“STUDY ON CREDIT APPRAISAL”
In partial fulfillment for the award of the degree of
POST GRADUATE DIPLOMA IN MANAGEMENT
INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH 24, Kothari Road, Nungambakkam, Chennai - 600 034
This is to certify that this project report “STUDY ON CREDIT APPRAISAL” is the bona fide work of PRAMOD.E (PGDMB12/72) who carried out the project work under my supervision.
Name of project Guide: Mr.Raju Designation: Senior Manager Organization: ALLAHABAD BANK Date
A journey is easier when we travel together. Interdependence is certainly more important than independence. It will always be my pleasures to thank those who have helped me in making this project a good experience for me. I would like to express my heartiest gratitude to Allahabad Bank , for giving me an opportunity to work in SRCM branch, Chennai, my Institute IFMR and important persons associated with this project as without their guidance and hard work I would have never ever have got a chance to have real life experience of working with a Public Sector Bank of such a great repute and learn practically about Credit appraisal process. I would also like to extend my gratitude to Mr. Raju (Senior Manager, SRCM Branch) for giving me an opportunity to know and learn various aspects. It is my privilege to thank Mr. Ramesh Subramanian (Industry Guide & Chief Mentor) whose guidance has made me learn and understand the finer and complicated aspects of banking, in general and of Credit Appraisal Process, in particular. The help and guidance which he has extended to me has made me feel as being an integral part of the organization.
TABLE OF CONTENTS
Chapter Number. TITLE
1 2 3 4 5 6 7 8
ALLAHABAD BANK- AN INTRODUCTION CREDIT APPRAISAL- INTRODUCTION CREDIT APPRAISAL PROCESS CREDIT RISK ASSESSMENT CREDIT RISK GRADING MODULES APPRAISAL CASE STUDY SUMMARY AND CONCLUSION REFERENCES
5 11 24 34 36 46 57 58
CHAPTER-1 ALLAHABAD BANK – AN INTRODUCTION
BRIEF HISTORY The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April 24, 1865 by a group of Europeans at Allahabad. At that juncture Organized Industry, Trade and Banking started taking shape in India. Thus, the History of the Bank spread over three Centuries - Nineteenth, Twentieth and Twenty-First. Nineteenth Century April 24, 1865's 1890's The Bank was founded at the confluence city of Allahabad by a group of Europeans. Opened branches at Calcutta Nainital, Bareilly, Lucknow, Kanpur and Jhansi.
Twentieth Century 1920's 1923 July 19, 1969 October, 1989 1991 The Bank became a part of P & O Banking Corporation's group with a bid price of Rs.436 per share, The Head Office of the Bank shifted to Calcutta on Business considerations. Nationalized along with 13 other banks, Branches - 151 Deposits Rs.119 crores, Advances - Rs.82 crores. United Industrial Bank Ltd. merged with Allahabad Bank. Instituted AllBank Finance Ltd., a wholly owned subsidiary for Merchant Banking.
Twenty-First Century October, 2002 The Bank came out with Initial Public Offer (IPO), of 10 crores share of face value Rs.10 each, reducing Government shareholding to 71.16%. Follow on Public Offer (FPO) of 10 crores equity shares of face value Rs.10 each with a premium of Rs.72, reducing Government shareholding to 55.23%. The Bank Transcended beyond the National Boundary, opening Representative Office at Shenzen, China. Rolled out first Branch under CBS. The Bank opened its first overseas branch at Hong Kong. Bank's business crossed Rs.1,00,000 crores mark. Bank's business crossed Rs.2,71,000 crores mark.
June, 2006 Oct, 2006 February, 2007 March 2007 2012
The Bank records 55. 2012 increased to ` 901.46% for quarter ended March. 2012 as against ` 257.91 % (YOY) 4. Net Interest Margin (NIM) stood at 3. FY-2011-12 (3 months)
Net Profit of the Bank increased to `400.34% for quarter ended March. 2012 is ` 355 crore.46% last year.91 %. FY2011-12 as against 10. Net Interest Income during Q4. Operating Profit for quarter ended March.TRENDS IN ALLAHABAD BANK
CONSISTENT GROWTH ALL THE WAY
ALLAHABAD BANK’S BUSINESS CROSSES ` 2.71.22 crore during Q4 of FY-2011-12 2.52% at ` 901 crore 3. Cost of Funds stood at 7.20% of corresponding quarter last year. FY2011-12 from 7. 2012 from 9.36 %.36 % growth in Net Profit by registering ` 400.
PRAMOD.23% during Q4 5. 2012.E(PGDMB12/72)
.67% for Q4.18 at the end of Q4
Highlights of Q4.71 % …. corresponding quarter last year. Operating Profit in Q4 up by 15.23% for quarter ended March. Yield on Funds rose to 10. Net Interest Margin (NIM) stood at 3.52 %.60 crore in the corresponding quarter last year registering a YoY rise of 55. Yield on Investments improved to 7.22 crore for the quarter ended March.07 crore as against ` 780 crore last year showing a YoY growth of 15. Total Other Income during the quarter ended March. Cost of Deposits stood at 7. 2012. FY2011-12 Yield on Advances increased to 12. FY2011-12 increased to ` 1288 crore as against `1151 crore last year showing a YoY growth of 11.23 % for Q4.000 CRORE
1. Earnings per Share mounts to ` 39. Net Interest Income in Q4 up by 11.02% for Q4.
2012 as against 3.48 % as against 9.423 crore last year showing a YOY Growth of 31.83 % as at March. Cost of Funds stood at 6. 2012 as against the stipulated norm of 9%.19% previous year. 2012 from ` 178. Yield on Funds improved to 10.42%. Book Value per Share increased to `192. 2012 from
1. Total Other Income during the Financial Year ending March. Net NPA to Net Advances Ratio stands at 0.163 crore as against ` 4.38 crore last year.38 % last year.98 % as at March. Credit Deposit Ratio stood at 71% as on 31st March. Total Deposits grew by 21.56 % as against 7.the Gross Credit increased by 18.09% as against 10. 2012.69 %.93 during the Financial Year ended March. Provision Coverage Ratio stands at 74 %. Business per Employee surged to ` 12.03.250 crore as on 31st March. Year-on-Year basis.02%. Gross NPA to Gross Advances stands at 1.Year-on-Year basis.887 crore as on 31 March.
SHAREHOLDER’S VALUE Business per Branch improved to ` 108.83% as on 31st March. 2012 is 1.458 crore as on 31st March 2011 showing a YOY growth of 20. 2012 as against ` 1.63 crore last year. Yield on Investments increased to 7. Deposits of the Bank went up to ` 1.12. 2012 as against ` 10.11.98 %. Net Interest Margin (NIM) increased to 3.26.64 as on 31. 2012 as against `
93. 2012 is `5.48 % during the Financial Year ending March.05 crore as on 31st March.Highlights of 12 Months period ending 31st March 2012
The Bank augmented Operating Profit of `3.18 during the Financial Year ended March.17 crore as on 31st March.
Earnings per Share surged to `39.571 crore as on 31st March 2011. Total Business of the Bank increased to ` 2. Return on Asset for Financial Year ending March. Cost of Deposits stood at 7.18 %. 2012. Gross Credit surged to ` 1.31.01%.299 crore .59.04 %.50%last year.2011. 2012 increased to `1.E(PGDMB12/72)
. 2012 as against ` 2.
7 PRAMOD.843 crore as on 31st March.71. Capital Adequacy Ratio was 12. 2012 from ` 31.867crore during the Financial Year ending 31st March. Yield on Advances increased to 12. Net Profit is ` 1. 2012.85 corresponding last year.770 crore during FY 2011-12 as against ` 3.07 %.022 crore last year recording a YOY Growth of 28. Net Interest Income during the Financial Year ending March.35 %.04% last year. 2012 from ` 94.055 crore last year showing a YOY growth of 23.593 crore as on 31st March.
12. b. Bank has entered into a tie – up agreement with M/s Ernst & Young Pvt Ltd.2012. Bank has developed a Web Portal for corporate customers to facilitate online payments like dividend payments/ salary payments /suppliers & expenses payments etc. Scheme for extending produce loan to farmers against Warehouse Receipts under Tie – Up arrangement with Warehouse companies for providing Collateral Management Services.New Initiatives
Bank opened 101 Branches during the last financial year. Scheme for providing Savings-cum-OD account to Non–Farm Sector (NFS ) poor families living in Rural/ Urban areas. Akshay Krishi. d. Allahabad Bank Potato Growers Credit Card Scheme. During the Financial Year 2011-12. one with Hindi Prompt to be used for Phone Banking and the other one for dealing with ATM related issues. Bank has launched under noted structured Loan products under Priority Sector Credit to promote Agro-based Industries and support trading of farm produce during the last financial year. of which 40 are Rural. Bank is having 13 FLCCs for strengthening Financial Inclusion initiative by providing financial education & credit counselling.
PRAMOD. Bank has signed a Memorandum of Understanding (MOU) with the Stock Holding Corporation of India Ltd (SHCIL) to act as Authorised Collection Centre for sale of e-stamp from its designated branches. Bank has recruited 1541 Officers and 876 Clerks in the system. 9 Urban and 13 are Metropolitan Branches taking the total number of Branches to 2516( excluding one Overseas Branch at Hong Kong) of which 39 Branches have been opened during the quarter ending March. c. unemployed youths. taking the total number to 21. the said facility has been provided to LIC of India for managing their payments of policy maturities/ claim settlement and management expenses.
Bank has introduced the facility of „Instant Transfer of Accounts‟ or Account Portability within the Bank. SHGs for improvement of skills and entrepreneurship ability. 25 branches have been opened under Financial Inclusion Plan during the year 2011. 39 Semi – Urban. Bank has developed a collection module which is being implemented in CBS to facilitate collection of insurance premium over the counter at all CBS branches of the bank.Kisan Credit Card Scheme. a. e. Bank has entered into an agreement with M/s Tata Communications Banking Infra Solutions Ltd (TCBIL) for providing Merchant Acquiring Services through Point of Sale ( POS) machines. Weavers Credit Card Scheme. Bank has also opened 4 Satellite Offices during the year. The Bank has established eight more Rural Self Employment Training Institutes
(RSETIs ) during the year 2011-12 for imparting training to farmers. for consultancy services on implementation of IFRS/IND – As in the bank. NGOs.E(PGDMB12/72)
. Bank has introduced two Interactive Voice Response (IVR).
