CREDIT APPRAISAL FOR TERM LOAN FINANCING AND

WORKING CAPITAL FINANCING

SIP project report in partial fulfilment of the requirement for the PGDM programme

BY

DHAWANI BHATT

(2013076)

Supervisors:

1. Priyanka Chouhan (Credit Manager, PNB)

2. Mr. Ajay Kumar Behara (Senior HR Manager, PNB)
3. Prof. Hanish Rajpal (Professor IMT Nagpur)

INSTITUTE OF MANAGEMENT TECHNOLOGY, NAGPUR

(2013-2015)

Institute of Management Technology Page |1

 Acknowledgement

I have taken efforts in this project. However it would not have been possible without the kind
support and help of many individuals of Punjab National Bank. I would like to extend my
sincere thanks to all of them.

I am highly indebted to Ms. Priyanka Chouhan, credit manager Punjab National Bank for
his guidance and constant supervision as well as for providing necessary information
regarding the project and also for her support in completing the project.

I would also like to thank my faculty guide, Mr. Hanish Rajpal, without whose support I
would not have been able to work in the right direction.

Also, I would like to thank, Dr. D.N Panigrahi for his reference and help to get an internship
at Punjab National Bank.

Lastly, I would like to thank Mr. Ajay Kumar Behera (Senior manager, HR) as he found
me credible enough to work for PNB and selected me for the challenging project. The
learning during the project was immense and valuable.

Dhawani Bhatt

2013076

PGDM Finance

Institute of Management Technology, Nagpur

Institute of Management Technology Page |2

Institute of Management Technology Page |3
 Table of Content

Chapter 1: Introduction and objectives of study

1.1 Introduction.......................................................................................6
1.2 Objectives..........................................................................................8
Chapter 2: Concepts/Models introduced in study
2.1 Working capital & its assessment.....................................................9
2.2 Assessment of Term Loan...............................................................12
Chapter 3: Company and Industry analysis
3.1 Industry Analysis.............................................................................13
3.2 Company Analysis...........................................................................15
Chapter 4: Findings and details of study
4.1 Introduction......................................................................................19
4.2 Credit appraisal in Detail..................................................................19
4.3 Credit risk management....................................................................27
4.4 Post Sanction follow-up....................................................................33
Chapter 5: Conclusion........................................................................................35
Chapter 6: Recommendations.............................................................................36
Chapter 7: Limitations........................................................................................37

Institute of Management Technology Page |4

 Executive Summary

Credit appraisal is a process in which a particular borrower approaches a bank with the
objective of getting a credit. After the approval of credit delivery, the task of monitoring
begins to ensure that the credit approved doesn’t turn out to be a bad loan.

Providing credit to the borrower is a primary source of revenue for a bank. Credit appraisal
department is linked to NPA department of the bank. Hence if Credit department has
approved the loan without any proper care or if borrower turned out to be a defaulter, bank
has to shell out that amount from their profits.

Every bank has their set of policies which has been decided by top management. Hence a
proper care has been taken which sanctioning any loan to ensure that it doesn’t turn out to be
a bad loan.

The primary objective of this study is to understand the credit appraisal process of Working
capital loan at Punjab National bank. How a credit is approved for any company and what
process is being followed before sanctioning any credit? What is the amount to be sanctioned
to a particular company depending upon its financial health?

Apart from NPA department, personnel from Agricultural department and SME are also
employed with credit appraisal department who uses their knowledge while sanctioning
credit for agricultural purpose or to SME.

It is also linked to IT department which aids in real time checking of credit worthiness of a
borrower and for communication with top management regarding the credit approval process.
This study also includes Credit Risk Rating whch is taken care by Risk Management
department. Every loan approved has some risk of turning out to be a bad loan. Hence to rate
the loan proposals PNB uses Trac and SME score. With the aid of rating score , interest
rates for the loan proposals is decided.

Institute of Management Technology Page |5

Chapter 1

Introduction & Objectives of study

1.1 Introduction

Credit appraisal is more of skill based work. Guessing or intuitive aspect won’t work. Before
appraising credit, credit managers look in economic position, financial position of a firm, and
technical related work of project and past credit history of a firm.

Firstly a loan proposal is submitted to the bank which contains following information.

1. Basic background information on the company

2. Required facility
3. Key industry dynamics
4. Management
5. Management information: planning, controlling and monitoring systems
6. Financials
7. Details of the security to be pledged
8. Present banking relationship

Then the process of credit appraisal begins by looking at credit information of the borrowing
company.

