financial status, appraisal of projected cash flows, fund flows, P & L .and Balance
sheets, along with evaluating the purpose.for which the facility has been availed. The
technical and financial feasibility of the project, credit history of the applicant and borrower ,
managerial competence and past experience, etc are also studied to make an accurate
decision. The study also speaks credit related guidelines that are supposed to be followed by
all the borrowers.

The subject for the case study is ABC Exports which was incorporated in the year 2001 as a
proprietorship concern of Mr. XYZ Taneja. (Note: Case study has been taken from an online
source and does not refer to any existing customer of HDFC Bank)

The company is engaged in trading of dry fruits and spices. The firm imports dry fruits from
the USA, Sri Lanka, Iran, Africa etc. The firm also procures almonds from local market as
and when required, in order to meet its customer’s requirements. The firm is engaged in
trading of dry fruits and spices. The firm is banking with HDFC bank under sole banking
arrangement & presently availing credit facilities of Rs. 150.00 lacs under. The renewal of
the facility at its existing level has been conducted in July’2023. However, the customer has
informed that due to an increase in the scale of the activity levels, the firm requires additional
funds. Therefore, the proprietor of the firm has approached the bank for enhancement of
facility from Rs.150.00 lacs to Rs.300.00 lacs.

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 Acknowledgment

I want to take this opportunity to express my deep appreciation for HDFC

Bank’s SME Department in Gurgaon for providing me with the opportunity to
gain knowledge and understanding in the field of credit assessment for SMEs.

First of all, I would like to express my sincere gratitude to my mentor Mr.

Vishal Khanna – Senior Vice President & Head North for Wholesale Credit
Risk-Working Capital Products in MSME domain and Mr. Akhilesh Roy –
Branch Banking Head & National Head Sales Excellence and Transformation at
HDFC Bank for their guidance, support and encouragement throughout my
entire internship experience.
I would also like to express my thanks to Ms. Laveena Agarwal and the whole
department for their smooth collaboration and guidance throughout my entire
internship. Their support and guidance played a crucial role in achieving the
goals of the project.

The internship experience with HDFC Bank has proven to be exceptionally

rewarding, and I am immensely enriched by the knowledge and exposure it has
granted me.

Regards
Akhand Pratap Singh

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 Table of Contents

Content Page
Number
Emergence Of Banking in India 5
Overview of HDFC Bank 6
Objective of Study 7
Introduction 8
Type of Loans 9
Different Products offered by HDFC 10
Type of Borrower 14
Credit Appraisal Process 15
Borrower Assessment Parameter 17
Management of NPA 22
Case Study 23
Appendix 30
References 31

Emergence Of Banking in India

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The emergence of banking in India is a testament to the country's economic evolution and
financial transformation. Historically, banking in India dates to ancient times when
indigenous systems like "hundi" facilitated trade and commerce. However, modern banking
as we know it began to take shape during the colonial era and gained momentum post-
independence.

The emergence of banking can be understood in 5 milestones:

1. Colonial Era: During British rule, the establishment of the Reserve Bank of India
(RBI) in 1935 marked a significant milestone. It became the central banking authority
responsible for regulating and supervising the banking sector.

2. Nationalisation: In 1969, the Indian government nationalized 14 major commercial

banks, followed by another 6 in 1980. This move aimed to extend banking services to
rural areas and prioritize social welfare.

3. Liberalization and Technological Advancements: In the 1990s, economic

liberalization opened doors to foreign banks and private players, leading to increased
competition and improved services. The integration of technology, like the
introduction of ATMs and online banking, revolutionized the sector.

4. Inclusive Banking: The 2000s saw a focus on financial inclusion, with initiatives like
the Pradhan Mantri Jan Dhan Yojana (PMJDY) aiming to bring the unbanked
population into the formal financial system.

5. Digital Transformation: The 2010s witnessed a rapid digital transformation of

banking services, with mobile banking, digital wallets, and UPI-based payment
systems becoming mainstream.

The evolution of banking in India reflects the nation's progress, from basic financial services
to cutting-edge digital offerings. Today, banks like HDFC play a vital role in catering to the
financial needs of diverse segments, including SMEs, contributing to India's economic
growth and development.

Overview of HDFC Bank

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HDFC Bank was founded in 1994 by Housing Development Finance Corporation (HDFC),
one of India's premier housing finance companies. It was established as a private sector bank
with the aim of providing a comprehensive range of banking and financial services to
individuals, businesses, and corporations. HDFC Bank is a prominent financial institution in
India that offers a wide range of banking and financial services. The bank's commitment to
innovation, efficient operations, and customer satisfaction has propelled it to become one of
India's largest and most trusted banks.

HDFC Bank offers a diverse portfolio of financial products and services, including retail
banking, corporate banking, trade finance, treasury operations, and wealth management. Its
wide-ranging offerings cater to the varied needs of individuals, businesses, and institutions.

Over the years, HDFC Bank has consistently delivered strong financial performance,
characterized by healthy profits, steady growth in assets, and a robust balance sheet. HDFC
bank has recently broke the $100 billion dollar market-cap and became India’s largest and the
word’s 7th largest lender. In HDFC’s latest financial reports of Q1FY24 HDFC bank showed
a YoY growth of 22% by earing Rs 11,950 crore against the expected Rs 11,000 crore.

HDFC Bank's SME (Small and Medium-sized Enterprises) Credit Department plays a pivotal
role in supporting the growth and development of small and medium-sized businesses in
India. This specialized department offers a range of financial products and services tailored to
the unique needs of SMEs, thereby facilitating their access to credit and enabling them to
thrive in a competitive business environment. SME 2 paragraphs

The SME credit department at HDFC Bank is responsible for assessing the creditworthiness
of small and medium-sized enterprises seeking financial assistance. It evaluates business
plans, financial statements, and other relevant documents to determine the viability of lending
to these enterprises. The bank emphasizes building strong relationships with SME clients.
Relationship managers and business advisors work closely with SMEs, offering guidance and
support throughout the credit application and repayment process.

