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MBA-IB (2009-20011)

Roll No. : A1802009075





Credit Appraisal and Risk Rating at PNB





TELE; 25744450 Fax: 25731252



This is to certify that KRITIKA ARORA, a student of Amity International
Business School, Noida, undertook a project on “CREDIT APPRAISAL
May to 30th June.
Ms.KRITIKA ARORA has successfully completed the project under the
guidance of Mr.ARUN KUMAR NIJHAWAN. She is a sincere and hard-
working student with pleasant manners.
We wish all success in her future endeavors.


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Senior Manager

Circle Office Delhi

Punjab National Bank


This is to certify that Ms. KRITIKA ARORA, a student of Post Graduate Degree in MBA in
INTERNATIONAL BUSINESS, Amity International Business School, Noida has worked in the
Credit Department of Punjab National Bank, Circle Office Delhi and has submitted this
project report entitled “Credit Appraisal and Risk Rating” at PUNJAB NATIONAL BANK,
under the able guidance and supervision of Mr. ARUN KUMAR NIJHAWAN, SENIOR
MANAGER, PUNJAB NATIONAL BANK. The period for which she was on training was for 8
weeks, starting from 1st MAY to 30th June.

This Summer Internship report has the requisite standard for the partial fulfillment the Post
Graduate Degree in International Business. To the best of our knowledge no part of this report has
been reproduced from any other report and the contents are based on original research.

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Dr. Ajit Mittal Kritika Arora

Professor Student
AIBS MBA in International Business
Amity International Business School


Every work involves efforts and inputs of various kinds and people. I am thankful to all those
people who have been helpful enough to me to the extent of their being instrumental in the
completion and accomplishment of the project entitled “Credit Appraisal and Risk Rating at
Punjab National Bank”.

I sincerely acknowledge with deep sense of gratitude to my project guide Mr. A K Nijhawan
Senior Manager, Credit, PNB Circle Office, for enhancing my understanding of the subject and
enabling me to appreciate finer nuances of the subject.

I would also like to express my deepest gratitude to Mr. Rohit Grover (Chief Manager, Credit),
Ms. Trilochan Kaur Anand (Manager, Credit), Mr. Sarkar (Senior Manager, Credit Risk
Management Department) and the entire Credit Department for their help and guidance, without
which the completion of this project would have been extremely difficult.

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Lastly, I would like to thank Mr. Nehal Ahad (Chief Manager, HR) as he found me credible
enough to work for PNB and selected me for challenging project.

Kritika Arora
MBA in International Business
Amity International Business School

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Table of Content

PART - 1


CHAPTER 3 OBJECTIVES…………………………………………... 12
CHAPTER 5 INDUSTRY PROFILE……………………………………. 14
CHAPTER 6 COMPANY PROFILE……………………………………. 17
7.1 Working Capital Assessment…………………………. 19
7.2 Assessment of Term Loans…………………………… 30
7.3 Basel Accord & Risk Management…………………….. 31
8.1 Introduction………………………………………. 33
8.2 Market Analysis…………………………………… 34
8.3 Technical Analysis…………………………………. 36
8.4 Financial Analysis………………………………….. 38
8.5 Management & Organizational Analysis………………… 45
8.6 Credit Appraisal Checklist…………………………… 46
9.1 Credit Risk………………………………………... 49
9.2 Credit Risk Management System in PNB………………... 49
11.1 PNB’s Loan Policy…………………………………. 57

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11.1.1 ………………………………….....
Objective 57
11.1.2 Basic Tenets of the Policy………………………... 57
11.1.3 Methods of Lending……………………………. 58
11.2 Credit Appraisal Process at PNB……………………… 60
11.2.1 Flowchart…………………………………... 60
11.2.2 Brief on the Process……………………………. 60
11.2.3 Risk Rating of the Borrower………………………. 62
11.2.4 Determination of the Applicable Rate of Interest…………. 65
11.2.5 Post Sanction Follow Up………………………… 66
12.1 ……………………………....
Borrowers Profile 68
12.2 Credit Appraisal of ABC PARTS Pvt. Ltd……………... 71
I. Management Evaluation…………………… 71
II. Business Evaluation……………………… 73
III. Technical Evaluation……………………... 75
IV. Legal Evaluation………………………... 77
V. Financial Evaluation……………………... 78
12.3 Present Proposal………………………………. 84
12.4 Security …………………………………… 89
12.5 Credit Risk Rating…………………………….. 90
12.6 Recommendations…………………………….. 94
Conclusion……………………………………….. 95
Findings…………………………………………. 97
Recommendations………………………………...... 98
Limitations………………………………………... 99

REFERENCES………………………………………………………......... 10


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14.1 Customer Satisfaction…………………………….... 102
14.2 Statement of the Problem……………….................... 3
14.3 Need for the Study…………………………………………. 103
14.4 Scope of the Study……………………………………………….. 104
14.5 Objective of the Study……………………………………… 104
14.6 Sample Method……………………………………………... 105
14.7 Method of Data Collection………………………………….. 106
15.1 Share of Different Types of Accounts………………………. 107
15.2 Ratios of the Services Offered by PNB……………………… 109
15.3 Reason for Selecting PNB…………………………………… 111
15.4 Consumers Willingness To Recommend PNB To Others….... 113
15.5 Satisfaction of Respondents With Services Offered by PNB… 115
16.1 Opening of Saving Account by Individual…………………… 117
16.2 Cash Deposit………………………………………………… 127
16.3 Cash Payment……………………………………………….. 131
16.4 ATM Management & Maintenance Operation……………… 133
16.5 Customer Facilities & Conveniences………………………… 136


17.1 Suggestion & Recommendation…………………………….. 137
17.2 Limitation of the Study………………………………..…….. 139
17.3 Conclusion………………………………………………….. 140

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This project was undertaken at the Punjab National Bank Circle Office Delhi, at the Credit
Department. Financial requirements for Project Finance and Working Capital purposes are taken
care of at the Credit Department. Companies that intend to seek credit facilities approach the
bank. Primarily, credit is required for following purposes:

a. Working capital finance

b. Term loan for mega projects
c. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc.

Project Financing discipline includes understanding the rationale for project financing, how to
prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In
addition, one must understand some project financing plans have succeeded while others have
failed. A knowledge-base is required regarding the design of contractual arrangements to support
project financing; issues for the host government legislative provisions, public/private
infrastructure partnerships, public/private financing structures; credit requirements of lenders, and
how to determine the project's borrowing capacity; how to analyze cash flow projections and use
them to measure expected rates of return; tax and accounting considerations; and analytical
techniques to validate the project's feasibility

Project finance is different from traditional forms of finance because the credit risk associated
with the borrower is not as important as in an ordinary loan transaction; what is most important is
the identification, analysis, allocation and management of every risk associated with the project.

The purpose of this project is to explain, in a brief and general way, the manner in which risks are
approached by financiers in a project finance transaction. Such risk minimization lies at the heart
of project finance. Efficient management of credit portfolio is of utmost importance as it has a
tremendous impact on the Banks’ assets quality & profitability. The ongoing financial reforms
have no doubt provided unparallel opportunities to banks for growth, but have simultaneously
exposed them to various risks, which need to be effectively managed.

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The concept of Credit Management is undergoing radical changes. Credit Risk in all exposures
calls for precise measuring and monitoring for taking considered credit decisions with suitable
risk mitigants, risk premium, etc. Credit portfolio should be well diversified in various promising
sectors with a cautious approach to be adopted in risky segments.

Also, lending continues to be a primary function in banking. In the liberalized Indian economy,
clientele have a wide choice. External Commercial Borrowings and the domestic capital markets
compete with banks. In another dimension, retail lending- both personal advances and SME
advances- competes with corporate lending for funds and for human resources. But lending by
nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be
competitive without compromising on the basic integrity of lending. The quality of the Bank’s
credit portfolio has a direct and deep impact on the Bank’s profitability.

The study has been conducted with the purpose of getting in-depth knowledge about the credit
appraisal and credit risk management procedure in the organization for the above said first two

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Project / Credit appraisal is a skill which has to be acquired by study and supplemented by
practice. Intuitive guess work has little place in appraising the credit rating or credit needs of a
corporate unit. The credit managers of banks and Non Banking Finance Companies (NBFCs) are
duty bound to accept or reject a proposal on the basis of its viability or non - viability.

Project / Credit appraisal is done by banks or financial institutions by obtaining credit information
of the borrowing company.

Credit information of the borrowing company can be obtained by the following sources:

1. Banks and Financial Institution

2. Bank References

3. Trade References

4. Credit Rating Agencies

5. Published Books: Basic information about a company may be taken from printed sources
like the Stock Exchange Year book, Corporate Path finder’s data base, etc.

6. Company Financial Reports

7. Press Reports

8. Stock Market Opinion

9. Charges Registered: Charges created on the assets of a company have to be registered

with the Registrar of Companies.

10. Personal discussion

11. Factory Visit

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12. Study of Financial Statements: Financial analysis determines the significant operating
and financial characteristics of a firm form accounting data and financial statements.
Analysis can be done through:
a. Ratio Analysis
b. Trend analysis: Trend analysis can be through:
i. Intra firm comparison that is review of the trend of the ratios over the years
within the firm and
ii. Inter firm comparison.
c. Reading of notes to accounts and other information: Careful reading and
analysis of the notes on accounts, one can gauge the policies of the management,
performance of the company, and its future planning.

Information required to be submitted by the Company (Borrower) to the Bank

The company should make sure that the following information required for processing credit
requests are collected by the company for submitting it to the bank or financial institution in order
to obtain the required credit facility:

1. Basic background information on the company:

2. Required facility

3. Key industry dynamics:

4. Management:

5. Management information system: Details of the planning, controlling and monitoring

systems which have been put in place have to given.

6. Financials

7. Details of the Security to be pledged:

8. Present banking relationship: The bank requires full details of the present credit
facilities being enjoyed at the moment.

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• To study broad contours of management of credit, the loan policy, credit appraisal for
business units i.e. for working capital loan or Term Loan

• To understand the basis of credit risk rating and its significance

• To utilize the above learning and appraise the creditworthiness organizations those
approach PUNJAB NATIONAL BANK for credit. This would entail undertaking of the
following procedures:

i. Management Evaluation
ii. Business / Industry Evaluation
iii. Technical Evaluation
iv. Legal Evaluation
v. Financial Evaluation
vi. Credit Risk Rating

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The methodology being used involves two basic sources of information primary sources and
secondary source.

Primary sources of Information

• Meetings and discussion with the Chief Manager and the Senior Manager of both
Credit and Credit Risk Management Department
• Meetings with the clients

Secondary sources of Information

• Loan Policy and Internal Circulars of the bank

• Research papers, power point presentations and PDF files prepared by the bank and
its related officials
• Referring to information provided by CIBIL, Income Tax files, Registrar of
Companies (Ministry of Corporate Affairs), and Auditor reports

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The last decade has seen many positive developments in the Indian banking sector. The growth in
the Indian Banking Industry has been more qualitative than quantitative and it is expected to
remain the same in the coming years. Based on the projections made in the "India Vision 2020"
prepared by the Planning Commission, the report forecasts that the pace of expansion in the
balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks
by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of
GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to
grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the
growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there
will be large additions to the capital base and reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks.
Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000
branches of Scheduled banks spread across India. As far as the present scenario is concerned the
Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for
more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with
excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On
the other hand the Private Sector Banks are making tremendous progress. They are leaders in
Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned
they are likely to succeed in the Indian Banking Industry.

Currently, banking in India is generally fairly mature in terms of supply, product range and reach-
even though reaching rural India still remains a challenge for the private sector and foreign banks.
In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets relative to other banks in comparable economies in its

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region. The Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without
any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy
expected to be strong for quite some time-especially in its services sector-the demand for banking
services, especially retail banking, mortgages and investment services are expected to be strong.
One may also expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with
the Government of India holding a stake), 29 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a
combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and
related government and financial sector regulatory entities, have made several notable efforts to
improve regulation in the sector. The sector now compares favorably with banking sectors in the
region on metrics like growth, profitability and non-performing assets (NPAs). Indian banks have
compared favorably on growth, asset quality and profitability with other regional banks over the
last few years. The banking index has grown at a compounded annual rate of over 51 per cent
since April 2001 as compared to a 27 per cent growth in the market index for the same period.

The interplay between policy and regulatory interventions and management strategies will
determine the performance of Indian banking over the next few years. Management success will
be determined on three fronts:

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i. Fundamentally upgrading organizational capability to stay in tune with the

changing market
ii. Adopting value-creating M&A as an avenue for growth
iii. Continually innovating to develop new business models to access untapped

Opportunities and Challenges for the Players

The bar for what it means to be a successful player in the sector has been raised. Four challenges
must be addressed before success can be achieved.

i. The market is seeing discontinuous growth driven by new products and services
that include opportunities in credit cards, consumer finance and wealth management
on the retail side, and in fee-based income and investment banking on the wholesale
banking side. These require new skills in sales & marketing, credit and operations
ii. Banks will no longer enjoy windfall treasury gains that the decade-long secular
decline in interest rates provided
iii. With increased interest in India, competition from foreign banks will only intensify
iv. Given the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities and
service levels from banks

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Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being the
first Indian bank to have been started solely with Indian capital. The bank was nationalized in July
1969 along with 13 other banks. Today, PNB is a professionally managed bank with a successful
track record of over 110 years. The bank has the 2nd largest branch network in India, with 4525
branches including 432 extension counters spread throughout the country. PNB was ranked as
248th biggest bank in the world by Bankers Almanac, London. Punjab National Bank is not only
the first bank to specialize in credit rating models in India but also the first one to launch image
based cheque transaction system for collection of intra bank intercity cheques thereby providing
credits merely in 48 hrs in 13 cities.

To be a Leading Global Bank with Pan India footprints and become

CORPORATE VISION a household brand in the Indo-Gangetic Plains providing entire
range of financial products and services under one roof
MISSION Banking for the unbanked

With over 56 million satisfied customers and 5002 offices, PNB has continued to retain its
leadership position amongst the nationalized banks. From its modest beginning; the bank has
grown in size and stature to become a front-line banking institution in India at present. Based on
its sound and prudent banking experience and consistent profit performance, PNB looks
confidently to the future………the name you can bank upon………

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PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs
4,35,931 crore. Today, with assets of more than Rs 2,96,633 crore, PNB is ranked as the 3rd
largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest network of
branches (5002 offices including 5 overseas branches ). During the FY 2009-10, with 40.85%
share of CASA deposits, the bank achieved a net profit of Rs 3905 crore. Bank has a strong
capital base with capital adequacy ratio of 14.16% as on Mar’10 as per Basel II with Tier I and
Tier II capital ratio at 9.15% and 5.01% respectively. As on March’10, the Bank has the Gross and
Net NPA ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its’ ratio of Priority
Sector Credit to Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank
Credit at 19.7% was also higher than the stipulated requirement of 40% & 18%.

The performance highlights of the bank in terms of business and profit are shown below:

Parameters Mar'08 Mar'09 Mar'10 CAGR(%)

Operating Profit 4006 5744 7326 22.29
Net Profit 2049 3091 3905 23.98
Deposit 166457 209760 249330 14.42
Advance 119502 154703 186601 16.01
Total Business 285959 364463 435931 15.09

(Rs in Crore)





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The objective of running any industry is earning profits. An industry will require funds to acquire
“fixed assets” like land and building, plant and machinery, equipments, vehicles etc… and also to
run the business i.e. its day to day operations.

Working capital is defined, as the funds required for carrying the required levels of current assets
to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus working
capital required (WCR) is dependent on

i. The volume of activity (viz. level of operations i.e. Production and Sales)
ii. The activity carried on viz. manufacturing process, product, production programme, and
the materials and marketing mix.
The purpose of assessing the WC requirement of the industry is to determine how the total
requirements of funds will be met. The two sources for meeting these requirements are the unit’s
long-term sources (like capital and long term borrowings) and the short-term borrowings from
banks. The long-term resources available to the unit are called the liquid surplus or Net Working
Capital (NWC).

It can be explained by visualizing the process of setting up of industry. The unit’s starts with a
certain amount of capital, which will not normally be sufficient, even to meet the cost of fixed
assets. The unit, therefore, arranges for a long-term loan from a financial institution or a bank
towards a part of the cost of fixed assets. From these two sources after meeting the cost of fixed
assets some funds remain to be used for working capital. This amount is the Net Working Capital
or Liquid Surplus and will be one of the sources of meeting the working capital requirements.

The remaining funds for working capital have to be raised from banks; banks normally provide
working capital finance by way of advantage against stocks and sundry debtors. Banks, however,
do not finance the full amount of funds required for carrying inventories and receivables: and

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normally insist on the stake of the enterprise at every stage, by way of margins. Bank finance is
normally restricted to the amount of funds locked up less a certain percentage of margins. Margins
are imposed with a view to have adequate stake of the promoter in the business both to ensure his
adequate interest in the business and to act as a protection against any shocks that the business
may sustain. The margins stipulated will depend on various factors like salability, quality,
durability, price fluctuations in the market for the commodity etc. taking into account the total
working capital requirements as assessed earlier, the permissible limit, up to which the bank
finance cab be granted is arrived.