1. Banks and Financial Institution

2. Trade References
3. Credit Rating Agencies like CIBIL, EQUIFAX
4. Company Financial Reports
5. Press Reports
6. Stock Market Opinion
7. Charges Registered with Registrar of Companies
8. Personal discussions
9. Factory visits

Institute of Management Technology Page |6

Then some extra information is required for project financing as follows:

1. Industry risk information

2. Business risk information
3. Management risk information
4. Financial risk information

Risk associated with the proposal is assesses by collecting all the above information. This
information is then fed into internal rating tool of PNB. On the basis of rating a decision is
taken whether the loan should be sanctioned or not.

Institute of Management Technology Page |7

1.2 Objectives

1. To gain knowledge of the overall Credit Administration processes of the banks

2. To understand different types of credit facilities and credit delivery mechanisms

provided to industrial customers viz. Overdraft, Cash Credit, Drawing Rights, Fund
Based Credit, Non Fund Based Credit etc.

3. To understand the methods available for risk measure of proposals, risk assessment
models and the credit rating procedures used in Punjab National Bank

4. To understand the appraisal process of Term Loan and Working Capital Financing
proposals

5. To understand the factors affecting rate of interest levied viz. risk assessment, bank
guidelines, sectorial policies, business considerations etc.

6. To understand various norms like credit exposure limits etc., that influence credit
disbursal for various sectors, companies and business groups.

Institute of Management Technology Page |8

Chapter 2

Concepts/Models introduced in the study

2.1 Working Capital and its assessment:

The term working capital means the minimum amount of fund which is a requisite for any
business to carry out their daily required operation. Every business need to have a some
minimal amount of current asset. Many a times firms fall short of their working capital funds.
In this case firms approach banks to meet their fund requirement. The bank may help firms
by providing fund against stock and sundry debtors. The bank will never finance the firm
completely, they always keep margin as per the regulations.

Various methods for assessment of Working Capital are discussed in

Detail:
1. Operating cycle method:

The above term can be defined as the time period between the cash outgoing and cash
incoming. Once the firm buy raw material and then convert it into finished goods and then
realize the cash. This takes time. This time period is called operating cycle.

So, the total cash that moves in the circle is Working Capital. Requirement of
working capital varies depending upon the amount of operating expenses and the
duration of operating cycle. It means that decrease in both is decline in WC
requirement and that is operating effectiveness.
Different industry has varying length of WC and this length also varies in different
firm though in the same industry. Hence the duration of operating cycle of
pharmaceutical firm is different from automobile firm. The duration of operating
cycle is the most important tool for taking the decision in a firm.

FUND RM SIP RECEIVABLES FUND

Institute of Management Technology Page |9

 2. Traditional method

In order to meet the required level of production or output, firms are expected to
maintain the minimum level of current asset. When they fall short, they approach
bank and bank in return provide working capital loan. The funds provided by bank
are blocked in terms of CA which let the bank to know about the requirement of
working capital.

 Raw material: Every firm in an industry has to maintain the minimum level of
stock so that production or output does not get interrupted. 

 Stock in process: There are very few firms or industry where raw material
quickly gets turn into finished goods. In other industries it takes longer time for
the processing. These stocks in process stem the realization of cash. These stocks
need to be blocked before they turn into finished goods. And these blocking
involves huge expense.

 Finished goods: Once the finished goods are produced, it doesn’t mean that
they will be sold immediately. Depending upon transport, variability in
demand and seasonal changes, sale of these finished goods varies. Hence
these needs to be stocked which involves expense.

 Sundry debtors: Sales varies according to the type of payment is done.

Whether it is cash as advance payment or on credit. Most of the banks lend
credit because investment seems profitable. The extent to which bank lends
credit depends hugely upon the market condition and practises carried out in
trade. Even if no credit is availed to a borrower, the transit time the goods
take will affect the sales that will cut out the fund.

 Expenses: During the assessment of working capital, industry is also

required to report the 1 month expense so that bank consider as a cushion
which firm will be able to pay in case required without any hassle.

While assessing the requirement of working capital, some of the factors need to be
considered such as whether the credit received is on purchase and does it affect the funds
the unit requires.
Institute of Management Technology P a g e | 10
 1. Projected Annual Turnover Method for SME units (Nayak Committee):

In case of SME, the requirement of working capital is judged on the basis of their
annual turnover which is projected. The limit on WC such firms enjoy is 5 crore.
Bank provides only 25% of their turnover. Also bank keeps a margin of 5%, which
means the firm has to shell out those 5% and bank is responsible for rest 20%.
Assessment on requirement of WC fund should be based on annual turnover which is
projected and traditional method. Depending upon which is high, credit is made
available. In many firms, their operating cycle may exceed 3 months, in that case
bank may provide more than 20%, but the firm should be willing to keep high stake
against finance by bank.

2. MPBF Method (Tandon and Chore Committee Recommendations):

During the time, when this committee was appointed, there were a scarce bank’s
resources. Hence this committee was asked for the suggestion on norms. So they
came up with three different methods of lending.