Objectives of the study

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The objectives of the study are as follows:

 To analyse the types of loans offered by HDFC Bank.

 To study the procedure for sanctioning loans
 Research and evaluation of the borrower creditworthiness
 To study the creation of credit scoring models and analysis of
credit risk
 To Analysis and review the financial statements of SME approved
industry

The objectives required a series of processes that needed to be carried out.

Following are stated below:

- Gathering information about the SME and its operations.

- General profile of the company and the directors/proprietor and the company's
past dealings with bank area so considered.

- Carrying out the Industry analysis after studying about the company and its
operations. Under this, the current trends and future expectations in the industry
are studied.

- Undertake credit appraisal process, the proposal, assessment of the working

capital requirements, proposed financing, shareholding pattern and security
details are studied.

- Internal credit rating of the company is done where the company is rated
under different heads namely financial performance, market position, industry
outlook etc.

- Understand and reiterate bank officials’ comments and recommendations on

the conduct of the existing banking arrangements of the company. The risk
assessment is undertaken and the policy compliance with the bank is
considered.

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 Introduction
SME at HDFC Bank

The Micro and Small Enterprise (MSE) sector contributes significantly to manufacturing
output, employment and exports of the country. MSE sector, in terms of value contributes for
30% of the manufacturing output and 40% of the total exports of the country. Keeping in
view the regulatory requirements, HDFC Bank has initiated a focused approach to ensure
flow of credit to the MSE sector. The Bank follows the broad guidelines issued under the
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Herein below,
bank furnishes the policy on MSEs.

Definition: MSEs are broadly classified into two classes:

1. Manufacturing Enterprises: Enterprises engaged in the manufacturing or production,

processing or preservation of goods.

 Micro (manufacturing) Enterprises – Original Investment in plant and machinery does

not exceed Rs 25 lakhs.
 Small (manufacturing) Enterprises – Original Investment in plant and machinery is
more than Rs 25 lakhs but does not exceed Rs 5 crores.

2. Service Enterprises: Enterprises engaged in providing /rendering of services.

 Micro (service) Enterprises – Original Investment in equipment (original cost

excluding land and building and furniture along with fittings) does not exceed Rs 10
lakhs.
 Small (service) Enterprises – Original Investment in equipment (original cost
excluding land and building and furniture along with fittings) is more than Rs 10 lacs
but does not exceed Rs 2 cores.

Service Enterprises includes small road and water transport operators, small businesses,
professional and self-employed persons, retail traders and all other service enterprises.

Bank’s structure to serve the MSE sector in India:

 The Bank provides finance to the MSE sector in India through 8,344 branches well
spread out throughout the country. The bank has a strong professional team placed at
these branches to evaluate the borrowers’ needs and provide customized solutions.

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 Type of Loans
In today's dynamic financial landscape, understanding the intricacies of loan products is
crucial for individuals and businesses alike. There are three distinct categories of loans which
the banks encounter on daily basis.

Initial - The Initial type of loan represents a fundamental step in a borrower's financial
journey, where a lending institution, such as HDFC, extends credit for the first time. This
category encompasses not only the traditional first-time loans but also includes takeover
loans. Takeover loans occur when a borrower decides to shift their banking association from
one institution to another, and their existing loan or credit limit is seamlessly transferred to
the new bank. Despite being a transfer of existing credit, the new bank treats the takeover as
an initial case, subject to its own evaluation and terms. Whether facilitating a fresh start for
borrowers or enabling a smooth transition between banks, Initial loans play a pivotal role in
providing financial support and fostering a trustworthy banking relationship.

Enhancement - Credit enhancement is a strategic approach aimed at bolstering the

creditworthiness of a business entity, often with the goal of securing more favourable terms
for the repayment of its debts. This tactic holds particular significance within the realm of
finance, where it serves to mitigate potential risks associated with specific structured
financial products, thereby enhancing investor confidence.

Businesses that actively employ credit enhancement strategies provide a measure of

assurance to their lenders regarding their commitment to fulfilling their financial obligations.
This objective can be accomplished through various means:

- The provision of additional collateral to secure the debt

- The acquisition of insurance policies that guarantee payment
- The establishment of third-party guarantees to vouch for repayment

Moreover, companies may opt to bolster their cash reserves or implement internal measures
that demonstrate their financial capability to meet debt obligations. Ultimately, the
implementation of credit enhancement tactics serves to diminish the overall credit risk and
default probability associated with the company's debts. This, in turn, positions the company
to qualify for reduced interest rates, reflecting its improved creditworthiness.

Renewal loans - Renewal credit cases encompass a vital aspect of banking relationships,
where loan accounts are routinely renewed by the bank on an annual basis. In these scenarios,
the bank utilizes projections for the upcoming year to calculate the working capital
requirements. Concurrently, the bank also assesses the alignment between the projections and
the company's financial performance as reported in the previous year. This diligent evaluation
process ensures that the loan remains aligned with the borrower's evolving financial needs
and capabilities. By considering both the projected figures and the historical performance, the
bank can make informed decisions regarding the renewal of the loan, facilitating a sustainable
financial partnership that adapts to the borrower's changing circumstances.
Different Products Offered by HDFC Bank
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HDFC Bank stands as a stalwart in catering to the financial requirements of Small and
Medium Enterprises (SMEs) through a meticulously crafted suite of lending solutions. The
bank recognizes the pivotal role that SMEs play in driving economic growth and employment
opportunities. In this light, HDFC Bank's offerings can be classified into two primary
categories: fund based and non-fund based loans.

