STUDY OF CREDIT APPRAISAL IN IDBI

Guided by: Suryanaryana S Presented by: Sravya Kamma

ITM Business School

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Agenda: 
Company Profile  Objective  Methodology  Case Study  Findings  Limitations  Suggestions  Conclusion

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Company Profile: 
On Oct 1,2004 IDBI converted into Banking Company.  Merger of IDBI bank with its parent company IDBI Ltd on April 2, 2005 .  Merger of United western Ltd with IDBI Bank on Oct 3,2006.

Vision: To be trusted partner in progress by leveraging quality human capital and selling global standards of excellence to build the most valued financial conglomerate´
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Product Profile: 
           

Preferred banking Deposits Loans Cards 24 Hours banking Corporate banking Investment Advisory SME finance Agri Finance NRI Services Lockers Institutional banking Services
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Objective: 
To understand the existing credit appraisal techniques in IDBI.  To understand the various valuations that happen in credit appraisal  To understand the risk management that exists in credit appraisal.

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Methodology:

Study

Study of Credit Risk Rating

Study of the procedure involved in Credit Appraisal

Case Study

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Study of Credit Risk Rating:
Risk Assessment Module Scoring sheets/ Models

Andersen Module

Internal rating Models

Enhanced SME Rating Model

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Procedure in Credit Appraisal:
Request from the corporate for credit Final Approval by Branch Head

Business screening by Regional Managers Financial Analysis by Regional Officers
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Credit Rating by Mumbai Head Quarters

Case Study of ABC Ltd: 
Introduction:  ABC Ltd is a agro based company.  Data Sources: Secondary data collected from Company Records, Books and Internet.  Proposal : Request for credit extension from existing 25 crores to 75 crores.  The credentials of the firm for credit extension have been evaluated on not just financial grounds but overall performance of the company in every aspect possible has been evaluated.

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Tools for Analysis:
Background information

Industry Analysis

Tools for analysis

Market Analysis

Financial Indicators
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Background Information:
Background Information

Business Activities

Product Profile

Awards and Rewards

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Industry Analysis: 
Deals with status of industry, growth rate, drawbacks and other technical factors.  Status of the industry: Eighth largest commercial seed market with an estimated size of INR 49 billion.

STRENGTH

WEAKNESS

OPPURTUNITIES

THREATS
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Market Analysis:
Market Analysis

Market Position

Level of Competition

Threats

Processing capacity and arrival of foreign seeds

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Financial Indicators: 
Tangible Net Worth Sales
500 400 Total Assets Total Outside Liabilities Tangible Networth Year Year Year Year 1 2 3 4
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800 700 600 500 400 300 200 100 0

Sales PBDIT Net Profits

300 200 100 0 Year Year Year Year 1 2 3 4

Financial Indicators:
Net Working Capital
90 80 70 60 50 40 30 20 10 0 Year Year Year Year 1 2 3 4 120 100 80 60 Net Working 40 20 Capital 0 Year Year Year Year 1 2 3 4

Current Assets/Net Sales(%)

Current Assets/Net Sales(%)

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Liquidity Ratios:
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Year 1 Year 2 Year 3 Year 4
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Current Ratio Quick Ratio

Profitability Ratios
35 30 25 20 15 10 5 0 Year 1 year 2 Year 3 Year 4
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PBDIT/Net Sales (%) OPBT/Net Sales(%) Net Profit/Net Sales(%)

Growth ratios
200 180 160 140 120 100 80 60 40 20 0 -20 Year 2 Year 3 Year 4
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Net Sales Growth(%) Net profit Growth(%) Net Worth Growth(%)

Findings in the case: 
Sales and profit after tax are showing rapid growth  Debt Equity Ratio is favourable.The value is showing a decrease.  Current Ratio is favorable. The current assets are being properly utilized to deal with current liabilities.  An appropriate current ratio is an indication of the stability of the sister firms too if they has being any diversion of firms.  The other current assets declared are of current nature only.  The bank borrowings declared are within the limits permitted by us.  The director¶s report provided vital information on trading conditions, plans for future, labor relations, impact of government policies, changes in management.

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Findings in the case: 
All profitability ratios namely operating profit/sales etc indicate good performance and financial health of the firm.  The turnover ratios of the firm are fair enough  A critical examination of the cash flow statement tells us that funds have been effectively and efficiently used.  There has been never undue building of fixed assets and also there has being increase in sales without increase in fixed assets.  The proportion of increase in owned funds and borrowed funds to the proportion of increase in working capital is high.  The firm has being fair enough in the apportionment of profits and payment of dividends.  The credit rating as given by crisil is fair enough.  The pre sanction inspection has been satisfactory and has helped in the validation of market information, correctness of particulars given in the credit application form so on and so forth.
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Other factors«.. 
Marketing prowess  Research and Development  Infrastructure  Technology  Operational performance 
achieved 450-460 crores INR against the projected 500 crores 


42% increase in turnover with respect to the previous year. increase of 79% in cotton seeds 

launched 11 number of varieties 

Crisil rating
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Result«. 
A blend of the characteristics defined above make the
firm a reliable client.  In view of above analysis, it is recommended that credit could be provided to the borrower. Borrower request for enhancement of credit from 25 crores to 75 crores can be sanctioned. Borrower should be continuously monitored and steps should be taken to improve their financial position

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Limitations: 
Study limited to business loans.  Findings and suggestions were based on secondary data  Study is limited to Hyderabad branch  The findings can¶t be generalized for the varied range of industries of borrowers

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Learnings: 
Financial Analysis is not the only requirement-overall analysis is must.  Updation on technology and tools is a must be it a individual or organization.  Understanding the nature of business and the market conditions is crucial for effective credit appraisal  Real time communication with clients helped me enhance my communication skills.  Decent understanding of the credit appraisal techniques.

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Suggestions: 
   

Current Appraisal System is good. Direct Interaction with the clients should be improved. The loan processing time should be reduced. The documents required for processing the loan should be reduced. The bank should focus more on advertising to increase awareness among the public about the services that it offers.  The bank should completely eliminate the file system and go computerization at every stage as this removes paper work and creates transparency in the system.  The bank should work on standardizing the processes and systems their follow.  Care must be taken to ensure that the judgment in appraisal process does not depend on one single person and a single factor.
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Suggestions: 
Need for improvised methods that are on par with international standards.  Revising the factors on which appraisal is done to face the ever increasing violatility.  Need for improvement in Risk Management system.

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Conclusion: 
The company is doing well in credit appraisal.  Scale of funding is high compared to private banks.  The system in IDBI is risk-averse.  Decreasing effect of the recession and ever increasing start ups the bank can see a lot of business on its way.  Need for upgradation-Increasing violatile markets and the upgradation of the financial techniques all around the globe.  Need for revising the parameters on which the valuations are done.
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THANK YOU !!!

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