CREDIT APPRAISAL PROCESS OF SBI:

A CASE STUDY OF BRANCH OF SBI

Masters of Business Administration

By

ANKITA MOKTA

(1805080500007)

Under the supervision of

Dr. GEETA SINGH

Department of management studies

Dev Bhoomi Institute of Technology, Dehradun

Dev Bhoomi Institute of Technology

Uttarakhand Technical University

Dehradun-248001

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 ACKNOWLEDGMENT

If words are considered as a symbol of approval and taken of appreciation,

then let the words play the heralding role expressing gratitude. First of all, I would like to thanx
our financial management professor Dr. Geeta Singh for her excellent support while imparting
knowledge and clearing doubts about the subject. Iam also thankful to all the respondents of our
primary research who took out time for us to provide us with honest and insightful information,
without which our project would be incomplete.

TABLE OF CONTENT
 Acknowledgement
 Summary
 Introduction
 Review of literature
 Research methodology
 Brief overview of loans:
 Credit risk assessment
 Appraisal process of SBI
 Credit appraisal process
 Rating scale for giving loans
 SBI norms for credit appraisal:
 Loan administration pre-sanction process
 Loan administration post- sanction process
 Case study:
 Deviation in loan policy
 Analysis of the case
 Swot analysis
 findings
 Conclusion
 References

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 SUMMARY

Credit risk is a risk related to non-repayment of the credit obtained by

the customer of a bank. Thus, it is necessary to appraise the credibility of the customer in order
to mitigate the credit risk. Proper evaluation of the customer is performed this measure the
financial condition and the ability of the customer to repay back loan in future. Credit appraisal
is a process to ascertain the risk associated with the extension of the credit facility. It is
generally carried by the financial institutions which are involved in providing financial funding
to its customers.

In this research, we study the credit risk assessment model of SBI Bank
and to check the commercial, financial & technical viability of the project proposed & its
funding pattern. Also, to observe the movements to reduce various risk parameters which are
broadly categorized into financial risk, business risk, industrial risk and management risk. The
scope of the research is restricted to branch of SBI.

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 INTRODUCTION

Credit appraisal means an investigation/assessment done by the bank

prior before providing any loans and advance/project finance and also checks the primary and
collateral security cover available for recovery of such funds. Credit appraisal is a process to
ascertain the risks associated with the extension of the credit facility. It is generally carried by
the financial institutions which are involved in providing financial funding to the customers. In
this paper, we study the Credit Risk Assessment Model of SBI Bank and to check the commercial,
financial and technical viability of the project proposed and its funding pattern. Also, to observe
the moments to reduce various risk parameters which are broadly categorized into financial
risk, business risk, industrial risk and management risk.

REVIEW OF LITERATURE
 Uwe (2005) analyzed and further development of the building blocks
of modern credit risk management: Definitions of default; Estimation of default probabilities;
Exposures; Recovery Rates; Pricing; Concept of portfolio dependence; Time horizons for risk
calculations; Quantification of portfolio risk; Estimation of risk measures; Portfolio analysis
and portfolio improvement; Evaluation (2006) focused on the changing interest rate controls,
statutory preemption and directed credit as well as the effects these policies had. The main
findings are that the degree of financial repression has steadily increased between 1960 and
1980, and then declined somewhat before rising to a new peak at the end of the 1980, and then
overall economic reforms in 1991, the level of financial repression has steadily declined. Despite
capital formation and financial development could be established which is contrary to the
prediction of the financial liberalization hypothesis. The unifying theme in the book is optimal
design, and various chapters deal with the design of contracts.

Gray (2009) examined that

‘shadow banking system’ at the heart of the current credit crisis is, in fact, a real banking
system- and is vulnerable to a banking panic. Indeed, the event starting in August 2007 are a
banking panic. The current panic involved financial firms ‘running’ on other financial firms by
not renewing sale and repurchase agreements (repo) or increasing the repo margin (‘haircut’),
forcing massive leveraging, and resulting in the banking system being insolvent.

