A Project Report On

ANALYSIS OF LENDING POLICY AND SECTORAL EXPOSURE AT

ANDHRA PRADESH STATE FINANCIAL CORPORATION, HYDERABAD.

Project submitted for

POST GRADUATE DIPLOMA IN MANAGEMENT

BY ASHISH SRIVASTAVA ROLL NUMBER B4-05

SIVA SIVANI INSTITUTE OF MANAGEMENT (AICTE APPROVED) NH-7 KOMPALLY, SECUNDERABAD.

2010-2012

CERTIFICATE
This is to certify that the project report titled ANALYSIS OF LENDING POLICY AND SECTORAL EXPOSURE AT APSFC submitted by Mr. A SHISH SRIVASTAVA (Roll number: B4-05) to SIVA SIVANI INSTITUTE OF MANAGEMENT, KOMPALLY, SECUNDERABAD is a record of independent analysis work undertaken by him during the year 2010-11.

PROF. V.G. CHARI PROJECT GUIDE DIRECTOR ACADEMIC SIVA SIVANI INSTITUTE OF MANAGEMENT, KOMPALLY, SECUNDERABAD500014

ACKNOWLEDGEMENT

It is indeed a pleasant task to thank the people who have contributed towards the successful completion of this project. I take this opportunity to thank Sri. R.C Kumar, Senior Manager HRD-Training, ANDHRA PRADESH STATE FINANCIAL CORPORATION, HYDERABAD, for providing me the opportunity to undertake the project work at APSFC, Hyderabad. I take this opportunity to thank SRI. V.V.V.S.S. RAM SARMA, SENIOR MANAGER, ACCOUNTS AND FINANCE DEPARTMENT, APSFC, who has helped a lot and provided valuable advice, guidance and inputs to me in completing the project,. I profoundly thank my Director Academic Professor V.G. Chari for his constant encouragement; motivation, guidance and kind help to complete the project. I would like to thank my faculty finance Associate Professor M. Pardhasardhy for his guidance, suggestion, help, support and encouragement. Finally I would like to thank my family members who gave moral support and encouraged me to complete this project.

Place: Hyderabad Date:

Ashish srivastava Roll number: B4-05

DECLARATION
I hereby declare that the Project Report titled ANALYSIS OF LENDING POLICY AND SECTORAL EXPOSURE AT APSFC is submitted by me to the Department of Business Management, Siva Sivani Institute of management is a bonafide work undertaken by me and it is not submitted to any other University or Institution for the award of any degree or diploma/certificate or published any time before.

Ashish Srivastava Roll number: B4-05

ABSTRACT

All the banks and financial institutions have their own Lending policy which varies from bank to bank and institution to institution.
The main objective of making the Lending policy is to formulate a basis for advances that shall be made. For this corporation classifies Line of Activity mainly In to two categories ENCOURAGED and NOT TO BE ENCOURAGED. To make the Lending policy corporation generally adopts: Government report for the development of MSME, RBI report on Priority sector, Gap analysis (Demand supply), Economy Analysis, trend analysis based on past experience of its own (APSFC). APSFC allocates the budget after classification of industries based on line of activities evenly as per the Fund available. By making Lending policy APSFC avoids acceptance of unhealthy proposals and sets the Format and conditions for eligibility for proposals which varies sector wise and includes As follows: Collateral security Norms Promoters Margin Ratio like: i. Debt Equity Ratio ii. Debt Service coverage Ratio iii. Current Ratio etc.

CONTENT SINO 1 1.1 PARTICULARS CHAPTER 1: INTRODUCTION LENDING POLICY NEED FOR THE STUDY IMPORTANCE OF THE STUDY METHODOLOGY OF THE STUDY OBJECTIVE OF THE STUDY LIMITATIONS AND SCOPE OF THE STUDY CHAPTER 2: SFCs IN INDIA AN OVERVIEW SFC ACT CHAPTER3: REVIEW OF LITERATURE CHAPTER 4: APSFC PROFILE CONSTITUTIONS CRM COMMITMENT FINANCIAL PERFORMANCE CREDIT FLOWS INCOME AND EXPENDITURE NET WORTH CAPITAL ADEQUACY RATIO EXPANDED LOAN PORTFOLIO TREASURY OPERATIONS NON FUND BASED ACTIVITIES ASSET QUALITY AND NPA MANAGEMENT EXPANDED LOAN PROFIT BRANCH NETWORK MILESTONE ACHIEVEMENT OF APSFC LOAN LIMIT OF FINANCIAL ASSISTANCE (SHARES) LENDING RATES PAGE NUMBER 9-19 10 15 16 17 18 19 20-43 31-43 44-57 46 46 47 47 50 51 51 51 52 52 52 53 53 53 53 54 57

2. 2.1 3. 4.1 4.2 4.3 4.4 4.8 4.8.4 4.8.5 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.20 4.21 4.22 4.23

5 5.1 6 7 7.1 7.4

CHAPTER 5: THEORETICAL AND CONCEPTUAL FRAMEWORK LENDING POLICY AND SECTORAL EXPOSURE CHAPTER 6: DATA ANALYSIS AND INTERPRETATION DATA INTERPRETATION AND SUMMARY CHAPTER 7: SUMMARRY FINDINGS AND SUGGESTION BIBLIOGRAPHY

58 59 65 87 94 94 95

SINO 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 3 4 5

LIST OF GRAPHS PARTICULARS INDUSTRY WISE DISBURSEMENTS BEVERAGES AND TOBBACCO PRODUCTS FOOD PRODUCTS MACHINERY EXCEPT ELECTRICALS TEXTILES CHEMICAL PRODUCTS SERVICES PAPER AND PAPER PRODUCTS CONSTITUTION WISE GROSS SANCTIONS AND DISBURSEMENTS SECTOR WISE DISTRICT WISE DISBURSED AMOUNT

PAGE NUMBER 80 80 81 81 83 80 82 82 84 86 86 87

CHAPTER 1: INTRODUCTION

CHAPTER CONTENTS LENDING POLICY NEED FOR THE STUDY IMPORTANCE OF THE STUDY METHODOLOGY OF THE STUDY OBJECTIVES OF THE STUDY SCOPE OF THE STUDY LIMITATIONS OF THE STUDY

CHAPTER 1: AN INTRODUCTION TO LENDING POLICY

CONTENTS OBJECTIVES OF LENDING POLICY STATEGY FOR ACHIEVING OBJECTIVES OF LENDING POLICY LENDING NORMS THRUST AREAS CLASSIFICATION OF LINES OF ACTIVITIES LOAN LIMITS APPLICABILITY OF LENDING POLICY COLLATERAL SECURITY NORMS PROMOTERS MARGIN CRITERION FOR LOAN ELIGIBILITY

1.1 LENDING POLICY: ANDHRA PRADESH STATE FINANCIAL CORPORATION HYDERABAD

Andhra Pradesh state financial corporation (APSFC) was established in 1956 with the main objective of extending financial assistance for setting up industrial units in Tiny, Small and Medium Scale and Service Enterprises. APSFC is jointly promoted by IDBI and Government of Andhra Pradesh.

APSFC, an ISO 9001-2000 Organization, offers liberal financial assistance for acquiring fixed assets like Land, Buildings and Machinery, Working Capital Term Loans for existing units and Seed Capital Assistance to smaller projects. The term loan assistance from the Corporation is available up to Rs. 2000 lakhs per project and is offered through various schemes of assistance. The Corporation also extends financial assistance in joint financing with SIDBI / Commercial Banks for large size projects.

The Corporation is undertaking distribution of insurance products (General & Life) and sale of Government of India Relief Bonds. APSFC also accepts Fixed Deposits both Cumulative and NonCumulative in Nature.

1.2 OBJECTIVE OF LENDING POLICY

The Lending Policy Aims to facilitate for delivery of the credit to the Prospective customers for Healthy Growth of MSME and others (included) in the State. The Broad Policy Objectives are enumerated below: To Assist MSME sectors to increase economic growth and Employment generation, To Help SSI sector, Service sector acquire new Technologies and skills so as to compete effectively in the Market place, To Encourage SME sector to grow vertically and Graduate, in the course of time from Micro to small and higher grades onwards.

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1.3 STRATEGY FOR ACHIEVING LENDING POLICY OBJECTIVE

Strive to put in place appropriate arrangement for timely sanctions and Disbursement of loans, Providing Need based consultancy and services to customers, Quick Appraisal and Rating of Project applying Credit Appraisal and Rating tool (CART) , Simplify Rules and Regulation for Hassle free and quick approvals of sanctions, Cluster based financing policy, Introduction of few new customer friendly schemes.

1.4 LENDING NORMS

The Core Business of the Corporation is providing credit facilities in the form of Long term credit and Working Capital Term Loan facilities to prospective c entrepreneurs. The following Norms are followed by corporation for lending: Financial Assistance to Industrial and Service sector Units, All the projects satisfying the definition of SME are eligible for loans irrespective of project cost, Activities for which financial assistance can be considered includes : Manufacturing / Processing industries, Service sector Information Technologies, Nursing Homes and other service units, Tourism Hotels, Restaurants and tourist Resorts, Commercial Complexes, Residential complexes, Group Housing, Working Capital Term loans to existing profit making units, Marketing of SSI Products, Loan repayment normally ranges up to 8 years and the moratorium period up to 2 years.

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1.5 THRUST AREAS (YEAR WISE FOR THE PERIOD OF STUDY)

1.6 CLASSIFICATION OF LINES OF ACTIVITIES At APSFC the corporation has the criterion to classify the Lines of Activity so as to decide whether to extend financial assistance or not in mainly two categories, as following: ENCOURAGED CATEGORY, NOT TO BE ENCOURAGED CATEGORY.

FY 2007-08
FOOD PROCESSING AND AGRO BASED INDUSTRIES, STEEL AND ENGINEERING INDUSTRIES, DRUGS, PHARMACEUTICALS AND BIOTECHNOLOGY, MINERAL BASED INDUSTRIES, APPARELS / TEXTILES INDUSTRIES, INFRASTRUCTURE DEVELOPMENT PROJECTS, EXPORT ORIENTED INDUSTRIES, HOSPITALITY INDUSTRY, INFORMATION TECHNOLOGY / IT RELATED ACTIVITIES / SERVICES.

FY 2008-09
FOOD AND AGRO BASED INDUSTRIES CERAMIC, REFRACTORIES AND MINERAL BASED INDUSTRIES CHEMICAL AND ALLIED INDUSTRIES CONSTRUCTION ACTIVITY DRUGS AND PHARMACEUTICAL S ELECTRICALS AND ELECTRONIC INDUSTRIES ENGINEERING, MECHANICAL & ALLIED PRODUCTS JUTE & TEXTILES PAPER & PAPER PRODUCTS PLASTIC INDUSTRIES PRINTING INDUSTRIES RUBBER & LEATHER BASED INDUSTRIES TRANSPORT VEHICLES WOOD BASED

FY 2009-10
AGRO AND FOOD BASED INDUSTRIES CERAMIC REFRACTORIES AND MINERAL BASED INDUSTRIES CHEMICAL AND ALLIED INDUSTRIES CONSTRUCTION ACTIVITY DRUGS AND PHARMACEUTICAL ELECTRICALS AND E;ECTRONIC INDUSTRIES ENGINEERING, MECHANICAL & ALLIED PRODUCTS JUTE & TEXTILES PAPER AND PAPER PRODUCTS PLASTIC INDUSTRIES PRINTING INDUSTRY RUBBER & LEATHER BASED INDUSTRIES TRANSPORT VEHICLES WOOD BAASED

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1.7 LOAN LIMITS

Loans below Rs. 10 Lakhs are not encouraged irrespective of line of activity / Scheme. But in case for the sanction of loan between Rs. 5 lakhs to Rs. 10 lakhs permission from concerned Head of Department (HOD) shall be obtained. For ST / SC Entrepreneurs only the Minimum Loan amount is relaxed to Rs. 5 Lakhs.

1.8 LINES OF ACTIVITIES LISTED UNDER NOT LISTED UNDER ANY OF THE TWO CATEGORIES
For the lines of activity not listed in any of the two categories of the Lending policy, prior approval shall be taken from Head Office, excepting those lines of activities for which financial assistance was considered in the respective Branch jurisdiction during the Last 2 years and where there are no sick units. For loan enquiries which require approval of Head Office, the Branches shall forward the enquiries to the Project Appraisal Department at Head Office for processing the Enquiries and to place the same before the Project Screening Committee for a Decision.

1.9 APPLICABILITY OF LENDING POLICY

The Lending Policy is applicable to the First generation entrepreneurs and for new projects. The Lending Policy is also applicable to the existing promoters going in for expansion / modernization and / or diversification of their activities in to other lines of activities. The units being set up by the existing promoters as backward / forward integration, expansion / modernization, in the lines of activities listed in NOT TO BE ENCOURAGED Category / The Lines of activities not listed in Lending Policy, the Branch Managers may issue the loan application depending on the merits of the case and the same shall be forwarded to Project Appraisal Department, H.O. to put to Project Screening Committee for taking decision on the proposal and to decide on the terms of financial assistance.

1.10 COLLATERAL SECURITY NORMS

A minimum collateral security as mentioned against each line of activity shall be insisted for all lines of activities listed under ENCOURAGED CATEGORY. All industrial units listed under encouraged category being set up in lease hold premises, the collateral security shall be a minimum of 50 percent of total loan being considered or the requirement of collateral security for the line of activity as per Lending Policy, whichever is higher. For projects in APIIC / ALEAP etc., industrial estates / IDAs, the Collateral Security shall be insisted on the total loan except loan component land and buildings provided the marketability of the land and buildings in such Estate is to the satisfaction of corporation.

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1.11 PROMOTERS MARGIN

The minimum Promoters Contribution shall not be less than 22.5 percent for SSI units and 25 percent for others, The Promoters Contribution in case of Good Entrepreneurs shall be as per the Norms of the Corporations.

1.12 CRITERION FOR LOAN ELIGIBILITY

The Maximum Debt Equity Ratio shall be as below:

a) b)

c) d) e)

PARTICULARS FOR PROPOSALS WITH PROJECT COST UP TO RS. 10.00 LAKHS FOR PROJECT COST ABOVE RS. 10 LAKHS AND FOR LOAN AMOUNT UP TO RS. 500 LAKHS FOR LOAN AMOUNT EXCEEDING RS. 500 LAKHS FOR HOSPITALS AND NURSING HOMES FOR RESIDENTIAL COMPLEXES / MUN SCHEMES

RATIO

3:1 2:1

1.5:1 1.5:1 1.857:1

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NEED FOR THE STUDY

In light of the fast changing economic scenario, it is necessary to fine-tune the operational policies every year. Recognizing this need, the Corporation formulates a comprehensive lending policy document and reviewing the same at yearly intervals.

