Corporate Agri

Two Days workshop on Corporate Agri Business
Axis Bank , Chennai December 9th and 10th By Disseminare Consulting
Day One
Session One
Basic Credit Concept
Different methods of financing

Financing
Long Term
Short Term
Equity
Debt
Debt
5
Different Banking Products

Short Term
Fund Based
Non Fund Based

6
Fund Based Working Capital

Cash Credit
WCDL
Over Draft
Cash Credit
The limit can be availed by the borrower as per borrowers requirement The cash management is at the hand of the bank
Interest rate should be higher
The drawal would be as per Drawing Power The Drawing Power would be arrived at with the help of stock statement
8
Cash Credit
Periodic submission of stock statement is required Regular sales proceeds have to be routed through the cash credit account Periodic submission of statement is essential Monitoring of account is required
9
Working Capital Demand Loan

WCDL is the facility by which the disbursement would take places in tranches The borrower would give the drawal schedule and repayment schedule The bank would disburse the amount as per the disbursement schedule and accordingly it can arrange fund in planned way The prepayment is not permitted in the case of demand loan Bank can recall the loan as per the banks requirement
10

Stock statement is required Quarterly Information System is required Sales proceed can not routed through this account The drawing power would determine the amount to be disbursed The interest rate would be lower Minimum maturity : 7 days and maximum period1 year
11

First disbursement would take place by debiting the WCDL account The disbursed amount would be credited to Cash Credit ( CC) account The drawing power of CC would be reduced by this amount On due date the cash credit is debited as per Drawing Power and the same amount is credited to WCDL account Same process is repeated for the next tranches
12
Over Draft
In the case of Over Draft , stock statement is not required The disbursement would take place in one go The sales proceeds may be routed or may not be routed The primary security can be other than current assets Simpler methods of disbursement of fund
13
Over Draft
End use of fund is not monitored properly The fund can be diverted to other speculative purpose This is the additional methods of financing apart from normal working capital bank funding Probability of double funding may take place
14
Non Fund Based Facility

NFB
LC
BG
15
Letter of Credit
For purchasing on credit , LC is used This would ensure the buyer to buy on credit and this would result in the building up of current assets Specially when import takes place this is the preferred methods of trade finance LC helps the buyer to get cheaper fund with the help of drawee bills discounting
16
Non Standard Working Capital Product

Tie Up arrangement : Banks would have tie up with Large Corporates that it would fund the suppliers of the large corporate on a predetermined criteria basis Banks would fund on the basis of strength of the Large Corporates commitment
17
Tie Up Financing
The supplier of Shri REI Agro would be providing goods to REI Agro
Say Supplier is A
A would be requiring working capital in the following stages :

Inventory Stages : RM, WIP & FG Receivable Stage : Receivable Stage
18
Tie Up Financing
REI Agro would enter into an arrangement with A for purchase of a pre determined quantity and quality of material REI Agro would have a tie up arrangement with Axis bank that it would guarantee the purchase Axis Bank would fund the Inventory requirement of A
19
Tie Up Financing
Axis bank would assess the working capital assessment of A
Inventory Cycle Receivable Cycle
Once the Inventory Cycle is assessed , the bank would give the amount after deducting the required margin The bank has to monitor the delivery schedule and progress of production
20
Tie Up Financing
A would raise invoice for credit sales to REI Agro REI Agro would accept the Invoice raised by A Axis Bank can fund the Invoice amount after deducting the necessary margin The Fund would be used to repay the Inventory Funding The Inventory funding can take place again for next order
21
Tie Up Financing
Axis Bank is secured by way of :
Corporate Guarantee issued by REI Agro PDC Provided by REI Agro REI Agro would pay directly to Axis Bank and it would go towards liquidation of the dues REI Agro would not take up the materials from A if the account with Axis Bank is irregular
22
Tie Up Financing
REI Agro would supply its products to its customers The customer would be funded by the Axis Bank The REI agro would give guarantee or stop order like of letter to Axis Bank Axis Bank would disburse the fund directly to REI Agro The customer would pay after a pre determined period of time
23
Tie Up Financing
The Customer may be having working capital borrowing for its entire business Axis Bank is funding a part of its working capital Axis Bank would disburse the fund directly to the REI Agro and it would intimate the working capital banker about its disbursement This letter should be kept in the file of the bank
24
Short Term Loan Financing

The Short Term Loan Financing would be to meet the sudden requirement of funds by the corporates This is given based on the strength of the balance sheet of the company The Assessment would be based on the requirement of the fund
Proper requirement of fund needs to be mentioned in the appraisal note The End Use certificate has to be obtained
25
Short Term Loan Financing