2012 from `13.78 lac ATM cum Debit Cards to its customers.12.2012 increased to 2.03. under which Rebate up to 1.114 crore as against ` 13.626 crore (21.869 crore during 2010-11. exclusively under the Plan. Fresh Credit disbursal in Agriculture Loans soared to ` 5.2012 increased to ` 603 crore as against ` 433 crore as on 31st March. High Definition Video conferencing system has been implemented at 59 identified locations across the country in order to have a seamless communication for review of performance of branches.203 crore. Bank has exceeded the National Goal of 18% of Agriculture Credit by achieving 18. Total Outstanding in Auto Loan (Car + Mobike) increased to ` 729 crore as on 31. As a part of green initiative.50 % in Interest Rate and 50 % in applicable Processing Charges have been allowed. The Bank issued 1. 2012 from ` 30. (YoY Growth 39%). Under Financial Inclusion Plan.225 crore as on 31.03. Agriculture Credit outstanding rose to `16.Technology
PRAMOD.2012 stood at ` 15. Bank has extended Festival Bonanza discount on Select Retail Loan Schemes up to 31.46% of Gross Credit of the Bank.192 crore (34.03. constituting 13. 25 “Brick & Mortar” Branches were opened during FY’11-12.590 crore as on 31st March.387 crore last year registering an absolute YoY growth of `3.640 crore.029 crore as on 31.919 crore as against ` 2.
Total Outstanding under Retail Credit as on 31.05 % as on March. issued more than 12.96%). Bank has covered 2618 villages allotted to it with population 2000 and above under various models. during FY’11-12. 2012.03.68 lac Kisan Credit Cards (KCC) involving a credit amount of ` 1. Outstanding under Bank’s Education Loan rose to ` 1.03.11 (YoY Growth 31%).2012 as against ` 621 crore last year.2011 with Festival Bonanza Discount. `
Priority Sector Credit of the Bank grew to ` 37. Loans amounting to ` 676.2011.2011.19 % as on March. Bank has exceeded the National Goal (40%) of Priority Sector Credit to ANBC by achieving 41.03. 2012.764 crore last year registering an absolute YoY growth of ` 6.2011.10.12.726 crore during 2011-12.89 crore have been disbursed up to 31.975 crore during FY’11-12 as against the target of ` 5.390 crore as on 31st March.182 crore as on 31. Cheque Truncation System (CTS) has been implemented at Chennai on 21. Total Outstanding under ALLBANK Trade Scheme as on 31.2012 from ` 11. Total Disbursement under Retail Credit of the Bank during 2011-12 was `4.54%).E(PGDMB12/72)
. Total Outstanding under ALLBANK COMMERCIAL VEHICLE FINANCE as on 31st March.2011. which now has 316 ATMs.180 crore as against `1.078 crore as against `3.990 crore last year registering an absolute YoY growth of ` 4. Credit to Micro and Small Enterprises (MSE) surged to `16.040 crore last year.
Bank has planned to achieve ` 3. Shanghai.
PRAMOD.00 lac crore in Total Business. Bank has been awarded the FIBAC Banking Award – 2011 for Best initiatives in Inclusive Banking. Bank will be recruiting 1600 Probationary Officers and 350 Specialist Officers during the year 2012-13.E(PGDMB12/72)
Bank has been awarded The Financial Advisor Award -2012 for Best Performing Bank in PSU category presented by UTI Mutual Fund and CNBC – TV 18. Bank is positioned 4th fastest growing Bank and 5th efficient Bank among 57 SCBs as per Business World Award.20. Bank has been awarded 1st prize in Indira Gandhi Rajbhasha prize for its excellent work in Rajbhasha (Hindi) by The President of India. Bank has planned to open more Branches Overseas. which include one each at Dhaka (Bangladesh). Singapore and Kowloon (Hong Kong) for which ground work is in progress.000 crore of Total Business by 31st March. to increase the number of Branches to 3000 and to open 2000 ATMs within the next 2-year horizon. 2011. 2013. powered by ICRA. Bank has envisaged to cross ` 4.
however if proper credit
PRAMOD. Brief overview of credit: Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. There is no guarantee to ensure a loan does not run into problems. Thus. Factors like age. repayment capacity. Proper evaluation of the customer is performed. previous loans. banks are normally interested in the actual loan amount to be repaid along with the interest. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. etc. However the 6 „C‟ of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at all times. continuity of employment. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. credit cards. are taken into account while appraising the credit worthiness of a person. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. nature of employment.E(PGDMB12/72)
. Character Capacity Collateral Capital Cash flow Condition
If any one of these is missing in the equation then the lending officer must question the viability of credit. which measures the financial condition and the ability of the customer to repay back the loan in future.CHAPTER-2 CREDIT APPRAISAL-INTRODUCTION
Definition: Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial. But even though the loans are backed by the collateral. the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. Generally the credit facilities are extended against the security know as collateral. number of dependents. income. Every bank or lending institution has its own panel of officials for this purpose. It is the process of appraising the credit worthiness of a loan applicant.
The finance charges are included in the payments. financing through the store or the easy payment plan.evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized. With the issuance of a credit. Loans can be for small or large amounts and for a few days or several years. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. make a down payment. By understanding how each works. which should be the objective of every lending officer.
PRAMOD. and water. you will be able to get the most for your money and avoid paying unnecessary charges. major appliances. The first party is called a creditor. Cars. Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately. vehicle loans. You often have to pay a deposit. Other credit plans include personal loans.
Basic types of credit There are four basic types of credit. Loans can be secured or unsecured. and agree to pay the balance with a specified number of equal payments called installments. electricity. and furniture are often purchased this way. a credit is an agreement of postponed payments of goods bought or loan. We use credit to buy things with an agreement to repay the loans over a period of time. and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. In simple terms. The borrower takes the goods home in exchange for a promise to pay later. and you may pay a late charge if your payment is not on time. thereby generating a debt. also known as a lender. while the second party is called a debtor. student loans. also known as a borrower. Installment credit may be described as buying on time. The most common way to avail credit is by the use of credit cards. a debt is formed. You usually sign a contract.E(PGDMB12/72)
. The item you purchase may be used as security for the loan. Service credit is monthly payments for utilities such as telephone. gas. trade. Loans let you borrow cash. Credit allows you to buy goods or commodities now. small business loans. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. and pay for them later. home loans.
Brief overview of loans: Loans are of following types: Working Capital Term Loan Letter of Credit Bank Guarantee Bill Discounting
WORKING CAPITAL: General The objective of running any industry is earning profits.Credit cards are issued by individual retail stores. product.
PRAMOD. plant. level of operations i. machinery. the materials & marketing mix. The excess of current assets over current liabilities is treated as net working capital or liquid surplus & represents that portion of the working capital.e.. equipments. For production.E(PGDMB12/72)
. funds are needed for purchase of raw materials/ stores/ fuel. banks.
DEFINITION Working capital is defined as the funds required carrying the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. tools etc. or businesses.e.
Thus Working Capital required is dependent on (a) The volume of activity (viz. vehicles. mfg process.. An industry will require funds to acquire “fixed assets” like land. for employment of labor. Funds required for day to-day working will be to finance production & sales. which has been provided from the long-term source. its day to day operations. for storing finishing goods till they are sold out & for financing the sales by way of sundry debtors/ receivables. & also to run the business i. for power charges etc. building. production program. Working capital in this context is the excess of current assets over current liabilities. Production & sales) (b) The activity carried on viz. Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month. Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital.
Cash Budget Method Cash budget containing cash receipts and cash payments for a particular period is obtained from the borrower. (a) or (b) . renovation or rationalization of plant. Permissible Bank Finance [C. Estimated Net Current Assets c. MPBF [ C. buildings. MPBF Method (Maximum permissible bank finance) A. A term loan is granted for a fixed term of not less than 3 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years. construction of. whichever is higher E.
TERM LOAN: 1. such as purchase of land. whichever is higher. & repayable from out of the future earning of the enterprise. The difference of cash receipt and payments for individual month represents surplus/ deficit. in installments. purchase of machinery. The opening cash surplus/deficit and the surplus /deficit for individual months is carried forward from month to month.D(c)]
. E. Total Current Liabilities ( Other than Bank Borrowings) C. with cumulative effect. Total Chargeable Current Assets B. Turnover Method A. Working Capital Gap ( A. A term loan is a loan granted for the purpose of capital assets. Less : Margin a. 2.B) D. The limit is fixed based on the peak cumulative deficit and drawings for individual months are allowed within the deficit for the respective month. Total Current Assets B.B) D. Total Current Liabilities (Other than Bank Borrowings) C. modernization.D(c) ] 2. as per a prearranged schedule. Minimum Required Margin (25 % of Current Assets less Export Receivables) b. Less: Margin (a) Minimum Required Margin (20 % of C) (b) Estimated Margin (c) (a) or (b) . Working Capital Gap (A.DIFFERENT METHODOLOGIES 1.
7. Term loans would be repaid in a regular way from the anticipated income of the industry/ trade. flow of funds & profits.E(PGDMB12/72)
. technical aspects. greater is the attendant uncertainty of repayment & consequently the risk involved also becomes greater.From the above definition. a projection of future trends of outputs & sales & estimates of cost. The security is not the readily saleable goods & commodities but the fixed assets of the units. The repayment should come out of the future cash accruals from the activity of the unit. The term loan is an advance not repayable on demand but only in installments ranging over a period of years. These distinctive characteristics of term loans distinguish them from the short term credit granted by the banks & it becomes necessary therefore. its financial aspects.To determine the suitability of the technology selected & the adequacy of the technical investigation & design. Appraisal of Term Loans Appraisal of term loan for. The repayment of a term loan depends on the future income of the borrowing unit. economic aspects. This will involve a detailed scrutiny of the scheme. There are four broad aspects of appraisal. It may thus be observed that the scope & operation of the term loans are entirely different from those of the conventional working capital advances. 3.
5. to adopt a different approach in examining the applications of borrowers for such credit & for appraising such proposals. say. The repayment of term loan is not out of sale proceeds of the goods & commodities per se. returns. These loans are subject to a definite repayment program unlike short term loans for working capital (especially the cash credits) which are being renewed year after year. However. whether given as security or not. 6. 4. the following differences between a term loan & the working capital credit afforded by the Bank are apparent: The purpose of the term loan is for acquisition of capital assets. the primary task of the bank before granting term loans is to assure itself that the anticipated income from the unit would provide the necessary amount for the repayment of the loan. an industrial unit is a process comprising several steps. The Bank‟s commitment is for a long period & the risk involved is greater. Longer the duration of the credit. namely
Technical Feasibility .
PRAMOD. it may be observed that term loans are not so lacking in liquidity as they appear to be. Hence. An element of risk is inherent in any type of loan because of the uncertainty of the repayment.
7. b) Size of the plant – One of the most important considerations affecting the feasibility of a new industrial enterprise is the right size of the plant. The accessibility to the various resources has meaning only with reference to location. quality & accessibility of all the goods & services needed. which will be competitive when compared to the alternative product available in the market. suitability of the envisaged pattern of financing & general soundness of the capital structure. Inadequate transport facilities or lack of sufficient power or water for instance. &
Managerial Competency – To ascertain that competent men are behind the project to ensure its successful implementation & efficient management after commencement of commercial production. The size of the plant will be such that it will give an economic product.To determine the accuracy of cost estimates.g.Economic Feasibility . Too many projects have become uneconomical because sufficient care has not been taken in the location of the project. costs.To ascertain the extent of profitability of the project & its sufficiency in relation to the repayment obligations pertaining to term assistance.1 Technical Feasibility The examination of this item consists of an assessment of the various requirement of the actual production process. can adversely affect an otherwise sound industrial project.E(PGDMB12/72)
PRAMOD. a) The location of the project is highly relevant to its technical feasibility & hence special attention will have to be paid to this feature. a woolen scouring & spinning mill needed large quantities of good water but was located in a place which lacked ordinary supply of water & the limited water supply available also required efficient softening treatment.