The fund based lending options are designed to provide direct financial support to SMEs.
These products are those where banks provide short and long term funds to individuals and
businesses. The financing is provided based on the repayment power of an individual or a
business. These loans include Cash Credit, Term Loans, Overdraft Against Property & against
FD etc.

On the flip side, non-fund based lending options offer critical assistance by facilitating
transactions and providing assurance to business partners. There options are where banks
operate certain functions and earn a fee out of the same. This fee can be in the form of
dividends or brokerages or a commission. This category encompasses services such as letters
of credit and bank guarantees.

HDFC Bank's commitment to SMEs goes beyond conventional lending. It strives to be a

partner in growth by understanding the unique needs and challenges faced by these
enterprises. Through a judicious blend of fund based and non-fund based loans, HDFC Bank
empowers SMEs to achieve their aspirations, fortify their financial standing, and contribute
meaningfully to the overall economic landscape.

The Fund Based Lending Options:

o Cash Credit - Cash credit, often referred to as short-term corporate funding, aids
companies in fulfilling their working capital demands. This financial support,
extended by institutions like banks, enables businesses to access funds based on their
credit history and financial stability. Utilizing these funds, companies can undertake
various activities such as expansion, procuring assets, hiring personnel, and managing
debts.

Key attributes of cash credit encompass:

 Short-term nature with a maximum 12-month repayment term.
 Interest charged solely on withdrawn amounts, excluding the total sanctioned
limit.
 Flexible withdrawals within the sanctioned threshold.
 Lender retains the right to recall the sanctioned amount with short notice.
 Tax deductibility for interest paid on Cash Credit.

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 o Term Loan - A term loan furnishes borrowers with an upfront lump sum of money,
given in exchange for specific borrowing terms. These loans are typically intended for
well-established small businesses that have strong financial statements. In return for a
designated sum, the borrower commits to a specific repayment plan featuring a fixed
or variable interest rate.

HDFC offers term loans in two forms, generally mirroring the duration of the loan:

 Short-term loans: A Short-Term Loan is a Business Loan that can finance

temporary business requirements. You repay the loan amount along with
interest before your loan tenure ends. For Short Term Loans, the loan tenure is
usually three to five years. It can cover immediate expenses like operation
costs, expansion, working capital requirements, etc. Short Term Loans can be
secured or unsecured loans.
 Long-term loans: These loans endure anywhere from five to 25 years. They
employ company assets as collateral and necessitate monthly or quarterly
payments derived from profits or cash flow. These loans may restrict other
financial obligations the company might undertake, including additional debts,
dividends, or executive salaries.

o Overdraft - The Overdraft Facility serves as a financial product that enables you to
withdraw funds from your savings or current account, even if your account balance is
zero. This service is available from various Private and Public Sector Banks.
Essentially, the overdraft functions as a short-term loan, which needs to be repaid
within a specified period, as stipulated by the lender. The interest rates that the
borrower must reimburse are determined by the bank's terms and conditions and can
either be fixed or non-floating.

Key attributes:
 Approved Credit Limit: The overdraft is granted based on a predetermined
limit, which can vary for each borrower depending on their financial
circumstances.
 Interest Rate Calculation: Interest is applied to the utilized funds and is
computed on a daily basis. It is then added to the account's bill at the end of
each month.
 No Minimum Monthly Repayment: Although there is no mandatory minimum
monthly payment for the overdraft, the sum you owe must remain within the
designated overdraft limit. Procrastinating the repayment of the overdraft for
an extended period can negatively impact borrowers credit score.

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 o CGTSME - The CGTMSE (Credit Guarantee Fund Trust for Micro and Small
Enterprises) is an entity established by the Government of India under the Ministry of
Micro, Small and Medium Enterprise (MoMSME) and in collaboration with the Small
Industries Development Bank of India (SIDBI). Launched in 2000, the CGTMSE
scheme extends credit guarantees to financial institutions that provide loans to Micro
and Small Enterprises (MSEs) in the country. This initiative assures credit guarantees
ranging from 75% to 85% for MSEs. Under this scheme, the applicant's loan is
supported by a party, eliminating the need for external collateral or third-party
guarantees.

Key Features of CGTMSE:

 Eligibility Criteria: Businesses falling within the manufacturing and service
sectors, including retail trade, are eligible for the CGTMSE scheme. However,
educational and training institutions, self-help groups, and agricultural
activities are not covered under this initiative.
 Guarantee Coverage: CGTMSE provides a repayment coverage of 75-85%
in case of default on the principal loan amount, but this applies only when the
principal loan doesn't exceed ₹50 lakh.
 Collateral Requirement: No collateral or third-party guarantee is needed
when utilizing CGTMSE for securing loans.

Non Fund-Based Lending Options:

o Letters Of Credit - The expectation of the seller of any goods or services is that he
should get the payment immediately on delivery of the same. This may not
materialize if the seller & the buyer are at different places (either within the same
country or in different countries). The seller desires to have an assurance for payment
by the purchaser. At the same time the purchaser desires that the amount should be
paid only when the goods are actually received. Here arises the need of Letter of
Credit (LCs).

A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at
the request & on the instructions of the customer (the applicant) or on its own behalf.
The objective of LC is to provide a means of payment to the seller & the delivery of
goods & services to the buyer at the same time.

 Is to make a payment to or to the order of a third party (the beneficiary), or is

to accept & pay bills of exchange (drafts drawn by the beneficiary); or
 Authorizes another bank to effect such payment, or to accept & pay such bills
of exchanges (drafts); or
 Authorizes another bank to negotiate the Terms & conditions of the credit arec
omplied with. against stipulated document(s), provided that

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 o Bank Guarantees – Bank Guarantee or BG is a contract of guarantee is defined as ‘a
contract to perform the promise or discharge the liability of the third person in case of
the default’. Bank Guarantees are used to for both preventive & remedial purposes.
The guarantees executed by banks comprise both performance guarantees & financial
guarantees. The guarantees are structured according to the Terms of agreement, viz.,
security, maturity & purpose. The parties in the contract of guarantees are:

 Applicant: The principal debtor — person at whose request the guarantee is

executed.
 Beneficiary: Person to whom the guarantee is given & who can enforce it in
case of default.
 Guarantee: The person who undertakes to discharge the obligations of the
applicant in case of his default.