While granting working capital advances to a unit, it will be necessary to ensure that a reasonable
proportion of the working capital is met from the long-term sources viz. liquid surplus. Normally,
liquid surplus or net working capital be at least 25% of the working capital requirement
(corresponding to the benchmark current ratio of 1.33), though this may vary depending on the
nature of industry/ trade and business conditions.

Various methods for assessment of Working Capital are discussed in detail:

Operating cycle method:

Any manufacturing activity is characterized by a cycle of operations consisting of purchase of

raw materials for cash, converting them into finished goods and realizing cash by sale of these
finished goods. The time that lapses between cash outlay and cash realization by sale of finished
goods and realization of sundry debtors is known as length of operating cycle. That is, the
operating cycle consists of:

Time taken to acquire raw materials and average period for which they are in store.

Conversion process time

Average period for which finished goods are in store and

Average collection period of receivables (sundry debtors).

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Operating Cycle is also called cash-to-cash and indicates how cash is converted into raw
materials, stocks in process, finished goods, bills (receivables) and finally backs to cash. Working
capital is the total cash that is circulating in this cycle. Therefore, working capital can be turned
over or deployed after completing the cycle. Factors, which influence working capital
requirement, are Level of operating expenses and Length of operating cycle.

Any reduction in either of the both will mean reduction in working capital requirement or indicate
an efficient working capital management.

It can thus be concluded that by improving that by improving the working capital turnover ratio
(i.e. by reducing the length of operating cycle) a better management (utilization) of working
capital results. It is obvious that any reduction in the length of the operating cycle can be achieved
only by better management only by better management of one or more of the individual phases of
the operating cycle period for which raw materials are in store, conversion process time, period
for which finished goods are in store and collection period of receivables. Looking at whole
problem from another angle, we find that we can set up extremely clear guidelines for working
capital management viz. examining the length of each of the phases of the operating cycle to
assess the scope for reduction in one or more of these phases.

The length of the operating cycle is different from industry to industry and from one firm to
another within the same industry. For instance, the operating cycle of a pharmaceutical unit would
be quite different from one engaged in the manufacture of machine tools. The operating cycle
concept enables to assess working capital need of each enterprise keeping in view the peculiarities
of the industry it is engaged in and its scale of operations. Operating cycle is an important
management tool in decision –making.


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1. Traditional method of assessment of working capital requirement

The operating cycle concept serves to identify the areas requiring improvement for the purpose of
control and performance review. But, as bankers, we require a more detailed analysis to assess the
various components of working capital requirement viz., finance for stocks, bills etc.

Bankers provide working capital finance for holding an acceptable level of current assets viz. raw
materials, stock-in-process, finished goods and sundry debtors for achieving a predetermined level
of production and sales. Quantification of these funds required to be blocked in each of these
items of current assets at any time will, therefore provide a measure of the working capital
requirement of an industry.

Raw material: Any industrial unit has to necessarily stock a minimum quantum of materials used
in its production to ensure uninterrupted production. Factors, which affect or influence the funds
requirement for holding raw material, are:

i. Average consumption of raw materials.

ii. Their availability – locally or form places outside, easy availability / scarcity,
number of sources of supply
iii. Time taken to procure raw materials (procurement time or lead time)
iv. Imported or indigenous.
v. Minimum quantity supplied by the market (Minimum Order Quantity (MOQ)).
vi. Cost of holding stocks (e.g. insurance, storage, interest)
vii. Criticality of the item.
viii. Transport and other charges (Economic Order Quantity (EOQ)).
ix. Availability on credit or against advance payment in cash.
x. Seasonality of the materials.
This raw material requirement is generally expressed as so many months requirement

Stock in process: Barring a few exceptional types of industries, when the raw material get
converted into finished products within few hours, there is normally a time lag or delay or period

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of processing only after which the raw materials get converted into finished product. During this
period of processing, the raw materials get converted into finished goods and expenses are being
incurred. The period of processing may vary from a few hours to a number of months and unit
will be blocked working funds in the stock-in-process during this period. Such funds blocked in
SIP depend on:

i.The processing time

ii.Number of products handled at a time in the process
iii.Average quantities of each product, processed at each time (batch quantity)
iv.The process technology
v.Number of shifts.

Finished goods: All products manufactured by an industry are not sold immediately. It will be
necessary to stock certain amount of goods pending sale. This stock depends on:

i. Whether the manufacture is against firm order or against anticipated order

ii. Supply terms
iii. Minimum quantity that can be dispatched
iv. Transport availability and transport cost
v. Pre-dispatch inspection
vi. Seasonality of goods
vii. Variation in demand
viii. Peak level/ low level of operations
ix. Marketing arrangement- e.g. direct sale to consumers or through dealers/
The requirement of funds against finished goods is expressed so many months’ cost of production.

Sundry debtors (receivables): Sales may be affected under three different methods:

i. Against advance payment

ii. Against cash
iii. On credit

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A unit grants trade credit because it expects this investment to be profitable. It would be in the
form of sales expansion and fresh customers or it could be in the form of retention of existing
customers. The extent of credit given by the industry normally depends upon:

i. Trade practices
ii. Market conditions
iii. Whether it is bulky by the buyer
iv. Seasonality
v. Price advantage
Even in cases where no credit is extended to buyers, the transit time for the goods to reach the
buyer may take some time and till the cash is received back, the unit will have to be cut out of
funds. The period from the time of sale to receipt of funds will have to be reckoned for the
purpose of quantifying the funds blocked in sundry debtors. Even though the amount of sundry
debtors according to the unit’s books will be on the basis of Sale Price, the actual amount blocked
will be only the cost of production of the materials against which credit has been extended- the
difference being the unit’s profit margin- (which the unit does not obviously have to spend). The
working capital requirement against Sundry Debtors will therefore be computed on the basis of
cost of production (whereas the permissible bank finance will be computed on basis of sale value
since profit margin varies from product to product and buyer to buyer and cannot be uniformly
segregated from the sale value).
The working capital requirement is expressed as so many months’ cost of production.

Expenses: It is customary in assessing the working capital requirement of industries, to provide

for 1 month’s expenses also. A question might be raised as to why expenses should be taken
separately, whereas at every stage the funds required to be blocked had been taken into account.
This amount is provided merely as a cushion, to take care of temporary bottlenecks and to enable
the unit to meet expenses when they fall due. Normally 1-month total expenses, direct and
indirect, salaries etc. are taken into account.

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While computing the working capital requirements of a unit, it will be necessary to take into
account 2 other factors,

i. Is the credit received on purchases- trade credit is a normal practice in trading

circles. The period of such credit received varies from place to place, material to
material and person to person. The amount of credit received on purchases reduces
the working capital funds required by the unit.
ii. Industries often receive advance against orders placed for their products. The
buyers, in certain cases, have to necessarily give advance to producers e.g. custom
made machinery. Such funds are used for the working capital of an industry. It can
be thus summarized as follows:

Raw materials Months requirement Rs. A

Stock-in-process Months (cost of Production) Rs. B

Finished Goods Months cost of Production required to be stocked Rs. C

Sundry Debtors Months cost of Production (o/s credits) Rs. D

Expenses One month(normally) Rs. E

Total Current Assets A+B+C+D+E

Credit received on Purchases

Rs. F
(months’ Purchase value)

Advance payment on order

Rs. G


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2. Projected Annual Turnover Method for SME units (Nayak Committee)

For SME units, which enjoy fund based working capital limits up to Rs.5 crore, the minimum
working capital limit should be fixed on the basis of projected annual turnover. 25% of the output
or annual turnover value should be computed as the quantum of working capital required by such
unit. The unit should be required to bring in 5% of their annual turnover as margin money and the
Bank shall provide 20% of the turnover as working capital finance. Nayak committee guidelines
correspond to working capital limits as per the operating cycle method where the average
production/ processing cycle is taken to be 3 months.

Anticipated Annual Output (A) 120

Working Capital Requirement: 25% of A (B) 30
Margin : 5% of A (C) 6
Maximum Permissible Bank Finance (B-C) 24
In Rs lacs

Important clarifications:

i. The assessment of WC limits should be done both as per Projected Turnover Method and
Traditional Method; the higher of the two is to be sanctioned as credit limit. If the
operating cycle is more than 3 months, there is no restriction on extending finance at more
than 20% of the turnover provided that the borrower should bring n proportionally higher
stake in relation to his requirements of bank finance.
ii. While the approach of extending need based credit will be kept in mind, the financial
strengths of the unit is also important, the later aspect assumes greater significance so as to
take care of quality of bank’s assets. The margin requirement, as a general rule, should not
be diluted.

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MPBF Method (Tandon and Chore Committee Recommendations)

The Tandon Committee was appointed to suggest a method for assessing the working capital
requirements and the quantum of bank finance. Since at that time, there was scarcity of bank’s
resources, the Committee was also asked to suggest norms for carrying current assets in different
industries so that bank finance was not drawn more than the minimum required level. The
Committee was also asked to devise an information system that would provide, periodically,
operational data, business forecasts, production plan and resultant credit needs of units. Chore
Committee, which was appointed later, further refined the approach to working capital
assessment. The MPBF method is the fall out of the recommendations made by Tandon and Chore
Committee.Regarding approach to lending: the committee suggested three methods for assessment
of working capital requirements.

First Method of lending: According to this method, Banks would finance up to a max. of
75% of the working capital gap (WCG= the total current assets - current liabilities other than bank
borrowing) and the balance 25 % of the WCG considered as margin is to come out of long term
source i.e. owned funds and term borrowings. This will give rise to a minimum current ratio of
1.17:1. The difference of (1.17-1) represents the borrower’s margin which is popularly known as
Net Working Capital (NWC) of the unit

Second Method of lending: As per the 2nd method Bank will finance maximum up to 75%
of total current assets (TCA) & Borrowers has to provide a minimum of 25% of total current
assets as the margin out of long term sources. This will give a minimum current ratio of 1.33:1

Third Method of lending: Same as 2nd method, but excluding core current assets from
total assets and the core current assets is financed out of long term funds. The term ‘core current
assets’ refers to the absolute minimum level of investment in current assets, which is required at
all times to carry out minimum level of business activity. The current ratio is further improved i.e.
1.79: 1

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Current Liabilities Current assets

Creditors for purchase 100 Raw material 200

Other current liability 50 Stock in process 20

Bank borrowings 200 Finished goods 90

Receivables 50

Other current assets 10

Total Current Liabilities 350 Total Current Assets 370

(In Rs lacs)

Calculating NWC

First method of lending Second method of lending Third method of lending

Total CA 370 Total CA 370 Total CA 370

Less: CL – Bank Less: core CA from

150 Less: 25% of CA 92 95
Borrowing LT


Less: CL - Bank Less: 25% from

Working Capital Gap 220 150 69
Borrowing LTS

25% of WCG from Less: CL – Bank

55 150
long term sources Borrowing

MPBF 165 MPBF 128 MPBF 56

Current ratio 1.17: 1 Current ratio 1.33: 1 Current ratio 1.79: 1

The above example shows that the contribution of margin by the borrower increases when
financing is shifted from First method to Second method which is known to be stringent from
borrower point of view (Third method was not accepted by RBI).

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3. Projected Balance Sheet Method (PBS)

The PBS method of assessment will be applicable to all borrowers who are engaged in
manufacturing, services and trading activities who require fund based working capital finance of
Rs. 25 lacs and above. In case of SSI borrowers, who require working capital credit limit up to Rs.
5 cr, the limit shall be computed on the basis of Nayak Committee formula as well as that based
on production and operating cycle of the unit and the higher of the two may be sanctioned.. The
assessment will be based on the borrower’s projected balance sheet, the funds flow planned for
current/ next year and examination of the profitability, financial parameters etc. unlike the MPBF
method, it will not be necessary in this method to fix or compute the working capital finance on
the basis of a stipulated minimum level of liquidity (Current Ratio). The working capital
requirement worked out is based on the following:

i. CMA assessment method is continued with certain modifications.

ii. Analysis of the Profit and Loss account, Balance Sheet, Funds flow etc. for the past
periods is done to examine the profitability, financial position, and financial
management etc of the business.
iii. Scrutiny and validation of the projected income and expenses in the business and
projected changes in the financial position (sources and uses of funds). This is carried
out to examine whether these parameters are acceptable from the angle of liquidity,
overall gearing, efficiency of operations etc.

In the PBS method, the borrower’s total business operations, financial position, management
capabilities etc. are analysed in detail to assess the working capital finance required and to
evaluate the overall risk. The assessment procedure is as follows:

i. Collection of financial information from the borrower

ii. Classification of current assets / current liabilities
iii. Verification of projected levels of inventory/ receivables/ sundry creditors
iv. Evaluation of liquidity in the business operation
v. Validation of bank finance sought

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Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of land,
building and plant and machinery, required for setting up a new industrial undertaking or
expansion/diversification of an existing one and also for acquisition of movable fixed assets.
Term Loans are also given for modernization, renovation, etc. to improve the product quality or
increase the productivity and profitability.

The basic difference between short-term facilities and term loans is that short-term facilities are
granted to meet the gap in the working capital and are intended to be liquidated by realization of
assets, whereas term loans are given for acquisition of fixed assets and have to be liquidated from
the surplus cash generated out of earnings. They are not intended to be paid out of the sale of the
fixed assets given as security for the loan. This makes it necessary to adopt a different approach
in examining the application of the borrowers for term credits.

For the assessment to Term Loan Techno Economic Feasibility Study is done. The success of a
feasibility study is based on the careful identification and assessment of all of the important issues
for business success. A detailed Project Report is submitted by an entrepreneur, prepared by a
approved agency or a consultancy organization. Such report provides in-depth details of the
project requesting finance. It includes the technical aspects, Managerial Aspect, the Market
Condition and Projected performance of the company. It is necessary for the appraising officer to
cross check the information provided in the report for determining the worthiness of the project.

The feasibility study is a part of Credit Appraisal process and the same is discussed in the
following chapter.

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The Basel accord/accords refer to the banking supervision accords namely Basel I and Basel II
issued by the Basel Committee on Banking Supervision (BCBS).


The 1988 Basel Accord primarily addressed banking in the sense of deposit taking and lending.
The main focus was Credit Risk. It described the strength of the Bank as measured by the Capital
employed. Accordingly it put a minimum level of capital adequacy (Capital to Credit Risk
Weighted Assets ratio) at 8%. Basel I allocated 4 risk weights i.e. 0%, 20, 50% and 100% to
different exposure types, based on the risk perceived on the exposure types under the credit
portfolio. Basel I provided a set norm for capital allocation which helped many banks to allocate
capital to counter the risks faced by them.

CRAR = Capital
Risk Weighted Assets (Credit Risk+ Market Risk +Operational Risk)

Paid Up Equity Capital + Statutory Reserves + Other disclosed free

Tier I
reserves + Capital Reserves representing surplus arising out of sale
proceeds of Assets + Innovative Perpetual Debt instruments
Revaluation Reserves (at a discount of 55%) + General Provisions and
Tier II
Loss Reserves + Subordinated Debt + Hybrid Debt Capital

Risk Weighted Assets

Basel I introduced the concept of Risk Weighted Assets (RWA). All the assets of a bank
(advances, investments, fixed assets etc.) carry certain amount of risk. In proportion to the
quantum of this risk, bank must maintain capital. Quantification of risk is done in percentage (0%,
20%, 50% etc.). Exposure when multiplied with these percentages gives risk based value of
assets. These assets are also called Risk Weighted Assets (RWA).

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Banking has changed dramatically since the Basel I document of 1988. Advances in risk
management and the increasing complexity of financial activities / instruments prompted
international supervisors to review the appropriateness of regulatory capital standards under Basel
I. To meet this requirement, the Basel I accord was amended and refined which came out as the
Basel II document. The Basel II document is structured into three parts. Each part is called as a
pillar. Thus these three parts constitute three pillars of Basel II.

This pillar is compatible with the credit risk, market risk and operational
risk. The regulatory capital will be focused on these three risks
This pillar gives the bank responsibility to exercise the best ways to manage
PILLAR II the risk specific to that bank. It also casts responsibility on the supervisors to
review and validate banks’ risk measurement models.
This pillar is on market discipline is used to leverage the influence that other
market players can bring

Recognizes wide range of Collateral &
1 Limited role of collateral as risk mitigant 1
Guarantees as risk mitigant
Recognizes Operational Risk and prescribes
2 Not recognizing Operational Risk 2
explicit capital charge for
Risk weights assignment on transaction
3 3 Risk weight assignment on risk rating basis
Not recognizing tenure or remaining time
Recognizes the tenure or remaining time to
4 to maturity of exposures in risk 4
maturity of exposures in risk assessment
Provisions are through Asset
Provisions are through Expected Loss
5 Classification. 5


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Effectiveness of Credit Management in the bank is highlighted by the quality of its loan portfolio.
Every Bank is striving hard to ensure that its credit portfolio is healthy and that Non Performing
Assets are kept at lowest possible level, as both of these factors have direct impact on its
profitability. In the present scenario efficient project appraisal has assumed a great importance as
it can check and prevent induction of weak accounts to our loan portfolio. All possible steps need
to be taken to strengthen pre sanction appraisal as always “Prevention is better than Cure”. With
the opening up of the economy rapid changes are taking place in the technology and financial
sector exposing banks to greater risks, which can be broadly classified as under:

Government regulations and policies, availability of infrastructure facilities,

Industry Risks Industry Rating, Industry Scenario & Outlook, Technology Up gradation,
availability of inputs, product obsolescence, etc.