Financial Feasibility . Projects whose technical requirements could have been taken care of in one location sometimes fail because they are established in another place where conditions are less favorable. e. A smaller plant than the optimum size may result in increased production costs & may not be able to sell its products at competitive prices. It is in short a study of the availability. One project was located near a river to facilitate easy transportation by barge but lower water level in certain seasons made essential transportation almost impossible.
external consultants. wherever necessary. should be obtained with specific comments on the feasibility of scheme. The principle underlying the technological selection is that “a developing country cannot afford to be the first to adopt the new nor yet the last to cast the old aside”. It is complicated because a variety of factors affect the demand for product e. This involves getting answers to three questions. etc. need to be assessed with special care.
7. there is shortage of trained personnel. the extent of competition prevailing. The quality of labor required & the training facilities made available to the unit will have to be taken into account e) Technical Report – A technical report using the Bank‟s Consultancy Cell. a) A thorough market analysis is one of the most essential parts of project investigation. Since earnings depend on the volume of sales.
PRAMOD. Though labor in terms of unemployed persons is abundant in the country. whether machinery proposed to be acquired by the unit under the scheme will be sufficient for all stages of production.g.. Forecasting of demand is a complicated matter but one of the vital importance. a) How big is the market? b) How much it is likely to grow? c) How much of it can the project capture? The first step in this direction is to consider the current situation. ii) Future – possible future changes in the volume & patterns of supply & demand will have to be estimated in order to assess the long term prospects of the industry. marketability of the products etc.E(PGDMB12/72)
. its profitability. d) Labor – The labor requirements of a project. technological advances could bring substitutes into market while changes in tastes & consumer preference might cause sizable shifts in demand. A new technology will have to be fully examined & tired before it is adopted. It is equally important to avoid adopting equipment or processes which are absolute or likely to become outdated soon.c) Type of technology – An important feature of the feasibility relates to the type of technology to be adopted for a project. taking account of the total output of the product concerned & the existing demand for it with a view to establishing whether there is unsatisfied demand for the product.2 Economic Feasibility An economic feasibility appraisal has reference to the earning capacity of the project. it is necessary to determine how much output or the additional production from an established unit the market is likely to absorb at given prices. Care should be taken to see that there is no idle capacity in the existing industries..
if at a particular level of production. The ratio may vary from industry
PRAMOD. this point of no profit/ no loss is known as the break-even point.g. start-up time etc. This is calculated by dividing cash accruals in a year by amount of annual obligations towards term debt. appropriately included in the cash flow statements.
7. The estimate of profitability & the breakeven point will enable the banker to draw up the repayment programme. in that it serves as a measure of the repayment capacity of the project/ unit & is.
The cash flow estimates will help to decide the disbursal of the term loan. paper for printing. The cash accruals for this purpose should comprise net profit after taxes with interest.E(PGDMB12/72)
. the total manufacturing cost equals the sales revenue. jute bags. parts for machines. Break-even point is expressed as a percentage of full capacity. depreciation provision & other non cash expenses added back to it. The market analysis in this case should cover the market for the ultimate product.iii) Intermediate product – The demand for “Intermediate product” will depend upon the demand & supply of the ultimate product (e. therefore.3 Financial Feasibility The basis data required for the financial feasibility appraisal can be broadly grouped under the following heads i) ii) iii) Cost of the project including working capital Cost of production & estimates of profitability Cash flow estimates & sources of finance. and tires for automobiles). A good project will have reasonably low breakeven point which not be encountered in the projections of future profitability of the unit. Debt/ Service Coverage: The debt service coverage ratio serves as a guide to determining the period of repayment of a loan. Break-even point: In a manufacturing unit. A study of the projected balance sheet of the concern is essential as it is necessary for the appraisal of a term loan to ensure that the implementation of the proposed scheme.
Maturing annual obligations
This ratio is valuable. The profitability estimates will also give the estimate of the Debt Service Coverage which is the most important single factor in all the term credit analysis.
75. Hence documentary LCs is those which contain
PRAMOD. The seller desires to have an assurance for payment by the purchaser. i. the success of the project may be put to test. The repayment program should be so stipulated that the ratio is comfortable. If there is a change in the administration & managerial set up. The integrity & credit worthiness of the personnel in charge of the management of the industry as well as their experience in management of industrial concerns should be examined. In high cost schemes. an idea of the unit‟s key personnel may also be necessary. Authorizes another bank to effect such payment.E(PGDMB12/72)
. The objective of LC is to provide a means of payment to the seller & the delivery of goods & services to the buyer at the same time. or iii.4 Managerial Competence In a dynamic environment. an appraisal of management is the touchstone of term credit analysis. Hence. is to make a payment to or to the order of a third party (the beneficiary). it is therefore necessary that the evidence of movement of goods is present. Definition A Letter of Credit (LC) is an arrangement whereby a bank (the issuing bank) acting at the request & on the instructions of the customer (the applicant) or on its own behalf.
LETTER OF CREDIT
Introduction The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. Authorizes another bank to negotiate against stipulated document(s). or to accept & pay such bills of exchanges (drafts). or is to accept & pay bills of exchange (drafts drawn by the beneficiary).
7. on the relative strength of its management. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). or ii. Here arises the need of Letter of Credit (LCs). the capacity of an enterprise to forge ahead of its competitors depends to a large extent.
Basic Principle: The basic principle behind an LC is to facilitate orderly movement of trade.to industry but one has to view it with circumspection when it is lower than the benchmark of 1. provided that the terms & conditions of the credit are complied with.
. If documents are in order issuing bank will pay irrespective of whether the goods are of expected quality or not. the LC may be transferred to the second beneficiary & if provided in the LC it can be transferred even more than once. consequential to a main contract between the applicant & the beneficiary. In the case of transferable LC. Here. guarantee is a collateral contract.
PRAMOD. Reimbursing bank is used in an LC transaction by an opening bank when the bank does not have a direct correspondent/branch through whom the negotiating bank can be reimbursed. A bank will confirm an LC for his beneficiary if opening bank requests this as part of LC terms. Thus. Banks are also not responsible for the genuineness of the documents & quantity/quality of goods.documents of title to goods as part of the LC documents. BANK GUARANTEES: A contract of guarantee is defined as „a contract to perform the promise or discharge the liability of the third person in case of the default‟. If importer is your borrower. Bankers and all concerned deal only in documents & not in goods. the bank has to advice him to convert all his requirements in the form of documents to ensure quantity & quality of goods. the opening bank will direct the reimbursing bank to reimburse the negotiating bank with the payment made to the beneficiary. Clean bills which do not have document of title to goods are not normally established by banks.
Parties to the LC 1) 2) 3) 4) 5) 6) 7) 8) Applicant – The buyer who applies for opening LC Beneficiary – The seller who supplies goods Issuing Bank – The Bank which opens the LC Advising Bank – The Bank which advises the LC after confirming authenticity Negotiating Bank – The Bank which negotiates the documents Confirming Bank – The Bank which adds its confirmation to the LC Reimbursing Bank – The Bank which reimburses the LC amount to negotiating bank Second beneficiary – The additional beneficiary in case of transferable LCs
Confirming bank may not be there in a transaction unless the beneficiary demand confirmation by own bankers & such a request is made part of LC terms. The parties to the contract of guarantees are: a) Applicant: The principal debtor – person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default.
In case of performance guarantee.Purpose of Bank Guarantees Bank Guarantees are used to for both preventive & remedial purposes. design/drawings in project finance. branches should exercise due caution & have sufficient experience with the customer to satisfy themselves that the customer has the necessary experience. security.
Guidelines on conduct of Bank Guarantee business Branches. creditworthiness & his capacity to take up financial risks. f) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts. In a performance guarantee. maturity & purpose. capacity. The subtle difference between the two types of guarantees is that under a financial guarantee. the bank‟s guarantee obligations relate to the performance related obligations of the applicant (customer).. & means to perform the obligations under the contract & any default is not likely to occur. as a general rule. etc. d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills. While issuing financial guarantees. g) Bid bonds on behalf of exporters h) Export performance guarantees on behalf of exporters favouring the Customs Department under EPCG scheme. should limit themselves to the provision of financial guarantees & exercise due caution with regards to performance guarantee business.E(PGDMB12/72)
. viz. c) In respect of raw materials supplies or for advances by the buyers. b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders.
PRAMOD. e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to realize the proceeds without waiting for warranty period to be over. The guarantees are structured according to the terms of agreement. a bank guarantee‟s a customer financial worth. The guarantees executed by banks comprise both performance guarantees & financial guarantees. expertise. it should be ensured that customers should be in a position to reimburse the Bank in case the Bank is required to make the payment under the guarantee.
Bank guarantee beyond maturity of 10 years may be considered against 100% cash margin with prior approval of the controlling authority. etc. All deferred payment guarantee should ordinarily be secured. e.e.g. Whenever an application for the issue of bank guarantee is received.Branches should not issue guarantees for a period more than 18 months without prior reference to the controlling authority.
PRAMOD. More than ordinary care is required to be executed while issuing guarantees on behalf of customers who enjoy credit facilities with other banks. Branches may obtain adequate cover by way of margin & security so as to prevent default on payments when guarantees are invoked. However. the customer‟s response to the invocation. in cases where requests are received for extension of the period of BGs as long as the fresh period of extension is within 18 months. the reasons thereof. financial or performance d) Applicant‟s financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. should be for a short period & for relatively small amounts. Appraisal of Bank Guarantee Limit Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits. as may be demanded by some of the beneficiary Government departments. When it is required to be issued on a format different from the IBA format. branches should examine & satisfy themselves about the following aspects: a) The need of the bank guarantee & whether it is related to the applicant‟s normal trade/business. Unsecured guarantees. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i. where furnished by exception. instances of invocation of bank guarantees. f) Present o/s on account of bank guarantees already issued g) Margin h) Collateral security offered
Format of Bank Guarantees Bank guarantees should normally be issued on the format standardized by Indian Banks Association (IBA).. No bank guarantee should normally have a maturity of more than 10 years. e) Past record of the applicant in respect of bank guarantees issued earlier.E(PGDMB12/72)
.. Extant instructions stipulate an Administrative Clearance for issue of BGs for a period in excess of 18 months. it should be ensured that the bank guarantee is a) for a definite period.
c) for a specific amount d) in respect of bona fide trade/ commercial transactions.b) for a definite objective enforceable on the happening of a definite event.E(PGDMB12/72)
. & g) not containing any clause for automatic renewal of the bank guarantee on its expiry
PRAMOD. e) contains the Bank‟s standard limitation clause f) not stipulating any onerous clause.