BGs are issued generally for the following purposes:

 In lieu of security deposit/earnest money deposit for participating in tenders.

 Mobilization advance or advance money before commencement of the project by the
contractor.
 In respect of raw materials supplies or for advances by the buyers.
 In respect of due performance of specific contracts by the borrowers & for obtaining
full payment of the bills.
 Bid bonds on behalf of exporters.

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 Type of Borrower

In the realm of lending and banking there are three distinct categories of borrowers that the
banks encounter on daily basis.

1. New To Bank - A "new to bank" borrower refers to an individual who has recently
established a banking relationship with a particular bank. This borrower has no
history of interactions with the bank, which means they haven't previously held any
accounts, conducted transactions, or borrowed funds from that specific bank. For the
bank, catering to "new to bank" borrowers presents an opportunity to extend its
services, while for the borrower, it marks the start of a potentially long-term financial
relationship that hinges on mutual understanding and cooperation.

2. First-Time Borrowers - A "first-time borrower" is an individual who has not

previously taken out any type of loan or credit. This borrower has little to no credit
history, making them a relatively blank slate in the eyes of lending institutions.
Because they lack a borrowing track record, lenders have limited information about
their ability to manage and repay loans. The process often involves demonstrating
their creditworthiness through alternative means, such as showcasing stable
employment, checking individual CIBIL, providing evidence of regular income, or
having a co-signer with an established credit history.

3. Existing Customers - An "existing borrower" refers to an individual or entity that

has previously borrowed funds from the bank and is currently in the midst of a
lending relationship with that institution. This borrower has a history of interactions
with the bank, including having taken out loans, credit cards, or other forms of credit
in the past. As a result, the lending institution possesses a record of the borrower's
credit behavior, repayment patterns, and financial responsibility.
A positive history of timely repayments and responsible credit management can
enhance their credibility in the eyes of the bank, potentially leading to more
favourable loan terms, higher credit limits, and easier access to financial products.
Conversely, if an existing borrower has a history of missed payments or defaults, their
ability to secure additional credit may be impacted negatively.

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 Credit Appraisal Process

Receipt of Application from Applicant

Receipt of Documents
(Balance sheet, KYC papers, Gov registration numbers, GST details, MOA
and properties documents)

Verification of the documents and credit risk rating of the borrower

Pre-sanction visit by bank officers

Check for RBI defaulters list, wilful defaulters list, CIBIL data, Caution list etc

Title clearance reports of the properties to be obtained from empanelled Advocates

Valuation reports of the properties to be obtained from valuer/engineers

Assessment of Financial Data

Credit call with the borrower

Decision made by the credit team is sent to the business team

Preparation of CAM (Credit Assessment Memo)

Verification of pre-sanction checklist of Bank

Assessment of CAM

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 Sanction/approval of CAM by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renewal of accounts,
etc

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 Borrower Assessment Parameter
When it comes to assessing borrowers, a comprehensive evaluation framework is crucial to
ensure informed lending decisions. Borrower assessment parameters consist of both financial
and non-financial criteria, offering a multifaceted view of a borrower's creditworthiness.
These parameters form the bedrock upon which lending institutions like HDFC base their
judgments, striving for a balanced and holistic understanding of each borrower's potential.

Financial Parameters:

 Liquidity Ratios - These ratios are used in assessing the degree of liquidity enjoyed by
an enterprise, i.e. level of current asset available to meet short term obligation.

Current Ratio = Current Asset/Current Liability

Quick Ratio = Current Asset- Inventory/Current Liability

 Gearing Ratios - These ratios provides information on the position of owned funds
compared to total outside liability of an enterprise and also indicated level of
capitalization.

Debt/Equity Ratio = Long time liability/TNW

TOL/TNW = (Short term credit + long term credit)/capital + reserves- intangibles)

 Profitability Ratios - These ratios indicates the profit earning capacity of an

enterprise in relation to sales.

Gross Profit Ratio = Gross Profit/Sales*100

Net Profit Ratio = PAT/Sales*100

Return on Capital Employed = PBDIT/Total Assets*100

 Turnover Ratio - The ratio shows the efficiency of the unit in turning inventory and
receivables into cash.

Turnover Ratio = Inventory/Net Sales+ Receivables/Gross Sales*365

 Coverage Ratios - This ratio shows the ability of the borrower to service the
obligation of payment of interest & instalments of principal loan amount.

Interest coverage Ratio = (PBT+Dep+Interest)/Interest

Debt service coverage ratio = (PAT+Dep+Interest on TL)/TL instalment+ TL interest

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  Promoters Money in Business (MIB or PMB)- Promoter's money in business refers to
the financial investment made by the individual who conceptualized a business idea
and intends to establish a company around it. In the corporate context, a promoter is
someone who takes the initiative to establish and incorporate a company, often
identifying opportunities and orchestrating the initial steps to bring the business idea
to fruition. Promoter's financial commitment not only demonstrates their dedication
and belief in the venture but also serves as a foundation for attracting additional
investments, as it showcases their personal stake and commitment to the company's
success.

MIB = Capital+Reserve & Surplus+Unsecured Loans–Investments made Outside

Business & Advances and loans given outside business.

