1. 1
Executive Summary
Economic Survey India: 2008-09
The Economic survey predicts GDP growth to reach a level of 7.75 per cent if the global
economy takes a turn up by autumn and a reasonable 6.25 per cent if the global
recession drags on. Exuding confidence on the external front, the survey predicts a
current account surplus of up to 2.8 percent of GDP and estimates that FDI inflow to
India in 2008 was $ 4.6 billion.
Economic survey claims that high savings and investment rates, rural prosperity and
resilient services exports have kept the economy going despite horrendous global
conditions. It focuses less on need for fresh economic stimuli than post recession
strategy to reverse fiscal and monetary easing and stresses the need to return to Fiscal
Responsibility & Budget Management (FRBM) targets possibly by 2010-11. It further
argues that the worst may be over and the monetary and fiscal measures taken by
government could facilitate a quick “U Shaped Recovery”, subject to some factors such
as policy reforms, a normal monsoon and US economy getting back on track by
September 2009. It pegs the GDP growth in 2009-10 at 7.0 +/- 0.75 per cent. In the
event of prolonged global slump, the survey warns that recovery could be delayed to
early 2010.
Industry
Industrial growth in 2008-09 stood at 2.4 per cent. Manufacturing growth was at 2.3 per
cent., for the same period. High commodity prices, rise in input costs initially, a sharp
drop in export demand and shortage of credit accentuated the slowdown.
Economic survey blames the global downturn for the sharp deceleration in Industrial
growth. It sees risks of increased dumping in current environment and argues for
balanced approach to tackle it. In the long run it urges the industry to build and maintain
cost advantage. It sees large domestic market to provide an insurance against global
shocks and wants industry to reach to the bottom of the pyramid to build on that
strength. On the external front while the economic survey acknowledges the poor global
trade outlook, it argues for measures such as reduction in excise and custom duties to
make Indian goods more competitive in global markets.

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An indication was given in the economic survey that government may ease curbs on
Foreign Direct Investment (FDI) and introduces an array of reforms to help reverse a
decline in Industrial growth, which has been observed from the past two fiscal years. The
reforms could include allowing FDI in multi format retail, starting with food retail, raising
FDI limits in defense industries
Relaxation in the external commercial borrowing norms and the foreign direct investment
has to some extent aided industrial growth. The over $ 45 billion FDI in 2008 shows that
India remains an attractive destination for FDI even when global economy struggles with
worst ever crisis.
The flow of credit continued to be a concerned area, as highlighted by industry. There is
little likelihood of the RBI continuing with an expansionary monetary policy for now, but
there may be measures to ensure faster transmission of steps taken earlier.
Industries managed to obtain credit in a year when the bank credit growth fell to 17.3 per
cent in 2008-09. The demand for bank credit grew sharply during April-October 2008 as
companies found that external sources of credit were drying up in wake of global
financial crisis.
Financial flows-domestic & foreign sources
Instrument 2008-09 Change % 2008-09
Domestic Sources ( Rs Crores)
Pvt. Placement-Pvt sector NFI’s 20422 -32.4
Pvt Placement-Public sector NFI’s 30832 73.3
Total Pvt placement NFI’s 51254 8.1
Public & rights issues 14720 -83.1
Industrial Credit 213621 25.8
External Sources ($ Mn)
FDI 33613 -2.2
ADRs / GDRs 1162 -86.7
ECB (gross) 17549 -42.2
Source: SEBI for public rights issues & rest from RBI

3. 3
The fall in credit off take growth was highest in sectors already reeling under weak
overseas demand like textiles, leather products and gems and jewelry. Among the fifteen
major sub sectors in Indian economy, only five which include petroleum, coal & nuclear
fuels, chemical & chemical products have seen higher growth in bank credit in fiscal year
2009 in comparison to year before.
Cheaper and continuous flow of credit remains high on the government agenda. The
government could offer enhanced interest subvention to few selected sectors of
economy to allow them access to cheaper credit.
Banking & Financial Markets
Banking Industry registered a 17 per cent YoY growth in bank credit as on March 27,
2009 led by public sector banks. The industrial credit grew by 22 per cent while priority
sector lending is up at 22.5 per cent. Debt market saw an inflow of Rs. 11.8 Billion.
Economic Survey India 2008-09 states that the credit market is working normally and
there is no dearth of liquidity and inflation is no longer a concern. It has however pointed
out that the credit market suffers from structural rigidities, which have made monetary
transmission sluggish in the credit market. Indeed this has implications for real economy.
It has argued that high interest rate on small savings schemes, which are sticky when
general interest rates are declining, have come in the way of cutting lending rates. The
survey has stated the need for creating a corporate bond market to supplement the
banking system.
The Economy Survey has recommended a slew of measures for bringing transparency
to and deepening the Indian stock markets. For integrated development of financial
markets, it said all regulations should be brought under the Securities and Exchange
Board of India (SEBI). To improve transparency, it said overseas high net worth
individuals should be allowed to register and invest directly through Indian
intermediaries. This would help ban indirect ways of investment, like participatory notes.
The survey reported that despite a sharp correction in stock market indices, the year-end
(December 2008) valuation of stocks, in terms of price/earning ratio of the BSE Sensex
and NSE Nifty were 12.4 and 12.9 – the highest among select emerging market
economies like South Korea, Malaysia, Thailand and Taiwan.

4. 4
The Sensex also gave the best five-year return, of 65.2 per cent, among major Asian
indices like Hang Seng, Nikkei, Kospi and SSE Composite Index by December 2008.
Following the global financial crisis, returns from the capital markets dipped over 50 per
cent. There were only 37 initial public offerings (IPOs) in 2008, compared to 100 in 2007.
The total amount raised through IPOs was only Rs 18,393 crore, down 45.8 per cent
from the previous year. However, the average IPO size increased from Rs 339 crore to
Rs 497 crore.
The private sector mutual funds witnessed heavy redemption pressure and witnessed a
net outflow of Rs 12,506 crore. The Unit Trust of India also recorded a net redemption of
Rs 2,704 crore. Investors’ risk preference was also changed during the year. Public
sector mutual funds (other than UTI) garnered Rs 14,587 crore. Investors also moved
from growth-oriented schemes to income/debt schemes.
Reflecting the bearish trend, the market capitalization declined sharply. The market
capitalization to gross domestic product (GDP) that was at 109.5 per cent in March 2008
fell to 49.7 per cent by March 2009. The turnover of the spot market continued to rise on
the NSE, while it declined by 6.4 per cent in the BSE. However, the turnover in the
derivatives market in both NSE and BSE fell by 2.4 per cent and 65.8 per cent,
respectively.
Foreign institutional investors (FIIs) and mutual funds slowed their activity in the equity
market as well. During 2008, the investment by FIIs recorded an outflow of Rs 41,216
crore. The number of registered FIIs rose to 1,591 from 1,219. The number of sub
accounts also increased to 4,864 from 3,644 in 2008
Credit Growth (2008-2009)
With the Indian economy projected to grow 6 per cent during the current financial year
and inflation has dropped down to negative 1.14 per cent , Reserve Bank of India is
trying to do its bit in reviving growth by increasing the flow of credit through reduction in
policy rates. Between October and April 21, the repo rate has been lowered by 425 bps,
while the reverse repo rate has been cut by 175 bps. The cash reserve ratio has also
been reduced by 400 basis points to increase liquidity in the system.

5. 5
Yet, the incremental credit flow has dropped and for most part of April, banks have
parked over Rs100000 crores (Rs1000 billion) with RBI through the reverse repo
window. RBI has gone on to say that banks with strong deposit base should grow their
loan book at 20 per cent or more.
Movement in the regulatory ratios
Particulars MAR-08 SEP-08 DEC-08 MAR-09 APR-09
CRR Movement 7.50 9.00 5.50 5.00 5.00
SLR Movement 25.00 25.00 24.00 24.00 24.00
REPO 7.75 9.00 6.50 5.00 4.75
REVERSE REPO 6.00 6.00 5.00 3.50 3.25
GSEC 10 Yrs Yield 7.94 8.62 5.31 7.01 6.12
According to the data released by the Reserve Bank of India (RBI) on 5th
June 2009,
credit has dropped to 15.70%, or Rs 3, 73,866 crores on year-on-year basis through 5th
June. The total credit deployed is standing at Rs. 27, 57,210 Crores. At the same time,
deposits have stayed almost flat at 22.0%, or Rs716695 crores, in the same period to
Rs39, 71,651 crores. The credit growth is below the central bank’s projection of 20% for
financial year 2009-10. Non-food Credit stood at Rs. 26, 98,102 Crores as on 5th
June
2009. The Credit-Deposit ratio for scheduled commercial banks was at 69.42 till 5th
June
2009.
Monetary stimulus by RBI:
The Reserve Bank has adjusted its policy stance from demand management to arresting
the moderation in growth. In particular, the aim of these measures was to augment
domestic and forex liquidity and to ensure that credit continues to flow to productive
sectors of the economy. Notably, since mid-September 2008, the Reserve Bank has
reduced the repo rate under the liquidity adjustment facility (LAF) from 9.0 per cent to
6.5 per cent, reduced the reverse repo rate under the LAF from 6.0 per cent to 5.0 per
cent and the cash reserve ratio from 9.0 per cent to 5.5 percent. The cumulative amount
of primary liquidity made available to the financial system through various measures
initiated by the Reserve Bank is over Rs300000 crores. This sizeable easing has
ensured a comfortable liquidity position starting mid-November as evidenced by a

6. 6
number of indicators. Since November 18, 2008, consistent with the policy stance, the
LAF window has largely been in the surplus mode
In recent times several public sector lenders, led by the India’s biggest lender State
Bank of India, have lowered their prime lending rates, the benchmark interest rate, to
which all loans are linked. This was following the Reserve Bank of India's slashing
reserve ratios and cutting short-term rates and the government’s assurance of favorable
policy measures.
As per findings of ASSOCHAM Financial Pulse (AFP) Study namely “Indian Banking
Sector: Capital Adequacy under Basel II”, Average Capital adequacy Ratio (CAR) of 10
commercial banks in India improved from 12.35 per cent in 2007-08 to 13.48 per cent in
FY 08-09. The capital adequacy ratio (CAR) of the ten banks that announced their
financial results for year ended March 2009 as per both Basel I and Basel II norms
shown significant improvement during testing times. In addition to the credit risk of the
banking sector (as defined by the Basel I), the Basel II accord covers a wider spectrum
of risks such as operating and market risk. Despite stringent and even rigorous capital
adequacy norms, the remarkable performance of Indian banks during the crisis period
has defied the withering collapse in the financial sector. The minimum capital to risk-
weighted asset ratio (CRAR) in India is placed at 9 per cent, one percentage point above
the Basel II requirement. The government injected capital into the public sector banks
that had their capital adequacy ratio (CAR) below 12 per cent.
Corporate Finance
Fund requirements of a corporate are of two types. Short Term Finance is required to
meet daily, seasonal and temporary working capital needs. Long Term Finance is
required for medium to long-term purposes to meet the cost of acquisition of fixed assets
for diversification, expansion.
Corporates raise money from promoters, banks, financial institutions, private investors,
and public. Venture capital funds support promising firms during their initial stages
before they are ready to make public offerings of securities. Financial Institutions
appraise a project from the marketing, technical, financial, economic, and managerial

