CREDIT APPRAISAL

TABLE OF CONTENTS Chapters

1. INTRODUCTION Reason for selectin the pro!ect Sche"e of the pro!ect Research #etho$olo % Li"itation of the st&$%

'. CREDIT POLIC( OF CO##ERCIAL BAN) Co""ercial *an+s an$ its o*!ecti,es Recent polic% $e,elop"ents re ar$in *an+ cre$it Chan in phase of *an+ cre$it Tren$s of *an+ cre$it in In$ia Proce$&re for pro,i$in *an+ cre$it Cre$it Appraisal -. T.E PROFILE OF T.E OR/ANI0ATION OF PNB In$ian *an+in sector 1 its "a!or challen es P&n!a* National Ban+ at a lance #ission an$ 2ision Or ani3ational str&ct&re of PNB

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4. CREDIT P.ILOSOP.( 1 POLIC( 5IT. RE/ARDS TO PNB Cre$it philosoph% Cre$it polic% Intro$&ction to loans Classification of loans B&il$in &p of a proposal Re6&ire"ents as per constit&tion of *orro7er Financial Appraisal 8. ANAL(SIS AND INTERPRETATION OF DATA Cre$it Appraisal techni6&es Process of cre$it appraisal for pro,i$in cash cre$it Appraisal techni6&es for retail loans 9. CONCLUSION

Concl&sion

BIBLIO/RAP.(

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Intro$&ction
The last year financial crises have become the main cause for recession which was started in 2006 from US and was spread across the world. The world economy has been majorly affected from the crisis. The securities in stock exchan e have fallen down drastically which has become the root cause of bankruptcy of many financial institutions and individuals. The root cause of the economic and financial crisis is credit default of bi companies and individuals which has badly impacted the world economy. So in the present scenario analysin one!s credit worthiness has become very important for any financial institution before providin any form of credit facility so that such situation doesn!t arise in near future a ain. "nalysis of the credit worthiness of the borrowers is known as #redit "ppraisal. $n order to understand the credit appraisal system followed by the banks this project has been conducted. The project has analysed the credit appraisal procedure with special reference to %unjab &ational 'ank which includes knowin about the different credit facilities provided by the banks to its customers( how a loan proposal is bein made( what are the formalities that is to be satisfied and most importantly knowin about the various credit appraisal techni)ues which are different for each type of credit facility. 'efore oin further it is necessary to understand the need and basic framework of the project. Therefore this chapter provides an introduction to the topic( objective of the project( reasons for selectin the project and the basic structure and framework how the project proceeds. $n order to understand the importance of the topic selected an introduction to the
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overview of the commercial bank ( its functions( and present trends and rowth in bank credit are re)uired and it is covered in this chapter.

Reasons for selecting the project

*henever an individual or a company uses a credit that means they are borrowin money that they promise to repay with in a pre+decided period. $n order to assess the repayin capability i.e. to evaluate their credit worthiness banks use various techni)ues that differ with the different types of credit facilities provided by the bank. $n the current scenario where it is seen that bi companies and financial institutions have been bankrupted just because of credit default so #redit "ppraisal has become an important aspect in the bankin sector and is ainin prime importance. $t is the incident of credit defaults that has iven rise to the financial crisis of 200,+0-. 'ut in $ndia the credit default is comparatively less that other countries such as US. .ne of the reasons leadin to this may be ood appraisal techni)ues used by banks and financial institutions in $ndia. /ventually the importance of this project is mainly to understand the credit appraisal techni)ues used by the banks with special reference to %unjab &ational 'ank.

Scheme of the project

$t covers the objective and structure of the project which is discussed as follows0+

Objective of the project

The overall objective of this project is to under stand the current credit appraisal system used in banks. The #redit "ppraisal system has been analysed as per the different credit facilities provided by the bank. The detailed explanation about the techni)ues and process has been discussed in detail in the further chapters.
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Structure or Plan of the project

The project first of all makes a study about the commercial banks+ its important functions. Then it hi hli hts on the concept of 'ank #redit 1 its recent trends. The project then proceeds towards the lendin procedure of banks and here it hi hli hts about credit appraisal bein the first step in buildin up of a loan proposal. Then it discusses the bank credit policy with respect to %unjab &ational bank where the project was undertaken. The project then proceeds with the review of literature i.e. review of some past work re ardin credit appraisal by various researchers. The project then moves towards research methodolo y where it covers the information re ardin the type of data collected and the theoretical concepts used in the project are discussed in detail. Then the project proceeds with the next chapter consistin of the analysis part which covers the analysis of various techni)ues used by the banks for the purpose of credit appraisal. Then the project moves to its next chapter i.e. findin s where some results found out are interpreted and then movin on to the last and the final chapter i.e. the su su estions and conclusions where some steps are ested to be implemented to increase the work efficiency and to reduce to work pressure

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Commercial banks and its objectives

" co""ercial *an+ is a type of financial intermediary that provides checkin accounts( savin s accounts( and money market accounts and that accepts time deposits. Some use the term 2commercial bank2 to refer to a bank or a division of a bank primarily dealin with deposits and loans from corporations or lar e businesses. This is what people normally call a 2bank2. The term 2commercial2 was used to distin uish it from an investment bank. #ommercial banks are the oldest( bi est and fastest rowin financial intermediaries in $ndia. They are also the most important depositories of public savin s and the most important disbursers of finance. #ommercial bankin in $ndia is a uni)ue bankin system( the like of which exists nowhere in the world. The truth of this statement becomes clear as one studies the philosophy and approaches that have contributed to the evolution of bankin policy( pro rammes and operations in $ndia. The bankin system in $ndia works under constraints that o with social control and public ownership. The public ownership of banks has been achieved in three sta es0 3--4( july 3-6and "pril( 3-,0. &ot only the public sector banks but also the private sector and forei n banks are re)uired to meet the tar ets in respect of sectoral deployment of credit( re ional distribution of branches( and re ional credit deposit ratios. The operations of banks have been determined by lead bank scheme( 5ifferential 6ate of interest scheme( #redit authori7ation scheme( inventory norms and lendin systems prescribed by the authorities( the formulation of credit plans( and service area approach. #ommercial 'anks in $ndia have a special role in $ndia. The privile ed role of the banks is the result of their uni)ue features. The liabilities of 'ank are money and therefore they are important part of the payment mechanism of any country. 8or a financial system to mobilise and allocate savin s of the country successfully and productively and to facilitate day+to+day transactions there must be a class of financial institutions that the public views are as safe and convenient outlets for its savin s. The structure and workin of the bankin system are inte ral to a country!s financial stability and economic rowth. $t has been ri htly claimed
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that the diversification and development of $ndian /conomy are in no small measure due to the active role banks have played financin economic activities of different sectors.

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Major objectives of commercial banks

Bank Credit
The borrowin capacity provided to an individual by the bankin system( in the form of credit or a loan is known as a bank credit. The total bank credit the individual has is the sum of the borrowin capacity each lender bank provides to the individual. The operatin paradi ms of the bankin industry in eneral and credit dispensation in

particular have one throu h a major upheaval. 9endin rates have fallen sharply. Traditional rowth and earnin such as corporate credit has been either slow or not profitable as before. 'anks movin into retail finance( interest rate on the once attractive retail loans also started comin down. #redit risks has went up and new types risks are surfaced

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Types of credit
'ank in $ndia provide mainly short term credit for financin workin capital needs althou h( as will be seen subse)uently( their term loans have increased over the years. The various types of advances provide by them are0 :a; Term 9oans( :b; cash credit( :c; overdrafts( :d; demand 9oans ( :e; purchase and discountin of commercial bills( and( :f; instalment or hire purchase credit.

!olume of Credit#ommercial banks are a major source of finance to industry and commerce. .utstandin bank credit has one on increasin from 6s <2< crore in 3-43 to 6s 3-(32= crore in 3-<,( to 6s 6-(<3> crore in 3-,6( 6s 3(03(=4> crore in 3-,-+-0 ( 6s 2(,2(<02 crore in 3--< and to 6s 6(0-(04> crore in 2002. 'anks have introduced many innovative schemes for the disbursement of credit. "mon such schemes are villa e adoption( a riculture development branches and e)uity fund for small units. 6ecently( most of the banks have introduced attractive education loan schemes for pursuin studies at home or abroad. They have introduced attractive educational loan schemes for pursuin studies at home or abroad. They have moved in the direction of brid in certain defects or aps in their policies( such as ivin too much credit to lar e scale industrial units and commerce and ivin too little credit to a riculture( small industries and so on. The %ublic Sector 'anks are still the leadin lenders thou h rowth has declined compared to previous )uarter. The credit rowth rate has dipped sharply in forei n and private banks compared to previous )uarter. $n all( the credit rowth has slipped in this )uarter. Cre$it :(O( /ro7th; #arch '< '==< '==? %ublic Sector 'anks 22.4 20.=
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#arch '>

CREDIT APPRAISAL

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The rates have one down compared to previous )uarter when it was seen that there was no chan es in loan rates in private and forei n banks. 'ut then compared to rate cuts done by 6'$( they still need to o lower. Ta*le 19@ Re$&ction in Deposit an$ Len$in Rates :Octo*er '==< A April '==?B; :'asis points; Len$in Ban+ /ro&p %ublic Sector 'anks %rivate Sector 'anks 8ive ?ajor 8orei n 'anks Deposit Rates :BPLR; 324+240 <4+200 300+200 324+224 300+324 0+300 Rates

BPLR Public Sector Banks Private Sector Banks Five Banks Major

Oct A =< 13.7514.75 13.75-

#ar A =?

Apr A =?

Chan e :fro" Oct to Apr; 125-225 100-125 0-100

11.50-14.00 11.50-13.50 12.75-16.75 12.50-16.75 14.25-15.75 14.25-15.75

17.75 Forei n14.2516.75

Sector+wise credit points credit has increased to a riculture( industry and real estate whereas has declined to &'8#s and @ousin . " bank roup wise sectoral allocation is also iven which su ests private banks have increases exposure to a riculture and real estate but has declined to industry. %ublic sector banks have increased allocation to industry and real estate. There is a more detailed analysis in the macroeconomic report released before the monetary policy.

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!s Sector Februar" 200$ C share in total %.2 45.2 3.1 7.3 5.7 1==

on 15# 2ariations :per cent; 16.4 25.% 26.7 12 4$.6 ''

!s

on

Februar" 27# 200% C share in total 13 52.5 $.5 4.7 6.6 1== 2ariations :per cent; 21.5 25.$ 61.4 7.5 41.7 1?.8

! riculture &n'ustr" (eal )state *ousin +BF,s O,erall Cre$it

To sum up( the credit conditions seems to have worsened after Aanuary 200-. The rates have declined but lendin has not really picked up. @owever( the )uestion still remains B whether credit decline is because banks are not lendin :supply; or because peopleCcorporates are not borrowin :lack of demand;. $t is usually seen that all financial variables as lead indicators say if credit rowth :alon with other fin indicators; is pickin ( actual rowth will also rise. @owever( it is actually seen the relation is far from clear. $n fact( the financial indicators hardly help predict any chan e in business cycle. ?ost rise in ood times and fall in bad times. ?ost financial indicators failed to predict this lobal financial crisis and kept risin makin everyone all the more complacent.

Recent policy developments Regarding Bank Credit

'ank lendin was done for a lon time by assessin the workin capital needs based on the concept of ?%'8 :maximum permissible bank finance;. This practice has been withdrawn with the effect from "pril 34th 3--< in the sense that the date( banks have been left free to choose their own method : from the method such as turnover ( cash bud et( present ?%'8 ( or any other theory; of assessin workin #apital re)uirement of the borrowers.

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The cash credit system has been the bane( yet it has exhibited a remarkable stren th of survival all these years. $n spite of many efforts which were direct in nature( only a slow pro ress has been made to reduce its importance and increase bill financin . Therefore a concrete and direct policy step was taken on "pril 23( 3--4 which made it mandatory for banks( consortia( syndicates to restrict cash credit components to the prescribed limit ( the balance bein iven in the form of a short term loan( which would be a demand loan for a maximum period of one year( or in case of seasonal industries ( for six months. The interest rates on the cash credit and loan components are to be fixed in accordance with the prime lendin rates fixed by the banks. This Dloan systemE was first made applicable to the borrowers with an ?%'8 of 6s 20 crore and aboveF and in their case ( the ratio of cash credit :loan; to ?%'8 was pro ressively reduced:increased; from <4 :24; per cent in "pril 3--4 ( to 60 :=0; percent in September 3--4( =0 :60; per cent in "pril 3--6 ( and 20 :,0; percent in "pril 3--<. *ith the withdrawal of instructions about the ?%'8 in "pril 3--< ( the prescribed cash credit and loan components came to be related to the workin capital limit arrived in banks as per the method of their choice. *ith effect from September >( 3--<( the 6'$ has permitted banks to raise their existin exposure limit to a business roup from 40G to 60GF the additional 30G limit bein exclusively meant for investment in infrastructure projects. The term lendin by banks also has subject to the limits fixed by 6'$. $n 3-->( this limit was raised from 6s 30 crore to 6s 40 crore in case of a loan for a sin le project by a sin le bank( and from 6s 340 crore to 6s 200 crore for a sin le project by all the banks. The latter limit was subse)uently raised to 6s 400 crore in the case of eneral projects and 6s 3000 crore for power projects. 8rom September>( 3--< these caps on term lendin by banks were removed subject to their compliance with the prudential exposure norms. The banks can invest in and underwrite shares and debentures of corporate bodies. "t present( they can invest five percent of their incremental deposits in e)uities of companies includin other banks. Their investment in sharesC 'onds of 58@$( Securities tradin #orporation of $ndia :ST#$;( all $ndian financial institutions and bonds :debentures; and
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preference shares of the companies are excluded from this ceilin of five per cent with affect from "pril 3--< . 8rom the same date banks could extend loans within this ceilin to the corporate a ainst shares held by them. They could also offer overdraft facilities to stock brokers re istered with help of S/'$ a ainst shares and debentures held by them for nine months without chan e of ownership.

C"#$%&$% P"#S' O( B#$) CR'*&T

" study roup headed by Shri %rakash Tandon( the then #hairman of %unjab &ational 'ank( was constituted by the 6'$ in Auly 3-<= with eminent personalities drawn from leadin banks( financial institutions and a wide cross+section of the industry with a view to study the entire amut of 'ankHs finance for workin capital and su est ways for optimum utili7ation of 'ank credit. This was the first elaborate attempt by the central bank to or ani7e the 'ank credit. ?ost banks in $ndia even today continue to look at the needs of the corporate in the li ht of methodolo y recommended by the Iroup. The report of this roup is widely known as Tan$on Co""ittee report. The weaknesses in the #ash #redit system have persisted with the non+implementation of one of the crucial recommendations of the #ommittee. $n the back round of credit expansion seen in 3-<<+<- and its ill effects on the economy( 6'$ appointed a workin and su est+ roup to study

i; ?odifications in the #ash #redit system to make it amenable to better mana ement of funds by the 'ankers and ii; "lternate type of credit facilities to ensure better credit discipline and co relation between credit and production. The Iroup was headed by Sh. J.'. #hore of 6'$ and was named #hore #ommittee. "nother roup headed by Sh. %.6. &ayak :Na%a+ Co""ittee; was entrusted the job of lookin into the difficulties faced by Small Scale $ndustries due to the sophisticated nature of Tandon 1 #hore #ommittee recommendations. @is report is applicable to units with credit re)uirements of less than 6s.40 lacs.
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The recommendations made by Tandon #ommittee and reinforced by Chore Co""ittee were implemented in all 'anks and 'ank #redit became much more or ani7ed. @owever( the recommendations were perceived as too strict by the industry and there has been a continuous clamor from the $ndustry for movement from mandatory control to a voluntary market related restraint. *ith recent liberali7ation of economy and reforms in the financial sector( 6'$ has iven the freedom to the 'anks to work out their own norms for inventory and the earlier norms are now to be taken as uidelines and not a mandate. $n fact( be innin with the slack season credit policy of 3--<+-,( 6'$ has also iven full freedom to all the 'anks to devise their own method of assessin the short term credit re)uirements of their clients and rant lines of credit accordin ly. ?ost banks( however( continue to be uided by the principles enunciated in Tandon #ommittee report.

Trends of Bank Credit in &ndia

The face of $ndian bankin has chan ed radically in the last decade. " perusal of the 'asic Statistical 6eturns submitted by banks to the 6eserve 'ank of $ndia shows that between 3--6 and 2004( personal loans have been the fastest rowin asset( increasin from -.> per cent of the total bank credit in 3--6 to 22.2 per cent in 2004. .f course( this is partly due to the hu e rise in housin loans( which rose from 2., per cent of the bank credit to 33 per cent over the period( but Kother personal loans! L comprisin loans a ainst fixed deposits( old loans and unsecured personal loans L also rose from 6.3 per cent to 30.< per cent. .ther cate ories whose share increased were loans to professionals and loans to finance companies. $n contrast( there has been a sharp decline in the share of lendin s to industry. #redit to small scale industries fell from 30.3 per cent of the total in 3--6 to =.3 per cent in 2004.

6easons for declinin trend of bank credit

" major share of the economic rowth has been led by the expansion of the service sector #apital intensity and investment intensity re)uired for rowth in the current economic context may not be as hi h as it used to be in the past.
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$n manufacturin sector more efficient utili7ation of existin capacities contributed to the sectoral rowth rather rather than any lar e addition of fresh capacities. The conse)uential increase in the demand for credit was also subdued.

Ireater and cheaper avenues for credit resulted in a bi er share of disintermediation bein resorted to by lar e borrowers.

The other trend has been the substantial drop in the share of rural credit( while the share of metropolitan centres has increased. *hile bankers say that up radation of rural centres into semi+urban could be one reason :the share of semi+urban centres has one up;( it is also true that the reforms have been urban+centric and have tended to benefit the metros more. The number of rural bank offices fell from >2(-,3 in ?arch 3--6 to >3(-6< by ?arch 2004. The states have been the main beneficiaries of bank credit are the northern re ion as it has increased its share from 3,.< per cent of the total credit in 3--6 to 22.2 per cent in 2004. "s it was seen that 5elhi!s share went up from -.4 per cent to 32.3 per cent over the period. This is not due to food credit( the account of which is maintained in 5elhi. #learly( the national capital has ained a lot from liberalisation.

Trends for the year +,,- ,.