 Total Outside Liabilities (TOL) - The Total Outside Liability is a financial metric
used to provide a comprehensive and accurate depiction of a business's reliance on
external debts to support its operations. It serves as a key indicator of the extent to
which a company's functions are funded through borrowed funds. This metric offers
valuable insights into the company's leverage and financial risk profile, aiding
stakeholders, investors, and analysts in understanding the level of debt-related
dependency in the company's operations and financial structure.

TOL = Short Term Loans+Long Term Loans+Current Liability+Provisions

 Net Working Capital (NWC) – NWC is a financial metric that holds significance in
assessing a company's short-term financial health and its ability to meet its ongoing
operational obligations. A positive NWC value implies that a company has more
current assets than current liabilities, indicating its capacity to cover its near-term
obligations without resorting to additional borrowing. Conversely, a negative NWC
value might indicate potential liquidity issues, as it implies that the company's short-
term liabilities exceed its short-term assets.

NWC = MIB+Long Term Debt-Fixed Assets

 Working Capital Gap - The Working Capital Gap refers to the disparity between a
company's short-term liabilities and its short-term assets. It represents the difference
between the funds needed to cover a company's immediate financial obligations and
the funds available to do so. This gap is a crucial indicator of a company's liquidity
and its ability to manage day-to-day operations effectively. When the Working
Capital Gap is positive, it suggests that a company has more short-term than short-
term liabilities, conversely, a negative Working Capital Gap indicates that a
company's short-term liabilities exceed its short-term assets.

Working Capital Gap = NWC+Short Term Loans+Long Term Loans

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Non-Financial Parameters:

 CIBIL Score - A CIBIL Score, also known as a credit score, is a three-digit numeric
representation that reflects an individual's creditworthiness. It's a crucial factor that
lending institutions use to assess the risk associated with extending credit, such as
loans or credit cards, to an individual. The score typically ranges from 300 to 900,
with a higher score indicating a stronger credit profile and a lower risk of default.

A Company CIBIL Rank between 1 and 10. A score between 4 and 1 is generally
considered favourable by most lenders, indicating a company’s sound credit behavior
and responsible credit utilization. Repayment history and credit utilization are the
primary factors taken into account when calculating a company’s CIBIL Rank.
Timely repayments and responsible credit utilization are positive factors that
contribute to a lower rank, implying a reduced credit risk for potential lenders.

 Probe42 - Probe42 serves as an invaluable resource in the realm of financial

information, particularly for unlisted Indian companies. As an independent
information services provider, Probe42 specializes in furnishing comprehensive
financial insights about these companies. This platform finds extensive application
across various sectors, including banking and corporations, where it plays a pivotal
role in facilitating critical processes such as business development, credit analysis,
Know Your Customer (KYC) procedures, and competitor analysis.

Notably, HDFC, among other entities, leverages Probe42 to enhance its operations.
One of its key applications involves scrutinizing the Reserve Bank of India (RBI)
Caution and Defaulter lists. This enables HDFC to ensure prudent lending practices
by identifying potential risks associated with certain companies or individuals.

Furthermore, Probe42 goes beyond caution lists and defaulters. It furnishes

information about any pending cases against private limited companies, providing
valuable insights for risk assessment. Additionally, the platform supplies pertinent
details about the directors of these companies and any common group companies.
This holistic approach to information sharing equips organizations with a well-
rounded understanding of their business partners and potential associates, thereby
enhancing the decision-making process and contributing to the overall risk
management strategy.

 Market Reference - A credit reference is akin to a professional referral in the context

of job applications, but within the realm of financial transactions. It involves
obtaining information from a reliable and trustworthy source to assess an individual or
entity's creditworthiness when applying for loans or credit. This reference is used by
the banks to evaluate the applicant's financial history, behavior, and overall reliability
in repaying borrowed funds.

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 In alignment with this concept, HDFC Bank, for instance, follows a policy wherein
they verify information from both suppliers and customers of borrowers. This means
they gather insights from at least two suppliers who provide goods or services to the
borrower and two customers who purchase from the borrower. This practice helps the
bank understand the borrower's financial relationships, reputation, and track record in
conducting business transactions.

 SVR - An SVR, which stands for Site Visit Report, is a crucial step undertaken by the
credit team of a lending institution to validate the physical location and operational
aspects of the business for which a borrower has applied for credit. This meticulous
process involves visiting the borrower's place of business to gather accurate and first-
hand information.

During an SVR, the credit team conducts various assessments:

1. Stock Verification: This involves physically verifying the inventory or stock

available at the business location. It helps ensure that the declared assets match the
actual inventory on-site, providing insight into the business's capacity and operational
practices.

2. Address Verification: Confirming the business's physical address is essential to

validate its authenticity and operational presence. This helps prevent instances of
fraud or misrepresentation.

3. Business Evaluation: The team observes the business's operations, overall

condition, and day-to-day functioning. This allows them to assess the business's
financial health, operational efficiency, and adherence to regulations.

4. Stress Analysis: During the site visit, the team also pays attention to any signs of
financial distress or operational challenges the business might be facing. This can
include identifying inventory issues, poor management practices, or other potential
stressors.

The findings from the SVR are then compiled into a comprehensive report that
includes details about the business's physical condition, inventory levels, operational
practices, and any observed stress factors. This report plays a critical role in the credit
assessment process, providing a more complete picture of the borrower's financial
situation and ability to repay the loan.

20
  ACR - Account Conduct Report (ACR) is an internal document generated by a bank
that provides a comprehensive overview of a borrower's financial behavior and
conduct in relation to their account with the bank. This report is an essential tool used
by lending institutions to assess a borrower's creditworthiness and repayment history.
The ACR contains various pieces of information, including:

DPD (Days Past Due): This indicates the number of days a borrower's payment has
been delayed beyond the due date. A higher DPD value suggests a less favorable
repayment behavior.

TOD (Technical Overdrawn): TOD refers to instances where the account balance
goes negative, which might indicate financial stress or operational issues.