RESEARCH METHODOLOGY
 The present report is a case study which is restricted to branch of SBI.
The objective of research paper is to study the Credit Risk Assessment Model of SBI and
to check the commercial, financial and technical viability of the project proposed and its
funding pattern. To observe the movement to reduce various risk parameters which are
broadly categorized into financial risk, business risk, industrial risk and management
risk. For the purpose, the secondary data is collected through:

 E-circulars of SBI
 Books and journals
 Database and SBI
 Library research
 Websites

BRIEF OVERVIEW OF LOANS

 Loans can be of two types fund based and non-fund based:

 Fund based includes-:

 1. Working capital
2. Term loan

 Non-fund based includes-:

1. Letter of credit
2. Bank guarantee

 Credit risk assessment and appraisal process of SBI:

1) CREDIT RISK ASSESSMENT (CRA)-:

 The CRC models adopted by the bank consider all possible factors which go into
appraising the risk associated with a loan.
 These have been categorized broadly into financial, business, industrial and
management risk and are rated separately.
 These factors duly weighted are aggregated to arrive at a credit decision whether
loan should be given or not.

< CREDIT APPRAISAL PROCESS >

Receipt of application from applicant

 Receipt of documents

(Balance sheet, KYC papers, different govt. registration no., MOA, AOA & properties
documents)

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 report of the properties to be obtained from empaneled valuer/engineers

Preparation of financial data

Proposal preparation
Assessment of proposal
Sanction/approval of proposal by appropriate sanctioning authority
Documentations, agreements, mortgages

Disbursement of loans

Post sanction activity such as receiving stock statements, review of accounts, renew
of accounts, etc. (on regular basis)

2) Credit appraisal standards qualitative-:

 The proposition is examined from the angle of viability and also from the bank’s
prudential levels of exposure to borrower, group and industry
 View is taken about bank’s past experience with the promoters, if there is a track
record to go by

 Opinion reports from existing bankers and published data if available

Sector/parameters Mfg. Other

Current ratio 1.33 1.20 (For
QUANTITATIVE-:
(min.) FBWC limits
above Rs. 5cr)
a) Working capital TOL/TNW 3.00 5.00
DSCR Net (min.) 2:1 2:1
b) Team loan
Gross (min.) 1.75:1 1.75:1
Technical feasibility Debt/Equity Ratio 2:1 2:1
Economic feasibility Promoters 30% of 20% of equity
Financial feasibility contribution* equity
Managerial competency (min.)

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RATING SCALE FOR GIVING LOANS:

 S.NO. Borrower Range of Risk level Comfort level
rating scores
1 SB1 94-100 Virtually zero risk Virtually absolute
safety
2 SB2 90-93 Lowest risk Highest safety
3 SB3 86-89 Lower risk Higher safety
4 SB4 81-85 Low risk High safety
5 SB5 76-80 Moderate risk with Adequate safety
adequate cushion
6 SB6 70-75 Moderate risk Moderate safety
7 SB7 64-69 “
8 SB8 57-54 Average risk Above safety
threshold
9 SB9 50-56 “
10 SB10 45-49 Acceptable risk Safety threshold
(risk tolerance
threshold)
11 SB11 40-44 Borderline risk Inadequate safety
12 SB12 35-39 High risk Low safety
13 SB13 30-34 Higher risk Lower safety
14 SB14 25-29 Substantial risk Lowest safety
15 SB15 <24 Pre-default risk Nil
(extremely
vulnerable to
default)
16 SB16 - Default grade Nil
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Bank has introduced new rating scales for borrower for giving loans. Rating is given on the
basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives
loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating
the risk increases. So, banks do not give loans after SB8 rating.
 SBI NORMS FOR CREDIT APPRAISAL

A) Loan administration pre-sanction process:

 Preliminary appraisal-:

 Sound credit appraisal involves analysis of the viability of operations of a business and
the capacity of the prompters to run it profitably and repay the bank the dues.

 The company’s memorandum and articles of association should be scrutinizing

carefully to ensure that there are no clauses prejudicial to the bank’s interest.

