Study On Credit Appraisal Methods In State 

Bank Of India. 
 
State Bank of India.

State Bank of India​ (​SBI​) is an Indian multinational, ​public sector​ banking and ​financial
services​ company. It is a ​government-owned corporation​ with its headquarters in ​Mumbai,
Maharashtra​. On 1st April, 2017, State Bank of India, which is India's largest Bank merged with five
of its Associate Banks (State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of
Mysore, State Bank of Patiala and State Bank of Travancore) and Bharatiya Mahila Bank with itself.
This is the first ever large scale consolidation in the Indian Banking Industry. With the merger, State
Bank of India will enter the league of top 50 global banks with a balance sheet size of ₹33 trillion,
278,000 employees, 420 million customers, and more than 24,000 branches and 59,000 ATMs.
SBI's market share will increase to 22 percent from 17 per cent. It has 198 offices in 37 countries;
301 correspondents in 72 countries. The company is ranked 232nd on the ​Fortune Global 500l​ ist of
the world's biggest corporations as of 2016.
The bank traces its ancestry to ​British India​, through the ​Imperial Bank of India​, to the founding, in
1806, of the ​Bank of Calcutta​, making it the oldest commercial bank in the ​Indian subcontinent​. ​Bank
of Madras​ merged into the other two "presidency banks" in British India, ​Bank of Calcutta​ and ​Bank
of Bombay​, to form the ​Imperial Bank of India​, which in turn became the State Bank of India in
1955.​[8]​ ​Government of India​ owned the Imperial Bank of India in 1955, with ​Reserve Bank of
India​ (India's Central Bank) taking a 60% stake, and renamed it the State Bank of India. In 2008, the
government took over the stake held by the Reserve Bank of India.
State Bank of India is a banking behemoth and has 20% market share in deposits and loans among
Indian commercial banks.

Credit Appraisal.
Credit Appraisal is a process by which a lender appraises the technical feasibility, economic viability
and bankability including creditworthiness of the prospective borrower. Credit Appraisal process of a
customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time,
or not. Here bank has their own methodology to determine if the borrower is creditworthy or not. It is
determined in terms of the norms and standards set by the banks. Being a very crucial step in
sanctioning of a loan, the borrower needs to be very careful in planning his financing modes.
However, the borrower alone doesn’t have to do all the hard work. The banks need to be catious,
lest they end up increasing their risk exposure. All banks employ their own unique objective,
subjective, financial and non-financial techniques to evaluate the creditworthiness of their customer.
Components of Credit Appraisal Process

While assessing a customer, the bank needs to know the following information: Incomes of
applicants and co-applicants, age of applicants, educational qualifications, profession, experience,
additional sources of income, past loan record, family history, employer/business, security of tenure,
tax history, assets of applicants and their financing pattern, recurring liabilities, other present and
future liabilities and investments (if any). Out of these, the incomes of applicants are the most
important criteria to understand and calculate the credit worthiness of the applicants. As stated
earlier, the actual norms decided by banks differ greatly. Each has certain norms within which the
customer needs to fit in to be eligible for a loan. Based on these parameters, the maximum amount
of loan that the bank can sanction and the customer is eligible for is worked out. The broad tools to
determine eligibility remain the same for all banks. We can tabulate all the conditions under three
parameters.

Parameter :- Documents
Technical feasibility :- Field Investigation, Market value of asset
Economic viability :- LTV(Loan to Value), IIR

Bankability :- Past month bank statements, Asset and liabilities of the

applicant.

Besides the above said process, profile of the customer is studied properly. Their CIBIL (Credit
Information Bureau (India) Limited)score is checked.

Parameter components & How bank asses your creditworthiness through it.

Technical
What bank is looking for
Feasibility
Decent living standard with some tangibles like T.V. & fridge will
Living standard
provide assurance to bank regarding your residential status.
Presence of some undesirable elements like local goons or
Locality
controversial areas adversely affects your loan appraisal process.
Telephonic At least one response is need from person to establish the identity of
Verification the person from contact point of view.
Educational Not an essential barrier but essential to understand the complex
Qualification terms & conditions of bank loan.
An interesting reference point in the sense that they are one of major
Political Influence
category of loan defaulters.
 To establish the residential identity of person from human contact
References point of view & cross check of their loans.

