Review Of literature:-

1. CREDIT RISK MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF

SELECTED COMMERCIAL BANKS IN KENYA

John Gaturo Chege, Dominic Ngaba

The study is about to fill the research gap by focusing on credit risk management practices and
commercial banks financial performance in Kenya. The specific objectives of the study are to
determine the effect of client appraisal, credit terms and conditions, credit collection policies and
credit control practices commercial banks’ financial performance in Kenya. The research
utilized descriptive research design and the sampling design was purposive sampling design. he
study adopted descriptive research design. Descriptive studies provide description of the general
characteristics of the study population and also give description of the characteristics of the
research variables. The study recommends that the management of commercial banks should
ensure and enhance effective terms and conditions regarding the lending habit of banks.

2. Growth and Development of Regional Rural Banks in India: An Overview

Tanay kumar pal and uday krishna mittra.

RRBs were established in India in the year 1975 with the purpose of taking banking services to
the doorsteps of rural people. Objectives of the study is to examine the growth and development
of RRBs in India, To assess the growth of deposit mobilisation of RRBs, To review loan and
advances granted by RRBs. , To find out the profit position of RRBs in India, To conclude by
stating the nature of overall performance of RRBs. The research design is exploratory as well as
descriptive in nature.

3.Effect of Credit Management Systems on the Loan Recovery Efforts of Microfinance Banks in
Akwa Ibom State, Nigeria

Dr Eno G. Ukpong Ukpe Essien Amos Essien, Iniabasi Thomas

This study set out to ascertain the effect of credit management techniques on loan recovery
efforts by microfinance banks. Objectives of the study To determine the effect of credit

1|Page
appraisal on loan recovery efforts of microfinance banks in Akwa Ibom State, To determine the
effect of credit risk control on loan recovery efforts of microfinance banks in Akwa Ibom State,
To determine the effect of collection policy on loan recovery efforts of microfinance banks in
Akwa Ibom State A descriptive survey research design was employed for the study. The
population is 85 operations and marketers in microfinance banks in Akwa Ibom State that have
been in existence from 2014 to 2017. The sample size is 60 and the stratified random sampling
technique was employed. The data generated was analysed using regression analysis to answer
the research questions and to test the null hypotheses at .05 alpha level. It was concluded that
Credit appraisal, credit risk control and collection policy were found to be very important in
influencing loan recovery. It was recommended among others that Microfinance banks should
ensure that credit appraisal is carried out by the technical people who are experienced and
competent credit officer in order to stem out those with intolerable credit risk at the earliest
possible opportunity.

4.Credit Risk Management Practices of Commercial Banks in Kenya

Dr. Francis Ofunya Afande

The purpose of the study was to investigate the current practices of credit risk management by
commercial banks in Kenya. The study was guided by the following specific objectives: to
evaluate the extent to which commercial banks use credit risk management practices and
techniques in dealing with different types of risk; to assess the factors that influence
effectiveness of Credit Risk Management practices used by commercial banks; and to examine
the internal performance measures of bank lending used by commercial banks. Research
methodology To undertake the study, a descriptive research design was used. The population
consisted of all the commercial banks in Kenya. The sampling frame was obtained from the
Central Bank of Kenya and included 45 elements. Stratified random sampling technique was
used to select 33 respondents. A semistructured questionnaire was used to collect the data from
the banks. : The study discloses that commercial banks in Kenya make use of credit risk
management practices that include; thorough loan appraisal, asking for collateral and checking
the credit history of the borrowers

2|Page
5.Credit Scoring Model for Auto Ancillary Sector.

Srinivas Gumparthi, Dr.V.Manickavasagam and M.Ramesh

This study examines credit scoring for leasing that how the model of leasing is different from
banking lending model. The objective of this study is to provide a robust credit scoring model
which is free from subjectivity and has got empirical proof for decision making. In this study we
made an attempt on design and develop a credit scoring model which is specific for Indian Auto
Ancillary Sector. The research methodology use here is descriptive. The data is been used is
secondary data for the research. The sample size taken over here is 70 and amongst that 50 are
considered for building and rest 20 is used for validating the model. The sampling technique
used is judgmental sampling for validating the model. Conclusion of the study is that the
growing number of the insolvencies of the business calls for the reliable procedures to minimize
the risk the new model can be fine tuned further by including new factors which can be
supporting creditworthiness of the lease applicants.

6.An Overview of Credit Appraisal System with special reference to Micro Small and Medium
Enterprises (MSME)

Ms. Sugandha Sharma

The Credit Appraisal is a finished exercise which begins from the time a potential borrower
strolls into the branch and closes in acknowledge conveyance and observing for the goal of
confirming and keeping up the nature of loaning and overseeing credit chance.
The Objective of this study is 1.To study the meaning and importance of Credit appraisal 2. To
study entire loan system 3. To study the procedure of obtaining loan from Bank. 4. To study the
market conditions conducive for credit appraisal process 5. To study and understand the terms
and conditions of sanctions and advances 6. To study the credit appraisal process 7. To know on
what criteria the bank Appraise the loan to the business. 8. To study the procedure of credit
appraisal process in MSME.. The bank has throughout the years planned and embraced the Best
Practices Code. This basically speaks to the bank's way of thinking towards successful
Corporate Governance.. Investigating loaning methodologies, credit evaluation, chance
examination and loaning choices, while remembering the wide system of corporate financial

3|Page
 procedure, this book accentuates that loaning is never again a movement limited to the benefits
side of the asset report. The conclusion of this research is that he credit appraisal passes through
various stages and evaluations before it is appraised he credit appraisal process carried out at
MSME has good parameters to appraise.

7.CREDIT APPRAISAL SYSTEM

Dr. R. Jayanthi
The study of this research is that the credit appraisal system is how feasible form the lender
point of view and also the process of the appraising the credit worthiness of a loan applicant the
objective of this research are:-1)Importance of credit appraisal process
2) Components of Credit Appraisal Process
3) 7C’s Credit Appraisal Model
4) Merits of Credit Appraisal System
5) Demerits of Credit Appraisal System
The research methodology used for gathering the data is secondary data which are available
from books and published reports. The conclusion of this research is that credit appraisal is been
checked before providing loans . the credit appraisal is based on the financial , business and
industry performance. The requirement for credit appraisal is ever increasing

Objective Of the Study :-

1. To Study The Process Of Documentation For Different Types Of Loans

2. To Understand Risk Of Loan Products Of Self Employed People
3. To Understand Rewards Of Loan Products Of Self Employed People
4. To Check The Financial, Banking And Eligibility Of Client.
5. To Know About The CIBILE Report Status Of The Client

4|Page
Research Methodology and Design:-

This study is an exploratory and Descriptive research as the aim of the study was to gain a
deeper understanding of the Credit Appraisal methods in banks.

Methodology used to collect data:-

The method used for the research is biased on secondary data like research papers , bank web
sites, journals etc.

Research design:-

Nature of research:- Exploratory and descriptive.

Data collection Sources:- Secondary dat.

