Professional Documents
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Credit Appraisal System of Commercial Vehicle Loans
Credit Appraisal System of Commercial Vehicle Loans
1. Introduction.
Executive Summary.
Credit Appraisal.
Importance of Credit Appraisal System.
Objectives of the Research.
Significance / Scope of the study.
Limitations of the Research.
2. Theoretical Background
Commercial Vehicle Industry Overview.
Non-Banking Financial Companies (NBFCs).
Role of NBFC’S in Commercial Vehicle Financing.
Financing procedure of Commercial Vehicle.
3. Company Profile.
o Supreme Financial Services ltd.
Introduction.
Vision and Mission.
Branches.
4. Research Methodology of the Project.
Means of research.
Primary Data.
Secondary Data.
5. Data Analysis.
Loan Appliers to Defaulters.
Parameter used for credit appraisal.
5 C’s of Credit
6. Findings.
7. Suggestions.
8. Conclusion.
9. Bibliography.
Executive Summary
Credit Appraisal
The process by which a lender appraises the creditworthiness of the prospective borrower.
This normally involves appraising the borrower’s payment history and establishing the quality and
sustainability of his income. The lender satisfies himself of the good intentions of the borrower,
Financial institutions and banks are intermediate between lenders and borrowers. These
financial intermediaries collect deposit and disburse it as loan and advance to the individual people,
business, commercial, industrial entity. The loan and advance should be given to them who have the
certain and predicted cash flow to repay the credit. If the manager fails to analyze the client’s viability
of repaying the loan, possibility of default may arise due to the fact.
So the importance of APPRAISAL, in sanctioning the loan, is the key to identify the
RECOVERY OF CREDIT: -
Appraisal is done to ensure the recovery of the credit along with the good supervision,
monitoring and the relationship. In other words, the purpose of appraisal is to be sure that the
proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate
security.
SAFETY: -
The most important measure of appraising a loan proposal is safety. Safety means the
assurance of repayment of distributed loans. Company is in business to make money but safety
should never be sacrificed for profitability. To ensure the safety of loan, the borrower should be
LIQUIDITY: -
The banker must ensure that the borrower is able to repay the loan on demand or within a
short period. This depends upon the nature of assets owned by the borrower & pledged to the
company. E.g. goods & commodities are easily marketable while fixed assets like land & buildings
can be liquidated after a time interval. Thus, the company regards liquidity as important as safety of
the funds & grants loans on the security of assets which are easily marketable without much loss.
PROFIT:-
‘Profit’ is the blood for any commercial institution. Before approval of any loan project, the
company authority has to be sure that the proposed project will be a profitable venture.
DIVERSIFICATION OF RISK:-
During sanctioning any loan, company has to be attentive about diversification of risk. All
The company would lend if the purpose of the advances can contribute more to the overall
To identify & suggest the scope for improvement in Credit Appraisal System.
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. The process of Credit Appraisal is
Management Appraisal.
Technical Appraisal.
Commercial Appraisal.
Financial Appraisal.
Economic Appraisal.
Management Appraisal has received lot of attention these days as it is one of the long term
factors affecting the business of the concern. Technical Appraisal emphasizes on the technical
feasibility of the venture and also finds out the possible economic life period of the present
technology. Commercial Appraisal focuses on the commercial viability of the project .It tries to find
matters regarding demand in market, the acceptance of product in market. It also focuses on the
It also focuses on the multiple scope of the product. 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?
The scope of credit structure is incomplete without examination of credit proposal. Credit
Character.
Capacity.
Capital.
Condition.
Collateral.
The Credit Policy of Supreme Financial Services has undergone changes to cope with the
environmental changes, tap the available opportunities, achieve their commercial objective, fulfil
Services has over the years designed and adopted the Best Practices Code. This in effect represents
the Supreme Financial Service’s philosophy towards effective Corporate Governance. Supreme
Financial Services has specialised type of lending known as Segmented Lending in which Supreme
Financial Services has set within it specialised branches for focused lending to various segments.
This segmented approach is expected to provide both market and customer focus for ensuring
better business development, better development of expertise and better customer satisfaction.
Supreme Financial Services has also set exposure norms which corresponds to the quantum of
finance been credited. These exposure norms are as per the RBI norms and also the bank’s specific
norms.