The repayment would be from the:
Realisation of new order proceeds Old order proceeds Other sources
The repayment of the loan is ensured by way of PDC from the company However no charge is created on any assets
This is unsecured advance
26
Session Two
27
Financial Statement
28
Financial Statement
29
Examples of Category , Head and Sub head of accounts for Owner of Transactions
Category Head Sub Head Sales Income Profit and Loss Interest from Investment Other Income Purchase of Raw Material Electricity Salary Expenses Advertisement Rent Interest on Borrowing
30
Examples of Category , Head and Sub head of accounts for Owner of Transactions
Category Head Sub Head Capital Reserves Liability Balance Sheet Loan Creditors Provisions Fixed Asset Investment Current Asset Asset Cash and Bank Balance
31
Accounts revisited
Expenses Income
Operating Expenses NOE Financing Expense Statutory

Retained Liability
Operating Income
NOI
Asset
TNW TOL
CE LTOL
Cash Credit Creditor
FA Less Liquid Liquid

32
CA
Ratio Analysis & Credit Appraisal
33
Types of Ratios
Types of Ratio
Profitability Ratios
Liquidity / Leverage Ratios
Return Ratio
34
Profitability Ratio
Profitability Ratio
PAT/Sales
EBIDTA/Sales
Interest Coverage Ratio
35
PAT/Sales Analysis
High
Realisation
High
High
Sales Low
Realisation
Low High Low
PAT/ Sales
Low
Sales
High
Realisation
High Low
Low
Realisation
High Low
36
EBITDA/Sales
Same grid with PAT/Sales analysis Find out the following component in percentage terms of the total numbers :
Depreciation Amortisation Interest Tax
37
EBITDA/Sales
Higher the depreciation and amortisation terms better is the position of the debt lenders within a given EBITDA. Tax has to be paid and debt lenders would not have priority over it Interest to be paid to the working capital lenders :
Term Lender would be paid from the working capital accounts only
The realisation aspects need to be verified from this number . It is accrual only .
38
EBITDA/Sales
Higher Depreciation means some assets have been added in the year when it is showing higher depreciation Incremental cash flows from this assets can be captured in the subsequent years and this incremental cash flows can be factored in the future cash flow projections Realisation part should be same as with the present year.
39
Interest Coverage Ratio

Same grid like PAT/Sales However, PAT is accrual . Proper adjustment towards the realisation should be made before drawing any conclusion The interest commitment to be segregated into :
Secured Loan Interest
Short Term Long Term
Unsecured Loan Interest

Short Term Long Term
The proportionate factored in.
coverage
ratio
should
be
40
Leverage Ratio
High
High
CR
ST
Low
USL High High
CR
Low High
LT
Low
CR
CR
High
TOL/ TNW
High
ST
SL High
Low
Low
CR
CR
High
USL = Unsecured Loan SL= Secured Loan ST= Short Term LT= Long Term CR= Cash Realisation
LT
Low
CR
CR
41
Leverage Ratio
High
High
CR
ST
Low
USL High Low
CR
Low High
LT
Low
CR
CR
High
TOL/ TNW
High
ST
SL High
Low
Low
CR
CR
High
LT
Low
CR
CR
42
Debt/Equity Ratio
High
High Low
CR
ST
USL High Low
CR
Low High
LT
Low
CR
CR
High
Debt/ TNW
High
ST
SL High
Low
Low
CR
CR
High
LT
Low
CR
CR
43
Debt/Equity Ratio
High
High Low
CR
ST
USL High High
CR
Low High
LT
Low
CR
CR
High
Debt/ TNW
High
ST
SL High
Low
Low
CR
CR
High
LT
Low
CR
CR
44
Current Ratio
High
HL
CA High
Low
HL
CR
CL
High
HL
Low
CR= Current Ratio CA= Current Asset CL= Current Liability HL= Holding Level
HL
45
Current Ratio
High
HL
CA Low
Low
HL
CR
CL
High
HL
Low
CR= Current Ratio CA= Current Asset CL= Current Liability HL= Holding Level
HL
46
Return Ratio
Return on Capital Employed Return On Equity Return On Asset Return on Asset would be more important from debt lenders point of view
Specially from SME perspective
Once ROA is determined then it has to be compared with the leverage ratio and funds available for repayment of the debt part
47
Fund Flow and Cash Flow Analysis
48
Basic concepts in fund flow statement

The cardinal principle of fund flow or cash flow statement is the following principle :
1. Increase in asset between two balance period is use of fund. 2. Decrease in liability between two balance period is also use of fund. 3. Increase in liability between two balance period is source of fund. 4. The decrease in asset between two balance period is source of fund. sheet sheet sheet sheet
49
Activities which will increase the fund flow ..

Raising of equity from share holders. Raising of debt from banks. Building up of creditors. Collection of receivables . Registering sales in cash. Income in interest from the fixed deposit investment . Selling of fixed assets. Conversion of current assets to cash sales. Liquidation of financial investment.
50

Raising of equity from share holders: This should be done only when the company has profitable projects in hand. Raising of debt from banks:For term loan , the company must have profitable project in hand. Building up of creditors: This should be built with caution as the expenses incurred need to be paid. This should be tagged with your level of Current asset. Collection of receivables: This should be priroritized. Registering sales in cash: Most profitable . Income in interest from the fixed deposit investment . Selling of fixed assets.
51

Conversion of current assets to cash sales. Liquidation of financial investment. Income in interest from the fixed deposit investment : The company must not rely on this income. Selling of fixed assets: Generally not preferable under normal circumstances. Conversion of current assets to cash sales : This is preferred and should be done in tandem with current liability . Liquidation of financial investment: Should be done at the earliest as the mainline of activity of the company is not investment .
52
Activities which will decrease the fund flow ..