Operating efficiency, competition faced from the units engaged in similar

Business Risks products, demand and supply position, cost of labor, cost of raw material
and other inputs, pricing of product, surplus available, marketing, etc.

Background, integrity and market standing/ reputation of promoters,

organizational set up and management hierarchy, expertise/competence of
Management Risks persons holding key position in the organization, delegation and
decentralization of authority, achievement of targets, track record in
execution of project, debt repayment, industry relations etc.

Financial strength/standing of the promoters, reliability and reasonableness

of projections, past financial performance, reliability of operational data and
Financial Risks
financial ratios, adequacy of provisioning for bad debts, qualifying remarks
of auditors/inspectors etc.

In light of the foregoing risks, the banks appraisal methodology should keep pace with ever
changing economic environment. The appraisal system aims to determine the credit
needs/requirements of the borrower taking into account the financial resources of the client. The

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end objective of the appraisal system is to ensure that there is no under - financing or over -
financing. Following are the aspects, which need to be scrutinized and analyzed while appraising:


(Demand & Potential)

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The market demand and potential is to be examined for each product item and its
variants/substitutes by taking into account the selling price of the products to be marketed vis-a-
vis prices of the competing products/substitutes, discount structure, arrangement made for after
sale service, competitors' status and their level of operation with regard to production and products
and distribution channels being used etc. Critical analysis is required regarding size of the market
for the product(s) both local and export, based on the present and expected future demand in
relation to supply position of similar products and availability of the other substitutes as also
consumer preferences, practices, attitudes, requirements etc. Further, the buy-back arrangements
under the foreign collaboration, if any, and influence of Government policies also needs to be
considered for projecting the demand. Competition from imported goods, Government Import
Policy and Import duty structure also need to be evaluated.


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In a dynamic market, the product, its variants and the product-mix proposed to be manufactured in
terms of its quality, quantity, value, application and current taste/trend requires thorough

Location and Site

Based on the assessment of factors of production, markets, Govt. policies and other factors,
Location (which means the broad area) and Site (which signifies specific plot of land) selected for
the Unit with its advantages and disadvantages, if any, should be such that overall cost is
minimized. It is to be seen that site selected has adequate availability of infrastructure facilities
viz. Power, Water, Transport, Communication, state of information technology etc. and is in
agreement with the Govt. policies. The adequacy of size of land and building for carrying out its
present/proposed activity with enough scope for accommodating future expansion needs to be

Raw Material

The cost of essential/major raw materials and consumables required their past and future price
trends, quality/properties, their availability on a regular basis, transportation charges, Govt.
policies regarding regulation of supplies and prices require to be examined in detail. Further, cost
of indigenous and imported raw material, firm arrangements for procurement of the same etc.
need to be assessed.

Plant & Machinery, Plant Capacity and Manufacturing Process

The selection of Plant and Machinery proposed to be acquired whether indigenous or imported
has to be in agreement with required plant capacity, principal inputs, investment outlay and
production cost as also with the machinery and equipment already installed in an existing unit,
while for the new unit it is to be examined whether these are of proven technology as to its
performance. The technology used should be latest and cost effective enabling the unit to compete
in the market. Purchase of reconditioned/old machinery is to be dealt in terms of laid down
guidelines. Compatibility of plant and machinery, particularly, in respect of imported technology
with quality of raw material is to be kept in view. Also plant and machinery and other equipments

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needed for various utility services, their supply position, specification, price and performance as
also suppliers' credentials, and in case of collaboration, collaborators' present and future support
requires critical analysis. Plant capacity and the concept of economic size has a major bearing on
the present and future plans of the entrepreneur(s) and should be related to the availability of raw
material, product demand, product price and technology.

The selected process of manufacturing indicating the adequacy, availability and suitability of
technology to be used along with plant capacity, manufacturing process needs to studied in detail
with capacities at various stages of production being such that it facilitates optimum utilization
and ensures future expansion/ debottlenecking, as and when required. It is also to be ensured that
arrangements are made for inspection at intermediate/final stages of production for ensuring
quality of goods on successful commencement of production and completion, wherever required.

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The aspects which need to be analyzed under this head should include cost of project, means of
financing, cost of production, break-even analysis, financial statements as also profitability/funds
flow projections, financial ratios, sensitivity analysis which are discussed as under:

Cost of Project & Means of Financing

a. The major cost components of any project are land and building including transfer,
registration and development charges as also plant and machinery, equipment for auxiliary
services, including transportation, insurance, duty, clearing, loading and unloading charges
etc. It also involves consultancy and know-how expenses which are payable to foreign
collaborators or consultants who are imparting the technical know-how. Recurring annual
royalty payment is not reflected under this head but is accounted for under the profitability
statements. Further, preliminary expenses, such as, cost of incorporation of the Company, its
registration, preparation of feasibility report, market surveys, pre-operative expenses like
salary, travelling, start up expenses, mortgage expenses incurred before commencement of
commercial production also form part of cost of project. Also included in it are capital issue
expenses which can be in the form of brokerage, commission, advertisement, printing,
stationery etc. Finally, provisions for contingencies to meet any unforeseen expenses, such
as, price escalation or any other expense which have been inadvertently omitted like margin
for working capital requirements required to complete the production cycle, interest during
construction period, etc. are also part of capital cost of project. It is to be ensured while
appraising the project that cost and various estimates given are realistic and there is no
under/over estimation. Further, these cost components should be supported by proper
quotations, specifications and justifications of land, machinery and know-how expenses etc.

ii. Besides Bank’s loan, the project cost is normally financed by bringing capital by the
promoters and shareholders in the form of equity, debentures, unsecured long term loans and
deposits raised from friends and relatives which are not repayable till repayment of Bank's
loan. Resources are raised for financing project by raising term loans from Institutions/Banks

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which are repayable over a period of time, deferred term credits secured from suppliers of
machinery which are repayable in installments over a period of time. The above is an
illustrative list, as the promoters have now started raising funds through Euro-issues, Foreign
Currency loans, premium on capital issues, etc. which are sometimes comparatively cheap
means of finance. Subsidies and development loans provided by the Central/State
Government in notified backward districts to attract entrepreneurs are also means of financing
a project. It is to be ascertained that requirement of finance has been properly tied-up for
unhindered implementation of a project. The financing structure accepted must be in
consonance with generally accepted levels along with adequate Promoters' stake. The
resourcefulness, willingness and capacity of promoter to contribute the same have also to be

In case of project finance, the promoter/borrower may bring in upfront his contribution (other
than funds to be provided through internal generation) and the branches should commence its
disbursement after the stipulated funds are brought in by the promoter/borrower. A condition
to this effect should be stipulated by the sanctioning authority in case of project finance, on
case to case basis depending upon the resourcefulness and capacity of the promoter to
contribute the same. It should be ensured that at any point of time, the promoter’s
contribution should not be less than the proportionate share.

Profitability Statement

The profitability statement which is also known as `Income and Expenditure Statement' is
prepared after considering the net sales figure and details of direct costs/expenses relating to raw
material, wages, power, fuel, consumable stores/spares and other manufacturing expenses to
arrive at a figure of gross profit. Thereafter, all other expenses like salaries, office expenses,
packing, selling/distribution, interest, depreciation and any other overhead expenses and taxes are
taken into account to arrive at the figure of net profit. The projections of profit/loss are prepared
for a period covering the repayment of term loans. The economic appraisal includes scrutinizing
all the items of cost, and examining the assumptions, if any, to ensure that these are realistic and

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achievable. There should not be any optimism or pessimism in working out profitability
projections since even a little change in the product-mix from non-remunerative to remunerative
or vice-versa can distort the picture. While preparing profitability projections, the past trends of
performance in an industry and other environmental factors influencing the cost and revenue items
should also be considered objectively.

Generally speaking, a unit may be considered as financially viable, progressive and efficient if it
is able to earn enough profits not only to service its debts timely but also for future

Break-Even Analysis

Analysis of break-even point of a business enterprise would help in knowing the level of output
and sales at which the business enterprise just breaks even i.e. there is neither profit nor loss. A
business earns profit if it operates at a level higher than the break-even level or break-even point.
If, on the other hand, production is below this level, the business would incur loss. The break-
even point in an algebraic equation can be put as under:

Break-even point
Total Fixed Cost / (Sales price per unit - Variable Cost per unit)
(Volume or Units)
Break-even point
(Total Fixed Cost x Sales) / (Sales - Variable Costs)
(Sales in rupees)

The fixed costs include all those costs which tend to remain the same up to a certain level of
production while variable costs are those costs which tend to change in proportion with the
volume of production. As regards unit sales price, it is generally the same for all levels of output.

The break-even analysis can help in making vital decisions relating to fixation of selling price
make or buy decision, maximizing production of the item giving higher contribution etc. Further,
the break-even analysis can help in understanding the impact of important cost factors, such as,
power, raw material, labor, etc. and optimizing product-mix to improve project profitability.

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Fund-Flow Statement

A fund-flow statement is often described as a ‘Statement of Movement of Funds’ or ‘where got:

where gone statement’. It is derived by comparing the successive balance sheets on two specified
dates and finding out the net changes in the various items appearing in the balance sheets.

A critical analysis of the statement shows the various changes in sources and applications (uses)
of funds to ultimately give the position of net funds available with the business for repayment of
the loans. A projected Fund Flow Statement helps in answering the under mentioned points.

• How much funds will be generated by internal operations/external sources?

• How the funds during the period are proposed to be deployed?
• Is the business likely to face liquidity problems?

Balance Sheet Projections

The financial appraisal also includes study of projected balance sheet which gives the position of
assets and liabilities of a unit at a particular future date. In other words, the statement helps to
analyze as to what an enterprise owns and what it owes at a particular point of time.

An appraisal of the projected balance sheet data of the unit would be concerned with whether the
projections are realistic looking to various aspects relating to the same industry.

Financial Ratios

While analyzing the financial aspects of project, it would be advisable to analyze the important
financial ratios over a period of time as it may tell us a lot about a unit's liquidity position,
managements' stake in the business, capacity to service the debts etc. The financial ratios which
are considered important are discussed as under:

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Ratio Formula Remarks

There cannot be a rigid rule to a satisfactory debt-

equity ratio, lower the ratio higher is the degree of
protection enjoyed by the creditors. These days the
debt equity ratio of 1.5:1 is considered reasonable.
It, however, is higher in respect of capital intensive
Debt-Equity projects. But it is always desirable that owners
1 Debt (Term Liabilities)
Ratio have a substantial stake in the project. Other
features like quality of management should be kept
in view while agreeing to a less favorable ratio.
(Where, Equity = Share capital, In financing highly capital intensive projects like
free reserves, premium on shares,
infrastructure, cement, etc. the ratio could be
, etc. after adjusting loss balance)
considered at a higher level.

This ratio of 1.5 to 2 is considered reasonable. A

Debt + Depreciation +
very high ratio may indicate the need for lower
Net Profit (After Taxes)
moratorium period/repayment of loan in a shorter
Debt- + Annual interest on long
schedule. This ratio provides a measure of the
Service term debt
2 ability of an enterprise to service its debts i.e.
`interest' and `principal repayment' besides
Ratio Annual interest on long
indicating the margin of safety. The ratio may vary
term debt + Repayment
from industry to industry but has to be viewed with
of debt
circumspection when it is less than 1.5.
Tangible Net Worth
(Paid up Capital +
Reserves and Surplus - This ratio gives a view of borrower's capital
TOL / TNW Intangible Assets) structure. If the ratio shows a decreasing trend, it
Ratio indicates that the borrower is relying more on his
Total outside Liabilities own funds and less on outside funds and vice versa
(Total Liability - Net
4 Profit-Sales Operating Profit (Before This ratio gives the margin available after meeting

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Taxes excluding Income

cost of manufacturing. It provides a yardstick to
from other Sources)
Ratio measure the efficiency of production and margin
on sales price i.e. the pricing structure
This ratio is of a primary importance to see how
best the assets are used. A rising trend of the ratio
reveals that borrower has been making efficient
Sales utilization of his assets. However, caution needs to
5 Tangible
be exercised when fixed assets are old and
Assets Ratio Total Assets - Intangible
depreciated, as in such cases the ratio tends to be
high because the value of the denominator of the
ratio is very low.
Higher the ratio greater the short term liquidity.
This ratio is indicative of short term financial
position of a business enterprise. It provides margin
as well as it is measure of the business enterprise to
6 pay-off the current liabilities as they mature and its
Current Assets capacity to withstand sudden reverses by the
strength of its liquid position. Ratio analysis gives
Current Liabilities
indications; to be made with reference to overall
tendencies and parameters in relation to the project.
Output This ratio is indicative of the efficiency with which
7 Investment Total capital employed the total capital is turned over as compared to other
Ratio (in fixed & current units in similar lines.

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Internal Rate of Return

The discount rate often used in capital budgeting that makes the net present value of all cash flows
from a particular project equal to zero. Higher a project's IRR the more desirable it is to undertake
the project. IRR should be higher than the Cost of the project (interest rate in case of project

Sensitivity Analysis

While preparing and appraising projects certain assumptions are made in respect of certain
critical/sensitive variables like selling price/cost price per unit of production, product-mix, plant
capacity utilization, sales etc. which are assigned a `VALUE' after estimating the range of
variation of such variables. The `VALUE' so assumed and taken into consideration for arriving at
the profitability projections is the `MOST LIKELY VALUE'. Sensitivity Analysis is a systematic
approach to reduce the uncertainties caused by such assumptions made. The Sensitivity Analysis
helps in arriving at profitability of the project wherein critical or sensitive elements are identified
which are assigned different values and the values assigned are both optimistic and pessimistic
such as increasing or reducing the sale price/sale volume, increasing or reducing the cost of inputs
etc. and then the project viability is ascertained. The critical variables can then be thoroughly
examined by generally selecting the pessimistic options so as to make possible improvements in
the project and make it operational on viable lines even in the adverse circumstances.

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Appraisal of project would not be complete till it throws enough light on the person(s) behind the
project i.e. management and organization of the unit. It is seen that some projects may fail not
because these are not viable but because of the ineffectiveness of the management and the
organization in controlling various functions like production, marketing, finance, personnel, etc.
The appraisal report should highlight the strengths and weaknesses of the management by
commenting on the background, qualifications, experience, and capability of the promoter, key
management personnel, and effectiveness of the internal control systems, relation with labor,
working conditions, wage structure, and the other assigned essential functions. In case the
promoter(s) have interest, in other concerns as Proprietor or Partner or Director, the appraisal
report should also comment on their performance in such concerns.

A business is more vulnerable if decision making in all the functional areas rests with a particular
person, in other words, `one man show'. Further, the management and the organization should be
conducive to the size and type of business. In case it is not so, it should be ensured that
professional managers are inducted to strengthen the organization.

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An indicative list of issues which need to be looked into while appraising a project is given below:

1. Reasonable demand projections keeping in view the size of the

market, consumption level, supply position, export potential, import
substitute, etc.
2. Competitors' status and their level of operation with regard to
production and sales.
3. Technology advancement/Foreign Collaborator's Status/Buy-back
arrangements etc.
MARKETING 4. Marketing policies in practice, for promotion of product(s) and
distribution channels being used. Expenses on marketing are done
so as to popularize the product.
5. Local/foreign consumer preferences, practices adopted, attitudes,
requirements etc.
6. Influence of Govt. policies, imports and exports in terms of quantity
and value.

7. Marketing professionals employed their competence, knowledge

and experience.

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1. Product and its life cycle, product-mix and their application.

2. Location, its advantages/disadvantages, availability of
infrastructural facilities, Govt. concessions, if any, available there.
3. Plant and machinery with suppliers' credentials and capacity
attainable under normal working condition.
TECHNICAL 4. Process of manufacturing indicating the choice of technology,
position with regard to its commercialization and availability.
5. Plant and machinery - its availability, specification, price,
6. Govt. clearance/ license, if any, required.

7. Labor/ Manpower, type of skills required and its availability

position in the area.

1. Total project cost and how it is being funded/financed.

2. Contingencies and inflation duly factored in project cost.
3. Profitability projections based on realistic capacity utilization
and sales forecast with proper justification. Unrealistic/ambitious
sales projections without reference to past performance and
FINANCIAL justification to be avoided.
4. Break-even analysis, fund flow and cash flow projections.
5. Balance sheet projections should be realistic and based on latest
available data. The components of financial ratios should be
subjected to close scrutiny.

6. Aspect of support of parent company, wherever applicable, may

be taken into account.

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1. Financial standing and resourcefulness of the

2. Qualifications and experience of the promoters
and key management personnel.
3. Understanding of the project in all of its aspects -
MANAGERIAL financing pattern, technical knowledge and marketing programme
4. Internal control systems, delegation of adequate
powers and entrusting responsibility at various levels.
5. Other enterprises, if any, wherein the promoters
have the interest and how these are functioning.

1. Impact on increase in level of savings and income distribution in

society and standard of living.
2. Project contribution towards creation and rate of increase of
ECONOMIC employment opportunity, achieving self sufficiency etc.