7. 7
angles. The key differentiating feature of project finance is the manner in which project
risks are allocated to various parties involved in a project.
Banks are among the most important sources of finance. In the First method of lending,
Banks can work out the working capital gap. This method is particularly for the small-
scale organization, whose requirements are less than 10 laces. In Second Method of
Lending, it was thought that the borrower should provide for a minimum of 25% of total
current assets out of long-term funds. This method is particularly for the medium and
large-scale organization whose requirements are more than 10 laces. The corporate
need fund for various reasons such as to expand the business at certain levels.
The following criteria’s are to be used by a Corporate while selecting a bank for
submitting our credit proposal.
Parameters Criteria Reason
1. BPLR Low It is obvious that if the BPLR is low
borrowing cost for corporate will be
minimized.
2. Cost to Income Ratio Low If Cost of Funds of the bank is lower, it
may induce a bank to quote better
price for a loan. Apart from this, if we
can estimate out cost of funds of
banks, it may be give a better
indication.
3. C-D Ratio Low Bank depending on its approach (
need to be find out via meeting
Corporate Banking Branch) may be
more interested to increase its
advances level
4. CAR High The bank with higher capital adequacy
ratio is in a better position to enhance
its advances level. Its risk taking ability
also increases, with increase in its
CAR/CRAR.

8. 8
5. Gross NPA Low The bank with lower NPA level may be
in a better position to take a bit higher
risk in lending.
6. Growth in Advances Low (?) The bank whose credit growth is lower
may be interested to increase
advances. But this criterion,
sometimes, may be misleading,
because, the bank with lower credit
growth may be very conservative as
regards to sanctioning of credit
proposals.
Banking regulations are a form of government regulation, which subject banks to certain
requirements, restrictions and guidelines. -- To reduce the level of risk bank creditors are
exposed, reduce the risk of banks being used for unsolicited purposes, to protect
banking confidentiality. Accurate business credit report provides access to critical
information needed for making informed financial business decisions about with whom
you do business with and at what price.
Bank loan ratings used by banks to determine risk weights on their loan exposures in
line with the guidelines for implementation of the new capital adequacy framework
issued by the Reserve Bank of India. The criteria for assigning BLRs is identical to the
criteria applied for ratings on bonds and debentures, after taking into account features
such as technical defaults and minor differences in defining due dates - that are specific
to bank facilities
Benefits of Bank Loan Ratings (BLR)
For Banks
The new guidelines from RBI create an incentive for banks to use BLR’s, by giving
significant relief in the capital that banks must hold against their corporate loan
exposures. The highest relief of 80 per cent is available for 'AAA' and 'P1+' (CRISIL
ratings) rated exposures, but there is substantial relief for exposures that are rated below
the highest category as well. For instance, both 'A' category-rated long-term loans and

9. 9
'P2' category-rated short-term facilities provide 50 per cent relief. BLR’s will also be a
key input for appropriate pricing of credit risk by banks.
For Corporate
A BLR will help borrowers obtain more precise risk-based pricing on bank loans.
Borrowers may also benefit when the capital savings that the banks enjoy are reflected
in loan pricing. In the long run, as many lower rated borrowers obtain BLR’s, and the
market understands the risk associated with such lower ratings, access to markets for
lower rated corporate is likely to improve significantly.
A Credit Rating will help corporate in the following ways:
· Improve bargaining power with lenders to get lower interest rates and better
credit terms
· Showcase the rating to various counterparties and investor
For Debt Market
BLR’s will help develop a secondary market for loans, and will provide a uniform scale
for analyzing credit risk of bank loans. Over time, they will contribute immensely to the
development of a Credit Default Swap market, where ratings on the underlying reference
obligations are indispensable.

10. 10
About Company
The Essar Group is a diversified business corporation with a balanced portfolio of assets
in the manufacturing and services sectors of Steel, Energy, Power, Communications,
Shipping Ports & Logistics, and Projects. Essar has a presence in more than 15
countries worldwide.
With a firm foothold in India, the Essar Group has been focusing on global expansion
with projects and investments in Europe, North America, the Caribbean, Africa, the
Middle East and South East Asia. Privately owned and professionally managed, the
Group is judiciously invested in the commodity, annuity and services businesses.
Forward and backward integration, as well as the use of state-of-the-art technology and
in-house research and innovation have made Essar Global a leading player in each of its
businesses. EGL’s abiding philosophy is to be a low cost, high quality, technology driven
group with innovative customer offerings.
STEEL
Essar Steel is a global producer of steel with a footprint covering India, Canada, USA
and Asia. It is a fully integrated flat carbon steel manufacturer—from iron ore to ready-to-
market products. Essar Steel has a current capacity of 9 million tonnes per annum
(MTPA). With its aggressive expansion plans in India as well as Asia and the Americas,
its capacity will go up to 20 to 25 MTPA. Its products find wide acceptance in highly
discerning consumer sectors, such as automotive, white goods, construction,
engineering and shipbuilding.
In 2007, Essar Steel acquired Algoma Steel in Canada, which has a capacity of 4 MTPA,
and Minnesota Steel, which has iron ore reserves of over 1.4 billion tonnes. While the
company is building a 4.1 MTPA steel plant in Minnesota, it is also setting up a 2 MTPA
hot strip mill in Vietnam and a 2.5 MTPA integrated steel plant in Trinidad & Tobago. In
Indonesia, it operates a 400,000 TPA cold rolling complex with a galvanising line of
150,000 TPA, making it the largest private steel company in that country.
Essar Steel is the largest steel producer in western India, with a current capacity of 4.6
MTPA at Hazira, Gujarat, and plans to increase this to 10 MTPA. The Indian operations

11. 11
also include an 8 MTPA beneficiation plant at Bailadilla, Chattisgarh, and an 8 MTPA
pellet complex at Visakhapatnam. Additionally, Essar is setting up a 6 MTPA integrated
steel plant in Paradip, Orissa.
The Essar Steel complex at Hazira in Gujarat, India, houses the world’s largest gas-
based single location sponge iron plant, with a capacity of 5.5 MTPA. The complex also
houses the steel plant and the 1.4 MTPA cold rolling mill. The steel complex has a
complete infrastructure setup, including a captive port, lime plant and oxygen plant. The
company is also building a 1.5 MTPA plate mill and a 0.6 MTPA pipe mill in Hazira to
make further value addition to its product portfolio.
Essar Steel produces highly customized products catering to a variety of product
segments and is India’s largest exporter of flat products to the highly demanding US and
European markets, and to the growing markets of South East Asia and the Middle East.
It has invested in downstream capabilities to evolve from being a product based
company to becoming a value added service provider. It has a global network of retail
steel outlets, called Steel Hyper marts, and offers services, like cutting, slitting and
blanking of steel sheets, through specialized Steel Service Centers worldwide.
ENERGY
Essar Oil Ltd (EOL, NSE: ESSAROIL) operates a fully integrated oil company. Its
assets include developmental rights in proven exploration blocks, a 12.5 MTPA refinery
in the west coast of India and over 1,000 oil retail stations across India. Plans are under
way to increase its exploration acreage in various parts of the globe, expand its refinery
capacity to 34 MTPA (680,000 barrels per day) and open 5,000 retail outlets.
The Exploration and Production (E&P) business of the company has participating
interests in several hydrocarbon blocks for exploration and production of Oil & Gas. This
includes the Ratna and R-Series blocks on Bombay High and an E&P block in Mehsana,
Gujarat, which has currently started commercial production. It has also been awarded a
Coal Bed Methane (CBM) block at Raniganj in West Bengal, and two more E&P blocks
in Assam, India. The overseas E&P assets include two offshore blocks in Australia, three
onshore oil & gas blocks in Madagascar-Africa, and one offshore block each in Vietnam
and Nigeria.

12. 12
Essar Oil’s 12.5 MTPA refinery at Vadinar in Gujarat started commercial production on
May 1, 2008. It has been built with state-of-the-art technology and has the capability to
produce petrol and diesel suitable for use in India as well as advanced international
markets. It will also produce LPG, naphtha, light diesel oil, aviation turbine fuel (ATF)
and kerosene. The refinery has been designed to handle a diverse range of crude—from
sweet to sour and light to heavy. It is supported by an end-to-end infrastructure setup
including SBM (Single Buoy Mooring), crude oil tankage, water intake facilities, a captive
power plant (currently 125 MW, being expanded to 1,200 MW), product jetty and
dispatch facilities by both rail and road. The refinery is strategically located in Vadinar, a
natural all-weather, deep-draft port that can accommodate very large crude carriers
(VLCCs). Vadinar also receives almost 70 percent of India’s crude imports. Post its
expansion to 34 MTPA, the refinery will run at a Nelson Complexity of 12.8. This means
it will be able to refine all varieties of crude, producing Euro 5 grade fuels. It will also be
among the largest single location refineries in the world thus leveraging on economies of
scale. The company plans to achieve a daily refining capacity of 1 million barrels per day
through organic and inorganic growth.
Essar Oil supplies to bulk consumers and has already opened more than 1,000 retail
outlets. The first private Indian company to enter petro retailing, it has product off take
and infrastructure sharing agreements with oil PSUs, namely Bharat Petroleum,
Hindustan Petroleum and Indian Oil. It has also received the Certificate of Type
Approval, a prerequisite to supplying ATF to the Indian Armed Forces.
POWER
Essar Power operates five power plants with a combined capacity of 1,200 MW in three
locations across India. This includes two gas-based plants, of 500 MW and 515 MW
capacities, and one liquid fuel based 32 MW power plant in Hazira, a 120 MW co-
generation plant in Vadinar and a 25 MW coal-based plant in Visakhapatnam.
Work is currently under way to increase generation capacity to 6,000 MW. The company
will set up three coal-based plants of 1,200 MW each in Gujarat, Madhya Pradesh and
Jharkhand, aggregating 3,600 MW. An additional 1,200 MW (co-generation plant of