The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within aggregate deposits demand deposits have shown an absolute fall (-Rs 4,179 crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 2007-08,. On the other hand, time deposits have shown an accelerated increase of 22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the previous year. In the investment portfolio of banks, the expansion during 2008- 09 at Rs 194,031crore has been much lower than the expansion of Rs 340,250 crore as increase in net bank credit to government under monetary data for the same period. This has happened because the latter has a sizeable amount of RBI credit to government following the increased open market operations. Finally, there has occurred considerable slowdown in bank credit expansion. Because of relatively higher procurement of foodgrains, food credit has expanded by Rs 1,812 crore during
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2008-09 as against an absolute fall of Rs 2,121 crore in 2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than in the previous year at Rs 432,846 (23.0%).

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Procedure for providing Bank Credit'anks offers different types of credit facilities to the eli ible borrowers. 8or this( there are several procedures( controls and uidelines laid out. #redit "ppraisal( Sanctions( ?onitorin and "sset 6ecovery ?ana ement comprise the entire amut of activities in the lendin process of a bank which are clearly shown as below0

Source- Self constructed 8rom the above chart we can see that #redit "ppraisal is the core and the basic function of a bank before providin loan to any personCcompany( etc. $t is the most important aspect of the lendin procedure and therefore it is discussed in detail as below.

Credit #ppraisal
#eanin + The process by which a lender appraises the creditworthiness of the prospective
borrower is known as #redit "ppraisal. This normally involves appraisin the borrower!s payment history and establishin the )uality and sustainability of his income. The lender satisfies himself of the ood intentions of the borrower( usually throu h an interview. The credit re)uirement must be assessed by all $ndian 8inancial $nstitutions or specialised institution set up for this purpose. *herever financin of infrastructure project is taken up under a consortium C syndication arran ement B bank!s exposure shall not exceed 24G 'ank may also take up financin infrastructure project independently C exclusively in respect of borrowers Cpromoters of repute with excellent past record in project implementation.

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$n such cases due dili ence on the inability of the projects are well defined and assessed. State overnment uarantee may not be taken as a substitute for satisfactory credit appraisal. The important thin to remember is not to be overwhelmed by marketin or profit centre reasons to book a loan but to take a balanced view when bookin a loan( takin into account the risk reward aspects. Ienerally everyone becomes optimistic durin the upswin of the business cycle( but tend to for et to see how the borrower will be durin the downturn( which is a short+si hted approach. 8urthermore reater emphasis is iven on financials( which are usually outdatedF this is further exacerbated by the fact that a descriptive approach is usually taken( rather than an analytical approach( to the credit. Thus a forward lookin approach should also be adopted( since the loan will be repaid primarily from future cash flows( not historic performanceF however both can be used as ood repayment indicators.

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In$ian Ban+in Sector 1 Its #a!or Challen es

$t is well reco nised by the world that $ndia is one of the fastest rowin economies in the world. /vidence from across the world su ests that a sound and evolved bankin system is re)uired for sustained economic development. The last decade has seen many positive developments in the $ndian bankin sector. The policy makers( which comprise the 6eserve 'ank of $ndia :6'$;( ?inistry of 8inance and related overnment and financial sector re ulatory entities( have made several notable efforts to improve re ulation in the sector. The sector now compares favourably with bankin sectors in the re ion on metrics like rowth( profitability and non+performin assets :&%"s;. " few banks have established an outstandin track record of innovation( rowth and value creation. This is reflected in their market valuation. @owever( improved re ulations( innovation( rowth and value creation in the sector remain limited to a small part of it. The cost of bankin intermediation in $ndia is hi her and bank penetration is far lower than in other markets. $ndia!s bankin industry must stren then itself si nificantly if it has to support the modern and vibrant economy which $ndia aspires to be. *hile the onus for this chan e lies mainly with bank mana ements( an enablin policy and re ulatory framework will also be critical to their success. The failure to respond to chan in market realities has stunted the development of the financial sector in many developin countries. " weak bankin structure has been unable to fuel continued rowth( which has harmed the lon +term health of their economies. $n this Dwhite paperE( we emphasise the need to act both decisively and )uickly to build an enablin ( rather than a limitin ( bankin sector in $ndia. $ndian banks have compared favourably on rowth( asset )uality and profitability with other re ional banks over the last few years. The bankin index has rown at a compounded annual rate of over 43 per cent since "pril 2003 as compared to a 2< per cent rowth in the market index for the same period. %olicy makers have made some notable chan es in policy and re ulation to help stren then the sector. These chan es include stren thenin prudential norms( enhancin the payments system and inte ratin re ulations between commercial and co+operative banks. @owever( the cost of intermediation remains hi h and bank penetration is limited to only a few customer se ments and eo raphies. *hile bank lendin has been a si nificant driver of I5% rowth and employment( periodic
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instances of the DfailureE of some weak banks have often threatened the stability of the system. Structural weaknesses such as a fra mented industry structure( restrictions on capital availability and deployment( lack of institutional support infrastructure( restrictive labour laws( weak corporate overnance and ineffective re ulations beyond Scheduled #ommercial 'anks :S#'s;( unless addressed( could seriously weaken the health of the sector. 8urther( the inability of bank mana ements :with some notable exceptions; to improve capital allocation( increase the productivity of their service platforms and improve the performance ethic in their or anisations could seriously affect future performance. $ndia has a better bankin system in place Mis a Mis other developin countries( but there are several issues that need to be ironed out. ?ajor challen es of $ndian bankin sector are mentioned below.

Interest rate ris+

$nterest rate risk can be defined as exposure of bankHs net interest income to adverse movements in interest rates. " bankHs balance sheet consists mainly of rupee assets and liabilities. "ny movement in domestic interest rate is the main source of interest rate risk. .ver the last few years the treasury departments of banks have been responsible for a substantial part of profits made by banks. 'etween Auly 3--< and .ct 200>( as interest rates fell( the yield on 30+year overnment bonds :a barometer for domestic interest rates; fell( from 3> per cent to =.- per cent. *ith yields fallin the banks made hu e profits on their bond portfolios. &ow as yields o up :with the rise in inflation( bond yields o up and bond prices fall as the debt market starts factorin a possible interest rate hike;( the banks will have to set aside funds to mark to market their investment. This will make it difficult to show hu e profits from treasury operations. This concern becomes much stron er because a substantial percenta e of bank deposits remain invested in overnment bonds. 'ankin in the recent years had been reduced to a tradin operation in overnment securities. 6ecent months have shown a rise in the bond yields has led to the profit from treasury operations fallin . The latest )uarterly reports of banks clearly show several banks makin losses on their treasury operations. $f the rise in yields continues the banks mi ht end up postin hu e losses on their tradin books. Iiven these facts( banks will have to look at alternative sources of investment.

Interest rates an$ nonDperfor"in assets

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The best indicator of the health of the bankin industry in a country is its level of &%"s. Iiven this fact( $ndian banks seem to be better placed than they were in the past. " few banks have even mana ed to reduce their net &%"s to less than one percent :before the mer er of Ilobal Trust 'ank into .riental 'ank of #ommerce .'# was a 7ero &%" bank;. 'ut as the bond yields start to rise the chances are the net &%"s will also start to o up. This will happen because the banks have been makin hu e provisions a ainst the money they made on their bond portfolios in a scenario where bond yields were fallin . 6educed &%"s enerally ives the impression that banks have stren thened their credit appraisal processes over the years. This does not seem to be the case. *ith increasin bond yields( treasury income will come down and if the banks wish to make lar e provisions( the money will have to come from their interest income( and this in turn( shall brin down the profitability of banks.

Co"petition in retail *an+in

The entry of new eneration private sector banks has chan ed the entire scenario. /arlier the household savin s went into banks and the banks then lent out money to corporate. &ow they need to sell bankin . The retail se ment( which was earlier i nored( is now the most important of the lot( with the banks jumpin over one another to ive out loans. The consumer has never been so lucky with so many banks offerin so many products to choose from. *ith supply far exceedin demand it has been a race to the bottom( with the banks undercuttin one another. " lot of forei n banks have already burnt their fin ers in the retail ame and have now decided to et out of a few retail se ments completely.The nimble footed new eneration private sector banks have taken a lead on this front and the public sector banks are tryin to play catch up. The %S's have been losin business to the private sector banks in this se ment. %S's need to fi ure out the means to enerate profitable business from this se ment in the days to come.

The &r e to "er e

$n the recent past there has been a lot of talk about $ndian 'anks lackin in scale and si7e. The State 'ank of $ndia is the only bank from $ndia to make it to the list of Top 300 banks( lobally. ?ost of the %S's are either lookin to pick up a smaller bank or waitin to be
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picked up by a lar er bank. The central overnment also seems to be ame about the issue and is seen to be encoura in %S's to mer e or ac)uire other banks. Ilobal evidence seems to su est that even thou h there is reat enthusiasm when companies mer e or et ac)uired( majority of the mer ersCac)uisitions do not really work. So in the 7eal to mer e with or ac)uire another bank the %S's should not let their common sense take a back seat. 'efore a mer er is carried out cultural issues should be looked into. " bank based primarily out of &orth $ndia mi ht want to ac)uire a bank based primarily out of South $ndia to increase its eo raphical presence but their cultures mi ht be very different. So the inte ration process mi ht become very difficult. Technolo ical compatibility is another issue that needs to be looked into in details before any mer er or ac)uisition is carried out.

I"pact of BASELDII nor"s

'ankin is a commodity business. The mar ins on the products that banks offer to its customers are extremely thin vis a vis other businesses. "s a result( for banks to earn an ade)uate return of e)uity and compete for capital alon with other industries( they need to be hi hly levera ed. The primary function of the bankHs capital is to absorb any losses a bank suffers :which can be written off a ainst bankHs capital;.&orms set in the Swiss town of 'asel determine the round rules for the way banks around the world account for loans they ive out. These rules were formulated by the 'ank for $nternational Settlements in 3-,,. /ssentially( these rules tell the banks how much capital the banks should have to cover up for the risk that their loans mi ht o bad. The rules set in 3-,, led the banks to differentiate amon the customers it lent out money to. 5ifferent wei hta e was iven to various forms of assets( with 7ero percenta e wei htin s bein iven to cash( deposits with the central bankC ovt. etc( and 300 per cent wei htin to claims on private sector( fixed assets( real estate etc. The summation of these assets ave us the risk+wei hted assets. " ainst these risk wei hted assets the banks had to maintain a :Tier $ N Tier $$; capital of - per cent i.e. every 6s300 of risk assets had to be backed by 6s - of Tier $ N Tier $$ capital. To put it simply the banks had to maintain a capital ade)uacy ratio of - percent. The problem with these rules is that they do not distin uish within a cate ory i.e. all lendin to private sector is assi ned a 300 per cent risk wei htin ( be it a company with the best credit ratin or company which is in the doldrums and has a very low credit ratin . This is not an efficient use of capital. The
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CREDIT APPRAISAL
company with the best credit ratin is more likely to repay the loan vis a vis the company with a low credit ratin . So the bank should be settin aside a far lesser amount of capital a ainst the risk of a company with the best credit ratin defaultin vis a vis the company with a low credit ratin . *ith the '"S/9+$$ norms the bank can decide on the amount of capital to set aside dependin on the credit ratin of the company. #redit risk is not the only type of risk that banks face. These days the operational risks that banks face are hu e. The various risks that come under operational risk are competition risk( technolo y risk( casualty risk( crime risk etc. The ori inal '"S/9 rules did not take into account the operational risks. "s per the '"S/9+$$ norms( banks will have to set aside 34 per cent of net income to protect themselves a ainst operational risks.

.ver the last few years( the fallin interest rates( ave banks very little incentive to lend to projects( as the return did not compensate them for the risk involved. This led to the banks ettin into the retail se ment bi time. $t also led to a lot of banks playin it safe and puttin in most of the deposits they collected into overnment bonds. &ow with the bond party over and the bond yields startin to o up( the banks will have to concentrate on their core function of lendin . The bankin sector in $ndia needs to tackle these challen es successfully to keep rowin and stren then the $ndian financial system. 8urthermore( the interference of the central overnment with the functionin of %S's should stop. " fresh autonomy packa e for public sector banks is in offin . The packa e seeks to provide a hi h de ree of freedom to %S's on operational matters. This seems to be the ri ht way to o for %S's. The rowth of the bankin sector will be one of the most important inputs that shall o into makin sure that $ndia pro resses and becomes a lobal economic super power.

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Punjab $ational Bank at a %lance

P&n!a* National Ban+ :PNB; 7as established in 3,-4 in anarkali ba7aar at 9ahore( undivided $ndia( %unjab &ational 'ank :%&'; has the distinction of bein the first $ndian bank to have been started solely with $ndian capital. The bank was nationalised in Auly 3-6alon with 3> other banks. 8rom its modest be innin ( the bank has rown in si7e and stature to become a front+line bankin institution in $ndia at present. Today( the 'ank is the second lar est overnment+owned commercial bank in $ndia with about 4000 branches across <6= cities. $t serves over >< million customers. The bank has been ranked 2=,th bi est bank in the world by the Bankers Almanac( 9ondon. The bankHs total assets for financial year 200< were about USO60 billion. $t has Stron correspondent bankin relationships with more than 23< international banks of the world. ?ore than 40 renowned international banks maintain their 6upee "ccounts with %&'. %&' has a bankin subsidiary in the UJ( as well as branches in @on Jon ( 5ubai and Jabul( %&'Hs and representative included several offices leaders in of "lmaty( 5ubai( .slo( and Shan hai. founders

the Swadeshi movement such as 5yal Sin h ?ajithia and 9ala @arJishen 9al 9ala 9alchand( Shri Jali %rosanna 6oy( Shri /.#. Aessawala( Shri %rabhu 5ayal( 'akshi Aaishi 6am( and 9ala 5holan 5ass. Lala La!pat Rai was actively associated with the mana ement of the 'ank in its early years.

"&STOR/

3,-40 %&' commenced its operations in 9ahore. 3-0=0 %&' established branches in Jarachi and %eshawar. 3-=00 %&' absorbed 'ha wan 5ass 'ank( a scheduled bank located in 5elhi circle. 3-=<0 %artition of $ndia and %akistan at $ndependence. %&' lost its premises in 9ahore( but continued to operate in %akistan.

3-430 %&' ac)uired the >- branches of 'harat 'ank :est. 3-=2;F 'harat 'ank became 'harat &idhi 9td. 3-630 %&' ac)uired Universal 'ank of $ndia.

3-6>0 The Iovernment of 'urma nationali7ed %&'Hs branch in 6an oon :Pan on;.
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CREDIT APPRAISAL

3-640 "fter the $ndo+%ak war the overnment of %akistan sei7ed all the offices in %akistan of $ndian banks( includin %&'Hs head office( which may have moved to Jarachi. %&' also had one or more branches in /ast %akistan 'an ladesh.

3-60s0 %&' amal amated $ndo #ommercial 'ank :est. 3->>; in a rescue.

3-6-0 The Iovernment of $ndia :I.$; nationali7ed %&' and 3> other major commercial banks( on Auly 3-( 3-6-. 3-<6 or 3-<,0 %&' opened a branch in 9ondon. 3-,6 The 6eserve 'ank of $ndia re)uired %&' to transfer its 9ondon branch to State 'ank of $ndia after the branch was involved in a fraud scandal.

3-,,0 %&' ac)uired @industan #ommercial 'ank :est. 3-=>; in a rescue. The ac)uisition added @industanHs 3=2 branches to %&'Hs network. 3-->0 %&' ac)uired &ew 'ank of $ndia( which the I.$ had nationali7ed in 3-,0.

3--,0 %&' set up a representative office in "lmaty( Ja7akhstan. 200>0 %&' took over &edun adi 'ank( the oldest private sector bank in Jerala. "t the time of the mer er with %&'( &edun adi 'ankHs shares had 7ero value( with the result that its shareholders received no payment for their shares.

%&' also opened a representative office in 9ondon 200=0 %&' established a branch in Jabul( "f hanistan. %&' also opened a representative office in Shan hai. %&' established an alliance with /verest 'ank in &epal that permits mi rants to transfer funds easily between $ndia and /verest 'ankHs 32 branches in &epal.

20040 %&' opened a representative office in 5ubai. 200<0 %&' established %&'$9 + %unjab &ational 'ank :$nternational; + in the UJ( with two offices( one in 9ondon( and one in South @all. Since then it has opened a third branch in 9eicester( and is plannin a fourth in 'irmin ham.

200,0 %&' opened a branch in @on Jon .

200-0 %&' opened a representative office in .slo( &orway( and a second branch in @on Jon ( this in Jowloon. 20300 %&' received permission to up rade its representative office in the 5ubai $nternational 8inancial #entre to a branch.