Interest Serving History: This section details the borrower's history of paying interest
amounts on time or any delays in doing so.

Check Bounce: Both inward and outward check bounces are noted, reflecting any
instances where checks deposited or issued by the borrower were not honored.

Stock Statement Details: Information related to stock or inventory pledged as

collateral is included to monitor the borrower's asset value.

Churn Against Utilization: Churn against utilization is a metric used by banks to

measure the frequency with which borrowers repay or "churn" their credit utilization.
In simpler terms, churn against utilization assesses how much money the borrower is
depositing back into their account in comparison to the credit they have utilized.

Based on the data collected, a numerical score between 1 and 10 is generated. A

higher score indicates better account conduct and financial behavior. This score helps
the bank standardize the evaluation process and streamline decision-making when it
comes to lending and credit decisions.

For new borrowers who have no prior history with the bank, the ACR score is
typically generated after six months of initiating credit services. This allows the bank
to accumulate sufficient data about the borrower's account conduct to provide an
accurate assessment of their creditworthiness.

21
 Management of NPAs

Non-performing assets (NPA) are assets that cease to generate income through interest earned
on the principal loan amount and the repayment of the principal loan amount. Non-
Performing assets are an outcome when the borrower intentionally defaults on the loan
payment or is unable to repay the loan due to poor economic conditions affecting his
business. In either case, for a bank it means that the loan asset may not be fully recovered or
may be only partly recovered. Non-performing assets reflect the bank's overall efficiency
while performing its business of converting deposits into loans and recovering these loans.
Non-recovery or partial recovery of loans has an impact on the bank's balance sheet and
income statement items in the form of reduction in interest earned on loan assets, increase in
provision on NPAs, increase in capital requirement and lower profits. Hence, rising NPAs are
a concern for a bank and determinants of NPAs should be identified prior to loans turning
into NPAs.

If the interest or principal remains overdue for a period 90 days or three months and above
the loan account is classified as a Non-Performing Asset (NPA).

The following strategies are followed for NPA containment:

 Evaluating a person's or corporation's Credit Information Bureau (India) Limited

(CIBIL) score prior to extending loans.
 Bank identifies potential NPAs at the beginning of the period through Early Warning
System.
 If bank identifies a potential NPA, bank usually reduce the credit limit and discuss
with the borrower the stress on business to limit the losses.
 Wherever possible, if business is not generating enough surpluses to repay dues,
pursue with the borrower to sell personal assets / borrower assets to bring down
exposure
 For non-exit able accounts, renew / review exposures on mutually agreed repayment
basis supported by repayment plan.
 Persuade borrower to pay by communicating verbally / through notices with
guarantors for regularization of accounts.
 On accounts becoming NPA, speedily initiate legal action through Stressed Assets
Department.

Due to this extensive parameters set by HDFC bank to minimize the risk and well-
planned strategies laid out to deal with NPAs. The bank reported gross NPA % of
1.12% which is the second lowest in India.

22
 Case Study

Analysis of the company

 Background - The subject for the case study is ABC Exports which was incorporated
in the year 2005 as a proprietorship concern of Mr. XYZ Taneja. (Note: Case study
has been taken from an online source and does not refer to any existing customer
of HDFC Bank)

 Business Model - The firm imports dry fruits from USA, Sri Lanka, Iran, Africa etc.
The firm also procures almonds from local market as and when required, in order to
meet its customer’s requirement. The firm is engaged in trading of dry fruits.

The stock is identifiable and is fully insured. As per the requirement, stock is drawn
from cold storage based on the order in hands. These dry fruits are being supplied to
various wholesalers, retailers all over India. The firm also supplies dry fruits to
companies which are into manufacturing of chocolates and biscuits.

Firm makes advance payment for import of dry fruits. Percentage of advance varies
from 20- 100% based on the relationship and credibility with the party. In cases,
where percentage of advance payment is less, remaining payment has to be made at
the time of shipment. Firm extends also takes advance from its customers and also
credit period up to 45 days to its customers depending on the relationship with the
customer.

 Management Details - Mr. XYZ Taneja, aged 35 years, resident of South Delhi is
graduate from IIM Delhi. He has pursued his post-graduation from London. He is
proprietor of the firm entire business of the firm is being managed by him. He has
experience of almost a decade in same line of business. Mr XYZ Taneja is also being
assisted by his father Mr MNP Taneja in the business. His father is having experience
of more than two decades in same line of business.

Share-holding Pattern

Name Position Shareholding PAN Number DOB

Mr XYZ Taneja Proprietor 100.00% ********** 07/05/1988
Assets Owned Valuation (Rs. in Lacs)
Residential Property at South Delhi 1200.00
Cars 50
Personal Net Worth Rs. 1250.00 Lacs

Personal net worth of the director (Value Of The Property As Per Valuation Report)

23
Existing Relationship
The firm is maintaining current account with the HDFC bank at Delhi Branch since 2010 and
the firm is also availing credit facilities from the bank under sole banking arrangement since
2014. The conduct of the account has been satisfactory with the bank.

HDFC Bank– Cash Credit facility:

 The firm is banking under sole banking arrangement & availing credit facilities of
aggregate Rs. 150.00 lacs since 2011. The statement of account for last one year i.e.
April’22 –March’23 has been analysed and found satisfactory.
 There has been NIL instance of any cheque returns in the account.
 The credit summation in the account during this tenor has been Rs.2920.25 lacs. The
proprietor of the firm routes its entire transaction through Cash Credit account
maintained with Axis Bank Limited.
 Maximum DPD of 3 days have been noticed in last 3 years.
 Overall conduct of the account has been satisfactory.