13. 13
equivalent capacity) is also under development in Vadinar to supply power and steam to
the expanded refinery.
With a license to enter the transmission, distribution and power trading segments, Essar
Power is now a fully integrated, end-to-end player in the Power sector. By using the
latest technology and equipment, Essar Power can generate and supply power at very
competitive price points. The company also has the capability to execute power projects
for other companies.
Essar Power is exploring opportunities for new projects based on thermal, wind and
hydro energy. It is also committed to reducing emissions from its plants and earning
carbon credits. The 500 MW combined cycle power plant at Hazira is eligible for
Certified Emission Reductions (CERs) under the Kyoto Protocol’s Clean Development
Mechanism (CDM).
COMMUNICATIONS
Essar Communications operates in four business segments: Telecom services,
telecom retail, telecom infrastructure and Aegis Services.
· Vodafone-Essar is a joint venture of Essar Communication Holdings Ltd and the
UK-based Vodafone Group. It is one of India’s largest cellular service companies,
with a subscriber base of over 60 million.
· Essar operates integrated IT enabled services through the Aegis brand name,
with a presence in interaction services, back office services and value-added
services. Aegis has a global delivery model with 31 centers across the
Philippines, Costa Rica, USA and India. It employs over 30,000 employees who
have expertise in the Telecom, Insurance, Banking and Healthcare domains.
· Essar has launched India's first national chain of multi-brand and multi-service
outlets in the telecom retail space. The MobileStore Ltd currently runs over 1,300
“The MobileStore” outlets. Over 2,500 stores outlets are expected across 650
cities.

14. 14
· Essar Telecom Infrastructure is one of the largest independent telecom
infrastructure service provisioning companies in the country. It builds telecom
tower infrastructure and shares it with several telecom operators in India. It has
already set up over 3,500 towers in India, with plans to build 20,000 towers.
SHIPPING PORTS & LOGISTICS
Essar Shipping Ports & Logistics Ltd (NSE: ESSARSHIP) is an end-to-end logistics
provider with sea and surface transportation services, oilfield drilling services, dry and
liquid terminals, tankage and associated pipelines. It provides complete supply chain
management services to clients in oil & gas, steel and power generation industries.
· The Sea Transportation business provides transportation management services
for crude oil and petroleum products, and dry bulk cargo to the global energy,
steel and power industries. With an experience of more than 220 ship years, it
owns a diverse fleet of 26 vessels, which is being expanded to 38 vessels.
· The Ports & Terminals business is among India’s largest owners and operators
of ports and terminal facilities. The operations include an oil terminal in Vadinar
and bulk terminals in Hazira and Salaya, all in the state of Gujarat. Vadinar,
which is an all-weather, deep-draft port, serves major oil refineries and
independent cargo traders in the region. The terminal has crude receiving
capacity of 32 MTPA and sea-based product dispatch capacity of 14 MTPA. The
port at Hazira has a capacity to handle 8 MTPA of bulk cargo. This will be
enhanced to 25 MTPA through building a shipping channel that can berth larger
vessels. The enhanced capacity will not only serve the expansion in the Hazira
steel plant, but also cater to the needs of the upcoming Essar SEZ units. The
business is also building a port, of about 20 MTPA capacities, at Salaya
comprising a bulk and liquid terminal with container handling facilities.
· The Logistics business provides end-to-end logistics services – from ships to
ports, lighterage services, intra-plant logistics and dispatch of finished products. It
owns trans-shipment assets to provide lighterage support services, and onshore
& offshore logistics services. It also operates a fleet of 4,200 trucks (of which 38
are owned) to provide inland transportation of steel and petroleum products.

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· Essar Oilfields Services offers onshore and offshore contract drilling, and
offshore construction services. It has invested USD 400 million in purchasing
drilling equipment and owns 12 onshore rigs, and an offshore semi-submersible
rig.
PROJECTS
Essar Projects is a 4,000 people strong global engineering procurement and
construction company headquartered in Dubai. It has offices in India, China and the
Czech Republic. It provides complete construction solutions under one roof. It operates
through five main businesses:
· Essar Constructions: This division has over four decades of experience in
executing projects involving industrial plants, civil & irrigation projects, laying of
onshore pipelines, and highways and expressways. With a pipeline division
certified at ISO 9001, it has developed capabilities to undertake turnkey projects.
· Essar Offshore Subsea: The marine construction expertise within Essar Oil,
Essar Shipping, Essar Projects and Essar Construction has now demerged into a
single entity namely Essar Offshore Subsea Ltd (EOSSL). The business provides
Engineering, Procurement, Construction & Installation (EPCI) services in this
sector in domestic as well as overseas markets. In the high-growth oil & gas
sector, EOSSL provides EPC services for offshore logistics support and marine
construction projects.
· Global Supplies: The Global Supplies team specializes in procurement, with a
presence in India, China, the Middle East and Europe. It has excellent
relationships with vendors across the globe, giving it the ability to procure
materials in a timely manner and at competitive prices.
· Heavy Engineering Services: Has modern facilities for manufacturing pressure
vessels, reactors, vacuum vessels, cranes, etc. The business is strategically
located on the waterfront at Hazira on the west coast of India.
· Project Management Consultants: An independent team of Project
Management Consultants ensures compliance to processes in project execution.
The team is also pitching for third-party projects.

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TABLE OF CONTENTS
1. Executive Summary…………………………………………………………….i
2. About the company…………………………………………………………….x
I Corporate Finance
1. General……………………………………………………………………… 1
2. Need & Sources of Finance…………………………………………………. 2
2.1 Medium & Long Term Purpose
2.2 Short Term Purpose
2.3 Sources of Finance
2.4 Securities for Ownership Capital
2.5 Instruments for Debt or Creditorship Capital
3. Financial Institutions…………………………………………………………8
3.1 Regulators………………………………………………………….. 8
3.1.1 Reserve Bank of India (RBI)
3.1.2 Securities & Exchange Board of India (SEBI)
3.2 Intermediaries………………………………………………………11
3.2.1 Banking Institutions
3.2.2 Non-Banking Financial Institutions (NBFC’s)
II Corporate Credit………………………………………………………………. 13
1. General……………………………………………………………………… 13
2. Working Capital Finance…………………………………………………….13
2.1 Fund Based Limits
2.2 Non-Fund Based Limits
3. Term Finance………………………………………………………………...16
4. Syndication…………………………………………………………………..19
4.1 Parties to a syndication
4.1.1 Borrower
4.1.2 Senior Syndicate Member
4.1.3 Junior Syndicate Member

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5. Consortium Finance …………………………………………………………22
5.1 RBI Guidelines on Consortium Finance
5.2 Consortium Meetings
5.3 Submission of Information
5.4 Difference between Syndicate & Consortium Finance
6. Multiple Banking…………………………………………………………... 24
6.1 Drawbacks of Multiple Banking
7. Working Capital…………………………………………………………..... 25
7.1 What is working capital?
7.2 Difference between net working capital & working capital requirement
7.3 Factors determining working capital
7.4 Working Capital estimation methods
7.4.1 Turnover Method
7.4.2 Cash Budget System
7.4.3 CMA Data Method
7.5 Calculation of MPBF
III Factors Influencing Loan Rates………………………………………….............29
1. Cash Reserve Ratio
2. Repo Rate
3. Reverse Repo
4. Statutory Liquidity Ratio (SLR)
5. Prime Lending Rate
6. What is BPLR?
7. What is a spread?
8. What are sub-BPLR loans?
9. Credit-Deposit Ratio
9.1 Implications of C-D Ratio
10. CASA (Current Account Saving Account)
10.1 How is CASA important to banks?
10.2 How is CASA different from Term & Demand Deposits?

18. 18
IV Significance of Interest Rates………………………………………………………33
1. General
2. Factors affecting
3. Impact on other Variables
V Sectoral Credit Deployment ……………………………………………………….34
1. Industry wise Credit Deployment
VI Indian Banking Industry…………………………………………………………..37
1. General
2. Capital Requirements
3. Movement in Regulatory ratio’s
4. Punjab National Bank
5. State Bank of India
5.1 State Bank Associates
6. Bank of India
7. Banks at BPLR Lever 12 per cent
8. Banks at BPLR Level 12.25 per cent
9. Banks at BPLR Level 12.5 + per cent
VII Bank Analysis……………………………………………………………………....46
1. Public Sector Banks…………………………………………………………...46
1.1 Banks Chosen (Top 5)
1.2 Credit Deployment FY 09
1.3 Credit-Deposit ratio FY 09
1.4 BPLR Charged
1.5 Growth in Advances FY 09
1.6 Net worth FY 09
1.7 Growth in CASA Deposits FY 08
1.8 Capital Adequacy Ratio (CAR /CRAR) FY 08

19. 19
2. Private Sector Banks………………………………………………………….51
2.1 Banks Chosen (Top 5)
2.2 Credit Deployment FY 09
2.3 Credit-Deposit ratio FY 09
2.4 BPLR Charged
2.5 Growth in Advances FY 09
2.6 Net worth FY 09
2.7 Growth in CASA Deposits FY 08
2.8 Capital Adequacy Ratio (CAR /CRAR) FY 08
3. Foreign Banks ……………………………………………………………….55
3.1 Banks Chosen (Top 5)
3.2 Credit Deployment FY 09
3.3 Credit-Deposit ratio FY 09
3.4 BPLR Charged
3.5 Growth in Advances FY 09
3.6 Net worth FY 09
3.7 Growth in CASA Deposits FY 08
3.8 Capital Adequacy Ratio (CAR /CRAR) FY 08
VIII Basel II...................................................................................................................56
1. General
2. Members
3. Basel II Pillars
3.1 The first pillar
3.2 The second pillar
3.3 The third pillar

20. 20
IX RBI Guidelines on New Capital Adequacy Framework in India......................61
1. Introduction………………………………………………………………...61
2. Approach to implementation, effective date……………………………….61
3. Capital Funds………………………………………………………………62
3.1 Elements of Tier I Capital
3.1.1for Indian Banks
3.1.2 for Foreign Banks in India
3.2 Elements of Tier II capital
3.2.1 Revaluation reserves
3.2.2 General Provisions & Loss Reserves
3.2.3 Hybrid Debt Capital Instruments
3.2.4 Sub-Ordinate Debt
3.2.5 Capital Charge for Credit Risk
4. Claims on Corporate………………………………………………………66
5. External Credit Assessments ………………………………………….......67
5.1 External Credit Rating Agencies
5.2 Scope of Application of External Rating
5.3 Mapping Process
5.3.1 Long term ratings
5.3.2 Short term ratings
5.3.3 Use of unsolicited ratings
5.3.4 Use of Multiple rating Assessments
X Bank Loan Ratings ……………………………………………………………….73
1. General……………………………………………………………………..73
2. Significance of Bank Loan Ratings………………………………………...74
XI Corporate Credit Rating ………………………………………………………..76
1. Industry Risk Analysis……………………………………………………..76
2. Business Risk Analysis…………………………………………………….76