MOA. review of accounts. AOA. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled engineers | Preparation of financial data | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations. and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list. etc. renew of accounts.CHAPTER-3 CREDIT APPRAISAL PROCESS
Receipt of application from applicant | Receipt of documents (Balance sheet. mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements.E(PGDMB12/72)
. KYC papers. registration no. agreements. CIBIL data. etc (On regular basis)
PRAMOD. ECGC caution list. willful defaulters list.. Different govt.
Appraisal.g.1 Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues as and then they fall 1. Group Exposure restrictions.2. Industry Exposure restrictions. Financial status in broad terms and whether it is acceptable bank to
The company‟s Memorandum and Articles of Association should be scrutinized carefully to ensure (i) that there are no clauses prejudicial to the Bank‟s interests. List of defaulters. APPRAISAL A. Towards this end the preliminary appraisal will examine the following aspects of a proposal. Assessment and Sanction functions 1. Prudential Exposure norms. Applicant‟s status vis-à-vis other units in the industry. Credit risk rating. Preliminary appraisal 1. ban on financing of industries producing/ consuming Ozone depleting substances.E(PGDMB12/72)
. Acceptability of the promoters. Profile of the promoters/senior management personnel of the project.3. Caution lists. if the proposal is to finance a project. Government regulations/legislation impacting on the industry. Compliance regarding transfer of borrower accounts from one another. if applicable. the following aspects have to be examined: • Whether project cost is prima facie acceptable • Debt/equity gearing proposed and whether acceptable • Promoters‟ ability to access capital market for debt/equity support
PRAMOD. e. Industry related risk factors.
1.Loan Administration .. (ii) no limitations have been placed on the Company‟s borrowing powers and operations and (iii) the scope of activity of the company. Further. Bank‟s lending policy and other relevant guidelines/RBI guidelines.
should include: • Organizational set up with a list of Board of Directors and indicating the qualifications. as the case may be) finds the proposal acceptable.5. If the branch (a reference to the branch includes a reference to SECC/CPC etc. covering specific credit requirement of the company and other essential data/ information. along with a copy of the proposal/project report. marketing and finance.• Whether critical aspects of project . a comprehensive application in the prescribed proforma. • Current practices for the particular product/service especially relating to terms of credit sales. • Demand and supply projections based on the overall market prospects together with a copy of the market survey report.E(PGDMB12/72)
. wherever necessary.. particulars regarding the history of the concern. etc. among other things. production. in other words a brief on the managerial resources and whether these are compatible with the size and scope of the proposed activity. in addition to the above. should also be called for. profitability. probability of bad debts. irrespective of market
PRAMOD. etc. its past performance. branch should obtain additionally currency
(i)Appraisal report from any other bank/financial institution in case appraisal has been done by them. the branch will arrive at a decision whether to support the request or not. purchase. present financial position. demand and supply gap. etc. • Estimates of sales. • Projected profit and loss account and balance sheet for the operating years during the of the Bank assistance. The report may comment on the geographic spread of the market where the unit proposes to operate. the competitors‟ share.4. • If request includes financing of project(s). are prima facie in order 1. cost of production. For non-corporate borrowers. The information. experience and competence of the key personnel in charge of the main functional areas e.g. This data/information should be supplemented by the supporting statements such as: a) Audited profit loss account and balance sheet for the past three years (if the latest audited balance sheet is more than 6 months old. 1. cost of production and profitability. proposed marketing arrangement.demand. (ii) „No Objection Certificate‟ from term lenders if already financed by them and (iii) Report from Merchant bankers in case the company plans to access capital market. it will call for from the applicant(s). competitive advantage of the applicant. etc. a pro-forma balance sheet as on a recent date should be obtained and analyzed). In respect of existing concerns. After undertaking the above preliminary examination of the proposal.
• Production capacity & use: past and projected. if any created for the purpose.
b) Details of existing borrowing arrangements. past deviations in sales and profit projections. sales tax. • The position regarding the company‟s tax assessment . • Pending suits by or against the company and their financial implications (e.segment.8 In addition to the financials. • Whether the company has revalued any of its fixed assets any time in the past and the present status of the revaluation reserve. c) Credit information reports from the existing bankers on the applicant Company. the following aspects should also be examined: • The method of depreciation followed by the company-whether the company is following straight line method or written down value method and whether the company has changed the method of depreciation in the past and. • Apart from financial ratios.whether the provisions made in the balance sheets are adequate to take care of the company‟s tax liabilities. • Record of major defaults. inter-firm and inter-industry comparisons should be made to establish their veracity. other ratios relevant to the project. if any. 1. etc. and d) Financial statements and borrowing relationship of Associate firms/Group Companies. and Estimates/projections of sales values. all the data/information furnished by the borrower should be counter checked and. audited balance sheet in the IBA approved formats should be submitted by the borrowers. if any.6 The viability of a project is examined to ascertain that the company would have the ability to service its loan and interest obligations out of cash accruals from the business. if any.). cases relating to customs and excise.10 lacs and above from the banking system. • The nature and purpose of the contingent liabilities. enjoying credit limits of Rs. wherever possible. While appraising a project or a loan proposal. 1.g.
PRAMOD.7 The financial analysis carried out on the basis of the company‟s audited balance sheets and profit and loss accounts for the last three years should help to establish the current viability. • Dividend policy. in repayment in the past and history of past sickness. • Qualifications/adverse remarks. made by the statutory auditors on the Company‟s accounts.E(PGDMB12/72)
. if any. together with comments thereon. if so. Detailed Appraisal 1. • Trends in sales and profitability. the reason therefore. B.
as applicable • Details of sourcing of energy requirements.9. power.• Estimated requirement of working capital finance with reference to acceptable build up of inventory/ receivables/ other current assets. • Pollution control clearance • Cost of project and source of finance • Build-up of fixed assets (requirement of funds for investments in fixed assets to be critically examined with regard to production factors. • Feasibility of arrangements to access capital market • Feasibility of the projections/ estimates of sales. the manner of repayment. • Projected levels: whether acceptable. Redeemable Preference Shares. All unsecured loans/ deposits raised by the company for financing a project should be subordinate to the term loans of the banks/ financial institutions and should be permitted to be repaid only with the prior approval of all the banks and the financial institutions concerned. the commercial.e.E(PGDMB12/72)
. improvement in quality of products.) • Arrangements proposed for raising debt and equity • Capital structure (position of Authorized. Issued/ Paid-up Capital. Return on Investment
PRAMOD. and • Compliance with lending norms and other mandatory guidelines as applicable 1./ Agencies • Licenses/permits/approvals/clearances/NOCs/Collaboration agreements. cost of production and profits covering the period of repayment • Break Even Point in terms of sales value and percentage of installed capacity under a normal production year • Cash flows and fund flows • Proposed amortization schedule • Whether profitability is adequate to meet stipulated repayments with reference to Debt Service Coverage Ratio. debentures. term Loans.) • Debt component i. furnish details of the terms and conditions governing the loan like the rate of interest (if applicable). Where central or state sales tax loan or developmental loan is taken as source of financing the project. economies of scale etc. Project financing: If the proposal involves financing a new project. economic and Financial viability and other aspects are to be examined as indicated below: • Statutory clearances from various Government Depts. deferred payment facilities.. etc. unsecured loans/ deposits. fuel etc. etc.
with emphasis on following aspects: • Market share of the units under comparison • Unique features • Profitability factors • Financing pattern of the business • Inventory/Receivable levels • Capacity utilization • Production efficiency and costs • Bank borrowings patterns • Financial ratios & other relevant ratios • Capital Market Perceptions • Current price • 52week high and low of the share price • P/E ratio or P/E Multiple • Yield (%).• Industry profile & prospects • Critical factors of the industry and whether the assessment of these and management plans in this regard are acceptable • Technical feasibility with reference to report of technical consultants. competence. viz. Present relationship with Bank: Compile for existing customers. market view (if anything adverse). if available • Management quality. public equity etc. should also be fully tied up. track record • Company‟s structure & systems • Applicant‟s strength on inter-firm comparisons For the purpose of inter-firm comparison and other information. their family members.. debentures.E(PGDMB12/72)
. A pre-sanction inspection of the project site or the factory should be carried out in the case of existing units. However. professional entities like CRIS-INFAC.half yearly and yearly Also examine and comment on the status of approvals from other term lenders.. the portion of the equity / loans which is proposed to be brought in by the promoters. relaxation in this regard may be considered on a case to case basis for genuine and acceptable reasons. To ensure a higher degree of commitment from the promoters. financial journals/ publications. the promoter should furnish a definite plan indicating clearly the sources for meeting his contribution. The balance amount proposed to be raised from other sources. and project implementation schedule. where necessary. etc. friends and relatives will have to be brought up front. Under such circumstances. CMIE. source data from Stock Exchange Directory. C. profile of present exposures:
• Stock turnover. report on search of charges with ROC.Primary & Collateral. number of times and total number of days the account was irregular during the last twelve months • Repayment of term commitments • Compliance with requirements regarding submission of stock statements.FB & NFB • Occurrence of irregularities. partners/ promoters and the proposed guarantors. E. where applicable
PRAMOD.For each facility as applicable Rate of interest Rate of commission/exchange/other fees Concessional facilities and value thereof Repayment terms.. etc. Guarantee Margins . realization of book debts • Value of account with break-up of income earned • Pro-rata share of non-fund and foreign exchange business • Concessions extended and value thereof • Compliance with other terms and conditions • Action taken on Comments/observations contained in RBI Inspection Reports: CO Inspection & Audit Reports Verification Audit Reports Concurrent Audit Reports Stock Audit Reports Spot Audit Reports Long Form Audit Report (statutory audit) D. G.e. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term Finance. F. Structure of facilities and Terms of Sanction: Fix terms and conditions for exposures proposed . Existing charges on assets of the unit: If a company. Opinion Reports: Compile opinion reports on the company.facility wise and overall:
Limit for each facility – sub-limits Security . if any • Frequency of irregularity i.• Credit facilities now granted • Conduct of the existing account • Utilization of limits . renewal data. financial follow-up reports.E(PGDMB12/72)
J. • Carry out pre-sanction visit to the applicant company and their project/factory site. and the borrower‟s application. I.
2. ASSESSMENT: Indicative List of Activities Involved in Assessment Function is given below: • Review the draft proposal together with the back-up details/notes. Proposed structure of facilities. if any. arrange with the appraiser for the analysis on the correct lines.ECGC cover where applicable Other standard covenants
Bank’s lending policy and other guidelines issued by the Bank from time to time RBI guidelines Background of promoters/ senior management Inter-firm comparison Technology in use in the company Market conditions Projected performance of the borrower vis-à-vis past estimates and performance Viability of the project Strengths and Weaknesses of the borrower entity. proposed from usual norms of the Bank and the reasons therefore. If any deficiencies are seen. incorporate these and required modifications in the draft proposal and generate an integrated final proposal for sanction. Assistance to Assessment: Interact with the assessor. Review of the proposal: Review of the proposal should be done covering (i) Strengths and weaknesses of the exposure proposed (ii) Risk factors and steps proposed to mitigate them (iii) Deviations. moratorium and repayment schedule
PRAMOD. margins. Adequacy/ correctness of limits/ sub limits. Proposal for sanction: Prepare a draft proposal in prescribed format with required backup details and with recommendations for sanction. provide additional inputs arising from the assessment. financial statements and other reports/documents examined by the appraiser. • Interact with the borrower and the appraiser. • Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even analysis/Debt Service/Security Cover.) to see if this is prima facie in order. • Examine critically the following aspects of the proposed exposure.