5|Page
BANKING INDUSTRY OVERVIEW:-

Banking in India has its Starting point as convey as the Vedic period. It is believed that the
progress from money lending to banking must have occurred even before Manu, the great Hindu
jurist, who has devoted a section of his work to deposits and advances and laid down rules
relating to the interest. During the mogal period, the indigenous bankers played a very important
role in lending money and financing foreign trade and commerce. During the days of East India
Company, it was to turn of the agency houses top carry on the banking business. The general
bank of India was the first joint stock bank to be set up in the year 1786.The others which
followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported
to have continued till 1906, while the other two failed in the meantime. In the first half of the
19th Century the East India Company established three banks; The Bank of Bengal in 1809, The
Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also known as
presidency banks and were independent units and functioned well. These three banks were
amalgamated in 1920 and The Imperial Bank of India was established on the 27th Jan 1921,
with the passing of the SBI Act in 1955, the undertaking of The Imperial Bank of India was
taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was
created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement, a number of
banks with Indian Management were started in the country are Punjab National Bank Ltd, Bank
of India Ltd, Canara Bank Ltd, Indian Bank Ltd, Bank of Baroda Ltd, Central Bank of India Ltd.
In 19th July1969, 14 Banks which are major in the country were nationalized and on 15 th April
1980 6 more commercial private banks were also taken over by the government. The Indian
Banking industry, which is governed by the Banking Regulation Act of India 1949, can be
broadly classified into two major categories, non-scheduled banks and scheduled banks.

The initial phase of financial reforms resulted in the nationalization of 14 major banks in 1969
and resulted in a shift from class banking to mass banking. This in turn resulted in the significant
growth in the geographical coverage of banks. Each bank needed to reserve a min level of their
advance portfolio to parts recognized as "need divisions" the assembling area additionally
developed during the 1970's in secured conditions and the financial segment was a basic source.
The following wave of reforms saw the nationalization of six more commercial banks in 1980’s
since then the number of scheduled commercial banks increased four- fold and the number of
bank branches increased to eight fold.

6|Page
After the second period of financial sector reforms and liberalization of the sector in the early
nineties. The PSB’s found it extremely hard to complete the new private sector banks and the
foreign banks. The new private sector first made their appearance after the guidelines permitting
them were issued in January 1993.

The Indian Banking System:

Banking in our country is already witnessing the changes as the banking sector seeks new
technology and applications. The best part is that the advantages are starting to reach the masses.
Earlier this domain was the preserve of very few organizations. Foreign banks with heavy
investments in technology started giving some “Out of the world” customer services. But, such
services were available only to select few- the very large account holders. When it came to
liberalization and with it a multitude of private banks, a large number of segment of the urban
population now requires minimal time and space for its banking needs.

Automated teller machines or popularly known as ATM are the three letters that have changed
the idea of banking like nothing before. In spite of tellers handling your own cash, today there
are efficient machines that don’t talk but just dispense cash. Under the Reserve Bank of India
Act 1934, banks are classified as scheduled and non- scheduled banks. The scheduled banks are
those, which are entered in the Second Schedule of RBI Act, 1934. Such banks are those, which
have paid- up capital and reserves of an average value of not less then Rs.5 lacs and which
satisfy RBI that their affairs are carried out in the interest of their depositors. All commercial
banks Indian and Foreign, regional rural banks and state co-operative banks are Scheduled
banks. Non Scheduled banks are those, which have not been included in the Second Schedule of
the RBI Act, 1934.

7|Page
The organized banking system in India can be broadly classified into three categories: (i)
Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve Bank of
India is the supreme monetary and banking authority in the country and has the responsibility to
control the banking system in the country. It keeps the reserves of all commercial banks and
hence is known as the “Reserve Bank”.

8|Page
 Introduction

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and
well-regulated. The financial and economic conditions in the country are far superior to any
other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are
generally resilient and have withstood the global downturn well.

Indian banking industry has recently witnessed the roll out of innovative banking models like
payments and small finance banks. RBI’s new measures may go a long way in helping the
restructuring of the domestic banking industry.
The digital payments system in India has evolved the most among 25 countries with India’s
Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments
Innovation Index (FPII).

Market Size

Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign
banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative
banks. In FY07-18, total lending increased at a CAGR of 10.94 per cent and total deposits
increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the
upcoming countries. It has been increased to US$ 281 billion on December 2017 from US$ 181
billion on December 2014.

Investments/developments

Key investments and developments in Indian banking industry are as follows:

 On September 2018, the Government of India launched India Post Payments Bank
and has opened branches across 650 districts to achieve the objective of financial inclusion.

9|Page
 Overall value of acquisition and merger during the year 2017 in NBFC diversified
financial services and banking was US$ 2,564 billion, US$ 103 million and US$ 79 million
respectively.
 The largest merger deal of FY17 was the microfinance segment of IndusInd Bank
Limited and Bharat Financial Inclusion Limited of US$ 2.4 billion.
 In May 2018, total equity funding's of microfinance sector grew at the rate of 39.88 to
Rs 96.31 billion (Rs 4.49 billion) in 2017-18 from Rs 68.85 billion (US$ 1.03 billion).

Government Initiatives

 September 2018 the Indian Government has made the Pradhan Mantri Jan Dhan
Yojana (PMJDY) scheme as open ended scheme and has also added more incentives value.

 Indian Government has planned to introduce Rs 42,000 crore (US$ 5.99 billion) in
the public sector banks by March 2019 and will infuse the next tranche of recapitalisation by
mid-December 2018.

Achievements

The achievement of the government are as follows for the year 2017-2018:

 To develop infrastructure in villages, 204,000 Point of Sale terminals have been

passed from the Financial Inclusion Fund by National Bank for Agriculture & Rural
Development.
 Somewhere around in December 2016 and March 2017, a major drive was initiated to
boost the use of debit cards, resulting in an increase in the number of Point of Sale terminals by
an adding up of 1.25 million by 2017 end from 1.52 million as on November 30, 2016.
 The total number of bank accounts were opened under Pradhan Mantri Jan Dhan
Yojana (PMJDY) which reached to 333.8 million as on November 28, 2018.

10 | P a g e
Indian Banking Structure:

Indian banking consist of Reserve Bank of India as its important Regulatory Authority. It is a
mix of the Public and Private sector and also of Co-operative banks and foreign banks. The
private sector banks are again split into old banks and new banks.

IMPORTANCE OF BANKING SECTOR IN A GROWING ECONOMY:

In the recent times when the service industry is attaining greater importance compared to
manufacturing industry, banking has developed as a prime part of giving financial services to
growing needs of the economy. Banking industry has undergone a paradigm shift from
providing ordinary banking services in the past to providing such complicated and crucial
services like, merchant banking, housing finance, bill discounting etc. This sector has become
more active with the entry of newly players are private and foreign banks, which has also
evolved as a prime builder of the economy by understanding the necessities of the same and
encouraging the advance way of giving loans, providing infrastructure facilities and financing
activities for the promotion of entrepreneurs and other business establishments. For a fast
developing economy like ours, presence of a sound financial system to mobilize and allocate
savings of the public towards productive activities is necessary. Commercial banks play a
crucial role in this regard.

The Banking sector in recent years has incorporated new products in their businesses, which are
helpful for growth. The banks have started to provide fee-based services like, treasury
operations, managing derivatives, options and futures, acting as bankers to the industry during
the public offering, providing consultancy services, acting as an intermediary between two-
business entities etc. At the same time, the banks are reaching out to other end of customer
requirements like, insurance premium payment, tax payment etc. It has changed itself from
transaction type of banking into relationship banking, where you find friendly and fast service
suited to your needs. This is possible with understanding the customer needs their value to the

11 | P a g e
bank, etc. This is possible with the help of well organized staff, computer based network for
speedy transactions, products like credit card, debit card, health card, ATM etc. These are the
present pattern of services. The customers at present request for convenience of banking
transactions, like 24 hours banking, where they want to use the services whenever there is a
want. The relationship banking plays a major and important role in growth, because the
customers now have enough number of opportunities, and they pick as per their satisfaction of
responses and recognition they get. So the banks need to play cautiously, else they may miss out
the spot in the market due to rivalry, where slightest of opportunities are captured quickly.