Buyback of equity shares from share holders. Payment of debt Retiring of debt from banks. Registering sales in credit. Payment of interest on the loan borrowed. Purchasing of fixed assets. Increase of current assets Increase in financial investment.
53

Buyback of equity shares from share holders: When Company has sufficient cash and does not have good projects, it should do this. It can also pay dividend. Payment of debt : The Company has hardly any options. Payment of creditors: The company should adhere regular payment so that it does not loose confidence with the liability holder. Registering sales in credit: Should be done with caution. Payment of interest on the loan borrowed:The Company has hardly any options.
54

Purchasing of fixed assets: The Company would purchase fixed assets once it find out the attractive investment opportunity . Increase of current assets: Should be allowed with caution and should be commensurate with the optimum production flexibility. Increase in financial investment: Should not be done in case of non investment company .
55
Advance analysis of fund flow statement

We can segregate the above mentioned cash flows into three parts namely : Cash flow from operation [ PAT+ Depreciation + Decrease in Working capital + Increase in Other current liability Increase in Current Asset Decrease in Other current liability ] =A
56
Advance analysis of fund flow statement Cash flow from Investment activity [ Sale/Reduction of Fixed
Asset + Dividend received + Interest received+ Investment matured Increase in Fixed Asset-Investment made ]=B Cash flow from Financing activity [ Increase in term loan+ Increase in Debenture+ Increase in Equity+ Increase in Bank Borrowing from Working Capital -Decrease in term loanDecrease in Debenture- Decrease in Equity- Decrease in Bank Borrowing from Working Capital ]=C Opening Cash Balance + A+B+C= Closing Balance
57
Session Three
58
Working Capital Facilities
59
Fundamental Concepts of Working Capital Facilities
60
Production
Borrowing
Repayment
Sales
Realisation
61

Current assets represents the expenses which is incurred but not realized. Part of the expenses can be deferred and this constitutes the other current liability ( OCL). The expenses which can not be deferred would be paid from borrowings and is known as Working Capital Gap ( WCG). A part of the expenses are paid from Net Working Capital ( NWC). Remaining part of expenses would met from borrowing from the banking system .
62
Fund Based Facility

Fund Based ( FB) working capital represents that portion of current liability which is going to build up that portion of current assets which are not financed by OCL and NWC. NFB would go towards building up the OCL. FB facility will appear as Assets under Loans and Advances of the Banks Balance sheet and as Liability under the head Secured Loan in the balance sheet of the company .
63
Working Capital Facilities
LTA NWC FB facility NFB OCL

64
CA
Some semantics of WCM

Gross Working Capital ( GWC) = Total Current Assets ( CA) Other Current Liability ( OCL) = Creditors + Provisions + Other Current Liability Working Capital Gap ( WCG) = CA- OCL Net Working Capital ( NWC) = LTL- LTA =CA-CL Operating Cycle (OC)=RM+WIP+FG+R Cash Cycle ( CC) = RM+WIP+FG+R-AP
65
Assessment of Fund Based Facility ..

In India, Fund Based working capital is carried out with the help of any of the three following processes :
Maximum Permissible ( MPBF) Process Cash Budget Process Turn Over Process Bank Finance
66
Methods of Assessment of Fund Based Working Capital

FB Assessment Method
MPBF
CB
TO
II
III
67
MPBF
68
MPBF Process
CMA form consists of 6 separate forms representing different types of figures taken from Profit & Loss and Balance Sheet of the company. Form I Form II Form III Form IV Form V Form VI
69
MPBF Process
Form I:
Total Existing Borrowing of the company as on the date of application. The proposed lender would decide to take a fresh exposure depending on the existing leverage and future cash out flows from the existing borrowing of the company .
70
MPBF Process..
Form II:
The Profit and Loss figures are represented Detail analysis is carried out for P&L Accounts. Since funding is mainly for operating purpose a detail analysis of the P&L figures with respect to production of the company is carried out .
71
MPBF Process..
Form III:
The Balance Sheet figure is represented Detail analysis is carried out for Balance Sheet. Here certain adjustment is carried out for giving the effect of short term cash flows of the company .
72
Companys CMA
Banks CMA
FA LTL NCA NWC WCG LTL CA BB OCL NWC WCG LTL
FA
NCA NCA CA
BB
73
Adjustment of Current Asset

Reduction of current asset by deducting those current asset which is not part of the normal operation :
Loan given to group company ; Receivable for more than 90 days ; Fixed deposit kept in the form of margin money Any other expenses incurred and not recovered but not associated with efficient production process .
74
Adjustment of Other Current Liability