21. 21
2.1 Diversification
2.2 Seasonality & Cyclicity
2.3 Size
2.4 Cost Structure
2.5 Market Share
2.6 Marketing & Distributing Arrangements
2.7 Government Policies
2.8 Operating Efficiencies
2.9 Technology
2.10 Access to resources
2.11 Human resources
2.12 Capacity Utilization & Flexibility
2.13 Level of Integration
3. Financial Risk………………………………………………………………79
3.1 Accounting Quality
3.2 Financial ratios
3.2.1 Growth Ratios
3.2.2 Profitability Ratios
3.2.3 Leverage and Coverage Ratios
3.2.4 Turnover Ratios
3.2.5 Liquidity Ratios
3.3 Cash Flows
3.4 Financial flexibility
3.5 Validation of projections and Sensitivity Analysis
4. Management Risk analysis……………………………………………………82
4.1 Track record
4.2 Corporate Strategy
4.3 Performance of group companies
4.4 Organizational structure
4.5 Control systems
4.6 Personnel policies
5. Project Risk Analysis…………………………………………………………83
6. External Support Analysis……………………………………………………84

22. 22
6.1 Governmental Support
6.2 Group / Parent Support
6.2.1 Economic rationale
6.2.2. Moral Obligations
7. Rating……………………………………………………………………………….85
7.1 Long Term Ratings
7.2 Short Term ratings
Conclusion……………………………………………………………………………………108
References……………………………………………………………………………..109

23. 23
I
1. Corporate Finance
1.1 Running an Industrial unit involves dealing in commodities, goods, cash and various
money instruments. To acquire these, the corporate need to secure finance of different
types. The requirements of the corporate being of two types, namely, short-term and
long-term, the nature of finance required also is of same two types. Securing both types
of funds required by the corporate and their utilization to an optimal extent to ensure that
the cost of such funds is minimized are the activities which together constitute Corporate
Finance. Corporate are able to generate only a minor portion (25-35%) of these finances
internally, the rest has to come from external sources, if a corporate has to grow and
remain profitable. Corporate Sector, therefore, has to depend heavily on the market
sources.
1.2 The instruments of raising funds from the market are many and varied and the
market segments where these are floated are as many. While the initial issues (first and
subsequent) are floated in the issue market, old securities (issues floated earlier) are
traded in the secondary market segment of the capital markets. Capital markets are
therefore, the major sources of funds for the corporate sector. However, markets are
tough taskmasters and only those corporate, which perform well, can hope to secure
funds from the market. Markets use a variety of parameters and tools including ratio
analysis to gauze the performance of a corporate. Another equally important source of
funds is the borrowing from financial intermediaries i.e. financial Institution and
Commercial Banks. The methods of raising funds may vary from unit to unit and industry
to industry, but broadly, the sources of borrowing for corporate units are
· Financial Institutions
· Commercial banks
· Deposits from general public
· Shares to existing or new shareholders. (Ordinary Shares & Preference Shares)
1.3 Another very important source of funds, which is gradually opening up for Indian
Corporate is the Global Market. Not only do the corporate access Foreign Exchange
through this market (loans in foreign currencies are also available from term-lending

24. 24
institutions like the IDBI, ICICI, IFCI, and commercial banks), but more important, they
tap the global pool of savings
2. Need & Sources of Finance
2.1 Medium and long term purposes
Medium and long term finance is required at the time of setting up operations,
undertaking of new activities, expansion/modernization of existing manufacturing
facilities or to meet the working capital requirements of a permanent nature (also known
as owners' stake in working capital), corporate need funds which cannot be repaid in a
hurry. The assets required for all these activities generate income after a gap, but this
stream of income lasts for longer time. The corporate, therefore, need funds which can
be paid over a period of time. Such funds are called medium or long-term funds. The
major external sources for such funding are borrowings from Banks or Financial
Institutions (Term Loans), issue of shares (equity and preference shares), issue of
debentures or bonds or raising fixed deposits from the public. In the case of existing
corporate, another source, which can meet these requirements, is the retained earnings
or the profit ploughed -back into the business. This source of funds, however, is
available only to corporates which practice prudent management policies in operations
to maximize profits, in tax planning and in the distribution of income.
2.2 Short term purpose
In order to run their operations, corporates buy goods from the market (raw material);
process them in their own facilities (or outsource processing); convert them into saleable
goods (product or finished goods) and then sell them in the market (against cash or
credit i.e. a promise to get money after a short time). This entire process - also called
cash cycle - takes anything between one to six months for most corporates. At each one
of these stages, expenditure is incurred without any inflow of money. The inflow starts
only when cash is paid (also called sales proceeds) for the goods produced by the
corporate. The finance needed to fund the expenditure in the intervening period is of
short-term nature (as it is to be paid back out of the sales proceeds) and is also called
working capital.

25. 25
2.3 Sources of Finance
Companies depend upon two categories of capital to meet both their short-term and
long-term requirements. These are:
· Equity or Ownership capital
· Debt or Creditorship capital
2.3.1 Equity or Ownership capital is the initial or venture capital, invested by the
shareholders or owners of the company. A cushion for all kinds of financial shocks, it
takes the form of equity or preference shares. Equity holders are the final and residuary
owners of the company. They shoulder the risk and are also entitled to all residual profits
and net worth of the company. The extent of equity shares (authorized and paid up
capital) can be increased or changed only as per the provisions of the Companies Act
and by passing a resolution by the general body meeting of the shareholders of the
company.
2.3.2 Debt or the Creditorship capital includes bonds, debentures apart from term loans
from financials institutions and banks. Owing to their nature of operations, FI’s normally
finance the long-term needs of the corporates and Banks grant funding for short-term
needs. However, lately, the roles are getting juxtaposed with FI’s making forays into
short end of the debt market and Banks beginning to pursue the long end of the debt
market. Lending by commercial banks and financial institutions are highly specialized
fields, which demand skills not ordinarily available in the market.
The mix of equity and debt capitals in funding the requirements of a corporate, also
known as Capital Structure is an important decision and should be taken after careful
examination of all relevant factors.
2.4 Securities for Ownership Capital
2.4.1 Ordinary Shares
These are ownership securities. Shares bestow certain advantages to both the issuing
companies and the investors. Investment in this financial instrument is of long term

26. 26
nature. This, however, does not mean loss of liquidity for the investor. Depending upon
availability of investors' interest in the company, shares can be easily converted into
cash in the secondary market.
A shareholder bears the highest risk in the company's operations. Conversely, he is also
entitled to participate in the earning and wealth of the company without limit. Issue of
shares is of advantage to the company, as payment of dividend is discretionary. Equity
is not required to be refunded. This instrument is quite popular with individual investors
in India. Face value of ordinary shares in India can be any amount from Re. 1 to Rs.
1,000 but the most common denomination of shares is Rs 10.
2.4.2 Preference Shares
A preference share (PS) is said to be a hybrid financial instrument. Companies have
issued preference shares with a large number of innovations. PS, as its name suggests,
is an ownership security, but unlike an ordinary share where dividend is discretionary,
PS carries a fixed rate of return (dividend) like a debenture. In order of preference, PS
holders rank below the claims of creditors of the company, but above those of ordinary
shareholders.
Following types of preference shares are normally available in the market:
(a) Cumulative and non-cumulative
(b) Convertible and non-convertible
(c) Redeemable and non-redeemable
(d) Participating and non-participating
In case of Cumulative PS, the dividend(s), if not paid in any period(s) are accumulated
as a liability of the company and has to be paid subsequently.
Convertible PS can be converted into ordinary share on terms and condition fixed at the
time of issue of such shares.
Redeemable preference shares have fixed period of maturity and are repayable at the

27. 27
end of that period. It is because of this property. Such PS is regarded more as a debt
instrument than an ownership security.
Participating preference shareholders have the best of both the worlds in as much as
they are not only entitled to a fixed rate of dividend, but can also expect to earn a higher
dividend in case the company makes good profits.
2.5 Instruments for Debt or the Creditorship capital
2.5.1 Commercial Lending
This is the mainstay of Indian Banking - its bread and butter activity. Although
historically, this activity had been relegated to a secondary position as banks were
driven by the desire to excel themselves in what is known as "priority sector banking"
yet it is this part of their loan portfolio which has kept them afloat and help meet the
costs. This activity survived despite a number of restrictions imposed on it in the past.
With financial sector reforms, the focus has shifted from "priority sector banking" and
commercial lending has been reinstated to its rightful place. Today many banks focus
on this activity for improving their bottom lines. Fresh and innovative products are
being launched to facilitate the corporate customer who forms the core of this
business. There is big competition among banks to secure bigger share of this
business
2.5.2 Corporate Loans
These loans are meant for corporate bodies (and bigger ones among other entities like
proprietorships, partnerships and HUFs) engaged in any legal activity with the object of
making profit. Banks lend to such entities on the strength of their balance sheet, the
length of cash cycle and depending upon the products available with individual banks.
2.5.3 Lending on the strength of balance sheet
Banks analyze the audited balance sheets of the prospective borrowers to appraise
their needs as also the capacity to absorb credit. Prospective borrowers are required to
furnish their financial details in the form of CMA data to the bankers and file an

28. 28
application for the loan. This application is processed and a line of credit (limit) allowed
to the borrower. The overall limit (line of credit) is structured into various type of facilities
or accounts - each with its own limit within the overall line of credit - depending upon the
needs of the customer. The borrower is then asked to execute Bank's standard
documents, surrender the security or title to the security to the Bank and open suitable
accounts (mostly Cash Credit accounts with different underlying securities) with the
Bank. Thereafter the borrower can operate these accounts within the limit (line of
credit).
There are many type of loan products available for corporate clients in India. The loans
are structured depending upon the need of the client and the product available with the
lending Bank
2.5.4 Term Loan
Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in
this mode when the repayment is sought to be made in fixed, pre-determined
installments. This type of loan is normally given to the borrowers for acquiring long term
assets i.e. assets which will benefit the borrower over a long period (exceeding at least
one year). Purchases of plant and machinery, constructing building for factory, setting up
new projects fall in this category. Financing for purchase of automobiles, consumer
durables, real estate and creation of infra structure also falls in this category
2.5.4 Cash credit Account
This account is the primary method in which Banks lend money against the security of
commodities and debt. It runs like a current account except that the money that can be
withdrawn from this account is not restricted to the amount deposited in the account.
Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit
facility" in excess of the amount deposited in the account.
Cash Credits are, in theory, payable on demand. These are, therefore, counter part of
demand deposits of the Bank.