3. Project contribution to the development of the region, its impact

on environment and pollution control

To judge whether the project is viable, i.e. it can generate adequate surplus for servicing its debts
within a reasonable period of time and still left with some funds for future development. This
involves taking an over-all view to analyse the strengths and weaknesses of the project. It should
also be analysed to see whether the management and organisation can prove effective for
successful implementation of the project.

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Credit risk means the possibility of loss associated with diminution in the credit quality of
borrowers. In a bank’s portfolio, losses stem from outright default due to inability or
unwillingness of a customer or counter party to meet, commitments in relation to lending, trading,
settlement and other financial transactions.


A comprehensive credit risk management system, which is in place in the bank, encompasses the
following processes:

• Identification of Credit Risk

• Measurement of Credit Risk
• Grading of Credit Risk
• Reporting and analysis of rating related data
• Control of Credit Risk


In order to take informed credit decisions, it is necessary to identify the areas of credit risk in each
borrower as well as each industry. Risk Management Division HO, in coordination with other HO
divisions involved in disbursal of credit and also the risk management departments of various
zonal offices identifies these risks areas and develops necessary tools and processes to measure
and monitor the risk.

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In order to measure the credit risk in banks’ portfolio, the bank has developed the following

Credit Risk Rating Model Total limits Applicable from the Bank

Small 2 Loans Above Rs. 20 lacs and up to Rs. 50lacs

Small Loans Above Rs. 50 lacs and up to Rs. 5crores

Mid Corporate Above Rs.5 crores and up to Rs. 15crores

Large Corporate Above Rs. 15 crores

Non Banking Financial Corporation Model (irrespective of any limit)

New Business Model Below Rs. 5 crores

New Project Model Above Rs. 5 crores

The credit risk rating models have been developed with a view to provide a standard system for
assigning a credit risk rating to all the borrowers on the basis of the overall credit risk involved in
them. Inputs to the models are the financial, management, business and conduct of account,
industry information. The evaluation of a borrower is done by assessment on various
objective/subjective parameters. The model evaluates the credit risk rating of a borrower on a
scale of AAA to D with AAA indicating minimum risk and D indicating maximum risk.

The credit risk-rating models incorporate therein all possible risk factors, which are important for
determining the credit quality/ rating of a borrower. These risks could be:

• Internal and specific to the company,

• Associated with the industry in which the company is operating or
• Associated with the entire economy and can influence the repayment capacity and/
or willingness of the company.

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Evaluation methodology under rating models

• The scores are assigned to each of the parameters on a scale of 0 to 4 with 0 being very
poor and 4 being excellent. The scoring of some of these parameters is subjective while for some
others it is done on the basis of pre-defined objective criteria.

• The scores given to the individual parameters multiplied by allocated weights are then
aggregated and a composite score for the company is arrived at, in percentage terms. Higher the
score obtained by a company, the better is its credit rating. Weights have been assigned to
different parameters based on their importance. Weights assigned to different parameters have
been loaded in the software. After allocating/evaluating scores to all the parameters, the
aggregate score is calculated and displayed by the software.

• The overall percentage score obtained is then translated into a rating on a scale from AAA
to D according to a pre-defined range of scores.

• Wherever a particular parameter is not applicable, no score should be given and the
parameter should be made ‘Not Applicable’.

• For multi-divisional companies, which are involved in more than one industrial activity,
evaluation should be done separately for each business. However, the management evaluation,
conduct of account and financial evaluation will be done on a common basis. In such cases, for
the business section, each business should be evaluated and scored separately, taking into account
the different industrial activity involved.

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In order to provide a standard definition and benchmarks under the credit risk rating system,
following matrix has been adopted in all the risk rating models.

Rating Grade within the

Description Score (%) obtained
category rating Category

PNB –AAA Minimum Risk Above 80.00 PNB- AAA

Marginal Risk Above 77.50 up to 80.00 PNB- AA +

PNB-AA Above 72.50 up to 77.50 PNB- AA

Above 70.00 up to 72.50 PNB- AA -

Modest Risk Above 67.50 up to 70.00 PNB- A +

PNB-A Above 62.50 up to 67.50 PNB- A

Above 60.00 up to 62.50 PNB- A -

Average Risk Above 57.50 up to 60.00 PNB- BB +

PNB-BB Above 52.50 up to 57.50 PNB- BB

Above 50.00 up to 52.50 PNB- BB -

Above 47.50 up to 50.00 PNB- B +
Acceptable Risk
Above 42.50 up to 47.50 PNB- B

Above 40.00 up to 42.50 PNB- B -

PNB-C High Risk Above 30.00 up to 40.00 PNB- C

PNB-D Caution Risk 30.00 and below PNB – D

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The process of rating and vetting is as under:

Loan Sanctioning Vetting/Confirming

Credit Risk Rating Authority
Authority Authority

i. Zonal CRMD in consultation

Head Office with branches GM (RMD), HO

ii. Large Corporate Branches

i. In case of Large Corporate

Zonal / Circle Model, ELB/VLB

Zonal CRMD
Office ii. In case of other Models, branches
to rate the accounts

An official designated by the

Incumbent not connected
Branch Office Officer/Manager, Credit Section with Processing/
recommending/rating of the
concerned loan proposal

In order to adopt internal rating based approaches (IRB) for credit risk, Basel II has placed certain
minimum requirements which inter-alia require, validation of rating system, process and
estimation of all relevant risk components. Banks must regularly compare realized default rates
with estimated probability of default (PD) of each grade and able to demonstrate to its supervisor
(RBI), that the internal validation process enable it to assess the performance of internal rating
and risk estimation system consistently and meaningfully. In view of above fact, not only rating
but consistent practices in evaluation of credit risk rating as well as evolving and updating robust
data on various risk components is must for adopting IRB approaches.


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The Credit Risk Management process in the bank encompasses the following management
Control techniques which help in mitigating the adverse impacts of credit risk in its credit

i. Credit Approving Authority

a. Credit Committee

b. Linkage of loaning powers with risk rating categories

ii.Prudential Exposure limits

iii.Risk Based Pricing

iv.Portfolio Management

v.Loan Review Mechanism

vi.Legal documentation

vii.Preventive Monitoring System


a. Use of CIBIL data and RBI defaulters list

b. Diversification of Risks


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Supervision and Follow-up of bank credit has assumed considerable significance particularly after
introduction of new norms of assets classification, provisioning and derecognition of interest
income on NPAs, affecting profitability. System of supervision and follow up can be defined as
the systematic evaluation of the performance of a borrowal account to ensure that it operates at
viable level and, if problems arise, to suggest practical solutions. It helps in keeping a watch on
the conduct and operational/financial performance of the borrowal accounts. Further, it also helps
in detecting signals/symptoms of sickness and deteriorations, if any, taking place in the conduct of
the account for initiating timely corrective actions to check slippage of accounts to NPA category.

The goals and objectives of monitoring may be classified into fundamental and supplementary
goals. Fundamental goals help a bank to ensure safety of funds lent to an enterprise while,
supplementary goals are directed towards keeping abreast of problems arising out of changes in
both the internal and the external environment for initiating timely corrective actions. Some of
the important goals of monitoring are listed as under:

i. To keep a watch on the project during implementation stage so that there are no time &
cost overruns.

ii. To ensure that the funds released are utilized for the purpose for which these have been
provided and there is no diversion of such funds.

iii. To evaluate operational and financial results, such as production, sales, profit/loss, flow
of funds, etc. and comparing these with the projections/estimates given by the borrower
at the time of sanction of credit facilities.

iv. To ensure that the terms and conditions as stipulated in the sanction have been complied

v. To monitor operations in the account particularly cash credit facilities which indicate
health of the account.

vi. To obtain market report on the borrower, to gather information like reputation/financial
standing etc.

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vii. To detect signals and symptoms of sickness or deterioration taking place in

conduct/performance of the account.

viii. To ensure that the unit's management and organizational set-up is effective.

ix. To keep a check on aspects like accumulation of statutory liabilities, creditors, debtors,
raw-material, stocks-in-process, finished goods, etc.

x. To ensure charging of applicable rate of interest/penal interest/ commitment charges as

per bank's guidelines.

System of supervision & monitoring of credit as laid down by the Bank needs to be meticulously
followed by the branches/controlling offices which, inter alia, covers the following:

i. Conveying the sanction

ii. Maintenance of Loan Document File

iii. Quarterly Review Sheet

iv. Preventive Monitoring System

v. Quarterly Monitoring System

vi. Inspection and Physical Verification of stocks – Stock Audit


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The Credit Management & Risk Policy of the bank at the macro level is an embodiment of the
Bank’s approach to understand, measure and manage the credit risk and aims at ensuring
sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. This
would entail reducing exposures in high risk areas, emphasizing more on the promising
industries / productive sectors/ segments of the economy, optimizing the return by striking
balance between the risk and the return on assets and striving towards maintaining/improving
market share.


• All loan facilities considered only after obtaining loan application from the borrower and
compilation of Confidential Report on them and the guarantor. The borrowers should
have the desired background, experience/expertise to run their business successfully

• Project for which the finance is granted should be technically feasible and
economically/commercially viable i.e. it should be able to generate enough surplus so as to
service the debts within a reasonable period of time.

• Cost of the project and means of financing the same should be properly assessed and tied
up. Both, under-financing and over- financing can have an adverse impact on the
successful implementation of the project.

• Borrowers should be financially sound, enjoy good market reputation and must have their
stake in the business i.e. they should possess adequate liquid resources to contribute to the
margin requirements.

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• Loans should be sanctioned by the competent sanctioning authority as per the delegated
loaning powers and should be disbursed only after execution of all the required

• Projects financed must be closely monitored during implementation stage to avoid time
and cost overruns and thereafter till the adjustment of the bank's loan.

• The policy sets out minimum or benchmark lending rate, BPLR = 11 %

• The policy lays down norms for takeover of advances from other banks/ financial

• As a matter of policy the bank does not take over any Non-performing Asset (NPA) from
other banks


1. For Working Capital

i. Simplified method linked with turnover

Simplified method based on turnover for assessing working capital finance up to

Rs.2 crore (upto Rs. 5 crore in case of SSI units)

ii. MPBF System

Existing MPBF system with flexible approach shall be followed for units
requiring working capital finance exceeding the above-mentioned amount

iii. Cash Budget System

Cash Budget System shall be followed in Sugar, Tea, Service Sector and Film
Production accounts. It will be our endeavor to introduce the same selectively in
other areas also

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2. Term Loan

In case of infrastructure/mega projects, proper appraisal will be made by utilizing the

services of specialized / Technical officers.

The term loans with remaining maturity period of above 5 years shall not exceed 50% of
the term deposits with remaining maturity period of above 5 years after taking into account
the renewal of term deposits as per the past trend.

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Submission of Project Report along Carrying out Due Diligence on the

with the Request Letter Client

Determining of Interest Rate and Feasible Preparing Credit Report / Feasibility

Preparation of Proposal Report and Risk Rating

Not feasible

Submission of Proposal to designated Submission of Proposal to designated

Authority (Circle office) Authority

Re-verification and analysis of the Meeting with the client to clarify the
Proposal queries

No Queries

Approval of request made by the client

Vetting of Credit Risk Rating Report
like Reduction of Interest Rates etc

Acknowledgement of Sanction Terms Sanction of Proposal on various Terms

& Condition by the client & Conditions

Application to comply with Sanction Disbursement of Sanctioned Amount

T&C. Execution of Loan Documents from the branch office

Procedures at Branch Office Level Procedures at Circle Office Level

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At Punjab National Bank, proposal for financing working capital limits and term loans can relate
to any of the following:

1. New proposal

2. Renewal of existing limits

3. Enhancement of existing limits

Once a proposal is received, financial statements, project report and other important documents
are used to evaluate:

1. Maximum permissible bank finance (in case of WC limit)

2. Techno Economic Feasibility Analysis of the project (includes all the 5 evaluation)

3. Various risks associated, if any

4. Various approvals of issues the borrower seeks (reduction of ROI, processing fee etc)

5. Risk rating of the borrower

6. Reasonableness of estimates/projection in regard to sales, chargeable current assets,

current liabilities (other than bank borrowings) and net working capital

7. Classification of current assets and current liabilities in conformity with the guidelines
issued by the Reserve Bank/HO.

8. Maintenance of minimum current ratio of 1.33:1 (Except where a relaxation is permitted

as in the case of sick/weak units, diamond exporters, etc.).

9. An undertaking by the borrower to submit his annual accounts promptly. Further annual
review is carried out regularly by the bank even where enhancement in credit limits is not

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10. Provisions of Foreign Exchange Management Act, 2000 (FEMA), wherever applicable are
complied with

11. In respect of industries where norms relating to inventory and receivables have been laid
down by Reserve Bank/HO, credit limits should be determined in accordance with such
norms and in other cases in tune with past trends.

12. In cases where deviations from norms/past trends are warranted, it should be ensured that
these are justified and specific comments in this behalf are incorporated in the notes placed
before the competent authority for sanction.

13. Specific guidelines issued by RBI/HO for sanctioning credit limits for financing certain
specific activities such as diamond exports, leasing and hire-purchase, tea, sugar and
computer software industries will continue to be in force.


Punjab National Bank uses a system of internal ratings for the assessment of the credit quality and
risk profile of its borrowers. An internal rating refers to a summary indicator of the risk inherent
in an individual credit quality in an individual credit. Ratings typically embody an assessment of
the risk of loss due to failure by a given borrower to pay as promised, based on consideration of
relevant counterparty and facility characteristics. A rating system includes the conceptual
methodology, management process, and systems that play a role in the assignment of a rating.

Credit risk rating tools at Punjab national bank

With respect to Punjab National Bank, credit risk rating has been developed with a view to
provide a standard system for assigning a credit rating to the borrowers of the bank according to
their risk profile. The management of credit risk at PNB includes a continuing review of credit
limits, policies and procedures; the approval of specific exposures and workout situations; the
constant re-evaluation of the loan portfolio and the sufficiency of provisions thereof. PNB was

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also one of the first banks to develop their own credit models to ease up their way to risk
management, PNB Trac -- for its entire category of lending. The loans with exposure of above Rs
20 lacs have been rated individually, while loans with exposure under Rs 20 lakh have been rated
segment-wise on portfolio basis as per the terms of Basel II accord. This means that the bank
would be able to do credit ratings on its own for its lending’s.

Inputs (parameters) to PNB Trac

The rating tool is designed to cater all the industry. The difference between ratings of two
borrowers lie in the limits he/she is seeking from the bank and the industry of the same. There are
broad categories defined in every model that require different parameters or inputs (both
quantitative and subjective) depending on the industry the borrower serves.
To explain the above statement an example of the inputs is described below.

Rating Model New Project Model Industry ABC Sector

Facilities Required Term Loan Limits Rs. 1200 lacs

Inputs to the Model for the above mentioned loan will be:


Capital market perception of the group Management Setup

Risk bearing capacity Integrity, commitment and sincerity
Track record in debt repayment Financial flexibility

Business Range of services Level of customer satisfaction

Quality of service offered Advertising / promotional strategies

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Economies of operation Brand equity

Ambience of service outlet Expected market growth

Effectiveness of distribution channels Locational advantage

Quality of infrastructure available Technology adopted in the process

Debt – Equity Ratio Internal Rate of Return

Repayment Period (in yrs) TOL / TNW
Foreign exchange risk Working capital cycle (in months)

Project complexities Expected time overrun

Implementation Expected cost overrun Status of obtaining clearances
Risk Evaluation
Funding risk Service period (in yrs)

How the Rating is done

1. The scores are assigned to each of the parameters of each of the broad category in the different
sections on a scale of 0 to 4 up to two decimal points with 0 being very poor and 4 being
excellent. The scoring of some of these parameters is subjective while for some others it is
done on the basis of pre-defined objective criteria.

2. The scores given to the individual parameters multiply by allocated weights are aggregated
and a composite score for the company is arrived at in percentage terms. Higher the score
obtained by a company, better is its credit rating. Weights have been assigned to different
parameters based on their importance.

Factor % score obtained Weight Weighted Score
Financial Evaluation 55.00 40.00% 22.00
Business & Industry Evaluation 50.00 25.00% 12.50
Management Evaluation 80.00 20.00% 16.00
Conduct of Account 75.00 15.00% 11.25

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The Aggregate Score of 61.75 refers to PNB- A-



Benchmark Prime Lending Rate (BPLR)

Bank has determined Benchmark PLR (BPLR) after taking into account actual cost of funds,
operating expenses and a minimum margin to cover regulatory requirement of provisioning /
capital charge and profit margin. At present, BPLR has been fixed at 11%. BPLR is the reference
rate for determination of rate of interest for the borrower’s accounts.

Sub-BPLR Lending

In order to remain competitive in the market, sub-BPLR lending is also permitted. The sub-BPLR
lending lies in the vested powers of CMD/ED/GMs (Head Office)/Circle Heads. These powers are
defined in the Internal Circular of the bank, which eventually depends on the rank of the officer
and the credit risk rating of the borrower.