Decrease of other current liability would increase the bank borrowing. Addition of following liability would be taken :
Term loan installment payable within one year; Some of the deferred liability which may incur in the current year.
75
MPBF Process..
Form IV:
The Current Assets and Other Current Liabilities are presented. Since working capital finance is for funding of current assets, a detail analysis is carried for composition of current assets and other current liabilities with respect to the holding months .
76
MPBF Process..
Form V:
Method of calculation is carried out . As mentioned earlier , under the MPBF method, the FB working capital assessment is carried out in any of the following methods:
Method I Method II Method III
The methods differs on the quantum of net working capital to be brought in

77
MPBF Process..
I
A B C=A-B D=Min NWC E=Est NWC MPBF CA OCL WCG 0.25WCG Est NWC Min (C-D,C-E)
II
CA OCL WCG 0.25CA Est NWC Min (C-D,C-E)
III
CCA OCL WCG 0.25CCA Est NWC Min (C-D,C-E)
78
MPBF Process..
Form VI :
The Fund Flow Statement It represents the Sources of Net Working Capital and the uses of Net working capital I.e. the amount of net working capital went for building up of different composition of current assets.
79
Analysis of cash flow

Form VI represent cash flows coming from long term and short term sources ; This cash flow has to be segregated into :
Cash flow from operation Cash flow from investment Cash from financing activity
The main aim is to generate more cash flow from operation ;
80
Cash flow and implication

Cash flow from operation + + + Cash flow from Investment + + Cash flow from financing + 81
Remarks
Analysis of cash flow

Form VI represent cash flows coming from long term and short term sources ; This cash flow has to be segregated into :
Cash flow from operation Cash flow from investment Cash from financing activity
The main aim is to generate more cash flow from operation ;
82
Last Year Current Yr.
Next Year
Actuals Estimate Projectio s ns Year 1.SOURCES a. Net Profit b. Depreciation c. Increase in Capital d. Increase Liabilities (including Deposits) e. Decrease in i. Fixed Assets ii. Other Assets f. Others in Term Public 2009 1.95 1.50 1.00 2010 5.75 1.75 4.15 83 7.42 1.50 2011
non-current
Form VI - Analysis
Net Profit of Rs 5.75 crores can never come up front. Depreciation amount of Rs 1.75 crores are available upfront . Decrease in non current asset of Rs 4.15 crores can come up front.
84
USES a. Net loss b. Decrease Liabilities (including Deposits) c. Increase in i. Fixed Assets ii. Other Assets non-current in
2009 Term Public
2010
2011
2.00 4.00 2.40
2.00
2.00
d. Dividend Payments e. Others f. TOTAL
0.00 0.00 4.00 85
6.40
2.00
Form VI Analysis
Decrease of term liability of Rs 2 crores would take place over the years as per repayment schedule Increase of fixed asset would take place as per schedule if there is a plan .
86
Form VI Analysis
2009 2010
Long term surplus /deficit Increase in Current Asset Increase /decrease in OCL Increase/decrease in WCG Net Surplus/Deficit Increase /Decrease in Bank Borrowing Increase/Decrease in Sales -1.95 2.35 0.30 2.05 -4.00 4.00 11.00 9.65 11.41 -0.99 12.40 -2.75 2.75 32.00
2011
4.92 9.12 1.20 7.92 -3.00 3.00 15.00
87
Draw back of MPBF Process..

In the case of MPBF process, the assessment is carried out by taking the figure from Balance Sheet alone. Balance sheet is for a particular day. For most of the companies, due to statutory requirements , balance sheet is made as on March 31 to coincide with the Financial Year . If the company has seasonality in operation not coinciding with the close of Financial Year, the Balance as on the end of Financial Year will not be able to capture such seasonality.
88
Draw Back of MPBF Process

31 March 2010 L A
st
31st October 2010 L A
31st March 2011 L A
89
How to address the drawback ..

If we capture the requirement of funds associated with the building up of current assets in between periods, the problem can be solved. This can be addressed by an assessment method called Cash Budget Method. If the concepts of building up of current assets and current liability is clear , we can easily understand this methodology.
90
Cash Budget Methods of Assessment

Requirement of fund based working capital is due to bridge the timing match between the expenses towards production of goods and /or service incurred and money realized from the sale of the same goods and /or service. Expenses is associated with the outflow of cash where as the realization from the products/services would be inflow of cash . Moreover, the long term surplus would represents components of NWC of the company
91

Revenue Account : Since working capital
represents the expenses incurred for the revenue account , the inflows and outflows of the revenue account are plotted in each month. The heads under which inflows and outflows are put represents the heads that will appear against current assets and liabilities. For example, the current asset consists of Raw Material ,SIP and Finished Goods.
92

If it purchase in cash then there would be immediate cash out flow and if it purchases in credit the creditor payment would capture this cash flow after some time. Now after purchase of raw materials there are other manufacturing expenses in the form of electricity, salary and wages for production and other manufacturing expenses. Expenses are plotted against these heads on monthly heads. Then after the finished goods stages are reached, there are selling and distribution expenses .These expenses are plotted monthly wise .
93

