Quantitative techniques Submitted to: Mr. Durgesh Batra

Analyzing Risks in Bank Financing Process Applying quantitative techniques to assess sensitivity in sanction and monitoring of loans.

Quantitative Techniques : An Introduction Quantitative analysis is a scientific approach to managerial decision making whereby raw data are processed and manipulated resulting in meaningful information. Raw Data Quantitative Analysis Meaningful Information

Risk Analysis :Sensitivity Analysis Sensitivity analysis is a technique used to show the effects of changing one or more variables on outcome. Sensitivity analysis is a useful tool while analyzing the impact of changes in variables on the actual outcome. By creating a given set of scenarios, the analyst can determine how changes in one variable(s) will impact the target variable. For example, many people use it to determine what the monthly payments for a loan will be given different interest rates or periods of the loan, or for determining break-even points based on different assumptions. Spreadsheet software, such as Excel, is a common tool for performing sensitivity analysis.

Background An educational institution has applied for a loan in a financial institution . The project report submitted contains details of proposed changes in services while presenting financial position, income statement, cash flow and fund flow statements to provide details to the bank to understand consolidated situation, once proposed infrastructure is in place while at the same time assisting bank in understanding stand alone impact of the proposed new infrastructure.

Objectives The bank has to analyze the data and assess : >> If the client is eligible to get the loan as per pre defined financing policies of the bank. >> Check whether the client will be able to repay the loan as per changes in the industry impacting surplus generating capability of the institute.

Project Report of the Institute >> Estimated cost and means of finance >> Details of existing land >> Details of building and civil work >> Details of proposed equipments >> Details of fixed assets >> Details of fee collection for existing courses >> Details of fee collection for new courses >> Projected Profitability Statement >> Consolidated Projected Profitability Statement >> Consolidated Balance Sheet

Contd… >> Consolidated Projected Cash Flow Statement >> Allocation of Preoperative Expenses and Contingencies >> Calculation of DSCR Analysis Sheet

Banking terminology Corpus Fund : is the capital of the organization; the funds generated and kept for the existence and sustenance of the organization. Normally a corpus fund denotes a permanent fund kept for the basic expenditures needed for the administration and survival of the organization. Projected cash flow statement indicates the source and amount of income and expense activities for a given period in the future. It also shows when money will be borrowed and when it will be paid. The cash flow demonstrates the ability to repay a loan in a timely manner, something that is important to lenders. A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.

Banking terminology Debt-Service Coverage Ratio: is the ratio of cash available for debt servicing to interest, principal and lease payments. A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income. A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.

Acknowledgement Mr. Durgesh Batra (our project guide) The financial institution (Confidential data)

References http://www.wikipedia.org http://www.google.co.in/search?hl=en&q=sensitivity+analysis&meta=&aq=0&oq=sensitivity http://www.google.co.in/search?hl=en&q=security+margin+meaning&meta=&aq=f&oq=

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