PRAMOD. all considered. State whether. give recommendations for grant of the requisite fund-based and non-fund based credit facilities.Adequacy of proposed security cover Credit risk rating Pricing and other charges and concessions. charges and concessions proposed for the exposure and covenants stipulated vis-à-vis the risk perception. remit it back to the Assessor for supply of the required data/clarifications. • Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state whether the proposal is economically viable. the proposal is a fair banking risk. with any required modification to the initial recommendation by the Appraiser • Arrange with the Appraiser to draw up the proposal in the final form. If any critical information is not provided in the proposal. if any. arrange for additional inputs/modifications to be incorporated in the proposal.E(PGDMB12/72)
• To the extent the inputs/comments are inadequate or require modification. proposed for the facilities Risk factors of the proposal and steps proposed to mitigate the risk Deviations proposed from the norms of the Bank and justifications therefore. • Examine critically the following aspects of the proposed exposure in the light of corresponding instructions in force: Bank‟s lending policy and other relevant guidelines RBI guidelines Borrower‟s status in the industry Industry prospects Experience of the Bank with other units in similar industry Overall strength of the borrower Projected level of operations Risk factors critical to the exposure and adequacy of safeguards proposed there against Value of the existing connection with the borrower Credit risk rating Security. SANCTION: Indicative list of activities involved in the sanction function is given below: • Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive manner as required. pricing. Finally. Recount briefly the value of the company‟s (and the Group‟s) connections.
The objectives of the three stages of post sanction process are detailed below. follow-up. supervision and monitoring. which together facilitate efficient and effective credit management and maintaining high level of standard assets. Credit assessment is made based on promises and projections.E(PGDMB12/72)
. He has to a) Make a proper selection of borrower b) Ensure compliance with terms and conditions c) Monitor performance to check continued viability of operations d) Ensure end use of funds. or Defer decision on the proposal and return it for additional data/clarifications.. Need Lending decisions are made on sound appraisal and assessment of credit worthiness. A banker cannot take solace in sufficiency of security for his loans. Stages of post sanction process The post-sanction credit process can be broadly classified into three stages viz. A loan granted on the basis of sound appraisal may go bad because the borrower did not carry out his promises regarding performance. Past record of satisfactory performance and integrity are no guarantee for future though they serve as a useful guide to project the trend in performance. e) Ultimately ensure safety of funds lent. setting out the reasons. 2. if it is not acceptable.
PRAMOD.• Accord sanction of the proposal on the terms proposed or by stipulating modified or additional conditions/ safeguards.Post sanction credit process
General 1. or Reject the proposal.
Loan Administration . It is for this reason that proper follow up and supervision is essential.
CHAPTER-4 CREDIT RISK ASSESSMENT
Definition of RISK Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments. success factors behind a business are: Managerial ability Favorable business environment Favorable industrial environment Adequate financial strength
As such. and Mitigate the risk
How does risk arise in credit? In the business world. The eventual CRA rating awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit exposure. They are like twin brothers. CRA is also used to track the quality of Bank‟s credit portfolio. Lender’ task Identify the risk factors. as per the stipulated terms.E(PGDMB12/72)
. CRA takes into account the above types of risks associated with the borrowal unit. these are the broad risk categories or risk factors built into our CRA models. & is used to indentify. Risk arises out of Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor)
Hence. At the corporate level.
Credit & Risk Go hand in hand. to measure & to monitor the credit risk of an individual proposal.
Lending despite risks: So. salaries to employees & dividend to shareholders In credit. there was no systematic method of Credit Risk Assessment till late 1980‟s/ early 1990‟s. with the implementation of Basle-II accord4. not CRA systems. That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise. 2002. based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank. at the time of taking an exposure. therefore.RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October.
Indian Scenario: In Indian banks.
CREDIT RISK ASSESSMENT (CRA):
Credit is a core activity of banks & an important source of their earnings. proper risk assessment right at the beginning. which go to pay interest to depositors. Moreover. To ensure asset quality. it is not enough that we have sizable growth in quantity/ volume. risk should not deter a Banker from lending. The banker has to take a calculated risk. excepting the almost negligible volume of lending against liquid collaterals with adequate margin. It is.
. But it‟s always prudent to have some idea about the degree of risk associated with any credit proposal. Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems. capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. extremely important for every bank to have a clear assessment of risks of the loan assets it creates. to become Basle-II compliant. that is.They can be compared to two sides of the same coin. A banker‟s task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. All credit proposals have some inherent risks. it is also necessary to ensure that we have only good quality growth. is extremely important.
Software based Risk Assessment Module (RAM) and Manual credit risk grading module. Doubtful-AB8B & Loss AB8C). Business Risk.e. The framework to adopt an internal grading system is done using ten grades to be expressed in alphanumeric characters (AB1 to AB7 and AB8a.1 crore and above) and above. Industry/Activity Risk. AB8 will be further categorized into three subcategories depending upon the asset classification (SST-AB8A.
The risk grades under CRG modules 2 to 6.CHAPTER-5 CREDIT RISK GRADING MODULES
Two types of CRG framework have been developed.
PRAMOD. Accounts not covered under RAM will be rated using one of the 8 under mentioned manual CRG modules developed by the Bank.00 crore & above aggregate credit limit falling under those industries /activities for which industry risk score under RAM is available = Score under RAM * Industry Risk Weight /6 The ratings will be used for pricing of credit products. 7A & 7B will be based on Total Risk Adjusted Score (TRAS) obtained by an account. Risk Adjusted Score = for each risk category Score obtained in the category * Risk weight Eligible score for that category for the account
Risk Adjusted Industry Risk Score for accounts with Rs. while AB8 will represent the accounts. AB1 will represent accounts with highest degree of safety.E(PGDMB12/72)
. capital allocation as per risk perceived in loans and advances and for risk based monitoring and supervision of individual loan asset apart from formulation / alterations in various policies relating to loans and advances.5 crore (to be brought down to Rs. Financial Risk and Management Risk.1. which have defaulted and categorized as NPA. RAM (Risk Assessment Module) developed with assistance from CRISIL will be used to rate borrowal accounts under various industrial sectors with exposure of Rs. b &c). TRAS is the sum of Risk Adjusted Score computed under various risk categories i. The ratings help to decide on the frequency/intensity of monitoring the account along with remedial measures to check further deterioration in the asset quality.
which are covered in CRG5 to CRG7 modules.10 lac.10 lacs and above limit under ALLBANK TRADE and scheme for concessional rate of interest to customers categorized as gold/silver/others) Risk Grading of Borrowal accounts (with existing units/ project) having Aggregate Credit Limit of Rs.00 lac. Air way.1. Risk Grading of Borrowal accounts (with existing units/ project) having Aggregate Credit Limit above Rs.CRG MODULES CRG -01
APPLICATIONS RISK GRADING OF : Advances Against Liquid Security & Advances to Staff.10.1.00 crore or more limit/service sector/Fis etc.00 crore and above. irrespective of Credit Limit Advances Under Retail Credit Scheme of the bank. irrespective of Credit Limit Clean Advances & Non Performing Assets. (but except accounts with Rs.00 Lac However. Risk Grading of Borrowal accounts (with New units/ project) having Aggregate Credit Limit of Rs. Risk Grading of Borrowal Accounts under SSI/SME category (existing accounts) with credit limit Rs.200.E(PGDMB12/72)
.00 Lac to Rs. Risk Grading of Borrowal Accounts under SSI/SME category (new connection) with credit limit Rs. nursing Home/ Amusement Park Hospital etc) Municipality Or Corporation/Development Authority Educational Institute.1.) Financial Corporation like IRFC. Transport Business.200. Risk Grading of Borrowal Accounts with Rs. Infrastructure Development.00 crore and above.00 Lakh & above aggregate credit limit falling under following categories: NBFC / Financial Institution Intermediaries engaged in lending activities (like lending for Project. Risk Grading of Borrowal Accounts with Rs.10.10.00 Lac and above but excluding SSI & SME WITH Rs. for accounts under ALLBANK TRADE cut-off limit will be Rs.00 Lakh & above aggregate credit limit falling under following categories: Service sectors (Railway. and Housing. However.00 Lac. State Road Transport Corp.10. irrespective of Credit Limit Other Advances with Credit Limit (Funded & Non-Funded) below Rs.00 lacs.10.10. for accounts under ALLBANK TRADE cut-off limit will be Rs.
CRG -02 CRG -03 CRG -04
CRG -7A CRG -7B
Bonds etc. Sensitive Sector but secured by collateral.50000/Moderately Advances to Farm Sector Or Low Farm Mechanisation fully secured by tangible collateral and classified as Standard Assets. No. Consumer Loan. Liquid Security Available.E(PGDMB12/72)
. Car Loan.e. Public Housing Loan where Repayment period is up to ten years and Salary Tie Up is not available.
Risk of recovery of Bank‟s dues is moderate Availability of tangible collateral from the guardian mitigates recovery risk.Sl. AllBank Abhushan.
1. Crop Loans (Standard Assets) including ABKCC/KSY above Rs. KVP. Advances against government securities including RBI Bonds.e. Housing Loan. Personal Loan (i.
PRAMOD. Claims/Exposures on a scheduled Bank. and LIP.
Highly Liquid Security Liquid Security Liquid Security Repayment is adequately ensured from monthly salary and terminal benefits. AllBank Mobike etc) & Advances under AL-RENT Liquid Scheme Loans to Pensioners as per Bank‟s Scheme and SARAL loans where 50% or more security is available. Repayment of Loan is ensured Bank‟s dues recoverable from monthly pension / salary. Very Low Advances to staff members. of UTI Advances against shares and debentures. Creation of Genuine Productive Assets has historically reduced the Recovery Risk. Secured Advances to Public Where Salary Tie Up is Low available (i. But volatility can not be ruled out. Advances against security of Units. Personal loan to medical practitioner). Education Loans fully secured by tangible collateral. Liquid Security Available. But volatility can not be ruled out. Secured loan with comparatively low risk of recovery due to shorter repayment period.
Overall Risk Rating/ Safety AB-1
Category of Borrowal Accounts
Advances against security of Bank‟s own Deposit Advances against security of NSC. car Loan where salary Tie Up is not available.
Risk of recovery is fair in view of no risk mitigation by security in case tie-up arrangement for loan repayment is discontinued Secured loan with fair risk of recovery in view of comparatively longer repayment period. Bills Remitted under Bank‟s Customer Service Guidelines.