HDFC Bank – Current account:

 The firm is also maintaining current account with Delhi Branch since 2009. Though
not much of the transactions are being routed through said account however we have
analysed the statement of account for last one year.
 The credit summation in the account during last financial year has been Rs. 40.00 lacs
only.
 There have been NIL instances of cheque returns in the account.
 Overall conduct of the account has been satisfactory

Present Request

The firm is banking with us under sole banking arrangement & presently availing credit
facilities of Rs. 150.00 lacs. The renewal of the facility at its existing level has been
conducted in May’2023. The proprietor of the firm informed that due to presence of many
traders in same line of business there is presence of stiff competition which has led to change
in the business model of the firm. Previously the firms allowed its customers with credit
period of not more than 10 days however due to change in scenario now holding levels have
increased to 20-30 days and firm imports the products on advance payment basis or with
maximum credit of 7-10 days therefore this has generated working capital gap therefore
proprietor of the firm has approached us for enhancement of facility from Rs. 150.00 lacs to
Rs. 300.00 lacs.

24
Performance Details:
(Rs. in
Particulars FY2020 FY2021 FY2022 FY2023 FY2024
Lacs)
Audited Audited Audited Provisional Projected
Net Sales 1420.64 2556.92 4765.14 5285.00 5549.25
Other Income 13.89 34.02 21.77 2.25 2.25
PBDIT 34.28 64.43 50.04 58.73 66.92
PBDIT 2.41% 2.52% 1.05% 1.11% 1.21%
Margin
Depreciation 1.12 3.55 0.00 3.25 3.00
Interest 3.81 12.75 18.26 20.25 26.25
PBT 29.35 48.14 31.79 35.23 37.67
PAT 23.48 38.19 31.79 28.54 30.51
PBT Margin 2.07% 1.88% 0.67% 0.67% 0.68%
Cash Accruals 24.60 41.74 31.79 31.79 33.51
Tangible Net 88.18 220.82 241.25 254.78 270.30
Worth
Unsecured 26.70 98.61 34.01 35.00 35.00
Loans
TOL 61.73 473.96 149.60 425.00 424.25
TOL/TNW 0.07 2.15 0.62 1.67 1.57
TOL/TNW 0.30 1.18 0.42 1.35 1.27
(ADJ)
Debtors 0 23 3 20 19
Holding Days
Current Ratio 4.30 1.54 2.46 1.45 1.47

Turnover:

There has been consistent improvement in the turnover of the firm on year on year basis. As
per audited financial of 2022, the firm has witnessed turnover of Rs. 4765.14 lacs as against
turnover of Rs. 2556.92 lacs in FY21. The firm has been able to manage sales growth of
86.36% over last financial year (2022). The proprietor of the firm informed that continuous
improvement in the prices of dry fruits and increased demand of the product has enabled the
firm to book better turnover for FY23.

In FY23, the firm is estimating to book turnover of Rs. 5285.00 lacs. The firm has already
booked turnover of Rs. 2700.34 lacs until August’23. The proprietor of the firm informed that
turnover of the firm starts picking up from September onwards and higher sales are being
booked during second and third quarters. Considering the past track record of the firm,
achieved turnover and experience of promoters in same line of business the estimates for the
year are considered acceptable.

25
Profitability:

Though there has been increase in the turnover of the firm in FY22 however there has been
subsequent increase in cost of the firm as well therefore this resulted in decline in PBDIT
margins of the firm. As per audited financial for FY22, the firm has PBDIT margin of 1.05%
as against margin of 2.52% in FY21. There has been reduction in PBDIT margins of the firm
due to decline in other income as well. Other income is inclusive of Foreign Exchange,
interest on FDR and rent in advance for the property. There has been decline in the margins
of the firm due to high competition in the trade. Since the promoters are veteran in their field
therefore with the margins are expected to be maintained at improved level of 1.11% for
FY23, which is considered acceptable.

Along with PBDIT margins of the firm there has been decline in PBT margins of the firm as
well. As per audited financial for FY22, the firm has been able to book PBT margin of 0.67%
as against margin of 1.49% in FY21. PBT margin has declined due to increase in interest cost
of the firm. The margin is expected to be maintained in same range for FY23 and FY24 as
well.

Overall profitability profile of the company is considered acceptable.

TOL/TNW:

There has been continuous improvement in the TNW levels of the firm. As per audited
financial for FY22, the TNW level has been maintained at Rs. 241.25 lacs. Due to presence
of adequate long term funds in the business the TOL/TNW level has been maintained at 0.62
times. Further, the firm also maintains unsecured loans availed from friends & family of Rs.
34.01 lacs considering it as quasi equity the gearing level of the firm has been maintained at
0.42 times, which is considered acceptable. For FY23, with the plough back of profits for the
year, the TNW level of the firm is estimated to be maintained at Rs. 254.78 lacs thereby core
gearing levels of the firm shall be maintained at 1.47 times. The firm shall continue to
maintain unsecured loans availed from friends & relatives of Rs. 35.00 lacs considering it as
quasi equity the gearing levels of the firm are estimated to be maintained at 1.47 times. The
position is considered acceptable.

Overall presence of Long term funds in the business and maintenance of core gearing levels
the position is considered acceptable.

Liquidity:

As per audited financial for FY22, the current ratio of the firm has been maintained at 2.46
times as against ratio of 1.54 times in FY21. The current ratio of the firm has been
maintained at higher side owning to maintenance of adequate long term funds in the business
to meet unforeseen contingencies. Further ratio is on higher side to high inventory and
debtors as well. The ratio is expected to be maintained above benchmark level and at 1.45
times in FY23 which is considered acceptable.

DSCR (Debt Service Coverage Ratio) for FY22 is greater than 1.5 which is expected to be
maintained and is considered acceptable.

26
 Internal Assessment:

- Request letter received and found satisfactory.