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CREDIT APPRAISAL
'ank with over 46 million satisfied customers and 4002 offices( %&' continue to retain its leadership position amon nationalised banks. The bank enjoys stron fundamental( lar e franchise value and ood brand ima e. 'esides being ranked

as

one of India's top service brands( %&' has remained fully committed to its
uidin principles of sound and prudent bankin . "part from offerin bankin products( the bank has also entered the credit card 1 debit card businessF bullion businessF life and non+life insurance businessF Iold coins 1 asset mana ement business( etc. %&' has achieved si nificant rowth in business which at the end of ?arch 2030 amounted to 6s =>4->3 crore. Today( with assets of more than 6s 2(-6(6>> crore( %&' is ranked as the >rd lar est bank in the country :after S'$ and $#$#$ 'ank; and has the 2nd lar est network of branches :4002 offices includin 4 overseas branches ;.5urin the 8P 200-+30( with =0.,4G share of #"S" deposits( the bank achieved a net profit of 6s >-04 crore. 'ank has a stron capital base with capital ade)uacy ratio of 3=.36G as on ?ar!30 as per 'asel $$ with Tier $ and Tier $$ capital ratio at -.34G and 4.03G respectively. "s on ?arch!30( the 'ank has the Iross and &et &%" ratio of 3.<3G and 0.4>G respectively. 5urin the 8P 200-+30( its! ratio of %riority Sector #redit to "djusted &et 'ank #redit at =0.4G 1 " riculture #redit to "djusted &et 'ank #redit at 3-.<G was also hi her than the stipulated re)uirement of =0G 1 3,G. The 'ank has maintained its stake holder!s interest by postin an improved &$? of >.4<G in ?ar!30 :>.42G ?ar!0-; and a 6eturn on "ssets of 3.==G :3.>-G ?ar!0-;. The /arnin per Share improved to 6s 32>.-, :6s -,.0> ?ar!0-; while the 'ook value per share improved to 6s 43=.<< :6s =36.<= ?ar!0-; %unjab &ational 'ank continues to maintain its frontline position in the $ndian bankin industry. $n particular( the bank has retained its &U?'/6 .&/ position amon "ssets( .peratin the nationali7ed banks in terms of number of branches( 5eposit( "dvances( total 'usiness( and &et profit in the year 200-+30. The impressive operational and financial performance has been brou ht about by 'ank!s focus on customer based business with thrust on #"S" deposits( 6etail( S?/ 1 " ri "dvances and with more inclusive approach to bankin F better asset liability mana ementF improved mar in mana ement( thrust on recovery and increased efficiency in core operations of the 'ank. The performance hi hli hts of the bank in terms of business and profit are shown below0 6s in #rore
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CREDIT APPRAISAL
%arameters .peratin %rofit &et %rofit 5eposit "dvance Total 'usiness ?arH0, =006 20=366=4< 33-402 2,4-4?arH04<== >0-3 20-<60 34=<0> >6==6> ?arH30 <>26 >-04 2=->>0 3,6603 =>4->3 #"I6 :G; 22.22>.-, 3=.=2 36.03 34.0-

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CREDIT APPRAISAL
%&' has always looked at technolo y as a key facilitator to provide better customer service and ensured that its K$T strate y! follows the K'usiness strate y! so as to arrive at D'est 8itE. The bank has made rapid strides in this direction. "ll branches of the 'ank are under #ore 'ankin Solution :#'S; since 5ec!0,( thus coverin 300G of its business and providin K"nytime "nywhere! bankin facility to all customers includin customers of more than >000 rural 1 semi urban branches. The bank has also been offerin $nternet bankin services to the customers of #'S branches like bookin of tickets( payment of bills of utilities( purchase of airline tickets etc. Towards developin a cost effective alternative channels of delivery( the bank with more than >400 "T?s has the lar est "T? network amon st &ationali7ed 'anks. *ith the help of advanced technolo y( the 'ank has been a frontrunner in the industry so far as the initiatives for 8inancial $nclusion is concerned. *ith its policy of inclusive rowth in the $ndo+Ienetics belt( the 'ank!s mission is D'ankin for UnbankedE. The 'ank has launched a drive for biometric smart card based technolo y enabled 8inancial $nclusion with the help of 'usiness #orrespondentsC'usiness 8acilitators :'#C'8; so as to reach out to the last mile customer. The 'ank has started several innovative initiatives for mar inal roups like rickshaw pullers( ve etable vendors( dairy farmers( construction workers( etc. Under 'ranchless 'ankin model( the 'ank is implementin =0 projects in 36 States. The 'ank launched an ambitious K%roject &amaskar! under which 3 lakh touch points will be established in unbanked villa es by 203> to extend the 'ank!s outreach. Under this( >0 Jiosks have been opened coverin 33- Milla es reachin 3.>2 9akh beneficiaries. 'acked by stron domestic performance( the bank is plannin to reali7e its lobal aspirations. 'ank continues its selective foray in international markets with presence in countries( with branches at Jabul and 5ubai( @on Jon 1 representative offices at "lmaty( 5ubai( Shan hai and .slo( a wholly owned subsidiary in UJ( a joint venture with /verest 'ank 9td. &epal and a AM bankin subsidiary D56UJ %&' 'ank 9td.E in 'hutan. 'ank is pursuin up radation of its representative offices in #hina 1 &orway and is in the process of settin up a representative office in Sydney( "ustralia and takin controllin stake in AS# 5ana 'ank in Ja7akhstan.

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CREDIT APPRAISAL

Mission and !ision

2ISION
ETo *e a Lea$in /lo*al Ban+ 7ith Pan In$ia footprints an$ *eco"e a ho&sehol$ *ran$ in the In$oD/an etic Plains pro,i$in entire ran e of financial pro$&cts an$ ser,ices &n$er one roofE

#ISSION
EBan+in for the &n*an+e$E FTO pro,i$e eGcellent professional ser,ices an$ i"pro,e its position as a lea$er in financial an$ relate$ ser,icesH *&il$ an$ "aintain a tea" of "oti,ate$ an$ co""itte$ 7or+force 7ith hi h 7or+ ethosH &se latest technolo % ai"e$ at the c&sto"er satisfaction an$ act as effecti,e catal%st for socioD econo"ic $e,elop"entI

Products and Services

#orporate bankin %ersonal bankin $ndustrial finance " riculture finance 8inancin of trade $nternational bankin @ome loan "uto loan "T?C5ebit card 5eposit interest rate #redit interest rate .ther services0 lockers facility( internet bankin ( /8T 1 #learin services etc

#0ard 1 #chievements
Best IT Team of the year Award SKOTCH Challenger Award for Change Management for the year 2005-06 Best IT ser !n Ban"!ng # $!nan%!al )y *ASSCOM !n +artnersh!+ w!th ,%onom!% Ser&!%es Ind'stry - 200( T!mes

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CREDIT APPRAISAL
-olden .ea%o%" Award S"ot%h Challenger Award for ,/em+lary 'se of Te%hnology -olden .ea%o%" *at!onal Tra!n!ng 200( # 2005 *at!onal Award for ,/%ellen%e !n SSI 4end!ng Ban"!ng Te%hnology Awards 200( 2'nner '+ !n 1Best IT Team of the 7ear Award 20051 Money O'tloo" Award - 200( 2'nner '+ !n 1Best Ban" :+')l!% Se%tor; of the year Award1 -2005 *!ryat Bandh' -old Tro+hy for ,/%ellen%e !n Cor+orate -o&ernan%e - 2005 )y Inst!t'te of 0!re%tors for )e%om!ng a +!oneer !n .')l!% Ban"s - 2005 )y Inst!t'te of 0!re%tors 2an"ed 2nd for ( %onse%'t!&e years - 20025 20065 200( # 2005 8o!ntly Ad9'dged )y IBA5 $!na%le # T$CI

$ICCI1s 2'ral 0e&elo+ment Award for ,/%ellen%e !n 2'ral 0e&elo+ment 3 2005

for e/%ellen%e !n e/+ort +erforamn%e for 6 %onse%'t!&e years 200<5 2002 # 2006 )y $ederat!on of Ind!an ,/+orters Organ!=at!on :$I,O; )y the lead!ng $!nan%!al 0a!ly The ,%onom!% T!mes5 8'ne 2005

2<st Amongst To+ 500 Com+an!es

>th amongst Ind!a1s To+ 50 Most A?C *!elson S'r&ey5 The ,%onom!% T!mes 0e% Tr'sted Ser&!%e Brands 200( 6rd 2an" amongst Ban"!ng Se%tor !n Ind!a The Ban"ers1 Almana%5 8an'ary 2006 626rd 2an" !n the @orld 66A amongst To+ <000 -lo)al Ban"s The Ban"er5 4ondon 8'ly 2005

*inner for becomin a pioneer in public banks by Skoch consultancy services pvt ltd( Iur aon 2004 8$##$Hs 6ural 5evelopment "ward "ward for excellence in rural development 2004 Skoch #hallen er "ward for /xemplary Use of Technolo y "mity 'usiness School( &oida has conferred the "ward to %&'( after an in+depth research to analyse the stren ths and core competencies of "mity Ilobal #orporate /xcellence the Ilobal 400 companies and banks which have "ward already made an indelible most admired impression on the $ndian economy. 200, 1 200< 1 2004 'ankin Technolo y "wards %# Quest Users! #hoice "ward $'"( 8inacle 1 T8#$ jointly adjud ed %&' as runner up in 2'est $T Team of the year "ward2 2004 'est $T $mplementation 200< 1 2004
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CREDIT APPRAISAL
Symantec Misionary "ward ?oney .utlook "ward 'ankin Technolo y "wards $nformation Security $mpact 2004 ?oney .utlok adjud ed %&' as runner up in 2'est 'ank :%ublic Sector; of the year "ward2 2004 $'"( 8inacle 1 T8#$ runner up "ward for .utstandin "chiever of the Pear :$ndividual;. 2004

Iolden %eacock $nnovative 2030 :for '#% implementation; %roductCService "ward Iolden %eacock "ward for *inner in the K9ar e Aoint /ntry!.200- 1 /xcellence in #orporate Iovernance 200< 1 2004 Skoch #hallen er "ward for 8or upliftment of *eaker sections of society #han e ?ana ement 2006 $56'T 'ankin Technolo y 'est $T Team of the Pear "ward 2006 "wards &ational "ward 8or /xcellence in 8irst %ri7e by 'y ?inistry of Small Scale lendin to Tiny sector $ndustries.2006 Skoch #hallen er "ward for Skoch #onsultancy Services %vt 9td 200< capacity buildin for 8T# initiative #omputer "ssociates /xcellence /xcellence in /?S 6oll .ut. 200< "ward 8or 'est $T $mplementation by $5I ?edia %vt. #$. 300 "ward 9td.200<( 200, 1 200&ational "ward for /xcellence in 8or 9endin to ?icro enterprises 200< 9endin to ?icro /nterprises "ward for the use of Technolo y for $nstitute for 5evelopment and 6esearch in 8inancial $nclusion. 'ankin Technolo y :$56'T;( @yderabad. 200, 5un 1 'radstreet "ward for D%riority Sector 9endin includin 5un 1 'radstreet 2008inancial $nclusionE. Jhadi 1 Milla e $ndustry #ommission( ?inistry &ational "ward for /xcellence in of ?icro( Small 1 ?edium /nterprises( Iovt. of 9endin for $nstitutional 8inance in $ndia %ropa atin JM$ %ro rammes in :$nterest Subsidy /li ibility #ertificate Scheme; &.6T@ R.&/ 200Jhadi 1 Milla e $ndustry#ommission( ?inistry &ational "ward for /xcellence in of ?icro( Small 1 ?edium /nterprises( Iovt. of 9endin for $nstitutional 8inance in $ndia %ropa atin JM$ %ro rammes in :$nterest Subsidy /li ibility #ertificate Scheme; #/&T6"9 R.&/ 200&ational "ward for /xcellence in Jhadi 1 Milla e $ndustry#ommission( ?inistry 9endin for $nstitutional 8inance in of ?icro( Small 1 ?edium /nterprises( Iovt. of %ropa atin JM$ %ro rammes in $ndia
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CREDIT APPRAISAL
:$nterest Subsidy /li ibility #ertificate Scheme; 200-

&"T$.&"9 9/M/9

Jhadi 1 Milla e $ndustry#ommission( ?inistry &ational "ward for /xcellence in of ?icro( Small 1 ?edium /nterprises( Iovt. of 9endin for $nstitutional 8inance for $ndia %ropa atin JM$ %ro rammes in :%rime ?inister /mployment Ieneration &.6T@ R.&/ %ro ramme; 200Jhadi 1 Milla e $ndustry#ommission( ?inistry &ational "ward for /xcellence in of ?icro( Small 1 ?edium /nterprises( Iovt. of 9endin for $nstitutional 8inance for $ndia %ropa atin JM$ %ro rammes in :%rime ?inister /mployment Ieneration #/&T6"9 R.&/ %ro ramme; 200$ndia %ride "ward by dainik 'haskar and 5aily &ews analysis $ndira Iandhi 6ajbhasha Shield /merson Uptime #hampion "wards D'est $nfoSphere *arehouse SolutionE "ward by $'? /xcellence in %SU 200%romotin @indi 200200200- :for implementation of /nterprise *ide 5ata *arehouse;

Organi2ational structure of Punjab $ational Bank

"ierarchy

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CREDIT APPRAISAL

Board of *irectors

Sh.).R. )a"ath0+ @e has been appointed as a chairman and mana in director of %unjab &ational 'ank by Iovt. .f $ndia. Sh. #.2.Tan+sale@+ /xecutive 5irector Sh. Nagesh Pydah:- /xecutive 5irector S"t. Ra,neet )a&r0+ Iovt. of $ndia &ominee 5irector Shri L.#.Fonseca@D 6eserve 'ank of $ndia &ominee 5irector Shri #&shta6 A Ant&la%@D %art+time non+official 5irector Shri /a&ta" P. )han$el7al@D %art+time non+official 5irector Shri 2ino$ )&"ar #ishra@D %art+time non+official 5irector Shri Tri*h&7an Nath Chat&r,e$i @D Share @older 5irector Shri / R S&n$ara,a$i,el@D Share @older 5irector Shri De,in$er )&"ar Sin la@ Share @older 5irector Sh. # P Sin h@D *orkmen /mployees 5irector Sh. Pra$eep )&"ar@D .fficer 5irector

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CREDIT APPRAISAL

Re,ie7 of Literat&re
9iterature review provides available research with respect to the selected topic of the project or the research findin s by an author which has been done with respect to the research topic. This chapter provides the overall view of the available literature with respect to the topic of the project. The review of the related research works are described as under0+

3. " research work on the topic D On the appraisal on consumer credit banking products 0ith the asset 3uality frame4 # multiple criteria application .E done by %ana iotis Sidonas( "lexandros 8lamos( Sortirios Joussouris( 5imitrious "skouins 1 $oannis %sarras from &ational Technical University of "thens in 200< says that "sset )uality refers to the likelihood that the bankHs earnin assets will continue to perform and re)uires both a )ualitative and )uantitative assessment. 5ecision problems like the 2internal appraisal of bankin products2( are problems with stron multiple+criteria character and it seems that the methodolo ical framework of ?ultiple #riteria 5ecision ?akin could provide a reliable solution. $n this paper( the "sset Quality bankin indicators are the( so called( 2criteria2( the value of these indicators are the( so called( 2scores2 in each criterion and the %.6...?/T@././. T%reference 6ankin .r ani7ation ?ethod of /nrichment /valuations( 'rans 1 Mincke :3-,4;U ?ultiple #riteria method is applied( towards modellin bankin products appraisal problems. " ?ultiple #riteria process( strictly mathematically defined( inte rates the behaviour of each indicator+criterion and utili7es each score in order to rank the so called 2alternatives2( i.e. cate ories of bankin products. 2. The research %aper on 5'valuation of decision support systems for credit management decisionsE by S. Janun o( S.Sharma( %.J. Aain from 5epartment of studies( $$T 5elhi have conducted a study to evaluate the efficiency of decision support system :5SS; for credit mana ement. This study formed a lar er initiative to access the effectiveness of the $.T based credit mana ement process at S'$. Such a study was necessitated since credit appraisal has
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CREDIT APPRAISAL
become an inte ral sub+function of the $ndian banks in view of rowin incidence of non+ performin assets. The 5SS they have assessed was a credit appraisal system developed by Quuattro pro at S'$. This system helps in analysis of balance sheets( #alculation of financial ratios( cash flow analysis( future projections( sensitivity analysis and risk evaluation as per S'$ norms. They have also used a stron Quassi experimental desi n called Solomon!s four roup desi n for the assessment. $n the experiment the mana ers of S'$ who attended the trainin pro ramme were the subjects the experiment consisted of the measurements that were taken as pre and post tests. "n experimental intervention was applied between the pre+ tests and the pro+tests. The intervention or stimulus consisted of 5SS trainin and use. There were four roups in the experiment. The stimulus remained constant as the they took care to ensure that the course content as well as the instructors remained the same durin the course of the experiment. Two were experimental roups and two were control roups. "ll four roups underwent trainin in credit mana ement between the pre and the post tests. 6esults from research shows that while the 5SS is effective( improvement needs to be done in the methodolo y to assess such improvements. ?oreover such assessment frameworks while bein ade)uate from a 5SS+centric viewpoint do not respond to the assessment of 5SS in an or ani7ational settin . $n the concludin section they have discussed how this evaluative framework can be stren thened to initiate an activity that will allow the lon term and possibly the only meanin ful evaluation framework for such a system. >. The research paper on the topic FTo0ards an appraisal of the (M"# farm credit program4 # case study of the efficiency of borro0er by S6 Mehdian7 8m6 Mc*6 "err7 Phil 'berle7 and Richard %rabo0ski9 have studied that the a production frontier methodolo y is used to measure the overall efficiency of a sample of farmers home administration:8?@"; compared to non participants. The study did not find evidence that the efficiency 8?@" farms improved between a time period 6esults indicated that overall efficiency of 8?@" borrowers is associated with selected financial characteristics of the farms. " review of the literature shows that a ricultural finance specialists have not been successful in evaluatin whether 8?@" pro+ rams improve the efficiency and income of probability of success. 9iberal loan policies

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CREDIT APPRAISAL
/li ible borrowers. $nade)uate evaluation of the 8?@" pro ram occurs partly because of because the difficulty of ade)uately deter+minin the impacts of chan es in the econ+ borrowers in a more normal period of the loan. This study addressed these difficulties by utili7in a nonparametric production frontier techni)ue to measure overall efficiency and a matched pair statistical procedure to measure how efficiency of farms receivin 8?@" credit chan ed relative to a &on+8?@" farmers. =. The book named D(inancial #nalysis for Bank :ending in :iberalised 'conomy9 by Sampat6P6Singh and *r6S6Singh have discussed the subject financial analysis for bank lendin has assumed considerable importance( particularly since early 3--0Hs when( like most of the countries( $ndia opted for the policy of liberalisation and lobalisation after 3--3. The present volume is meant to be a standard reference as well as text book on the varied facets of financial analysis with reference to credit mana ement by 'anks and 8inancial $nstitutions. The book consists of three parts. %art $ discusses the concepts and tools of 8inancial "nalysisF %art $$ explains various concepts of workin capital in its historical contextF while %art $$$ demonstrates the application of these tools in the chan in context of liberalised economy by focusin on new concepts like H#redit *orthinessH( 6isk+"nalysis( #redit 6atin ( %roducts+5ifferentiation( %ricin +5ifferentiation( "sset+9iability ?ana ement( etc. The book contains+ 'ank 9endin and $ndustrial 8inance in $ndia ('asic /conomics for 'ankers and 'usiness ?ana ers ($ntroduction to 8undamentals "ccountin %rinciples (%rofit and 9oss "ccount :.peratin Statement; ("nalysis of %rofit and 9oss "ccount :.peratin Statement; (Structure and "nalysis of 'alance Sheet (6atios as Tools of 8inancial Statements "nalysis ("ccountin 8lows 0 $ncome( #ash and 8unds ('reak+even "nalysis and ?ar in of Safety ("ppraisal of #apital %rojects (&ew #onceptual 8ramework for "nalysis( 9iberalised /ra and &ew 8ocus of 'ank 9endin (?ana in *orkin #apital by Strate ic #hoice ( 8inancin *orkin #apital 0 #onceptual and @istorical /xposition(#reditworthiness and #redit 6atin 0 "t #entre sta e &ucleus of #redit "ppraisal ( *orkin #apital ?ana ement+$ 0 ?%'8 System of "ppraisal and 'ifurcation of 8und+ 'ased 9imit in Two #omponents *orkin #apital ?ana ement+$$ 0 "lternative ?ethods of "ppraisal (*orkin #apital ?ana ement+$$$ 0 8ollow+up and Supervision ( "ppraisal of a &ew %roject $nvolvin Term 9oan ( ?ana ement of %roblem "ccounts ( ?ana ement of
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CREDIT APPRAISAL
&on+%erformin "ssets :&%"s;( 6ehabilitation of Sick $ndustrial Units( *orkin #apital ?ana ement 0 #oncepts and Techni)ues ( 3st #ommittee on 8inancial Sector 6eform and the 2nd #ommittee on 'ankin System 6eform :Jnown as &arasimham #ommittee 6eport( 3--,;.