For instance:

i. Sub-BPLR Lending permitted by CMD: up to 5.50% below BPLR

ii. Sub-BPLR Lending permitted by ED: up to 3.00% below BPLR

iii. Sub-BPLR Lending permitted by Circle Heads: up to 1.00% below BPLR

Applicable Rate of Interest (ROI)

The BPLR attracts further a term premia of 0.50% for term loans having a repayment reschedule
over 3 years. Also the applicable ROI depends upon the credit risk rating and the Industry of the
borrower. RBI also grants certain rebates or lower ROI for lending to few sectors, like
Agriculture, SME etc. to boost the sector and encouraging more participation.
Example: for Advances to NBFCs above Rs. 20 lacs

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AAA BPLR + 1.50 %
A BPLR + 3.00 %
BB BPLR + 3.50 %
(The Base Rate system will replace the BPLR system with effect from July 1, 2010)


If the proposal is considered viable and accepted by the bank then proper account in name of the
borrower is created. The account is reviewed from time to time in order to know whether the
company has met with all the terms & conditions or not, whether the interest is being paid on time
or not, whether there is overdraft in accounts or the funds are not utilized by the company at all,
whether the bank’s interest income is increasing or not. Two of the most used methods for post
sanction follow up are:


Objectives of PMS

The objective of PMS is to track & evaluate the health of borrower’s account on a continuous
basis and detect:

• Unsatisfactory/adverse signals/indicators at an early stage in a comprehensive manner.

• Thorough probe into reasons behind observed signals and analysis thereof.

• Speedy corrective/remedial actions/steps to prevent the account from becoming NPA as

well as to minimize the loan losses.

Preventive Monitoring System consists of two parts:

i. PMS Index and Rank

PMS Index is a numerical index consisting of 29 indicators Parameters grouped into 6

sections. Penalty rates (weights) in the form of numerical values have been assigned to

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each indicator (parameter) depending upon their degree of impact on health of an account.
The score assigned to any parameter is stored for last one year at any point of time, which
is known as Cumulative score. The section-wise maximum of cumulative scores is to be
summed up to arrive at PMS Index Score. Based on PMS Index Scores a scale of 1 to 10
has been devised, which is known as PMS Ranking Scale. The PMS Rank indicates the
state of health of an account. The lower the PMS Rank, better the health of account and

ii. PMS Report

PMS Report, which has eight parts, describes brief profile of the borrower, position of
accounts, details of signals contributing to PMS Index Score, reasons behind adverse
signals and proposes corrective/ remedial steps with time frame.


Bank has prescribed the QMS system for monitoring performance of big borrower accounts
enjoying working capital facilities of Rs. 1crore & above from the banking system. QMS includes
the submission of data on the prescribed formats depending upon the economic activity of the
borrower. Under this system financial and operational information/ data is required to be
submitted in two different sets of formats

i. QMS I

This form is required to be submitted within six weeks from the close of the quarter to
which it relates. It gives information about the operations of the unit and its performance
for the quarter, also giving reasons for non-achievement of sales/production targets.

ii. QMS II

This form is required to be submitted within two months from the close of the half-year to
which it relates. In addition to providing comparative position of the actuals vis-a-vis the
projections accepted at the time of sanction relating to the operations of the unit, this form
also indicates the `SOURCES' and `USES' of the funds generated by the unit, during the

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half year. Critical analysis of this form can reveal the diversion of short-term funds for
long term uses.


Group Name ABC Parts Private Limited

Address of Regd./Corporate Office 41, DLF, Industrial Area, New Delhi-110015

Constitution Private Limited

Date of incorporation 18/08/1960

Maintaining current account with PNB, New Delhi

Dealing with PNB since
for the last 8 years.

Industry/Sector Manufacturing of Auto & Tractor Parts (Large Scale)

Engaged in Designing, Engineering and

Business Activity (Product)
Manufacturing of Auto and Tractor components.


The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The borrower has setup
manufacturing units at 4 locations for manufacturing of Automotive Parts. This company is an
ISO-9001 – 2000 Certified Company and working speedily on achieving the TQ 14000. The
Management of the company is experienced and working in the line since long and the party is

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having the regular orders for marketing of products and as well as contracts with corporate
manufacturing units of Vehicles/Auto Mobiles. Because of their standing the company is getting
repeated orders. The Company is supplying its product to manufacture of Automobile/Vehicles
Manufacturer unit as Original Equipment Manufacturers. The company has set up in- house R&D
facility in their unit, sophisticated instrumentation laboratory, testing laboratory etc., which
reflects the broad vision of the company to withstand the changing environment.


Major Share holders No. of shares Amt. in Rs. Lacs % Holding

Promoters Holding 100000 100.00 100%

FIs/ Mutual Funds/UTI/Banks/FIIs NIL NIL NIL



Total 100000 100.00 100%


Secured/Unsecured (As per

Nature Proposed
RBI’s guidelines)

Fund Based

CC(H) 900.00 Secured

Fund Based Ceiling 900.00

Non Fund Based


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Non Fund Based Ceiling NIL

Term Loan 1600.00 Secured

TOTAL COMMITMENT 2500.00 Secured

Rs. In Lacs

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1. Market reputation on the promoter / management of the company: Satisfactory

2. Brief Profile of Directors

• Shri Mahender Kumar Bhunsali, aged 80 years, promoted the business of auto
ancillaries after completing his education. He has been founder of the company and
is presently the chairman of the company. Looking at his rich experience along
with his forward looking capabilities, excellent work and ability to progress as per
the changing industry scenario, he was honored by Udyog Patra Award

• Shri Munish Kumar Bhunsali, aged 46 years, son of Shri Mahendra Kumar
Bhunsali joined his father’s business after completing his Graduation. He has now
been associated with this business for twenty-four years and is presently Managing
Director of the company

• Smt. Meenal Bhunsali¸ W/o of Shri Munish Kumar Bhunsali aged 44 years, is also
a graduate. She has also been associated with the business for last eight years and
presently Director in the company

3. Quality of Management (Including Corporate Governance): Management of the

company is well experienced and have more than 40 year experience in the auto parts line.

4. Succession Planning: Is been taken care of

5. Confidential Reports: Satisfactory

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6. Marketing: The endless pursuit for quality excellence for over four decades has earned
ABC the unswerving confidence of leading automotive and tractor manufactures, that's
why its components are used as Original Equipment in vehicles manufactured. The
company supplies its products to various ORIGINAL VEHICLE MANUFACTURERS

• Escorts Tractors Limited,

• Tractors and Farm Equipment Limited (Massey Ferguson U.K)

• Carraro India Ltd., (Carraro Spa, Italy)

• Samey Deutz Fahr India Ltd.,(Samey, Italy)

• Eicher Tractors (Valtra, Brazil)

• Ford New Holland (CNH, Italy)

• "Sonalika" International Tractors Ltd (Renault, France)

• International Auto Ltd. etc.

On the other hand company have well experienced management, good marketing team and
vide market network of customers of its products.

7. Borrowers' diversification, expansion, modernization program: The company is

setting up a new manufacturing facility, as a part of company’s overall
expansion/integration plant for its production activities. For the above purpose, a plot of
land measuring about 11,190 sq. meters has been allotted to the company by New Okhala
Industrial Development Association, near New-Delhi. The Company Intend to set up new
machinery there for setting up a new plant to cater growing demands of its customers, who
have already placed orders to increase supply.

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Comments on industry scenario and industry outlook:

The past few years have witnessed a continuous influx of global auto majors in India.
Many auto majors have established facilities, which have also been aided by the liberal
government policy. India crossed million-mark last fiscal, which has set the domestic auto
ancillary industry on a roll. Auto MNC’s are also launching their latest models in India.
The domestic auto industry has also come up with new and quality models. Consequently,
the importance for precision auto components has been growing. The increase in demand
for auto components in India has also resulted in an increase in revenues and exports.
Exports of auto components from India have witnessed a CAGR of over 19% over the last
six years.

The auto component sector is on a growth trajectory as is evident by the fact that an auto
component has been designated as a “Thrust Sector” by the Government of India under the
EXIM Policy.

Also, the problems of high rejection rates which plagued the domestic auto ancillary
industry has been overcome which is exhibited in number of overseas deals concluded by
the domestic industry amidst stiff competition from other Asian countries. The
Government has extended various fiscal incentives and policy measures which have helped
the industry.

Critically, outsourcing of automobile components that have relatively high engineering and
design content from suppliers in low cost countries like India, is gaining momentum fast. It
is estimated that in the next 10 years the auto components industry will reach USD 33-40

Going by the current trends in the domestic automotive industry and as stated above, it is
expected that the indigenous demand for auto components will also reach USD 13-15
billion in the next 10 years and about USD 20-25 billion would be exported. To meet the
combined demand from domestic and international customers the industry will have to

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make significant incremental investment Hence, the Indian auto component industry (and
by sequel the forging industry) is poised to achieve a position in the top slot in the world
and will be in all probability a major driver of growth and employment in the domestic

The fortunes of the auto ancillary sector are closely linked to those of the auto sector.
Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an
impact on auto ancillary demand. Demand is derived from original equipment
manufacturers (OEM) as well as the replacement market. Replacement demand accounts
for close to 57% of total demand, while OEMs account for 27%, with exports accounting
for the balance 16%.

The Indian auto component industry had an estimated 480 companies operating in this area
in FY05, employing more than 250,000 people and the industry exported goods worth
estimated at US$ 1.4 bn. Share of exports to output is estimated to have increased from
15% in FY04 to 16% in FY05.

One area where domestic units compare favorably with their international peers is it terms
of costs. Lower labour costs give Indian auto ancillary companies an absolute cost
advantage. India's strength in exports lies in forgings, castings and plastics historically. But
this is changing with more component manufactures investing in upgradation of
technology in recent years

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1. Land & Building - The Party has proposed to setup the designing , engineering and
manufacturing unit at Noida –II having the area of 11,190 sq Mts The Party has already
constructed approx 45000 sq feet Industrial Shed. The building area is sufficient for the
installation of the plant and machinery and for smooth working of the unit.

2. Plant and Machinery: It is reported by the party that they are one of the largest integrated
plant of its kind for manufacturing Auto and Tractor Component in North India spread
over sprawling area of 57,340 sq feet at different locations in Delhi, Faridabad and Noida.
There are different types of shops i.e grinding shop, Turning centers, Machine Shops,
ensuring high productivity and better quality to keep pace with the ever rising quality
standards. The party is also having HEAT TREATMENT SHOP with hardening,
annealing, carbonizing, tampering furnaces which make the component to withstand
strength in operating conditions of the parts.. The party has submitted the quotations from
the suppliers/manufacturers with the term and conditions for supply. The credential of the
suppliers is verified for the supply of the machinery as per bank guidelines.

3. Raw Materials: The basic raw material required for the unit is forging of auto parts ,
stainless steel, welding rods and store items etc. The material is available through local
suppliers/ units and most of the raw material is purchased from Delhi & NCR.

4. Manufacturing Process: The auto parts being manufactured under strict quality control
by using latest CNC Machines of improved technology, modern process control devices
monitored by microprocessors and backed by a competent team of technical personnel to
ensure strict quality norms as laid down by the OEM units/ Manufacturer of Tractors and
other Vehicles.

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5. Production Capacity: The stated projections are accepted by the bank as they both match
and are in sync the installed capacity and the market demand. The new plant will become
operational in the mid of the financial year 2010-11 and production capacity of the
company will increased.

6. Quality Control: The party has proposed to set up in- house R&D facility comprising of
pilot plant facility, sophisticated instrumentation laboratory, testing laboratory etc. for Raw
Material and finished goods etc. Quality control test are being undertaken for raw material
and other products at stages of production. The product shall meet all the specification
requirement of their client.

7. Staff and Labor: As the machines are semi automatic and the unit is located at the Nodia,
which is the approved industrial area. So, there is no problem of skilled and unskilled labor
and it will be easily available as per the requirement of the party as and when required for
the proposed unit at Noida.

8. Power: The party has taken the temporary power load connection of 20KW for
completion of construction at Noida unit.

9. Other Infrastructure: The unit of the party is situated at Noida, it is a developed

industrial area and is connected to other parts of the country by roads and rails routes. All
types of facilities like postal, telecommunication, transportation etc. are easily/already

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Status of various statutory approvals and clearances:

For the Noida Unit Company has already obtained the Various approvals such as sanction of
building plan, Electricity/Power Load Connection, Water Connection, Pollution Control
Clearance. The other units of the Company are already working at different locations in
Faridabad and Delhi. The Director of the company has reported that they have obtained the all
approvals required for the units for manufacturing of auto parts i.e, registration of the units
with the concerned departments i.e. SSI registration, Income tax, Sales Tax, authorization
from Pollution control board.

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Financial Statements of the company are as follows


(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection
Sales Turnover 1995.39 2047.12 2584.65 2379.88 4840.00
% rise or fall in sales 2.59 26.26 -7.92 103.37
Cost of sales 1868.41 1954.42 2502.28 2270.66 4405.56
Operating Profit 126.98 92.70 82.37 109.22 434.44
Other Income 17.40 7.44 17.84 12.39 20.00
Profit Before Tax 144.38 100.14 100.21 121.61 454.44
Provision for taxes 40.00 40.00 69.74 3.67 113.59
Profit After Tax 104.38 60.14 30.47 117.94 340.85
Depreciation 41.97 52.91 74.08 84.98 344.00
Cash Profit 146.35 113.05 104.55 202.92 684.85


(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection
Share capital 100.00 100.00 100.00 100.00 175.00
Reserves and Surplus 482.55 542.69 573.16 691.10 1064.68
Share App. Money 0.00 0.00 0.00 75.00 0.00
Quasi Capital 17.45 32.79 45.84 60.88 75.00
Def. Tax liability/ Loss 0.00 0.00 32.81 32.81 0.00
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Net Worth 600.00 675.48 751.81 959.79 1314.68
Secured Loans 496.55 685.86 981.12 1119.01 1819.54
Unsecured Loans 0.00 0.00 0.00 0.00 0.00
Term Liabilities 496.55 685.86 981.12 1119.01 1819.54
Working Capital Advances 0.00 461.01 482.21 442.79 900.00

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Sundry Creditors 496.60 400.67 694.94 633.65 100.00

Statutory Liabilities 0.00 0.00 0.00 0.00 0.00
Adv from Customers 0.00 0.00 0.00 0.00 0.00
Other current Liabilities 707.92 187.91 105.32 85.00 138.59
Current Liabilities 1204.52 1049.59 1282.47 1161.44 1138.59
Total Outside Liabilities 1701.07 1735.45 2263.59 2280.45 2958.13
Total Liabilities 2301.07 2410.93 3015.40 3240.24 4272.81

Fixed Assets 1640.29 1830.50 2372.27 2590.20 3998.99

Depreciation 792.19 845.10 919.18 1004.16 1398.16
Lease Asset 0.00 0.00 0.00 0.00 0.00
Net Block 848.10 985.40 1453.09 1586.04 2600.83
Inventories 426.89 602.67 796.42 932.02 979.28
Sundry Debtors 735.23 353.35 473.80 326.43 403.33
Cash & bank balance 13.38 68.33 3.72 37.19 19.30
Advances to suppliers 0.00 64.57 38.14 44.23 0.00
Loans & advances 0.00 0.00 0.00 0.00 0.00
Advance Tax 0.00 0.00 0.00 0.00 113.59
Other Current Assets 277.47 330.22 243.75 307.85 150.00
Current Assets 1452.97 1419.14 1555.83 1647.72 1665.50
Investments 0.00 6.39 6.48 6.48 6.48
Security Deposits 0.00 0.00 0.00 0.00 0.00
Margin Money 0.00 0.00 0.00 0.00 0.00
Exp. Not WO 0.00 0.00 0.00 0.00 0.00
Non-current Assets 0.00 6.39 6.48 6.48 6.48
Total Assets 2301.07 2410.93 3015.40 3240.24 4272.81


(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection
Long Term Approach
Net Worth 600.00 675.48 751.81 959.79 1314.68
Term Loans 496.55 685.86 981.12 1119.01 1819.54
Total Long Term Sources 1096.55 1361.34 1732.93 2078.80 3134.22

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Net Fixed Assets 848.10 985.40 1453.09 1586.04 2600.83

Other Non Current Asset 0.00 6.39 6.48 6.48 6.48
Total Long Term Uses 848.10 991.79 1459.57 1592.52 2607.31
Surplus / Deficit 248.45 369.55 273.36 486.28 526.91

Short Term Approach

Current Liabilities (Sources) 1204.52 1049.59 1282.47 1161.44 1138.59
Current Assets (Uses) 1452.97 1419.14 1555.83 1647.72 1665.50
Surplus / Deficit -248.45 -369.55 -273.36 -486.28 -526.91


(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection
Intangible Assets 0.00 0.00 0.00 0.00 0.00
TNW 600.00 675.48 751.81 959.79 1314.68
Investments in allied co. 0.00 0.00 0.00 0.00 0.00
Adjusted TNW 600.00 675.48 751.81 959.79 1314.68
Current Ratio 1.21 1.35 1.21 1.42 1.46
Debt/Equity 0.83 1.02 1.31 1.17 1.38
NWC 248.45 369.55 273.36 486.28 526.91
TOL/TNW 2.84 2.57 3.01 2.38 2.25
TOL/ Adjusted TNW 2.84 2.57 3.01 2.38 2.25
Operating Profit / Sales (%) 6.36 4.53 3.19 4.59 8.98
PAT / Sales (%) 5.23 2.94 1.18 4.96 7.04
FACR 1.71 1.44 1.48 1.42 1.43
Brief discussion on Financial Indicators

1. Paid up capital / TNW

a. Authorized capital of the company is Rs.100 Lacs comprising of 1 Lac-equity

shares of Rs. 100/- each. Paid up capital are Rs. 100 Lacs comprising of 1 Lac-
equity shares of Rs 100/- each. It has been projected at the level of Rs 175.00 Lacs
during current year. The company already inducted Rs. 75.00 Lacs as Share
application money, which will be converted in to Paid up share Capital before
disbursement of limits by the bank. The Company will increase the Authorized

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Capital Limit after the Sanction of the Proposal but before the disbursement of the

b. TNW of the company is steadily increasing with full retention of profits. It was
Rs. 582.55 Lacs as on 31.03.2007 and increased to Rs. 675.48 Lacs as on
31.03.2008 and further increased to Rs. 751.81 Lacs as on 31.03.2009. It has been
estimated / projected at Rs. 959.79 Lacs and Rs.1314.68 Lacs respectively as at
31.03.2010 and 31.03.2011 due to retention of estimated/projected internal accruals
and proposed induction of capital in the business. Keeping in view of the past trend
of profitability, estimates/projections of TNW can be accepted.