Another significant role played by the banks is in transnational business, transactions and
networking. Many leading Indian banks have spread out their network to other countries, which
help in currency transfer and earn exchange over it. These banks play a major role in
commercial import and export business, between gatherings of two nations. This foreign
presence also helps in bringing in the international standards of operations and ideas. The
liberalization policy of 1991 has allowed many foreign banks to enter the Indian market and
establish their business. This has helped large amount of foreign capital inflow & increase our
Foreign exchange reserve.

Another emerging change happening all over the banking industry is consolidation through
mergers and acquisitions. This helps the banks in strengthening their empire and expanding their
network of business in terms of volume and effectiveness.

12 | P a g e
Introduction to Credit Appraisal

What is credit appraisal? The word ‘credit appraisal’ earns a lot of meaning when you talk of
personal loans. It looks a complicated word, but it is assessing a particular loan application in a
thorough manner, to check or measure your loan repayment capacity. The moneylender or the
bank does credit appraisal to check if you have the capacity to repay the loan.

Credit Appraisal is the 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 a
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 the 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 cautious, 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 customers.

Credit appraisal assesses two major factors. Ability and willingness to repay the loan.

The bank checks:

Your past credit history. The bank goes through credit information report (CIR) and the credit
score. CIBIL gives you and other borrowers a score between 300 to 900. A CIBIL score of 700
and above is good and gets loans easily sanctioned. The bank checks if you are salaried or a
businessman. It then goes through the various conditions/criteria which you need to meet, based
on the respective category. Understand a customer through physical interactions (body

13 | P a g e
 language) and gauge his intentions and understand the business model. Assess the financials of
customers. This is both the past and present. Banks go through financials of the business and
spending pattern of individuals also gauging source of income. The bank does the job of a
policeman. It takes a close look at facial expressions of the customer at the time of questioning.
All details, financials might look up to the mark. But, if there is strain in your voice while
talking to the banker, he suspects something is amiss. Banks check conflict of interest before
lending. Loans must never be given out of pity as the customer might not be able to repay the
loans.

MERITS AND DEMERITS OF CREDIT APPRAISAL SYSTEM:

1. MERITS:-
o Competent management.
o Distinctive edge – skills, costs etc.
o Brand image – strong customer base.
o Low attrition rate.
o Sufficient financial resources.
o Reduces risk involved in the loans provided for a project.
o Increase confidence among the corporate bankers and improved sales decision.
o Reduces the possibility of financial loss and Non-performing Assets.
o Proper Assessment is done with different options.

2. DEMERITS:-
o Lack of management talent.
o Deteriorating competitive position.
o Newcomer with unproven record.
o Short of financial resources.

14 | P a g e
o Technology obsolescence.

OPPORTUNITIES AND THREATS OF CREDIT APPRAISAL SYSTEM:

1. Opportunities:-
o Quick growth of market.
o Entering new market segments.
o Expanding product line.
o Backward and Forward integration.

2. Threats:-
o Growing competitive pressure.
o Growing bargaining power of providers.
o Changing Purchasers needs and tastes.
o Adverse government agreements/policies.

PROCESS OF CREDIT APPRAISAL.

Banks check:

1. Your Total Income.

2. Age.
3. Repayment capability.
4. Work experience and job stability.
5. Loan EMIs paid and currently being paid.
6. Nature of employment (Type of job you are in).

15 | P a g e
7. Amount you spend each month.
8. Future liabilities.
9. Taxes you are paying.
10. Assets you/business owns.
11. Capital structure of the business(Debt or Equity).

Submission of Documents for Proving Your Bankability:-

Bankability is a significant angle that is a part of credit appraisal. Bankability refers to what will
be acknowledged by a specific bank. A lender will cross check if a loan is given to a specific
person will result in future cash flow and profitability.

When you apply for a personal loan or any other loan from a bank or an NBFC, you will be
required to compulsorily take some certain government-approved reports, documents and other
different documents in order to prove your age, income etc. These standards will vary from
moneylender to moneylender. While applying for your loan, your moneylender will indicate the
standards and you will be required to follow them so that they can decide if the loan can be
approved or not. Let us take a look at some of the common standards that are set by
moneylenders for the credit appraisal process:

1. Income Proofs:- You will be required to submit certain documents in order to prove your
monthly income which include:
i. Recent banking statements of 3 to 6 months.
ii. Recent salary slips.
iii. latest Income Tax Return (for self-employed people).
iv. Audited financials for the last 2 years.

2. Address Proofs:- In order to prove your residential address, you will have to provide any one
of the following documents:
i. Leave and license agreement.
ii. Latest utility bills or electricity bills
iii. Aadhaar card.

16 | P a g e
iv. Driving license.
v. Passport.

3. Identity Proofs:- You will be required to submit any one of the following documents to prove
your identity and date of birth are:-
i. PAN card
ii. Aadhaar
iii. Driving license
iv. Voter ID
v. Passport-size photographs

4. Employment Proofs:- You will be required to give certain documents regarding your
employer or your own company (if you are self-employed) to prove your employment
information:
i. Letter provided by your employer.
ii. Proof of office address.
iii. Offer letter or appointment letter provided by your employer.
iv. Present Employment certificate from your employer.
v. Experience Certificate or relieving letter from your previous employers to show your overall
work experience

5. Creditworthiness Proof:- You can show your credit score to your new moneylender. This
should be done by submitting your CIBIL report. When you are submitting your CIBIL report
you should be aware about the details of your credit score. Make it ensure that your credit score
is 750 and above to prove your creditworthiness.

With the help of your CIBIL report your moneylender will check if you have been prompt while
clearing your credit card bills and while making your repayments. Your moneylender will also
be able to see if you have made any default in any loan during your entire credit history and if
you have made many enquiries. So you need to be very particular about how your credit report
appears.

17 | P a g e
6. Investment Proof: If there is any kind of investment made you will be required to give
proofs. This should be possible by giving documents of your investments made such as mutual
funds, gold , fixed deposits, fixed assets, shares, etc.

At the point when the moneylender takes a look at your employment proof, age proof, and
income proof. So by looking at this moneylender gets an gist about your overall profile and the
bank can decide whether you will be able to repay your loan promptly without any financial
problems.

Credit Appraisal for Project Financing for Organisations:- If a lender is approached by a

company for project financing or a loan then the lender will need to consider technical, market ,
managerial , financial, and commercial aspects of the organisation.

i. Under credit appraisal to assess financial aspects the bank should check the organisations
expenses, costs and estimated revenues so that it can be understood that the company will be
able to repay the loan without any financial trouble.
ii. To evaluate the technical aspects of a company the bank will have to assess the nature of the
business and the sector or industry of the borrower. The moneylender should observe the
companies capital, labour, raw materials, selling plans , transportation, etc.
iii. To assess the market of the borrower the bank should evaluate its supply and demand. If the
supply-demand difference is high, then it is good news for the lender. This shows that the
company will enjoy good sales and hence can repay the loan efficiently.
iv. The bank also needs to evaluate the managerial aspects of an organisation before providing
loan to them. The bank should understand the plans, objectives and commitment of the company
to the specific project. The organisations management style and method of handling the
subordinates should be seen by the lender.

Banks will evaluate both financial and non-financial point in order to decide the borrowers
reliability while conducting the credit appraisal process.