1st Method:
As per this method, bank can lend 75% of the gap in working capital, rest 25% would
be considered as a margin. Min current ratio comes out to be 1.17:1
Working capital gap = total current assets - total liabilities excluding bank liabilities

2nd Method:
As per this method, bank will finance 75% of firm’s total current asset. Rest 25%
would be considered as a margin and the borrower has to shell out from his pocket.
Min current ratio comes out to be 1.33:1

3rd Method:
This method is no different from second one. The only difference is that core current
assets are excluded from total current asset while computing. RBI does not accept this
method. Here current ratio comes out to be 1.79:1

Institute of Management Technology P a g e | 11

 3. PBS Method:

Projected balance sheet method of assessing working capital requirement i.e. fund
based is applicable to all those who are involved in manufacturing, trading who needs
to procude fund worth 25 lacks or more. For the borrower like SSI, who asks for fund
more than 5 crore, then fund would be sanctioned as per Nayak Committee. The
assessment will take into consider the balance sheet which is projected as well as the
fund flow of firm and other relevant financial parameters.

Under this method, the assessment steps are as follows:

1. Collecting financial related information of borrower.
2. Classifying current asset and current liabilities.
3. Verifying inventory, receivables and payables which are projected.
4. Evaluating the liquidity
5. Validating the finance the bank has been asked for

2.2 Assessment of Term Loans:

Term loans are given when firms seek money for land acquisition, or purchasing a new plant
or machinery for expansion or setting up new sire purposes. Providing loans in this case will
enhance firm’s output quality or productivity.
The basic difference between the short term loan and long term is that short term is meant for
filling the working capital gap whereas the long term is meant for acquisition of any kind of
assets that are fixed in nature. These fixed assets would be considered as a security of the
loan and repayment of loan should be through earning from operation from newly acquired
asset and not from their sale.
The study of Techno economic feasibility is done while assessing term loan. Careful
assessment of all the business activity is mandatory for sanctioning this loan. A report is
provided to the bank which contains all the necessary details a bank seeks for approving the
loan.

Institute of Management Technology P a g e | 12

Chapter 3

Company and Industry Analysis

3.1 Industry Analysis

In 1786, General bank of India was established and that laid the foundation of Indian banking
system. The three banks that were established by East India Company were bank of Bengal,
bank of madras and bank of Bombay. These banks were then merged to form New Imperial
bank of India. It was then renamed as State bank of India. Reserve bank of India which was
established as shareholder’s bank then became the bank which regulates the Indian bank.

Nationalization:

Nationalization paved the way for the sectors which were neglected. These sectors were not
able to meet the credit requirement. Moreover they were offered the lower interest rate
compared to business houses. Retail banking resulted in network growth of branches,
mobilization of deposits, employment and disbursals of credit.

Impact:

Tremendous increase in the average deposits and excessive loans related to agriculture soared
up.

Classification of Banks

Banking industry of India is classified as Scheduled banks and Non-scheduled banks.

Scheduled banks include commercial and co-operative banks. Also there is a private, public
and foreign bank. Public banks are further divided into old and new banks.

The current state and the road ahead

In major economies, there lies a recession. Because of declining demand and financial
breakdown, the banking industry is in downturn. But despite of all these, Indian banking
industry doesn’t seems to be affected by that.

The success of Indian banks lies in its enhancing balance sheet, profitability, ease of credit

Institute of Management Technology P a g e | 13

availability and low NPA’s. Also it keeps a check on risk underlying to appraised credit. The
continuous assessment of risks aids the bank to grow progressively. The pace of Indian
banking industry is tremendous. As per FICCI survey, Indian banks are in a growth phase.
Change is the feature that works in this fast changing world

Challenges faced by the banking industry

Expectation of customer from banks has risen. Moreover, to continue the growth rate and
manage the defaulters has been posed as a major challenge.

Global Expansion
Every bank aspires to be a bigger and better because of competitive banking industry. But the
fact is Indian banks are nowhere when it is compared to foreign banks. A lesson has been
learnt during the 2008 financial meltdown when many of the foreign banks went bankrupt
and turned down their commitments.

Chance of New Entrants

It has been almost a decade that government has issued a license to new banks. It’s quite
possible that Government may nod permission to grant license to new banks. Recently RBI
issued license to NDFA and bandhan Bank.

Credit risks in Indian banks

Before nineties, banking industry was highly regulated. Hence these regulators were watchful
that industry does not go bust. But then because of deregulation, competition soared and
many financial roles became prevalent and existed in market. Safety issues also ramped up.