After the selling and distribution expenses there are finance charges or interest expenses. The interest expenses are divided into two groups ,interest on working capital finance and interest on long term liabilities. However, both the interest would come in the revenue account ( others wise debt trap like situation will arise) . Now the tax payment would take place and also dividend payment would take place. Both this would be incorporated in the cash out flow.
94

Capital Account: Inflows : Inflows on account of induction of fresh equity capital Inflows on account of fresh term liability in the form of term loan and debenture Inflows on account of unsecured loan
95

Outflows: Outflows on account of investments in financial assets Outflows on account of repayment of term liability Outflows on account of repayment of unsecured loan.
96

Inflow Revenue Account :
Cash Sales Realisation of receivable Interest or earning from investment
Outflow revenue account :

Payment of creditor Payment of cash purchase Payment of other liability
97

Difference between expenses and income is called deficit ; The meaning of revenue deficit in a period means that during the period the borrowers inflow of cash associated with operation is less than the outflow of cash associated with such operation . A part of this deficit would be funded by long term surplus.
98

Capital Account Inflow :
New Equity New Term Loan Reduction/ sale of investment
Capital Account outflow :

Increase of fixed asset Increase of term loan Repayment of term loan
99

Difference is called capital surplus . Part of revenue deficit would be met by Capital Surplus Remaining part by taking fund based working capital borrowing from Banking. Cash budget the closing balance is the DP of that month and the maximum limit is the pick limit .
100
Limit and DP in Cash Budget

Lim it and Drawing Power 60 50 40 Months 30 20 10 0 -10 1 2 3 4 5 6 7 8 9 10 11 12 Amount in Rs Lacs Lim it and Drawing Power
101
Session Four
102
CMA Form Filling Up
103
Day Two
104
Session One
105
Determination Of Fixed Asset Cost
Determination Of Margin Money for Working Capital
Sales Expenses Holding Level
Inventory Receivable Other CA
Margin Money for Working Capital
Determination Of Project Cost
IDC Calculation, Pre Operative Exp
Cash Flow Calculation
106
Project Cost
Project Cost
Fixed Asset Related Cost
Current Asset Related Cost
Cost of Fixed Asset
Pre operational Cost
Margin Money of Working Capital

107

This cost is incurred up front. There is a provision for over financing this amount. If it happens, project is financed more than the desired level by institutional lender. This would result in over leverage of the project . Increases the risk of default.
108

Example of over financing :
Original Fixed Asset cost is Rs 75 lacs; Quotation received Rs 100 lacs to be paid in five installments ;
109
How over financing happens?

T=0 , borrower takes unsecured loan of Rs 5 lacs and deposits the money to term lender T=0, term lender disburses Rs 15 lacs from term loan account and total Rs 20 lacs paid to the supplier ; T=0 , supplier gives back the money to the borrower Rs 5 lacs as the original cost is Rs 15 lacs not Rs 5 lacs; T=1, borrower deposits this Rs 5 lacs to the term lender ; T= 1, term lender disburses Rs 15 lacs from term loan account and total Rs 20 lacs paid to the supplier; T=1, supplier gives back the money to the borrower Rs 5 lacs as the original cost is Rs 15 lacs not Rs 5 lacs; This process continues and the last 5 lacs would be paid back to the unsecured lender ; Instead of Rs 25 lacs margin money , Rs 5 lacs is brought at the beginning and the same is withdrawn at the end. This is the classic example of 100% financing .
110
Procedure to be followed
Accept quotation from renowned supplier Cross check with competitors Verify the sources of means of finance
How and when the margin money would be brought in; Time and sources of margin money;
Disburse only confirmed tie up with the proposed margin money.

111
Preoperative expenses
The second component of project cost over financing is the preoperative expenses. Concrete proof of expenses may not be available due to nature of expenses. Lenders have to rely on the authentication of third party. Best way to handle this is to arrive at the industry wise project size of preoperative expenses as a percentage of total fixed asset cost. Accept this amount.
112
Working capital component of project cost Term loan is assessed on the basis
of working capital requirement at the time of starting . Margin money for term loan = Current Asset * 25% for MPBF Method II ; This margin money would be of no use unless the MPBF is tied up; Disbursement of Term Loan is conditional upon tying up of MPBF or Fund based working capital ; This working capital requirement would change depending on the current asset at different years; 113
Working capital component ofmoney for subsequent project cost Provision for margin
years if any in excess of realised profit and other sources of net working capital; Disbursement of term loan installment depending on the phased requirement of margin money for working capital; Confirmation of availability of Fund Based Working capital in different periods .
114
Means of Finance Current Liability
Fixed Asset Current Asset Current Asset
115
Means of finance
Means of Finance
Equity
Debt
Domestic
Foreign
Private Placement
Private Placement
Public Issue
Public Issue
116
Project Cash flows

Cash flows from operation :
Operating Profit After Tax + Depreciation Increase in Current Asset ( except Cash and Bank Balance ) + Increase in Other Current Liabilities
Cash flows from financing :