29. 29
2.5.6 Overdraft
The word overdraft means the act of overdrawing from a Bank account. In other words,
the account holder withdraws more money from a Bank Account than has been
deposited in it.
2.5.7 Bill Discounting
Bill discounting is a major activity with some of the smaller Banks. Under this type of
lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pays
him immediately deducting some amount as discount/commission. The Bank then
presents the Bill to the borrower's customer on the due date of the Bill and collects the
total amount. If the bill is delayed, the borrower or his customer pays the Bank a pre-
determined interest depending upon the terms of transaction.
2.5.8 Debentures or Bonds
Debentures or bonds are essentially debt instruments which enable the holder to earn a
fixed rate of return, fixed maturity period. An additional benefit on these instruments is
relatively lower capital uncertainty. In India, debenture can be of both types i.e. secured
or unsecured. There are many types of debentures available in the market:
(a) convertible,
(b) non-convertible,
(c) partially convertible,
(d) redeemable,
(e) perpetual,
(f) registered,
(g) bearer,
(h) rights,
(i) callable, etc.
These can be either secured by a mortgage on the assets of the company or unsecured.
The redeemable debentures have to be repaid by the company at the end of a specified
period, say, 7 years. The debentures are tradable on Stock Exchanges, if they are
quoted. More recently, convertible debentures have become popular, as they can be
converted into equity after a specified period and at a specified price. In this case, debt

30. 30
capital becomes ownership capital after a specified period. These debentures may be
partly or fully convertible into equity, as per the terms of issue. The non-convertible
portion is also traded in the market.
The proportion of debentures, both convertible and non-convertible, to total capital
issues increases during boom years, mainly due to the popularity of conversion and due
to the creditworthiness of the companies floating them.
3. Financial institutions
This segment is divided into two types of Institutions:
· Regulators
· Intermediaries
3.1 Regulators Regulatory Institutions are statutory bodies assigned with the job
of monitoring and controlling different segments of the Indian Financial System
(IFS). These Institutions have been given adequate powers through the vehicle of
their respective Acts to enable them to supervise the segments assigned to them.
It is the job of the regulator to ensure that the players in the segment work within
recognized business parameters maintain sufficient level of disclosure and
transparency of operations and do not act against the national interests. At
present, there are two regulators directly connected to IFS:
· Reserve Bank of India
· Security and Exchange Board of India
3.1.1 The Reserve Bank of India
Reserve Bank of India, the Central Bank of the country, is at the center of the Indian
Financial and Monetary system. RBI is among the oldest among the developing
countries. It was inaugurated on April 1, 1935 as a private shareholders' institution under
the Reserve Bank of India Act 1934. It was nationalized in January 1949, under the
Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the
central government, in consultation with the Governor of the Bank, to issue such
directions to RBI as might be considered necessary in the public interest. RBI is

31. 31
governed by a Central Board of Directors with 20 members consisting of the Governor
and the Deputy Governors. The Governor and the deputy Governors of the Bank are
Government of India appointees. The preamble to the Reserve Bank of India Act lays
down the purpose of establishing RBI as “to regulate issue of Bank notes, to keep the
reserves with a view to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage”.
RBI took a leading role in designing and implementing policies for agricultural and
industrial development and for laying the foundations for financial markets. Some of
today’s premier development and market institutions such as the National Bank for
Agriculture and Rural Development (NABARD), the Industrial Development Bank of India
(IDBI) and the Unit Trust of India (UTI) had their beginnings as specialized departments
and divisions within the RBI. When RBI started in 1935, there were just three
departments, namely the Banking Department, the Issue Department and the
Agricultural Credit Department. Today, RBI has 26 departments in the Central Office,
have 26 regional and field offices across the country, four subsidiaries (BRB Note
Mudran Press Ltd., DICGC, NABARD and NHB,) and a staff of over 20,000 employees.
Today, RBI is the monetary authority, and regulator and supervisor for banks and non-
banking financial companies. RBI is the issuer of currency and the debt manager for the
central and state governments. Besides, RBI manages the country’s foreign exchange
reserves, manage the capital account of the Balance of payments, and design and
operate payment systems. RBI also operates a grievance redressal scheme for bank
customers through the Banking Ombudsmen and formulates policies for treating
customers fairly. RBI has had a decisive influence in shaping and implementing every
major economic policy in the monetary and financial sectors. The developmental role of
the RBI has expanded too. Major endeavors today of RBI are financial inclusion and the
strengthening of the credit delivery mechanisms for agriculture, and small and micro-
enterprises, especially in the rural areas. With India emerging as a key player in the
global growth story, RBI’s role and responsibilities too have increasingly acquired an
international dimension. Today RBI is an active participant in several important
international institutions that seek to promote more effective regulatory structures and
financial and systemic stability. We have for sometime now been shareholders of the
Bank for International Settlements (BIS) and member of the Committee on Global

32. 32
Financial System, the Markets Committee, and the International Liaison Group under the
aegis of the Basel Committee on Banking Supervision (BCBS), and are now becoming
active members of the Financial Stability Forum and the BCBS.
3.1.2 Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India was established on April 12, 1992 in
accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
The Preamble of the Securities and Exchange Board of India describes the basic
functions of the Securities and Exchange Board of India as “…..to protect the interests of
investors in securities and to promote the development of, and to regulate the securities
market and for matters connected therewith or incidental thereto” SEBI's governing
board comprises of the Chairman, two members from the ministries of the central
government dealing with finance and law, two professional members with experience or
special knowledge of securities market, and one member from the RBI. All members,
except the RBI member, are appointed by GOI. Their terms of office, tenure, and
conditions of service are also laid down by GOI. It can also remove any member from
office under certain circumstances.
3.2 Intermediaries
Intermediary Financial Institutions are essentially of two types:
· Banking
· Non Banking
3.2.1 A distinguishing characteristic of banking Financial Institutions lies in the fact that,
unlike other institutions, they participate in the economy’s payments mechanism, i.e.,
they provide transaction services, their deposit liabilities constitute a major part of the
national money supply, and they can, as a whole, create deposits or credit, which is
money. Banks, subject to legal reserve requirements, can advance credit by creating
claims against themselves. Financial Institutions, on the other hand, can lend only out of
resources put at their disposal by the savers. Indian Financial System boasts of well
developed banking Financial Institutions each designated to carry out a specific

33. 33
developmental task. Most FI’s, however, work on commercial lines with an eye on the
development of the sectors assigned to them.
Financial institutions have been the primary source of long term lending for large
projects. Conventionally, they raised their resources in the form of bonds subscribed by
RBI, Public Sector Enterprises, Banks and others. With the drying up of concessional
Long Term Operations (LTO) funds from the Reserve Bank in the early 1990s, Financial
Institutions have increasingly raised resources at the short end of the deposit market.
The Banking Segment in India functions under the umbrella of Reserve Bank of India,
the regulatory central bank. This segment broadly consists of:
· Commercial Banks
· Co-operative Banks
3.2.2 Commercial Banks
The commercial banking structure in India consists of:
· Scheduled Commercial Banks
· Unscheduled Banks
Scheduled commercial Banks constitute those banks which have been included in the
Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only
those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of
the Act. Some co-operative banks are scheduled commercial banks albeit not all co-
operative banks are. Being a part of the second schedule confers some benefits to the
bank in terms of access to accommodation by RBI during the times of liquidity
constraints. At the same time, however, this status also subjects the bank certain
conditions and obligation towards the reserve regulations of RBI.
For the purpose of assessment of performance of banks, the Reserve Bank of India
categorize them as public sector banks, old private sector banks, new private sector
banks and foreign banks

34. 34
This sub sector can broadly be classified into:
1. Public sector
2. Private sector
3. Foreign banks
3.2.3 Non-Banking Financial Institutions
Non-banking Financial Institutions carry out financing activities but their resources are
not directly obtained from the savers as debt. Instead, these Institutions mobilize the
public savings for rendering other financial services including investment. All such
Institutions are financial intermediaries and when they lend, they are known as Non-
Banking Financial Intermediaries (NBFI’s) or Investment Institutions.
· UNIT TRUST OF INDIA
· LIFE INSURANCE CORPORATION (LIC)
· GENERAL INSURANCE CORPORATION (GIC)
Apart from these NBFI’s, another part of Indian financial system consists of a large
number of privately owned, decentralized, and relatively small-sized financial
intermediaries. Most work in different, miniscule niches and make the market more
broad-based and competitive. While some of them restrict themselves to fund-based
business, many others provide financial services of various types. The entities of the
former type are termed as "non-bank financial companies (NBFC’s)". The latter type is
called "non-bank financial services companies (NBFC’s)".

35. 35
II Corporate Credit
1. Banks in India offer a wide array of products and services to its corporate clients.
These are broadly classified into two categories as shown below. Corporate credit is one
of the largest segments of any bank’s lending. Banks come up with numerous schemes
to cater to need of different corporate segments. There are basically two types of credit
which is extended to corporates i.e. working capital finance and term finance. Apart from
credit corporates also use various fee based financial products and services.
Corporate loans
· Short Term
· Long term loans
2. Working Capital Finance
Indian industry tends to rely heavily on the short term working capital needs. The
availability of bank finance is regulated through the credit policy of RBI. The current
assets of companies i.e. their inventories and receivables are expected to conform to
specific levels. Typically 25% of these current assets are to be financed by companies,
through their own sources, while banks finance is permissible for the rest 75% of current
assets and current liabilities. The advances are normally secured by hypothecation of
current assets usually receivables.
2.1 Fund Based Limits
· Cash Credit
o Cash credit is allowed against hypothecation / pledge / charge of
stocks/book debts of a corporate. The limits basically allowed for
maintaining current assets as per MPBF assessment.
· Over Draft
o Overdraft is also a finance to meet day to day requirements of a corporate
where specific drawing limit may not be arrived on basis of stocks / book
debts

36. 36
· Working Capital Demand Loan (WCDL)
o It is a working capital loan repayable in regular installments not more than
36 months.
· Export Packing Credit in Rupee (EPC)
o Advance granted by a bank to an exporter for financing the purchase,
processing, manufacturing or packing of goods prior to shipment in Indian
rupee.
· EPC in Foreign Currency
o It is particularly known as PCFC i.e. packaging credit in foreign currency.
Customer is free to avail this finance either in rupee or foreign currency.
· Foreign Currency Loan (FCL)
o To avail advantage of lower interest rates a corporate can prefer to avail a
loan in foreign currency to meet working capital requirement or to acquire
fixed assets. The loan repayment should be within 36 months. It can also
be availed for payment of existing rupee loans.
· Channel Finance
o Corporate can avail credit under this scheme to ease their working capital
requirement. This is nothing but financing the supplier’s of raw materials
and dealers. This is purely domestic sales and purchases.
· Line of Credit
o A corporate can be sanctioned a line of credit to meet working capital
requirement within or outside consortium agreement based on the
strength of the balance sheet and P&L account and other information
available. The limits sanctioned may be fund based or non fund based
working capital limits.
· Buyers Credit
o It is a short term credit under ECB. When an Indian importer company
arranges for credit / loans from a foreign office of his bank or from a
financial institution outside India for importing goods to India; it is called a
buyer’s credit.