Managing the Credit Risk:

Banks granting loans as well as advances consists of 60% of their asset side in balance sheet.
As long as borrower pays the interest and principal amount timely and fully, these assets are
working fine, but the moment the borrower defaulted from the payment of interest and
principal, it turns out to be a Non performing asset and bank has to shell out the amount from
their profits.

Institute of Management Technology P a g e | 14

3.2 Company Analysis

Punjab National Bank:

In 1894, Punjab National Bank was established as the Government bank. It was fourth largest
in India. It owns 5100 branches and serves 63 million people. It offers various banking
services such as corporate banking, Personal banking, Industry financing and agricultural
financing. Also it aids in international banking and trade finance. MNCs, Corporate
personnel, Individuals, and Indian conglomerates, Exporters are some of its clients. The
banks continuously strive hard to be on growth path.

Vision:

“To be a Leading Global Bank with Pan India footprints and become a household brand in
the Indo-Gangetic Plains providing entire range of financial products and services under one
roof”
Mission:
“Banking for the unbanked”

Financial Performance (2013-2014):

PNB performed fairly well in FY 2013-14. As per the guidelines given by the RBI, PNB took
the provisions for standard assets, investment depreciation, restructured advances, Non-
performing assets, standard asset and standard deviation exposure. Also PNB is leading in
CASA deposits, net operating margins and customer base.

Summary of the financials for this year is as below:

Parameters March 2013 (in Cr.) March 2014 (in Cr.)

Operating Profit Rs. 10907 Rs. 11866

Net Profit Rs. 4748 Rs. 3617

Deposit Rs. 391560 Rs. 451396

Borrowings Rs. 39620 Rs. 48034

Institute of Management Technology P a g e | 15

Global Footprint:

Domestically PNB is performing so well that it has now aspirations to expand globally. As of
today, there exists 9 overseas branches including 2 in Hongkong, 1 in Kabul and 1 in
Dubai.Also PNB has JV with Everest bank ltd. Nepal and in Bhutan as “DRUK PNB Bank
Ltd.”. PNB also has network with 200 internationally leading banks. It aids PNB in all over
world transaction. Also it has an arrangement for rupee drawing in Gulf. It has also best
Forex related operations in India.

New Initiatives:

 Machines for depositing cash has been installed in all branches which provides an ease
to customer to deposit their cash which will be credited in their respective account
without any hassle on real time basis.
 Also an automatic passbook update machine has been installed, which aids customer to
get their passbook updated in no time.

Product and Services:

 Saving Accounts: 
1. PNB Premium Saving Account
2. PNB Prudent Sweep
3. Total Freedom Salary Account
4. PNB Vidyarthi SF Account
5. PNB Mitra SF Account
6. PNB Rakshak Scheme
7. PNB Shikshak Sweep Scheme
8. PNB Shikshak Overdraft Scheme
 Scheme for Providing Overdraft to Pensioners 

 Current Accounts: 
 PNB Smart Banking Current Account, 
 PNB Current Account 

Institute of Management Technology P a g e | 16



 Scheme Credit Schemes- 
 Housing Laons 
 Car finance
 Personal Loan
 Credit Cards 
 Professional Loans 
 PNB Saraswati 
 PNB Kamgaar
 PNB Pratibha 


 Social Banking: 
4. Mahila Udyam Nidhi Scheme
5. Krishi Card
 PNB Farmers Welfare Trust 

 Corporate Banking: 
 Term Loan and Working Capital Financing
 fund Based and Non-fund based financing 
 Gold card scheme for exporters
 EXIM Finance

 Other Services and Businesses:
 Locker Facilites
 Senior Citizens Scheme 
 PPF Schemes and Internet Banking 
 Mutual Fund Business, Gold Coin Business
 Depository Services
 Online Trading Facility 
 Insurance Business
 Merchant Banking 

Institute of Management Technology P a g e | 17

Chapter 4

Findings & Details of the study

4.1 Introduction:

 On a primary level, meeting with the project guide and understanding the basic
functions, roles of the credit division of the circle office.
 Studying the proposal of the company, its industry and doing a preliminary
investigation for the viability of the information.
 Balance sheet analysis of the concerned company and projecting the balance sheet for
next 5 years with suitable CAGR or Regression
 Studying the company presentations, notes and documents prepared by the company.
 Financial analysis of the concerned company by in depth study of the Credit
Monitoring Arrangement data and Credit Risk Arrangement data and finding out
various financial ratios.
 Studying the performance of peer group companies to understand the trends in PAT,
ROCE (Return on Capital employed), RONW (Return on Net Worth).
 Ascertain the DSCR, Sensitive Analysis.

4.2 Credit appraisal in Detail:

The credit department has assumed the importance because they play a major role in
sanctioning the loan. It is their responsibility to keep a check on Non-performing asset and
keep it as low as possible. Also they ensure that their loan portfolio is strong because this
directly affects their profitability. Hence a proper care is taken before sanctioning any loan so
that it doesn’t turn out to be a bad loan. But now with the opening of economy, major
changes has taken place in financial as well as technological sector which exposes bank to
many different risks discussed as below.