2. Sales: Gross Sales of the company is showing increasing trend. Sales have increased from
Rs. 20.47 crores in 2007-08 to Rs. 25.85 crores in 2008-2009. Thus the company has
registered a growth of more than 26% over the last year. But sale during the financial year
2009-10 did not register any growth, due to fluctuation in the foreign market export sale of
the company decreased from the last financial year. The company has achieved net sales of
Rs 22.30 crore during the financial year 2009-10. The company is estimating the sale on
the basis of order in hand. In view of the recovery of economy since Oct. 2009, Company
is expecting the good growth rate in sale in coming financial years, Another reason of the
healthy estimates are good government policies for export out of India and recovery of
overall global market from the financial crunch. The new plant of the company will
become function in the mid of the financial year 2010-11, which will increase the
production capacity of the company. The company has good demand of its product in the
market. Increase in the production capacity of the company will increase the turnover of
the company. Based on its existing clientele and the demand in the market of the products
of the company, the company is estimating its Gross turnover for the financial year 2010-
11 at Rs.48.40 Crore. Keeping in view the overall growth in the automobile and auto part
manufacturing market, the estimated turnover of the company can be accepted.

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3. Other income: The other income of the company includes interest on FDR, Rebate and
Discounts received, Foreign Exchange Benefit etc. The other incomes for the year end
31.03.2008 were Rs. 7.44 Lacs and for the year ending 31.03.2009 were Rs. 17.84 Lacs.
The other incomes of the company as per the provisional balance sheet for the financial
year 2009-10 have Rs. 12.39 Lacs. The company is estimating other income at Rs. 20.00
for the financial year 2010-11.The Company estimated these income by taking care of
interest receivable on FDR and current discounts /rebate policies of the suppliers. Keeping
in view the past records of the company, Estimates/Projections of Other Incomes can be

4. Profitability: PAT / Sale of the company for the financial year 2007-08 was 3% and for
the financial year 2008-09 was 1% . The PAT of the company for the financial year 2008-
09 was decreased because of increase in the depreciation and Interest expenditure of the
company. Due to expansion and installation of new equipments during the financial year,
depreciation and financial expenses of the company increased disproportionately as
compared to the increase in gross sale of the company. These expenses were 10.68% of
turnover for the financial year 2008-09 in comparison to 8.59% for the financial year
2007-08. As per the provisional balance sheet for the financial year 2009-10 the company
achieved profitability @ 4.96% (PAT/Sale) upto 31.03.2010. The company is estimating
the profitability for the financial year 2010-11 at 7.04%. Increase in the production
capacity of the company will reduce the operation cost of the company and the
profitability of the company will increase. Keeping in view the industry scenario and past
trends of the company projections/estimates of the profitability of the company can be

5. Investments: The Company has made investments in Fixed Deposits. The value of Fixed
Deposits at the end of the financial year 2008-09 is Rs. 6.48 Lacs.

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6. Current ratio: Current ratio of the company for the financial year ending 31.03.2007 &
31.03.2008 was 1.21:1 & 1.35:1 .But current ratio for the financial year 2008-09 was
1.22:1 which is little lower than the bench mark of the bank i.e, 1.33:1 which was due to
expansion plan of the company and formation of long term assets of the company during
the financial year 2008-09 to increase the overall profitability of the company. The
company used its internal accrual for purchase of capital assets of the company. In spite of
using its short term funds for the purchase of the capital assets the NWC of the company is
positive. The expansion in the capital assets has increased the size of the plant and
profitability of the company which also improve the short term liquidity of the company.
As per the provisional balance sheet for the financial year 2009-10 the current ratio of the
company is 1.42, which is above the bench mark of the bank. Keeping in view the past
records/trends of the company estimated level current ratio can be accepted.

7. Debt Equity Ratio: Debt Equity Ratio of the company for the financial year 2007-08 was
1.02:1 and for the financial year 2008-09 was 1.31:1. As per provisional Balance sheet of
the company the debt equity ratio for the financial year 2009-10 is 1.17. The Company has
estimated it debt equity ratio for current financial year at 1.38:1. The debt equity ratio of
the company is below the acceptable bench mark of the bank i.e. 3:1 and proves the long
term solvency of the company. Hence keeping in view the past trends of the company
estimates/ projections of Debt Equity ratio of the company can be accepted.

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The Borrower, ABC PARTS Pvt. Ltd. approached to the Bank for the Sanction of following

• For Sanction of Working Capital Limit of Rs. 900.00 Lacs

• And, for Sanction of Term Loan of Rs.1600.00 Lacs (by way of takeover of Term Loan of
Rs. 612.00 Lacs from SBBJ, Barakhamba Road, New Delhi and sanction of Fresh Term
Loan of Rs. 988.00 Lacs for New Plant & Machinery at Noida Unit)



(In Rs. Lacs)
31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011
Audited Audited Audited Provisional Projection
Inventories 426.89 602.67 796.42 932.02 979.28
Sundry Debtors 735.23 353.35 473.80 326.43 403.33
Chargeable Current Assets 1162.12 956.02 1270.22 1258.45 1382.61
Other Current Assets 290.85 463.12 285.61 389.27 282.89
Total Current Assets 1452.97 1419.14 1555.83 1647.72 1665.50

Other Current Liabilities 1204.52 588.58 800.26 718.65 238.59

Working Capital Gap (A) 248.45 830.56 755.57 929.07 1426.91

Minimum Stipulated
Working Capital -25% of 363.24 354.79 388.96 411.93 416.38
Actual / Projected NWC
248.45 369.55 273.36 486.28 526.91
PBF 1 ( A - B ) -114.79 475.78 366.61 517.14 1010.54
PBF 2 ( A - C ) 0.00 461.01 482.21 442.79 900.00

MPBF -114.79 461.01 366.61 442.79 900.00

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a. Purpose: Sanction of Fresh Term Loan of Rs. 988.00 Lacs for purchase of New
Plant & Machinery at new unit at New Okhla Industrial Area, Noida.

b. Summary of Cost of Project and Means of Finance

Cost of Project Amount

Cost of Machinery 1313.79
Electricity and Water Connection 20.00
Total 1333.79

Means of Finance Amount

Term Loan 988.00

Unsecured Loans 75.00
Share Capital & internal accruals 270.79
Total 1333.79
(In Rs. Lacs)

c. Sources of Promoters’ Contribution and the time schedule as to when the

funds will be brought.
Promoters of the company have already contributed Rs. 75.00 Lacs by way of
share application money and Rs. 60.88 Lacs as unsecured loan up to 31.03.2010 as
unsecured loans. Promoters will introduce remaining amount of unsecured loans
Rs.14.12 Lacs during the current financial year. The balance amount of promoters
contribution & internal accrual will be arranged by 100% retention of profits for
the financial year 2009-10 and 2010-11.

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d. Projections for the profitability of the project


2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017- 2018-
11 12 13 14 15 16 17 18 19
4251.3 4677.4 5145.2 5648.7 6811.8 7482.0 7850.6
Net sales 6202.6 8237.69
3 6 1 3 6 5 5
Profit after
256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83 606.02
224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02 126.67
Cash Profit 481.64 582.47 577.08 592.91 590.71 654.46 691.57 719.85 732.69
(In Rs. Lacs)

e. DSCR calculation


2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017- 2018-
11 12 13 14 15 16 17 18 19
PAT 256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83 606.02
Depreciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02 126.67
Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15 130.27
Sub Total 702.26 822.7 790.97 781.11 755.98 805.87 835.37 856 862.96

Loan Instalment 228.29 207.94 197.44 197.7 155.02 58.34 58.66 58.98 31.5
Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15 130.27
Sub Total 448.91 448.17 411.33 385.9 320.29 209.75 202.46 195.13 161.77

DSCR 1.56 1.84 1.92 2.02 2.36 3.84 4.13 4.39 5.33
Average DSCR 2.59

Imp: Detailed projected financial statements are not shown in the report due to confidentiality of the data

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f. Detailed Sensitivity Analysis on DSCR

Variation Average DSCR Minimum DSCR

Impact of Reduction of Selling price by 5% 1.95:1 1.21:1

Impact of Increase in Cost of Goods sold by 5% 2.08:1 1.28:1

Impact of Increase in Rate of Interest by 1% 1.89:1 1.17:1

g. Present physical & financial status of project, if any

Basement of the factory building is already constructed. Present Financial Status of

the project is

PARTICULARS Cost Incurred Cost to be Incurred Total Cost

Cost of Construction NIL 1313.79 1313.79

Cost of Electricity and Water

1.65 18.35 20.00

Total 1.65 1332.14 1333.79

(In Rs lacs)

h. Implementation Schedule

Activity Start Date Completion Date

Land Acquisition Already Done

June 2010 ( Shed Measuring 45000 Sq Ft is

Building and Civil Construction Already
already Constructed)

Delivery of Equipment at site March ,2010 June,10

Installation of Equipments June, 2010 July,10

Commissioning of plant August,2010 Sept,10

i. Proposed Repayment Schedule

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Scheduled date of Completion of Project Sept 2010

Commercial Operations Date (COD Oct 2010

Implementation period (in months) 6 Months

Moratorium (in months) 12 Months

Repayment period in months/quarters/ Half year 84 Months

No. of installment 84

Starting Date Oct 2011

End Date (Last installment) Sept 2018

Door to door tenor 102 months

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1. Primary

i) For working capital limits: Hypothecation of Company’s present and future raw
material, Stock in process, finished goods, stores and spares and other current assets and Book

ii) For Term Loan:

• First charges on plant and machinery purchased from fresh term loan of Rs.
988.00 Lacs. Security Cover Available

Description of Security Book Value Market Value

Land Situated at, Nodia, U.P. 365.68 1100.00

Building and Sheds 519.55 519.55

Plant & Machinery* 1671.87 1671.87

Other Fixed Assets** 56.21 56.21

Total 2613.31 3347.63

(In Rs lacs)

iii) Personal /Corporate Guarantee:

Net Worth As on Immovable property

Name of Guarantor Position
31.03.10 As on 31.03.10

Mr. M K Bhunsali Chairman 394.95 261.00

Mr. Munish Kumar Bhunsali MD 389.45 261.00

Mrs. Kumad Bhunsali Director 124.56 40.50

(In Rs lacs)

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The account was rated under the Large Corporate Model. The following rating have been
obtained by both: branch office and zone office


i. Past Financials

CO Benchmark Values Rate

Category Parameter
Value 0 1 2 3 4

TOL/TNW 2.38 >5.00 5.00-4.00 4.00-2.50 2.50-1.00 <1.00 3.08

1.42 <1.00 1.00-1.25 1.25-1.50 1.50-2.00 >2.00 2.68
Past Ratio
DSCR 1.56 <1.00 1.00-1.25 1.25-1.75 1.75-2.50 >2.50 2.62
Comparison ROCE 12.29 <8% 8-12% 12-15% 15-25% >25% 2.10

(Inv + Rec) /
0.53 >6.00 6.00-5.00 5.00-4.00 4.00-3.00 <3.00 4.00
Net sales

ii. Future risk and subjective assessment

Category Parameter Comments Rate

Impact of contingent
There is no other contingent liability 4.00
Future risk liability
Impact of Expansion It will lead to more sales. 3.00

Transparency in The financial statements are prepared in accordance

Subjective accounting with generally accepted accounting principles
of The expected variance in the value may be less than
Quality of inventory 3.00
Financials 5%

Reliability of Debtors There is no disclosure of debtors 2.00

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A. Market position evaluation

Parameter Comments Rate

Competitive position 3.00

Expected sales growth The firm has achieved a sales growth of around 3.00
48% during the years 2007 – 08. It is expected
that company will be in a position to achieve a
sales growth of around 10 – 25% in the current

Input related risk 3.00

Availability of raw material Raw material is easily available from nearby 3.00
and other critical inputs states

Proximity to skilled Labor The firm is located in industrial in NOIDA inputs 3.00
are available easily

Production related risk 4.00

State of technology used The firm has adopted proven technology better 4.00
than its peers

Product related risk 3.00

Product range Firm is mainly engaged in the processing of 3.00


Product quality Quality of product is reported to be better than 3.00

the peers

Marketing 3.00

Distribution network Firm has a well developed distribution network 3.00

Geographical diversity of the Firm is selling its product directly to the vehicle 3.00
market manufacturers

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B. Industry risk evaluation

Industry risk evaluation for auto ancillary industry 75%


A. Objective

Parameter 0 1 2 3 4 Rate

Actual gross
<75% 75% - 79% 80% - 89% 90% - 95% >95% 4.00
Targeted sales 2208.91

Actual PBT 144.38

Targeted PBT 137.57 <75% 75% - 79% 80% - 89% 90% - 95% >95% 4.00
(in Rs lacs)

B. Subjective

S. No. Parameter Comments Rate

1 Management set up The firm is in operation since 1960 3.00

The management is reported to be reliable

2 Commitment and sincerity 3.00
and sincere

3 Track record in debt payment The account is running satisfactorily with us 2.00

Management is capable of arranging funds

4 Financial strength/ flexibility 2.00
but with a time lag

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Parameter Comments Rate

Status of account No irregularity is observed with our bank in last 2 yrs 3.00

Operations in account Operations in account are healthy 3.00

Submission of financial data Timely submission of data 3.00


Factor % score obtained Weight Weighted Score

Financial Evaluation 75.00 40.00% 30.00
Business & Industry 60.00 25.00% 15.00
Management Evaluation 75.00 20.00% 15.00
Conduct of Account 75.00 15.00% 11.25

(The Aggregate Score of 71.25 refers to PNB- AA-)



From the internal circular of the bank on ROI the corresponding ROI for auto ancillary firm
having a credit risk rating of AA- are:

• BPLR + 1.50% for Working Capital limit, and

• BPLR + 1.50% + 0.50% for Term loan

Imp: The rating as shown in the above section is not a replication of the original model in any form,

And the values and calculation of scores is for the purpose of understanding the process

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On examining the request of the Company, the following were observed:

• The Management of the company is well experienced.

• The Company has been in operation for past 40 years and has been earning profits

• The company has good track record in dealing with Banks.

• The overall financial position of the company is satisfactory.

Keeping in view the increasing profitability and financial position of the company, the
following are recommended

i For Sanction Term Loan of Rs. 1600.00 Lacs ( including Takeover of Term Loan of Rs. 612
Lacs from State Bank of Bikaner and Jaipur) for purchase of new plant and machinery .

ii For Sanction Working Capital limit of Rs. 900.00 Lacs

The facilities desired by the borrowers are subject to the given ROI and Terms and Conditions.

Nature Applicable ROI Limits Sanctioned

Fund Based BPLR + 1.50% 900.00

Term Loan BPLR + 1.50% + 0.50% 1600.00


(In Rs lacs)

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The study at PNB gave a vast learning experience to me and has helped to enhance my
knowledge. During the study I learnt how the theoretical financial analysis aspects are used in
practice during the working capital finance and term loan assessment. I have realized during my
project that a credit analyst must own multi-disciplinary talents like financial, technical as well as
legal know-how.

The credit appraisal for business loans has been devised in a systematic way. It is a process of
appraising the credit worthiness of loan applicants. Thus it extremely important for the lender
bank to assess the risk associated with credit; thereby ensure the security for the funds deposited
by the depositors. There are clear guidelines on how the credit analyst or lending officer has to
analyze a loan proposal. It includes phase-wise analysis which consists of 6 phases:

1. Financial statement analysis

2. Working capital and its assessment techniques
3. Techno Economic Feasibility Analysis
4. Credit risk assessment
5. Documentation
6. Loan administration

Punjab National Bank’s adoptions of the Projected Balance Sheet method (CMA) of assessment
procedures are based on sound principles of lending. This method of assessment has certain
flexibility required to avoid any rigid approach to fixing quantum of finance. The PBS method
have been rationalized and simplified to facilitate complete flexibility in decision-making.

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To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That
is why Credit Risk Management system is an essential ingredient of the Credit Appraisal exercise.
PNB has formulated a Credit Risk Rating model, PNB Trac. It considers important parameters
like profitability, repayment capacity, efficiency of the unit, historical / industry comparisons
etc… depending on the industry. PNB Trac is one of the best rating models present till date.