4. The research paper on the topic D#ompetitive analysis in bankin 0 "ppraisal of the methodolo iesE by &icola #etorelli has discussed about the U.S. bankin industry has experienced si nificant structural chan es as the result of an intense process of consolidation. 8rom 3-<4 to 3--<( the number of commercial banks decreased by about >4 percent( from 3=(>3, to -(234. Since the early 3-,0s( there have been an avera e of more than =00 mer ers per year :see "very et al.( 3--<( and Simmons and Stavins( 3--,;. The relaxation of intrastate branchin restrictions( effective to differin de rees in all states by 3--2( and the passa e in 3--= of the 6ie le.&eal $nterstate 'ankin since Aune 3( 3--<( to open interstate branches( is certainly acceleratin and 'ranchin the process of /fficiency "ct( which allows bank holdin companies to ac)uire banks in any state and( consolidation. These si nificant chan es raise important policy concerns. .n the one hand( one could ar ue that banks are mer in to fully exploit potential economies of scale andCor scope. The possible improvements in efficiency may translate into welfare ains for the economy( to the extent that customers pay lower prices for banks. services or are able to obtain hi her )uality services or services that could not have been offered before.3 .n the other hand( from the point of view of public policy it is e)ually important to focus on the effect of this restructurin process on the competitive conditions of the bankin industry. 5o banks ain market power from mer in V $f so( they will be able to char e hi her than competitive prices for their products( thus inflictin welfare costs that could more than offset any presumed benefit associated with mer ers. $n this article( analysis of competition in the bankin industry is done hi hli htin a very fundamental issue0 @ow market power is measured and how do re ulators rely on accurate and effective procedures to evaluate the competitive effects of a mer er.

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CREDIT APPRAISAL

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CREDIT APPRAISAL

Cre$it Philosoph% 1 Polic% 7ith re ar$s to P&n!a* National Ban+

"n ideal advance is the one iven to a reliable customer for an approval purpose with ade)uate experience( safe in knowled e that the money will be used to advanta e and repayment will be made within a reasonable period from trade receipts or known maturities due on or about iven dates.

Credit philosophy
prudent gro0th.E

B DTo achieve credit e;pansion re3uired for sustaining the

profitability of the bank and emphasis on 3uality assets7 profitable relationships and

CR'*&T PO:&C/
'ank follows followin broad policy imperatives0+ 6eduction in dependence upon short term corporate loans( especially unsecured exposures. "imin to achieve more sanctions at levels closer to the customer. #han in the mix of the portfolio in favour of better diffused and hi her yieldin credit. 'uildin competencies in credit mana ement throu h trainin 1 promotion of self directed learnin .

Objectives of credit policy

3. " balanced rowth of credit portfolio( which does not compromise safety.

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CREDIT APPRAISAL
2. "doption of a forward lookin and market responsive approach for movin into profitable new areas on lendin which emer e( within the pre determined exposure ceilin s. >. Sound risk mana ement practices to identify measure( monitor and control risks. =. ?aximi7e interest yields from credit portfolio throu h a judicious mana ement of varyin spreads of loan assets based upon their si7e( credit ratin and tenure. 4. 9evera e on stron relationships with existin lon +standin clients to source a bulk of new business by addressin their re)uirements comprehensively. 6. /nsure due compliance of various re ulatory norms includin reco nition and asset classification <. "ccomplish balanced development of credit to various sectors and re ions. ,. "chieve rowth of credit to priority sectors C subsectors and continue to surpass the tar ets stipulated by reserve bank of $ndia. -. Usin of pricin as a tool of competitive advanta e ensurin however that earnin s are protected.
10. 5evelop and maintain enhanced competencies in credit mana ement at all levels

#"6( income eo raphical

throu h a combination of trainin initiatives( promotion of self directed learnin and dissemination of best practices.

Objectives in Credit
To maintain healthy balance between+ #redit volumes /arnin s "sset )uality oals and bank!s social

within the framework of re ulatory prescriptions( corporate responsibilities.

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CREDIT APPRAISAL

&ntroduction to loans
9oans are advances for fixed amounts repayable on demand or in instalment. They are normally made in lump sums and interest is paid on the entire amount. The borrower cannot draw funds beyond the amount sanctioned. " key function of the 'ank is deployin funds for income+yieldin assets. " major part of 'ank!s assets are the loans and advances portfolio and investments in approved securities. 9oans 1 "dvances refer to lon +term and short+term credit facilities to various types of borrowers and non+fund facilities like 'ank Iuarantees( 9etters of #redit( 9etters of Solvency etc. 'ill facilities represent structured commitments which are ne otiable claims havin a market by way of ne otiable instruments. Thus( 'anks extend credit facilities by way of fund+based lon +term and short+term loans and advances as also by way of non+fund facilities.

Classification of Loans
9oansC"dvances 9oansC"dvances

!nd "ased

#on$ !nd "ased

%etai& 'oan

"ank /!arantee Post s)ip+ent inance

(as) (redit

-.port inance

'etter of (redit

"i&& ,isco!nting

Pre$s)ip+ent inance

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*er+ 'oan

CREDIT APPRAISAL

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CREDIT APPRAISAL

'ank provides credit in various forms. These are broadly classified into two cate ories+ F&n$ *ase$ an$ Non AF&n$ Base$. 8und based refers to the type of credit where cash is directly involved i.e. where bank provides money to the seeker in anticipation of ettin it back. *here as in a &on+fund 'ased( 'ank doesn!t pay cash directly but ives assurance or takes uarantee on behalf of its customer to pay if they fail to do so. $n case on F&n$ Base$ there are different cate ories of loans which are discussed as follows
I.

RETAIL LOANS+

6etail bankin in $ndia is not a new phenomenon. $t has always been prevalent in $ndia in various forms. 8or the last few years it has become synonymous with mainstream bankin for many banks. The typical products offered in the $ndian retail bankin se ment are0+

@ousin loans #onsumer loans for purchase of durables "uto loans /ducational loans #redit #ost. %ersonal loans

6etail loan is the practice of loanin money to individuals rather than institutions. 6etail lendin is done by banks( credit unions( and savin s and loan associations. These institutions make loans for automobile purchases( home purchases( medical care( home repair( vacations( and other consumer uses. 6etail lendin has taken a prominent role in the lendin activities of banks( as the availability of credit and the number of products offered for retail lendin have rown. The amounts loaned throu h retail lendin are usually smaller than those loaned to businesses. 6etail lendin may take the form of instalment loans( which must be paid off little by little over the course of years( or non+instalment loans( which are paid off in one lump sum.

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CREDIT APPRAISAL
These loans are marketed under attractive brand names to differentiate the products offered by different banks. "s the Report on Trend and Progress of India, 2007-0 has shown that the loan values of these retail lendin typically ran e between 6s.20( 000 to 6s.300 lakh. The loans are enerally for duration of five to seven years with housin loans ranted for a lon er duration of 34 years. #redit card is another rapidly rowin sub+se ment of this product roup. $n recent past retail lendin has turned out to be a key profit driver for banks with retail portfolio. The overall impairment of the retail loan portfolio worked out much less then the Iross &%" ratio for the entire loan portfolio. *ithin the retail se ment( the housin loans had the least ross asset impairment. $n fact( retailin make ample business sense in the bankin sector. 'asic reasons that have contributed to the retail rowth in $ndia are+

8irst( economic prosperity and the conse)uent increase in purchasin

power has

iven a fillip to a consumer boom. &ote that durin the 30 years after 3--2( $ndiaHs economy rew at an avera e rate of 6., percent and continues to row at the almost the same rate B not many countries in the world match this performance. Second( chan in consumer demo raphics indicate vast potential for rowth in consumption both )ualitatively and )uantitatively. $ndia is one of the countries havin hi hest proportion :<0G; of the population below >4 years of a e :youn population;. The '6$# report of the Ioldman+Sachs( which predicted a bri ht future for 'ra7il( 6ussia( $ndia and #hina( mentioned $ndian demo raphic advanta e as an important positive factor for $ndia. Third( technolo ical factors played a major role. #onvenience bankin in the form of debit cards( internet and phone+bankin ( anywhere and anytime bankin has attracted many new customers into the bankin field. Technolo ical innovations relatin to increasin use of credit C debit cards( "T?s( direct debits and phone bankin has contributed to the rowth of retail bankin in $ndia. 8ourth( the Treasury income of the banks( which had stren thened the bottom lines of banks for the past few years( has been on the decline durin the last two years. $n such a scenario( retail business provides a ood vehicle of profit maximisation. #onsiderin the fact that retail!s share in impaired assets is far lower than the overall
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CREDIT APPRAISAL
bank loans and advances( retail loans have put comparatively less provisionin burden on banks apart from diversifyin their income streams. 8ifth( decline in interest rates have also contributed to the rowth of retail credit by eneratin the demand for such credit.

"ccordin to J 2 )a"athJ the chan in demo raphic profile and a downward trend of the interest rates will propel retail credit in $ndia.2There is a hu e retail credit opportunity that is surfacin . 'anks have low penetration in this se ment currently. 'ut it is the one area that is providin the momentum in the bankin business now(E $ndia has amon the lowest penetration of retail loans in "sia. Thou h the sector has been rowin at around 34 per cent( there is still a hu e opportunity to tap into. ?iddle and +hi h+income homes in $ndia has increased to 2.4< crore :24.< million;. $nterest rates on retail loans have been droppin rapidly too. 8or instance residential mort a es slumped by < per cent over the last four years.2The entry of a number of banks in $ndia in the last few years has helped provide increased covera e and a number of new products in the market(2 says Jamath.

I.

5OR)IN/ CAPITAL K CAS. CREDIT

#ash credit is a short+term cash loan to a company. " bank provides this type of fundin ( but only after the re)uired security is iven to secure the loan. .nce a security for repayment has been iven( the business that receives the loan can continuously draw from the bank up to a certain specified amount. The bank provides certain amount to the company for its day to day workin keepin certain mar in in hand.

II.

TER# LOANS

" bank loan to a company( with a fixed maturity and often featurin amorti7ation of principal. $f this loan is in the form of a line of credit( the funds are drawn down shortly after the a reement is si ned. .therwise( the borrower usually uses the funds from the loan soon after they become available. 'ank term loans are very a common kind of lendin .

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CREDIT APPRAISAL
Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates( and monthly or )uarterly repayment schedules and include a set maturity date. 'ankers tend to classify term loans into two cate ories0

Inter"e$iateDter" loans@ Usually runnin less than three years( these loans are enerally repaid in monthly instalments :sometimes with balloon payments; from a businessHs cash flow. "ccordin to the "merican 'ankers "ssociation( repayment is often tied directly to the useful life of the asset bein financed.

Lon Dter" loans@ These loans are commonly set for more than three years. ?ost are between three and 30 years( and some run for as lon as 20 years. 9on +term loans are collaterali7ed by a businessHs assets and typically re)uire )uarterly or monthly payments derived from profits or cash flow. These loans usually carry wordin that limits the amount of additional financial commitments the business may take on :includin other debts but also dividends or principalsH salaries;( and they sometimes re)uire that a certain amount of profit be set+aside to repay the loan.

Appropriate For@ /stablished small businesses that can levera e sound financial statements and substantial down payments to minimi7e monthly payments and total loan costs. 6epayment is typically linked in some way to the item financed. Term loans re)uire collateral and a relatively ri orous approval process but can help reduce risk by minimi7in costs. 'efore decidin to finance e)uipment( borrowers should be sure they can they make full use of ownership+related benefits( such as depreciation( and should compare the cost with that leasin . S&ppl%@ "bundant but hi hly differentiated. The de ree of financial stren th re)uired to receive loan approval can vary tremendously from bank to bank( dependin on the level of risk the bank is willin to take on.

I.

BILL DISCOUNTIN/

*hile discountin a bill( the 'ank buys the bill :i.e. 'ill of /xchan e or %romissory &ote; before it is due and credits the value of the bill after a discount char e to the customerHs account. The transaction is practically an advance a ainst the security of the bill and the
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CREDIT APPRAISAL
discount represents the interest on the advance from the date of purchase of the bill until it is due for payment. Bills of eGchan e+ " bill of exchan e or 2draft2 is a written order by the drawer to the drawee to pay money to the payee. " common type of bill of exchan e is the che)ue :check in "merican /n lish;( defined as a bill of exchan e drawn on a banker and payable on demand. 'ills of exchan e are used primarily in international trade( and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. %rior to the advent of paper currency( bills of exchan e were a common means of exchan e. They are not used as often today. " bill of exchan e is an unconditional order in writin addressed by one person to another( si ned by the person ivin it( re)uirin the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. $t is essentially an order made by one person to another to pay money to a third person. " bill of exchan e re)uires in its inception three parties++the $ra7erJ the $ra7eeJ an$ the pa%ee. The person who draws the bill is called the drawer. @e ives the order to pay money to third party. The party upon whom the bill is drawn id called the drawee. @e is the person to whom the bill is addressed and who is ordered to pay. @e becomes an acceptor when he indicates his willin ness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. Pro"issor% Note+ " promissory note is a written promise by the maker to pay money to the payee. 'ank note is fre)uently transferred as a promissory note( a promissory note made by a bank and payable to bearer on demand. " maker of a promissory note promises to unconditionally pay the payee :beneficiary; a specific amount on a specified date. " promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person( on demand or on a specified date. " ne otiable promissory note is unconditional promise in writin made by one person to another( si ned by the maker( en a in to pay on demand( or at fixed or determinable future time( sum certain in money to order or to bearer
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CREDIT APPRAISAL
$$.

ELPORT FINANCE+

This type of a credit facility is provided to exporters who export their oods to different places. $t is divided into two parts+ pre+shipment finance and post+shipment finance. Pre Ship"ent Finance is issued by a financial institution when the seller want the payment of the oods before shipment.

Post Ship"ent Finance is a kind of loan provided by a financial institution to an exporter or seller a ainst a shipment that has already been made. This type of export finance is ranted from the date of extendin the credit after shipment of the oods to the reali7ation date of the exporter proceeds. /xporters don!t wait for the importer to deposit the funds.

Non F&n$ Base$ loans

enerate income for the bank without committin the funds of

the bank. 'ank enerates substantial income under this head. There are two types of credit under this cate ory which are discussed as follows0+

I.

BAN) /UARANTEED

" bank uarantee is a written contract iven by a bank on the behalf of a customer. 'y issuin this uarantee( a bank takes responsibility for payment of a sum of money in case( if it is not paid by the customer on whose behalf the uarantee has been issued. $n return( a bank ets some commission for issuin the uarantee. "ny one can apply for a bank uarantee( if his or her company has obli ations towards a third party for which funds need to be blocked in order to uarantee that his or her company fulfils its obli ations :for example carryin out certain works( payment of a debt( etc.;. $n case of any chan es or cancellation durin the transaction process( a bank uarantee remains valid until the customer dully releases the bank from its liability. $n the situations( where a customer fails to pay the money( the bank must pay the amount within three workin days. This payment can also be refused by the bank( if the claim is found to be unlawful.
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CREDIT APPRAISAL

II.

LETTER OF CREDITD

" standard( commercial letter of cre$it is a document issued mostly by a financil institution( used primarily in trade finance( which usually provides an irrevocable payment undertakin . The 9# can also be the source of payment for traction( meanin that redeemin the letter of credit will pay an exporter. 9etters of credit are used primarily in international trade transactions of si nificant value( for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities :streets( sidewalks( storm water ponds( etc.; will be built. The parties to a letter of credit are usually a *eneficiar% who is to receive the money( the iss&in *an+ of whom the applicant is a client( and the a$,isin *an+ of whom the beneficiary is a client. "lmost all letters of credit are irrevocable( i.e.( cannot be amended or canceled without prior a reement of the beneficiary( the issuin bank and the confirmin bank( if any. $n executin a transaction( letters of credit incorporate functions common to iros and TravelerHs che)ues. Typically( the documents a beneficiary has to present in order to receive payment include a commercial invoice( bill of ladin ( and documents provin the shipment were insured a ainst loss or dama e in transit. @owever( the list and form of documents is open to ima ination and ne otiation and mi ht contain re)uirements to present documents issued by a neutral third party evidencin the )uality of the oods shipped( or their place of ori in.

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CREDIT APPRAISAL

Building <p of a Proposal

=6/AT.ERIN/ CREDIT INFOR#ATION0+
"n appraisal of a proposal be ins with the atherin of ade)uate back round knowled e about borrower!s character and credit worthiness. $n the concept of appraisal( much reliance is placed on the credentials of the borrower. Therefore( there is a necessity for evaluation of the borrower in re ard to his standin in the business( means and respectability. The result of the elaborate scrutiny concernin all these aspects is re)uired to be put into a precise credit report which helps in takin decision on a credit proposal. /ach individual case has to be examined in the li ht of its own circumstances and jud ment exercised on issues enumerated above and a final decision has to be arrived at on the basis of scrutiny of all the issues.

$nformation by definition is that data which is relevant and meanin ful for makin decisions. "n information system is an aid to the decision makin ( carryin out and alterin decisions. "ll information re)uired by the banker in the pre+sanction period should become part of a system. $t should flow into the information system from various sources( such as the borrower( bank!s own record( environment etc. " si nificant basis of banker+borrower relationship is overned by the information which flows between the two parties. "fter ascertainin the credit needs of the borrower( the banker looks towards information about his borrower!s credit worthiness. @e seeks out the credit information etc. from his co+bankers( other borrowers and market information.