The 3 methods used to arrive at Eligibility

● Installment to income ratio 

● Fixed obligation to income ratio 

● Loan to cost ratio 

 
 

Installment to income ratio

This ratio is generally expressed as a percentage. This percentage denotes the portion of the
customer's monthly installment on the home loan taken. Usually, banks use 33.33 percent to 40
percent ratio. This is because it is has been observed that under normal circumstances, a person
can pay an installment up to 33.33 to 40 per cent of his salary towards a loan.

Example :- ​If we consider the installment to income ratio equal to 33.33 per cent, and assume the
gross income to be Rs 30,000 per month, then as per the ratio, the applicant is eligible for a loan
with the maximum installment of Rs 10,000 per month.

 
 
Fixed obligation to income ratio
 
This ratio signifies the importance of the regularity in the repayment of previous loans. In this
calculation, the bank considers the installments of all other loans already availed of by the customer
and still due, including the home loan applied for. In other words, this ratio includes all the fixed
obligations that the borrower is supposed to pay regularly on a monthly basis to any bank. Statutory
deductions from salary like provident fund, professional tax and deductions for investment like
insurance premium, recurring deposit etc. are exempt from these fixed obligations.

Example :- ​Assume that monthly income of an applicant is Rs 30,000 and the applicant has a car
loan installment of Rs 4,000 per month, a TV loan installment of Rs 1,000 per month. In addition to
this his proposed housing loan installment is Rs 10,000 per month. Numerically, the ratio is equal to
Rs. 15,000 or 50 percent (i.e. 50 percent of the monthly income). If the bank has decided on the
standard of 40 per cent of ratio as the criteria, then the maximum total installments the person can
pay, as per the standard, would be Rs 12,000 per month. As he is already paying Rs 5,000 for the
car and TV, he only has Rs 7,000 left out. Hence, the customer would be given only that loan for
which the EMI would be equal to Rs 7,000, keeping in mind the repayment capacity of the applicant .

 
Loan to cost ratio
 
This ratio is used by banks to calculate the loan amount that an applicant is eligible to pay on the
basis of the total cost of the property. This ratio sets the upper limit or the maximum loan amount
that a person is eligible for, irrespective of the loan eligibility under any other criteria. The maximum
amount of loan the borrower is eligible to pay is pegged as equal to the cost or value of the property.
Even if the banks’ calculations of eligibility, according to the above mentioned two criterions, turns
out to be higher, the loan amount can't exceed the cost or value of the property. This ratio is set
equal to between 70 to 90 per cent of the registered value of the property.

Hence, while deciding on the maximum amount of loan a customer can be given, the banks use
these three parameters. These parameters help in computing loan eligibility, which is crucial in
calculating the creditworthiness of a customer. It also acts as a guide to determine the loan amount.

Bankability Parameters

Parameter Norms Checkpoints

To  check the average amount client 
6  months  bank  statements is  maintaining  in  the  account  is 
Bank Statements 
need to be furnished  sufficient  to  pay  the  installment 
amount or not. 
Business  continuityTwo  year  IT  returns  made To  enquire  primary  source  of 
proof  compulsory  income. 
To  check  the  general  attitude  of 
For  the  big  loan  amount credit 
Credit interview  customer  along  with efforts are put 
interview is necessary.   
in to understand their needs better. 
 Salaried  professionals  get  an 
Secured  source  of  income  give 
Profile of customer  edge  over  business  income
them a edge 
people. 
Asset  of  value  equal  to  or 
more  than  loan  amount  taken To  safeguard  bank  interest  against
Security 
has  to  be  put  as  pledge  or any future default. 
collateral. 
To  be  on  the  name  or  blood To  establish  the  ownership claim of
Ownership title 
relative of applicant.  the loan applicant. 
Bank  tool  to  check  any  default 
To  check  the  credit  history  of 
CIBIL Report  incidence  in  loaning  history  of 
the bank applicant. 
applicant. 

These are the parameters which help banks in deciding your creditworthiness & help them in
granting the loan to the seekers.