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After completing the entire project at Punjab National Bank the following key findings as mentioned below
were observed.

1. At Punjab National Bank, Circle Office the priority to appraise a proposal was given to
new or fresh clients over the existing clients presenting proposals for renewal
2. Ratings, as being performed at PNB, are done once a year. Therefore, the ratings do not
take into account short term drastic changes like price level changes (which are an issue
with any method based on accounting statements, since annual reports are based on
historical cost basis of accounting and other changes like sudden mishap/ of the
counterparty are not readily accounted for by the rating system due to long lag between
repeat ratings on the same account.
3. Some of the parameters in Business and industry evaluation are based on the information
provided by company, which in some cases may not be sufficient. No specific guidelines
are followed in such cases. Also, some of the parameters here may be rendered redundant
in some cases and may push up/ push down the rating needlessly in these cases.
4. The present risk rating model does not have any mechanism to prioritize certain sectors of
the economy. There are certain sector in the economy where risk spread is low and certain
sectors where spread of risk is high like real estate. Also, there are certain infrastructural
projects which need to be prioritized. The risk rating model is not flexible to incorporate
all these issues.
5. The BPLR system will soon be replaced by Base Rate system. Banks may choose any
benchmark to arrive at the Base Rate for a specific tenor that may be disclosed
6. With the deregulation of the financial sector, the ability of the banks to service the credit
requirements of the SME sector depends on the underlying transaction costs, efficient
recovery processes and available security. There is an immediate need for the banking
sector to focus on credit and finance requirements of SMEs.

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The Credit Department at PNB Circle Office Delhi, works at its full potential and the staff is
highly experienced and has a very strong intuitive sense. So, there is no such recommendation on
the entire process. However to make the process more flexible and efficient, an electronic
database should be designed carrying all the available and important information related to the
proposals accepted, and it should be easily accessible to the Credit Department. This will help
reduce paperwork and loss of information.

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Like any other study this study too is not free from limitations. The major limitations of the study
are listed below:

1. The major limitation of this study shall be data availability as the data is proprietary and
not readily shared for dissemination.

2. Also the geographical scope of the project was limited to PNB Circle Office and the loans
studied were of solely of businesses established majorly in NCR

3. The credit appraisal decision are more of intuition and experience and since the time
period was limited, hence best efforts were made to grasp the process as much as possible

4. Due to ever changing environment, many risks are unexpected and the remedial measures
available are based on general experience from the past. Therefore risks can only be
minimized cannot be erased completely. Hence, out of the various ways in which risks can
be managed, none of the methods is perfect and may be very diverse even for the work in a
similar situation in the future

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Mckinsey & Company. “India Banking 2010 - Towards a High-performing Sector”

Ben McClure. Working Capital Works. Investopedia. From

Richard Loth. The Working Capital Position. Investopedia. From

Naila Iqbal. Paradigms of Working Capital Management. From


Jagdish Capoor. Risk Management in Financial Institutions. From

Principles for the Management of Credit Risk, from

M.Y.Khan & P.K.Jain, Financial Management, Seventh Edition

PNB Journals (For internal circulation only)

Credit Management & Risk Policy for the year 2008-09

Book of Instructions on Loans, March 2005

Loans & Advances Circulars on


• Project Finance

• Industry Rating

• Loaning Powers and Guidelines for exercising such powers

RBI Circulars and Guidelines

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Guidelines on Credit Appraisal

Basel II Accord

Base Rate


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Customer satisfaction refers to the extent to which customers are happy with the products and
services provided by a business. Customer satisfaction levels can be measured using survey
techniques and questionnaires.


Definition 1: Customer satisfaction is equivalent to making sure that product and service
performance meets customer expectations.

Definition 2: Customer satisfaction is the perception of the customer that the outcome of a
business transaction is equal to or greater than his/her expectation.

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Definition 3: Customer satisfaction occurs when acquisition of products and/or services provides
a minimum negative departure from expectations when compared with other acquisitions.

Gaining high levels of customer satisfaction is very important to a business because satisfaction
customers are most likely to be loyal and to make repeat orders and to use a wide range of
services offered by a business.

There are many factors which lead in high levels of customer satisfaction including, products and
services which are customer focused and hence provide high levels of value for money.

What is clear about customer satisfaction is that customers are most likely to appreciate the goods
and services that they buy if they are made to feel special. This occurs when they feel that the
products and services that they buy have been specially produced for them or for people like them.


This Study will help us to understand the consumer’s satisfaction about banking services and
products. This study will help banks to understand, how a consumer selects, organizes and
interprets the Quality of service and product offered by banks.

The market is more aware and realistic about investment and returns from financial products. In
this background this study tries to analyze the customer satisfaction towards banking services in
general and PNB in particular.


 The deeper the company understands of consumer’s needs and satisfaction, the earlier the
product or service is introduced ahead of competition, the greater the expected
contribution margin. Hence the study is very important.

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 This study will help companies to customize the service and product, according to the
consumer’s need.

 This study will also help the companies to understand the experience and expectations of
the existing customers.


This study is limited to the consumers with in New Delhi city. The study will be able to reveal the
preferences, needs, satisfaction of the customers regarding the banking services, it also help banks
to know whether the existing products or services are offering are really satisfying the customers’


 To have an insight into the attitudes and behaviours of customers.

 To find out the differences among perceived service and expected service.

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 To produce an executive service report to upgrade service characteristics.

 To understand consumer’s preferences.

 To access the degree of satisfaction of the consumers.

Convenience sampling method is used for the survey of this project. It is a non-probability
sample. This is the least reliable design but normally the cheapest and easiest to conduct .In this
method Researcher have the freedom to choose whomever they find, thus the name convenience.


Sample size denotes the number of elements selected for the study. For the present study, 100
respondents were selected at random. All the 100 respondents were the customers of different
branches of PNB.


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A sample is a representative part of the population. In sampling technique, information is

collected only from a representative part of the universe and the conclusions are drawn on that
basis for the entire universe.

A convenience sampling technique was used to collect data from the respondents.


To know the response, the questionnaire method is used. It has been designed as a primary
research instrument.

Questionnaires were distributed to respondents and they were asked to answer the questions given
in the questionnaire. The questionnaires were used as an instrumentation technique, because it is
an important method of data collection.


A well-structured questionnaire was personally administrated to the selected sample to collect the
primary data.


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Two types of secondary data were collected for the preparation of the project work:

Internal Data was generated from company’s brochures, manuals and annual reports.

External Data, on the other hand, was generated from magazines, research books, intranet and
internet (websites).



TABLE 15.1




1 . Saving A/Cs 77 77%

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2 Current A/Cs 12 12%

3 Fixed Deposits 5 5%

4 Loans 4 4%

5 Others 2 2%

Total 100 100%

Graph - 15.1

Classification based on nature of A/Cs

Figure 1

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Analysis: Above table shows that 77% respondents have Saving A/Cs, and 12% have Current
A/Cs and rest of the respondents have 11% share of other A/Cs in total (which includes fixed
deposits, loans, and other products).

Interpretation: This means most of the respondents are having Saving A/Cs which means the
bank deposits are enriching as Saving A/Cs share is most.


TABLE 15.2


SL. No. RATINGS Account Bank's staff Miscellaneous

Opening availability and

1 EXCELLENT 35 15 5

2 VERY GOOD 22 33 46

3 GOOD 28 34 12

4 AVERAGE 4 12 30

5 POOR 11 6 7

TOTAL 100 100 100

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Graph - 15.2

Classification based on Rating of the service offered by PNB branches

Analysis: From this table it could be inferred that 41% of the consumers have rated service
offered like account opening as ‘excellent’, 22% of them have rated them as ‘very good’, and 04%
of them have rated as average’ while only 8% have rated as ‘poor’.

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Interpretation: Service offered by the bank is improving day by day. Returns consumers are
getting are also attractive. Majority of the customers rates good, very good and excellent because
of the customer service offered by the bank.

The miscellaneous column includes the infrastructure, facilities to the customers, queuing system,
etc. As per my observation during the internship and from statistics the overall condition of the
bank is not satisfactory. There is a lot of customer to this branch as this is the main branch in Patel
Nagar but the services offered by this branch is not satisfactory. The Customer Care Officer Mrs.
Poonam Grover is very calmly and patiently managing the customers and their problems.


TABLE 15.3



1 Brand name 49 1

2 Customer service 32 2

3 Interest 16 3

4 Others 3 4

Total 100

Graph - 15.3

Reason behind the Selecting of PNB

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Analysis: This table show the strengths and weaknesses of the brand, and what are the important
criteria or factors on which decision-making are done. From this table we can infer that consumers
give more importance for ‘Brand name’, secondly they prefer ‘satisfaction’, and then ‘returns on

Interpretation: This purely shows that people are now looking forward for better customer
service in addition to the brand name in which they are investing and the returns they are getting

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TABLE 15.4




1 Recommended 93 93%

2 Not recommended 07 07%

Total 100 100

Graph - 15.4

Classification based on the willingness to recommend PNB branch services to other banks

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Analysis: From this table it can be noted that the majority of consumers (93%) would like to
recommend their bank services to others and only 07% of consumers would not like to
recommend it to others.

Interpretation: Since the competition has increased in the field of benefits and service of
banking. So customers are getting good service, so that they are willing to recommend their bank
services to others.

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TABLE 15.5





1 Satisfied 88 88%

2 Not Satisfied 12 12%

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Total 100 100%

Graph - 15.5

Classification based on satisfaction level of respondents

Analysis: From the above table it could be inferred that 88% of the consumers are satisfied with
the service and quality of products of their bank. Only 12% of consumers are not satisfied.

Interpretation: Most of the respondents are satisfied with the service offered by PNB. Presently
the bank offers varieties of services and the customers are getting a good rate of return from their
deposits. Customers are getting good service from the bank.

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Types of Deposit Accounts:

While various deposit products offered by the Bank are assigned different names. The deposit
products can be categorized broadly into the following types. Definition of major deposits
schemes are as under: -

i) “Demand deposits” means a deposit received by the Bank which is withdraw able on demand;

ii) “Savings deposits” means a form of demand deposit which is subject to restrictions as to the

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number of withdrawals as also the amounts of withdrawals permitted by the Bank during any
specified period;

iii) “Term deposit” means a deposit received by the Bank for a fixed period withdraw able only
after the expiry of the fixed period and include deposits such as Recurring / Double Benefit
Deposits / Short Deposits / Fixed Deposits /Monthly Income Certificate /Quarterly Income
Certificate etc.

iv) Notice Deposit means term deposit for specific period but withdraw able on giving at least
one complete banking day’s notice;

v) “Current Account” means a form of demand deposit wherefrom withdrawals are allowed any
number of times depending upon the balance in the account or up to a particular agreed amount
and will also include other deposit accounts which are neither Savings Deposit nor Term Deposit;

Account Opening and Operation

A) The Bank before opening any deposit account will carry out due diligence as required under
“Know Your Customer” (KYC) guidelines issued by RBI and or such other norms or procedures
adopted by the Bank. If the decision to open an account of a prospective depositor requires
clearance at a higher level, reasons for any delay in opening of the account will be informed to
him and the final decision of the Bank will be conveyed at the earliest to him.

B) The account opening forms and other material would be provided to the prospective depositor
by the Bank. The same will contain details of information to be furnished and documents to be
produced for verification and or for record, it is expected of the Bank official opening the account,
to explain the procedural formalities and provide necessary clarifications sought by the
prospective depositor when he approaches for opening a deposit account.

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C) For deposit products like Savings Bank Account and Current Deposit Account, the Bank will
normally stipulate certain minimum balances to be maintained as part of terms and conditions
governing operation of such accounts. Failure to maintain minimum balance in the account will
attract levy of charges as specified by the Bank from time to time. For Saving Bank Account the
Bank may also place restrictions on number of transactions, cash withdrawals, etc., for given
period. Similarly, the Bank may specify charges for issue of cheques books, additional statement
of accounts, duplicate pass book, folio charges, etc. All such details, regarding terms and
conditions for operation of the accounts and schedule of charges for various services provided will
be communicated to the prospective depositor while opening the account.

D) Savings Bank Accounts can be opened for eligible person / persons and certain organizations /
agencies (as advised by Reserve Bank of India (RBI) from time to time)

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Procedural Chart for new account opening:-

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Types of Saving A/C

• General saving a/c

• NRE/ NRO a/c

• Pension a/c

• Salary a/c

• Total freedom salary a/c

• Mitra a/c

• Student a/c

Account Opening Form

To simplify the existing procedure and to eliminate multiplicity of filling up of various AOFs for
Savings Fund, Current Account & Term Deposit accounts and to adhere to the instructions of the
Reserve Bank of India on due diligence in implementation of KYC policy and customer
identification norms, a common Account Opening Form for resident individual (Single & Joint)
Account-PNB-1057 for branches other than CBB has been prescribed.

For Centralized Banking Branches (CBB) separate form PNB-1084 has been prescribed in place
of PNB-1057. All CB branches shall use this form for opening new accounts. The new form
(PNB-1084) also contains provisions for ‘Personal Information’ of the account-holder to establish
his/her identity and monitor transactions in the account.

While feeding data of new accounts, the CTO should enter all the information mentioned in the
AOF and the particulars for generating customer ID.

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The authorized officer/Supervisor will verify the same. The authorized official should ensure
completeness of personal information about the account holder and should ensure that all columns
of AOF are filled in properly. A print out of this data should be taken out and preserved after
verification and authentication by the officer.


The various controls required in the centralized banking branches (CBB) environment are as


All the customers shall be identified by a unique customer ID number under the CBB
environment. In Finacle, when a new account for customer is opened, the system gives a
Customer ID. This ID shall be utilized for opening other accounts of the same customer in the
same branch or other CBB branches

Required information about the customer is captured as a part of customer ID creation. The
customer detail is used for MIS purpose.

Branch should ensure that only one “customer ID” is assigned to a customer for all his accounts.
This reduces the repetitive entry of information to be entered while opening multiple accounts for
the same customer.


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In all new deposit accounts, two recent photographs of the applicant are to be obtained and affixed
on the relative A.O.F. and Specimen Signature Slip (SSS). The photographs so affixed should also
be attested by the account opening authority under his/her full signature. In all subsequent deposit
accounts opened by the depositor, no fresh photograph is to be obtained and a reference of the
existing account (wherein the photographs are available) is only to be made in the new AOF.
Further, while attesting the photographs as above, the concerned officer should ensure
i) Both the photographs submitted by the prospective customer are identical.

ii) The prospective customer also puts his/her signature/thumb impression on the
photographs in such a way that it partly lies on the photograph and partly on the

iii) The photographs must be attested by the Incumbent In charge or other officer of
the branch, authorized to open the accounts, by using a sign-pen/gel-pen. The
signature of the attesting official should appear partly on the photograph and partly
on the AOF / SSS, mentioning his/her GBPA number and date and rubber stamp
bearing the branch name be affixed below the signature.

AOF shall be verified & preserved manually.


i) Scanning should be done on daily basis for new accounts

ii) The authorized officer will verify the signatures on line and ensure scanning of
signatures of all accounts. Every deletion and modification should be verified by
authorized officer.
iii) Signature should be scanned as per Customer ID

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iv) Scanning of signatures should be restricted to System Administrator/ authorized

officer. The scanned signatures should also be authorized in the system by an
authorized officer other than System Administrator.
v) More than one signature of the customer should be captured from the four
specimen signatures given on the signature slip.
vi) Scanned signatures should be very clear.
vii) Description for the signature field should be used for noting down any specific
instructions, e.g. “these signatures are valid for amount below ten lacs”, joint
signatures or any two etc.
viii) Irrelevant areas should not be scanned.
ix) Inoperative account signatures shall be classified separately and access to such
signatures would be controlled. The general user will not be able to see the
signatures of inoperative accounts. The right to view signature of inoperative
account is restricted to authorized officer. The transactions relating to inoperative
accounts should be in accordance with existing guidelines of the bank.


The signatures scanned as per Customer ID can be viewed from any account opened under any
scheme for that particular Customer ID by entering the account number.


Accounts are normally not to be opened without obtaining proper introduction of an existing
account holder of the Bank or a respectable member of local community known to the
Bank. It is to be ensured that the account of the introducer is at least one year old and
conduct thereof has been satisfactory.

Introduction is a mandatory requirement. It should be treated as a substantive requirement having

real significance and not merely a formality. If the customer who wants to open suppose a fixed

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deposit account, is already having an account viz. SF, CA, C/C, OD then this fact must be noted in
the AOF with details of the said account and as he/she has already been introduced while opening
the earlier account, fresh introduction is not required.

As far as possible, introducer should personally come and introduce the account and in cases
where it is not possible, the branch should send a letter of thanks (as per annexure-I) by
Registered Post to the introducer immediately along with self addressed stamped envelope and
obtain his confirmation in writing. Implication of introduction should be fully explained to the

However, if the prospective account holder is not in a position to offer introduction of an existing
account holder / respectable member of local community known to the Bank, his
personal documents, such as Passport, Postal identification, Pay Books, Identification
Cards of Armed Forces, Police and Government may be accepted for the purpose of
introduction in all deposit accounts provided the account opening authority is fully
satisfied about the genuineness of such document.