2. 2ARIOUS SOURCES OF CREDIT INFOR#ATION $nformation re ardin character( honesty( and financial position has to be discreetly athered from followin sources0 a. The *orro7er0 the bank should develop as much credit information as possible durin the initial interview with the borrowerCpartners of firmC directors of companyC proposed uarantor Cco+obli ator and principal officials of firmsCcompany( nature of its
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CREDIT APPRAISAL
business( past and expected profitability( the de ree of competition that the firmCcompany faces and whether or not it has had or anticipated any difficulty etc. $nformation re ardin its principal officers should be collected durin such interview. b. Borro7erMs financial state"ents0 for lendin decisions( financial information is a si nificant part of the total information system. $t is derived basically from borrowers0 Tradin and profit and loss statement 'alance sheet #ash and fund flow statements

c. Ban+s o7n recor$s0 $f he is an existin borrower( bank!s own records are a rich source of additional information. .perations in the borrower!s account and other dealin s at the bank level in re ard to collections( discountin Cretirement of bills etc. often useful clues to borrower!s operatin and financial transactions. " review of the previous year!s operations in the account and assessments of borrowers! financial statements relatin to that period will provide a rich source of information about the borrower. d. Opinions0 'ank should compile opinions on their borrowers. They should contain full and reliable records of the character( estimated means and business activities of all firms and individuals who are under any form of liability to the bank( whether as direct borrowers or as co+obli ators. 8ull particulars of parties immovable properties where they are situated( whether they are free from encumbrance and in the case of land( acrea e should be recorded to ether with fair estimates of their value. "s far as possible written statements of their properties should be taken in evaluatin properties owned by parties jointly with others and as a rule such properties should be disre arded in arrivin at the net means. e. Fro" other *an+s0 in respect of fresh proposals( en)uiries with local banks should be made before entertainin the proposal to avoid multiple financin without our full
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CREDIT APPRAISAL
knowled e. $n case of new customer havin dealin s with other banks( confidential opinion of his banker has to be obtained. f. Inco"e taG assess"ent or$er+ $ncome tax assessment orders a ricultural income tax assessment orders ive an insi ht into the borrower!s account and the extent to which it is profitable. #omments thereon by the income tax office shall indicate the shortcomin s :lacunae; in the business. $n the case of estate owners a ricultural tax assessment orders to be obtained to arrive at parties credit worthiness. . Sales taG assess"ent or$ers0 Sales tax assessment orders will reveal the turnover in business and when read with tradin C manufacturin and profit 1 loss account( it may be possible to have a fair assessment of tendencies in trade i.e.( whether over+tradin or carefully tradin within recourses at command or tradin entirely on the borrowed funds. h. 5ealth taG assess"ent or$ers0 wealth tax assessment order will indicate the net worth of individuals and reveals the li)uid source available to brin the re)uired mar in money for the venture. i. #ar+et so&rces0 #onstant touch with the market will help to have first hand information about the borrowers. j. Propert% state"ents0 The property statement of borrower will ive an idea of his worth( liabilities and his income from real estate!s :immovable properties;. k. #&nicipal propert% re isters0 reference to municipal property re isters will ive an idea of buildin owned within the municipality( 6ental Malues and house tax payable. $t may be noted that the said re isters are open for reference to all persons. ains or losses in particular business transactions of the

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CREDIT APPRAISAL
l. Other eGternal so&rces0 other external sources( if any( like stock exchan e directory( business periodicalsCma a7inesCjournals etc.

R'><&R'M'$TS #S P'R CO$ST&T<T&O$ O( BORO8'R4

8ollowin 6e)uirements as per constitution of borrower should be collected for proposals emanatin from+ 3. Partnership0 #opy of partnership deed #opy of certificate of re istration of firm :if re istered;

3. Co"pan% 0 ?emorandum and articles of association #ertificate of incorporation #ertificate of commencement of business Search report indicatin subsistin char es on the assets of the company. 'oard resolution for borrowin s( creation on the assets of the company and execution of the documents. 1. Cooperati,e societies 'ylaws %ermission from re istrar for the borrowin s( creation of char e on the assets of the society and execution of documents. 1. Tr&sts Trust deed 6esolution for the borrowin s and execution of documents.

1. In$&strial &nits @
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CREDIT APPRAISAL
%roject report with cash flow( fund flow statements etc. $ndustrial licensesCSS$ re istration certificate. 9icense from local authority( compliance of le al re)uirements or conditions as applicable and clearance from re ulatory bodies. (&$#$C&#: #PPR#&S#:

.n receipt of a loan application the banker be ins the process of financial appraisal. The first thin done is to analy7e the financial statements. Therefore( an understandin of these financial statements is important for the appraiser. .nce balance sheet is taken for analysis the followin items are checked up0 3. FiGe$ assets0 To find out any revaluation of fixed assets done by the company to improve their net worth. The schedules of the fixed assets should be checked up. Study notes on accounts and comments of auditors should be checked. Schedule for reserve should be studied "ny chan e in the accountin procedure of depreciation should be checked

2. C&rrent assets0 to find out whether the assets stated are really li)uid or not. The schedules under current liabilities and current assets to ascertain any obsolete or slow movin raw material or finished ood and old debtors or receivables should be checked The auditor!s report should be read and understood properly. The claims lod ed a ainst receivables must be studied The receivables due from sisterCassociate concerns must be studied.

>. Other C&rrent Assets0 Their reasonableness and their need to maintain them for the business.

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CREDIT APPRAISAL
Marious components of other current assets and if the same is more than 4G +30G( ascertain the nature and need for maintainin such amount F any assets which is not used in the into day business activity shall be removed and proper treatment is to be made accordin ly. 'ank uarantee or letter of credit mar in shall be shown as non+ current assets.

>. Contin ent lia*ilities0 To find out any unreco ni7ed liabilities or losses if any. The #55C5'5 other bills discounted liability( if any (is reported in the auditor!s report ( then increase the bank borrowin to the extent liability was not taken in the balance sheet and also increases the debitsCreceivables to that extent. >. Ter" lia*ilities0 To find out whether the liabilities are lon term or short term( and its needs and re ularity This shall be decreasin year after yearF if it has increased( then the reason for the same is to be looked into :may be irre ular or new term loan availed for expansion etc.; The term liabilities with repayment of the same and the amount payable durin the year shall be deducted from the term liabilities as current liabilities for findin out li)uidity position of the company should be checked. -. Stoc+s@ The stock statements and Q$S forms to find the authenticity of the fi ures reported under stockCreceivables. #han e in the valuation of the stockCfinished oods( if any( is to be verified to find out its effect on the profitability of the company. >. Intan i*le assets 0 "ny abnormal increase in this fi ure shall be studied to find out the reasons for the sameF this may be due to take over by others also.

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CREDIT APPRAISAL
>. Acco&ntin Nor"s0 "ny chan e in the accountin norms from the past shall be studied to find out the reasons for the sameF its effect on the net profit( net worth of the company is to be ascertained.

B#:#$C' S"''T #$#:/S&S

1. Co""ents on the perfor"ance of the &nit vis+W+vis last year sales+

$ncreased in last year sales are always oodF if the net profit also has increased correspondin ly the performance can be noted as satisfactory. $f the sales has come down or the net profit has also come down then the reason has to be ascertained. $f the unit earned at least cash profit then the position may be considered as satisfactory.

If the NP to NKsales is positi,eJ that is s&fficient for acceptin the borrower achieves ,G as percenta e of net profitCnet sales.

as

satisfactor%F but as per the credit ratin chart maximum marks are assi ned if 6eturn on investment or 6eturn on e)uity may also be used to find out the return on capital invested.

1. Lon ter" Stren th of a co"pan% is calculated based on the level of the net worth

of the company Cpromoters stakeCloans from close relatives+

$f the net worth has increased due to infusion of fresh capital or plou h back of profit( it can be termed as satisfactoryF even increase of loan from friends 1 relatives is a ood si n.

$f the net worth is decreasin ( reason may due to net loss or diversionF true reason needs to be ascertained.
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CREDIT APPRAISAL

$f the DKE ratio is less than 203 the same is oodF further if the T.9CT&* is less than 403 then the unit!s solvency is noted to be satisfactory. The ratio indicates that borrower has not borrowed much and the outside debts within a reasonable limit.

'. Li6&i$it% position of the part%DC&rrent ratio

$f the current ratio is increasin and nearer to 3.4 and above then we can note the position is satisfactory. /xpected #urrent ratio is 3.2203 and aboveF if the ratio is less than 3.2203 then the promoter!s mar in :&et workin capital; towards *orkin #apital may not be sufficient to cover the workin capital limitF care shall be taken to ensure that sufficient &et workin capital for the workin capital enjoyed is available.

*hen the #urrent ratio is poor and the &et workin capital is not sufficient to cover the existin limit( no further term loan shall be sanctioned and the party is to be advised not to take up any fresh investment in fixed assets.

3. N&alit% of c&rrent assets 0

The current assets holdin period must be less than > months for traders and the 4 months for the industries dependin upon the type of industry Fholdin level more than the above needs proper justification.

$t should be ensured that the current assets turnover is at least more than four times in a year.

4. Contin ent lia*ilit%0

The effect of this liability on the net worth of the companyF if

it!s effect is

less than 4+30 G of the net worth of the company (the same may be notedF but if it threatens the existence of the company then the position needs serious analysis.
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CREDIT APPRAISAL

5. Di,ersion fro" the *&siness nee$s to *e ,ie7e$ caref&ll%.

6eduction in &et workin capital position: below the re)uired level; when the unit has earned cash profit and clearin of term loan installments when the unit is makin cash loss needs to be viewed seriously.

6eduction in the net worth of the firm :when they have shown net profit needs further probin .

MO!'M'$T O( CR'*&T PROPOS#:S

*ith reference to %unjab &ational 'ank the movements of credit proposals are studied carefully and the detailed process is discussed as follows0 The movement of credit proposals follows a pre+defined path which has been structured in keepin with the risk mana ement principle that the credit rantin process should involve multiple credit approvers who should subject the proposals to credit approvals at various sta es accordin ly.

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CREDIT APPRAISAL

Credit #ppraisal Techni3ues

#redit appraisal techni)ues act as tool for the credit portfolio mana ers to take ri ht decisions. $t is the first and the prime most function performed by the #redit "ppraisal #ell before providin any sort loans or advances. The appraisal techni)ue for each type of loan is separate from each other. /ach type of loan whether secured or unsecured has to be analy7ed
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CREDIT APPRAISAL
in a different way. The different techni)ues of credit analysis or credit appraisal are discussed as under0

Process of Credit appraisal for Term :oans

Ter" loansD 9oans which are repayable in not less than >6 months are referred to as term
loans. $n the interest of sound risk mana ement practices( banks monitor the percenta e of Term loans in their credit portfolio with a view to keepin the term loan component within a pre+determined percenta e.

Re3uirements to be obtained 0ith the proposal@

a; #opies of project report b; *here loan is on participation basis( a copy of the appraisal note of the lead institution C bank should be obtained. c; Scrutiny of proposals

T!e scope of t!e pro"ect# Background of promoters $o%ernment consents T!e tec!nical appraisal &ost of t!e pro"ect Sources of finance T!e sc!edule of implementation T!e financial pro"ections and profita'ilit( &as! flow statements &alculation of de't ser%ice co%erage ratio )*S&R+ Breake%en anal(sis
d; 5isbursement e; 8ollow up :post sanction;
Page 66

CREDIT APPRAISAL #ssessment 4

8or assessment purposes the forms prescribed are used and debt e)uity ratio( avera e 5S#6( '/%( pay back period( etc. are taken into consideration. The followin minimum financial parameters are re)uired to be satisfied for a Term loan proposal to merit consideration0

&ot more than 2.>>03:3.<03 may be accepted in 5ebt /)uity 6atio the case of real estate sector and enerally for different type of industry different level of 5/6 is acceptable.; &ot less than 3.4to 2 :ratio lower than this is to "vera e 5S#6 be looked into;

Ratios for appraising term loans@

De*t e6&it% ratio0

lon term debt Tan ible net worth

A,era e DSCR 0 &et profit N 5epreciation N interest on T9

Term loan installment N interest on T9

Brea+e,en point 0 8ixed costXXXXXXX

Sales+Mariable cost :contribution;

$t should be noted that the banks enerally consider only term loans repayable within 4 to < yrs. Term loans with maturity beyond < yrs are normally not experienced except infrastructure loans.

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CREDIT APPRAISAL *ebt '3uity Ratio@

" measure of a companyHs financial levera e calculated by dividin its total liabilities by stockholdersH e)uity. $t indicates what proportion of e)uity and debt the company is usin to finance its assets. "lso known as the %ersonal 5ebtC/)uity 6atio( this ratio can be applied to personal financial statements as well as companiesH. " hi h debtCe)uity ratio enerally means that a company has been a ressive in financin its rowth with debt. This can result in volatile earnin s as a result of the additional interest expense. $f a lot of debt is used to finance increased operations :hi h debt to e)uity;( the company could potentially enerate more earnin s than it would have without this outside financin . $f this were to increase earnin s by a reater amount than the debt cost :interest;( then the shareholders benefit as more earnin s are bein spread amon the same amount of shareholders. @owever( the cost of this debt financin may outwei h the return that the company enerates on the debt throu h investment and business activities and become too much for the company to handle. This can lead to bankruptcy( which would leave shareholders with nothin . The debtCe)uity ratio also depends on the industry in which the company operates. 8or example for lar e projects :with project cost 6s. 300 crore and above; in %ower( acceptable level of 5/6 is 2.>>03( in $ron and Steel $ndustry 2.2403 ( in $nfrastructure and #apital $ntensive projects 203 and in 6eal /state( level of 5/6 is 3.<403. The #@( I?( /5 and #?5 have powers to further relax.

*ebt Service Coverag Ratio ?*SCR@4

The ultimate purpose of project appraisal is to ascertain the viability of a project which has a direct bearin on the repayment of the instalments under the proposed term loan C deferred payment uarantee. *hile the repayment pro ram will depend upon the profitability of a project( the )uantum of annual instalments has to be related to the si7e of the annual cash
Page 68

CREDIT APPRAISAL
flows. The repayment schedule should( therefore( be fixed after ascertainin the annual servicin by the debt service covera e ratio.

The debt service covera e ratio is the core test ratio in project financin . This ratio indicates the de ree of viability of a project and influences in fixin the repayment period( and the )uantum of annual instalments. 8or the purpose of this ratio ( DdebtE means maturin term obli ations vi7. instalments payable durin a year under all the term loansC deferred payment uarantees and Kservice! means cash accruals :service; available to cover the maturin obli ation :debt; durin each year. The debt service covera e ratio indicates the ability of the firm to enerate cash accruals for repayment of installment and interest. 8or example( a 5S#6 of >03 indicates that for each 6e.3C+lon term debt includin interest to be paid the business enerates cash accrual of 6s.>C+ to be utili7ed for repayment of debt. The difference between the accruals and debt is known as mar in of safety :6s.2C+ in this case;. The ratio of 1.8 to ' is considered reasonable. 6atio lower than this should be further looked into. " very hi h ratio may indicate the need for lower moratorium periodCrepayment of loan in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service its debts i.e. YinterestH and Yprincipal repaymentH besides indicatin the mar in of safety. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 3.5.

BREA)

E2EN

POINT

OR

COST

2OLU#E

PROFIT

:C2P;

ANAL(SIS@
A. The breakeven point is calculated to note the level of production at which the unit neither earns profit nor incur loss. '/% is the level of operations :in terms of sales or production or capacity utili7ation; at which total revenues are e)ual to total operatin costs :fixed and variable; or( in other words( the operatin profit is e)ual 7ero. @e firm starts earnin

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CREDIT APPRAISAL
operatin profits only after the break+even is reached. "t '/%( DcontributionE exactly e)uals the Dfixed costs. B. The formula for calculatin the break+even point for each year is as under0 Total fiGe$ costKContri*&tion C. #ertain items of the cost that are to be incurred by the unit irrespective of the level of production are called as fixed cost. The same includes depreciation( repairs and maintenance( interest( certain portion of salaries( rent( insurance( sellin expenses other than variable items and administrative expenses D. The variable cost chan es with the levels of production. $t includes cost of raw materials( direct wa es and other items( which are apportion able to unit of production. E. The breakeven point is enerally expressed in terms of percenta e of capacity utili7ation 'reak even analysis is enerally expressed in terms of percenta e of capacity utilisation. The #M% analysis provides answers to such )uestions as0 level of operations needed to avoid loss( level of sales re)uired to achieve tar eted profit( effect of product mix on profits( impact of expansion( most and least profitable products etc. 'reak+ even analysis is the most widely used form of the #M% analysis. 'reak+even analysis is one of the most useful techni)ues of profit plannin and controllin . The break+even analysis can help in makin vital decisions relatin to fixation of sellin price make or buy decision( maximi7in production of the item ivin hi her contribution etc. 8urther( the break+even analysis can help in understandin the impact of important cost factors( such as( power( raw material( labor( etc. and optimi7in product+mix to improve project profitability. $t is a useful method for considerin also the risk implications of alternative actions. 8rom one alternative a firm may expect hi her profit and also a hi her break+even point( while another alternative may produce comparatively lower profit but at a lower break+even point. The firm has to wei h the probability :riskiness; of reachin the break+even in the first case
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CREDIT APPRAISAL
before choosin that alternative. Ienerally( the preferred alternative would be where the break+even will be reached earlier. Ca&tion@ 6elationship between revenue( variable costs and volume may not be linear. $t is not always easy to have a clean separation of costs into fixed and variable components. 8ixed costs may be Kstepped! B not fixed over all volumes. #omplexity involved in usin '/% analysis in multi+product businesses

Ill&stration@ Ass&"e$@ &ormal year production 8ixed #osts Mariable #osts Sales reali7ation #ontribution '/% :production; <4 lakh units :->.<4G of installed capacity; 6s. 3>.<3 lakh 6s. 3>.>4 lakh 6s. =3.24 lakh 6s. 2<.-0 lakh

0 :8ixed cost C #ontribution;Z <4 lakh [ >6.,4 lakh units

'/% :capacity utili7ation;0 :8ixed cost C #ontribution;Z ->.<4 [ =6.0<G '/% :sales; 0 :8ixed cost C #ontribution;Z 6s. =3.24 lakh [ 6s. 20.2< lakh

SENSITI2IT( ANAL(SIS
%rojects do not always run to plan. #osts and benefits estimated at an early sta e of a project may indicate a profitable project( but this profit could be eroded by an increase in costs or a decrease in the value of the benefits :the revenue;. Sensiti,it% Anal%sis involves
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CREDIT APPRAISAL
chan in input variable estimates from an ori inal set of estimates :called the *ase case; and determine their impact on a project!s measured results( such as &%M :or $66; from investor!s viewpoint( or 5S#6 from banker!s point of view. The Sensitivity "nalysis helps in arrivin at profitability of the project wherein critical or sensitive elements are identified which are assi ned different values and the values assi ned are both optimistic and pessimistic such as increasin ascertained. The critical variables can then be thorou hly examined by operational on viable lines even in the adverse circumstances. $n the absence of any defined factors and its values for carryin out the sensitivity analysis( a common 8C sensitivity factor on sale priceKcost price of "a!or ra7 "aterials is to be applied in appraisals of all the projects irrespective of the industry. @owever( 30G sensitivity factor may be applied in hi hly volatile industries by assessin the expected volatility in sale priceK cost price of "a!or ra7 "aterials in future on case to case basis. enerally selectin the or reducin the sale priceCsale volume( increasin or reducin the cost of inputs etc. and then the project viability is

pessimistic options so as to make possible improvements in the project and make it

Process of Credit #ppraisal for providing Cash Credit A 8orking Capital :imits
*orkin capital for any unit means the total amount of circulatin funds re)uired for meetin day to day re)uirements of the unit. 8or proper workin a manufacturin unit needs a specific level of current assets such as raw material( stock in process( finished oods( receivables and other current assets such as cash in handC bank and advances etc. So the workin capital means the funds invested in current assets. The tradin units need the workin capital for storin the oods and allowin credit to its customers.

