MBA BANKER

  (This post explains important ratios are to be examined while appraising a term loan project. The article also deals with how to compute break even point , how to calculate DSCR (Debt service Coverage ratio) for the period of repayment of the loan, how to arrive fixed asset coverage ratio and important financial indicators . The assessment of DPG/APG etc is done in the same method how term loan is assessed, as they are the substitution of the term loan.) Term loan appraisal covers the appraisal of the borrower and appraisal of the project. The characteristics of a term loan are that term loan commitments are to be of long term. The banks and financial institutions normally offer term loans repayable in 10-15 years and beyond that period in  exceptional cases like housing loans. The repayment would be made out of cash generated from business activities. Appraisal of the borrower covers the honesty and integrity of the borrower, the standing of the borrower, business capac...

  (This post explains the definitions of   working capital ,  Operating cycle  and various methods of working capital appraisal viz.   Tandon’s first method, Tandon’s second method, Turnover method or Nayak committee norms, Cash budget method, Chore committee norms,  Maximum permissible bank finance, Minimum permissible bank finance and Important things to note in assessment of working capital assessments) Definitions of  (a)working capital , (b) Operating cycle : (a) Working capital means the sum of the funds invested at various current assets used in the operating cycle, by the industrial and trading establishments. (b) Operating cycle  means the length of time required to convert ‘Non-Cash current assets’, ( like raw material (RM), work in process (WIP), finished goods (FG), and receivables)  into  cash . Methods of Working capital appraisal: B anks in India have evolved their own method of lending as they have been given ...

  ·          DER measures the ratio of long term or total debt to shareholder’s equity. ·          The relationship between borrowed funds and the owner’s capital is a measure of the long term financial solvency of the firm. ·          The relationship is shown by the DEBT: EQUITY ratio. ·          The DER is a financial ratio indicating the relative proportion of entity’s equity and debt used to finance an entity’s assets. ·          This is also known as financial leverage . ·          This ratio is used as a standard for judging a company’s financial standing. ·          It is also a measure of a company’s ability to repay its obligations. ·         ...

  The Acid Test ratio is a more stringent measure of Liquidity than the CR (Current Ratio). It is expressed as a ratio of all the current assets excluding inventory to the Current Liabilities. The term quick assets refers to CA which can be converted into cash immediately or at a short notice without decreasing of value. CA included in the category as (i)                 Cash & bank balances (ii)   Short term marketable securities (iii)            Debtors/ receivables CA excluded   Inventory ATR (Acid Test Ratio) is more superior to CR (Current Ratio) The ratio is computed as:- (Cash+ receivables + investments)/ (Current Liabilities) OR (Current Assets –Inventory) / (Current Liabilities –Short Term Bank Borrowings) Receivables are considered to be more easily realisable and so the ratio is supposed to give a better...

  First we need to understand Money comes from owners are termed as Equity and money comes from outsiders are known as Liability . When money comes from outsiders comes with obligations to be repaid within one year or after one year. When it comes with obligation to be repaid within one year is called short term Liability . Taking advance in the form of Cash Credit, Overdraft, and advance from customers, you have the commitment either to repay them or deliver the goods. Using this money, generally one creates Short Term Assets .   If you look at the proportion here, Short term assets are greater than Short term Liabilities. If one business is having Short term assets are greater than Short term liabilities, then the business is in comfortable position. So one can say Liquidity position is comfortable. Let’s have an example, suppose a firm is having Short term assets of 15 Cr and is having Short term liabilities of 10 Cr. This means the company is in comfortable position or ...

After going through Part 1, now let's discuss, whether bank should undertake analysis of financial statement of its credit customers? are ratios useful? Consider the following:- 1) An automobile manufacturer has stocks of cars and other current assets valued at Rs 100 cr and he has payables and other current liabilities worth Rs 80cr. 2) A retailer has stocks in show room and other assets worth Rs 25 lacs and has dues to his creditors and other current liabilities valued at Rs 12.5 lacs. Which Customer is better? Banks analysis will show that in absolute terms the first borrower has lots more money available than the retailer. But when the banker calculates the current ratios, he will find that the automobile seller has CR is (Current Ratio=CA/CL) i.e 100/80= 1.25 and the retailer has 25/12.5= 2. The banker knows that he has to examine the first borrower's financials with reference to industry standards before deciding if the CR is low and is a cause for concern. In te second c...