The policy document helps credit dispensing functions to create good loan portfolio. It also provides explicit guidelines to the concerned in the areas of project acceptance, appraisals and loan sanctioning. A brief stock of the economic scenario of the country and the State is taken before going into the Lending Policy of the Corporation applicable for the existing financial year. As it has been generally seen that today many of the industrial projects are entirely shut down without any production. The reasons for this are manifold among them one most important is oversupply of funds that implies to unnecessary exposure for corporation or vice versa i.e., the potential sectors where there is need for credit assistance and have potentials for generating income are deprived and there is no/less exposure. Improperly framed Lending policy also leads to improper appraisal of projects feasibility, commercial and economic viability of the project at project conception and at planning stage. If the lending Policy is not framed properly leads to failure of proper appraisal of project and hence results in unnecessary and unhealthy exposure to the corporations. If the Lending Policy is not properly tuned with the economy will lead to imbalance in the economy resulting in losses. It is not only Loss to the Entrepreneur but also to the corporation which undergoes losses. Moreover it is a loss to the countrys resources. For the industry and economical growth and success, the Lending Policy should be in tune with prevailing economic scenario which can give balanced and least risk bearing exposure to the corporation. Hence, this is the need for the study.

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IMPORTANCE OF THE STUDY

Written loan policies vary considerably in content, length, and specificity, as well as in style and
quality. No two SFC/Bank share the same tolerance for risk, offer the same loan products, and face the same economic conditions. An effective loan policy should reflect the size and complexity of a credit union and its lending operations and should be tailored to its particular needs and characteristics. Revisions should occur as circumstances change, and the policy should be flexible enough to accommodate new lending activity without a major renovation.

Regardless of a credit unions size or location, a loan policy should address: General areas of lending, Lending authority of loan officers or committee Guidelines for the loan portfolio mix, risk diversification, appraisals, unsecured loans, and rates of interest, Limitations on loan-to-value, and aggregate loans Credit and collateral documentation, standards Collection procedures, Internal controls to ensure compliance with the policy Methodology to be used to determine the amounts of an appropriate Allowance for Loan and Lease Losses. A sound loan policy, established and overseen by the board of directors, reflects favorably on the board and management. When a board sets forth its expectations clearly in writing, management is better positioned to control lending risks, ensure the credit union stability and soundness, and fulfill oversight responsibilities. An effective and up-to-date loan policy increases the likelihood that actual loan documentation and underwriting practices will satisfy the board expectations. Actual lending practices vary significantly from those outlined in the policy Numerous exceptions to policy requirements have been approved Policy limits are being ignored Exceptions to policy should be few in number and properly justified, approved, and tracked. If actual practices vary materially from the written guidelines and procedures, the source of this discrepancy should be identified, and either actual practices or the written policy should be changed. Management may conclude that specific sections of the written policy are no longer relevant. A case is then made to the board of directors to amend the policy to reflect different, but still prudent, procedures and objectives. POTENTIAL CONSEQUENCES OF AN INADEQUATE LOAN POLICY Outdated and ineffective loan policies can contribute to a range of problems. Introducing a loan product that is not adequately addressed in the written loan policy can create a variety of challenges for the lending staff and involve risks that management did not anticipate. lending function is operating within established risk tolerances. Such a policy is more likely to be consulted and followed by staff and contributes to uniform and consistent board-approved practices. Therefore, financial institution staff, members, and regulators will be well served by the implementation of a process that helps ensure that a financial institutions loan policy is, and remains, comprehensive, effective, and up to date.

A current and effective loan policy is a tool to help management ensure that a financial institutions

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METHODOLOGY OF THE STUDY

The Primary information was collected from the officials of the project department and account and finance department, which includes the procedures involved in framing of the Lending Policy, financing of Project in the corporation and the project appraisal methods and techniques followed by corporation etc, The Analysis of the procedure in Lending policy resulting in corporations exposure to the different industries and techniques in appraising a project is done through studying a case which was financed by the corporations and the references of that case is cited.

The study of Index of Industrial production on different parameters published by APDES for the period of study i.e., 2007-08,09,10, economic survey report, A.P. Government IIP report has been studied to understand the framework and coordination of lending policy, The question were also put to the Executives of the corporation to know about the case in depth and also other details of the corporation, The secondary information was collected from the brochure and records of the corporation i.e., Annual reports, Lending policy brochures, scheme booklets etc. And from the Books related to study. The Project is based on economical analysis hence it is descriptive in nature, for analysis and interpretation of the data of sect oral exposure, graph and charts has been used.

17

OBJECTIVE OF STUDY

The main objective of the project is to study the framework of Lending Policy. To highlight the importance and significance of adopting the parameters in lending policy at APSFC. To understand the synchronization in Lending policy and sect oral exposure at APSFC using graphs and charts. To understand the evaluation and appraisal of project using a case study on different parameters in Lending Policy adopted at APSFC. To ascertain the technical feasibility of Lending Policy.

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LIMITATIONS AND SCOPE OF THE STUDY

The scope of the study was confined lending policy and procedures i.e. procedures followed by
APSFC.

The study consists of organization profile of APSFC and brief details about the procedures of A case study is done on Lending procedure after understanding various procedures, methods and
techniques followed by APSFC as per its Lending Policy. lending.

As formulation of lending policy is very vast topic only few about implementation and As Policy formulation is secret as per the corporation rules therefore there was no access to
relevant data which is used for policy formulation. As per the rules of corporation Risk management department does not shares the data which has limited the scope of study. As Lending Policy formulation requires thorough study of prevailing economy, past performance of financed industry, study of industry, governmental norms, risk management etc. there is huge scope of further study. implication has been covered in the study due to lack of time and inadequacy of data.

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CHAPTER 2: SFCs IN INDIA AN OVERVIEW

CHAPTER CONTENTS
SFCs IN INDIA AN OVERVIEW SFC ACT 1951

20

STATE FINANCIAL CORPORATIONS IN INDIA AN OVERVIEW

CONTENT INTRODUCTION STATEMENT OF OBJECT AND REASON MAIN FEATURES OF SFC ACT 1951 FINANCIAL RESOURCES OF SFCs ACT APPLIES TO ALL BROAD FUNCTION OF SFCs SPECIFIC FUNCTIONS OF SFCs SFCs CONTRIBUTION TO THE INDIAN ECONOMY TABLE OF SUMMARRY GRAPH CONCLUSION

21

STATE FINANCIAL CORPORATION OF INDIA 2.1 INTRODUCTION

A Central Industrial Finance corporation was set up under the industrial Finance corporations Act, 1948 in order to provide medium and long term credit to industrial undertakings which fall outside normal activities of commercial banks. The State governments expressed their desire that similar corporations be set up in states to supplement the work of the Industrial financial corporation. State governments also expressed that the State corporations be established under a special statue in order to make it possible to incorporate in the constitutions necessary provisions in regard to majority control by the government, guaranteed by the State government in regard to the payment principal. In order to implement the views Expressed by the State governments the State Financial Corporation bill was introduced in the Parliament.

2.2 STATEMENT OF OBJECTS AND REASONS

In order to provide medium and long term credit to industrial undertaking, which fall outside the normal activities of commercial banks, a central industrial finance corporation was set up under the industrial Finance Corporations act, 1948. The state governments wished that similar corporations should be set up in their states to supplement the work of industrial financial corporation. The intention is that the State corporations will confine to financing medium and small scale industrial and will , as far as possible consider only such access which are outside the purview of industrial finance corporation .

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2.3 THE MAIN FEATURES OF THE STATE FINANCIAL CORPORATIONS ACT 1951
i. ii. The bill provides that the state government may, by notification in the official Gazette, establish a financial corporation for the state. The share capital shall be fixed by the State government but shall not exceed Rs 2 crores. The issue of the shares to the public will be limited to 25 % of the share capital and the rest will be held by the State Governments, The Reserve Bank, Scheduled Banks, Insurance Companies, Investment Trusts, Co- operative banks and other financial institutions. Shares of the corporation will be guaranteed by the State government as to the re payment of principal and the payment of a minimum dividend to be prescribed in consultation with the central government. The corporation will be authorized to issue bonds and debentures for amounts which together with the contingent liabilities of the corporations shall not exceed five times the amount of the paid up share capital and the reserve fund of the corporations. These bonds and debentures will be guaranteed as to payment of the principal and payment of interest at such rate as may be fixed by the State Government. The corporation may accept deposits from the public repayable after not less than Five years, subject to the maximum not exceeding the paid up capital. The corporation will be managed by a board consisting of a majority of Directors nominated by the State governments , The Reserve banks and the industrial Finance corporation of India The corporation will be authorized to make long term loans to industrial concerns which are repayable within a period not exceeding 25 years. The Corporation will be further authorized to underwrite the issue of stocks, shares, bonds or debentures by industrial concerns, subject to the provision that the corporation will be required to dispose of and shares etc. Acquired by it in fulfillment its underwriting liability within a period of 7 years. Until a reserve fund is created equal to the paid up share capital of the Corporation and until the State Governments has been repaid all amounts paid by them, if any, in fulfillment of the guarantee liability, the rate of dividend shall not exceed the rate guaranteed by the state government. Under no circumstances shall the dividend exceed 5% p.a. and surplus profits will be re payable to the State governments. The corporation will have special privileges in the matter of enforcement of its Claims against borrowers.

iii.

iv.

v. vi. vii.

viii.

ix.

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2.4 FINANCIAL RESOURCES OF THE SFCS:

The SFCs mobilize their financial resources from the following sources 1. Their own Share capital 2. Income from investment and repayment of loans 3. Sale of bonds 4. Loans from the IDBI ( To some extent ) 5. Borrowings from the Reserve Bank of India 6. Deposits from the Public 7. Loans from State Governments. In the act Financial corporations are Financial corporation established under section 3 and includes a Joint Financial Corporation established under section 3 A of the Sate financial Corporations Act of 1951.

2.5 THE ACT APPLIES TO ALL

i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. INDUSTRIAL CONCERN means any concern engaged or to be engaged in the manufacturing, preservation or processing of goods. The mining or development of mines The hotel industry The transport of passengers or goods by road or by water or by air ( or ropeway or lift) The generation or distribution of electricity or any other form of power, The maintenance, repair, testing or servicing of machinery of any description or vehicles or vessels or motor boats or trailers or tractors. Assembling , repairing or packaging and article with the aid of machinery Or power The setting up or development of an industrial area industrial estate Fishing or providing shore facilities for fishing or maintenance thereof Providing weight bridge facilities Providing engineering, technical, financial, management, marketing or other Services or facilities for industry. Providing medical, health or other allied services Providing software or hardware services relating to information technology, Telecommunication or electronics including satellite linkage Setting up or development of tourism related facilities including amusement Parks, conventions centers, restaurants travel and transport, tourist services Agencies and guidance counseling services to tourists Construction Development, maintenance and construction of roads Providing commercial complex facilities and community centers including Conference halls Floriculture Tissue culture, fish culture, poultry farming, breeding and hatcheries

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xxii.

xxiii.

Service industry, such as altering. Ornamentation, polishing, finishing, Oiling, washing, cleaning or otherwise treating or adapting and article or Substance with a view to its use, sale transport, delivery or disposal. Research and development of any concept , technology , design process or product , whether in relation to any of the matters aforesaid including any activities approved by the Small Industries Bank

State Financial Corporations also include industries which specialize in processing goods which includes any art or process for producing , preparing or making an article by subjecting any material to manual , mechanical , chemical , electrical or any other like operation .

2.6 BROAD FUNCTIONS OF STATE FINANCIAL CORPORATIONS: Project advisory and Finance as a catalyst in small scale industrial growth the SFCs Provide the following services:

2.7 INVESTMENT APPRAISAL

I. Project conceptualization and related services, including guidance in relation to selection of projects, preparation of feasibility studies, capital structuring, techno economic feasibility, financial engineering, project management design etc. Credit Syndication including assistance in legal documentation etc. Documentation of various project documents Placement of debt equity including design of the structure of instruments, Placement of instruments with financial institutions, bank etc.

II. III. IV.

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2.8
1. 2. 3. 4. 5. 6. 7. 8.

ASSIST

IN

ORGANIZATIONAL

STRUCTURAL

CHANGES

LIKE

Analysis of operational performance Study of existing organizational structure Study of the existing statures and rules and regulations Market analysis with respect to products Review of domestic and international scenario Valuation of fixed assets and inventory Advising on formation of new entity Preparation of relevant agreements / legal documents.

2.9

INDUSTRY

RESEARCH

INFORMATION

SERVICE A

dedicated research team looking at both macro level issues as well as sector specific, industry research. The expertise of the professional research team and a large diversified data base enables SFC to provide erudite research reports to the corporate world.

2.10 LEGAL ADVISORY SERVICES

A full fledged legal cell, comprising of experienced professional with expertise in handling cases of diverse nature, offer legal help services. The services rendered by this unit comprise investigations and preparations of title reports, besides advisory services in respect of matters under dispute where an independent consultant view is required.

2.11 SPECIFIC FUNCTIONS OF SFCs

The SFCs Provide the following types of assistance to industrial units in their respective states: The SFCs while giving loans to industrial units see to it that loans are secured by a PLEDGE, MORTAGAGE, HYPOTHECATION of movable and immovable property or other tangible assets or guarantee by the state government or scheduled commercial bank , they also accept personal pledge by the entrepreneur . SFCs do not give loans on the basis of second mortgage. Grant loans or advances to industrial concern repayable within a period not exceeding 20 years. Providing guarantee for loans raised by industrial units from commercial banks and state cooperative banks. Providing guarantee for deferred payments in cases where industrial units have purchased capital goods on a deferred payment basis. 26

 To underwrite the issue of shares, bonds and debentures of industrial concerns. To Subscribe to shares, bonds and debentures of industrial concerns. Guarantee loans raised by industrial concerns which are re- payable within a period not exceeding 20 years and which are floated in the public market SFCs grant loans to industrial units for the purchase of fixed capital assets like land, Machinery. In some exceptional cases, some SFCs also provide loans for working Capital requirements in combination with loans for fixed capital. SFCs provide loans in foreign currency for the import of machinery and technical Know how, under the IDA (International development association) and world bank tie up. SFCs however are prohibited from subscribing directly to the shares or stock of any Company having limited liability except for underwriting purposes and granting any Loans or advance on the security of its own shares

2.12 SFCS - CONTRIBUTORY TO DEVELOPMENT INDUSTRIES IN THE INDIAN ECONOMY:

OF

SMALL

SCALE

There are at present 18 State financial Corporations and almost every state has a financial Corporation of its own. During 2000-2001 SFCs had sanctioned loans aggregating to 2800 crores and disbursed Rs 2000 crores. Their assistance in the form of loans has declined subsequently due to the existence of a large amount of Non Performing assets. Over 70 % of the total assistance sanctioned and disbursed by all SFCs is provided to small scale industries. Attempts are now being made to strengthen the role of SFCs as regional development banks. The SFCs sanctioned seed capital assistance under the seed capital schemes introduced and operated by IDBI. This assistance is available to promoters of small business units. Since June 1989, SFCs have also been implementing special schemes of seed capital assistance to women

Entrepreneurs. Assistance is extended in the form of loan or grant or a combination of both to voluntary agencies working for women in decentralized industries.