- Verification of Audited Financials is done and found satisfactory.
- ACR (Account Conduct Report) score is 9 with zero inward or outward check bounce,
which is above the benchmark level.
- OVI (One View Indicator) is found satisfactory.
- Churn noticed in the account is greater than 90%.
- No conditions noticed in the previous CAM that are still pending.
- Site Visit Report found satisfactory.

External Assessment:

- Individual CIBIL of the promoter is 817. Applicant lies in low risk category with
CIBIL score of 817.
- Commercial CIBIL score is 2 and is found satisfactory.
- Sales in Balance sheet have been verified using GST3B forms.
- No Record of director in RBI Caution List
- No Record of director in RBI Defaulter List

Collateral Security Details:

(Rs. in
Lacs)
Security Details Valuation by Party Valuation by Party Lower of two
1 2
Residential Rs. 1260.00 Rs. 1200.00 Rs. 1200.00
Property in South
Delhi. Measuring (Distress sale value (Distress sale value (Distress sale value
1190 Sq. Yard. – Rs.1100.00) – Rs.1050.00) – Rs.1050.00)
Owned solely by
XYZ Taneja.

Property Visit Report:

 The said property is residential in nature and presently is vacant. Earlier it was
occupied by US embassy.
 The property is located upper middle class residential locality.
 The interiors & exteriors of the property have been well maintained.
 The property is located within municipal limits.
 The property has been constructed in year 2010 accordingly age of the property is 13
years.
 The property is located at well-established location of Delhi.
 The property is well connected through bus metro etc.
 The property has good marketability.

27
 Market Reference:
NAME OF THE RELATIONSHIP FEEDBACK REMARKS
REFERENCE
Ms. JJ SUPPLIER SATISFACTOR It was informed that they have
Y been supplying almonds to the
CONTACT NO - ******** firm from last 4 years. There
have been nil instances of
delayed payments with the
company and dealing with firm
has been satisfactory.
Mrs. KL CUSTOMER SATISFACTOR Mrs. KL informed that ABC
Y export is one of the main
CONTACT NO - ******** supplier for Mrs. KL company.
They have been dealing with the
firm since last 8 years. They
have been obtaining almonds
from the firm. The dealing with
the firm has been satisfactory.
Mr. BM CUSTOMER - Unable to connect

CONTACT NO - ********

Feedback from a minimum of 2 supplier and 2 consumer sources are required.

This being a case study, the market reference has been found satisfactory.

Risks Factors and Risk Mitigants:

Risk Factors Risk Mitigants
Business Risk The business risk associated with this industry is dependent on the market
conditions. The firm is in this field for the past two decades and is well
organized to overcome such ongoing business risks.
Competition The firm is one of the prominent players in their segment with an established
brand. The promoters are highly experienced in their business line. Hence, it
expected to withstand competition successfully.
Demand The demand for the product is evergreen. The demand of the product shall
further increase with the onset of the festive season from Sept to Jan.

28
Overall Recommendation:
Considering the need based requirement of the firm and supporting financial the
bank recommends for renewal cum enhancement of cash credit facility from Rs.
150.00 lacs to Rs. 300.00 lacs.

Bank has verified the credentials of the applicant which is found to be to be

found to be satisfactory and is of the view that the proposal is a fair banking
risk. The bank officials have visited the applicant’s establishment and the
property to be mortgaged to the bank. The activity levels of the establishment
are good and the applicant has met all regulatory requirements like obtaining a
license, registrations etc. To the best of bank's knowledge, the information given
above are correct and the valuation given by the valuer is reasonable. The credit
facilities shall be released after completion of the documentation formalities and
creation of security.

29
 Appendix
Learnings:

My internship with HDFC Bank in the SME department was an immense

learning experience. It gave me adequate exposure in the field of credit
appraisal process undertaken for small and medium enterprises. I was given full
freedom to interact with people of other departments and source required
documents that aided me in my report completion.

The whole process of credit appraisal is a very meticulous process of identifying

the right borrower in terms of reduced credit risk. The entire process has been
designed in such a way that it helps in studying information about the SME and
its operations and thereby various aspects of the company.

The department works efficiently and ensures the disbursal of loans within two
weeks of credit appraisal. The credit analyst and the relationship manager are in
regular conversation with the client and ensuring that the required information
is given to the bank in required time to ensure no lag in the appraisal process.
The credit analyst is given regular training and weekly meetings are held
ensuring that credit risk is maintained and timely credit appraisal is done.

In conclusion, my time as an intern at HDFC Bank has been incredibly valuable

and enriching. The exposure I've gained to various aspects of the banking
industry, coupled with the guidance and mentorship from the bank's
experienced professionals, has significantly contributed to my growth. I am
eager to continue expanding my knowledge and skillset in this dynamic field.
Thank you for considering me for the training programme and I look forward to
the possibility of furthering my journey with HDFC Bank.

30
 References

 https://www.timesnownews.com/business-economy/companies/hdfc-bank-q1-fy-
2024-quarterly-results-announced-check-pat-net-npa-gross-npa-operating-profit-and-
more-article 101820149#:~:text=HDFC%20Bank%27s%20absolute%20gross
%20NPA,to%20Rs%202%2C860%20crore%20now
 https://www.moneycontrol.com/financials/hdfcbank/results/yearly/HDF01
 https://www.hdfcbank.com/personal/about-us/overview/who-we-are
 https://www.clearias.com/history-of-banking-in-india/#:~:text=In%20India%2C
%20modern%20banking%20originated,but%20it%20failed%20in%201791.
 https://www.investopedia.com/terms/s/smallandmidsizeenterprises.asp
 https://www.scribd.com/document/427566894/Axis-Bank-Internship-Report-PDF
 https://currentaffairs.adda247.com/hdfc-bank-breaks-into-100-billion-market-cap-
club-as-worlds-7th-largest-lender/

31