Institute of Management Technology P a g e | 18

 Government regulations and policies, availability of infrastructure facilities, Industry
Industry Risks Rating, Industry Scenario & Outlook, Technology Up gradation, availability of inputs, product
obsolescence, etc.

Operating efficiency, competition faced from the units engaged in similar products,
Business Risks demand and supply position, cost of labor, cost of raw material and other inputs, pricing of
product, surplus available, marketing, etc.

Background, integrity and market standing/ reputation of promoters, organizational

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

Financial strength/standing of the promoters, reliability and reasonableness of

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

All the above mentioned risks are taken into consideration to keep a check on changing
economic environment. The aim of bank’s appraisal system is to ensure that there is neither
under-financing nor over-financing. Hence bank must understand the needs of a borrower
looking at its financial resources and sanction accordingly.

Institute of Management Technology P a g e | 19

Credit Appraisal Process at PNB:

Flowchart:

Submission of Project Report along with the Carrying out Due Diligence on the Client
Request Letter

Determining of Interest Rate and Preparation of Feasible Preparing Credit Report / Feasibility Report
Proposal and Risk Rating

Not feasible

Submission of Proposal to designated Submission of Proposal to

Authority (Circle office) designated Authority

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

No Queries

Vetting of Credit Risk Rating Report Approval of request made by the client like
Reduction of Interest Rates etc.

Acknowledgement of Sanction Terms & Sanction of Proposal on various Terms &

Condition by the client Conditions

Application to comply with Sanction Disbursement of Sanctioned Amount from

T&C. Execution of Loan Documents the branch office

Institute of Management Technology P a g e | 20

Market Analysis:
For every product, there is a demand and potential exists in the market. The selling price of the
item and the sale price the competitor is offering is also taken into account. Moreover what are
the substitutes of the product available in market also affects the sale of a product. The
distribution channel and the operation level of production also matters. It also includes the
critical analysis of its market in local area and what proportion of item they export. Apart from
these, government also play a major role determining the demand in market through its policies
and regulations.

Technical Analysis:
The market is so dynamic that complete investigation of a product or its variants or product mix
is requires as far as its quality and tastes or trends are considered. Also what value it offers to its
customers also plays a significant role.

Location and Site:

After the broad consideration of government regulations and market conditions, Location i.e.
the area of a land and the site i.e. the particular plot plays an important role. Every plot that a
firm acquires has both advantages as well as disadvantages. Sufficient availability of power,
transport, and water and infrastructure facility is must without which the site will incur a lot of
additional cost which is not good for any firm. Also the land area should be adequate enought
that future expansion is possible.

Raw Material:

While purchasing the raw material, their past and future trends must be taken into account. Also
the transportation expense and their regular availability is taken into account. The government
regulation pertaining to the prices of raw material should be thoroughly checked. Also, last but
not the least the cost of raw material also matters must.

Plant & Machinery, Plant Capacity and Manufacturing Process:

Proper selection is must for the plant and machinery and also whether it would be domestic or
imported should comply with the available capacity of plant. Whatever new technology they
bring in the firm should be efficient enough to compete in this dynamic market. Also it needs to

Institute of Management Technology P a g e | 21

be ensures that newly built capacity doesn’t affect the output quality and doesn’t hinder future
prospects or expansion. The manufacturing process should be selected carefully in such a way
that it keeps a check on availability of products and their respective cost.

Financial Analysis:
In Financial analysis, we look for cost of project, financial statements, financial ratios, sensitive
analysis, profitability and fund flow projections.

1. Cost of Project & Means of Financing:

The main cost is that of land and building regarding development and registration
charges. There are also auxiliary services which includes cost apart from plant and
machinery. Also there is transportation charge, insurance cost, loading charges and
unloading charges. Moreover there is royalty payments plus consultancy charges. Then
there exists issue of capital expense which includes brokerage and commission charges.
Then some contingencies to meet unexpected outcomes. Further there should be proper
price quotations and a proper care should be taken that project should neither
undervalued or overvalued.
Apart from the bank financing, the cost of project is financed by shareholders and
promoters through equity, unsecured loan from relative or friend, which cannot be paid
unless the repayment on bank is done. Then business owners may procure items on
credit from their suppliers, which can be repaid in instalments. Moreover government
also provide subsidy, which can also be considered as an advantage.