One of the important monitoring aspects in the credit portfolio is the periodic review of
advance accounts. The vital decision to deploy the Supreme Financial Service’s resources should
necessarily be based upon the thorough assessment and Evaluation of the needs of the borrower. For
It is difficult to collect more important and confidential personal documents. They are
rarely recorded and more seldom preserved. They are generally destroyed after a short time.
Limitations of time:
There are limitations of time so we can’t measure the trends which are very slow. Due to
There is great dearth of journals and magazines in different areas in India to publish data
concerning various aspects of problem. Even the data is collected; it is seldom published in time. Thus
2. Theoretical Background
(NBFC’s)
Section 45I of the Reserve Bank of India Act, 1934 defines ‘‘non-banking financial
company’’ As-
(i) A financial institution which is a company;
(ii) A non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any
manner;
(iii) Such other non-banking institution or class of such institutions, as the Bank may, with the
previous approval of the Central Government and by notification in the Official Gazette, specify;
A company is, therefore, considered to be an NBFC if it carries on any of the financial activities listed
society, is imperative for sustainable economic growth for any country. In India, NBFC’s typically
function in unorganized and under-serviced segments of the economy, establishing a forte in those
areas. The NBFC business model is highly customer centric with a deep perception of customer
needs. With a wider and specialized branch network, they are able to develop very close customer
interaction and relationships, presenting unique last mile credit delivery. The vast and diverse
character of India itself has inevitably assured a gap in the dispensation of credit and mobilization
of savings. NBFCs have demonstrated that they can play a definite long –term role in the financial
inclusion strategy of the country. They have succeeded in the mobilization of inactive assets and
users of credit because of their innate capability to provide customized services according to the
needs of the client. It is reflected by the steady increase in the levels of credit penetration that they
are bringing about. The rigidity of the banking system’s policies for lending, especially in the
automobile and transport sector, is consequently giving NBFCs an opportunity to meet this unmet
The total commercial vehicle (CV) segment accounts for about only 5 percent of total
automobile sales in India. The Indian Commercial Vehicle (CV) Industry is the lifeline of the
economy. Approximately 66 percent of the goods and 87 percent of the passenger traffic in the
country moves via road. The trends have clearly indicated that the CV demand is closely correlated
with GDP growth rate (more strongly with the Index of Industrial Production, IIP) of the country and
turn in the economy respectively. The CVs can be classified on the basis of their Gross Vehicular
Weight (GVW) as Light Commercial Vehicles (LCV) or Medium & Heavy Commercial Vehicles
(M&HCV), with M&HCVs accounting for approximately 58 percent of the total domestic CV sales.
From the days of traditional all purpose 9 tonner trucks, the industry has moved towards more usage
specific vehicles. The developing road infrastructure is giving a push to a modern Hub & Spoke
model of distribution of goods, which in turn is changing the kind of vehicles being deployed for
goods transportation.
The Industry is now witnessing a clear segmentation in demand, with vehicles more than 16.2 tonnes
(M&HCVs & Multi Axle vehicles) being used for transportation on the highways and less than 3.5
Similarly in case of passenger vehicles there is an increasing demand for luxury buses from the
private players unlike earlier when the demand used to be largely driven by the State Transport
Undertakings. The CV industry draws its demand from the economy and hence is prone to cyclicality.
However, due to
Greater versatility of usage, the LCV demand is less cyclical than the M&HCV demand. The growth
in volume sales of Commercial vehicle in India has been strong, averaging 11 percent in real terms in
the five years ended 2009-10. This compares with 13 percent in the five years ended 2004-05and -3
percent in the five years ended 1999-2000. We expect India’s demand for commercial vehicles to
remain strong. India’s stock of commercial vehicles is currently low at six vehicles per thousand
people versus 11 for China and 48 for other Asian peers. The gap is expected to narrow down in
the coming years in wake of GDP growth and increase in infrastructure spending.