Independent verification of address in all the accounts is an integral part of the procedure for
opening an account and this is required as an additional precaution and not as a substitute of
introduction. The independent verification of Address may be done from ANY ONE of the
following documents and keeping a copy of the document so verified, duly attested by the officer
opening the account, along with the AOF: -

i. Ration Card
ii. Passport

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iii. Photo Identity Cards issued by the Election Commission

iv. Driving License
v. Identity Cards issued by Armed Forces, Police Department, Government Department
and any other institute of repute
vi. Copy of the electricity bill or telephone bill showing residential address
vii. Any document or communication issued by an authority of Central Govt., State Govt.
or Local Bodies showing residential address
viii. Any other documentary evidence in support of the address given in the declaration.

A letter (as per annexure-I) is to be sent by registered post at the cost of the customer, both to the
customer and the introducer (if the latter has not come personally to the branch for giving
introduction) to seek their confirmation for having opened the account with the bank and given
introduction respectively. This is also to be recorded in the account opening form. Cheque Book is
to be issued only after receipt of such confirmation from the depositor and / or introducer, as the
case may be. A letter of authority (as per annexure-II), for debiting postage expenses, in this
connection, should also be obtained from the customer.

In case of accounts to be opened in the name of firms, if possible enquiry on telephone is made by
a reference to the telephone directory so as to ensure that the persons representing the firms are
genuine. To the extent possible, the AOFs etc. should be completed and signed by all concerned,
including introducer, in the Bank premises. The Communication confirming any change in
address of the depositor should be sent both to his old as well as to his new address by registered
post. Cheque Book is to be issued only after receipt of such confirmation from the depositor and /
or introducer, as the case may be.

Pan / Gir Number or Form 60 / 61

The prospective account holder is required to mention his / her PAN / GIR no. in the Account
Opening Form. The officer opening the account should verify the same from the original and put
his signature having verified the original. In case the customer is not having the same, Form No.
60 / 61, as applicable, is required to be obtained.

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After the saving a/c is opened successfully the pass book is issued next day.

The whole process of opening a new account takes 15-20 minutes if all the details are filled
properly and the documents required are provided.

2010 – 30 JUNE 2010)

General a/c – 142

Mitra a/c – 60

Student a/c – 81

NRO a/c – 2

Salary a/c – 92

Total a/c opened = 377

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While receiving cash for credit to customers’ accounts, the staff concerned will ensure that the
required particulars (e.g. the nature and number of the accounts and the names and addresses of
the account holders etc.), are duly mentioned in the relative pay-in-slips, which should be signed
by the depositor. In case of doubt the slip should be sent to the CTO for verification and utmost
care should be taken to ensure that the customer is not unduly inconvenienced.

If deposits are tendered by a person other than the account holder, he must, in addition to signing
the pay-in-slip, give his full address. This applies equally to casual customers tendering moneys
for issuance of drafts and/or remittances etc.

Where cash remittances are received by post or otherwise under cover of a letter from a customer,
the official receiving the cash will ensure that the cash is deposited in the appropriate account and
that the authority is recorded on the voucher and authenticated by him.

After the cash has been counted and verified, the receiving cashier will (i) sign in full under the
cash receipt stamp affixed on both parts of the pay-in-slip, (ii) write the amount received by him
on both parts of the relative pay-in-slip in such a way as to prevent subsequent additions and
alterations therein and (iii) after entering the amount received in respect of each pay-in-slip
separately in his long book, will pass on the pay-in-slip/voucher to the CTO/clerk concerned for
entry in the cash book/ computer.

Counterfoils and voucher portions of pay-in-slips of receipts in respect of cash must be signed in
full by receiving cashier before these are released from the cash book. The counterfoils will,
thereafter, be delivered to the depositors, if the amount of deposits is up to and including Rs.10,
000/-, whilst the voucher portion will be passed on to the respective sections for necessary action.

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It is important that no receipt or counterfoil relating to cash should be released until it has been
signed in full by a checking official except that counterfoils/receipts for cash deposits up to and
including Rs.10000/- will be delivered to depositors direct, duly signed by the receiving cashier
only. Both the receiving cashier and a checking official should sign cash receipts above

The user shall enter the voucher to credit the customer account and the system shall generate a
transaction ID (tran-id). The user shall note down the tran-id on the credit voucher and pass on
the voucher to authorized official for passing verification.

The verifying official shall enter the tran-id noted on the credit voucher at the relevant menu and
authenticate the transaction after verifying the correctness of the particulars of the transaction.

All cash transactions must be entered in the cash book (Form No.PNB-72) after the cash has been
received or paid by the cashier. The amount of each transaction and the name of the account to
which it relates will be entered in the appropriate columns of the cash book, in which each entry
will be checked and initialed by a checking official.

In no circumstances should any action be taken on a cash receipt voucher unless it has been signed
by a checking official in token of having checked the entry in the cashbook or cash book-cum-
realization long book.

To facilitate expeditious retirement of inward bills and demand drafts and the issue of drafts etc.,
cash receipt vouchers pertaining thereto may be sent by the cashier direct to the clerk concerned,
who will record them in 'cash book-cum-realization long book' (Form No.PNB-190) maintained
for the purpose. Entries made in these long books and their totals will be checked by the officials

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in charge of the respective sections. At the close of business each day, the total of cash entries
recorded in the aforesaid long books along with the number of vouchers will be carried over to
the main cash book by the cash book writer, under authentication of in charge of cash book.

The CTO/ cashier, before making payment, will satisfy him from the chart of powers provided to
him, that the cheque, draft or debit voucher, etc. has been passed for payment by a duly authorized
official. As a measure of safety, the paying cashier should also enquire the name of the person
receiving payment and the amount of the cheque, draft or cash order etc. and if found in order,
obtain the latter's signatures on the back of the document.
The CTOs use tokens for payments made by him within the prescribed limits.

All tokens will be engraved with the name of the bank’s office and entered in the tokens in use
register (Form No.PNB-135), missing tokens being recorded in red ink. Each morning the cashier
will distribute the tokens to the staff concerned against their receipt according to the lots
determined by the incumbent in charge (or officer in charge of cash). In the evening, all tokens
will be collected by the cashier and checked by the incumbent in charge or the officer in charge of
cash under his initials in the relative register and will be kept with the cash in hand. Any token
which is found missing must be reported, as soon as the loss is discovered, to the incumbent in
charge who will (i) take steps to guard against its misuse, (ii) ensure that the necessary entry is
made in the tokens in use register and (iii) will institute enquiries with a view to its recovery.
Each paying cashier and CTO will keep a list of the numbers of the missing tokens to guard
against their misuse.

At the end of the day, the CTO concerned will tally both sides of the cashbook and add the
opening and closing cash balances through the system to the receipt and payment sides
respectively ensuring that the grand total on the receipt side agree with the grand total on the
payment side. The total number of vouchers will be tallied entered on either side of the cashbook
and the balance in hand will be expressed both in words and figures. The officer in charge of
cash, while signing the cash book, will ensure that the closing balance of cash shown in the cash
book agree with the balance shown by the cashier in the daily cash balance book (Form No.PNB-
107). The cash book will be signed by the Head cashier/Cash Officer, Cashier, official in charge

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of cash book, Sr.Manager/ Manager and the officer in charge of cash. Cash payment vouchers
will, thereafter, be handed over to the official in charge of daybook section against his receipt in
the cashbook.

The numbers of receipt per day are around 200.

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The CTO shall receive the payment instrument, verify it and post the transaction in the relevant
menu option. He shall note down the Tran-id on the debit instrument and pass the instrument on
to the authorized official for passing the entry. The authorized official shall verify the instrument,
pass it and then verify the transaction in the system.

Long Book/Transaction Log

The teller will generate the Cash payment long book having record of all payments made by him
during the day. The concerned authorized officer shall compare entries in the long book with the
payment vouchers and confirm (by putting his initials against individual entry that all payments
made by the teller have been recorded properly. At the end of the day, the teller shall tally his
cash balance in hand, prepare denomination wise summary of currency notes on the long book
and hand over the cash to the cashier/head cashier against his receipt on the long book.


All transfer vouchers will be recorded in the transfer journal (Form No.PNB-70), where it is not
generated on computers, with the object of exercising control on such vouchers and balancing of
transfer transactions every day. This will be ensured by the concerned section in charge, which
will also satisfy him that transfer vouchers are branded with the rubber stamp of the section.

Entries made in a transfer journal will be serially numbered generated by the system and the
number indicated on the relative voucher. The contra entry number(s) will be indicated in the
cage provided for on the voucher for the purpose. The checking official, while releasing vouchers
from the transfer journal, will initial in the appropriate column on the voucher in token of having
verified that the entries are correctly recorded and that the necessary formalities have been
observed. He will also initial in the cage bearing contra entry number.

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The official signing the debit voucher shall also sign on the corresponding credit vouchers at the
space earmarked for the purpose, that is to say, under the column "Debit Voucher Passed” in
token of his having passed the corresponding debits. While doing so, the official concerned will
satisfy himself that the vouchers are initialed as having been entered in and released from the
transfer journal.

All day end reports including Cash Book/Long Book /Transfer journals/Day Book /Exception
Report etc. have been generated on day to day basis during implementation phase and checked.

At the close of the day, all columns of the transfer journal will be totaled, ruled off, tallied and the
totals being checked and signed by the officials’ in charge of the respective section.

At the end of the day the totals of all the transfer journals together with the total number of
vouchers will be carried into the transfer analysis register (which will be balanced by adding, in
the appropriate columns, total of the cash book clearing sheets and opening and closing cash
balances. This will be checked and signed by a checking official.


There is no restriction on number of withdrawals. For cheques drawn for a sum of less than Rs.
50/-, prescribed charges (presently Rs. 10/- per such cheque) would be recovered from the

In the Patel Nagar Branch, the windows differ by the amount of cash payment is to be done. For
the amount less than Rs. 20,000 different counter was there. This window was taken care by the
assistant. For the amount higher than Rs. 20,000, i.e. large payments are handled by the head

Regarding the queue management a proper token system was there and the numbers were
displayed on the electronic screen. The number of transactions in a day was around 100.

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A Debit Card provides access to ATMs for cash withdrawals, balance enquiries and mini
statement, on-line electronic payment for purchases from your savings / current (individual)
accounts. You can also transfer funds through ATM to your own / other PNB accounts and also
transfer / receive funds to / from any MasterCard or Maestro card holder (Debit or Credit card) of
other selected banks.

At present following types of Debit card Bank is issuing:

i. PIN based Debit Card (Maestro card)

ii. Signature based Classic Debit card (Master card)
iii. Signature based Gold Debit card with photo (Master card)

PIN is a unique 4 digit number that allows you to access your account through Debit Card at

Debit card can be obtained from any CBS branch of PNB (irrespective of your account
maintaining branch) by filling a Debit Card application form. In case of Non-Personalized card
(without name) the card would be issued instantly. In case of personalized card (with name) the
card would be issued in 7-8 working days. You can also get a Debit Card through PNB 24 Hour
Call Centre by making a call at 1800 180 2222 (Toll free) and 0124-2340000 (accessible from
mobile also), in which case the deactivated card would be delivered at your address directly
within 7-10 working days. However you can send the duly filled application from along with
proof of identity to HO for activation of the card.

If one do not received personalized card even after 10 days of giving the request at the branch /
call centre you should contact the Branch / call centre to enquire about the status of your request.
In case you do not get a satisfactory reply, please contact Debit Card Cell at 011 – 23710021 or
through email at

If PIN is not legible you should contact the card issuing branch and request for a duplicate PIN.
You can collect the Duplicate PIN from the branch after 7 working days.

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Validity of PNB Debit Card: PIN based Maestro Debit card has no expiry date. However
Signature based Debit Card is valid for 7 years from the date of issue.

For PIN Based Maestro Debit card and Signature Based classic Debit card the daily cash
withdrawal limit at ATM and shopping limit at merchant establishments are Rs. 25,000 each.
However per transaction limit at ATM is Rs. 15,000 only.
For Signature Based Gold Debit Card, the daily cash withdrawal limit at ATM and shopping limit
at merchant establishments are Rs. 40,000 and Rs. 60,000/- respectively. However per transaction
limit at ATM is Rs. 15,000 only.

If Debit card is lost or misplaced: You should immediately contact our below given no. of call
centre to get the card hot listed / blocked. 1800 180 2222 (Toll Free) Contact Numbers 0124 –
2340000 (Accessible from Mobile also.In case you do not get the Call Centre no, contact our
helpdesk no of ATM Switch at 011 -23765143, 011 - 23323672.

Fee for the issuance of Debit card: PNB Debit Card is issued free of cost. However a nominal
fee of Rs. 100 per Year will be levied after one year of Card issuance every year.


Eligible for PNB Debit card

•All existing Account holder who are maintaining minimum balance and who regularly operate
their account are eligible for the issuance of Debit Card.

• New customers, who open their accounts after introduction, are also eligible for the issue of
Debit Cards at the time of opening the account itself.

• Debit Card facility shall be extended to the individual customers only, having Savings Bank
Account and Current Account.

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• Debit cards shall also be issued to individual customers having overdraft facility, which is in the
nature of a personal loan. This shall mean and include personal loans extended to individual
customers in the form of a regular overdraft limit such as clean overdraft facility or overdraft
facility against FD/NSCs/LICs etc. where operations through cheques are permitted.

• Debit Card can be issued in Joint Accounts with “Either or Survivor”/”Former or Survivor”
mandate. In “Either or Survivor” accounts, cards can be issued to both the account holders
whereas in “Former or Survivor” accounts card can be issued only to the Former. In joint
Accounts where account has to be jointly operated Debit Card shall not be issued unless mandate
for operation of account is changed to “Either or Survivor” or “Former or Survivor” basis.

ATM Maintenance: Now for the ATM maintenance a single channel is made. The complaints
can now be lodged or resolution can be done by ‘SPARSH’ call centre. Branches if approached by
customers, in addition to using call centre service, have also been given the option to use the
centralized mail- id, to lodge the complaint & to get the docket-id from ‘SPARSH’.

Now reconciliation & complaint resolution system has been put into place. Complaints resolution
status updated on ‘SPARSH’ is now being done on day to day basis, besides sending SMS to
customer’s mobile number if available.

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Physical facilities:

A proper sitting place was not available. There were hardly one or two seats for the customers.
They need to work on the seating arrangements for the customers. For the disposal of the cheques
the forms were kept properly on the table and proper instructions were written as to how to
proceed. Both the cheque box and the electronic machine were present. There were no proper
instructions and the sign boards present on the different counters.

Punctuality & staff cordiality:

The staff members were highly motivated toward the work. They strictly followed the time line.
They are very helpful and gave all kinds of assistance to the customers. They were punctual and
most of the time busy doing the work. The functions in the branch start well in time. The lunch
hours were not too long and they come back to their seat on time.

Routine banking operation:

The indicators were bilingual. They were written both in Hindi and English. The most of the staff
members was not wearing any name plates. But after the notice came for wearing the name plates
everyone was made sure that they wear the name plates. The queue management system was
missing in this branch. But due to large number of people it gets break more often. The pass book
printer was in the working condition and was performing nicely

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 With regard to banking products and services, consumers respond at different rates,
depending on the consumer’s characteristics. Hence PNB should try to bring their new
product and services to the attention of potential early adopters.

 Due to the intense competition in the financial market, PNB should adopt better strategies
to attract more customers.

 Return on investment company reputation and premium outflow are most preferred
attributes that are expected by the respondents. Hence greater focus should be given to
these attributes.

 PNB should adopt effective promotional strategies to increase the awareness level among
the consumers.

 PNB should ask for their consumer feedback to know whether the consumers are really
satisfied or dissatisfied with the service and product of the bank. If they are dissatisfied,
then the reasons for dissatisfaction should be found out and should be corrected in future.

 The PNB brand name has earned a lot of goodwill and enjoys high brand equity. As there
is intense competition, PNB should work hard to maintain its position and offer better
service and products to consumers.

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 The bank should try to increase the Brand image through performance and service then,
only the customers will be satisfied.

 Majority of the people find banking important in their life, so PNB should employ the
strategies to convert the want in to need which will enrich their business.

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Although the study was carried out with extreme enthusiasm and careful planning there are
several limitations, which handicapped the research viz,

1. Time Constraints:

The time stipulated for the project to be completed is less and thus there are chances that some
information might have been left out, however due care is taken to include all the relevant
information needed.

2. Sample size:

Due to time constraints the sample size was relatively small and would definitely have been more
representative if I had collected information from more respondents.

3. Accuracy:

It is difficult to know if all the respondents gave accurate information; some respondents tend to
give misleading information.

4. It was difficult to find respondents as they were busy in their schedule, and collection of data
was very difficult. Therefore, the study had to be carried out based on the availability of

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Since the opening up of the banking sector, private banks are in the fray each one trying to cover
more market share than the other.

Yet, PNB is far behind SBI. PNB must also be alert what with Private Banks (ICICI, HDFC)
breathing down its neck.

I am sure the bank will find my findings relevant and I sincerely hope it uses my suggestions
enlisted, which I hope will take them miles ahead of competition.

In short, I would like to say that the very act of the concerned management at PNB in giving me
the job of critically examining consumer satisfaction towards financial products and services of
the company is a step in their continual mission of making all round improvements as a means of

I am sure the bank has a very bright future to look forward to and will be a trailblazer in its own

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