2. Profitability Statement:

Profitability statement includes the income statement of the company which tells us
about the financial health of the company. Once analyzing the financial health,
projections of profit or loss is made for the duration of repayment of loans. The bank
must ensure that while projecting they should neither be optimistic nor pessimistic,
because a minor switch can disrupt the entire picture and it hits the bank’s profitably
badly.
Part performance of a firm as well as of an industry must be taken into consideration and
also some environmental effects such as revenue must be observed carefully. In short,
firm should look profitable and should be in capacity to return the entire loan amount.

Institute of Management Technology P a g e | 22

3. Break-Even Analysis:

Breakeven point is a point at which firm neither makes a profit neither make a loss. The firm
should be operating at this point in order to sustain. The firm will generate profit only if it is
working above this point. The BEP can be expressed as follows:

BEP (Units) = Fixed costs/ (sales price per unit-variable cost per unit)

BEP (Sales) = (Fixed cost x Sales)/ (Sales-Variable costs)

Here fixed costs tend to remain the same whereas variable costs vary as the number of units
produced. This BEP point helps in fixing the selling price of an item, in buying decisions, and
in deciding the level of production of an item with maximum contribution.

4. Fund-Flow Statement:

Fund flow analysis captures the changes in balance sheet of the company. The two consecutive
balance sheets is compared to find out the changes and the reasons behind it. The proper
analysis of fund flow will aid in answering the below mentioned questions:

1) What is the amount of fund obtained through internal operations?

2) What is the amount of fund obtained through external sources?
3) Is there any likely possibility of liquidity crunch?
4) How the funds would be distributed during the period?

5. Balance Sheet Projections:

The study of balance sheet of a firm will aid in knowing what the firm owns and what
firm owes. Studying it will let the firm have realistic projections.

6. Financial Ratios:

Looking at the financial viability of a firm, these financial rations come very handy.
Solving the below mentioned financial ratios may aid the banks to understand the liquidity
position of a firm as well as servicing to debt capacity of a firm.

Institute of Management Technology P a g e | 23

The financial ratios which are considered important are discussed as under:

Ratio Formula Remarks

There cannot be a rigid rule to a satisfactory debt-equity

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

Debt + Depreciation + Net

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

Total outside Liabilities outside funds and vice versa

Institute of Management Technology P a g e | 24

 Operating Profit (Before
Taxes excluding Income
This ratio gives the margin available after meeting cost
from other Sources)
Profit-Sales of manufacturing. It provides a yardstick to measure the
4
Ratio efficiency of production and margin on sales price i.e.
Sales
the pricing structure

This ratio is of a primary importance to see how best the

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

7. Internal Rate of Return:

In capital budgeting the discount rate used to make the NPV od all the cash flows zero is
called Internal rate of return. High IRR of a project means that project is likely to be
successful and to be financed.

8. Sensitivity Analysis:

While appraising a project some assumptions are being made regarding the selling
price or a cost price of an item. With respect to the assumptions made, it is likely possible
that the assigned value mismatch because of unexpected outcome. To reduce these
uncertainties, sensitive analysis is used. These uncertainties are reduced by assigning the

Institute of Management Technology P a g e | 25

both optimistic as well as pessimistic value to the assumptions so that any variations occur
can be captured and correct accordingly.

Management & Organization Analysis:

Many projects do not succeed. It’s not because they are not viable but because of inefficient
management. The decisions that managers taken who are responsible for the project matters a
lot for the result of the project. A single incorrect decision may disrupt the entire picture and
project fails. So a proper analysis of management and their organization must be carried out.
The appraisal report must consist of the strength as well as the weaknesses of management
personnel. Because every department such as marketing, finance, operation is under their
control. Also it needs to be ensured that there is an effective management at place and the
business should not be run by a one man.

Institute of Management Technology P a g e | 26

4.3 Credit Risk Management

A credit risk management involves following.

 Identification of Credit Risk 

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

Credit Risk Identification:

First of all risk management department identifies the area which are vulnerable. And this
RMD is linked with Head office department. They continuously are in talk with these HO
personnel. After identifying the critical risk, they take an informed decision to prevent those
risks.

Credit Risk Measurement:

Following model is used to to measure the risk in bank:

Credit Risk Rating Model Total limits Applicable from the Bank

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

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

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

Large Corporate Above Rs. 15 crores

Non-Banking Financial Corporation Model (irrespective of any limit)

New Business Model Below Rs. 5 crores

New Project Model Above Rs. 5 crores

Institute of Management Technology P a g e | 27

 Credit risk rating tools at Punjab national bank:

Every borrower is being assigned a credit rating on the basis of the riskiness of his profile.
These rating have been given by using a standard system at Punjab National bank. PNB is
one of all banks who came up with its own individual model to decide the credit rating. This
model is called as PNB Trac where a loan above 20 lakh is individually rated. Whereas loan
under 20 lakh is being rated segment wise as per BASEL 2. This means that bank does not
have to depend upon others to procure credit rating of a borrower.