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TABLE OF SUMMARY IN CRORES/YEARS LOANS SANCTIONED LOAN DISBURSED 1980-81 1990-91 2000-01 2003-04 370 250 1860 1270 2800 2000 1130 860

E TOTAL WRITTEN OFF (LOSS) RS 1880 CRORES

YEAR WISE LOAN SANCTIONED AND DISBURSED

A M O LOANS SANCTIONED C LOAN DISBURSED 2800 186 0 200 0 127 0 113 860 0

R U O N R T E S I N 370

250

1980-81

1990-91 04

2000-01

2003-

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2.13 CONCLUSION:
State financial corporations have not been able to become popular due to poor implementation and poor investments that they have undertaken. as they invest in small scale industries the returns will be lower as gestation period for small scale industries is very long. Losses are bound to occur but as a business and financial organization the government and the state must find ways of minimizing their losses and earning a moderate profit which can be recycled back to promote SFCs. Business decisions must be taken with a purely business perspective in mind and political, emotional factors should not play the major factors while making business decisions as only then can there and will there exist a difference between what is viable and what is not.

LIST OF 19 STATE FINACING CORPORATIONS IN INDIA

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Assam Financial Corporation Andhra Pradesh State Financial Corporation Bihar State Financial Corporation Delhi Financial Corporation Gujarat State Financial Corporation The Economic Development Corporation of Goa Haryana Financial Corporation Himachal Pradesh Financial Corporation Jammu & Kashmir State Financial Corporation Karnataka State Financial Corporation Kerala Financial Corporation Madhya Pradesh Financial Corporation Maharashtra State Financial Corporation Orissa State Financial Corporation Punjab Financial Corporation Rajasthan Financial Corporation Tamil Nadu Industrial Development Corporation Ltd. Uttar Pradesh Financial Corporation West Bengal Financial Corporation

SFC ACT 1951

CONTENT

INTRODUCTION STATEMENT OF OBJECT AND REASON MAIN FEATURES OF THE BILL ACT 63 OF 1951 INCORPORATION OF SFC THEIR CAPITA AND MANAGEMENT SHARE CAPITAL AND SHARE HOLDERS SPECIAL CLASS OF SHARES TRANSFER OF SHARE CAPITAL TO DEVELOPMENT BANK ISSUE OF REDEEMABLE SHARES REDUCTION OF SHARE CAPITAL RESTRICTIONS ON VOTING RIGHT MANAGEMENT BOARD OF DIRECTORS TERM OF DUTY BUSINESS SFCs CAN TRANSACT PROHIBITED BUSINESS

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2.14 INTRODUCTION
A Central Industrial Finance Corporation was set up under the Industrial Finance Corporations Act, 1948 in order to provide medium and long term credit to industrial Undertakings which fall outside the normal activities of Commercial Banks. The State Governments expressed their desire that similar Corporations be set up in States to supplement the work of the Industrial Finance Corporation. State Government also expressed that the State Corporations be established under special statute in order to make it possible to incorporate in the Constitution necessary provisions in regard to Majority control by the Government, guaranteed by the State Government in regard to the payment of principal. In order to implement the views expressed by the State Governments the State Financial Corporation Bill was introduced in the Parliament.

2.15 STATEMENT OF OBJECTS AND REASONS

In order to provide medium and long term credit to industrial undertakings, which fall Outside the normal activities of Commercial Banks, a Central Industrial Finance Corporation was set up under the Industrial Finance Corporation Act, 1948 (XV of 1948). The State Governments wish that similar Corporations should also be set up in the States to supplement the work of the Industrial Finance Corporation. The intention is that the State Corporations will confine their activities to financing medium and small scale Industrial and will, as far as possible, consider only such cases as are outside the scope of The Industrial Finance Corporation. The State Governments also consider that the State Corporations should be established under a special Statute in order to make it possible to Incorporate in the Constitution necessary provisions in regard to majority control by Government, guaranteed by the State Government in regard to the repayment of principal, And payment of a minimum rate of dividend on the shares, restriction on distribution of Profits and special powers for the enforcement of its claims and recovery of dues. Since The incorporation, regulation and winding up of such Corporations fall within the purview Of Parliament vide Entry No.43 of the Union ListThe State Governments have requested the Government of India to enact the necessary enabling legislation, which is sought to be effected by this Bill.

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2.16 THE MAIN FEATURES OF THE BILL ARE AS FOLLOWS

1. The Bill provides that the State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State. 2. The share capital shall be fixed by the State Government but shall not exceed Rs. 2 crores. The issue of the shares to the public will be limited to 25 percent, of the share capital and the rest will be held by the State Government, the Reserve Bank, Scheduled Banks, Insurance Companies, Investment Trusts, Co-operative Banks and other Financial Institutions. 3. Shares of the Corporation will be guaranteed by the State Government as to the re-payment of principal and the payment of a minimum dividend to be prescribed in consultation with the Central Government. 4. The Corporation will be authorized to issue bonds and debentures for amounts which together with the contingent liabilities of the Corporation shall not exceed five-times the amount of the paid-up share capital and the reserve fund of the Corporation. These bonds and debentures will be guaranteed as to the payment of the principal and the payment of interest at such rate as may be fixed by the State Government. 5. The Corporation may accept deposits from the public repayable after not less than five years, subject to the maximum not exceeding the paid-up capital. 6. The Corporation will be managed by a Board consisting of a majority of directors nominated by the State Government, the Reserve Bank and the industrial Finance Corporation of India. 7. The Corporation will be authorized to make long-term loans to industrial concerns and to guarantee loans raised by industrial concerns which are repayable within a period of not exceeding 25 years. The Corporation will be further authorized to underwrite the issue of stocks, shares, bonds or debentures by industrial concerns, subject to the provision that the corporation will be required to dispose of any shares, etc., acquired by it in fulfillment of its underwriting liability within a period of 7 years. 8. Until a reserve fund is created equal to the paid-up share capital of the corporation and until the State Government has been repaid all amounts paid by them, if any, in fulfillment of the guarantee liability, the rate of dividend shall not exceed the rate guaranteed by the State Government. Under no circumstances shall the dividend exceed 5 per cent, per annum and surplus profits will be re-payable to the State Government. 9. The Corporation will have special privileges in the matter of enforcement of its claims against borrowers.

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2.17 ACT 63 OF 1951

The State Financial Corporation Bill having been passed by both the Houses of Parliament received the assent of the President on 31st October, 1951. It came on the Statute Book as THE STATE FINANCIAL CORPORATIONS ACT, 1951

2.18 INCORPORATION OF STATE FINANCIAL CORPORATIONS, THEIR CAPITAL AND MANAGEMENT

2.18.1 ESTABLISHMENT OF STATE FINANCIAL CORPORATIONS

The State Government May, by notification in the Official Gazette, establish a Financial Corporation for the State under such name as may be specified in the notification.

The State Financial Corporations Act, 1951 (7)

The Financial Corporation shall be a body corporate by the name notified under Sub-section U), having perpetual succession and a common seal, with power, subject to The provisions of this Act, to '[acquire, hold and dispose of] property and shall by the Said name sue and be sued.

. 2.18.2 ESTABLISHMENT OF JOINT FINANCIAL CORPORATIONS

Notwithstanding anything contained in section 3, two or more States may, after consultation with the 3[Small Industries Bank], enter into an agreement that there shall be one Financial Corporation for the group of States participating in the agreement and if the agreement is Published in the Official Gazette of each of those States, the Central Government may, By notification in the Official Gazette, establish a Joint Financial Corporation to serve the Needs of those States under such name as may be specified in the notification.

The State Financial Corporations Act, 1951 (8)

Subject to the provisions of this Act, to acquire, hold and dispose of property and shall, By the said name sue and be sued. Any reference in this Act to "State" in relation to a Joint Financial Corporation established for two or more States shall be construed as a reference to each such State.

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2.19 SHARE CAPITAL AND SHARE-HOLDERS

1. The authorized capital of the Financial Corporation shall be such sum as may be fixed by the State Government in this behalf, But it shall not, be less than fifty Lakhs of rupees, or exceed five hundred crores of Rupees: Provided that the State Government may, on the recommendation of the Small Industries Bank, by notification in the Official Gazette, increase the authorized capital Up to one thousand crores of rupees. 2. Subject to the provisions of section 4D, the authorized capital shall be divided Into such number of fully paid-up shares of the same face value and such number of Fully paid-up redeemable preference shares of the same face value and shall be issued To the parties mentioned in clauses (a), (b) and (c) of sub-section (3) and in the case Of parties referred to in clause (d) of that subsection, such shares shall be issued at Such times and in such manner as the State Government may, by notification in the Official Gazette, determine. 3. Subject to the approval of the State Government and the Small Industries Bank, the Board shall determine the number of shares which may, respectively, be Distributed among The State Government; The Small Industries Bank; Public sector banks, The Life Insurance Corporation of India established under Section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956), other Insurance companies owned or controlled by the Central Government, Other Institutions owned or controlled by the Central Government or the State Government, as the case may be; and Parties other than those referred to in clause (a), or clause (b) or clause (c): Provided that the number of shares which may be allocated to parties referred to In clause (d) shall in no case exceed forty-nine per cent, of the total number of issued Equity shares: Provided further that no increase in the issued equity capital shall be made in Such a manner that the parties referred to in clause (a) or clause (b) or clause (c) hold , In aggregate, at any time less than fifty-one per cent, of the issued equity capital of j The Financial Corporation.

The State Financial Corporations Act, 1951 (9)

Subject to the other provisions contained in this section, the allocation of shares Among the parties referred to in clauses (c) and (d) of sub-section (3) and the allotment Of such shares shall be made by the Financial Corporation in such manner as may be Prescribed. If any shares allocated to any of the parties referred to in clauses (c) and (d) of Sub-section (3) remain unsubscribed, they shall be subscribed for equally by the State Government and the 2[Small Industries Bank].

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2.20 SPECIAL CLASS OF SHARES

1. The State Government may, in consultation with the '[Small Industries Bank], specify from time to time such part of the unissued capital of the Financial Corporation as shall be allocated for the issue of a special class Of shares.] 2. The special class of shares so allocated under sub-section (1), shall be, (a) divided into such number of shares of the same face value as the State Government may, in consultation with the f'[Small Industries Bank], determine; (b) subscribed by the State Government and the ''[Small Industries Bank] and they may do so in such proportion as may be agreed upon by and between them and the Financial Corporation shall make allotment of such shares accordingly. 3. The funds representing the capital subscribed as aforesaid shall be used only for such purposes, in such manner and for rendering assistance to such class or category of industrial concerns, as the 6 [Small Industries Bank] may, in consultation with and after obtaining the advice of the State Government, specify in this behalf from time to time and nothing contained in '[***] section 48 shall apply thereto. 4. The rate of dividend declared on the special class of shares in respect of any accounting year of a Financial Corporation shall not exceed the rate of dividend in respect of its other shares. 5. Nothing contained in sub-sections (2) to (5) of section 4, section 5, and "[subsections (1) to (4) of section 6], shall apply to the special class of shares.]

2.21 TRANSFER OF SHARE CAPITAL TO DEVELOPMENT BANK

On such date as the Central Government may, by notification in the Official Gazette, specify (hereinafter referred to as the specified date), all the shares of every Financial Corporation subscribed by the Reserve Bank as on the date immediately preceding the specified date, shall, stand transferred to, and vested in, the Development Bank.

The State Financial Corporations Act, 1951 (10) 2.22 PAYMENT OF AMOUNT
The Reserve Bank shall be given by the Development Bank, in cash, for the transfer to, and vesting in, the Development Bank of the shares of every Financial Corporation which have been subscribed by the Reserve Bank, an amount equal to the face value of the shares of the Financial Corporation so subscribed.]

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2.23 ISSUE OF REDEEMABLE PREFERENCE SHARES

On and after the commencement of the State Financial Corporations (Amendment) Act, 2000, the Financial Corporation may: Issue redeemable preference shares on such terms and in such manner as the Board may decide; and convert, such number of equity shares as it may decide into redeemable preference shares, with the prior approval of the State Government and the Small Industries Bank, by a resolution passed in the general meeting Provided that such conversion shall in no case reduce the equity shares held by the parties referred to in clauses (a), (b) and (c) of sub-section (3) of section 4 to less than fifty-one per cent, of the issued equity capital of the Financial Corporation. The redeemable preference shares referred to in sub-section (1) shall(a) carry such fixed rate of dividend as the Financial Corporation may specify at the time of such issue or conversion; and (b) neither be transferable nor carry any voting rights. The redeemable preference shares referred to in sub-section (1) shall be redeemed by the Financial Corporation in such installments and in such manner as the Board may determine.

2.24 REDUCTION OF SHARE CAPITAL

1. The Financial Corporation, with the prior approval of the State Government and the Small Industries Bank, may, by resolution passed in a general meeting of the shareholders, reduce its share capital in any way. 2. Without prejudice to the generality of the foregoing power, the share capital may be reduced by (a) extinguishing or reducing the liability on any of its equity shares in respect of share capital not paid-up; or (b) either with or without extinguishing or reducing liability on any of its equity shares, cancelling any paid-up share capital which is lost or is unrepresented by available assets; or (c) either with or without extinguishing or reducing liability on any of its equity shares, paying off any paid-up share capital which is in excess of the wants of the Financial Corporation.

2.25 RESTRICTION ON EXERCISING OF VOTING RIGHT

Every shareholder of the Financial Corporation' holding equity shares shall have a right to vote in respect of such shares on every resolution and his voting right on a poll shall be in proportion to his share of the paid-up equity capital of the Financial Corporation:

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The State Financial Corporations Act, 1951 (11)

" Provided, however, that no shareholder, other than a shareholder referred to in clauses (a), (b) and (c) of sub-section (3) of section 4, shall be entitled to exercise voting rights in respect of any equity share held by him in excess of ten per cent, of the issued equity capital.

2.26 PROXY VOTING

In a general meeting referred to in clause (b) of subsection (1) of section 4D and sub-section (1) of section 4E, the resolution for conversion or reduction of share capital shall be passed by shareholders entitled to vote, voting in person, or, where proxies are allowed, by proxy, and the votes cast in favor of the resolution are not less than three times the number of votes, if any, cast against the resolution by shareholders so entitled and voting.

2.27 TRANSFER OF SHARE CAPITAL TO SMALL INDUSTRIES BANK

On such date as the Central Government may, by notification in the Official Gazette, notify (hereinafter referred to as the notified date) all the shares of every Financial Corporation subscribed by the Development Bank and the amount outstanding in respect of loans in lieu of capital provided by the Development Bank as on the date immediately preceding the notified date, shall stand transferred to, and vested in, the Small Industries Bank, such transfer shall be at such rate and be paid in cash or such other manner as may be mutually agreed upon between the Development Bank and the Small Industries Bank.

2.28 TRANSFER OF SHARES

The shares of the Financial Corporation shall be freely transferable. (2) Nothing contained in sub-section (1) shall entitle the parties referred to in clauses (a) (b) and (c) of sub-section (3) of section 4 to transfer any of the shares held by them in the Financial Corporation if such transfer will result in reducing the aggregate value of shares held by them to less than fifty-one per cent, of the issued equity capital of the Financial Corporation.