The strength of the credit appraisal will rely on the loan quantum and the purpose of the loan.
On these bases the appraisal process can be simple or complex for both individuals and entities.

18 | P a g e
Applicability of GST rate of 18% will be applicable on products and banking services from 01
July, 2017.

Lenders check the fixed obligation to income ratio:

This gives an idea to the banks that how much debt you have and how regular you are with your
repayments. Fixed obligation to income ratio gives the fixed obligations a bank has to meet each
month. Banks disapprove on customers having loan EMIs of 50% or more versus monthly
income. Banks expects that you require 50% at least of your income for living expenses. If your
monthly salary goes more than 50% in paying loan EMIs than you could face problems with
repayments.

Example:- Let’s Calculate Loan Eligibility Based on fixed obligation to income ratio.

You have an income of Rs 60,000 a month. You have taken a car loan where you pay EMIs of
Rs 9,500 a month. You also have taken a personal loan where EMIs comes to Rs 6,500 a month.
Banks thinks that if a loan EMIs are within 50% of monthly income, you can easily repay loans.

Salary = Rs 60,000.

Car loan = Rs 9,500

Personal loan = Rs 6,500

Total loan EMIs = Rs 16,000.

Banks are happy to give you a loan as long as loan EMIs are within Rs 14,000. (This is 50% of
Rs 60,000 – Rs 16,000).

19 | P a g e
FOIR = Sum total of loan EMIs / Monthly Income.

FOIR = 16,000 / 60,000 = 27%.

Instalment to Income Ratio: This is loan EMIs to income you earn.

Loan to Cost Ratio: This helps to measure how much of a loan you must be given.

Personal
Based on Requirement
Loan

Home Loan based on 80-90% of the

Home Loan cost of the property

70-80% of the cost of the car

Car Loan

20 | P a g e
 Credit Appraisal Process in Bank Projects:

dentification of the customer: Banks check identity proof like

A. Passport and PAN.

B. Employment proof like appointment letter/experience letter or office address proof.
C. CIBIL score of 700 and above.
D. Investment proof required for collateral like

Mutual
Lic Policy Fund
PPF

Shares FD

21 | P a g e
 The bank wants to know who you are, where you live, how much you earn and your reputation
in society. Banks want to know the ability and willingness to repay the loan.

Banks Want to Understand Your Business:

The bank wants to know the business model, before authorizing credit. They enquire on the idea
of business the industry you work and peers in the business, and do a research on the
performance of the business and the sector.

Banks Check Credit Requirements:

Banks need an accurate gauge of funds you need to keep running the business. If they sanction
too much loan amount, the businessman will utilize the money for other purposes. Too low
amount of loan means money would not be sufficing to run the business.

Banks Slot You in the Right Scheme:

Banks slot you in a plan based on the line of business. This could be a sole plan for,
professionals, travel agents , traders ,car dealers and so on. Banks check, rate of interest,
eligibility, margins, collateral before slotting you in a plan.

Loan Application:

Applicant need to fill the loan application in the given format. The bank collects required
information on applicant through loan application.

KYC: Know Your Customer.

1. PAN
2. Address proof
3. Identity proof
4. Business proof

CIBIL:

22 | P a g e
 Banks go through the credit information report (CIR) and the CIBIL score. There are two types
of credit reports.

Personal
Commercial

Banks check for settlements, defaults, dues and written off amounts.

RBI Defaulters List:

The list of the defaulter can be taken from CIBIL website. Partners, guarantors promoters,
proprietors , borrowers must not be on the list.

CERSAI:

To find out if the property is mortgaged or not to another lender Banks check the CERSAI
website.

Components of Credit Appraisal Process:

While evaluating a customer, the bank has to know the following information:

1. Incomes of applicants and co-applicants

2. Age of applicants
3. Educational qualifications
4. profession.
5. Experience.
6. Additional sources of income.
7. Past loan record.

23 | P a g e
8. Family history.
9. Employer/business.
10. Security of tenure.
11. Tax history.
12. Assets of applicants and their financing pattern.
13. Recurring liabilities.
14. Other present.
15. Future liabilities and investments (if any).

Out of these the incomes of applicants are the most important criteria to calculate and
understand the credit value of the applicants. As stated before the actual standards fixed by
banks differ greatly. Each has certain standards within which the customer should be eligible
for loan. Based on these parameters the extreme amount of loan that the bank can endorse and
the customer is qualified. The wide tools to decide the qualification remain the same for all
banks. We can classify each one of the conditions under three parameters which are as follows.

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

Other than the above said process, profile of the customer are been examined properly.
Customers CIBIL (Credit Information Bureau (India) Limited) score is checked. Parameter
segments and how do bank asses customers reliability through it.

24 | P a g e
How Is Credit Analysis Done In Banks:
1.Technical Feasibility:
Technical Feasibility
1.Living standard
2.Locality
3.Telephonic Verification
4.Educational Qualification
5.Political Influence
6.References
Eligibility Of Credit Appraisal:
There are 3 Methods to Achieve are as follows:
What bank is looking for
Decent living standard with some tangibles like Television and
fridge will give confirmation to bank respect to customers
residential status.
Presence of some unfortunate elements like local goons or
disputable areas adversely affects customers loan appraisal
process.
At least one response is need from individual to build up the
identity of the individual from contact perspective.
Not an necessary barrier but important to understand the
complex terms and conditions of bank loan.
An interesting fact point is the significant that they are one of
big category of loan defaulters.
To set up the residential identity of individual from human
contact perspective and cross check of their loans.
25 | P a g e
 Installment to
income ratio

Fixed
obligation to
income ratio

Loan to
cost ratio

Instalment to Income Ratio:

This ratio is commonly expressed as a percentage. This percentage indicates the portion of the
customers monthly payment instalment on the home loan taken by the customer. More often
banks use 33.33% to 40 % of ratio. This is because it has been seen that under ordinary
conditions, an individual can pay an instalment up to 33.33% to 40 % of his salary towards a
loan.

For Example: If we consider the instalment to income ratio equal to 33.33 % and assume that the
gross income of Rs 30,000 per month. As per the ratio, the maximum instalment the customer is
qualifying for a loan amount of Rs 10,000 per month.

Fixed obligation to income ratio:

26 | P a g e
This ratio implies the significance of the regularity in the repayment of past loans. In this count
the bank considers the instalments of all alternative loans already availed of by the customer and
still due which includes home loan applied for. If we say in other words this ratio involves all
the other fixed obligations that the borrower is supposed to pay on a monthly basis to any bank.
Statutory deductions from salary like PF, Professional tax and other deductions for investment
like recurring deposit, insurance premium etc. are exempt from these fixed obligations.

For Example: Assume that a salary of an customer is Rs 30,000 and the customer has Rs 4,000
per month instalment payment of a car loan and instalment of Rs 1,000 per month for a TV loan.
In addition the customer has instalment of Rs 10,000 per month towards his housing loan.
Adding up all the values the ratio comes up to Rs. 15,000 or 50 % which is the of his monthly
income. If the bank decides on the standard of 40 % of ratio as the criteria then the most extreme
total instalments the customer can pay according to the standard would be Rs 12,000 per month.
As customer is paying Rs 5,000 towards the car and TV loan and customer is left only with Rs
7,000. So the customer would be given loan for which the EMI would be equivalent to Rs 7,000
keeping in consideration that the repayment capacity of the customer.