Inputs (parameters) to PNB Trac:

This tool is designed such that it can be used for all the type of industry. Depending upon the
type of limit the borrower is seeking, a credit rating is assigned. This rating differs from
industry to industry.

Consider the below examples:

Rating Model New Project Model Industry XYZ

Facilities Required Term Loan Limits Rs. 1200 lacs

Inputs:

CATEGORY PARAMETERS / INPUTS

Capital market perception of the group Management Setup

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

Institute of Management Technology P a g e | 28

 Range of services Level of customer satisfaction

Quality of service offered Advertising / promotional strategies

Business Economies of operation Brand equity

Evaluation Ambience of service outlet Expected market growth

Effectiveness of distribution channels Locational advantage

Quality of infrastructure available Technology adopted in the process

Debt – Equity Ratio Internal Rate of Return

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

Project complexities Expected time overrun

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

How the Rating is done:

1. Different parameters of a particular category are considered and a value on a scale from 0
to 4 is given, with 0 as poor and 4 as excellent. Some of the scoring is subjective while
some are objective.

2. The score given to the parameter is then multiplied with the weights assigned to a
particular parameter and then a final score is calculated. If the final score is high, better is
the credit rating.

This rating model is developed with an aim of getting a credit rating of a borrower looking at
his risk profile. The input given to this model is financial, managerial and industrial. The
evaluation is done on the basis of both subjective and objective parameter. The rating given
is on the scale of AAA to D, with AAA means less vulnerable and D as more risky.

This model includes all the factors which could be risky. These risks can be:

 Internal and specific to the company, 


 Associated with the industry in which the company is operating or 

 Associated with the entire economy and can influence the repayment capacity
Institute of Management Technology P a g e | 29
 and/ or willingness of the company. 

Evaluation methodology:

 The scoring is as per the scale of 0 to 4. 0 is considered to be poor and 4 as excellent.

The parameter includes both subjective as well as objective scoring.

 The scores obtained is then multiplied to the assigned weights. The weights are assigned
to the parameter depending upon its importance. Final score is calculated then which the
software displays. Higher the score, higher will be the rating.

 The scores obtained are then graded accordingly ranging from AAA to D

 If any such parameter exists, which is not to be considered, “Not Applicable” will be
displayed.

 Many firms has the business which come under different industry. Hence different
scoring is done for the different firms under different industry and rated separately.

Institute of Management Technology P a g e | 30

Grading Of Borrowers under the Rating System:

Consider the below displayed matrix which is standard.

Grade within the

Rating category Description Score (%) obtained
rating Category

PNB –AAA Minimum Risk Above 80.00 PNB- AAA

Marginal Risk Above 77.50 up to 80.00 PNB- AA +

PNB-AA Above 72.50 up to 77.50 PNB- AA

Above 70.00 up to 72.50 PNB- AA -

Modest Risk Above 67.50 up to 70.00 PNB- A +

PNB-A Above 62.50 up to 67.50 PNB- A

Above 60.00 up to 62.50 PNB- A -

Average Risk Above 57.50 up to 60.00 PNB- BB +

PNB-BB Above 52.50 up to 57.50 PNB- BB

Above 50.00 up to 52.50 PNB- BB -

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

Above 40.00 up to 42.50 PNB- B -

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

PNB-D Caution Risk 30.00 and below PNB – D

Institute of Management Technology P a g e | 31

 System for Assignment & Appraisal Of Rating:

The process of rating and vetting is as under:

Loan Sanctioning
Credit Risk Rating Authority Vetting/Confirming Authority
Authority

i. Zonal CRMD in consultation with

Head Office branches GM (RMD), HO
ii. Large Corporate Branches

i. In case of Large Corporate Model,

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

An official designated by the

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

If any bank who has to adopt internal based rating they have to meet the certain
requirements fixed by BASEL
Credit Approving Authority

a. Credit Committee

b. Linkage of loaning powers with risk rating categories

ii. Prudential Exposure limits

iii. Risk Based Pricing

iv. Portfolio Management

v. Loan Review Mechanism

vi. Legal documentation

vii. Preventive Monitoring System

viii. Others

a. Use of CIBIL data and RBI defaulters list

b. Diversification of Risks
Institute of Management Technology P a g e | 32
4.4 Post Sanction Follow Up

Once the proposal of loan is sanctioned, bank personnel continuously monitor the loan
approved. They ensure that all the rules are followed properly, interest is paid timely and if
the funds are used for some other purpose then bank is getting its relevant share or not.
Below mentioned two different methods for the same purpose.

1. Preventive Monitoring System (PMS)

Objectives of PMS:

Continuously tracking the account of loan sanctioned.