37

The Board may refuse to register the transfer of any shares in the name of the transferee on anyone or more of the following grounds, and on no other ground, namely: 1. The transfer of the shares is in contravention of the provisions of the Act or regulations made there under or any other law; 2. The transfer of the shares, in the opinion of the Board, is prejudicial to the interests of the Financial Corporation or to the public interest; 3. The transfer of shares is prohibited by an order of a court, tribunal or any other authority under any law for the time being in force. 4. The Board shall, before the expiry of two months from the date on which the instrument of transfer of shares of the Financial Corporation is lodged with it for the purpose of registration of such transfer, not only form, in good faith, its opinion as to whether such registration ought not or ought to be refused on any of the grounds referred to in sub-section (3) but also, If it has formed the opinion that such registration ought not to be so refused, effect such registration; and

The State Financial Corporations Act, 1951 (12)

If it has formed the opinion that such registration ought to be refused on any of the grounds mentioned in sub-section (3), intimate the transferor and the transferee by notice in writing. An appeal against the order of refusal of the Board under sub-section (4) shall lie to the Central Government and the procedure for filing and hearing of such appeal shall be in accordance with the rules made by the Central Government in this behalf.

2.29 DEPOSITS WITH FINANCIAL CORPORATION

The Financial Corporation i accept from the State Government, or with the prior approval of the Reserve Bank from a local authority or any other person deposits repayable after the expiry of period which shall not be less than twelve months from the date of the making of the depsoit and on such other terms as the Board think fit:

The State Financial Corporations Act, 1951 (15)

Provided that the total amount of such deposits shall not exceed twice the paid-up share capital of the Financial Corporation Provided further that the State Government may permit the Financial Corporation to accept deposits up to a higher limit not exceeding ten times the paid-up share capital of the Financial Corporation. Any deposit accepted under sub-section (1), other than a deposit from the State Government may, if so required by the Financial Corporation, be guaranteed by the State Government as to the repayment of the principal and payment of interest.

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2.30 MANAGEMENTS
The general superintendence, direction and management of affairs and business of the Financial Corporation shall vest in a Board of Directors which may exercise all powers and do all such acts and things, as may be exercised or done by the Financial Corporation and are not by this Act expressly directed or required to be done by the Financial Corporation in general meeting. The Board may direct that any power exercisable by it under this Act shall also be exercisable in such cases and subject to such conditions, if any, as may be specified by it, by the chairman, managing director or the whole-time director.

2.30.1 BOARD OF DIRECTORS

The Board of directors shall consist of the following, namely: A director to be nominated as chairman under sub-section (1) of section 15; Two directors nominated by the State Government of whom one director shall be a person who has special knowledge of or experience in small-scale industries: Provided that in the case of a Joint Financial Corporation, the number of directors shall be such as the State Governments of the participating States may, by agreement among themselves, think fit to nominate each participating State Government nominating not more than two directors: Provided further that in the case of a Joint Financial Corporation, the director, who shall have special knowledge of, or experience in, small-scale industries, shall be nominated by that participating State which, according to the terms of agreement between the participating States, is entitled to make such nomination; Two directors nominated by the Small Industries Bank; Two directors nominated in the prescribed manner by the parties mentioned in clause (c) of subsection (3) of section 4; Such number of directors elected, in the prescribed manner, by shareholders, other than those mentioned in clauses (a), (b) and (c) of subsection (3) of section 4, whose names are entered on the register of 1. Subs, by Act 39 of 2000, sec. 7.

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The State Financial Corporations Act, 1951 (16)

Shareholders of the Financial Corporation, ninety days before the date of the meeting in which such election takes place on the following basis, namely: 1. Where the total amount of issued equity share capital held by such shareholders is ten per cent, or less of the total issued equity capital, two directors; 2. Where the total amount of issued equity share capital held by such shareholders is more than ten per cent, but less than twenty-five percent of total issued equity capital, three directors; 3. Where the total amount of issued equity share capital held by such shareholders is twenty-five per cent, or more of total issued equity capital, four directors; and 4. Where the total amount of issued equity share capital held by equity shareholders referred to in this clause does not permit election of all the four directors, the Board shall co-opt such number of directors as is required to make up the said number who shall retire in equal number on the assumption of charge by the elected directors in the order of their co-option; 5. A managing director appointed in accordance with the provisions of sub- section (1) of section 17: Provided that on the first constitution of the Board, the directors referred to in clause; 6. Shall be nominated by the State Government and directors so nominated shall, for the purpose of this Act, be deemed to be elected directors: NOTE: Provided further that all the directors of the Board first constituted, other than the managing director, shall retire at the end of the first year.

2.30.2 TERM OF OFFICE AND RETIREMENT OF DIRECTORS

A nominated director shall hold office during the pleasure of the authority nominating him. Subject to the provisions of sub-section (1), a nominated director shall hold office for such term not exceeding three years and shall also be eligible for re nomination: Provided that no such director shall hold office continuously for a period exceeding six years. An elected director other than a director deemed to be elected under the first proviso to clause (d) of section 10 shall hold office for three years and shall also be eligible for re-election: Provided that no such director shall hold office continuously for a period exceeding six years.

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2.30.3 CHAIRMAN OF BOARD

The Small Industries Bank shall, in consultation with the State Government nominate a director as a Chairman of the Board for such period not exceeding three years and "on such terms and conditions as the Small Industries Bank may specify: Provided that the Chairman shall not be a whole-time director unless he is also appointed to function as the managing director: Provided further that the Chairman shall so long as he remains a director be eligible for reappointment as Chairman. The Chairman shall preside over the meetings of the Board and the general meetings of the Financial Corporation.

2.30.4 EXECUTIVE COMMITTEE

The Board shall constitute an Executive Committee consisting of the chairman and managing director, the whole-time directors and such other directors as it may deem fit: Provided that in- the case of a Joint Financial Corporation, if the directors nominated under clause (b) of section 10 represent different State Governments then, all of them shall be members of the Executive Committee. The Executive Committee shall discharge such functions as may be prescribed or as may be delegated to it by the Board. The Board may constitute such other committees whether consisting wholly of directors or wholly of other persons or partly of directors and partly of other persons for such purpose or purposes as it may think fit.

2.31 MEETINGS OF THE BOARD AND COMMITTEE

1. The Board and the Executive Committee shall meet at such times and places and shall observe such rules of procedure in regard to transaction of business at its meetings as may be provided by regulation made under this Act. 2. All questions at a meeting shall be decided by a majority of votes of the members present, and, in the case of equality of Votes, the Chairman or in his absence, any other person presiding shall have a second or casting vote. 3. No director shall vote on any matter in which he is interested. 4. If for any reason the Chairman of the Board or the Chairman of the Executive Committee is unable to attend any meeting of the Board or, as the case may be, of the Executive Committee, 5. In the case of the meeting of the Board, a director authorized by the Chairman of the Board in writing shall preside at such meeting, but if the director so authorized is absent or if no such authorization has been made, the Board may elect a director to preside at that meeting; and 6. In the case of the meeting of the Executive Committee, a member authorized in writing by the Chairman of that Committee shall preside at (The State Financial Corporations Act, 1951 (20))

41

That meeting, but if the member so authorized is absent or if no such authorization has been made, the Committee may elect any of its members to preside at that meeting.

2.32 POWERS AND DUTIES OF THE BOARD

2.32.1 GENERAL DUTY OF THE BOARD

The Board in discharging its functions under this Act shall act on business principles due regard being had by it to the interests of industry, commerce and the general public.

2.32.2 BUSINESS WHICH FINANCIAL CORPORATION MAY TRANSACT

The Financial Corporation may, subject to the provisions of this Act, carry on and transact any of the following kinds of business, namely:

The State Financial Corporations Act, 1951 21

Guaranteeing, on such terms and conditions as may be agreed upon,

1. loans raised by industrial concerns which are repayable within a period not exceeding twenty years, and are floated in the public market; 2. loans raised by industrial concerns from scheduled banks or State cooperative banks or other financial institutions; 3. Guaranteeing, on such terms and conditions as may be agreed upon, deferred payments due from any industrial concern in connection with its purchase of capital goods within India; 4. Underwriting of the issue of stock, shares, bonds or debentures by industrial concerns; 5. Transferring for consideration any instruments relating to loans and advances granted by it to industrial concerns; 6. Acting as agent of the Central Government or the State Government or the Development Bank or the Small Industries Bank or the IFCI Limited formed and registered under the Companies Act, 1956 (1 of 1956) or any other financial institution notified in this behalf by the Central Government in respect of any matter connected with, or arising out of, the grant of loans or advances to an industrial concern, or subscription to debentures of an industrial concern or relating to the business of the Development Bank, Small Industries Bank, IFCI Limited or financial institution; 7. Subscribing to, or purchasing of, the stock, shares, bonds or debentures of an industrial concern or any other concern; 8. Retaining as part of its assets any stock, shares, bonds or debentures which it may acquire by subscription or in fulfillment of its underwriting liabilities and disposing of the stock, shares, bonds or debentures so acquired; 42

9.

Granting loans or advances to, or subscribing to debentures of, an industrial concern, repayable within a period not exceeding twenty .years from the date on which they are granted or subscribed to, as the case may be: Provided that the Financial Corporation may, with the prior approval of the Small Industries Bank, exceed the said limit of twenty years up to a further period of ten years: Provided further that nothing contained in this clause shall be deemed to preclude the Financial Corporation from granting loans or advances to, or subscribing to debentures of, and industrial concern to which may be attached an option to convert such debentures or loans into stock or shares of the industrial concern: Provided also that the Financial Corporation may, in the exercise of such option, convert the amounts outstanding on such debentures or loans into stock or shares of the industrial concern if such concern increases its subscribed capital by the issue of further stock or shares in accordance with and subject to, the provisions of section 81 of the Companies Act, 1956 (1 of 1956).

2.32.3 PROHIBITED BUSINESS

The Financial Corporation shall not Except as provided in section 8, accept deposits; Except as provided in clauses 4[(da)], (f) and (g) of sub-section (1) of section 25, subscribe to the shares or stock of any company; Grant any loan or advance on the security of its own shares; Grant any form of assistance to any industrial concern in respect of which the aggregate of the paid-up share capital and free reserves exceeds ten (The State Financial Corporations Act, 1951 (25)) crores of rupees or such higher amount not exceeding thirty crores of rupees as the State Government, on the recommendation of the Small Industries Bank, may, by notification in the Official Gazette, specify. The Financial Corporation shall not enter into any kind of business with any industrial concern, of which any of the directors of the Financial Corporation is a proprietor, partner, director, manager, agent, employee or guarantor, or in which one or more directors of the Financial Corporation together hold substantial interest: Provided that this section shall not apply to any industrial concern if any director of the Financial Corporation I. is nominated as a director of the Board of such concern by the Government or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) or by a Corporation established by or under any other law; or II. is elected on the Board of such concern by virtue of shares held in the concern by Government or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) or by a Corporation established by or under any other law, by reason only of such nomination or election, as the case may be.

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CHAPTER 4: APSFC PROFILE

CHAPTER CONTENTS
INTRODUCTION OBJECTIVES CONSTITUTION AND CAPITAL STRUCTURE CUSTOMER RELATIONSHIP COMMITMENTS TO QUALITY STANDARDS FINANCIAL PERFORMANCE SOURCE OF FUNDS DEPLOYMENT OF FUNDS ASSET QUALITY MANAGEMENT CREDIT FLOW ANALYSIS INCOME AND EXPENDITURE CAPITAL ADEQUACY RATIO NET WORTH AS ON MAR 2010 PERFORMANCE IN KEY AREAS MILESTONE ACHIEVEMENTS SCHEMES PROCEDURES AND LENDING RATES

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4.1 INTRODUCTION
Before formation of the Andhra Pradesh State, there were two State financial Corporations by name Andhra Financial Corporation established on 3rd November 1955 with headquarters at Vijayawada and Hyderabad State Financial Corporation with headquarters at Hyderabad established on 13th February 1954. Both corporations were established under the state Financial Corporations Act. Andhra Pradesh State was formed on 1st November 1956. On the same day, the Andhra Pradesh State Financial Corporation (APSFC) came into existence with the amalgamation of the erstwhile Andhra State Financial Corporation and Hyderabad State Financial Corporation with the mandate to promote and develop Small and Medium Enterprises. By 1st November2010, the corporation entered into its 55th year of existence. APSFC, an ISO 9001 2008 Organization, offers liberal financial assistance for acquiring fixed asset Like Land, Building & Machinery, and Working capital term loans for existing units and seed capital to smaller projects. The term loan assistance from the corporation is available up to Rs. 500 lakhs per project and is offered through various schemes of assistance to suit to the requirements of the individual entrepreneurs. For extremely deserving units, APSFC offers financial assistance up to Rs. 2000 lakhs on case to case basis. The corporation is extending financial assistance in joint financing with SIDBI or banks for bigger projects. APSFC also endures customer satisfaction through professional management and team work by implementing quality management system that meets the requirement of ISO 9001:2008. Andhra Pradesh State Financial Corporation [APSFC] is state level Development Financial Institution established on 1956 for promoting Small & Medium Scale (SMEs ) industries in Andhra Pradesh under the provisions of the State Financial Corporation (SFC) Act,1951. The Corporation extends finance basically through two products the Term Loans and the Working Capital Term Loans. The corporation is also undertaking distribution of Insurance products (General and Life) and Scale of Government of India relief bonds as non fund based activities. APSFC also accepts fixed deposits both Cumulative and Non Cumulative in nature. Thus, the corporation has completed Five Decades of dedicated service in industrial financing of Tiny, Small and Medium Scale sector units and contributing to the Balanced Regional Development of the State.

4.2 OBJECTIVE

To industrialize the State through balanced regional development and dispersal of Industries, To support promotion and development of tiny, small and medium scale industries and Service sector units by extending need based credit to them, Nurtures entrepreneurship and encourages first generation entrepreneurs, To act as a catalyst for generation of employment,

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4.3 CONSTITUTION AND CAPITAL STRUCTURE

A statutory corporation established in 1956 under Andhra Pradesh Financial Corporation Act, 1951 as a state level industrial development bank with an aim to promote industrial development in the state of Andhra Pradesh. The capital structure of APSFC is as:

CAPITAL STRUCTURE
GOVERNMENT OF ANDHRA PRADESH INDUSTRIAL DEVELOPMENT BANK OF INDIA OTHER 6% 35% 59%

4.4 CUSTOMER RELATIONSHIP

To maintain long- term relationships the corporation has categorized its customers as: GOOD SENIOR SUCCESSFUL SUPER ENTREPRENEURS

Based on their Track records it is offering special concessions. As a result of its thoughtful and customer oriented schemes, APSFC has become the truly investor friendly Financier. The feedback of their customers has been taken forward in policy formulation and implementation. It is an article of faith with APSFC that it should not merely lend, but comprehend and tend the customer and the industry. This has been the secret of its success.