Loan to Cost Ratio:

This ratio is used by banks to compute the loan amount that an customer is qualified to pay on
the basis of the total cost of the property. This ratio sets the possible upper limit or the maximal
loan amount that a customer is eligible for irrespective of the loan eligibility under any other
criteria. The maximal amount of loan the borrower is qualified to pay is pegged as equivalent to
the expense or estimation of the property. Whether the banks calculations of qualification as per
the previously mentioned two criterions end up being higher the loan amount cannot exceed the
expense or estimation of the property. This ratio is set equivalent to between 70% to 90% of the
value of the property is registered.

While deciding on the maximal amount of loan can be given to a customer. The banks takes
these three parameters which helps in calculating loan eligibility, which in calculating the

27 | P a g e
creditworthiness which is crucial in calculation of a customer. Likewise it acts as a guide to
decide the loan amount.

2.Economic Viability:

1. Instalment to income ratio:- 1. Instalment to income ratio for salaried

people would be capped at 60% of Net income
in general.

2. In cases IIR to Pension Income it would be

restricted to 40%
2. Fixed obligation to income ratio:- 1. Fixed obligation to income ratio kept at 55%.

3. Loan to value ratio:- 1. Loan to value ratio amount to 80%

Bankability Parameters:

Parameter Norms Checkpoints

1. Bank Statements:- Need bank statements of last 6To check the average amount
months. customer is maintaining in the
account is sufficient to repay
the EMIs amount or not.

28 | P a g e
 2. Business continuity proof Made compulsory to give 2 yearTo enquire essential source of
IT returns. income.

3. Credit interview Credit interview is necessaryTo understand customer needs

4. Profile of customer
5. Security
6. Ownership title
7. CIBIL Report
for maximal loan amount. better check the general attitude
of customer.
Salaried professionals get anVerify the Secured source of
edge over business incomeincome give them a edge.
individuals.
Asset of value are equivalent toTo secure the bank interest
or more than loan amount takenagainst any future default.
must be put as pledge or
collateral.
To be on the name or bloodTo establish the proprietorship
relative of customer guarantee claim of the loan
customer.
To verify the credit past of theBank checks any default
bank applicant. occurrence in loaning history of
customer.

Some are the parameters which can help banks in determining customers creditworthiness and
help them in availing the loan to the seekers.

CREDIT EVALUATION AND APPROVAL:

Credit evaluation and approval is the procedure a business or an individual must experience to
end up qualified for a loan or to pay for services and goods over an extended period. It also
refers to the procedure of businesses or lenders embrace when assessing a request for credit.
Granting of credit approval relies upon the willingness of the creditor to lend money in the
present economy and that equivalent lenders appraisal of the ability and willingness of the
borrower to return the money or pay for the goods obtained, plus interest, in a timely fashion.
Small businesses must take credit approval to obtain funds from moneylenders, vendors , and
investors and also grant credit approval to their customers.

1. CREDIT WORTHINESS EVALUATION:

29 | P a g e
 In general the allowing of credit relies upon the certainty of the moneylender has in the
borrowers credit value. Credit values which envelops the borrowers capacity and willingness to
pay is one of many factors defining the lenders credit policies. Creditors and moneylenders uses
various number of financial devices to assess the credit values of a potential borrower. At the
point when both borrower and moneylender are businesses where much part of the assessment
depends upon analysing the borrowers, cash flow statements, debt structure, balance sheet,
management performance, inventory turnover rates and also market conditions. Creditors
support borrowers who create net earnings in excess of debt obligations and any possibilities
that may emerge. Following are some of the factors of lenders thinks about when assessing an
individual or business that is looking for credit:

Size of debt burden. Creditors look for borrowers whose earning power exceeds the request of
the instalment schedule. The size of the debt is fundamentally restricted by the resources which
are available. Creditors like to keep a safe ratio of debt to capital.

Loan size.  Creditors prefer towards huge loans because the administrative costs decline
proportionately to the size of the loan. Practical limitations and Legal perceive the need to
spread the risk either by making a bigger number of loans, or by having different moneylenders
participate. Participating lenders must have enough resources to engage large loan applications.
What more the borrower must have the ability to ingest a big sum of money.

Frequency of borrowing:- Customers who are frequent borrowers build up a reputation which

directly impacts on their capacity to secure debt at favourable terms.

Length of commitment:- Lenders accept extra risk as the time skyline increments. To cover a
portion of the risk, lenders charge higher interest rates for longer term loans.

2. OBTAINING CREDIT APPROVAL FROM LENDERS:

There are so many small business must depends upon loans or different forms of credit to fund
day-to-day purchases or long-term investments in facilities and equipment. Credit is one of the
establishments of the American economy and small businesses often must obtain credit in order
to compete. To set up certifications for any credit approval process from short term loans to
equity funding. A small business should have a business plan and along with it should all so
have a good credit history. The build-up interest rate of the loan the company must be able to

30 | P a g e
 show that it can repay the loan amount. It should also demonstrate that the viewpoint for its
kind of business supports planned future projects and the purpose for borrowing.

In applying for credit entrepreneurs should understand that potential creditors whether vendors,
banks, or investors will try to assess both their capacity and willingness to pay the amount owed.
This implies that the creditor will analyse

the character of the borrower as well as his / her capacity to run a fruitful business. Creditors
will also like to take gist at the size of the loan required the company purpose in obtaining funds
and the way or method of repayment. Ideally moneylenders assessing a small business for credit
approval like to see up-to-date record books and business records. A big number of customer
base a past of brief payment of obligations and adequate insurance coverage.

3. GRANTING CREDIT APPROVAL TO CUSTO MERS:

The credit approval is additionally something that a small business is probably going to
accommodate for their customers, regardless of whether those customers are basically individual
consumers or different businesses. The procedure by which a small business gives credit to
individuals people is represented by a series of laws regulated by the Federal Trade Commission
that assures non-discrimination and other benefits. These laws involves the

1. Proper Credit Reporting Act.

2. Proper Debt Collection Practices Act.
3. Equivalent Credit Opportunity Act.
4. Honesty in Lending Act.

31 | P a g e
The experts person suggest that small businesses develop credit policies that are reliable with
overall company objectives. In different words company approach toward expanding credit
should be as moderate as its attitude toward other business activities. While giving credit to
customers can offer small business some number of benefits and also is necessary requirement
for several types of business which also includes risks. There are some disadvantages of
furnishing customers with credit which involves increasing the expenses of activities and tying
up capital that could be utilized somewhere else. There is also chance of incurring risk which
leads to losses because of non-payment. however granting credit will provide the advantage of
making a strong base of standard customers. Additionally credit applications give necessary
information regarding these customers that may be utilized in mailing lists and promotional
activities. Within the retail trade what is more credit purchasers have proved to be less involved
with costs and inclined to buy lot of goods at just the once.

Credit Appraisal:

Effectiveness of Credit Management within the bank is highlighted by the standard of its loan
portfolio. each Bank is endeavour arduous to confirm that its credit portfolio is healthy which
Non playing Assets are unbroken at lowest doable level, as each of those factors have direct
impact on its profit. within the gift situation economical project appraisal has assumed an
excellent importance because it will check and stop induction of weak accounts to our loan
portfolio. All possible steps got to be taken to strengthen pre sanction appraisal as continually
“Prevention is best than Cure”. With the gap from the economy fast changes are going down
within the technology and money sector exposing banks to bigger risks, which may be generally
classified as under:

Risks Of Industry Government laws and policies, availableness of

infrastructure facilities. Rating Industry,
Scenario Of Industry and overlook, Up
gradation Of Technology, availableness of
inputs, obsolescence product etc.
Risks Of Business Operating potency, rivalry looked from the
units engaged in comparative product demand

32 | P a g e
 and supply position, price of labour price of raw
material and alternative inputs valuation of
products surplus out there marketing etc.
Risks Of Management Background, integrity and market standing of
promoters and organizational setup and
management level expertise of holding key
persons position within the organization and
decentralization of authority accomplishment
of goals and track record of project, debt
repayments etc.
Risks Of Financial Financial position of the promoters,
responsibility of projections and previous
financial performance responsibility of
operational data and financial ratios adequacy
of provisioning for dangerous debts, qualifying
comments of auditors etc.