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CREDIT APPRAISAL /ross 5or+in Capital an$ Net 5or+in capital

Iross workin capital means the total funds re)uired for financin the total current assets. &et *orkin capital means the difference the current assets and liabilities. $n other words ( net workin capital denotes the portion of ross workin capital contributed from lon term sources. "s per practice of $ndian banks net workin capital should normally be 24G of total current assets which will ive a current ratio of 3.>> to the unit. *hen net workin capital is ne ative( it implies that the short term funds have been diverted C used for lon term uses and the unit is facin a li)uidity crunch. Such situation may also arise due to losses. $n such a situation( the need of the hour is for raisin lon term sources. " unit needs workin capital because the production( sales and reali7ations are not simultaneous. The unit needs cash to purchase the raw material and pay expenses as there may not be perfect matchin between cash inflows and outflows. The stock of raw material is kept to ensure the uninterrupted and smooth production. $t may also be re)uired to cover the situations of shorta es etc.

Factors affectin the re6&ire"ent of 7or+in capital@

3. &ature of activity0 ?anufacturin units need more workin capital as compared to tradin and service units. 2. The len th of operatin cycle0 ?ore the len th of operatin cycle( more the re)uirement of workin capital. len thy the process of manufacture( more the need of workin capital due to increase of len th of workin capital cycle >. ?arket trend0 The market trend of allowin credit to customers also varies from industry to industry and city to city. ?ore the credit allowed to customers( more the need of workin capital. =. "vailability of raw materials0 *hen the availability of raw material is assured and comfortable( lower stock maintenance is re)uired. *hen there is expectation of shorta e or expectation of rise in prices( more amounts is blocked in raw materials. 4. 9ocation of the unit0 *hen the unit is located near the source of raw material( lower stock maintenance is re)uired.
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CREDIT APPRAISAL
6. Type of customers0 *hen there are re ular customers( low stock of finished products is needed. *hen the sales are to be made to walk+ in customers( more level of stock of finished products is re)uired. <. Seasonality 8actor0 *hen the raw material re)uired is available in a particular season( the stock for whole of year is to be purchased in the particular season. /. . Su arcane( #otton( %addy etc. Similarly the woollen products and products re)uired in a particular season such as "#s( for keepin the production runnin ( hi her level of finished stocks have to be kept.

Role of Ban+er@
The unit should have sufficient amount of workin capital. " portion of it is to be financed from lon term sources called the li)uid surplus or net workin capital :&*#;. The remainin is normally financed by the bank in the form of workin capital limits. /xcess maintenance of workin capital may result in idle resources and hi h interest cost whereas less amount of workin capital may mean disruption in the workin . So both the situations are to be avoided. That is why the techni)ue of calculation of ri ht amount of workin capital assumes si nificance. 8or financin of workin capital( a banker should be able to calculate ri ht amount of workin capital needed by the unit bein financed. $t shall mean ri ht amount of financin which will result in hi her profitability for the unit and safety of funds of the bank. Para"eters for ,ario&s sta es in co"p&tation of 7or+in capital@ Stage i 6aw ?aterial Time @oldin period ,alue value of 6? consumed durin the period ii S$% Time taken in convertin the 6? into 8I iii 8I @oldin period of 6? N ?f ./xp. durin the period :#ost of production; 6.? N ?f . /xp. N"dm
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CREDIT APPRAISAL
8I before bein sold iv 6eceivables #redit allowed to buyer overheads for the period :#ost of sales; 6?N ?f . /xp. N "dm. /xp.N %rofit for the period :sales; The assessment of workin capital re)uirement of business unit has been en a in the attention of the Iovt.( 6'$ and a series of committees were set up to su modalities of financin workin capital as under. TANDON CO##ITTEE RECO##ENDATIONS 6ealisin the absence of a proper control system in the flow of bank credit for workin capital( 6'$ constituted a workin roup DTandon #ommittee! in Auly 3-<= under the chairmanship of Shri %.9. Tandon- The main task of the roup was0 est appropriate

3. To su

est uidelines to commercial banks to follow up and supervise credit from the

view of ensurin proper end use of the funds and keepin a watch on the safety of the advances. 2. To su su >. To su est as to what constitutes the workin capital re)uirements of industry and to est the maximum level of bank finance and the method to compute the same. pattern of financin workin est the sources for financin the minimum workin capital re)uirements.

=. To make recommendations as to whether the existin su est suitable modifications.

capital re)uirements by cash credit or overdraft etc. re)uires to be modified. $f so( to

The roup submitted its final report durin 5ecember 3-<4. The recommendations of this #ommittee are summarised below0 :i; Nor"s for In,entor% an$ Recei,a*les
Page 75

CREDIT APPRAISAL
*ith a view to curbin speculative and hoardin tendencies( the #ommittee fixed norms :in terms of the weeksCmonth consumption; in respect inventory and receivables which industrial units may hold. The norms were fixed for 34 major industries and indicate the maximum permissible limits for inventory holdin . 5eviations from norms not allowed for meetin unforeseen situations.

:ii;

Approach to Len$in . ested by the committee are0 8irst ?ethod0 <4G of *orkin #apital Iap :Total #urrent "ssets B .ther #urrent liabilities;

The three methods of lendin as su

Second ?ethod0 <4G Total #urrent "ssets B .ther

#urrent liabilities

Third ?ethod0

<4G T:Total #urrent "ssets B #ore #urrent "ssets; B .ther #urrent liabilities;

Third method of lendin was not accepted by 6'$ and hence rejected. :iii; St%le of Cre$it. Tandon #ommittee su #ommittee;. :i,; N&arterl% Follo7D&p an$ S&per,ision Tandon #ommittee su ested )uarterly forms under the information system made applicable to borrowers with workin capital credit of 6s. 3 crore and over from the bankin system. These forms aim at ensurin proper end+use of credit. C.ORE CO##ITTEE RECO##ENDATIONS $n "pril 3-<-( a workin roup under the chairmanship of Sh J.'.#hore was constituted to ested that instead of makin available entire limit by way of cash credit it may be bifurcated into demand loan and cash credit component :modified by #hore

review the system of cash credit. The committee submitted the report in 5ec 3-,0. The
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CREDIT APPRAISAL
lendin discipline( as enunciated by Tandon #ommittee( has been streamlined by certain recommendations made by #hore #ommittee. The ist of these recommendations is as follows0 :a; Ann&al Re,ie7 "ll workin capital credit limits of 6s. 40 lacs and above from the bankin system should be reviewed at least once a year. These reviews are intended to ensure that the limits are need+ based and continue to be viable propositions. :*; Infor"ation S%ste" The scope of the )uarterly information system ori inally envisa ed by the study roup to frame uidelines for follow+up of bank credit has been enlar ed brin in into its ambit all borrowers havin credit limits of 6s. 40 lacs and over from the bankin system. %resently this limit of 6s. 40 lac has been raised to 6s. 3 #rore. :c; 5ith$ra7al of *if&rcation of cash cre$it The recommendation of the Tandon Study Iroup to bifurcate cash credit accounts into demand loan and cash credit components has been withdrawn. :$; Separate li"it for pea+ le,el an$ nonDpea+ le,el " recommendation that will induce a reater de ree of credit plannin pertains to the separate H%eak+levelH and Ynon+peak levelH credit limits( wherever considered feasible. The period durin which these limits will be utilised will now be indicated in the bankHs advice conveyin sanction of credit. This recommendation is based on the pronounced seasonal trends in a riculture+based industries( :such as tea. coffee( su ar( jute( ve etable oils( etc.;( and in the case of some consumer industries such as those manufacturin fans( refri erators etc. .ne of the major determinants of borrowerHs peak+level and non+peak level credit limits will be their availment durin the correspondin period in the past. 'orrower in whose cases there are no pronounced seasonal trends( may be sanctioned only one limit as peak+level and non+peak level concepts will not be relevant in such cases.
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CREDIT APPRAISAL

:e; Deter"ination of N&arterl% Operati,e li"its 'efore the commencement of each )uarter( the borrowers will now be re)uired to indicate limits sanctioned for their re)uirements of funds durin the ensuin )uarter. This will be termed as the operative limit for the relevant )uarter. The operative limit indicated by the borrower would virtually set the level of drawin in that )uarter subject to tolerances of 30G either way. @ence forth( excess+utilisation or under+ utilisation of the operative limit( beyond the tolerance level referred to above would be considered as an irre ularity in the account. This will be treated as an indication of defective credit plannin by the borrower. 5ialo ue with the borrower will be initiated to set ri ht the position in re ard to defective credit plannin and to ensure that such instances are avoided in future. :f; Penalt% for $ela%e$ or non s&*"ission of ret&rns &on+submission of returns( within the prescribed time limit( will henceforth entail penal of 2G per annum on the total outstandin for the period of default in the submission of returns. Simultaneously( a notice would be issued to the borrower statin that if the default persists it would be open to the bank to free7e the account without further notice to the borrower. lf the default persists despite imposition of penal interest and the bank is satisfied that deterrent action is warranted( the operations in the account may be fro7en on the basis of the notice issued to the borrower. : ; A$hoc or te"porar% li"its The workin roup has conceded that in exceptional cases( ad+hoc or temporary limits could be sanctioned to borrowers throu h demand loan or non+operatable cash credit accounts. .n those limits( banks are re)uired to char e additional 3G interest per annum over the normal rate. @owever( in certain cases like natural calamities it would be the discretion of the bank to char e interest of 3G per annum. :h; S7itchin o,er to Secon$ #etho$ of len$in

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CREDIT APPRAISAL
" major recommendation of the workin roup relates to switchin over the borrowers from

the first to the second method of lendin . 6eco nisin that in some cases this may not be possible immediately( 6eserve 'ank has stipulated that in such cases( the excess borrowin s are to be se re ated and treated as *#T9 :*orkin #apital Term 9oan;( which should be made repayable in half+yearly instalments within a definite period but not exceedin five years in any case. :i; Enco&ra e"ent of Bills s%ste" To encoura e bills systems of financin purchase of raw material inventory( the *orkin Iroup has recommended that banks should extend at least 40G of the cash credit limit a ainst raw materials to manufacturin units( whether in the public or private sector( by way of drawee bills only. Present Stat&s@ The concept of ?%'8 was the cornerstone of financin which had emer ed as a result of recommendation of Tandon and #hore. @owever 6'$ has now abolished the uidelines for ?%'8 and advised the banks to draw the uidelines for credit dispensation. .ur bank is still followin ?%'8 system. @owever the relaxations on case to cases are bein allowed. NA(A) CO##ITTEE RECO##ENDATIONS To ive a comprehensive and strai ht line method for the assessment of workin capital re)uirement of the borrowers( 6'$ constituted a workin roup under the chairmanship of the credit Sh %.6.&ayak. The study roup ave its recommendations in ?arch 3-->. $n "pril( 3-->( 6'$ implemented the recommendations of &ayak #ommittee for assessin re)uirements of villa e industries( tiny industries and other SS$ units . $nitially the recommendations were for SS$ units only but now other units have also been covered. %resently units covered under these from the bankin system. uidelines are those havin a re ate fund+based workin capital credit limits less than 6s.200 lacs for other than SS$ and 6s. 400 lacs for SS$

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CREDIT APPRAISAL
$t has been advised not to apply the norms for inventory and receivables as also the ?ethods of 9endin . $nstead such units be provided workin capital limits computed on the basis of a minimum of 20G of their %rojected "nnual Turn+.ver :%"T.; for new as well as existin units. Their workin capital re)uirement be assessed at a minimum of 24G of their %rojected "nnual Turn+.ver :%"T.; assessed on realistic basis for new as well as existin units. .ut of this( at least =C4th:20G of their %"T.; be provided by the bank and the borrower should contribute 3C4th of this estimated workin capital re)uirement :4G of %"T.; as mar in money of workin capital. $n case the mar in with the party is more than 4G ( %'8 may be adjusted accordin ly. + The 20G limit is the minimum. "s a temporary relief measure for S?/ Units( 6'$ has allowed banks to finance upto 24G under stimulus packa e. The same shall be reviewed after >0.6.0-. @owever if the workin capital cycle is lon er than > months( hi her limit may be fixed. $f the workin capital cycle is less than > months( the limit may be fixed \ 20 G of turnover but actual withdrawal should be allowed only on the basis of actual 5.%. @owever lower limit can be sanctioned if re)uested in writin by the borrower.

LENDIN/ DISCIPLINE D NUARTERL( #ONITORIN/ S(STE# :N#S; #onse)uent to operational freedom ranted by 6'$ in re ard to submission of statements under Q$SC?onthly #ash 'ud et System prescribed under #?"( 'ank reviewed the same and submission of Q$S was replaced with Quarterly ?onitorin System :Q?S; The Q?S discipline is to be enforced on all borrowers enjoyin workin capital limits of 6s.3 crore and over from the bankin system( irrespective of whether they are exporters or otherwise $n case the limits have been sanctioned on the basis of &aik #ommitttee( Q?S forms and #?" data need not be submitted.

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CREDIT APPRAISAL
The forms for Q?S and time period for submission are as under. 8orm+ 3 8orm+33 To be submitted within 6 weeks from the close of )uarter to which it relates To be submitted within 2 months from the close of @alf Pear to which it relates. Q?S form $ ives us the )uarterly data of production and sales current assets and current liabilities. Q?S form $$ ives us half yearly profitability statement and fund flow statements. 'y comparin with the projections as iven in #?"( we can see whether the performance is oin on as projected. Q$S $0 Q$S $ which was earlier discontinued has been reintroduced and is to be submitted in addition to Q?S $ and Q?S $$. + 8or all borrowed accounts availin fund based workin capital credit limits of 6s.4 crore 1 above from our bank( Quarterly $nformation System :Q$S; 8orm+$ may be obtained for fixin up of )uarterly operative limits in addition to the Q?S 8orms. The Q$S 8orm+$ is to be submitted in the week precedin the commencement of the )uarter to which it relates. + &on adherence to the operative limits will attract penal interest. and )uarterly levels of

COMM&TM'$T C"#R%'S To discoura e the borrowers from non+availment of credit already provided to them by bankin institutions and to indirectly help the banks in their "sset ?ana ement( 6'$ has permitted bank to char e penalty on unavailed portion of sanctioned limit known as a commitment char e. $t is applicable to the workin capital limits of 6s.4 crore or above and char ed \ 3G per annum with a tolerance limit of 34G based upon the limit sanctioned.

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CREDIT APPRAISAL
The unutili7ed part of the limit is found out by calculatin the avera e utili7ation durin the )uarter. *hile calculatin the avera e utili7ation( overdrawn portion or excess portion is not taken into consideration. $f the avera e utili7ation is less than ,4G than commitment char es is levied on the entire unavailed position. #ommitment char e is not applicable in case of export unit and sick unit. PENAL INTEREST $n order to instil a sense of credit discipline amon the borrowers( 6'$ has permitted banks to levy penal intt. over and above the sanctioned rate of interest in case of non compliance of various terms and conditions The broad areas of non compliance where bank char es penal interest are0 5efault in repayment of loans $rre ularity in cash credit account &on submission of stock statements and other financial data 5efault in adherin to borrowin covenants &on payment of bills /xcess borrowin s arisin out of excess current assets &on submission of information under Quarterly ?onitorin System ELE#PTION FRO# PENAL INTEREST

"ll advances up to 24000C+

Sick unit under rehabilitation Sick unit remained closed

"dvance a ainst depositsC9$# policyCIovt. securitiesCIold 1 Aewellery where the drawin s are within available value of security

"ccount transferred to %rotested cate ory

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CREDIT APPRAISAL

RATE OF PENAL INTEREST

2G above the sanctioned rate where irre ularity and default and non+compliance of terms and conditions as iven earlier. 2G above the sanctioned rate where adhocCtemporary limit are sanctioned to borrower. >G above the sanctioned rate in case of non compliance of terms and conditions in adhocCtemporary limit

A#OUNT ON 5.IC. PENAL INTEREST TO BE C.AR/ED

"mount of default in B instalment Cexcess drawals or borrowin s or amount of irre ularities in accountCoverdue bill not debited to account.

Total amount of outstandin B for non+submission of stock statement and other financial dataCdefault adherin information under Q?S. to borrowin covenantsCnon+submission of

#PPR#&S#: T'C"$&><'S (OR R'T#&: :O#$S

I.