All other Advances (Including Advances Under Govt. Sponsored Schemes) classified as Standard Assets and fully Secured by Tangible Collateral. Sponsored Schemes) classified as Standard Assets and partly Secured/ Not Secured by Tangible Collateral. branches are permitted to allow advances subject to their discretionary authority.10 lac and above covered under AllBank Trade Scheme and Scheme for allowing rating based pricing by categorizing borrowers as Gold/Silver/other customers.
PRAMOD. Education Loans not fully secured by tangible collateral.
Performance Risk is higher.50000/ All other Advances excluding risk grading of borrowers having aggregate limit of Rs. Sensitive Sector and Not Collaterally Secured. However.
Existing regular accounts under old Personal Loan scheme of Bank with salary tie-up. Public Housing Loan where Repayment period is above ten years and Salary Tie Up is not available & Advances under AL-Property Scheme. Crop Loans (Standard Assets) including ABKCC/KSY up to Rs. SARAL loans on salary tie-up where available security is below 50%. Future performance risk of the concerned student is fair. and Drawals against uncleared effect of cheques etc) and classified as Standard Assets. (Including Advances Under Govt. Recovery Risk is high due to non-availability of tangible collateral.E(PGDMB12/72)
. Though repayment risk is less due to loan repayment tie-up but no full risk mitigation by available security. which is not specified elsewhere. All Advances allowed as clean advances up to 90 days (including Debit Balance arising from Bank‟s Credit Card.
Clean Outstanding recovery risk is high.
Yielding interest from the asset ceased. It may cause loss to the Bank.6.
Of above Clean Advances. It may cause loss to the Bank. Various risk categories and their weightage in computing overall risk grade are given below.
8. The account may slip to NPA if irregularity persists. D-2 and D-3. All Advances classified as Loss Default Assets. Likely to be NPA.E(PGDMB12/72)
All Advances Classified as Doubtful Default Assets under Category D-1. Advances not liquidated within due date. High Risk If installments/interest are overdue for 45 days or more but below 60 days.
If installments/interest are overdue Very for 60 days or more but below 90 High Risk days. It may cause loss to the Bank. Yielding interest from the asset ceased. All sub-standard loans and advances Default
CRG02 to CRG06 and CRG7A & 7B The ratings under modules CRG 02 to CRG 06 and CRG 7A & 7B will be determined on the basis of over all score for an account arrived at by computing weighted average of scores under various risk categories. VARIOUS RISK CATEGORIES & THEIR WEIGHTAGE MODULE INDUST BUSINES FINANCI MANAGEME OPERATION RY/ S AL NT AL ACTIVIT Y CRISIL‟S 15% 30% 40% 15% NIL RAM* CRG 2 10% 20% 35% 35% NIL CRG 3 20% 25% 35% 20% NIL CRG 4 20% 20% 25% 35% NIL CRG 5 20% 30% 30% 20% NIL CRG 6 15% 25% 40% 20% NIL CRG 7A 10% 10% 40% 20% 20% CRG 7B 20% 15% 30% 35% NIL
PRAMOD. Yielding interest from the asset ceased. The account may slip to NPA if irregularity persists.
Recovery prospects are minimum.
10 . AB8B and AB8C as per the asset class in NPA category.40 .40 .75
AB – 1 AB – 2 AB – 3 AB – 4 AB – 5 AB – 6 AB – 7 AB – 8
Very Low Low Moderately Low Fair Moderate High Very High Default
Over all maximum score will be 100 in manual CRG 2 to CRG 6 modules based on weight attached to different risk categories whereas the same will be 6 in CRISIL‟S RAM.00 4.00 . 10.50 -<3.40 3.00 1.75 .40 2.<4.<2.E(PGDMB12/72)
CRG MODULE USED AS PER CASE STUDY (EXAMPLE)
APPLICABLE FOR ↓
Risk Grading Of Borrowers (With Existing Units/Projects) Having Aggregate Limit of Rs.80 .80 3.00 Lakh to Rs. 200 Lakh
Name of the Borrower: Line of Activity: Branch: Zone: Scoring Based on Audited Balance Sheet As At: Existing Facility:
Nature of Facility (TL/ WC/Others) Credit Limit Outstanding Overdue/ Other irregularities.<5.50 < 1.The norms for assigning risk grade based on in case of manual CRG 2 to CRG 6 module is as under:
Scores under CRG2 to CRG 5 Above 90 Above 80 & Up to 90 Above 70 & Up to 80 Above 60 & Up to 70 Above 50 & Up to 60 Above 40 & Up to 50 Above 35 & Up to 40 35 or Below
Scores under CRG 6 Above 90 Above 80 & Up to 90 Above 70 & Up to 80 Above 60 & Up to 70 Above 55 & Up to 60 Above 50 & Up to 55 Above 45 & Up to 50 45 or Below
Score under RAM 5. if any
PRAMOD.<3.<3.10 3. All standard assets will be graded between AB1 to AB7 whereas all NPAs will be graded as AB8A.6.
00 and below Above 2.50 : 1 Below 1.33 or More 1.13 Comment: A.2) TOL /TNW RATIO 2.75 or More but below 2.17 Below 1.75 Below 1.13 or More but below 1.17 or More but below 1. FINANCIAL RISK: (Aggregate Score 36) Parameter
A.00 & up to 3.50 or More but below 1.25 1.30 : 1 Comment: A.I.00 & up to 4.50 : 1 to 1.3 a) INTEREST COVERAGE RATIO (PBDIT/INTERSET) 3 or More 2. Capital employed (In % Term).00 Above 3.75 : 1 From 1.E(PGDMB12/72)
.4).3 b) Average DSCR :Applicable for Fresh Term Loan of Existing Unit (In Such case Interest Coverage Ratio will be replaced by DSCR) More than 1.33 1.25 or More but below 1.50 Comment:
6 5 4 2 00
FINANCIAL RISK CONTD--A.P
PRAMOD.50 Above 4. Reserve-Capital W. Where Capital Employed= Capital+ Reserve+ Long term borrowing+ other bank borrowing.50 &up to 5.50 for Infrastructure/construction/PSU Sector) Comment: A.75 : 1 From 1.00 ( above 7.00 (Up to7.30 : 1or More but below 1.50 or More but below 3 1. RETURN ON CAPITAL EMPLOYED *
6 4 2 0
* PBIT/Av.1) CURRENT RATIO 1.Reval.Scoring Under Various Risk Categories: A.50 1.50 for Infrastructure/construction/PSU
6 5 4 2 0
6 5 4 2 0
Score. Business is not cyclical or there is no cyclical earnings. After sale service is satisfactory 3. Future growth potential is high. 9.1 Key Business Features: Score. 10. BUSINESS RISK: (Aggregate Score: 26)
B.Yes: 2 Score.
18% or More BPLR+ 4% or More but below 18% BPLR+ 2% or More but below BPLR+ 4% Above BPLR but below BPLR+ 2% BPLR or Below Comment: A.5.6 SECURITY COVERAGE (COLLATERAL)
6 5 3 2 0
(+) 2 (-) 2 0
(-) 2 (+) 2 0
(+) 2 (-) 2 0 SCORE 6 5 4 2 0
100% and above 75% or More but below 100% 60% or More but below 75% 50% or More but below 60% Below 50% COMMENTS: B. The business is not sensitive to changes in Govt Policies like price control. Product Range/Mix is satisfactory 2.No: 0 Key Business Features (B1) Contd----7. 5. Scores Obtained:
PRAMOD. 4.. Trend Analysis: TREND ANALYSIS – VARIATION IN NET CURRENT ASSET Increasing Trend in Net Current Asset Decreasing Trend in Net Current Asset Stable ( not more than 5% downward variation from previous year or current ratio not below bench mark) TREND ANALYSIS – VARIATION IN TANGIBLE NET WORTH Decreasing Trend in TNW Increasing Trend in TNW Stable (not more than 5% downward variation from previous year) TREND ANALYSIS: PROFITABILITY (NET PROFIT/NET SALES OR RECEIPT) Increasing Trend in Profitability Decreasing Trend in Profitability Stable (not more than 2% downward variation from previous year) Comments:
A. 8. 6. pollution. The borrowers are financially able to withstand competition. custom/excise duty etc.No: 0
1.1. ---------------. Total: Eligible Scores under B. There are only few competitors in local market. Capacity utilisation is 80% or more. Borrowers not dependent on limited customers.E(PGDMB12/72)
. (For mfg) Score. Borrowers not dealing in perishable goods.
2 Due amt paid after 60 working days or since un paid . fair dealing with customers.2.Yes: 1 Score. Good turnover (80-90% of sales)in the account & nominal return of cheques.1. when in need. whichever is low ) &/or frequent return of cheques.E(PGDMB12/72)
. no penal action from any tax/ govt /statutory authority.2. Payment of Bills : Due amt paid within 15 working days and less 6 Due amt paid between 16 working days to 30 working days.APayment of interest/installment. payment of amount involved in devolved LC or Invoked B.No: 0 i) Management is established player for more than 5 Years. Average turnover (70-80% of sales) & average level of return of cheques. Commission. iv) Business is not managed by one or two persons./PSUs ii) Having good reputation and track record (no litigation with customers/suppliers . Exchange etc.B. INCOME VALUE OF THE BANK:
(Interest. timely wage payment to their workmen/employees etc) iii) Having satisfactory relation with Bank for more than 2 years. vi) The management is proactive rather than reactive and their business policy is sound.2. 5 Due amt paid between 31 working days to 45 working days. 3 Due amt paid between 46 working days to 60 working days.Key Management Features: Score. sales would mean proportionate sales based on our share in total limit
High turnover (above 90% of sales) in the account & negligible return of cheques.Projected figure if new connection but previous year actual if existing account) PARAMETERS SCORE 6 More than 12 % 5 More than 10% but up to 12% 4 More than 8% but up to 10% 2 More than 6% but up to 8% 0 6% or below COMMENTS: C. from the Account as Percentage of Total Fund Based Limit. MANAGEMENT RISK: (Aggregate Score: 36) C. Unsatisfactory turnover (below 70% of sales or 2 times of working capital limit. v) The associate concern/group/ family is financially sound & their support is available to the borrower . (-) 3 Operations in the account (for working capital limit):
In case of consortium/multiple financing. Management Risk Contd---:
6 4 2 0
PRAMOD.G.. TOTAL : C. Payment Records & Operations in the Account: SCORE C.