37. 37
· Suppliers Credit
o It may be defined as a short term credit for imports into India extended by
overseas supplier for a period of more than 6 months and less than 3
years. Supplier’s credit essentially represents credit sales affected by the
supplier on the basis of accepted bills or promissory notes with or without
collateral security.
o
· Bill Finance (BO/BD/BN)
o This is post sales finance, the DP is purchased and DA bills are
discounted and bills backed by LC are negotiated.
· Mortgage OD
o Corporates can meet urgent requirements for working capital under this
scheme of banks
2.2 Non Fund Based Limits
· Letter of Credit
o A corporate can acquire required raw materials by establishing LC
instead of parting funds upfront. The payment will be made to supplier of
goods against submission documents as per terms and conditions
specified in letter of credit. The letter of credit is an agreement whereby
the applicant (importer) requests and instructs the issuing bank
(importer’s bank) or the issuing bank acting on its own behalf. The LC can
be established for working requirement or for acquisition of fixed assets
for corporate.
· Bank Guarantee
o A BG is similar to LC. A corporate can submit a bank guarantee in lieu of
payment by cash for its working capital requirements. A BG can also be
issued for acquisition of fixed assets for corporate.

38. 38
3. Term Finance (Project Finance)
These loans are commonly set for more than three years. Most are between three and
ten years and some run as long as 20 years. Long term loans are collateralized by
business assets and typically require quarterly or monthly payments derived from profits
or cash flow. These loans usually carry wordings that limit the amount of additional
financial commitments, the business may take on (including other debts but also
dividends or principal’s salaries) and they sometimes require that a certain amount of
profit be set aside to repay the loan.
· Term Loan
o It’s the traditional way of fixed assets financing. The corporate can avail
term loan to spread over the repayment in long term as per cash accruals
and break even. One of the important aspect in this financing is the debt
service coverage ratio should be 1.5 and above.
· Acquisition Finance
o When corporates go for an external mode of expansion through acquiring
a running business and thus growing over night through corporate
combinations called mergers and acquisitions then they seek acquisition
finance.
· Bridge Loan
o Bridge loan is obtained by corporates against expected equity flows/
issues. Loan to corporate for meeting promoters contribution.
· External Commercial Borrowings (ECB’s)
o ECB’s are commercial loan by non-resident lenders. This includes buyer’s
credit, supplier’s credit, FCCBs with minimum average maturity of 3
years.
· Leasing
o Leasing is less capital incentive than purchasing, so if a corporate has
constraints on its capital, it can grow more rapidly by leasing property
than it could by purchasing them.
· FCL for Fixed Assets
o The foreign currency loans are granted out of the FCNR (B) deposits etc
accounts are permitted by RBI. These loans are commonly known as

39. 39
FCNR (B) loans. Demand loan for purchase of new plant and machinery,
acquisition of equipments and other assets can be financed under foreign
currency loan scheme.
· LC for Fixed Assets
o The letter of credit is an agreement whereby the applicant requests and
instructs the issuing bank acting on its own behalf to do the payments. LC
can be established for acquisition of fixed assets for corporate.
· Differed Payment Guarantee
o When a corporate is in need of capital equipment, a corporate may
approach the supplier to provide the same on deferred terms of payments
as per his cash flows. Generally the client preferred DPG, if the
equipment is available at less than term loan interest. The deferred
payments will be guaranteed by the bank. Bankers demand for a pari
pasu charge on the assets of the company.
· Corporate Loan
o High net worth corporate having good track record of profits / dividend
payments / market reputation can be provided with a corporate loan for
their general corporate purposes to augment long term resources for
working capital management / acquisition and or refinance of fixed assets
, prepayment of high cost loans etc.
· Discounting Future Cash Flow / Lease rents
o High net worth corporate having good track record of profits / dividend
payments / market reputation can discount their future cash flows
including lease rentals for their general corporate purposes to augment
long term resources for working capital management / acquisition and or
refinance of fixed assets , prepayment of high cost loans etc. this facility
can be availed without joining the consortium.
· Mortgage Loans
o Corporates can avail the loan repayable by installments by mortgaging
the land and building of the corporate under mortgage loan. This is
quickest mode of finance.

40. 40
· Loan against paper Securities
o Corporates can avail loan against pledge of paper securities including
deposits held with banks to meet urgent requirement of finance. The loan
can repaid by way of installments or will be liquidated on maturity.
The Credit requirements may be dispensed by one of the following modes
1) Syndication
2) Consortium Lending
3) Multiple Banking

41. 41
4. Syndication
A syndicated loan is an arrangement whereby a number of banks, known as a syndicate,
agree jointly to make a loan to a borrower on uniform terms and conditions.
In a syndicated loan
· Every syndicate member has a separate claim on debtor, although there is a
single loan arrangement contract
· Syndication facilitates sharing of credit risk between various financial institutions
without disclosure to financial market and marketing burden
· Each member bank in syndicate participates only that amount which it has
committed to i.e. each bank is responsible for its portion of loan only.
4.1 Parties in Syndication
4.1.1 Borrower
Borrower can be Corporates, Governmental Bodies or Public Sector Undertakings
4.1.2 Senior Syndicate Members
· Lead Arranger: Lead arranger is one who is engaged by the borrower to arrange
syndication by contacting other banks and obtaining their commitments towards
syndication. Borrower may choose the lead arranger by calling for bids and
taking up the one with excellent track record in syndicated loans. Upon selection
the borrower gives a letter of appointment or mandate to the lead arranger
Arranger bank prepares the Information Memorandum (IM) similar to prospectus
in consultation with the borrowing entity, incorporating:
1) Borrower’s financial position carrying out financial and accounting due-
diligence and his detailed business profile
2) Summarized preparation of income statement and analysis of balance sheet
present and future periods
3) Industrial / Business sector analysis

42. 42
4) Comment on management and strategic plans
5) If a project is involved, its economic analysis, engineering design, financial
arrangements etc
· Co-arranger: In large syndication where sourcing and utilization is
geographically spread one or two banks may additionally be selected as a co-
arranger.
4.1.3 Junior Syndicate Members
· Manager/ Co-Manager: these are banks agreeing to lend a significant portion of
the loan. Their number and identity may vary according to the size, complexity
and pricing of loan as well as the willingness of the borrower to increase its range
of banking relationships
· Agent: Agent bank is appointed by lead arranger to administer the syndicated
loans throughout its life on behalf of the syndicate members.
The agent duties are:
1) To administer the syndicate loan
2) To arrange for disbursal by collecting funds from members.
3) To calculate and collect interest, principal and pass on to the members.
4) To ensure fulfilling the covenants
5) To check security and insurance cover
6) To call meetings and take vote on majority decisions
7) To call and event of default, if necessary.
8) To obtain financial information of borrower
· Security Trustee: the lead arranger normally acts as a trustee in most of the
cases. However an outside legal agency can be nominated with concurrence of
the borrower. The documents generally comprise
o Basic Loan agreement
o Inter-se-agreement among participant banks

43. 43
o Guarantee Letter
o Credit Support Document
o Description and identification of all parties in Syndicate
Various clauses such as purpose clause, commitment clause, repayment clause, draw
down clause, prepayment clause, interest rate and interest payment clause, covenant
clause (like maintenance of ratios, submission of financial statements and not charging
assets to other creditors etc) Agency Clause-duties and responsibilities of agent bank,
security clause etc are included in the above documents.

44. 44
5. Consortium Financing
The entire credit needs of borrowing units are financed by a group of banks forming a
consortium. It is a concept to promote collective application of banking resources.
Consortium helps to spread risk amongst bank consortium members. There is a better
credit appraisal. Smaller banks can join consortium and finance to improve their
profitability. It also stops unhealthily practice of snatching of accounts. Borrowers get
their credit requirements even if single bank has a credit squeeze.
5.1 RBI Guidelines on Consortium Finance
· Not obligatory / mandatory
· Banks free to frame their own ground rules for consortium lending
· No of participating banks-Max 10 in respect of fund based working capital limit
beyond Rs 100 crores
· Minimum share of each bank-5% of fund based credit limits or Rs 5 Crores which
ever is more. Lead bank vested with discretion to permit participation which is
less than 5% provided quantum ceiling of Rs 5 Crores is adhered to.
· New bank can enter when existing member unable to take up share in enhanced
limits or
· When recommended time frame for disposal is not adhered to by a member. In
both cases leaders NOC is a must
· Enhanced share need not be taken up by a member bank but no member can
leave before the expiry of the least 2 yrs from date of disbursement of its share.
· Reallocation of such enhanced share amongst other existing members is
possible
· If no bank is willing to take over the entire outstanding of an existing member
desirous to move out of consortium after 2 years, such bank can leave but selling
of its debt at a discount and /or undertaking to defer its dues till other members
are paid in full.

45. 45
5.2 Consortium Meetings
Consortium Meetings are to be attended by executives/ officials having adequate
designation / authority. Appraisal note to be circulated to all members 10 days in
advance. Appraisal note to be prepared on the basis of latest financial data.
In case of any disagreement amongst members, lead bank and the bank having 2nd
largest share of fund based credit facilities shall have the final say. Dissenting members
have fall in line.
5.3 Submission of Information
Member banks have to submit to lead bank quarterly information regarding extent of
utilization of limits, conduct and status of the accounts any adverse audit observations.
5.4 Difference between Syndicate and Consortium advance
Syndication method is sought when project cost is huge, project is to be executed with
combination of loans in local currency and foreign currency, borrower wants to take
advantage of pricing, minimizes the cost of rising loan with least turn-over time.
Consortium involves a lengthy procedure, more lead time, leader Vs members
concurrence in all exposures, varied pricing (and thereby increased cost), followed by
regular meetings, observations and compliance by / with the corporate. In respect of
consortium term loan the monitoring aspect of declaring the financial closure. There is
no drawdown schedule and no monitoring agency, as in case of a syndication where an
agent carries out all the activities. Consortium bankers have to hold the risk in their
books throughout life, whereas in syndication the participants can offload the risk in
secondary market.