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4.5 COMMITMENT TO QUALITY STANDARD

APSFC was the first state public sector enterprise to secure ISO 9002-1994 in the year 2001, which was soon upgraded in the tear 2002 to ISO 9001-2000 and later on to ISO 9001-2008 for all its activities and all its offices indicating its commitments and adherence to standards in products and processes. It thus became the standard bearer and path setter for promotion of the quality movement among small and medium industries in Andhra Pradesh.

4.6 FINANCIAL PERFORMANCE

The total sanction during F.Y. 2009-10 recorded a growth of 18.82% to Rs. 1058.38 crores from Rs 885.67 crores in the previous year. The corporations disbursements marginally increased to Rs 685.70 crores in the previous year, registering to subdued growth of 32.5%. The performance of the corporation in sanctions and disbursements during the year was the highest ever in the annuals of the organization. The sanctions and disbursements for last three FY are depicted here graphically:

YEARWISE PERFORMANCE IN SANCTIONS AND DISBURSEMENTS

AMOUNT IN Rs CRORES

1006.6 6 885.6 7 1052.3 8

2007-08 2008-09 2009-10 662. 7 685. 7 707.9 9 DISBURSEMENTS

SANCTIONS

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4.7 RECOVERY PERFORMANCE

The corporation has mapped up Rs 785.12 crores of recoveries against Rs 658.08 crores achieved during the previous year registering the growth of 19.30%. For Last three year the recovery performance is depicted graphically here:

RECOVERY PERFORMANCE
621.9 4 658.0 8 785.1 2 TOTAL 2007-08 2008-09 2009-10 Rs In Crores 421.7 2 449.2 5 528.0 4 PRINCIPAL 200.2 2 208.8 3 257.0 8

INTEREST

4.8 LEAD POSITION

The corporation has retained its NUMBER ONE position among all the SFCs in the country for the th successive 9 year during 2009-10.

4.9 RESOURCE MANAGEMENT Resource Mobilization

The aggregate resource raised by the corporation during the year stood at Rs 547.77 crores by way of refinance from SIDBI, Non-SLR Bonds, term loans from commercial banks and public deposits, besides the internal generation of funds. The corporation availed Rs 300 crores by way of Line of credit and Rs 2.5 crores by way of short term loans from SIDBI. The corporation raised Rs 121.00 crores by issue of Series IV of Non-SLR bonds guaranteed by the state government through private placement during the year. Further, public deposit of Rs 46.75 crores were also raised during 2009-10. The corporation availed Rs 50.01 crores out of 100 crores term loan sanctioned by corporation bank and Rs 5.01 crores out of 50 crores term loan sanctioned by Karur Vysa bank Ltd. The corporation also enjoyed a term credit line of rs 50 crores from Axis Bank. The corporation also utilized the overdraft facility of Rs 50 crores from Andhra Bank and Rs 10.00 crores from syndicate bank from time to time to address the temporary liquidity mismatch.

48

SOURCES OF FUND
10% 9% SIDBI 22% 59 % Refinance/STL Non-SLR Bonds Public Deposit ommercial Banks

4.10 RESOURCE DEPLOYMENT

The corporation continued to maintain its Default free track record by meeting all the commitments on the principal and interest payments on time to its lenders during the year. The corporation repaid Rs 111.38 crores and Rs 135 crores to SIDBI towards LOC/Refinance installments and short term loan respectively, Rs 22.49 crores to Central Bank of India. Further, it redeemed SLR Bonds of Rs 8.85 crores and Fixed Deposit of Rs 15.84 crores (net of renewals). With a view to optimizing the Borrowing cost, the corporation prepaid an amount of Rs 80.00 crores to SIDBI. The corporation had also pre-closed the Term loan availed from Central Bank of India and Bank of India during the year

R ESOURCE DEPLOYMENT

S DB Re nance SLR Bonds Pub c Depos ts Commerc a B Ba I I fi /STL/PrePayments li ii l nks

49

4.11 REDUCTION IN BORROWING COST

During 2009-10, the corporation prepaid high cost borrowing of Rs 80 crores carrying interest rate of 9.73% availed from SIDBI. The corporation also prepaid an amount of Rs 31.24 crores to central Bank of India and Bank of India and closed the Term loans carrying interest rate of 9/10%.Non SLR Bonds to an extent of Rs 121 crores were raised at a lower coupon rate of 8.35% p.a. The prepayments and raising funds at lower interest rates helped the corporation to save an interest cost and bring down the average cost of borrowing from 8.75% in the previous year to 8.30% in 2009-10.

4.12 CREDIT FLOW ANALYSIS

During the year, the bulk of the sanctions and disbursement were shared by micro and small enterprises, which accounted for 68% and 65% of total sanctions and disbursements of the corporation respectively. Rs 103.24 crores were sanctioned to micro enterprises, Rs 610 crores to units in small enterprises, Rs 260.86 crores to medium enterprises and 78.28crores to others. The disbursement consisted of Rs 80.75 crores to Micro enterprises, Rs 377.76 crores to small enterprises, Rs 176.83 crores to medium enterprises and Rs 73.44 crores to others.

CLASSWISE PERFORMANCE IN SANCTIONS AND DISBURSEMENTS

MICRO
AMOUNT IN Rs CRORES

SMALL

MEDIUM

OTHERS

61 0

SANCTIONS

50

377.7 6 176.8 3 73.4 4 DISBURSEMENTS

260.8 6 78.2 8

103.2 4

80.7 5

4.13 INCOME AND EXPENDITURE

The total income of the corporation during 2009-10 grew by 21.32% to 288.17 crores from Rs 237.53 crores in 2008-09. The interest income stood at 257.08 crores in 2008-09, recording a growth of 23.10%, other income was Rs 31.09 crores during 2009-10 as against Rs 28.70 crores during the previous year. The expenditure decline to Rs 188.52 crores from Rs 192.95 crores of the previous years.

500 450 400 350 AMOUNT IN CRORES 300 250 200 150 100 50 0

YEARWISE COMPARISSON OF INCOME AND EXPENDITURE

2009-10 2008-09

INTEREST INCOME EXPENDITURE

OTHER INCOME

4.14 NET WORTH

The net worth of the corporation improved to Rs 332.19 crores as on 31.03.2010 from Rs 266.59 crores as on 31.03.2009, registering a growth of 24.61%.

4.15 CAPITAL ADEQUACY RATIO

The capital adequacy ratio at the end of the FY 2010 stood at 15.09% from 13.94% as on 31.03.2009 against the benchmark of 9% CAR stipulated by RBI for commercial banks. The supplementary capital adequacy ratio stood at 15.67% as on 31.03.2010 as against 14.59% as on 31.03.2009.

5 15

4.16 EXPANDED LOAN PORTFOLIO

The total loan portfolio had gone up to Rs 1865.50 crores as on 31.03.2010 from Rs 1674.17 crores as on 31.03.2010, reflecting a year on year growth of 11.42% in the year under view.

4.17 PERFORMANCE IN KEY AREAS

The per employee performance in the Key parameters in 2009-10 vis--vis 2008-09 was as under

(Rs in Lakhs)
PERFORMANCE INDICATOR

2009-10 19.28 13.09 203.56 3.17%

2008-09 8.35 8.02 165.86 2.27%

Per Employee operating profit Per employee net profit Per employee sanctions Return on Average assets

4.18 TREASURY OPERATIONS

During 2009-10 the income from treasury operations was Rs 203.39 Lakhs in 2008-09 the sharp decline in the treasury income during the year essentially reflects Macro environment and overall regime of flow of interest rates in call money market.

4.19 NON FUND BASED INCOME

The corporation continued to market insurance products of LIC of India and United Insurance Company Ltd., during the year. The corporation has undertaken training programmes sponsored by SIDBI and earned Rs 10.24 lakhs in 2009-10 as against Rs 4.38 lakhs in 2008-09.

4.20 ASSET QUALITY AND NPA MANAGEMENT

Standard assets had gone up by 12.04% to Rs 1749 crores in 2009-10 from Rs 1562.31 crores as on 31.01.2009. The gross NPA have gone up from Rs 112.86 crores as on 31.03.2009 to Rs 116.25 crores as on 31.03.2010. For last five years Asset quality has been depicted graphically:
849.5 294.0 3 1 1062. 203.1 3 5 1379.8 89.8 7 6 1561.3 112.8 1 6 1749.2 116.2 5 5

ASSET QUALITY

2000 1500 Rs in crores 1000 500

STANDARD ASSET NPA

0 2005-06 2006-07 2007-08 2008-09 2009-10

4.21 BRANCH NETWORK It has Network of 25 branches cover in all the 25 districts of Andhra Pradesh and a spanking head office building in Chi rag Ali lane, Hyderabad. 4.22 MILESTONE ACHIEVEMENTS OF APSFC So far sanctioned 9,748 crores for 91,277 units in Andhra Pradesh as on 31/03/2010, Disbursed 6,730 crores to 71,071 units - 70% to Tiny/SSI sector as on 31/03/2010, Recovered Rs 7,479 crores including interest since inception till 31/03/2010, Established unblemished repayment track record since inception Has consistent record of earning operating profit throughout its history Created total Investment of around 20,542 crores Generated direct and indirect employment to about 11 lakhs persons Channeled a significant share of assistance of around 70% to tiny and small scale industries Industrialized backward areas by extending 50% of its assistance to industries coming up in notified backward areas. Enjoying 60% of the market share in term lending in promoting First Generation

Entrepreneurs

4.23 SCHEMES AND PROCEDURES

APSFC offers liberal financial assistance for acquiring fixed assets like land, building and machinery. The term loan assistance from the Corporation is available up to Rs. 500 Lakhs per project and is offered through various schemes of assistance to suit to the requirements of the individual entrepreneur. Objectives

To Finance Industrial and service activities in tiny, small and medium scale sectors. Balanced regional development of the State. Upliftment of weaker sections of the society.

4.24 SERVICES
For the past four decades and more, APSFC has extended financial assistance to number of industrial units in the State. APSFC offers expertise of experienced professionals to counsel entrepreneurs at every stage in every discipline of industry. Thus APSFC delivers a complete package to the entrepreneurs right from concept to commissioning of their ventures.

4.25 FINANCIAL ASSISTANCE FOR INDUSTRIAL ACTIVITIES

Manufacturing Industries Service Sector Information Technology, Nursing Homes etc. Tourism Hotels, Restaurants and Tourist Resorts Commercial Complexes Working Capital Term Loans Activities involving Bio-technology Construction activities

APFSC finances Medium, Small and Tiny Sector.

Financial assistance up to Rs. 500 Lakhs per Project. Project Cost shall not exceed Rs. 12 crores.

Limits of Loan Assistance:

Constitution Maximum Limit

Proprietary& Partnership Concerns and Joint Hindu Family Rs. 800.00 Lakhs Limited Companies and Co-operative Societies Rs. 2000.00 Lakhs

4.26 SCHEMES IN OPERATION FOR FINANCIAL ASSISTANCE

The Corporation is extending financial assistance to various schemes and the main schemes include, General Loan Scheme, Good Entrepreneur Scheme, Modernization and Equipment Refinance Scheme, Scheme for assistance to Tourism related activities, Single Window Scheme, Mahila Udyam Nidhi Scheme, Self - Employment Scheme for Ex-Servicemen, Hospitals and Nursing Home Schemes, Electro medical Equipment Schemes, Working Capital Term Loan Schemes, Super Entrepreneur Scheme, Senior Successful Entrepreneurs Scheme. These schemes aim at suiting to the individual requirements of the entrepreneurs and also to extend financial assistance on liberal terms to entrepreneurs with good track record.

4.27 PROCEDURES
If the line of activity for which an entrepreneur approaches for financial assistance is permissible U/s. 2 of SFCs Act and is listed in the Lending Policy of the Corporation, the credentials of the entrepreneur and viability of the project is examined and loan application form is issued to the entrepreneur at Branch Office of the respective area. Along with the prescribed loan application form, the following details shall be submitted at the concerned branch office. 1. Location, copy of the land sale deed / sale agreement / allotment letter from APIIC. 2. In case the proposed land and building are lease hold, a copy of the registered lease deed fir a period of 10 years shall be submitted. 3. Detailed building plans with site plan incorporated and detailed estimates for all civil works. 4. List of machinery proposed under the scheme with supplier, breakup cost and H. P item wise together with questions from standard suppliers, technical literature along with at least two comparative quotations and comparative statement for Cost of machinery. The list of registered suppliers is available with branch offices. In case of non-registered suppliers who are supplying machinery for the first time to the Corporations clients, their full background and satisfactory performance letters from the other customers to whom similar machinery is supplied. 5. Import license for imported machinery, it may. 6. Item-wise electric power requirement for each machine and arrangements made for obtaining electric power connection. Power feasibility certificates along with estimate from concerned Div. Engineer, A. P. S. E. B for service line charges and deposits. 7. Utilities like water, fuel etc; their requirement and cost. 8. Details of installs capacity of the machinery / plant. 9. Raw materials required, giving details of quantity and availability of each of the materials arrangements made for procurement.

10. Manpower required including technical and non-technical staff, cadre-wise and approximate wage / salary bill. 11. Comparative quotations for the finished products proposed, based on the market value. 12. Detailed economics of working and profitability. 13. Brief details of the process of manufacture. 14. Market/demand analysis and sources of information. 15. Detailed bio-data of the promoters including solvency details of each promoter with their colour photographs (three copies). 16. Details of collateral security wherever necessary. 17. Details of technical knowhow such as source, bio-data of consultant, draft technical know-how / turnkey supply agreement along with letters from the units to whom the consultant has earlier given consultancy for the same line of activity, performances of units working with his consultancy / technology. The know-how agreement shall include performance warranties and guarantees. 18. Permission from Urban Development Authority if the unit is location in non-industrial Zone of concerned HAD. 19. Schedule of implementation of the project. 20. Details of progress made so far in the implementation of the project. 21. Copy of the SSI registration/Industrial License. 22. In respect of all industries classified as polluting industries shall have to obtain consent for establishment from APPCB before establishing the unit. 23. Copies of legal documents for scrutiny at the time filling the application. 24. In case the unit is already in existence, or the promoters are associated with any other unit / firm / company, past 3 years balance sheets and profit and loss accounts of such units. 25. Project report Loan applications shall be submitted at branch offices of the respective service charges shall be remitted along with the loan application at the official. The application form received from the entrepreneur with full particulars and enclosures are put up to the Projects Screening Committee meeting where in it is decided whether to encourage or reject the proposal. If decided to encourage, the same is Sanctioned by the respective Committees as per their sanction limits and then disbursed, monitored and recovered.

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LENDING RATES

SINO. SIZE, TYPE OF LOANS, SCHEME AND LOAN REVISED NET INTEREST AMOUNT. RATE w.e.f 01.06.2009 Term loans to SME and service sector including hotels, 14.00% 1.
hospital loans under TDMF, ISO 9000 series, transport vehicles, bore-well rigs, road laying and heavy earth moving equipments etc., All working capital term loans / working capital loans sanctioned under single window scheme/working capital term loans to civil contractors. Loans for construction of commercial and residential complexes Financial assistance to practicing doctors and existing nursing homes for acquiring fixed asset up to Rs 25 lakhs Assistance for marketing of SSI products

2.