Increase in Long Term Finance ( Equity + Debt ) + Increase in Short Term Finance ( Working Capital + Line of Credit ) + Income from Interest Income
Cash flows from Investment :

Decrease in Financial Asset ( Fixed Deposit + Investment in Group Companies ) + Decrease in Loans and Investment +Capital Gain from Investment
117
Non Fund Based Working Capital
118
Letter of Credit
Payment Transmitted Sends Confirmation Issuing Bank/ Opening Bank Sends documents for Acceptance Payments Made to Bank Accepts documents Sends Documents Negotiating Bank Submits Documents For Negotiation
Bank Opens LC
Advising Bank/ Confirming Bank Advises LC Goods Receipt Ships Goods
Payment Made
Applies to bank
Applicant/ Buyer/ Drawee
Sends Invoice
Beneficiary/ Seller/ Drawer

119
Letter of Credit
LC can be assessed separately for two types of customers :
One for routine operation Another one is for seasonal operation
At the time of LC assessment , operating cycle is very important to ensure repayment.
120
LC for routine operation

Purpose of LC :
Purchase of RM ; Finding out total RM to be purchased
Cash Purchase Credit Purchase
With LC Without LC
121
Assessment of LC
Sl NO I Particulars Estimated/ Projected consumption of Raw Material & Spares Opening Stock of Raw Material & Spares Closing Stock of Raw Material and Spares Purchase of Raw Material and Spares Source Form II
II III IV
Form III Form III 1+3-2

122
Assessment of LC
Sl NO V VI VII VIII IX Particulars % of Purchase on Cash % Of Purchase on Credit % of Credit Purchase on LC Average lead time LC amount ( Limit) (VII/360/VIII)
123
Source
Assessment of seasonal LC
For seasonal LC , the LC requirement would have to calculated by purchase period basis. Find out months of peak purchase and quantum of purchases during these peak months. Find out average credit period. Find out the LC cycle . Find out the LC Limit.
124
Seasonal LC assessment can not take place without Cash Budget Methods Finding out of the Peak Level requirement is crucial We need to have the current asset requirement at the time of Peak Level LC outstanding This would help us to have security coverage
125
Stipulation of stock statement :
Time for submission Inspection stipulation Movement of such stock
LC Payment period
Cash Budget statement
Payment authentication
126
Importance of operating cycle and LC payment

Applicant would pay LC from selling proceeds of materials purchased under LC. This is operating cycle of the company . If a company is having an operating cycle of 6 months and LC usance period is 3 months , portion of LC payment has to be arranged from someone else. Bank may have to think providing CC limit or Trade credit during time.
127
Back to Back Letter of Credit B1 B2 BLC B3
Ex
128
Precaution
Back to Back LC Issuer :
Original LC terms and Back to Back LC terms should be same Date of Shipment of Back to Back LC should be less than Original LC Value of Back to Back LC should be less than Original LC Negotiation on Original LC must be restricted in the favour of Back to Back LC issuer
129
Pricing
LC is a NFB facility LC amount should be multiplied by the CCF Credit Equivalent amount is obtained Credit Rating would be applicable Risk Weight would be calculated RWA would be calculated Capital requirement would be calculated Min return from this capital would be calculated Desired ROE would calculated Amount to be divided by the LC amount
130
Session Two
131
Appraisal Writing Skills
132
Writing Appraisal Note
133
Content of Appraisal Note

Content
Qualitative
Quantitative
134
Qualitative
135
Qualitative
Name of Borrower: Address :
Registered : All data to be filled up as per appraisal format ; No field to be left blank ; Factory : All data to be filled up as per appraisal format ; No field to be left blank
Constitution : Date of Incorporation : Should be tallied with documents submitted ;

136
Qualitative
Line of activity : Mention the industry and job specification ; Name of group : As per HO guidelines ; Share Holding Pattern : As per HO guidelines ; Price of shares : Must for listed company ; Details of Directors :
Name Designation Position : Independent Director / Whole time director ; Name of other companies they are directors ; Qualification Name Qualification Designation Position Since when : Responsibility
Details of key management personnel :
137
Qualitative
Back ground of promoter :
Name Age Previous business experience :
Name of company / firm Line of activity Present status Any negative feature of previous experience If any negative feature how it is addressed.
138
Qualitative
Since when in the present business. The importance of present business in the promoters overall business . Managing capability with some illustrations. Featuring in any negative list of any banks or other bodies. Members of associations and position hold in associations.
139
Qualitative
Quality of Management :
Team or one man show;
If one man , description of forming team and putting this in terms and conditions
Composition of team Presence of any management system or not If management system :

Marketing Sales HR Operation IT
140
Qualitative
Extent of computerization :
No of computers LAN / WAN system Presence of ERP package Existence of IT enabled MIS Report Future views on computerisation
141
Qualitative
Movement of key personnel :
New joinee :
Previous employment of joining of key personnel ; Back ground of key personnel ; Established capability of key personnel; Number of new joinee and different levels;
142
Qualitative
Exit of any key stipulated period :
personnel
over
preferably to be put in terms and conditions of sanction;
If any key person has left :