Role of NBFC’S in Commercial Vehicle Financing
The NBFC sector has been playing an important role in development of the Road
Transport sector. The Banks have not been in a position to deploy more than 3 to 4 per cent of
their funds to this sector. Therefore, disbursals to SRTOs (small road transport operators)
have not been significant enough to support the Road Transport operators. Bank funding as a
percentage of total funding in the commercial vehicle market has therefore not exceeded 25 to
Funding SRTOs requires specialised customer evaluation skills and infrastructure that is
different from the requirements of typical bank borrowers. The operators are unable to
provide necessary documentation and securities required for processing of the disbursal. The
purpose of special schemes for SRTOs has been defeated by this inability to conduct business
in this segment. Further, recovery management in this also requires special skills and
infrastructure.
The NBFC sector has grown to fill this void. It has developed necessary focus and the
infrastructure to operate successfully in this sector. The high share of funding to this sector
reflects this fact. The NBFC sector therefore is in an excellent position to develop this role in
the Industry.
Existence of recovery management systems and infrastructure to ensure high
collection efficiency.
operators.
According to Palish “In modern money using economy, finance may be defined as the
According to Bonneville and Dewey “Financing consist of the raising, providing connection with
business”
Here we are concerned with assets based financing. There are three most popular asset based
financing.
3) Loan
Hire purchase finance is a popular financing mechanism especially in certain sectors of Indian
business such as the automobile sector. In this, there are 3 parties the manufacture, the Borrower &
Guarantor. The borrower may be the manufacturer or a finance company. The manufacturer sells
assets to the borrower who sells it to the guarantor in exchange for the payment to be made over a
Hire purchases agreement is the agreement between the customer (borrower) & the finance
company, which is the owner. The title of the vehicle passes on to the customer when the last due sum
& one rupee. Till the last rupee, the right, title & interest in the vehicle along with any additions and
When a payment is more than 14 days late it is considered a default. Date of receipt is considered.
Payment by post is considered the risk of the hirer. Increases in 0.85% bank interest rate results
in a potent increase in finance charges. But in this regime of falling interest rates NBFC’S also pull
Supplier or dealer delivers the vehicle on behalf of owner but risk is not that of the owner.
Increase the damage or non-delivery suffered by borrower and borrower charges commence as if
Borrower takes the insurance in the name of the owner. Owner may renew and recover from
hirer. The policy taken and the insurance company have to be approved by the owner. Borrower
obtains necessary license. Registration of the vehicle is in the joint name of owner and guarantor and
even beyond the control of the guarantor. Borrower cannot sublet or sell the vehicle during the term of
Delivery of vehicles concludes that hirer accepts it as it is. Guarantees or warrantees are given
by the supplier/dealer/manufacturer not the owner. Increase the damage insurance claim negotiations
steeled after consent of the owner. Any damage to vehicle not covered by insurance is born by
The asset that is the vehicle is shown in the balance sheet of the hirer. Accordingly the guarantor can
claim depreciation.
Interest component of the instalment is a tax-deductible expense. Guarantor enjoys salvage value.
There is a 5% service charge & 0.2% resale tax. Resale because the Hire Purchase agreements
involves three parties and two transactions. Dealer or manufacturer, owner (finance) company and
customer.
1. The owner of the asset gives the possession of the asset to the hirer with an understanding
that the hirer will pay agreed instalment over a specified period of time.
2. The ownership of the asset will transfer to the hirer to the on the payment of all
instalments.
3. They will have the option of the terminating the agreement any time before the transfer of
the asset.
The hirer is required to show the hired asset on his balance sheet and is entitled to claim depreciation,
although he does not own the asset until full payment has been made. The payment made by the hirer
is divided in to two parts; interest charges and repayment of the principal. The hirer thus gates tax
Mobilisation of funds:
In case of Hire purchase agreement the finance company can present the proposal to the bank
and mobilized funds against it. These can be done, since the finance company is the owner of the
vehicle till the complete payment is model thus the bank can hold the vehicle as security.
Lease financing:
Leasing is widely used in Western countries to finance investment in USA, which has the
Lease is contract between a lessor, and the owner gives the right to use the asset to the user
over an agreed period of time for a consideration called the lease rental. The lessee pays the rental to
the lessor as regular fixed payments over a period of time at the beginning or at the end of the month,
quarter, half-year, or year. Although generally fixed, the amount and the timing of payment of Lease
can be tailored to the lessee’s profits or cash flows. In up-fronted Leases, more rentals are charged in
the initial years and less in the later years of the contract. The opposite happens in back-ended Lease.