In light of the prior risks the banks evaluation strategy should keep pace with consistently
changing financial condition. The evaluation system plans to decide the credit necessities of the
borrower considering into account of the financial resources of the customer. The end goal of
the evaluation system is to guarantee that there is no under financing or over financing.
Following are the angles which should be examined and analysed while assessing.

ORGANIZATION & MANAGEMENT ANALYSIS:-

The evaluation of project would not be finished till it throws enough of light on the person
behind the project that is management an the organization of the unit. It has been seen that a few
projects may be unsuccessful not because these are not feasible but rather as a result of the
management and the organization in controlling different works like finance, marketing,
production, personnel, etc. The evaluation report should feature the strengths and weaknesses of
the management by remaking on the background capabilities experience and ability of the

33 | P a g e
promoter key management staff and adequacy of the internal control system connection with
labour, working environment, wage structure and the other allocated basic functions. In case of
the promoter have enthusiasm in different worries as Proprietor or Partner or Director, the
evaluation report should also remark on their presentation in such concerns.

A business is highly vulnerable if basic decision making in all the useful areas rests with a
specific individual, in different word `one man show'. Further the management and the
organization should be helpful for the size and kind of business. In other scenario it should be
ensured that professional managers are accepted to strengthen the organization.

APPRAISAL OF PROJECT - A CHECK LIST:

A characteristic list of issues which should be looked into while appraising a project is given
below are:

MARKETING 1.Reasonable interest projections keeping in mind

the size of the market, level of utilization, supply
place, trade potential etc.
2.Competitor status and their degree of activity
with respect to production and sale.
3.Technology progression and Collaborators
Status Buy-back plans etc.
4. Practice of Marketing policies for promotion of
product and distribution channels being utilized.
cost on marketing are done so as to promote the
products.
5.Local/international buyers preferences, practices
adopted, requirements etc.
6.Influence of government approaches, import /
export in terms of quantity and values.
7.Marketing experts employed their ability,

34 | P a g e
 information and experience.

TECHNICAL 1. life cycle of a Product, product-mix and their

application.
2. Location its advantages and disadvantages
accessibility of infrastructural offices, government
concessions assuming any accessible there.
3. Machinery and Plant with suppliers credentials
and limit feasible ordinary working condition.
4. Process of assembling demonstrating the
decision of technology, position with regard to its
commercialization and available.
5. Machinery and Plant its accessibility
specification, price, performance.
6. Government permit assuming any required.
7.Labor/ Manpower sort of skills required and its
accessibility position in the region.
FINANCIAL 1.Total cost of project and how it is being funded.
2.Contingencies and expansion properly
considered in project cost.
3.Break even analysis of fund flow and cash flow
projection.
4.Balance sheet projections must be practical and
dependent on most recent accessible information.
The segment of financial ratios should be
exposed to close scrutiny.
5.Aspect of help of parent company any place
applicable might be considered.
MANAGERIAL 1.Financial standing and cleverness of the
management.
2. Experience and Qualification of the advertising
and key management staff.
3.Understanding of the project in the majority of

35 | P a g e
 its perspective financing pattern, technical
learning and marketing program etc.
4.Internal control systems, designation of
sufficient powers and entrusting duty at different
levels.
5.Other ventures assuming any wherein the
promoters have the interest and how these are
working.

ECONOMIC 1.Impact on increment in level of reserve fund

and income distribution in the society and living
of standard.
2.Project commitment towards creation and rate
of increase of business opportunity,
accomplishing self - adequacy and so on etc.
3.Project commitment to the improvement of the
region, its effects on environment and pollution
control.

To pass judgment on whether the project is suitable that is it can produce sufficient surplus for
servicing its obligations inside a sensible timeframe and still left with certain funds for future
improvement. This includes taking a general view to analyse the strengths and weaknesses of the
project. It should also be examined to check whether the management and organisation can
prove effective for fruitful execution of the project.

Company Profile:-

Punjab National Bank was set up in 1895 in Lahore and has the qualification of being the First
Indian bank to begun exclusively with Indian capital. The bank was nationalized in July1969
alongside 13 different banks. Today, PNB is an expertly overseen keep money with an effective
reputation of more than 110 years. The bank has the second biggest branch organize in India,
with 4525 branches including 432 augmentation counters spread all through the nation. PNB
was positioned as248th greatest bank on the planet by Bankers Almanac, London. Punjab

36 | P a g e
National Bank isn't just the main bank to represent considerable authority in FICO score models
in India yet in addition the first to dispatch picture based check exchange framework for
gathering of intra bank intercity checks consequently giving credits only in 48 hrs in 13 urban
areas

Current scenario:- Punjab National Bank was incorporated in year 1969 as a banking company
having a market cap of Rs 31836.99 Crore.

Punjab National Bank key Products/Revenue Segments incorporate Interest and Discount on
Advances and Bills which contributed Rs 35086.21 Crore to Sales Value (68.38 % of Total
Sales), Income From Investment which contributed Rs 14105.97 Crore to Sales Value (27.49 %
of Total Sales), Interest On Balances with RBI and Other Inter-Bank Funds which contributed
Rs 1891.39 Crore to Sales Value (3.68 % of Total Sales) and Interest which contributed Rs
226.68 Crore to Sales Value (0.44 % of Total Sales)for the year finishing 31-Mar-2019.

For the quarter finished 30-06-2019, the organization has announced a Consolidated Interest
Income of Rs 8949.73 Crore, up .57 % from last quarter Interest Income of Rs 8898.72 Crore
and down - 4.61 % from a year ago same quarter Interest Income of Rs 9381.89 Crore. The bank
has announced net benefit after assessment of Rs 1032.23 Crore in most recent quarter.

37 | P a g e
Shareholding of PNB:

No Of Shares

ForeignCentral Government
Others
Institutions
NBFC and MF 3% 1% 0%
General public 4%
7%

Financial insitutions
9%

Promoters
75%

38 | P a g e
CREDIT RISK MANAGEMENT SYSTEM IN PNB:

A comprehensive credit risk management system, which is set up in the bank, encompasses the
following processes are as follows:

Identification of Measurement of Grading of

Credit Risk Credit Risk  Credit Risk

Reporting and
Control of Credit
analysis of rating
Risk
related data

CREDIT RISK IDENTIFICATION:-

39 | P a g e
In order to take informed credit decisions it is important to distinguish the zones of credit risk in
every borrower just as well as every industry. Risk Management Division HO in joint effort with
other HO divisions involves in disbursal of credit and furthermore the risk management
departments of various zonal offices distinguishes these risks territories and creates essential
tools and procedures to measure and monitor the risk.