Reason for such leaving ;
To be verified from independent authority
143
Qualitative
Industry scenario :
Macroeconomic position :
Growth rate ; Contribution of the industry in overall growth rate; Government preference of the industry; Tax structure of industry; Segmentation of industry :
Small , Medium and Large player ;
Intra industry position :

Position of the company within the industry Advantage and disadvantages of each category of player
How to overcome disadvantages;
Future growth rate ( sources to be quoted ) ;

Negative features to be addressed properly Controlled / Free market ; Import substitute ; Duty effect ;
Pricing :
144
Qualitative
Addition of new capacity in the near future :
How it would effect the price of output of the present company ; Transportation cost of the new capacity Is transportation cost a major deterrent for new competitors ; Time to add new capacity ; Licensing requirement ; Government restriction on new capacity;
145
Qualitative
Market of the product :

Geography of the market ; Importance of transportation cost ; Import substitute ; Domestic competition;
How to overcome competition :
Domestic Foreign
Distribution channel
146
Qualitative
Risks Analysis :
Strength of the company Weakness of the company Opportunities of the company Threat of the company How to overcome weakness How to convert threat into opportunities
147
Terms and conditions :

Qualitative
Facility Limit Interest rate / commission/exchange Processing fee Commitment charge Penal interest Repayment provisions Security
Primary Collateral
Period of sanction Pre disbursement clause if any Other terms and conditions
148
Quantitative
149
Working capital
Last three years audited result analysis Sales :
Increase or decrease has to be explained in terms of :
Quantity increase/decrease Price increase/decrease
Cost of consumption of raw material to be explained in terms of :

Quantity increase/decrease Price increase/decrease
150
Working capital
Power and Fuel :
Quantity Price For projections any increase in the projected period should be addressed ;
Salary and wages :

No of employees Average salary Projected increase to be factored into
151
Working capital
Other manufacturing expenses :
Major heads to be explained for past three years Increase / decrease to be explained with respect to sales achieved; Accounting treatment of such expenses Working capital and Term loan to be explained separately :
Outstanding amount Rate of Interest
Selling and Distribution expenses :
Interest expenses :
152
Working capital
Depreciation :
Increase to be explained with respect to :
Increase in asset Increase in change in depreciation rate Change in depreciation methods
Taxes :
Amount to be explained
Provisions of dividends
153
Working capital
Capital structure :
Increase in equity
Sources of fund How the fund would come in ( inflow of fund )
Increase in term loan :

Rate of interest Repayment obligation Present status of term loan
154
Working capital
Short term loan :
Amount of loan Interest rate Main terms and conditions
Creditors :
Major creditors Average credit period Pricing of credit purchase
155
Working capital
Detail of fixed asset :
Addition during the year Category of assets Depreciation amount
Investment :
Nature of investment Maturity period Interest rate earned Interest amount earned
156
Working capital
Raw Material :
Imported Indigenous No of months Price Quantity Year end phenomena Stock building up
Order Speculation Cash discount
157
Working capital
Stock in process :
Stock building up
Order Inefficiency
Increase due to :
Price Quantity
158
Working capital
Finished goods :

Increase is due to :
Slow moving Impending order Price increase Quantity increase
Receivable increase :
More than 90 days Less than 90 days
Reason for increase in terms of different customers
159
Working capital
Other current asset :
Each category Rational for increase / decrease
Other current liability :

Each category Rational for decrease / increase Guarantee / LC requirement
160
Working capital
Cash accrual
Increase in profit Increase in depreciation
Free cash flow :

Increase
Reason
Decrease
Reason
161
Working capital
Net Profit Margin :
Increase / Decrease :
Increase profit Decrease sale Decreased interest rate
Operating profit Margin :

Increase/ Decrease :
Increase in cost Increase in sale
162
Working capital
TOL/ TNW :
Increase / Decrease :
Increase in Term Liability Increase in Current Liability Increase in TNW
Profit New capital issued
Current Ratio :
Increase / Decrease
Increase in current asset Increase in current liability
163
Working capital
All the items of CMA form :
Form II Form III Form IV to be explained projections ;
for
estimates
and
164
Term Loan
Projections :
For each item of projected P&L to be explained in terms of assumption
Free cash flow has to be determined Margin money source to be explained with numbers Phase wise margin money contribution to be explained with clear cut strategy on timing of bringing the margin money.
165
Special Emphasis on the Seasonal Nature of business

Seasonality is not captured in the balance sheet and P&L as a whole Comparison of two years financials would be proper methods of comparison Breaking up of the financials for shorter period would be the proper way of carrying out financial analysis Identification of proper period is crucial
166
Quarterly Comparison
Quarterly comparison would give the correct picture Quarterly comparison with previous year for the following :
Sales Operating Profit Operating Cash Flows Net Profit Net Cash Accrual Current Ratio
167
Quarterly Comparison
Sales :
Qty Price per unit
Profit :
Operating Profit Non Operating Income
Cash Flows :
Operating ( Incremental ) Non Operating ( Incremental)
168
Mandatory Terms and Conditions