14.5%

3. 4. 5.

15.5% 13.00% 14.5%

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CHAPTER 5 THEORETICAL AND CONCEPTUAL FRAMEWORK

CHAPTER CONTENTS LENDING POLICY A STRATEGIC FRAMEWORK LENDING POLICY SHOULD ADDRESS THE ISSUES SIGNS THAT POLICY NEEDS TO BE TUNED UP CONSEQUENCES POLICY NOT UPDATED CONCEPTUAL FRAMEWORK: STUDY A IF

CASE

58

5.1 LENDING POLICY A STRATEGY FRAME WORK

Lending institution's (Organization such as a bank, credit union, or finance company that makes loans. It may or may not also be a depository institution) statement of its philosophy, standards, and guidelines that its employees must observe in granting or refusing a loan request. These policies determine which sector of the industry or business will be approved loans and which will be avoided, and must be based on the country's relevant laws and regulations. A sound loan policy, established and overseen by the board of directors, reflects favorably on the board and management. When a board sets forth its expectations clearly in writing, management is better positioned to control lending risks, ensure the institution's stability and soundness, and fulfill oversight responsibilities. An effective and up-to-date loan policy increases the likelihood that actual loan documentation and underwriting practices will satisfy the board's expectations. Furthermore, a wellconceived policy clearly and comprehensively describes management's system of controls and helps examiners identify high-risk areas and prioritize and allocate examination time The policy document helps credit dispensing functions to create good loan portfolio. It also provides explicit guidelines to the concerned in the areas of project acceptance, appraisals and loan sanctioning. A brief stock of the economic scenario of the country and the State is taken before going into the Lending Policy of the Corporation applicable for the existing financial year. In nut shell lending policy is a written philosophy, standard, and guideline that is made to address the issues as under in order to meet Board and Management expectation.

5.2 A LENDING POLICY SHOULD ADDRESS CONTENTS OF LENDING POLICY

THE

FOLLOWING ISSUES/

Written loan policies vary considerably in content, length, and specificity, as well as style and quality. No two institutions share the same tolerance for risk, offer the same product mix, and face the same economic conditions. An effective loan policy should reflect the size and complexity of a financial institution and its lending operations and should be tailored to its particular needs and characteristics. Revisions should occur as circumstances change, and the policy should be flexible enough to accommodate a new lending activity without a major overhaul. During risk management examinations, examiners make a determination about the adequacy of an institution's loan policy. Financial institution examiners are guided in their review by regulations, examination guidelines, and common sense: Is the policy up-to-date and are important areas adequately addressed?

59

General fields of lending, Normal trade area, Lending authority of loan officers and committees, Responsibility of the board of directors in approving loans, Guidelines for portfolio mix, risk diversification, appraisals, unsecured loans, and rates of interest, Limitations on loan-to-value, aggregate loans, and overdrafts, Credit and collateral documentation standards, Collection procedures, Guidelines addressing loan review/grading systems and the allowance for loan and lease losses, Safeguards to minimize potential environmental liability.

5.3 SIGNS THAT A LOAN POLICY NEEDS A TUNE-UP

A recent cover date does not provide adequate assurance that a policy is current. Only a careful review of the entire policy will reveal the extent of any shortcomings; however, even a cursory review can provide clues that a policy needs an overhaul. Common red flags include:

The policy has not been revised or reapproved in more than a year. Multiple versions of the policy are in circulation. The table of contents is not accurate. The policy is disorganized or contains addendums from years past that have never been incorporated into the body of the policy. The policy contains misspellings, typos, and grammatical errors. Officers and directors who no longer serve are listed, or new ones are not listed. The designated trade territory includes areas no longer served, or new areas are omitted. Discontinued products are included, or new products are not addressed. New regulations are not addressed.

In addition, a review of lending decisions may identify areas where management is departing from the specifics of the loan policy, such as:

Actual lending practices vary significantly from those outlined in the policy. Numerous exceptions to policy requirements have been approved.

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5.4 POTENTIAL CONSEQUENCES OF AN INADEQUATE LOAN POLICY

Outdated and ineffective loan policies can contribute to a range of problems. Introducing a loan product that is not adequately addressed in the written loan policy can create a variety of challenges for the lending staff and involve risks that management did not anticipate. If lending authorities, loan-to-value limits, and other lending limitations are not revised when circumstances change, a financial institution could be operating within guidelines that are too restrictive, too lenient, or otherwise inappropriate in light of the financial institution's current situation and lending environment. If guidelines do not comply with current laws and regulations, lending decisions may not

Reflect best practices or regulatory requirements. Imprudent lending decisions can have a ripple effect. A loan policy that does not anticipate the risks inherent in an insured institution's lending practices can lead to asset quality problems and poor earnings. In turn, earnings that do not fully support operations increase an institution's vulnerability to adverse movements in interest rates, a downturn in the local economy, or other negative economic events.

5.5 THE LOAN POLICY UPDATING PROCESS

A Financial institution's loan policy is not a static document, but rather should be revised as the institution, business conditions, or regulations change. A comprehensive annual review, in addition to more limited reviews as needed, will help ensure that a loan policy does not become outdated and ineffective. The frequency and depth of the reviews will depend on circumstances specific to each institution, such as growth expectations, competitive factors, economic conditions, staff expertise, and level of capital protection. Planned changes to an institution's lending function or business plan should prompt a modification to the policy. Pertinent criticisms and recommendations made during recent audits and regulatory examinations should be considered during the updating process. In certain situations, a loan policy can be updated effectively through addendums or supplemental memorandums, but if carried too far, such "cobbling together" can result in a cumbersome and disorganized document. It is best to merge supplementary materials periodically into a logical place in the main document. The updating process also includes identifying obsolete or irrelevant sections of the policy. For example, a financial institution might have entered a new field of lending a few years ago and modified its loan policy at that time. However, when it became obvious the financial institution could not compete successfully in this field, management wound down the operations. The loan policy should reflect the decision to exit that lending niche. Compliance testing, conducted as part of the updating and audit processes, will help management determine whether staff is aware of and adhering to the provisions of a loan policy. An institution's board of directors should demonstrate their commitment by emphasizing that noncompliance is unacceptable. Loan staff, executive officers, and directors should be able to demonstrate some level of familiarity with 61

all provisionsmore so with the provisions that affect their daily responsibilities. Awareness and knowledge of the policy's specific provisions can be promoted through periodic training that stresses the need for the policy to keep pace with current lending activities and clarifies any areas of ambiguity or uncertainty. Specific areas that may benefit from review are

ranges for key numerical targets, such as loan-to-value ratios or loan portfolio segment allocations responsibility for monitoring and enforcing loan policy requirements documentation requirements for various classes of loans remedial measures or penalties for loan policy infractions preparation and content of loan officer memorandums individual and committee lending authorities

A current and effective loan policy is a tool to help management ensure that a financial institution's lending function is operating within established risk tolerances. Such a policy is more likely to be consulted and followed by staff and contributes to uniform and consistent board-approved practices. Therefore, insured institution staff, borrowers, and regulators will be well served by the implementation of a process that helps ensure that a financial institution's loan policy remains comprehensive, effective, and up to date.

5.6 PROCEDURES OF REVIEWING LENDING POLICY AT APSFC The corporation organizes Annual officer conference in the beginning of the financial year to review the performance of the corporation and work out future business strategy, where the Managing Director, Head of the Departments, senior officers and all the Branch Managers of the corporation participate. The corporation has an approved lending policy in place. The corporation reviews the policy in the beginning of the financial year and formulates the lending policy based on the experience of the corporation and performance of various sectors in the previous years.

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5.7 QUICK GLANCE AT LAST THREE YEARS

2007-2008

During the year SIDBI circulated policy guidelines on know your customer norms (KYC) and Anti money laundering (AML) standards compiled on the basis of RBI guidelines issued to commercial banks, for compliance by SFCs. The guide lines were issued with the aim to develop and evolve a robust system to prevent abuse of FIs as conduit for money laundering and align SFCs operations with standard and practices being followed by other players in the industry combating financing of terrorism. The corporation took steps for implementation of these guidelines. Developing and maintaining healthy portfolio, measurement, monitoring and management of risk both at portfolio level and at consumer level remains a key focus area during the year, Default review, Asset liability management. During the year performance review in key result areas was reviewed of the previous year at corporate level, Zonal level, and individual branch level held. Discussion like business outlook for FY 2008-09, fixation of industry wise exposure limits, fixation of targets in key result areas for 2008-09, Review of various schemes, strategy to bring down NPAs, improving the business from Non-fund based activities etc. while taking in to consideration the suggestions received from the participants, suitable policy decisions were taken on some of the above issues, also new lines of activities introduced. The corporation reviewed the Lending policy Formulated plan for various sectors based on past experience and fixed the exposure limit sector wise. The corporation had also fixed exposure for individuals and group.

2008-2009

2009-2010

63

The two major inputs is taken while formulating the Lending policy in the corporation, IIP Index of Industrial Production Government of Andhra Pradesh industrial policy, and the other important inputs as past experience, RBI Lending Norms, SIDBI instructions.

AS PER IIP INDEX OF INDUSTRIAL PRODUCTION (2009-2010)

Indian industry began on a strong note in the year 2010, with the expansion of industrial production at a record pace of 17.6% in April, 2010, marking a near 20 years high of 17.7% posted in December, 2009. The growth in the manufacturing output, with 80% weight in index of industrial production, surged to 19.4%, led by a whopping 73% increase in production of capital goods and 37% growth of consumer durables. This double digit pace of growth in industrial output is expected to continue throughout the year. Encouraged by the industrial growth of 17.6% in April, 2010, the Indian economy is well poised to achieve the projected growth rate of 8.5% + in 2010-11.

THE GOVERNMENT OF ANDHRA PRADESH INDUSTRIAL POLICY FOR 2010-2015

The government of Andhra Pradesh unveiled the new industrial policy for 2010-2015, which is aimed to achieve manufacturing growth rate of 12% to 17%, create additional employment to five lakhs persons per year. The policy, inter-alia, envisages special focus on micro small and medium enterprises (MSMEs). The new policy focuses on creation of quality infrastructure in the industrial clusters /industrial estates, promotion of manufacturing investments in region along national highways to capitalize the strengths. In line with the government of India initiatives, the state encourages industrial estates in backward revenue divisions in PPP mode and provides differential rate of incentives to MSMEs in backward revenue divisions to reduce regional imbalances. It also provides sector specific policies/ focus to capitalize the sect oral strengths like textiles, cement, pharma, food processing, steel, granite etc. and encourage anchor industries in thrust sectors to increase the ancillary base and comprehensive policy for growth of MSME sectors. The pace of growth Indian industry, surge in the industrial activity with the massive public and private investments in the various projects in the state and enhanced focus towards MSME sector by the state government in the new industrial policy, promise excellent growth potential for the corporation in the coming financial years. As per the state credit plan for the year 2010-11, projected credit flow to small and medium enterprise is expected to be Rs. 18964 crores. The corporation is fully geared to substantially increase the sanctions for 2010-11, a growth of around 38% over the previous year. While adopting itself to fast changing environment, the corporation will focus on strengthening the customer relationship quick and quality services. The corporation will continue to identify the niche areas of business through a judicious mix of the quality and quantity. During 2009-10, the corporation will strive to further improve its performance, reduce the NPAs to the targeted level and ensure overall improvement in profitability. The corporations special emphasis will be on becoming a significant player in MSME lending in the state of Andhra Pradesh in the years to come.

64

DATA ANALYSIS AND INTERPRETATION

65

AS IT HAS BEEN DICUSSED EARLIER THAT LENDING POLICY SHOULD ADDRESS THE FOLLOWING ISSUES: General fields of lending, Normal trade area, Lending authority of loan officers and committees, Responsibility of the board of directors in approving loans, Guidelines for portfolio mix, risk diversification, appraisals, unsecured loans, and rates of interest, Limitations on loan-to-value, aggregate loans, and overdrafts, Credit and collateral documentation standards, Collection procedures, Guidelines addressing loan review/grading systems and the allowance for loan and lease losses, Safeguards to minimize potential environmental liability. Above mentioned points are analyzed with the help of Case study: In the case study step by step lending procedure is studied.

66

CASE STUDY: STEP BY STEP ANALYSIS OF LENDING PROCEDURE TO UNDERSTAND LENDING POLICY AT APSF C

67

INTRODUCTION M/s XYZ & Exports, a sole proprietary concern promoted by Sri Abs, approached the corporation for sanction of term loan of Rs. 50 Lakhs under general loan scheme to set up SSI unit for manufacture of readymade garments at Survey No. Question & Answer Part, BBC village bearing Plot No. Asx at VVV Park. The party has acquired an industrial plot at xxxxxxxxx and approached for sanction of term loan for construction of building and acquisition of machinery for establishment of the readymade garments manufacturing units. The cost of the proposed project is estimated at Rs. 96.13 Lakhs including working capital margin of Rs. 15.05 Lakhs. NAME AND ADDRESS OF THE UNIT M/s XYZ & Exports Plot No. Asx, VVV, xxxxxxxxxx Phone No. xxxxxxxxxx Amount OF term loan applied Rs. 50.00 Lakhs Classification of borrower General Category of Borrower ROC LENDING POLICY As per lending policy, the line of activity Readymade Garment is placed under Encouraged Category with 50% collateral Security and the minimum loan amount shall be Rs. 50.00 Lakhs. Since the unit is proposed to be located in no collateral is required for the loan on civil works as per the norms of the corporation. Hence, the borrower shall offer 50% collateral security on Plant & Machinery by way of urban immovable property to the satisfaction of the corporation. The proposal was placed before the Operation Zone projects Screening Cum Sanction Committee meeting held on where in, the committee, after detailed deliberations, decided to process the proposal subject to the following: The decision of the committee vis--vis the compliance there of are as below: DECISION As per the norms applicable to the line of activity The party shall offer collateral security at 50% of the term loan excluding loan component on buildings by way of urban immovable properties to the satisfaction of the corporation COMPLIANCE The proposal is appraised as per the norms applicable under General loan scheme The party shall offer collateral security worth Rs. 15.93 lakhs at 50% of the term loan excluding the loan component on buildings by way of urban immovable properties as per the norms The promoter is offering units land as collateral security. A suitable condition is stipulated in terms of sanction. The rate of interest is stipulated at 14% p.a. (Net) in the terms and conditions.

The rate of interest shall be at 14% p.a.(net)

68

CONSTITUTION This is a sole proprietary concern of which xxxxxxxxxxxxxxx is the sole proprietor.

BACKGROUND OF THE PROMOTER: Sri xxxxxxxxxx is the proprietor of the unit, qualification Bachelor of Engineering and has work experience as: Worked as Sr. Planner in BHPV from 1972 to 1978 Worked as Sr. Manager (Works) in Heavy Engg., from 1978-1996 Worked as G.M (Works) from 1998-2000 He is not an income tax Assesses He has got IT PAN Card.