46. 46
6. Multiple Banking
Where the credit needs of different divisions of a borrowing company are met
independently by different banks without any formal agreement / arrangement amongst
them the company is said to have availed multiple banking. This system has certain
drawbacks. They are credit discipline is in jeopardy, good account is snatched away,
and recovery becomes difficult. Corporates can avail these facilities however they have
to submit details of other banks facilities to the existing bank. There is a ceiling limit
involved. The aggregate working capital facilities availed should be within 10% tolerance
of working capital assessed by existing bank. Again Bank’s exposure should not exceed
75% of total working capital needs of the borrower.
6.1 Drawbacks of Multiple Banking
· Double financing can be done
· In case of term loan, direct payment can be made through one bank and
reimbursement taken from another bank on same invoice
· Since no single assessment of MPBF, excess financing is possible
· Difficulty in knowing the value of stocks/receivables charged due to lack of
information from other banks
· Difficulty in arriving at the drawing power
· Lack of details on over limits from other banks
Precautions observed in Multiple Banking
· Multiple banking facilities are provided only to highly rated borrowers with good
credit rating
· Financial statements obtained are to be notified by top authorities of corporates.

47. 47
7. Working Capital
7.1 What is working Capital?
Working capital for any manufacturing unit means the total amount of circulating funds
required for the continuous operations of the unit on a going basis. The working capital
comprises of:
· Amount of raw material of various kinds
· Amount for stock in process
· Amount for all finished goods in stores and in transit
· Amount for receivables or Sundry Debtors
· Other routine expenses
7.2 Difference between Working Capital requirement and net working capital
Working capital requirement means the requirement of funds for financing minimum total
current assets. Net working capital or liquid surplus means the difference between
current assets and current liabilities. The desired level of net working should be higher
than 1:1 to ensure sufficient liquidity and availability of working funds.
7.3 Factors which determine working capital
1) Policies for production
2) Manufacturing process
3) Credit policy of the unit
4) Pace of turnover
5) Seasonality
7.4 Working Capital Assessment Methods
7.4.1 Turnover Method: Under this method working capital is calculated on basis of the
25% of the annual projected turnover / sales of the borrower. Out of this 25% a minimum
of 20% of the projected turnover is to be provided by bank as working capital limit and
rest 5% is to be contributed by borrower as their margin towards working capital.

48. 48
Particular Calculations Rs Lacs
Projected Turnover 300
Working Capital Requirement
(300 x 25) / 100 75
25% of Projected Turnover
Bank Finance for working capital
(300 x 20 / 100
60
20% of projected turnover
Or
75 x 4 /5
4/5th of working capital requirement
Margin Money for working capital
(300 x 5) / 100
15
5% of projected turnover
Or
75 x 1/5
1/5th of working capital
Further these guidelines are subject to an assumption of an operating cycle of a period
of 3 months, although in reality the operating cycle may be shorter or longer. However in
case of a shorter operating cycle, working capital should be provided at 20% of the
projected turnover. In case of commodities covered under selective credit control,
directives issued by RBI from time to time are followed.
6.4.2 Cash Budget System: Some banks give this option to corporates enjoying
working capital limits in excess of Rs 5 Crores. But when the corporates choose cash
budget system of lending, they have to satisfy the bank that they have necessary
infrastructure inn place to submit the required information periodically in time. The scope
of internal MIS should be satisfactory and commensurate with the level of operations.
The corporate must have finance professionals and computerized environment.
Under this method the peak level cash deficit will be the level of total working capital
finance to be extended to the borrower by the banking system. The peak level cash
deficit will be ascertained from the projected cash budget system submitted by the
borrower. The cash budget system will comprise of projected receipts and payments for
next 12 months in account of
· Business Operations
· Non-Business operations

49. 49
· Cash Flow from Capital Accounts
· Sundry Items
Mandatory Information to be provided
· Projected cash budget system (annual)
· Projected cash flow for next quarter ( at least a week in advance)
· Quarterly summary of cash book pertaining to previous quarter (actual) certified
by a chartered accountant within 2 weeks of the close of the quarter.
· Monthly selective operational data.
7.4.3 CMA data / 2nd
method of lending: this method makes use of data obtained from
corporates for calculating the working capital requirement. Data is collected from
corporates in form of following six forms
Form 1: Particulars of existing / proposed limits from banking system
Particulars of the existing credit from entire banking system as also the term loan
facilities availed from term lending institutions / banks are furnished in this form.
Maximum and minimum utilization of limits during last 12 months and outstanding
balances as on a recent date are also given so that comparison can be made with limits
now requested for and the limits actually utilized during last 12 months.
Form 2: Operating Statement
The data relating to gross sales, net sales, cost of raw materials, power and fuel, direct
labor, depreciation, selling and general administrative expenses, interest etc are
furnished in this form. It also covers information on operating profit and net profit after
deducting total expenditure from total sales proceeds.
Form 3: Analysis of Balance Sheet
A complete analysis of various items of last two year’s balance sheet, current year’s
estimates and following year’s projections are given in this form. The details of current
liabilities, term liabilities, net worth, current assets and fixed assets, other non-current
assets etc are given in this form as per the classification accepted by the banks.

50. 50
Form 4: comparative statement of current assets and current liabilities
This form gives the details of various current assets and current liabilities as per the
classification accepted by banks. The figures given in this form should tally with the
figures given in form 3 where details of all liabilities and assets are given. This form is
used to indicate all the current assets and current liabilities at one place. In case of
inventory, receivables and sundry creditors, the holding levels are given not only in
absolute amounts but also in terms of months so that a comparative study may be done
with the prescribed norms / past trends.
Form 5: Computation of Maximum Possible Bank Finance MPBF
On basis of the details of the current assets and current liabilities given in Form 4, MPBF
is calculated in this form to find out the credit limits to be allowed to borrowers.
Form 6: Funds Flow Statement
In this form flow of long term sources and uses is given to indicate whether long term
funds are sufficient for meeting the long term requirements. In addition to long term
sources and uses, increase / decrease in current assets is also indicated in this form.
7.5 Calculation of MPBF
Sr.
No. Particular Value
1 Total Current Assets XXXX
2 Total Current Liabilities XXXX
3 Working Capital Gap (1-2) XXXX
4 Min stipulated WIC
XXXX
25% of 1
5 Actual / Projected Net WIC XXXX
6 item 3 - item 4 XXXX
7 item 3 - item 5 XXXX
8 MPBF
XXXXitem 6 or item 7 whichever
is lower

51. 51
III Factors Influencing Loan Rates
Money lent by banks and financial institutions for various purposes come with a cost,
which is known as the loan rate or the interest rate at which the loan is lent.
1. Cash Reserve Ratio (CRR)
It is the percentage of cash deposits that banks need to keep with the Reserve Bank of
India on an everyday basis. Increasing the CRR also means banks have lesser money
to lend. RBI adjusts the CRR to change the amount of liquidity in the financial system,
which helps to keep the inflation within reasonable limits.
Also, when CRR is increased, the interest rates also increase as the amount of liquidity
in the financial system decreases. RBI has made frequent CRR cuts in the recent past to
inject liquidity into the financial system.
2. Repo Rate
This is the interest rate at which RBI lends money to the banks whenever they need to
borrow funds from RBI. When the repo rate decreases its good news for the banks as
they can avail more funds at a lower interest rate and vice versa.
3. Reverse Repo Rate
This means just the opposite of repo Here, RBI borrows funds from the banks and when
the Reverse Repo Rate increases banks are very happy to lend money to RBI because
of the attractive interest rates RBI offers to obtain the loans.
4. SLR (Statutory Liquidity Ratio) Rate
Every commercial bank needs to maintain a certain amount of funds in some form —
which includes cash, gold, government bonds, etc — before they can provide credit to its
customers. This measure helps RBI have control over the bank’s credit expansion,
keeping it realistic.
The collective impact of all these rates influence the liquidity in the financial system and
lead to an increase or decrease in PLR, which in turn affects loan lending rates.

52. 52
5. Prime Lending Rate (PLR)
This is the benchmark interest rate on the basis of which financial institutions decide the
interest rates on the various loan products. For example, a bank might say a loan
interest rate will always be 0.5% above the PLR. This means, if the PLR increases or
decreases by a certain amount, the interest rates charged on the floating rate loans
offered by the bank also increase or decrease by the same amount.
6. What is BPLR?
By definition, the Benchmark Prime Lending Rate (BPLR), is the reference interest rate
based on which a bank lends to its credit worthy borrowers. Normally, loans are given
out a little more or a little less that this reference interest rate. All retail loans are linked
to the BPLR or the PLR. So, any change in it will affect the cost at which you take a loan
from a bank.
The RBI does not set these rates, but in a broad way stipulates the interest rates in the
economy.
The PLR is influenced by RBI’s policy rates - the repo rate and cash reserve ratio - apart
from the bank’s policy. In simple words, availability of funds in the banking system and
demand for credit by consumers (both retail and industrial) determine what the BPLR
should be.
7. What is a ‘Spread’?
Spread is the difference between the BPLR (prime lending rate) and the loan interest
rate. This can be “x” plus or “x” minus the BPLR rate fixed by the bank.
8. What are Sub-PLR Loans?
Some banks provide loans and advances at a rate lower than the BPLR (Prime Lending
Rate) of the bank to customers availing finance for business purposes or short term
funds for various needs (Usually large companies, major exporters and some individuals
etc.) with high credit ratings. This enables them to attract bigger clients, offer bigger
amounts of loans since the high credit worthiness is a likely indicator of customers