At the end of the contract, the asset reverts to the lessor. Who is the legal owner of the asset. As legal
owner, it is lessor not lessee, who is entitled to claim depreciation on the leased asset. In long term
lease contract, lessee is generally given an option to buy or renew the Lease. Sometimes it is divided
into two types- primary lease and secondary lease for the purpose of lease rentals. Primary lease
provides for the recovery of the cost of the asset and profit through lease rentals during a period of
about 4-5 years. It may be followed by a perpetual, secondary lease on nominal lease rentals.
Loan Procedure
Marketing Executive
File
Checking Documents
Coordinator
Initiating Verification
Credit Department
Approval / Decline
Disbursement
Auto Loan:
Most of the banks and financial institution are providing today finances for most of the
automobiles. The most important automobile today being cars, two wheelers, commercial vehicles.
These loans are given on various models at very competitive rates. If a person has the required
eligibility and documents. He can avail the loans for any vehicle and any model of his choice.
The loan is given to the person on the basis of the value of the vehicle. Usually 90% of the loan
amount of the value of the vehicle is given in case of new one and in the case of old one. It is up to
Auto loan is a secured loan. As there are some physical assets involved in it and it can be
hypothecated. Then it is called as hypothecated vehicle, which means that the motor vehicle is to be
owned and acquired by the borrower in respect of which the loan is to be made by the financial
institute.
2) Company Profile
The Supreme Finance Services LTD. A NBFC leading Auto Finance company. The Group is
one of the largest and well respected financial services conglomerates in India. The Groups main line
of activates in financial services include chit fund use vehicle finance, three wheeler finance, auto
dealership. The group has a customer base of 5000.thorough network of 14 offices all over
Maharashtra. The Group has the largest force in the private sector. The Supreme Finance Services
Vision
To be the most profitable global player with quality and technology leadership in the vehicle
Mission
To become a market leader in light transport vehicle finance segment, and achieve the status
of world Class Company with finance and markets a wide range of financial products to the total
I) Highly returns.
Gate No.9, Market Yard, Office No.313, 3rd floor, Mahalaxmi Market, Near Panan
Mahamandal building, Pune 411037
Solapur:
Vaibahvshali Chambers, Ground Floor, 1/5,Morji Peth, Old Pune Naka, Near Janata Bank,
Solapur 413009
Tembhrni:
Oswal Tawar Third Floor, Kurudwadi Road, Tembhurni, Tal. Madha Dist. Solapur.
Latur:
Ajinkya Arked Opp. Guru Hotel, Near Rajiv Gandhi Chowk, Ring Road, Latur 413512.
Aurangabad:
First Floor, Tulshi Chambers’, Opp. Sun franchiesco School, Near Shriram General Ins. Co.
Office, Akashwani, Jalna Road, Aurangabad 431005.
Nagpur:
Beed:
Sangale Building Navjivan Shikshak Colony, Near Samant Hospital, Behind S.T. Stand,
Beed.
Nanded:
involves the systematic procedure by which the research starts from the time of initial identification of
This chapter deals with different steps which are undertaken by the
investigator for gathering and organizing the data. It includes the description of
techniques, criteria for selection of the samples size, limitation, method of data
Means of research
The research is based upon various types of information, which give knowledge concerning
the problem. Now in order to carry on research successfully, information should be gathered from
proper source. The more valid is the source of information, the more reliable will be the information
Kinds of Data:
Primary Data:
Primary data are the actual information, which are received by the researcher for study from
the actual field of research. These data are obtained by means of questionnaires and schedules. The
primary data are the facts there are many more methods of collecting the primary data. Such data are
known as primary because the researcher attains them from the field of research directly and for the
first time. For this study I had asked queries to the seniors, also gathered information by direct
The sources of such information are the individuals and the incidents around them generally,
primary source information is gathered through direct observation and interview methods.
1) Direct observation:
The primary source of information is direct observation. The method requires that the researcher
should personally and directly observes the conditions of his field study. It is the most reliable method
for gathering information. I observed many things and got the lots of information.