EDUCATION LOANS

Till some year!s back hi her education and )uality education was not affordable to some illustrious students because of the financial constraints. There was no any alternative but to jump in the job market prematurely. "nd this led to untimely end of buddin talents and their forceful transformation into to the mediocrity. Scholarships were there( but those were so less in numbers that only luckier few could avail them. 'ut now the scene has chan ed
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CREDIT APPRAISAL
drastically. The boom in the bankin sector has led to release of lar e amount of funds for education loans St&$ent loans in $ndia :popularly known as E$&cation loans; have become a popular method of fundin hi her education in $ndia with the cost of educational de rees oin hi her. The spread of self+financin institutions:which has less to no fundin from the overnment; for hi her education in fields of en ineerin ( medical and mana ement which has hi her fees than their overnment aided counterparts have encoura ed the trend in $ndia. ?ost lar e public sector and private sector banks offer educational loans. Under section ,0:e; of the $ndian $ncome tax act( a person can exempt the amount paid a ainst the interest of the education loan + either for self or for hisCher spouse or children + for ei ht years from the year :s;he starts to repay the loan or for the duration the loan is in effect( whichever is lesser. /ducation loan is becomin popular day by day because of the risin fee structure of hi her education. $t came into existence in 3--4 started first by S'$ bank and after that many banks started offerin study loan. The education loan provided by %unjab &ational bank is known as Mi$%ala+sh%ap&rti scheme. The details re ardin its eli ibility( processin ( documentation etc. are iven as follows0+

Concept Co&rses eli i*le

2ID(ALA)S.(APURTI Scheme is the main scheme and its variant %&' Sarvotam Shiksha scheme stands mer ed with the main scheme with effect from 20.32.200, St&$ies in In$ia School level includin . N2( Iraduation( %ost raduation( %rofessional courses( #omputer courses and /venin courses( other courses leadin to diploma Cde ree approved by UI#( Iovt( "$#T/( "$'?S( $#?6 etc. and "dvance diploma in 'ankin Tech. $t includes professional 1 commercial 1 pilot trainin courses in $ndia and abroad. 8or study in $ndia. $nstitutes approved by 5I#" are included. St&$ies A*roa$ Iraduation( %I and #ourses offered by #$?" 9ondon ( #%" in US" $ndian &ational Secured "dmission
Page 84

Eli i*ilit%

CREDIT APPRAISAL
Secured pass marks in )ualifyin exam. 'ranches need not o into technicalities of admission process :selection throu h mana ement )uota etc.; and may consider loan based on admission advice. : RBD Cir. No. 9=K=< $t. '=.1'.'==<; #ore than one loan in a fa"il% Top &p Loans A e of st&$ent Inco"e Criteria $n case of more than one loan in a family( the family as a unit is to be taken into account for considerin the loan and security taken in relation to total )uantum of loan subject to mar in and repayin capacity of the parents. Top up loans may be sanctioned to students for pursuin further studies within overall eli ibility limits with appropriate reschedulement of existin loans and re)uired permission by the #@ There is no restriction with re ard to a e of student for bein eli ible for the loan. &o $ncome criteria are prescribed for the parents. @owever amount of loan be decided by jud in $ncome of the parents.

A"o&nt of loan 6s. 30.00 lac in $ndia and 20.00 lac for abroad. #@ can exercise hi her powers. Priorit% Sector 6s. 30.00 lac in $ndia and 6s. 20.00 lac for abroad. Capital Re6&ire"ent #ar in 6isk *ei ht as per '"S/9+$ 6isk *ei ht as per '"S/9+$$
&$9

300G <4G

Sec&rit%

Sec&rit% for staff "e"*ers Penal Interest Upfront fee

Up to 6s. =.00 lac 4G "bove 6s. =.00 lac in $ndia 34G "bove 6s. =.00 lac abroad :ScholarshipCassistance may be included in the mar in; &$9 Up to 6s. =.00 lac >rd party uarantee for loans above =.00 lac upto 6s. <.4 lac :/xemption from takin uarantee for loan up to <.40 lakh for students of $$T( $$?( S96$ etc. /? of $% or other #oll. Security for loans above <.40 lac :sho&l$ *e interprete$ as loan a"o&nt of Rs. >.81 lac an$ a*o,e in ter"s @ypothecation of assets if created out of loan amount. #o+obli ation of students! parents as well as assi nment of future income of student in loan above 6s. <.4 lac. 8or married persons( co+ obli ator can be spouse or parents or parents+in+law. Irand parents can also become co+obli ants. 9ien on Terminal dues /xtension of /? of $% 8resh ?ort a e if there is no @9 #o+obli ation of employee Up to 24000C+ ++++&$9 ( "bove 24000C+ \ 2G on .M/65U/ "?.U&T &$9
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CREDIT APPRAISAL
0.40G :?aximum 4000C+; for studies abroad which is eli ible for refund on availment of loan. Upto =.00 lac + 6s. 2<0C+ plus service tax "bove =.00 lac 6s. =40C+ plus service tax 4 to < years with moratorium period e)ual to #ourse period N 3 year or 6 months after ettin job whichever is earlier. '? is empowered to permit extension in moratorium period up to 2 years as a ainst present provision of max. 3 year in deservin cases under reportin to circle head. Simple interest is to be char ed durin moratorium period and kept in a separate account. The accrued interest durin repayment holiday will be added to %rincipal for fixin of /?$. 3G interest concession is allowed if it is serviced durin holiday period. The concession will be iven at start of repayment and /?$ will be fixed accordin ly. 6ebate of 0.4G is allowed to students of $$Ts( $$?s etc.

Doc&"entation Char es Repa%"ent

Calc&lation of interest Interest concession

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CREDIT APPRAISAL

Constit&tes of loan

Tuition fees( @ostel char es( /xam fees( 9ibraryC9ab char es( 'ooks( /)uipment( $nstruments( Uniform( 'uildin fund( 6efundable deposit( Travel expenses 1 #omputers. :"dvances for #omputers are allowed in #omputerC?ana ement courses only.; Fees reD *ithin 6 months. #ircle @ead can allow beyond a period of 6 months i"*&rse"ent also on merits.:6'5 #ir. &o. 32C30 5t. 36C02C2030; Doc&"ents 5ocuments will be executed both by student and the parentC uardian. 3. 9etter of admission and proof of last )ualifyin exam. 2. 9oan application >. " reement on %&' 3336 if student is minor. =. " reement on %&' 333< if student is major. 4. 9etter of uarantee if loan is above 6s. =.00 lac. 6. /? of $% if loan amount is above 6s. <.4 lac Post sanction 8ollow up with the colle eCuniversity for ettin pro ress report at re ular Follo7 &p intervals. Life Ins&rance $n terms of uidelines contained in 6'5+" cir no. 36C0, dt. 26.>.0,( *% )ota+ $nsurance policy can be obtained to meet the exi encies in case of death #ahin$ra of student borrower between a e roup of 3,+>> years. The covera e is between 20000+34 lac. Sin le premium will be paid. $t will vary accordin to a e and total insurance Tenor. The scheme is valid for one year. RelaGations for $t has been decided to permit the followin relaxations to the students securin admission in $$TsC$$?sC?5$ Iur aonCS96$ Aamshedpur and st&$ents of IITJII#J #DIJ $S' @yderabad0 LLRIJ ISB /xemption from makin parentC uardian as co+borrower. /xemption from takin uarantee for loans up to <.40 l Other #6 of the borrower is not re)uired. 'rief #6 of the uarantor to be prepared. pro,isions D&o due #ertificateE is not to be insisted upon. "pplication will be rejected by next hi her authority. 2nd time loan can be considered by the #@ within limits. #apability #ertificated may be issued for studies abroad. /ducation loan to the institutions previously under Sarvotam Shiksha Scheme can be sanctioned by the branch :other than place of residence of parents; convenient to the borrower dependin upon enuineness( accessibility and aspect of recovery. .n+line applications are bein accepted for rant of education loan. 9oan applications are to be disposed of within 34 days under branchChub sanction and 23 days under #@ and above. #@ has full powers to relax eli ibility( mar in and security norms. %arents( randparents( spouse( parents+in+law can be co+obli ants. %assport and Misa is re)uired for study abroad.
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CREDIT APPRAISAL
Disposal of loan applications $t has been decided to curtail the period of disposal of education loan applications to maximum 3 week except cases of #@ and above level where the outer limit of disposal will be 2 weeks from the date of receipt of complete application.

I.

2E.ICLE LOANS

Today( vehicles can be financed usin a number of options such as loans( lease( or hire purchase a reement. .btainin a vehicle loan is one of the more strai htforward ways of financin a two or four wheeler. $n this manner( the vehicle purchased is actually possessed by the bank or lendin institution. This means the car or motorbike is hypothecated. Therefore( thou h the consumer owns the vehicle( the bank or the lendin institution is actually usin it as a security a ainst the loan that the consumer has obtained. Mehicle loan provided by %unjab &ational 'ank are under two cate ories know as %&' S"6T@$ and #"6 9oan 1 details about its processin ( eli ibility( mar in etc are discussed below0+ %&' S"6"T@$ Eli i*ilit% $ndividuals with $ncome proof Students above 3, years with parents as co+borrowers 'usiness concerns $ndividuals without income proof but residin at the iven address for the last at least > years. $ndividuals with ood repayment track without default. P&rpose 1 %urchase of ScooterC?otor #ycleC?oped EGtent #aGi"&" R&pees. 1=====KD. #ar in 4G where salary is disbursed throu h branch or check+off facility is available. 24G for students where parents are co+borrowers. >0G for business or where there is no income proof. 30G for others. Inco"e criteria 30000C+ pm. $s the minimum criteria. $ncome of parents be considered in case of students.
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CREDIT APPRAISAL
$ncome of spouse can be added. S7itch o,er to .n flat fee of 2G ne7 sche"e /&arantee Ienerally it is not re)uired. $n cases where there is no $ncome proof( Iuarantee of some family member or > rd. party $n cases where income of spouse is to be added( Iuarantee of spouse can be taken. Ins&rance #omprehensive $nsurance with bank clause and policy to remain with the bank. Sec&rit% %&' 443 is re)uired for the $st time. $n case account is re ular( %&' 443 is not re)uired thereafter. Inspection $n case the account is irre ular( Qtrly. $nspection is must. Upfront fee 6s 200C+ N Service Tax 8or students B &il Doc&"entation Char es Other Re6&ire"ents 6s. 2<0C+ plus service tax 5rivin 9icense is re)uired. Statement of account for the last > years is re)uired. $ncome Tax %roof Salary certificate $ncome of spouse can be considered if heCshe is made uarantor. CAR LOAN #onveyance 9oan :%ublic; for #ar Eli i*ilit% P&rpose 1 EGtent $ndividual 1 'usiness concerns( %rofessionals 1 " riculturists with 6? transaction records. #ar( Man 1 Aeep( ?ulti &ew or .ld :not older than > years B #@ Utility MehiclesCSports powers; Utility Mecles $ndividuals 24 times of net monthly salary or 6s. 24 lac whichever is lower for one or more vehicles. #@ may relax the criteria within powers keepin in view the repayment capacity. $ncome of spouse can be considered provided heCshe stands as additional uarantor 'usiness #orporate and &o #eilin . .ne or more vehicle can be non+corporate purchased. /arnin and repayin capacity will be considered. " riculturists ++do++

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CREDIT APPRAISAL
#ar in 20G + #ost of $nsurance and one+ time road tax can be considered as mar in. Iovt.C%SU employees 34G :6epayment in ,= /?$s; $f net income is more than 6 lac ?ar in can be reduced to 34G by Sanctionin "uthority. .ld Mehicles >0G #@ may reduce up to 30G in deservin cases. Repa%"ent ?aximum < years without any ?oratorium period .ld Mehicles B 4 years " riculturists B 3= @Cyears as per crop pattern #@ and above empowered to relax repayment by 32? ?aximum a e for /?$ 64 years relaxable up to <0 years. #arry home pay should not be more than 40G of ross salary "dvance che)ues e)ual to no. of installments be obtained. Rate of Interest The rate is on fixed option with reset clause of 3 year. 6ate of interest is linked with tenure of loan. %resently 0.4G extra interest is char ed if repayment period is > years and above. Upfront fee 3G of loan subject to maximum 6000C+ exclusive of service tax. Doc&"entation char es Sec&rit% /&arantee Ins&rance Sec&rit% Inspection Other Pro,isions 6s. 2<0C+ :Tie up arran ement 6s.32<0C+ ; up to 6s. 2.00 lac N ST 6s. =40C+ :Tie up arran ement 6s.3<00C+ ; "bove 6s. 2.00 lac N ST @ypothecation of the vehicle 6# in joint name of borrower and bank 'ill of the vehicle will also be in the joint name. Spouse if employed or Suitable >rd party uarantee or #ollateral Security in shape of $%Cli)uid security e)ual to 300G of loan amount. #@ and above can waive the uaranteeCcollateral security. #omprehensive $nsurance with bank clause and policy to remain with the bank. %&' 443 is re)uired for the 3st. time. $n case account is re ular( %&' 443 is not re)uired thereafter. $n case the account is irre ular( Qtrly. $nspection is must. 34G depreciation on St. line method is to be applied in case of .ld #ar 5rivin 9icense is not at all re)uired. Statement of account for the last 6 ?. is re)uired. #ar loan finance to business concerns for personal use of executives shall be outside the purview of corporate bankin and may be sanctioned by officials under vested powers even in case where existin facilities have been sanctioned by hi her authorities in terms of 6'5 cir. &o. 43 dt. 34C0-C0-. Ieneral

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CREDIT APPRAISAL
I. II.

8.<.- .OUSIN/ LOANS

@ousin loans have emer ed as an attractive avenue for credit deployment for banks in the recent past. $ndustry level statistics reveal that &%"s in this se ment is relatively low. @ousin loans are fully secured as they are backed by mort a es of residential properties. Small housin loans up to 6s 30 lakhs can be classified as priority sector credit and hence help in achievin C maintainin the mandated priority sector lendin tar ets. 6isk wei hta e for housin loans is only 40 G ( enablin expansion of the credit portfolio with lesser capital re)uirement. The prevailin lower interest rates( which have resulted in reater affordability and the tax concessions offered by the overnment have made this one of the fastest rowin financial products. 8urther since the housin loan portfolio typically comprises a lar e pool of small and medium si7ed loans( risk is distributed over a lar e number of accounts( which is ideal from 6isk ?ana ement point of view. @ence rowth of )uality assets under @ousin 8inance is one of the major areas of focus for the bank. %&'+:%unjab &ational 'ank; @ome 9oan offers the most consumer friendly

home loans and housin finance schemes at attractive rates. %&' @ousin 9oans( with an aim to make purchase and construction of homes a comfortable task( provides fixed as well as floatin home loans at different rate of interest for different tenures. %&' @ousin 8inance covers ,0G of the cost of your home or renovation C repairin of your home loan up to 6s. 30 9acs for buyin land and up to 6s. 2 9acs for furnishin can be availed from %&' @ome 9oan. The $etails of ho&sin loan pro$&ct of P&n!a* National Ban+ re ar$in its p&rposeJ eli i*ilit% criteriaJ assess"entJ processin J $oc&"entationJ c&t *ac+J "ar inJ preDsanction follo7 &psJ etc. are as foll 1. .OUSIN/ FINANCE :PUBLIC; Eli i*ilit% $ndividual 1 Aoint .wners P&rpose 1 EGtent %urchase of %lot #onstruction of @ouse 6s.20 lac. @owever( 6? 1 above may consider 9oan upto 40 lac. &eed based

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CREDIT APPRAISAL
Semi +built @ouseCflat SmallC?edium branch 6s. 30 lac from %vt 'uilders 9ar e branch 6s. 20 lac /9'CM9's 6s. =0 lac #@ :"I?; 6s. 300 lac #@ :5I?; 6s 300 lac I? 6s.340 lac 6epair 1 6enovation 6s. 20 lac #ost of furnishin ?ax. 30G of the loan upto maximum of 6s. 2.00 lac %ari pasu #har e #@ powers up to 20 lac to Iovt. /mployees The loan can be ranted both for freehold and for leasehold property. $n case of 9easehold( loan can be ranted on the basis of %C" from ori inal allottee where 55"C%U5"C@U5" permit conversion of leasehold into freehold property. .therwise advance is not permitted a ainst plots purchased on %ower of "ttorney basis. 9oan limit up to >0 lac 6isk *ei ht is 40G 9oan limit above >0 lac 6isk *ei ht is <4G 9TM 6atio more than <4G 6isk *ei ht is 300G 9andC%lot =0G #onstructionCrepairCadd 24G ition 6ate of $nterest as per 9" #irculars issued from time to time. 0.40 G extra will be char ed on @C9 for >rd @ouse. The interest can be fixed or floatin .ption can be chan ed from fixed to floatin and vice versa with flat char es of 2G fee on 'alance outstandin 8ixed $nterest rate be reviewedCreset after a block of 4 years in respect of loans disbursed on or after 3.,.2006. 'ank has decided to extend concessions to 5efense personnel who are raisin @ousin 9oans under bank!s re ular @ousin 9oan scheme for public as under0 24 bps relaxation in interest rates 40 bps relaxation in processin fee These relaxations are to be made applicable in all new cases where defense personnel avail housin loan either in sin le name or alon with spouse. :RBD Cir. No. 11K'=1= $t. 19.'.'=1=;
Page 92

Freehol$ 1 Lease hol$

Capital Re6&ire"ent #ar in Rate of Interest

Concessional Rate of Interest for Defense E"plo%ees

CREDIT APPRAISAL
Repa%"ent ?aximum 24 years includin ?oratorium period of 3, months $nstallment can be fixed up to maximum a e of 64 years. @ub $nchar e of Scale+ $M and above besides #ircle @ead can relax the a e up to <0 years( 6epayment of loan for repairCrenovationCadditionCalteration restricted to 30 years includin moratorium period of 6?. "ll deductions should not exceed 40G of Iross monthly income. @owever where ross monthly salary is above 40000C+( the deduction can be up to 60G and if ross monthly salary is above 300000C+( the deduction can be up to <0G with the permission of #@. The income of earnin spouse and children can be taken into account. The $ncome of spouse and earnin children can be taken into account provided they are made co+borrowers. 8atherCmother can also be made co+ borrowers in cases where property is in the sin le name of hisCher son and also clubbin of their income is permitted for determinin eli ibility criteria. ?inimum 2= advance che)ues should be obtained. "s and when( 6 che)ues remain( fresh lot be obtained. .ut of 2=( 2> che)ues should be of installments and 3 che)ue should be of the amount e)ual to the balance amount. %&' offers benefit of raduated /?$. This means that the customer has the option of choosin /?$ that can increase or decrease durin repayment period rather than bein iven a fixed /?$ over repayment tenor.