53. 53
making regular payments and in turn this helps the banks to increase business and get
more profits from their loans.
9. Credit Deposit ratio (C-D ratio)
It is the proportion of loan-assets created by banks from the deposits received. The
higher the ratio, the higher the loan-assets created from deposits. The higher the ratio,
the more the bank is relying on borrowed funds, which are generally more costly than
most types of deposits.
9.1 . Implication of credit-deposit ratio
Some experts contend that a high credit-deposit ratio could lead to a rise in interest
rates.
Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of
60 per cent. That means Bank X has used deposits worth Rs. 60 crores to create loan-
assets. Only Rs. 40 crores is available for other investments. Now, the Indian
government is the largest borrower in the domestic credit market. The government
borrows by issuing securities (G-secs) through auctions held by the RBI.
Banks, thus, lend to the government by investing in these G-secs. And Bank X has only
Rs. 40 crores to invest in G-secs. If more banks like X have lesser money to invest in G-
secs, what will the government do? After all, it needs to raise money to meet its
expenditure.
The government has two options. One, it can raise yields to make investment by banks
in G-secs attractive. Or two, force the RBI to take the securities into its books. Both the
options have a tendency to push up interest rates in the economy.
Yields on G-secs serve as a benchmark for interest rates on other debt instruments. A
rise in the former, thus, pushes up interest rates on the latter. But why should interest
rates rise if RBI takes G-secs into its books? Because, by doing so, the RBI releases
fresh money into the system. If the money so released is large, ``too much money will
chase too few goods'' in the economy resulting in higher inflation levels. This would

54. 54
prompt investors to demand higher returns on debt instruments. In other words, it will
lead to higher interest rates.
10. CASA
CASA stands for current and savings account. Different kinds of deposits current
account, savings account and term deposits form the major source of funds for banks.
The CASA ratio shows how much deposit a bank has in the form of current and saving
account deposits in the total deposit.
10.1 How is it important for banks?
A higher CASA ratio means higher portion of the deposits of the bank has come from
current and savings deposit, which is generally a cheaper source of fund. Many banks
don’t pay interest on the current account deposits and money lying in the savings
accounts attracts a mere 3.5% interest rate. Hence, higher the CASA ratio betters the
net interest margin, which means better operating efficiency of the bank. Net interest
margin is difference between total interest income and expenditure and is shown as a
percentage of average earning assets. Higher income from CASA will improve the net
interest margin as the cost of this fund is relatively lower. For instance, most banks lend
at over 10%, whereas, the rate of interest that they pay on saving deposit is just 3.5%.
However, actual realization depends on other expenditure, too.
10.2 How is CASA different from term and demand deposits?
Current and saving accounts remain operational. Depositors don’t need to give prior
notice to withdraw money, however, in case of term deposits; the money is locked in for
a specific period. If a depositor wishes to withdraw the money before maturity, he may
have to pay a fine. Usually, an overdraft facility is available with the current account
deposit. Demand deposit gives you the facility to withdraw your money anytime

55. 55
IV. SIGNIFICANCE OF INTEREST RATES
The interest rate is the profit over time due to financial instruments. In a loan structure
whatsoever, the interest rate is the difference (in percentage) between money paid back
and money got earlier, keeping into account the amount of time that elapsed. If you were
given Rs. 100 and you give back Rs. 120 after a year, the interest rate you paid was
20% a year.
1. In general, an increase of interest rates may be provoked by the following factors
alternatively or cumulatively:
1. An anti-inflationary policy of the central bank, based on restrictions to the growth
of the nominal money supply and on rising discount interest rate.
2. A policy by the central bank aimed at revaluating the currency or defending it
from devaluation,
3. The attempt of the Treasure of covering public deficit by issuing more bonds in
an unwilling market
2. A fall in interest rates may be justified especially by the following reasons:
1. An expansionary policy of the central bank.
2. The requests of industrialists and trade unions for cheaper money in front of a
crisis.
3. A loose monetary policy due to a commitment to a fast export-led growth.
4. The relaxation of the need for defending the exchange rate, for example thanks
to a new monetary union.
3. IMPACT ON OTHER VARIABLES
The traditional effects of an increase of interest rates are, among others, the following:
1. A fall in stock exchange
2. A fall in profitability of firms
3. A fall in private investment
4. A fall in consumption credit
5. An inflow of capital for buying bonds
6. An upward pressure on exchange rate.

56. 56
V. Sectoral Credit Deployment
SECTORAL DEPLOYMENT OF GROSS BANK CREDIT
( Amount in Rupees crores)
Variations (Growth) during
Sector March 31, March 31, March 28, 2006-07 2007-08
2006 2007 2008 Absolute Per
cent
Absolute Per
cent
1 2 3 4 5 6 7 8
I Gross Bank Credit (II
+ III)
14,45,531 18,48,166 22,47,437 40,2,635 27.9 3,99,271 21.6
II Food Credit 40,691 46,927 44,399 6,236 15.3 -2,528 -5.4
III Non-Food Gross
Bank Credit
14,04,840 18,01,239 22,03,038 3,96,399 28.2 4,01,799 22.3
(1 to 4)
1 Agriculture & Allied
Activities
1,73,972 2,30,398 2,73,658 56,426 32.4 43,260 18.8
2 Industry (Small,
Medium & Large)
5,50,444 6,97,334 8,71,900 1,46,890 26.7 1,74,566 25
3 Services 3,20,177 4,16,773 5,46,516 96,596 30.2 1,29,743 31.1
3.1. Transport
Operators
17,341 26,519 37,447 9,178 52.9 10,928 41.2
3.2. Professional and
Other Services
15,283 23,926 29,756 8,643 56.6 5,830 24.4
3.3 .Trade 83,535 1,06,612 1,22,297 23,077 27.6 15,685 14.7
3.4. Real Estate
Loans
26,723 45,206 62,276 18,483 69.2 17,070 37.8
3.5. Non-Banking
Financial Companies
34,305 49,027 75,301 14,722 42.9 26,274 53.6
4 Personal Loans 3,60,248 4,56,734 5,05,390 96,486 26.8 48,656 10.7
4.1. Consumer
Durables
7,106 9,189 8,663 2,083 29.3 -526 -5.7
4.2. Housing @ 1,85,203 2,30,994 2,55,653 45,791 24.7 24,659 10.7
4.3. Advances against
Fixed Deposits
34,417 40,239 45,031 5,822 16.9 4,792 11.9
(including FCNR (B),
NRNR Deposits etc.)
4.4. Credit Card
Outstanding
9,086 13,416 19,259 4,330 47.7 5,843 43.6
4.5. Education 9,962 15,209 20,547 5,247 52.7 5,338 35.1
5 Priority Sector 5,10,738 6,34,142 7,38,686 1,23,404 24.2 1,04,544 16.5
of which, Housing# 1,33,200 1,60,345 1,82,646 27,145 20.4 22,301 13.9

57. 57
March 31, March 31, March 31, 2006-07 2007-08 2006-07 2007-08
2006 2007 2008
2 3 4 5 6 7 8
550444 697334 871900 146890 174566 26.69 25.03
1 4,146 7,704 10,616 3,558 2,912
2 30,946 39,999 50,221 9,053 10,222
of which:
Sugar 8,776 11,551 16,726 2,775 5,175
Edible Oils and
Vanaspati
5,077 6,111 7,191 1,034 1,080
Tea 1,851 2,340 2,334 489 -6
Others 15,243 19,997 23,970 4,754 3,973
3 4,002 4,774 5,641 772 867
4 58,472 78,971 95,935 20,499 16,964
of which:
Cotton Textiles 29,781 38,051 47,337 8,270 9,286
Jute Textiles 1,053 967 1,055 -86 88
Man Made
Textiles
3,062 4,178 4,681 1,116 503
Other Textiles 24,577 35,775 42,862 11,198 7,087
5 4,486 4,774 5,750 288 976
6 1,497 2,887 3,060 1,390 173
7 9,148 11,588 13,622 2,440 2,034
8 25,150 35,886 41,738 10,736 5,852 42.69 16.31
9 48,638 55,774 64,391 7,136 8,617
of which:
Fertiliser 10,569 9,837 9,251 -732 -586
Drugs &
Pharmaceutical
s
16,273 18,584 23,286 2,311 4,702
Petro
Chemicals
6,965 8,316 9,516 1,351 1,200
Others 14,830 19,037 22,338 4,207 3,301
10 7,250 9,250 10,410 2,000 1,160
11 1,817 2,564 2,759 747 195
12 7,799 9,389 14,210 1,590 4,821
13 65,896 83,870 1,04,719 17,974 20,849
of which:
Iron and Steel. 50,991 63,877 80,790 12,886 16,913 25.27 26.48
Other Metal
and Metal
Products
14,905 19,993 23,929 5,088 3,936
14 34,878 44,026 52,442 9,148 8,416
of which:
Electronics 11,004 13,511 16,024 2,507 2,513
Others 23,875 30,515 36,418 6,640 5,903
15 18,628 20,922 29,152 2,294 8,230
16 20,559 23,850 24,995 3,291 1,145
17 13,303 19,970 28,298 6,667 8,328
18 112853 142975 202296 30,122 59,321 26.69 41.49
of which:
Power 60,157 72,816 93,899 12,659 21,083 21.04 28.95
Telecomunicati
ons
18,455 19,446 37,121 991 17,675
5.37 90.89
Roads & Ports 19,695 24,941 32,990 5,246 8,049 26.64 32.27
Other
Infrastructure
14,546 25,772 38,286 11,226 12,514
19 80,975 98,161 1,11,645 17,186 13,484
Industry-wise Deployment of Gross Bank Credit
(Rs. crore)
Growth
Sr. No
1
Industry
Outstanding as on
Wood and Wood Products
Industry
Variation
Paper and Paper Products
Mining and Quarrying
Food Processing
Beverage & Tobacco
Textiles
Leather & Leather
Other Industries
Cement and Cement
Basic Metals and Metal
All Engineering
Vehicles, Vehicle Parts
Gems and Jewellery
Petroleum, Coal Products
Chemicals and Chemical
Rubber, Plastic & their
Glass and Glass Ware
Construction
Infrastructure

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1. Industrial Credit deployed in India increased by 25 per cent in FY 08 over its figure for
FY 07. The actual variation observed in the Industrial Credit was of the quantum Rs.
174,566 Crores. 34% of the total credit deployed by Institutions in India went towards
financing industrial growth.
Sectoral Credit
Deployment
India
FY 08
43,260, 9%
174566,
34%
129,743,
26%
48,656, 10%
104,544,
21%
Agriculture
Industry
Services
Personal
Priority
2. Industry wise credit deployment of for the year FY 08 has been shown below. Sectors
involving PPP (Public Private Partnership) drew 10 per cent and 12 per cent in the
telecom & power sector respectively. Iron & Steel sector drew 10 per cent of the total
credit deployed by scheduled commercial banks in India for FY 08.
Industry Wise
Credit Deployment
FY 08
5,852, 3%
16,913, 10%
21,083, 12%
17,675, 10%
8,049, 5%
104,994, 60%
Petro
Iron & Steel
Power
Telecom
Road & Ports
Other

59. 59