A+C. Profit Growth during the year is 10% -15% of last two year average N.Compliance of Major Terms & Conditions.4.A) Sales Growth during the year Exceeds 20% of last two year average
SCORE 6 4 0
6 5 3 2 0 6 5 4 2 0
Sales Sales Growth during the year is 15% -20%of last two year average Sales Sales Growth during the year is 10% -15% of last two year average Sales Sales Growth during the year is 5%.2 below Assign 1 for Yes & 0 for NO
PARTICULARS Yes (1) No (0)
1.4. For all Industries/Activities other than D.4.4.A.4. Profit N. C.4.
PRAMOD.1 FOR FRESH CONNECTIONS WHERE PROJECTIONS NOT AVAILABLE (In place of C.4.E(PGDMB12/72)
.A. Profit N.A.B.10% of last two year average N. PAST COMMITMENT WITH RESPECT TO NET PROFIT: Achievement is 95% or above of Projection Achievement is 90% or More but below 95% of Projection Achievement is 75% or More but below 90% of Projection Achievement is 60% or More but below 75% of Projection Achievement is below 60% of Projection &/or below last year actual. Profit Growth during the year is below 5% of last two year average N. COMPLIANCE OF TERMS & CONDITIONS: All Terms and Conditions complied with.B.1.4.1)
D) INDUSTRY/ACTIVITY RISK: (Aggregate Score 10)D.1. Profit Scores under Credibility (“C.1+C.B” or C.B) N. Profit Growth during the year is 15% -20%of last two year average N. Profit N.4. FOR FRESH CONNECTIONS WHERE PROJECTIONS FOR NET PROFIT NOT AVAILABLE (IN PLACE OF C. Profit Growth during the year Exceeds 20% of last two year
6 5 3 2 0
6 5 3 2 0
average N. Profit Growth during the year is 5%. Credibility: C. Non.4.C.B. Compliance of terms & Conditions other than creation of Collateral Security due to reasons duly accepted by the Sanctioning Authority.
C. PAST COMMITMENT WITH RESPECT TO NET SALES: Achievement is 95% or above of Projection Achievement is 90% or More but below 95% of Projection Achievement is 75% or More but below 90% of Projection Achievement is 60% or More but below 75% of Projection Achievement is below 60% of Projection &/or below last year actual.10% of last two year average Sales Sales Growth during the year is below 5% of last two year average Sales
C.Present industry/activity scenario dealt by is favourable.3.4. C. Profit N.
5.Industry/Activity does not depend on the vagaries of nature. telephone etc) are available. water supply.2.00 crore & above aggregate limit falling under those Industries/ activities whose Industry Risk Score under Software based RAM Module is available (In this case D. 6. Risk Total Marks
35 20 35 10 100
y/x * z
36 26 36 10 108
PRAMOD. TOTAL SCORE FOR INDUSTRY/ ACTIVITY RISK: D. ELIGIBL SCORE E SCORE SCORE OBTAINE D RISK WEIGHT S (%) RISK ADJUSTE D SCORE
A B C D E Financial Risk Business Risk Management Risk Industry/Act.1.2. Firm is not assembler or trader of unbranded items. 10. 3.Demand of the product is increasing.Quality of the Product is satisfactory. 9. will not be applicable): Risk Adjusted Score to be assigned= (Scores under RAM* 10)/6
COMPUTATION OF FINAL SCORE/GRADE: Sl. For accounts with Rs 1. No.Technology/Activity is proven for medium term.1.Threat of substitute/competitors to the product/s is not there. road or rail.E(PGDMB12/72)
. fuel. 4. RISK CATEGORY MAXM.) CONTD--7.Requisite infrastructural facility (power.The products are having established markets. 8. INDUSTRY/ACTIVITY RISK (D.Availability of Raw Material/Products (Traders) is adequate.
PFTs .15. Private Limited company Trading in medical & surgical equipments April‟2001 1995 (when it was a proprietorship firm) Not applicable Risk Parameter Financial Risk Business Risk Management Risk Industry/Activity Risk Overall Grade Risk Grade AB-4 AB-1 AB-1 AB-2 AB-2
8. West K K Nagar. The company imports critical medical and surgical equipments such as spirometers. Constitution Business / Activity Incorporated on Advance since If the a/c is new . Munusamy Salai. ECG.. from
PRAMOD.CHAPTER-6 APPRAISAL CASE STUDY
Account : Branch: M/s J K Medical System (P) Ltd SRCM. Borrower Profile 1. Chennai -600078. (based on audited financials of 2006-07 enclosed as annexure A) Asset Classification Group Chief Executive/ Promoter Director
M/s J K Medical System (P) Ltd.15 100.15 lacs issued at 100% cash margin which will be retained as collateral security for proposed exposure of Rs. 9. Nebulisers.00 30.
Standard Does not belong to any recognized group.00 Bank Guarantee 10. lacs) Facilities Existing Proposed Cash credit 35.00 lacs . name of the earlier banker Credit rating / Risk Grade. 10. 5.
Consortium: Multiple Banking Arrangements
12. Name of the Account 2. 6.E(PGDMB12/72)
.00 * inclusive of BG Rs.00 70. Blood Gas Analyzers etc. Mr Ratnakar Sahoo Mrs Priya Sahoo
11.15 Bank Guarantee (against 100% margin) TOTAL 60. 4. 1052. 7. Manapakkam Zonal Office: Chennai
SUBJECT: To review the account and to consider enhancement in WC facilities as under : (Rs.
Present Request/ Last Sanction
The company is engaged in trading of medical and surgical equipments. 3.100.00* 15.
00 10.12.00 lacs to Rs. 13. Last sanction: The company‟s account was reviewed and the then CC limit was enhanced from Rs.15 lacs at 100% cash margin over and above the outstanding of Rs.00 lacs under the authority of the Branch as on 24..E(PGDMB12/72)
. present & future.61
Branch has advised that they have issued BG of Rs.00 30.00 100..Cover under GLH Cash Credit & Bank Guarantee : .12. Ramapuram. USA. Ramapuram.Cover under GLH Cash Credit & Bank Guarantee : .10.Counter indemnity from the company covering the entire BG limit .00 70. Security Primary : Existing Cash Credit : Exclusive hypothecation charge on entire stocks and book debts and other current assets.15.22 .00 Bank Guarantee 10. present & future. medical research institutes.ft at Plot No. Germany .Equitable mortgage of residential land admeasuring 1281 sq. health care centre.Equitable mortgage of residential land admeasuring 1281 sq.99* 22.214.171.124 . UK.00 lacs to Rs. Bank Guarantee : . Chennai valued at Rs.00 45. and sells them to reputed hospitals . research laboratories etc.2007 34. of the company. in India.19.62 9.00 lacs and the then BG limit was enhanced from Rs. Azeez Nagar .19.00 Outstanding as on 11. Bank Guarantee : . The company specializes in supply of respiratory equipments and is an exclusive distributor in India for many reputed overseas medical and surgical equipments and suppliers. lacs) Facilities Existing Proposed Cash credit 35. Chennai valued at Rs.00 Present Position of account: (Rs.99 lacs. of the company. Present Proposal: The present proposal is to review the account and to consider enhancement in WC facilities as under : (Rs.2006.
PRAMOD.ft at Plot No.21 lacs . Japan etc.Counter indemnity from the company covering the entire BG limit . Azeez Nagar . Proposed Cash Credit : Exclusive hypothecation charge on entire stocks and book debts and other current assets.00 TOTAL 45.Switzerland.21 lacs . lacs) Facilities Cash credit Bank Guarantee TOTAL Limit 35.9.5.
1. Mortgage and documentation fees : as per circularized instructions allowed/Proposed
PRAMOD.00 Lowest Dr. FDR in the name of the company for Rs. SV being RS.11. Munusamy Salai .----) Dec‟06 – Mar‟07 Earning (Rs.39 42.r Pricing BG : as per circularized instructions Comment on Concessionary facilities if Processing fees.00
15.1068. SV being RS.07 Current Year: Apr’07Nov’07 Turnover : 388.00% p. Bal : 11.00 Lowest Dr. 16.1. including common area and 1031. K K Nagar. 236/2B Part.00 lacs
. Existing pledge of FDR of Rs.
Pledge of LIC policies in the name of Ratnakar Sahoo . Chennai 600078 measuring approximately 1575 sq. In Lacs) 65.07 due on 25.50 lacs Interest Commission Total CC : PLR+1.w. Bal : 36.00 Highest Dr.
19.00 Highest Dr. Dated 25. Bal : 7.08.
.5.ft (super built up area).30.15 lacs Equitable mortgage of all that 2nd floor flat and ground bearing plot no.68.00 lacs. lacs) Rs.ft of undivided share of land .45 Last Year: Dec’06*Mar’07 Turnover : 82.00
As per Credit Report Dated: 19.08. In Lac) * transferred from IB in Dec‟06
Guarantor’s Worth (Rs.
Name of Guarantor Ratnakar Sahoo Priya Sahoo Conduct/ Value of Account Utilization of Fund Based Limits (Rs. Bal : 28.00 lacs. 18. Survey no.
Not applicable Export Turnover (Rs.-
Pledge of LIC policies in the name of Ratnakar Sahoo .00 lacs.15. to be purchased at a price consideration of Rs.
48 69.8 1.00 814.81 20 40. Company)
21.00 28.26 11.26 46.80 38.66 15.26 4.27 2.00 0.00 13.
Share Price Rs.71 1.81 1.27 21.00 Growth Base year 49.46 1.63 5.46 0.20 218.00 1. Selling & General Expenses Interest Operating Profit Non-operating surplus/Deficit (+/-) Pre-Tax Profit/Loss Provision for Taxation Net Profit/Loss NP/Net sales (%) Profit distributed through : a) Equity Dividend b) Preference Dividend Retained Profit Depreciation Cash Generation 355.46 19.00 1.85%
8.94 532.69 13.82 39. As on: Source of Information:
Not applicable (Pvt.10% 2 3 4 5 6 Net sales Cost of goods sold Gross Profit Gross Profit/Net sales (%) Operating.73% 85.62 18.67 18.41%
2009 (Revised) 119.71 532.215.84 2.00 0. Administrative.05 35.2 42.81 1.1 1.20% 23.64
2009 (Projn) 51.26 10.4 7.99
0.51% 65.41 29.26 11. lacs) 2007 2008 (Aud) (Est) 27.215.57%
5.48 3.24 17.00 0.97 60.78 6.75 57.00 0.47 44.71 2.21 10.76 172.64
2008 (Revised) 114.00 40.53 2. Ltd.51
7 8 9 10 11 12 13
PRAMOD.55 Net Block 4. Financial Position: PROFITABILITY STATEMENT (Rs.51 Depreciation 7.00 996.82 107.01
STATEMENT OF FINANCIAL POSITION 2006 (Aud) Gross Block 12.94 286.36%
14 15 16
0.95 434.01% 152. in Lacs) For the year ended 31st 2006 2007 2008 2009 March (Audited) (Audited) Estimate Projection 1 Gross sales 355.1 2.28 98.95 987.12 987.51% 83.81 3.80 18.20.1 16 28.E(PGDMB12/72)
(Rs.42 13.62 103.37
0.26 9.13 8.45% 127.