 Any adverse signals get detected early


 Complete probe and accordingly analysis for the adverse signal

 Preventive steps taken so that account doesn’t turn out to be NPA

Preventive Monitoring System consists of two parts:

i. PMS Index and Rank

In PMS index, there exists 29 different indicators and these indicators are clubbed in 6
different groups. Depending upon how these indicators affect the loan account,
weights are assigned to each and every indicator. The scores obtained are then stores
for the year. These are nothing but cumulative scores. It is being ranked on a scale of
1 to 10. The lower the PMS account, healthy is the loan account.

ii. PMS Report

There are 8 parts in PMS report that includes brief the borrower’s profile and
accounts positions. Also it contains description regarding the PMS score. It also
signals the adverse blur and provides remedial action.

3. Quarterly Monitoring System (QMS)

Any borrower whose limit for working capital is more than 1 crore , his account’s
performance can be tracked through QMS. This system asks for the data submission
as per the borrower’s economic activity. Two different format exists for it.

Institute of Management Technology P a g e | 33

 i. QMS I

Within 6 months post financial quarter, the submission of this form is mandatory. It
provides information about the performance of that quarter as well as operations and
also it provides reason why a particular sales has been achieved.

ii. QMS II

Within 2 months post financial half year, submission of this form is mandatory. It not
only provides the reason for mismatch between original and projected report. But also
mentions from where the fund is procured and where it can be used. It also talks about
the long term use of short term funds.

Institute of Management Technology P a g e | 34

Chapter 5

Conclusion

It has been a great learning experience at PNB and it improved my knowledge in the field of
loan proposal. I had the comprehensive learning of how to put in practise the theory i have
learned in class schedules. I got to know that my profile of being a credit analyst made me
realize that you need to have a multi-disciplinary knowledge apart from financial and legal
knowledge.
There exists a systematic approach in which the business loans are sanctioned. They
determine the credit worthiness of an applicant. Hence it become mandatory for a lender bank
to look out for the risks attached to the borrower and ensure that it is safe lending. There is 6
phases which a credit manager goes through while approving credit.

1. Financial statement analysis

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

Punjab National Bank uses the projected balance sheet to lend the credit following the
relevant procedures. The reason behind adopting this method is that it provides flexibility to
prevent the rigid fixtures.
In order to prevent the lending turning out to be a bad loan, a proper care is being taken right
from the beginning. PNB uses its own rating model called as PNB Trac, which help them to
get the credit rating of an applicant. This model checks the profitability, historical trends of
the firm and the industry environment in which the firm is. This rating is considered to be the
best one so far.

Institute of Management Technology P a g e | 35

Chapter 6

Recommendations
Following are the findings that were observed after working at PNB:

1. The rating score given by PNB using its own model is done only once a year. The
disadvantage of it is that it does not take under consideration any minute changes such
as price variation. This is the problem with any other model which considers the
accounting based on historical data. So the rating should be done periodically.

2. In some of the parameters used in rating model, information is obtained from firms
personnel. This information may be exaggerated to increase the rating. Hence the
rating obtained by a particular firm may be skewed by revealing the exaggerated
information which may prove advantageous to the firm. Also there exists redundancy
in some parameters which may unnecessarily increase or decrease the rating. So the
borrowers information should be authentic.

3. Following the deregulation, the bank has to look upon the cost of transaction,
availability of security to satisfy the borrowing requirement of SME. This is very
important for the banking sector to focus on SME. So the steps should be taken by the
bank to reduce the approval time

4. The department of credit at PNB, Head office, Nagpur, where i worked as an intern
has a highly efficient and skilled staff and they work with their full potential. Hence
no such recommendations from my side. But during my two months at PNB, i found
the credit department’s work is mostly paper base and bulky files. Hence a proper
electronic system must be designed so that these bulky file can be replaced by storing
in the database which would make the proposal acceptance easy and fast and could be
shared more readily with the top management.

Institute of Management Technology P a g e | 36

Chapter 7

Limitations

The limitations of this study are as follows:

1. Data availability. Larger the date, better the analysis before the sanctioning of loan.
Most of the firm do not share the data readily which is disadvantageous on part of credit
department.
2. Geographical limitation: Most of the approved loan studied at Nagpur head office of
PNB was of business that was located in and around the city of Nagpur.
3. The learning of approving credit is more of intuition based and require experience.
Hence the two months of SIP were not enough to have a thorough learning of credit
appraisal process.
4. While lending credit, many risks exist. Though most of the risks encountered can be
managed through an experience. But it is to be noted that risk cannot be erased
completely but can only be avoided.

Institute of Management Technology P a g e | 37

 Bibliography

Online Sources:

 www.rbi.org.in 

 www.pnbindia.in 

 www.wikipedia.com 

 www.scribd.com 

Institute of Management Technology P a g e | 38