SOLVENCY OF THE PROMOTER: Details of the Property Immovable: Industrial Plot Bearing xxxxxxxxxxxxxxxxxxx Wet Land admeasuring Ac. 2.25 at xxxxxxxxx Movable: Jewellery Movable: Cash-on-hand Total 70.00 11.25 1.00 0.25 82.50 Amount (Rs. in Lakhs)

PERFORMANCE OF THE ASSOCIATED UNITS:

There are no associated units. Units financed by the corporation Units not financed by the corporation MANAGEMENT: The promoter is an engineering graduate and has got job experience of 28 years in different organizations from 1972 to 2000. He is not having direct experience in the field. However, with his earlier job experience, he can run the unit with the help of the skilled and un-skilled workers in addition to other administrative staff. : : Nil Nil

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SCHEDULE OF IMPLEMENTATION: DETAILS LAND BUILDINGS PLANT & MACHINERY POWER CONNECTION ERECTION/INSTALLATION TRIAL RUNS COMMERCIAL OPERATIONS FINISH ALREADY ACQUIRED SEPTEMBER 20XX DECEMBER 20XX JANUARY 20XX FEBRUARY 20XX FEBRUARY 20XX MARCH 20XX APRIL 20XX MARCH 20XX START

The firm was sanctioned a Term Loan of Rs. 50 Lakhs to xxxxxxxxxxxxxxx to set up a SSI for the manufacture of ready-made garments subject to special term and conditions( mentioned in Annexure to the memorandum in addition to other general terms and conditions as applicable to the sole proprietary concerns)

70

THE PROJECT

Sri Xxxxxxxxxx proprietor of the firm is having 24 years of experience. The firm proposes to produce readymade garments.

MANUFACTURING PROCESS: The production of garments is done in parallel batch process. The process of manufacturing of the readymade garments consists of the following operations: Raw material checking Laying of fabric Designing as per cutting pattern Marking up on the fabric Cutting as per the design Collectively select the trims Stitching of the individual pieces such as sleeves, collars etc. Attaching all the pieces to form the garments including buttons, button holes, bar tacking, label attachment Ironing and inspection Packing Dispatch

71

TECHNICAL APPRAISAL SCOPE OF THE PROJECT: The proposal envisages setting up a SSI unit for manufacture of readymade garments in xxxxxxxxxxxxx. The installed capacity is based on number of single needle lockstitch sewing machines (basic and special). Each sewing machine can produce 15 shirts / trousers on an average per day. The capacity is assumed at 15 pieces /day /machine. No. of machines proposed are 70. Hence installed capacity of the unit is estimated on an average at 15*70*300 days = 315000 garments per annum on single shift basis. The product mix proposed is as under: Type Shirts Trousers Total % 30 70 100
st

Pieces 94500 220500 315000

nd rd th

The operating capacity of the unit is assumed at 50%, 60%, 70% and 80% during 1 , 2 , 3 and 4 year and onwards, respectively. Product Mix at 50% operating capacity during 1 year: Own production Job works 25% 75% 39375 118125
st

The cost of proposed project is estimated at Rs.96.13 Lakhs including working capital margin of Rs. 15.05 Lakhs. LOCATIONS: The unit is proposed to be located in xxxxxxxxxxx, which is within GVMC Limits.

72

PLANT AND MACHINERY SI.NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. DESCRIPTION Brother SL-1110-3 Single Needle straight lock stitch machine for medium duty Brother SL-777b-31-64 Single Needle straight lock stitching machine with wide cutter Brother S-62000A-403 Single Needle integrated direct drive straight lock stitching machine Brother T-8420C-003-N64D Twin Needle fixed bar Lock stitcher Brother T-8450-003-N64D-Twin Needle split bar lock stitching machine Pegasus M732-38-3*4 Basic 2 Needle thread over lock machine Brother HE-800A-2 Electronic lock stitching Button Hole Machine Brother BE-438F-03-S Electronic direct drive lock stitch Brother KE-430F-03-S Electronic direct drive lock stitch bartacker machine Brother DA -9270-3-264L/PF two needle feed off the arm double chain stitcher Kansai DFB-1404 PSF -1 4 needle high speed chain stitcher Kansai KS-AU-V-8 straight knife cloth cutting machine KC2 and cutter machine Hashima HP-600LFS Fusing machine Powerica 62.5 KVA DG. set with all standard accessories Steam generator unit Electrification and power supply to individual work bench Cutting tables, chairs, other tools like scissors, etc. QUANTITY 40 3 20 1 2 4 2 2 2 2 1 1 1 1 1 1 LS LS

RAW MATERIALS: The unit proposes to procure the fabric, stitching accessories, buttons, zippers, support liners, threads etc., for undertaking own production from the reputed indigenous suppliers. The packing materials required are carry-bags, cartons etc. The total cost of raw-material is estimated at Rs. 84.30 Lakhs at 50% operating capacity. The fabric and other accessories required for the job works will be supplied by the customers/ clients.

73

UTILITIES: ITEMS Power Fuel Water Effluents Man Power REQUIREMENTS The unit requires 25 KW, which falls under LT category. The party has paid line development charges to APEPDCL and obtained power feasibility. Diesel is required for DG set. Water is required for domestic purpose and can be met from the bore-well provided in the scheme. No effluents are generated in the process. The unit requires 100 skilled & unskilled workers apart from 26 supervisory/ administrative staff. The required manpower can be recruited locally.

PRESENT STAGE The party has completed the construction of main factory building and compound wall. The auxiliary works such as, electrification, sanitation and water-supply, watchman quarters etc. are under process. MARKET APPRAISAL PERFORMANCE OF SIMILAR UNITS: So far the branch has sanctioned term loans to 4 units in the line of which 1 unit xxxxxxxxxx is working well and 2 units i.e., yyyyyyyy and zzzzzzzzz are under implementation. One cccccccccc is not working and is in DBT-2 category. MARKET AND SELLING ARRANGEMENTS Apparel industry is the largest source of foreign exchange earnings to the country with the garments export accounting for almost 16% of the total exports of the country. The industry is the very vast with over 60300 readymade garments manufacturing units and employs nearly 7 million people. The party has initially proposed to utilize 75% of its operating capacity for job works and the rest of 25% for own production. It is contemplated that the unit will slowly graduate to 100% EOU. FINANCIAL APPRAISAL

COST OF THE SCHEME PARTICULARS Land Building Plant and machinery Deposits Preliminary and Pre-operative Expense Working Capital Margin Total AMOUNT 8.00 24.30 42.68 0.50 5.60 15.05 96.13

74

MEANS OF FINANCE PARTICULARS PROMOTERS CAPITAL APSFC-TERM LOAN TOTAL AMOUNT 46.13 50.00 96.13

FINANCIAL ASSUMPTION MADE IN COST OF PRODUCTION, PROFITABILITY & CASH FLOW STATEMENTS: The installed capacity is 1570300days = 315000 garments per annum on single shift basis for 300 working days per annum. Product mix Own Production 39375 Nos. 25% Job Works 118125 Nos. 75% The operating capacity of the unit is assumed at 50%, 60%, 70%, and 80% during st nd rd th 1 , 2 , 3 and 4 year and onwards respectively. The working capital has been estimated as 36.10 Lakhs The cost of utilities (Power & Fuel) at 50% operating capacities is Rs. 6.30 Lakhs.
DESCRIPTION RAW MATERIALS &PACKING MATERIALS WAGES & OTHER EXPENSES WIP & FINISHED GOODS SUNDRY DENTORS TOTAL LESS: BANK BORROWINGS WORKING CAPITAL MARGIN PERIODS(DAYS) 15 28 8 30 PER ANNUM 84.30 85.40 169.70 193.80 QUANTUM OF WORKING CAPITAL 4.20 8.00 4.50 19.40 36.10 21.05 15.05 BANK BORROWINGS @75% 3.15 0 3.35 14.55 21.05

The wages and salary are based on actual man power requirements with annual increments Repairs and maintenance has been provided at Rs. 3.00 Lakhs in the first year and the provision is progressively increased by 10% every year. Interest on Term Loan per Annum is reckoned as follows:

75

On Term Loan form APSFC On Bank Borrowings for Working Capital

14% p.a.(net) 13% p.a.

Depreciation has been calculated on W.D.V method on the following basis: NATURE OF ASSETS BUILDINGS PLANT & MACHINERY DEPRECIATIONS RATE 10% 15%

Income tax provision has been made as per the rules in force after availing the benefits/ incentives under the Income-Tax Act. The Term Loan of the corporation is assumed to be repaid over a period of 8 years with a moratorium period of 2 years. The increase in working requirements is assumed to be met by way of additional bank borrowings and/ or out of internal accruals. FINANCIAL INDICATORS INDICATORS LOAN ELIGIBILITY DEBT-EQUITY RATIO PROMOTERS CONTRIBUTION AVERAGE DEBT SERVICE COVERAGE RATIO FOR 8 YEARS BREAK EVEN POINT INTERNAL RATE OF RETURN(IRR) LOAN REPAYMENT PERIOD INCLUDING MORATORIUM MORATORIUM PERIOD CREDIT RATING As per the Credit rating model of the corporations, the rating of the unit is CR-4 which means ordinary safety. The credit rating awarded is above investible grade for the corporation. VALUE 74.65% 1.08:1 47.99% 1.75 TIMES 51.74% 19.46% 8 YEARS 2 YEARS

76

METHODS OF REPAYMENTS The term loan shall be repaid in 73 monthly installments as: First monthly installments @ Rs. 68000/- and the subsequent 72 installments @ Rs. 68500/- Each. Repayment shall commence after 2 years from the date of disbursements of any part of the term loan. COMMENTS ON FINANCIAL ANALYSIS The promoters contribution of Rs. 46.13 Lakhs in the proposed project cost of Rs. 96.13 Lakhs works out to 47.99% and the same is satisfactory. The Average debt service coverage ratio of 8 years is 1.75 is satisfactory. The loan period is fixed at 8 years with moratorium of 1 years. The party submitted financial projections and, on analyzing the same, it is felt that the project is viable proposition. SECURITY PRIMARY SECURITY: The corporations term loan of Rs. 50.00 Lakhs shall be secured by equitable mortgage of units land admeasuring 3650 sq.mts. Covered by Plot No. xxxxxxxxxxxxx together with building constructed/ to be constructed there on and hypothecation of plant and machinery as proposed in the scheme and all future acquisitions of fixed assets in nature. COLLATERAL SECURITY As per norms, the party shall offer collateral security at 50% of the term loan excluding loan components on building, which works-out to Rs. 15.93 Lakhs by way of urban immovable properties including the value of units land as collateral security to the proposed term loan. RISK-RATING As per credit rating model of the corporation, the rating awarded to the project is CR-4, ordinary safety which indicates that the proposal is above investible grade.

77

RISK-RATING PARAMETERS AND SCORING SINO 1. A. B. C. D. E. 2. A. B. C. D. E. F. 3. A. B. C. 4. A. B. C. D. E. PARTICULARS FINANCIAL RISK PARAMETER PROJECTED DER IRR GROSS AVERAGE DSCR TERMS OF REPAYMENT STRESS TESTED DSCR AGGREGATE FINANCIAL RISK SCORE BUISNESS RISK PARAMETER TECHNOLOGY CAPACITY UTILIZATION V/S BEP COMPLIANCE OF ENVIRONMENT REGULATIONS CHARACTERISTICS OF PRODUCT OF THE UNIT MARKETING NET-WORK LOCATION OF THE UNIT INDUSTRY RISK PARAMETER COMPETETITION INDUSTRY OUTLOOK REGULATORY RISK AGGREGATE INDUSTRY RISK SCORE MANAGEMENT RISK PARAMETERS INTEGRITY OF PROMOTERS/MANAGEMENT COMPOSITION OF MANAGEMENT EXPERIENCE IN THE INDUSTRY PAYMENT RECORD (BANKERS & OTHER LENDERS) LENGTH OF RELATIONSHIP WITH CORPORATION AGGREGATE MANAGEMENT RISK SCORE RISK MITIGATION PARAMETER PROMOTERS CONTRIBUTION MARGIN VALUE OF COLLATERAL SECURITY NATURE OF COLLATERAL SECURITY SOLVENCY OF THE PROMOTER DEFAULT RATION IN THE INDUSTRY AGGREGATE RISK MITIGATION SCORE MAXIMUM MARKS 5 2 5 5 3 20 4 2 2 3 5 4 4 4 2 10 5 5 5 10 5 20/(30) 3 5 4 4 4 20 UNITS SCORE 5 2 3 1 0 11 2 0 2 1.5 3 3 2 3 2 7 5 5 2 NA 0 12 3 5 3 4 3 18

5. A. B. C. D. E.

78

SECTORAL EXPOSURE AT APSFC OVER LAST THREE YEARS 2007-10

79

TREND: INDUSTRYWISE LOANS SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY 2007 TO FY 2010

600 500 400

BEVERAGES AND TOBACCO PRODUCTS

485 348

311.5 300 200 100 0 FY 2007-08

FY 2008-09

FY 2009-10

BEVERAGES AND TOBACCO PRODUCTS Poly. (BEVERAGES AND TOBACCO PRODUCTS) 2 per. Mov. Avg. (BEVERAGES AND TOBACCO PRODUCTS) Poly. (BEVERAGES AND TOBACCO PRODUCTS)

10000 9000

CHEMICAL PRODUCTS
8166 8424

8000

7000 6000 5000 4000 3000 2000 1000 0 FY 2007-08 FY 2008-09 FY 2009-10 CHEMICAL PRODUCTS Poly. (CHEMICAL PRODUCTS) 2 per. Mov. Avg. (CHEMICAL PRODUCTS) Poly. (CHEMICAL PRODUCTS) 4983.48

80

TREND: INDUSTRYWISE LOANS SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY 2007 TO FY 2010

6000

FOOD PRODUCTS

5537

5000 3856

4000

3000

2811.84

2000

1000

0 FY 2007-08 FOOD PRODUCTS 2 per. Mov. Avg. (FOOD PRODUCTS) FY 2008-09 FY 2009-10 Poly. (FOOD PRODUCTS) Poly. (FOOD PRODUCTS)

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

MACHINERY EXCEPT ELECTRICAL MACHINERY

4013

4471

649.96

FY 2007-08 FY 2009-10

FY 2008-09

MACHINERY EXCEPT ELECTRICAL MACHINERY Poly. (MACHINERY EXCEPT ELECTRICAL MACHINERY) 2 per. Mov. Avg. (MACHINERY EXCEPT ELECTRICAL MACHINERY) Poly. (MACHINERY EXCEPT ELECTRICAL MACHINERY)

81

TREND: INDUSTRYWISE LOANS SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY 2007 TO FY 2010

3000 2500

2546.41

PAPER AND PAPER PRODUCTS

2332

2000 1500 1000 1037

500 0 FY 2007-08 FY 2008-09 PAPER AND PAPER PRODUCTS Poly. (PAPER AND PAPER PRODUCTS) 2 per. Mov. Avg. (PAPER AND PAPER PRODUCTS) Poly. (PAPER AND PAPER PRODUCTS) FY 2009-10