CREDIT RISK MEASUREMENT:-

In order to check the credit risk in bank portfolio. The bank has made the following models:-

Rating Model Of Credit Risk Total limits from the Bank

Small two Loans Rs. 20 lacs Above and up to Rs. 50lac
Small Loan Rs. 50 lacs Above and up to Rs. 5crores
Avg Corporate Rs.5 crores Above and up to Rs. 15crores
Big Corporate Rs. 15 crores Above
Financial Corporation Model Of Non Banking irrespective of any limit
New Business Model Rs. 5 crores Below
New Project Model Rs. 5 crores Above

The credit risk rating models have been created with a view to provide a standard system to
assigning a credit risk rating to every one of the borrowers based on the general credit risk
associated with them. Contributions to the models are the monetary, the executives, business and
lead of record, industry data. The assessment of a borrower is finished by appraisal on
riousobjective/emotional parameters. The model assesses the credit hrisk rating of a borrower on
a size of AAA to D with AAA showing least risk and D demonstrating most extreme risk.

The credit risk-rating models fuse in that all conceivable risk factors. which are significant for
deciding the credit quality and rating of a borrower. These risks are as follows:

• Internal and explicit to the company

• Associated with the industry wherein the company is working.

40 | P a g e
• Associated with the whole economy and can impact the repayment limit as well as willingness
of the company.

GRADING OF BORROWERS UNDER THE RATING SYSTEM:-

In order to give a standard definition and benchmarks under the credit risk rating system,
following grid has been embraced in all the risk rating models.

Rating Description Score (%) obtained Grade within threating

category Category
PNB –AAA Min Risk 80 &Above PNB- AAA

PNB-AA Marginal Risk 77.50-80 & Above PNB- AA+

72.50-77.50 & Above PNB-AA
70-72.50 & Above PNB-AA-
PNB- A Modest Risk 67.50-70 & Above PNB-A+
62.5-67.50 & Above PNB-A
60-62.50 & Above PNB-A-
PNB-BB Avg Risk 57.50-60 & Above PNB-BB+
52.50-57.50 & Above PNB-BB
50-52.50 & Above PNB-BB-

PNB-B Acceptable Marginal 47.50-50 & Above PNB-B+

Risk 42.50-47.50 & Above PNB-B
40-42.50 & Above PNB-B-
PNB-C High Risk 30-40 & Above PNB-C

PNB-D Caution Risk 30 and below 30 PNB-D

41 | P a g e
SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING:

The process of rating and vetting is as follows:

Loan Sanctioning Authority Credit Risk Rating Authority Vetting/Confirming Authority

Head Office Area CRMD in consultationGM (RMD), HO

with branches
Big corporate model
Area Office In case of big corporateArea CRMD
model.
In case of different models
branch to rate the accounts
Branch Office Officer or manger, creditAn official designated by the
section Incumbent not connected with
rating of the specific loan
proposal.

In order to embrace internal rating based approaches for credit risk. Basel II has put certain base
requirements which inter-alia require approval of rating system procedure and estimation of all
related risk parts. Banks should routinely compare realized default rates and evaluate probability
of default of each grade and able to show to its manager RBI that the internal approval
procedure enable it to check the performance of internal rating and risk estimation system
reliably and meaningfully. In perspective on above facts not only rating as well as steady
practices in assessment of credit risk rating just as devolving and updating the data on different
risk parts is must for embracing IRB approaches.

42 | P a g e
 CONTROLS:

The Credit Risk Management process in the bank incorporates the following management
Control procedures which help in mitigating the adverse effects of credit risk in its credit
portfolio.

1. 1.Credit Sanction Authority.

a. Credit forum
b. Linkage of lending loaning powers with risk rating classes.
i. Exposure Of Prudential limits
ii. Based On Pricing Risk
iii. Managing The Portfolio
iv. Review Loan Mechanism
v. Legal documents
vi. Preventing Monitoring System
vii. Others

C. Utilization of CIBIL information data and RBI defaulters list

D. Diversifying The Risks

PNB’s LOAN POLICY:

OBJECTIVE:-

The Risk Policy and Credit Management of banks at the macro level is an encapsulation of the
Banks way to deal with understanding the measure and deal with the credit risk and targets at
targets guaranteeing continued development of sound advance portfolio while dispensing the
credit and dealing the risk. This would involve decreasing exposures in high risk areas.
Emphasizing more on the promising enterprise, minimizing the return by striking balance

43 | P a g e
between the risk and the return on resources and endeavouring towards keeping up and
improving market share.

Credit Appraisal Process :-

Generating Business Leads

Receipt of application from applicant
Receipt of documents (Balance sheet, KYC papers, Different government
registration no., MOA, AOA, and Properties documents)
Due diligence of Loan Arranger & customer
Pre- sanction visit by bank officers
Check for RBI defaulters list willful defaulters list CIBIL data, ECGC caution list
etc.
Title clearance reports of the properties to be obtained from empaneled advocates
Valuation reports of the properties to be obtained from empaneled valuer/engineers
Activity & Industry Analysis –Viability assessment
Verify authenticity of Financial statement from various sources –
MCA21, diligence report etc.
Preparation of financial data (CMA Data)
Risk Assessment – Credit Rating
Proposal preparation (MCB Note)
Assessment of Limit – Quantum of loan
Sanction / approval of proposal by appropriate sanctioning authority –Also PSR
note
Documentations, agreements, mortgages
Disbursement of loan
Post sanction activities such as receiving stock statements, review of accounts,
renew of accounts, etc.

44 | P a g e
 THE BASIC TENETS OF THE POLICY:

 All the loan facilities which are considered only after getting the loan application from the
borrower and accumulation of Confidential Report on them and the underwriter. The borrowers
should have the idea foundation base and experience to maintain their business effectively.

 Project for which the fund is conceded should be feasible and economically viable that is it
should be able to make enough of surplus n order to support the obligations within a feasible
period of timeframe.

 The cost of project and way of financing the equivalent should be appropriately evaluated and
tied up. Both, under-financing and over- financing can adversely affect the fruitful usage of the
project.

 The borrowers should be financially stable and appreciated good market reputation and must
have their stake in the business that is they should satisfactory fluid assets to contribute to the
margin prerequisites.

 Loans should be authorized by the equipped endorsing authority as per the assigned crediting
powers and should be disbursed simply after execution of all the required documents.

 Projects financed must be intently observed during implementing stage to reduce the time
and cost invades and thereafter till the changes of the bank loan.

 The policy strategy sets out least or benchmark lending rate BPLR = 11%.

 The policy strategy sets down standards for takeover of advances from different bank and
financial institutions.

 As a matter of policy the bank does not assume control over any Non-performing Asset from
different banks.
45 | P a g e
 METHODS OF LENDING:-

1. For Working Capital:-

 Simple method linked with turnover:- Simple method based on turnover for evaluating
working capital finance upto Rs 2 crore. (upto Rs. 5 crore in case of Small Scale Industry units)

 MPBF System:- Present MPBF system with adaptable approach will be followed for units
requiring working capital finance exceeding the previously mentioned amount.

 Cash Budget System:- The cash Budget System will be followed in Sugar, Tea, Service
Sector and Film Production accounts. It will be our undertaking to present the equivalent
selectively in different areas also.

2. Term Loan:-

In case of any kind of infrastructure and mega projects have proper evaluation will be made by
using the services of Expert and Technical officers only.
The term loans with left over maturity period of more than 5 years will not surpass more than
50% of the term deposits with left over maturity period of more than 5 years after considering
into the account of the renewal terms of deposits as per the past trends.