/ra$&ate$ E#I

Upfront fee

0.-0 G of loan amount N service tax 1 education cess :30.>0G; on loans above >00 crore. %rocessin fees \ 0.40G of loan amount :max. 20000; Nservice tax for loans up to >00 crore. Doc&"entation 6s.3>40 N service tax
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CREDIT APPRAISAL
char es

Sec&rit%

/&arantee

/)uitableC6e istered ?ort a e of $mmovable %roperty Tripartite a reement be executed amon st @ousin 'oardC5ev "uthorityC#oop SocietyC'uilder( the borrower and the bank where mort a e cannot be created immediately. $n such cases( >rd party uarantee is also to be obtained. /? of other $% or pled e of &S# etc. up to 324G of loan amount if property is bein purchased from 3st %C" holder and where there is delay in execution of Tripartite a reement or where the mort a e of property is not possible bein an ancestral property :without title deeds; or 9al 5ora 9and. Merification of security is re)uired once in 2 years. $n case of &%"s accounts( security is to be verified on @alf yearly basis. In eneralJ no &arantee is to *e as+e$ for. B&t 7hile preparin RBL score sheetJ if score is less than 8=CJ then -r$ part% &arantee can *e o*taine$ to raise score of the applicant. $n case of buildin at ReDconstr&ction cost. 6epair 1 6enovation 6s.3.00 lac :6ural 1 SemiCUrban; 6s.2.00 lac :Urban; .thers 6s. 20.00 lac

Ins&rance Priorit% Sector incl&sion

Other feat&res

I"portant con$itions

9oan can be sanctioned by the branchChub near to the present place of workCpostin Cresidence of the borrower. @owever( if the property is situated at other place( services of branchChub located at that center may be availed for verification of Security and &/#CMaluation etc. 9oan can be ranted even if property is in the name of wifeCparents provided that the owner is made co+borrower. 9oan can be ranted for 2nd house in the same city. 9oan can be ranted for purchase of house for rental purpose. 8or take over( permission of hi her authority is not re)uired 9oan cannot be ranted 8or construction in Un+authori7ed colonies $f property is to be used for commercial purpose *ithout approved ?ap : In Co"pliance of Delhi .i h Co&rt Or$ers;
%re+payment char es of 2G be recovered on account bein

taken over by another bank. $n case( the loan is pre+paid out of

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CREDIT APPRAISAL
own sources or the loan is taken over by another bank with in >0 days from date of circular by which either the interest is raised or any important term or condition is chan ed( there will be no pre+payment char es. 8lat pre+payment char es of 2G be recovered from borrowers who pre+pay without construction on the plot before 4 years. %owers of concessions in rate of interestCother char es stand withdrawn vide 6'5 cir no. 42C0< dt. 3>.33.0<. In caseJ the constr&ction of ho&se is not co"plete$ 7ithin - %ears or in case the plot is sol$J penal interest O'C o,er an$ a*o,e the applica*le rate *e char e$. EGpression of Interest $t is a letter issued by the bankCbranch wherein the lender expresses intention to make advance to the intended borrower on the basis of eli ibility criteria subject to the fulfillment of terms and conditions. /rih Ra+sha $t is ?ort a e 6educin Term "ssurance %olicy issued in Tie up arran ement with )a,ach T"T"+"$I. There is one+time premium of 2.4G :approx; and that amount can also be financed. The covera e of the scheme is 3+20 years. The sum assured is between 6s.30000 to 6s. 3.00 crore. $n case of death of the borrower( receipt from insurance company can be utili7ed towards adjustment of loan amount as per amorti7ation table. %rior permission of T"T"+"$I is re)uired if amount is over 6s. ,0.00 lac. Iffco To+%o The covera e for accidental death and permanent total disability :due to accident; eneral alon with mandatory insurance D8ire ins&rance co. %olicy B includin earth)uakeE is offered in tie up arran ement with $ffco Tokyo Ieneral $nsurance #o. 9td. To all existin as well as new borrowers. Earnest #one% To meet the re)uirement of earnest money to apply for plotCflatChouse Deposit from State @ousin 'oards and Urban Sche"e 5evelopment authorities. These authorities undertake to refund or issue allotment letter to the bank subject to eli ibility of the bank for proposed loan and future re)uirement of @ousin 9oan.
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CREDIT APPRAISAL
/xtent of loan is -0G of /?5 or max. 6s 2.00 lac in the shape of 5emand 9oan 6.$ is '%96 B 3.<4G 6epayment throu h 6efund orderC@ousin 9oanC'ullet %ayment. Iuarantee clause deleted .5 facility can be allowed to existin @ousin 9oan borrowers there is no $6 irre ularity. .ther features of the scheme are as under0 ?inimum 40000C+ and ?aximum 6s. 4.00 lac. "dditional limit and present oCs should not exceed <4G of current market price of the house so as to maintain mar in of 24G. Upfront fees is &$9 and documentation char es are 6s. 400C+. Take home salary should not be less than =0G of ross salary. 9oanin powers are S'+&il( ?'+ 6s.=.00 lac( 9'( /9' 1 M9' 6s. 4.00 lac. 6.$ is e)ual to '%96 "fter @9 is repaid( .5 can be continuedC renewed provided the sanctionin authority is satisfied about repayin capacity of the borrower and Malue of security. OD facilit% for personal &se sho&l$ not *e sanctione$ to the *orro7ersJ 7ho ha,e a,aile$ loan for plot J constr&ction on 7hich is %et to *e co"plete$ in ter"s of RBD cir. no. 4$t.'1K=<K=? .n review( it has been decided to do away with the condition of minimum 2 year of repayment track record of the borrower for considerin .5 facility up to 4 lac. @owever this is subject to compliance of all other terms and conditions such as JP# norms( #$'$9 database( takeover
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OD Facilit% to eGistin .KL *orro7ers

CREDIT APPRAISAL
uidelines( security norms( maintenance of mar in etc. This facility is outside the purview of D@ub and SpokeD model in the accounts of existin @9 borrowers. :RBD Cir. No. 94 $t. 1?.1'.'==?; This is an attractive variant of @ousin 9oan Scheme offered by the %&' for its customers. Under this scheme( .5 facility is made available to the @9 borrower. @e can deposit his savin s and withdraw the same as per his re)uirement. The features of the scheme are as under0 /li ibil " e of the applicant must be less than 8=. ity /xistin @9 borrowers can also apply provided their loan account is re ular and no $6 irre ularity persists. %urpos "ll purposes as per ori inal e scheme eGcept P&rchase of Lan$ K Plot. /xtent Term 9oan ,0G .verdraft 20G

PNB FleGi*le .o&sin Loan Sche"e

"fter lapse of > years( enhancement in .5 will be allowed e)ual to reduction in Term 9oan and thereafter on yearly basis. "fter lapse of 4 years( 20G increase in ori inal limit is allowed in the shape of T9C.5 for personal needs. ?arket Malue of %roperty should be sufficient to cover the mar in of 24G "fter attainin a e of 44 years( .5 facility will be reduced on monthly basis so that whole limit and
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CREDIT APPRAISAL
TC9 are adjusted by the end of 64 years. ?aximum .5 limit should not exceed 40G of Total limit. @9 can be sanctioned by the branchChub situated near the workplaceCpostin Creside nce. Security verification can be done by nearby branch. 6ate of $nterest as iven above in the table in @ousin 9oan scheme : eneral; 8or .verdraft portion( 6C$ is e)ual to '%96

I2. 8.<.4 Personal Loan For Pensioner 1 P&*lic Two types of personal loans are bein offered by %&'. %ersonal loan for pensioner is special cate ory of retail lendin includin below. Eli i*ilit% P&rpose 1 EGtent %ensioners drawin pension from the branch( 8amily %ensionersJ 5%5. %ensioners( /x+employees %ersonal needs Up to <4 years of a e0 3.40 lac :?inimum 6s. 24000C+; "bove <4 years of a e0 0.<0 lac :?inimum 6s. 24000C+; Li"it calc&lation /)uivalent to 3, months net pension or 6s. 340000 :for borrowers up to <4 years! a e; and 32 months net pension or 6s <0000 :for borrowers above <4 years! a e; whichever is lower. 8or defense retirees( the loan e)uivalent to 20 ? net %ension can be ranted. Take home %ension should not be less than 40G of monthly pension
Page 98

scheme bein

offered by %unjab &ational 'ank to

pensioner. The main intension of this loan is to meet each and every personal needs medical expense of senior citi7en. 5etails re ardin the same are mentioned

CREDIT APPRAISAL
Nat&re #ar in /&arantee Upfront fee Doc&"entation char es Repa%"ent #iscellaneo&s DL or TL or OD on "onthl% re$&cin DP &$9 Personal &arantee of spo&se eli i*le for fa"il% pension or any other family member or >rd party uarantee. &$9 6s. 2<0C+ plus service tax 60 /?$s . 2= /?$s in case a e is more than <4 years which can be extended up to =, months by the sanctionin authority. %%. be kept with the loan documents "ffidavit from the pensioner that present disbursin branch will not be chan ed without bank!s consent. The loan can be availed more than once only after adjustment of earlier loan PERSONAL LOANS FOR PUBLIC .nly %&' "ccount holders are eli ible. ?inimum 6 months! salary should be routed in the account or 6 months satisfactory transaction record for non salary savin accounts. %ermanent 5efence( #6%8( 'S8 1 $T'% %ersonnel :&ot to be ranted to those who are due to retirement within next 2= ?. #onfirmed permanent employees of #entralCstate Iovt.C%SUsC6eputed #o.CSchoolsC$nstitutions who fulfill any of the followin 2 conditions0 6oute of salary throu h branch #heck+off facility %rofessionally )ualified practicin doctors vi7. ?''S( '5S and above havin customer relationship with %&' at least for 6 months havin annual income of 6s. =.00 lac and above. 5octors should be tax payers for > years and $T6s be kept on record. $t means that the employer undertakes to deduct monthly installment from the salary and remit the same towards adjustment of the loan till its li)uidation and also confirms attachment of terminal dues of the borrowerCemployee. %ersonal needs. ?inimum 6s. 40000 1 ?aximum 6s. =.00 lac or 20 times net salary whichever is lower dependin upon the repayin capacity 1 6s. 4.00 lac for those salaried persons who have completed > years in the present or ani7ation and drawin net monthly salary not
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Eli i*ilit%

Chec+ off Facilit% P&rpose 1 EGtent

CREDIT APPRAISAL
less than 6s. >0000C+. T9 or .5 "ll branches can enerate leads for processin at 6etail @ubsC##%#s. @owever disbursement can be made only by branches havin reco,er% percenta e of not less than ?=C under %ersonal 9oan se ment as at end of previous half year. ?etro Rs. 18===KD p.". Urban Rs. 1'8==KD p.". SU 1 6ural areas Rs. 1====KD p.". 5efence personnel and Rs. >8==KD p.". Teachers &$9 T9 B 60 /?$s .5+ 6educin 5% spread over 60 ?. 5efence %ersonnel B >6 ?. A"o&nt of E#I sho&l$ not *e "ore than 8=C of net "onthl% inco"e. 60 advance che)ues :maximum; si ned by the borrower alon with letter of deposit be obtained. .btention of advance che)ues is applicable where check off facility is not available. Suitable >rd party uarantee. 6?C#? may waive %&' Score system will be applicable and the applicant will have to score at least 40G marks to avail loan. G of loan amount N service tax &$9 for defense personnel. 6s. 2<0C+ up to 6s. 2.00 lac. 6s. =40C+ "bove 6s. 2.00 lac N ST &$9 for defense personnel. $n case of "rmy personnel( a copy of authority letter be sent to #ontroller of 5efense "ccount :#5".; %une so that salary is remitted till li)uidation of loan Statement of account for at least 6 m. be obtained. "ffidavit that no other loan from other bank is availed be obtained. #opy of $T return for previous > years be obtained. 8orm 36 be taken if loan is ranted to employee. " 6e istered letter be sent to the employer informin about details of loan raised by the employee. $t is clarified that the branches eli ible for disbursementCmaintainin the accounts shall obtain blanket permission from #@ for disbursement in the next 24 accounts submittin performance of the branch under the portfolio. The enuineness of salary certificates be independently ot verified from @6 5eptt. .f the employer of applicant.@ubs should ensure
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Nat&re Sanction an$ Dis*&rse"ent #ini"&" net "onthl% inco"e #ar in Repa%"ent

/&arantee RBL Sheet Upfront fee Doc". Char es Other Re6&ire"ents

RBD Cir. No. '>K=? $t. '9.8.'==?

CREDIT APPRAISAL
drawin of #$6s from #$'$9 5ata base for considerin re)uest of %ersonal 9oans.

2. 8.<.8 PNB Ba h*an sche"e for senior citi3en %&' is the first %ublic Sector 'ank to come out with a 6everse ?ort a e concept based product for senior citi7en titled 2%&' 'a hban2. The product addresses one of the very important re)uirements of the society in the fast chan in culture of $ndian society. The main objective of this scheme is to address the financial needs of senior citi7ens ownin self occupied property :house;( for leadin a decent life. The salient features of the product are iven hereunder0

Eli i*ilit%

P&rpose 1 EGtent

#ar in Inco"e criteria

Senior citi7ens ownin Self+occupied property. $f property in sin le name( there must be will in favors of spouse and it should be re istered. $n case of joint property( one of the spouses must be of 60 years and above. The other spouse should be at least 4, years old. $f there is no spouse( loan will be made in favor of sin le. To lead a decent life ?aximum )ualifyin amount can be 6s. 3.00 crore which will depend upon reali7able value of property after maintainin mar in of 20G. The monthly payment will be made to the borrower on the basis of reverse mort a e annuity table. 20G of reali7able value of the property to arrive at the )ualifyin amount &o

Rate of Interest 30.4G with reset clause of 4 years. Dis*&rse"ent $n the shape of monthly instalments :to be calculated on reverse of loan annuity basis; durin loan tenor of 34+20 years for a e roup of individuals between 60+<0 years and 30+34 years for a e roup of over <0 years or till death of last survivin spouse( whichever is earlier. 8or example( if Qualifyin amount is 6s. 3.00 lac( .n 30 year tenor of loan( monthly installment will be 6s. =<4C+( .n 34 year tenor( monthly instalment will be 6s. 2>0C+ and on 20 year
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CREDIT APPRAISAL
tenor( monthly instalment will be 6s. 324C+ The series of monthly instalments would continue after death of first spouse durin life time of survivin spouse. Tenor of loan " e roup of 60+<0 years " e roup above <0 years Ins&rance Sec&rit% Upfront fee Doc". Char es Repa%"ent 34+20 years 30 B34 years

" ainst fire( /arth)uake and other calamities at the cost of the borrower /? of $% in favor of the bank. Maluation of property to be ot done from approved valuer. 6evaluation be also ot done once in a span of 4 years. "mount e)ual to half month!s loan subject to maximum of 6s. 34000C+ N Service Tax \30.>0G &$9

The loan becomes due for payment after 6 months from death of both the spouses. $n case the loan is not repaid by le al heirs within 6 months from the death( the bank is within its ri ht to sell the property for adjustment of the loan in case the consent of the le al heirs is not received within 6 months from the death of last survivor. Others 6esidual life of property should be at least 20 years. %urpose of loan should not be speculation or tradin . $t should be ensured that the will executed by the borrower is the last will. 9ife certificate is to be obtained once in a year in &ovember. A e of 6esidual life of property should be at least 20 years. " certificate from architect at the time of first valuation be obtained. 6evaluation of Propert% property will be done once in 4 years. Ancestral &ow it has been decided to accept ancestral property provided bank is satisfied that there are no other le al heirs or ori inal title deed is not propert% as available. 8or this( documentary evidence is re)uired. #ircle @ead will sec&rit% deal such proposals. TER# LOANS " lump sum Term loan can be sanctioned up to 6s. 34.00 lac. The UNDER PNB cases can be considered on selective basis by @. only for medical BA/.BAN purpose to senior citi7ens for treatment of self( spouse and dependents. SC.E#E A"en$"ents in PNB Ba h*an Sche"e 8ollowin two amendments have been carried out in $T "ct( 3-63. 1. 6everse ?ort a e does not tantamount to transferF therefore there is no #apital Iain Tax. $ncome tax is levied only at the time of alienation of ?ort a ed property by mort a ee for recovery of loan. '. Stream of payment received by Sr. #iti7en would not be treated as $ncome. Therefore( bank has to obtain the followin at the time of
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CREDIT APPRAISAL
application of loan0 #ost and year of ac)uisition of #apital asset. #ost and year of improvement. %"& &o. of all le al heirs. #han es( if any made in the 6e istered *ill.

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CREDIT APPRAISAL

Concl&sion

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CREDIT APPRAISAL
#redit appraisal is a process of appraisin the credit worthiness of loan applicants. The fund of depositors i.e. eneral public are mobilised by means of such advances C investments. Thus it is extremely important for lender bank to assess the risk associated with credit( thereby ensure the security for fund deposited by depositors. Therefore my analyses re ardin credit appraisal procedure of %unjab &ational 'ank are as follows0+ $n case of retail lendin bank strictly follow it!s circular and fulfils all re)uirement of necessary documents re)uired for different types of loan so that bank do not suffer any types of loss. 'ank is very much particular about #$'$9 report of borrowers in case of each type of lendin . 'ank lendin process in case of retail loan is very much fast after compilin with all the criteria of bank.
$n case of project financin bank follow len thy norms to check the feasibility of the

project such as0+ $. 8irstly personal appraisal of promoter is done by the bank to ensure that promoters are experienced in the line of business and capable to implement and run the project efficiently.
II. Secondly detail study about the technical aspect is done to find the

technical soundness of project such as proper scrutiny of financial report is done( valuation of property by overnment approved valuer is done and view re ardin each and every area of project is done under technical analysis. $$$. " detail study relatin financial viability of project is done by detail study of cash flow( fund flow statements and by calculatin import ratio which is very much necessary for project appraisal such as 5S#6( 5/6 etc. the main purpose of financial appraisal is insure that project will ensure sufficient surplus to repay the instalment and interest.
I0. 6isk analysis is done by bank to determine the risk associated with the

project. This is mainly done by sensitivity analysis and by %&' credit ratin or scorin . *ith sensitive analysis feasibility of project is
Page 105

CREDIT APPRAISAL
determined under worsened condition. #redit ratin or %&' scorin is done of various parameters such as personal( mana ement( financial etc ( thereby determine credit worthiness of customer. M. $t is on basis of credit risk level( a collateral security to be iven by borrower is determined. This shows that P&n!a* National Ban+ has sound credit appraisal system.

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CREDIT APPRAISAL

BIBLIOGRAPHY

i. PUNJAB NATIONAL BANK ANNUAL REPORT ii. PNB JOURNALS iii.BOOKS

MANAGEMENT OF IN IAN FINAN!IAL INSTITUTION1 2%I032*303 %.4 5 #I/34 ,I0631 10*7 -,I*I8#120101 7I43'63 P9"'I27I#/ 7892-1 /9%/38# 494"3I FINAN!IA INSTITUTION AN P3*-' #3/3%1 #-: ,-'7I i#.$EBSITE MARKETS" "78'- '.41

5*7 -,I*I8#120091 *3*3 4c /%3:$ 7I''217 :-2*

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NE$SPAPER

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