2) Interview:
In an interview, the researcher meets people and discusses the problems with them. During
the course of this discussion, he gathers facts. Schedule includes a predetermined form of questions
but the interview has not any definite form or order of questions. I have used this method, and
Secondary Data:
Secondary data are the information, which is attained indirectly. The researcher does not
attain them himself or directly. Such data are attained generally from published and unpublished
material. It provides information of past which is not possible from any other source? To facilitate the
study, secondary data is important to know historical background of the concerning problem.
1) Records:
Records occupy the most important place among public documents. Most of companies
preserve so many types of a record of important information. I used much information from the
records.
2) Published data:
Published documents include data published by institutions from time to time. I used this data
Journals and Magazines are important public documents including a variety of information,
which can be usefully utilized in research. Most of this information is very much reliable. Letters to
the editors published in various magazines and journals are an important source of information.
4) Other documents:
Other document mainly include newspapers publish news, discussions on important issues,
meetings and conferences. The reliability of this source is very high. Besides it, television public
5) Internet:
In today’s world of information technology internet is the biggest source of the secondary data, I used
DATA ANALYSIS
2500
2000
1500
Loans Sanctioned
Defaultres
1000
500
0
1 2 3
Parameter DOCUMENTS
Technical
feasibility
Economic
Viability
Bankability
Credit Apprasial
1) Technical feasibility:
2) Economic Feasibility:
Economic viability
Installment to income ratio -IIR for salaried cases would be capped at 60% of Net income in
general
-Pension Income cases IIR to be restricted to 40%a
3) Bankability:
Security Asset of value equal to or more than To safeguard bank interest against
loan amount taken has to be put as any future default.
pledge or collateral.
Ownership title To be on the name or blood relative of To establish the ownership claim
applicant. of the loan applicant.
5 C’s of Credit:
Character
Conditions Capacity
Credit
Apprasial
Collateral Capital
1) Character:
It refers to the honesty and integrity of the person. Borrowers are not necessarily reliable or
honest and the lender must look for evidence of good character, if it exists. Frequently, this can be
ascertained during an interview. The lender must, however, be sure to make his own assessment and
not rely on the decision of an existing lender, or similarly on a key individual in the company – so
2) Capacity:
It refers to the actual ability of the borrower to enter into a contract with the lender. It relates
to the technical, managerial and financial means. It also refers to how the company monitors and
manages its risks and the suitability of the assets in the company to generate sufficient levels of cash
3) Capital:
Capital refers to the investment or the stake that the borrower has in the firm. This is
important to understand the capability of the individual. It is important for analysis as it determines
how well the firm is capitalized and does the borrower has reasonable stake or he is willing to let it go
4) Collateral:
It analysis other potential sources of repayment of the obligations if these are supported by
collateral security. Typically the amount of security required will depend on the type of business
5) Conditions:
It discusses the competitive environment of the firm and how well the firm fits in. It also
considers any economic event that will affect the repayment ability of the firm and also the purpose
Findings
1) Supreme finance Services Limited is one of the trusted financial institutions in NBFC, with
2) Credit Appraisal plays the most significant role in funding the right and eligible person.
3) From the responses of the customer, the staff of Supreme Finance is cooperative.
4) Supreme finance provides refinance facility if the customer shows a good Repayment Track
Record (RTR).
5) From the information customers are satisfied with Supreme Finance, 35% customers are old
customer.
6) From the data the loan procedure of company is easy as compared to others.
7) In the company the recovery rate is 90%.
SUGGESTIONS
1) The company should try for reducing the documentation required for loan.
2) Company should appoint customer relationship manager for better customer relations.
3) The company should provide door step service to the potential customer.
The credit appraisal of Supreme Finance is simple to understand and easy to calculate Which
helped me to understand the credit appraisal system. Sometimes credit goes to wrong person then also
it will not affect the performance of the company because company gives loan against hypothecation
(HP) of vehicle. The loan systems starts from verifying and checking the necessary documents,
collection the actual cost in terms of monthly instalment and end’s with No Objection Certificate
(NOC).
In the company the credit manager is the only person who takes care of proposals. The credit
manager should consult the recovery manager that a person is not a default gist. If the customer taking
loan twice then credit manager should check his previous record.