System of keeping an watch of credit as arranged down by the Bank has to be carefully followed
by the branches and controlling offices which, inter alia, covers the following are:

46 | P a g e
 Conveying the
sanction

Maintenance of
Quarterly Review
Loan Document
Sheet
File

Inspection and
Physical
Preventive Quarterly
Verification of
Monitoring System Monitoring System
stocks – Stock
Audit

47 | P a g e
 POST SANCTION FOLLOW UP OF LOANS:

Supervision and Follow-up of bank credit has expected extensive significance particularly after
introduction of new standards of assets grouping, provisioning and diversifying of interest
income on NPAs, influencing profitability. System of supervision and follow up can be
characterized as the deliberate valuation of the performance of a borrowable account to
guarantee that it works at feasible level and if issues emerge, to recommend practical solutions.
It helps in keeping a watch on the direct and operational/financial performance of the
borrowable accounts. Further in addition it also helps in recognizing signals/symptoms of
infection and weakening assuming if any taking place in the lead of the account for starting
timely corrective actions to check slippage of records to NPA category.

The objectives and targets of observing might be arranged into fundamental and advantageous
objectives. The major objectives help a bank to guarantee safety of assets loaned to an
endeavour while dvantageous objectives are coordinated towards staying informed concerning
issues emerging out of changes in both the inward and the outside condition for starting timely
corrective actions. A portion of the significant objectives of checking are listed as under:

1. To keep an eye on the project during execution stage so that there are no time and cost
invades.
2. To make sure that the released funds are been utilized for the reason for which these have
been given and there is no redirection of such funds.
3. To assess operational and financial related outcomes for example production, sales, profit and
loss, flow of funds, etc. and measure these with the projections and estimates given by the
borrower at the time of endorsement of credit facilities.
4. To make sure that the terms and conditions as stipulated in the endorsement have been
conformed to.
5. To check in the account records especially for cash credit facilities which shows strength of
the account.
6. To acquire market report on the borrower to assemble data information like reputation and
financial standing etc.
7. To find out the sign and effects of sickness or crumbling taking place in conduct and
performance of the account.

48 | P a g e
8. To make sure that the units management and organizational set-up is fruitful.
9. To keep an eye on perspectives like gathering of statutory liabilities, creditors, debtors, raw-
material, stocks-in-process, finished goods, etc.
10. To make sure charging of applicable rate of interest and penal interest and duty charges are
according to bank rules and guidelines.

CREDIT APPRAISAL PROCESS OF MAHINDRA FINANCE

Company Profile:-

Credit Appraisal Process:-

The process of approving loans are as follows.

1. Interest shown by potential customers

2. Filling up the application form
3. Submitting the required documents
4. Documents verification
5. Recording deviations
6. Deviation Approval
7. Loan Approval

1. Interest Shown by Potential Customers:-

Whenever an individual wishes to purchase a vehicle he or she contacts a dealer. After choosing
the Vehicle the on road price is being calculated. If the person opts for financial help in
specifically he or she becomes a potential customer to Mahindra finance. The dealer fix up an
appointment between the customer and advisor of Mahindra Finance.

2. Filling up of form:-

After all the conversation gets over and the individual has agreed to avail loan from Mahindra
Finance he or she is given a application form of loan to fill up.

3. Submission of documents required:-

49 | P a g e
 After submitting the loan application form the individual has to submit so required documents
which are as follows:-

i. Identity Proof
ii. Proof Of Residence
iii. Photo with Front attested,
iv. Proof Of Income
v. Bank Statement for Last 6 Months
vi. Post Dated Cheque
vii. Verification Of Signature
viii. CIBIL Score

4. Verification of documents:-

After submitting all the required documents the agent cross checks all the documents for
address, Identity proof, electricity bills, annual income etc.

5. Recording deviations:-

If the person fails to full fill any kind of the requirements it gets recorded as deviation from the
regular requirement. All such deviations are recorded properly.

6. Deviation approval:-

If MMFSL thinks that any one or some of the deviations are been accepted under the situations
then a deviation approval letter is being given by the Mahindra Finance.

7. Loan Approval:-

After all the procedures are been completed and MMFSL observes that the individual he or she
applying for the Loan is literally eligible for the Loan then it is been sanctioned by Mahindra
Finance.

50 | P a g e
 Loan Applications process:-

Any Customer who have manifested interest in taking up the loan from MMFSL should first fill
up the loan application form and complete in all angles and after the customer should submit the
application form to the nearest branch of the Company.

When the application gets received will be checked and seen by the Company immediately on
the submission of the loan application form and will be processed for authorization of the loan.
The Company will consider each and every documents which are been submitted and the
information provided by the applicant and then verify the reliability of the applicant and assess
the proposal at its individual circumspection and will grant loan by issuing a sanction letter
within 10 days from the date of receipt of the loan application and if no correspondence is
received by the applicant the loan application is assumed to have been rejected and the Company
will not send any correspondence for rejected cases. Sanction letter in the vernacular language is
to be issued to all borrowers whose loan have been sanctioned after due diligence.

Terms & Conditions OF Loan Appraisal:-

The approval letter in the vernacular language would convey in the following ways:

1. Financed Amount
2. Submission of documents for disbursement of the loan
3. Rate of interest
4. Security Details to be given
5. Schedule Of Repayment
6. Delayed in instalment payment or Penal interest charges beyond the due dates.
7. The Documents of the Underwriter and co-borrower for to be executed for the purpose of
disbursement of loan.

A copy of sanction letter will be accepted. The applicant have to give a photocopy of the
sanction letter to the Company duly accepted by him as a token of acceptance. After that
Company will issue D.O. or a cheque in favour of the applicant or dealer depends upon the case
to case.

51 | P a g e
In the present loan agreement it also provides a clause for the delay in payment penalties All the
loan agreements or policies will mention this clause in bold letters so the applicant can take a
look of the clause.

Changes In Terms & Conditions Of Disbursement Of Loans:-

Any sort of change done in terms and Conditions like change in rate of interest, time duration,
all charges and expenses will be imparted to the borrower and recorded as a hard copy in the
vernacular language. Any choice to recall quicken instalment payment will be imparted to the
borrower and recorded as a hard copy as per the terms and condition of the agreement. NOC is
to be issued on repayment of all dues. Collateral assumed any will be released alongside with
the NOC. If any Kind of collateral is taken to ensure the performance of agreement will be
properly recognized and protected and will be kept in safe custody. Cross holding of protections
will be properly conveyed recorded as a hard copy vide RPAD giving reference of balance
exposure in different contracts. Company will take plan of recourse and actions only through
legally permissible remedies according to the terms & conditions of loan agreement entered into
with the borrower agreement.

Only just written request from applicant for transfer of liabilities will be assessed by the
company and written affirmation and rejection will be implied to the applicant within 21 days
after due perservance. Any agency to which different activities are outsourced/ depended should
be short listed and empanelled according to the company policies issued from time to time. The
Company has done an exclusive recovery team who are experts in doing the collection activity
in a professional manner by adopting a legal procedure as per the law.

52 | P a g e
Reference

https://www.academia`.edu/4366225/49449249_Report_Credit_Appraisal_PNB?auto=download.

https://indianmoney.com/articles/what-is-credit-appraisal.

https://www.slideshare.net/BabasabPatil/credit-appraisal-in-sbi-bank-project6-report.

https://www.referenceforbusiness.com/small/Co-Di/Credit-Evaluation-and-Approval.html.

https://www.bankbazaar.com/personal-loan/credit-appraisal.html.

https://economictimes.indiatimes.com/punjab-national-bank/stocks/companyid-11585.cms.

https://www.pnbindia.in/downloadprocess.aspx?fid=s1d6Z2gyk/XHdtU0omsGsA==.

http://www.managementparadise.com/kundanhaha/documents/21195/credit-appraisal-process-of-
mahindra-finance/

53 | P a g e
54 | P a g e