9000 8000

SERVICES

8103

7000

6920

6000

5735.96

5000 4000 3000 2000 1000 0 FY 2007-08 FY 2008-09 FY 2009-10

SERVICES

Poly. (SERVICES)

2 per. Mov. Avg. (SERVICES)

Poly. (SERVICES)

82

TREND: INDUSTRYWISE LOANS SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY 2007 TO FY 2010

3500

TEXTILES
2887

3000

2500 2000 1731.87

1864

1500 1000 500 0 FY 2007-08 TEXTILES 2 per. Mov. Avg. (TEXTILES) FY 2008-09 Poly. (TEXTILES) Poly. (TEXTILES) FY 2009-10

1000 800

935 TRANSPORT VEHICLES, EQUIPMENTS AND SPARE PARTS

600

507.5

400 200

137

0 2007-08 -200 TRANSPORT VEHICLES, EQUIPMENTS AND SPARE PARTS Expon. (TRANSPORT VEHICLES, EQUIPMENTS AND SPARE PARTS ) Linear (TRANSPORT VEHICLES, 2008-09 2009-10

EQUIPMENTS AND SPARE PARTS )

83

TREND: CONSTITUTION-WISE LOANS SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY 2007 TO FY 2010

700000 600000 500000

CONSTITUTIONWISE AMOUNT DISBURSED SSI, OTHERS AND IN TOTAL (IN LAKHS)

597245

400000

361377

300000 235870 200000 100000 28416.5 0 2007-08 SSI OTHERS Expon. (TOTAL) TOTAL 221392 2008-09 Expon. (SSI) 2009-10 Expon. (OTHERS ) 66269.91 37853.41 33029 37770 70799

250000

200000

CONSTITUIONWISE INCLUDES SSIs AND OTHERS

136258

150000

167287

68380

9552

120

1542

15498

5711.54

10137.58

188.49

15570.4

50000

0 2007-08 PUBLIC LTD. COMPANIES OPERATIVES PARTENERSHIP CONCERNS PROPRIETARY CONCERNS 2008-09 PVT LTD. COMPANIES JOINT HINDU FAMILY CONCERNS 2009-10 COSOLE-

2044

19248

100000

24941

84
6013.2

TREND: SECTOR-WISE LOANS SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY 2007 TO FY 2010

SECORWISE LOAN DISBURSED OVER THE PERIOD OF THREE YEARS FROM FY 2007-08 TO FY 2009-10
300000

250000

200000

150000

100000

37862

329232

350000

142.94

3783.41

260

30248

50000

28273.56

0 2007-08 TRANSPORT SSI 2008-09 OTHERS 2009-10 Expon. (SSI)

85

97

37770

120000 100000 80000 60000 40000 20000 0

88566.88

105238.25

100665.8

68569.62

70798.77

66269.91

GROSS SANCTION

DISBURSEM ENT 2007-08 2008-09 2009-10

62193.76

RECOVERIES

DISTRICT WISE DISBURSED AMOUNT IN LAKHS

1834.29 4002.23 1575.09 8368.62 3071.01 4123.96

1359.08

4214.51

2274.31

65808.23

78512.03 5093.66

2216.46

1676.66 987.41

2060.44

HYDERAB AD ADILABAD R.C. PURAM (MEDAK DISTT.) SANGAREDDY (MEDAK DISTT.) TIRUPATHI (CHITTOR DISTT.)

2017.49

NALGONDA WARRANGAL KARIMNAGAR NIZAMABAD RANGAREDDY EAST RANGAREDDY WEST MAHABOOBNAGAR

2857.5

6221.47

TREND: TOTAL DISTRICTWISE OPERATIONWISE SANCTIONED AND DISBURSED OVER LAST THREE YEARS FROM FY
86
ANANTPU R NELLORE 2418.03 KADAPA GUNTUR 2025.11 KURNOOL KHAMMAM 1764.95

843.54 420.26 1024.23 3031.29 788.31

DATA INTERPRETATION AND SUMMARY

87

For analyzing the above stated parameters of Lending Policy the excerpts are taken from corporation in addition to this a thorough analysis of project appraisal methods have been done using a case study which was financed by corporation for which the tools used and interpretation have been given as follows:

The corporation reviews its Lending policy every year based on its past experience and governmental norms. It classifies its General Fields of Lending as Lines of activities in to two categories under ENCOURAGED and NOT TO BE ENCOURAGED. Excerpts from Policy brochure:

FY 2007-08
FOOD PROCESSING AND AGRO BASED INDUSTRIES, STEEL AND ENGINEERING INDUSTRIES, DRUGS, PHARMACEUTICALS AND BIOTECHNOLOGY, MINERAL BASED INDUSTRIES, APPARELS / TEXTILES INDUSTRIES, INFRASTRUCTURE DEVELOPMENT PROJECTS, EXPORT ORIENTED INDUSTRIES, HOSPITALITY INDUSTRY, INFORMATION TECHNOLOGY / IT RELATED ACTIVITIES / SERVICES.

FY 2008-09
FOOD AND AGRO BASED INDUSTRIES CERAMIC, REFRACTORIES AND MINERAL BASED INDUSTRIES CHEMICAL AND ALLIED INDUSTRIES CONSTRUCTION ACTIVITY DRUGS AND PHARMACEUTICAL S ELECTRICALS AND ELECTRONIC INDUSTRIES ENGINEERING, MECHANICAL & ALLIED PRODUCTS JUTE & TEXTILES PAPER & PAPER PRODUCTS PLASTIC INDUSTRIES PRINTING INDUSTRIES RUBBER & LEATHER BASED INDUSTRIES TRANSPORT VEHICLES WOOD BASED

FY 2009-10
AGRO AND FOOD BASED INDUSTRIES CERAMIC REFRACTORIES AND MINERAL BASED INDUSTRIES CHEMICAL AND ALLIED INDUSTRIES CONSTRUCTION ACTIVITY DRUGS AND PHARMACEUTICAL ELECTRICALS AND E;ECTRONIC INDUSTRIES ENGINEERING, MECHANICAL & ALLIED PRODUCTS JUTE & TEXTILES PAPER AND PAPER PRODUCTS PLASTIC INDUSTRIES PRINTING INDUSTRY RUBBER & LEATHER BASED INDUSTRIES TRANSPORT VEHICLES WOOD BASED

NAME OF THE SECTORS

88

The corporation declares Normal Trade Areas in its Lending Policy as Thrust Areas every year. The corporation has different Departments like Human resource and developments, project finance, finance and accounts, monitoring and recovery, computers and IT etc which is responsible and accountable for their job. It has experienced and well qualified officers as Lending Authority. Based on its performance and experiences the corporation decides its portfolio mix. It has well placed and conceived method of project appraisal. As per the Lending policy the project is evaluated on five broader parameters as follows: 1. Business appraisal 2. Management appraisal 3. Technical appraisal 4. Market Appraisal 5. Financial appraisal. Under Business Appraisal: 1. Background of Promoter 2. Performances of the Associated units 3. Solvency of the Promoter Under Management Appraisal 1. Experience of the Promoter or management 2. Schedule of implementation Under Technical Appraisal 1. Manufacturing process 2. Scope of the project 3. Location 4. Plant and Machinery 5. Raw Material 6. Utilities 7. Present stage (status of the project completed) Under Market Appraisal 1. Performance of similar units 2. Market and selling arrangements

89

Under Financial Appraisal 1. Cost of scheme 2. Means of finance (promoters margin etc.) 3. Preparation Cash flow statement and assumption made 4. Financial indicators like a) Loan Eligibility b) Debt-Equity Ratio c) Promoters contribution d) Average DSCR for 8 years e) Break Even point f) IRR g) Loan repayment period including moratorium period h) Moratorium period Methods of repayment: The Corporation envisages method of repayment like EMI, Tenure etc. Documentation: For any proposal the Corporation has detailed documentation about each above stated points in Lending procedure in its policy few examples of such documents are: 1. Detail project report 2. Documentation regarding primary security 3. Collateral security etc. The corporation has Monitoring and recovery department to assess the performance of its financed projects and, in case of any irregularity it has procedures for recovery as per norms. Over a period of three years (2007-08, 09, 10) there is no significant change in inclusion and exclusion of the sectors except few in Lending Policy categories like Encouraged and Not to be Encouraged. For analyzing sect oral exposure five parameters have been taken industry wise, sector wise, constitution wise, amount wise disbursed, district wise credit disbursed. As per Index of Industrial Production report: During 2008-09 it is observed that among all groups under manufacturing sector, 7 groups have shown positive trend, the highest growth is noticed under Wood and Wood Products at 59.8 percent followed by Paper and Paper Products at 12.2 percent and Basic Chemicals and Chemical Products at 10.8 percent. Transport Equipment and Parts a negative growth (-) 19.5 percent followed by Other Manufacturing Industries at (-) 17.9 percent. At all India level where 9 groups out of 17 have shown positive growth, the highest increase being noticed in Beverages, Tobacco and related Products at 16.2 percent. As we can see the table above that in 2008-09 the corporation included the sectors like Paper and paper based industries, wood and wood products, Chemical and chemical product sectors in the ENCOURAGED category and IIP report says these industries grown (as stated above). Therefore it can be said as corporations Lending policy is in tune with the prevailing Economic scenario. As per IIP Report 2008-09 Food Products group consisting of 14 items has shown a growth of 8.7 percent during the year 2008-09 over the previous year. As from the annual report the CAGR for corporation Lending towards Food and Agro Based industries have grown 25.31% in 3 years and 17.10% in 2008-09 from 2007-08. As standard Lending policy says that credit union should have a proper written credit scoring system in its Lending policy. Excerpts from case study regarding credit scoring at APSFC is as follows: 90

RISK-RATING PARAMETERS AND SCORING SINO 1. A. B. C. D. E. 2. A. B. C. D. E. F. 3. A. B. C. 4. A. B. C. D. E. PARTICULARS FINANCIAL RISK PARAMETER PROJECTED DER IRR GROSS AVERAGE DSCR TERMS OF REPAYMENT STRESS TESTED DSCR AGGREGATE FINANCIAL RISK SCORE BUISNESS RISK PARAMETER TECHNOLOGY CAPACITY UTILIZATION V/S BEP COMPLIANCE OF ENVIRONMENT REGULATIONS CHARACTERISTICS OF PRODUCT OF THE UNIT MARKETING NET-WORK LOCATION OF THE UNIT INDUSTRY RISK PARAMETER COMPETETITION INDUSTRY OUTLOOK REGULATORY RISK AGGREGATE INDUSTRY RISK SCORE MANAGEMENT RISK PARAMETERS INTEGRITY OF PROMOTERS/MANAGEMENT COMPOSITION OF MANAGEMENT EXPERIENCE IN THE INDUSTRY PAYMENT RECORD (BANKERS & OTHER LENDERS) LENGTH OF RELATIONSHIP WITH CORPORATION AGGREGATE MANAGEMENT RISK SCORE RISK MITIGATION PARAMETER PROMOTERS CONTRIBUTION MARGIN VALUE OF COLLATERAL SECURITY NATURE OF COLLATERAL SECURITY SOLVENCY OF THE PROMOTER DEFAULT RATION IN THE INDUSTRY AGGREGATE RISK MITIGATION SCORE MAXIMUM MARKS 5 2 5 5 3 20 4 2 2 3 5 4 4 4 2 10 5 5 5 10 5 20/(30) 3 5 4 4 4 20 UNITS SCORE 5 2 3 1 0 11 2 0 2 1.5 3 3 2 3 2 7 5 5 2 NA 0 12 3 5 3 4 3 18

5. A. B. C. D. E.

9 19

ANALYSIS AND INTERPRETATION FOR CORPORATION SECTORAL EXPOSURE AND COMPARING WITH PREVAILING ECONOMIC SCENARIO USING IIP REPORT SECTORS CAGR FOR CAGR FOR CAGR SECTORS SECTORS CORPORATION CORPORATI FOR INDEX OF INDEX OF ON CORPOR GROWTH GROWTH LENDING OVER LENDING ATION 2007-08 TO 2008AS PER AS PER OVER 2008LENDIN IIP DATA IIP DATA 09 09 TO 2009-10 G OVER IN 2008-09 FOR IN 2007-08 2008-09 TO 200910 FOOD PRODUCTS 223.6 NOT AGAINST 17.10% 19.83% 25.05% AVAILAB 178.9 IN LE 2007-08 569.7 BEVERAGES AND AGAINST TOBACCO 5.69% 18.05% 15.73% -DOPRODUCTS 578.5 IN 2007-08 TEXTILE 327.1 AGAINST 3.75% 24.45% 18.36% -DO312.5 IN 2007-08 PAPER AND 253.1 PAPER AGAINST PRODUCTS -36.18% 49.95% -2.86% -DO260.0 IN 2007-08 CHEMICAL PRODUCTS MACHINERY EXCEPT ELECTRICAL MACHINERY 28% 1.56% 18.91% 338.7 AGAINST 326.3 IN 2007-08 478.3 AGAINST 303.2 IN 2007-08 -DO-

148.47%

5.55%

88.96%

-DO-

As it can be compared from above table that corporations lending towards the sectors is reflected by sectors growth indices of IIP report. Some excerpts (to interpret the inclusion of sectors in APSFC Lending Policys Encouraged category and government policy for industrial promotion) from A.P Government Industrial Investment Promotion Policy are as follows:

9 29

Textile Sector: Government felt that there is a need for promotion of Textile industry in sustainable manner and also for value addition within the State for optimum utilization of the cotton available in the State. a. The eligibility period for Spinning/Weaving/Garmenting units commissioned during IIPP 2005-10 period is extended by another 3 years, making total eligibility period as 8 years (2005-13). b. To continue the benefits of existing incentives under Textile and Apparel Policy 2005-10 [G.O.Ms.No.300 Industries & Commerce (Tex) Department, dated.08.11.2005] by another 5 years. The State stands at the apex in the country in paper production, with an existing capacity of 5.50 lakh TPA. Another 5.0 lakh tons are going to be added in the next 3 years.

9 39

CHAPTER 7: FINDINGS AND SUGGESTION, BIBLIOGRAPHY

94

FINDINGS AND SUGGESTION The corporation reviews its Lending process every year based on its experience, industry performance, and governments norms. Lending Policy brochures contains all requisite information as standard stipulated generally. There is direct relation between its Lending policy and exposure to different exposure. There is impact of its lending policy, lending, exposure and industrial growth which can be deduced from APDES IIP report and Annual report of APSFC over a period of three years 200708, 09, 10.

BIBLIOGRAPHY
1. Annual reports 2007-2008, 2008-2009 and 2009-2010 2. BOOKS a. A Report of STATE FINANCIAL CORPORATION ACT, 1951 b. 50th Golden Jubilee of APSFC c. Industrial Finance by R Vishwanathan (Macmillan publication, Reprinted Edition 2005-10). 3. BOOKLET Broacher of Schemes for Financial assistance. 4 .WEBSITES

www.apsfc.com

5. INTERNET SEARCH ENGINE www.google.com

95