84 0.33 1.12.75 0.80 166.00 lacs) for FY 2007-08 which is considered achievable as under : Sales achieved upto Oct‟07 : Rs.00 5.46 lacs* Estimated for balance 5 months : Rs.28 67.71 18.03.44 125.65
59. This is mainly due to increase in fixed assets without corresponding increase in long term sources as detailed under:
PRAMOD.00 5.75 94.03.45 21. The company has estimated a PAT of Rs.07 5.25 80.61 29.21 50.63 189.40 1.08 50.00 lacs Profitability: Gross profit margin has remained stable at around 19% in FY 2005-06 & FY 2006-07 and is expected to be around 18% in FY 2007-08 & FY 2008-09.65 1.06 to 1.76 34.97 0.75 12.35 1.39 98.17 13.75 0. TOTAL LONG TERM LOANS Secured Loans Unsecured Loans SUB-TOTAL Equity Share Capital Share Application Money Reserve & Surplus SUB-TOTAL Intangible Assets Tangible Net Worth TOTAL D/E Ratio TOL/TNW
133.07.00 49.12 2.00 49.00 9.Total Current Assets Total Current Liabilities Net Current Assets CURRENT RATIO QUICK RATIO Investment & Non-C.00 59. Liquidity: Current Ratio has come down from 1.10 lacs in FY 2007-08 which is considered achievable considering the provisional PAT of Rs.63
18.93 180.37 98. Comment in Brief on financial Position: Sales : Gross sales of the company has increased by about 50% in FY 2006-07 over that of FY 200506.25 0.45 33.25 21.09 125.03 1.00 (exclusive of service charges of Rs.00 90.28.00 193.11 46.00 8.25 1.20.15 4.24 23.96 6.72 2.69 67.79 30.90 200.25 0.50 108.25 0.90 91.47 0.09 0.78 0.69 67.32 1.24 5.75
239. NP margin has increased in FY 2006-07 over that of FY 2005-06 and is expected to increase further in FY 2007-08 & FY 2008-09.467.61 3.65 7.975.28 67.71 18.94 0.00 90.40 1.88 21.39 0.59 16.54 lacs Total : Rs.31 108.25 0.37 6.72 8.31 108.37 23.35 as at 31.As.09
22.90 3. The company has estimated an increase in sales to 975.93 1.507.56 29.25
280.25 as at 31.44 203.37 0.93
280.03 10.09 3.90 200.50 108.66 166.65 18.11 1.59 39.03 5.13 lacs earned upto Oct‟07.94 0.00
1.22 39.96 90.65 98.93 180.80 2.52
239.31 72.11 0.84 6.E(PGDMB12/72)
.97 2.53 0.33 0.
10 lacs for FY 2007-08.95 80. requiring a margin contribution of Rs.49% 80. lacs) 13.76 814.20 996.24 lacs .00 (Month's Consumption) 0.43 32.35 65.07 .90 3.08 due to ploughing back of estimated PAT of Rs. The same is estimated to come down to 3.52
PRAMOD.03.49% 99.35 82.76 813.23 11.10 lacs for FY 2007-08.28.11.33 :1 as at 31.CA Capital TOTAL
Amount (Rs. lacs) 2009 Projection 1215.12 0.00 125.66 9.49% 99. However.03.61 2. the same is estimated to increase to 1.25. indicating high dependence on outside borrowings.88%
Calculation of Company’s Working Capital requirement : Holding period in Months DIFFERENT ITEMS OF CURRENT 2006 2007 ASSETS 2008 a) Stock 23.Sources of funds PAT Depreciation Secured Loans Decrease in Non.30 3.06 & 31.49% 81.11:1 as at 31.95 434. to COP
2006 (Actual) 355.62%
2008 Estimate 987.83%
(Rs.90 150.20 995.28.00 81.56 lacs as against available margin of Rs.47%
2007 (Actual) 532. Solvency: TOL/TNW is high at around 6:1 as at 31.96 d) Receivables (Month's sales) 94.03. Assessment/ Justification: 27.00 1. Working Capital Assessment: The assessment of WC requirement based on the CMA submitted by the company is as under :
(Year ending) 31 March i) ii) iii) iv) v) vi) vii) Sales (Gross) Cost of Production(COP) Cost of Sales(COS) Raw Material Consumn % of COP to Sales % of COS to Sales % of R.00 814.71 1.75 5.48 286.55% 99.07 over that of 31.60 32.99 1.03.62 81.28 434.102.03.00 996.45 40.E(PGDMB12/72)
.08 due to ploughing back of estimated PAT of Rs.00 0.43 lacs .55% 82.51 4. M.94 286.99% 81. This lead to decrease in current ratio as at 31.99% 99.28 432.09
Applications of funds Fixed assets Unsecured loans paid Misc assets Amount available for WC TOTAL
Amount (Rs. Cons.68 0. lacs) 14.00 1.20 133.48 284.06.09
The current assets has increased by Rs.
93 85.00 129.90 100.04 133.42) =10.93 239.03.00 110.23 59.98 235.56
COMPUTATION OF PERMISSIBLE BANK FINANCE: (Year ending) 31st March i) Working Capital Gap ii) 25% margin on Current Assets iii) Projected Working Capital Surplus iv) Item (i) minus Item(ii) v) Item (i) minus Item (iii) Permissible Bank Finance-item(iv) or (v) which is vi) less
(Rs.00 25. Financial Risk: No 1 2 3 4 5 Parameter Current ratio TOL/TNW ratio Interest coverage ratio Return on capital employed Trend Analysis Status 1.25 5.00
From the above it is observed that the MPBF for FY 2007-08 & FY comes to Rs.82/261.90=9.43 70.28 16.95 80.00 69.90 280.10% Score 5 0 6 0
PRAMOD. Branch: SRCM.30 15.00 lacs Considering the increase in sales we may accept the request of the company.00 30.65 69. Chennai Zone: Chennai.
CREDIT RISK GRADING ( CRG 02) Name of Borrower: Sri J K Medical Systems (P) Ltd Line of activity: Trading in medical & surgical equipments.2007.50 89.79 174.42)/(2. Manapakkam.07 61.70.80 43.65 59.E(PGDMB12/72)
55.61 (21.63 157.39 74. in Lacs) 2008 2009 129. Scoring based on balance sheet as at 31.93 150.98 70.93 80.e) Consumable spare (*) f) Other Current Assets (*) (*) In amount TOTAL CURRENT ASSETS Less : Creditors Others Sub-total (Working Capital Gap)
61.66+2.00 70.25 150.95 70.53 23.
.A Yes Yes Yes No 18 More than 12% 24
Score 2 2 2 2 2 N.m.a.00
+2 +2 +2 5
Business Risk: No Parameter 1 Product mix is satisfactory After sales service is satisfactory Borrowers are able to withstand competition Not dealing in perishable goods Future growth potential is high Capacity utilization is more than 80% Business is not cyclical Borrowers not dependent on limited customers Business not sensitive to Govt.w. No Parameter 1 Activity scenario is favorable 2 Technology proven in medium term 3 Demand for product is increasing
Status Yes Yes Yes
Score. policies Only few competitors in the local market Total 2 Income value to the bank (PLR+1% p.r) Total Score obtained: 22/24 MANAGEMENT RISK No Parameter 1 Established for more than 5 years Having good reputation and track record Having satisfactory relation with the bank for more than 2 years Business is not managed by 1/2 persons Associate company is sound and support is available Management is pro active 2 Payment record Operations in the account 3 Compliance of terms and conditions 4 Sales growth during FY 2006-07 Net Profit growth during FY 2006-07
Status Yes Yes Yes Yes Yes N.A 2 2 2 0 16 6 22
Status Yes Yes Yes No No associates Yes 15 days High Complied More than 20% over FY 2005-06 More than 20% over FY 2005-06
Score 1 1 1 0 NA 1 6 6 6 6 6
Score obtained: 34/35 INDUSTRY/ ACTIVITY RISK. 1 1 1
PRAMOD.Increase in NCA Increase in NW Increase in profitability 6 Security Coverage Score obtained: 22/36
Increasing Increasing Increasing 98.
. Sl no Risk category Maximu m score Eligible score
Yes Yes Yes Yes Yes No Yes
1 1 1 1 1 0 1
A B C D E
Financial risk Business risk Management risk Activity risk Total
36 26 36 10
36 24 35 10
29 22 34 9
35 20 35 10
Risk adjust ed score 21 18 34 9 82
AB-4 AB-1 AB-1 AB-2 AB-2
Total risk adjusted score-82/100
Rating: AB-2 (Low).4 Availability of mtls adequate 5 Industry does not depend on nature 6 Products having established markets 7 Quality of the product is satisfactory 8 Availability of infrastructure 9 Substitutes/competitors not there 10 Not an assembler of unbranded iterms Score Obtained 9/10.
the study at Allahabad bank gave a vast learning experience and has helped to enhance knowledge.Management Appraisal. Financial Appraisal is done to find out whether the promoter is having the capacity to raise finance – both own equity and debt? What are the sources of margin? Will the business generate sufficient funds to service the debt and other stakeholders? Is the capital structure optimal? Economic Appraisal examines level of cost/ benefit and IRR (Internal Rate of Return). One of the important monitoring aspects in the credit portfolio is the periodic review of advance accounts. It includes phase-wise analysis which consists of 5 phases: Financial statement analysis. Technical Appraisal. The vital decision to deploy the Bank‟s resources should necessarily be based upon the thorough assessment and evaluation of the needs of the borrower. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial. The CRA models adopted by the bank take into account all factors. the acceptance of product in market. a proper periodical review of any account is inevitable. Financial. Moreover. The process of Credit Appraisal is multidimensional and includes.CHAPTER-7 SUMMARY AND CONCLUSION
The Credit Appraisal is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and monitoring with the objective of ensuring and maintaining the quality of lending and managing credit risk. technical as well as legal know-how. Usually. Working capital and its assessment techniques. which go into risk appraisal involved with a loan. That is why Credit Risk Assessment system is an essential ingredient of the Credit Appraisal exercise.E(PGDMB12/72)
. it can be said that other strong parameters also play an important role in analyzing the credit worthiness of the firm.It tries to find matters regarding demand in market. Each risk is rated separately. It also focuses on the multiple scope of the product. They are broadly categorized into the following. is extremely important. Financial Appraisal and Economic Appraisal. Credit risk assessment Documentation. it is seen that credit appraisal is evaluated on the lines of financial soundness. Commercial Appraisal. To ensure asset quality.
PRAMOD. Management Appraisal has received lot of attention these days as it is one of the long term factors affecting the business of the concern. We can also conclude that Allahabad bank has a sound credit appraisal system. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance assessment. proper risk assessment right at the beginning. It also focuses on the presence of other substitutes of the product in the market. after the illustrious case study. The credit appraisal for working capital finance system has been devised in a systematic way. But. Business. Technical Appraisal emphasizes on the technical feasibility of the venture and also finds out the possible economic life period of the present technology. For this. Commercial Appraisal focuses on the commercial viability of the project . Loan administration. Industrial and Management risks.
PRAMOD.in www.org.in www.rbi. 11413/CP & RMD/2011-12/ 05.REFERENCES
BOOKS: “PRACTICAL BANKING ADVANCES” BY HARDIKAR AND BEDI. “FINANCIAL MANAGEMENT” BY KHAN.google.
“BANK‟S DOMESTIC LENDING POLICY” Circular No.allahabadbank.com www.E(PGDMB12/72)
. “BANK‟S CREDIT RISK MANAGEMENT POLICY “ Circular No.wikipedia.