A Credit Arrangement Letter would contain the following : Name of Customer : Name of the Facility Sanctioned : e.g.Fund Based Working Capital Type of Facility Sanctioned : e.g. Cash Credit Limit Sanctioned : Interest Rate : % Interest rate with reference to PLR or any other rate. Mode of charging of interest i.e. either quarterly or monthly should be mentioned . Security : The sanction letter would describe in details about the security to be offered against the facility Tenure of Loan :
169
Additional Terms and Conditions

Any escrow agreement to be opened Any corporate guarantee to be taken :
Persons authorised to sign the guarantee
Necessary Board Resolution Article of Asociation verification
Any collateral security to be created

Necessary permission to be taken Process of creation of security
Any PDC to be taken

Amount of PDC Tenure of PDC
170
Additional Terms and Conditions

Direct disbursment to the cash credit account
Name of account Name of bank Amount to be disbursed
NOC stipulation from existing lender if any Submission of periodic statement for monitoring purpose
FFR Stock Statement Valuation of security statement
Infusion of capital stipulation

Proof of capital infusion ROC Receipt of appropriate application filing
171
Language
Simple English Preferably simple sentence Maximum two to three simple sentences combined together Simple word No use of extreme word and preferably simple words
172
Language
Executive summary :
Qualitative :
Name :1 Line of activity:1 Back ground of promoter :1 Management set up :2 Industry situation :3 -4 Share holding pattern : 3-4 Risk analysis : 2
173
Language
Executive summary :
Quantitative :
Past performance : 5-6 Future projections : 5-6 Assessment : 5-6
174
Session Three
175
Sample Appraisal Writing Exercise
176
Session Four
177
Reading the annual report

Find out the classification of current assets :
Loans and advnaces
Group companies
See the auditors comments on the loan and advances to the group companies :
Period for which given and the position of movement of the same
If stagnant , we have to comment on this why it can not be writen off
178

Find out the classification of current assets :
Receivable of more than 6 months
Comment on the movement on this receivables
How much is constant and for how many periods Reason for not writing off If write off takes place the impact of net worth of the company
Investment details
Investment value
Mark to Market value Any depletion in Market value to be provided for
179

Notes to Contingent Liability :
Letter of Credit opened
Not appearing on Creditor To Bank for its own operation To Bank for other operation
Net Worth True Value Corporate Net worth
Corporate Guarantee Given
Applicability of Net Worth Statement
Liability not provided for

Disputed sales Disputed service tax Pending appeal
180

Investment :
Auditors comments on the adverse movement of Mark to Market Investment If adverse movement takes place , how the liability which funded this investment would be paid off In such case , the impact of the companies cash flows on our loan
181

Deferred Revenue Expenses :
Why such deferred revenue has appeared on the balance sheet Accounting policies for writing off the deferred revenue expenses Impact on net worth of the company Calculation of Adjusted Tangible Net Worth
182
Thank you
183

Corporate Agri

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Two Days workshop on Corporate Agri Business

Axis Bank , Chennai December 9th and 10th By Disseminare Consulting

Basic Credit Concept

Different methods of financing

Different Banking Products

Non Fund Based

Fund Based Working Capital

Working Capital Demand Loan

Working Capital Demand Loan

Working Capital Demand Loan

Non Fund Based Facility

Non Standard Working Capital Product

A would be requiring working capital in the following stages :

Short Term Loan Financing

Short Term Loan Financing

Operating Expenses NOE Financing Expense Statutory

FA Less Liquid Liquid

Ratio Analysis & Credit Appraisal

Liquidity / Leverage Ratios

Interest Coverage Ratio

Low High Low

Interest Coverage Ratio

Unsecured Loan Interest

The proportionate factored in.

USL High High

USL High Low

USL High Low

USL High High

Fund Flow and Cash Flow Analysis

Basic concepts in fund flow statement

Activities which will increase the fund flow ..

Activities which will increase the fund flow ..

Activities which will increase the fund flow ..

Activities which will decrease the fund flow ..

Activities which will decrease the fund flow ..

Activities which will decrease the fund flow ..

Advance analysis of fund flow statement

Working Capital Facilities

Fundamental Concepts of Working Capital Facilities

Fund Based Working Capital

Fund Based Facility

Working Capital Facilities

LTA NWC FB facility NFB OCL

Some semantics of WCM

Assessment of Fund Based Facility ..

Methods of Assessment of Fund Based Working Capital

FA LTL NCA NWC WCG LTL CA BB OCL NWC WCG LTL

Adjustment of Current Asset

Adjustment of Other Current Liability

The methods differs on the quantum of net working capital to be brought in

Analysis of cash flow

The main aim is to generate more cash flow from operation ;

Cash flow and implication

Analysis of cash flow

The main aim is to generate more cash flow from operation ;

Last Year Current Yr.

2009 Term Public

2.00 4.00 2.40

d. Dividend Payments e. Others f. TOTAL

0.00 0.00 4.00 85

Draw back of MPBF Process..

Draw Back of MPBF Process

31st October 2010 L A