 Towards this end the preliminary appraisal will examine the following aspects of a
proposal. Bank’s lending policy and other relevant guidelines/RBI guidelines:

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 Industry related risk factors

 Credit risk rating
 Profile of the promoters/senior management personnel of the project
 List of defaulters
  Caution lists
 Government regulations impacting on the industry

 Whether the project cost acceptable or not

 Debt/Equity Ratio whether acceptable
 Demand and supply projections based on the overall market prospects together with a
copy of the market survey report
 Estimates of sales, cost of production and profitability

B) Loan administration post- sanction process:

 The post-sanction credit process can be broadly classified into three stages-:

 Follow-up
 Supervision
 Monitoring

Which together facilitate efficient and effective credit

management and maintaining high level of standard assets

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CASE STUDY

 Company-: Janak Transport Co.

 Firm-: Partnership established in 1982 for carrying a transport business.
 Industry-: Transport activity
  Banking with SBI-: 16 years as a current A/C holder
 Project/purpose-: To purchase 59 new Mahindra Bolero under tie-up arrangement with
ONGC
 The total project cost estimated to be Rs.363.44 lacs
 Proposed credit requirement-: Fund based=Rs.295 lacs

DEVIATION IN LOAN POLICY/SCHEME:

Parameters Min/Max level as per Company’s level

scheme
Liquidity Min. 1.33 1.42

TOL/TNW Max. 3.00 12.80*

DSCR Min. 2.00 2.002

Promoters contribution Min. 10% 18.86%

(under tie-up)
Profits in the last two years Min. Rs. 3.00 lacs with rising Actual profit Rs. 1.20 lacs.
trend

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ANALYSIS OF THE CASE

 Janak Transport Company is an existing profit-making unit
 The main chunk behind giving loan is that Janak Transport Company is doing contract
with ONGC since incorporation
 The promoters are having considerable experience as transport contractor with ONGC
 The unit has got confirm order/tie-up with ONGC
 The promoter’s contribution to the project is 18.86% which is above the margin
requirement
 The current ratio is 1.42 that is satisfactory
 Profit in last two years-: Min. Rs. 3 lacs with rising trend
 The bank checks commercial viability of the company and found that the DSCR for term
loan is 2.02 which is satisfactory
 The net sales and PAT of the company is increasing year after year so overall
profitability is good

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SWOT ANALYSIS
 STRENGTH:
* Years of experience .......century
* Experienced employee
* Large natwork
* Huge ATM Network
* Government support
* safety & security of money
SWOT ANALYSIS
OPPORTUNITY:
* Constant fear in the minds of
customers towards private banks
* So much hidden changes of private
banking
* Fraud & cheating with customer from
private banking
* Dissatisfy from private banking
FINDINGS
WEAKNESS:
* Excessive documentation
* Rigid work culture
* Bureaucracy
* Less control on empliyee
* Poor recovery systm
THREATS:
* Private banks providing more facilities at
lower charges
* Shifting customer's preference towards
private banks
* Young stage are attract towards private
banks because of speedy & upgrade
technology
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 SBI loan policy contains various norms for sanction of different types of loans

 These all norms do not apply to each & every case

 SBI norms for providing loans are flexible & it may differ from case to case

 After case study, we found that in some cases, loan is sanctioned due to strong
financial parameters

 From the case study analysis, it was also found that in some cases, financial
performance of the firm was poor, even though loan was sanctioned due to some
other strong parameters such as the unit has got confirm order, the unit was an
existing profit-making unit & letter of authority was received for direct payment to
the bank from ONGC which is public sector

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CONCLUSION
 Credit is the core activity of the banks & important source of their earning which go
to pay interest to depositors, salaries to employees & dividend to shareholders

 Credit and risk go hand in hand

 Credit appraisal is done to check the commercial, financial & technical viability of
the project proposed its funding pattern & further checks the primary or collateral
security cover available for the recovery of such funds

 SBI norms for providing loans are flexible & it may differ from case to case

 The CRA models adopted by the consider all possible factors which go into
appraising the risk associated with a loan

 Bank’s main function is to lend funds/provide finance but it appears that norms are
taken as guidelines not as a decision making

 A banker’s task is to identify/assess the risk factors/parameters and manage/mitigate

them on continuous basis

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REFERENCES
 WEBSITES:

htt://www.rbi.org.in

htt://www.sbi.co.in

htt://www.indianbankassociation.com
htt://www.wikipedia.com

htt://www.google.com

 BOOKS, MAGAZINES & JOURNALS:

Indian Finance System

Tata Mc Graw Hill (Accounting & Finance)

THANK-YOU

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