A PROJECT REPORT

ON
“Risk Management in Punjab National Bank for Working
Capital and Term Loan”
At

Punjab National Bank

(Submitted toward partial fulfillment of the requirements for the

award of the Post Graduate in Management 2013-15)

Submitted by:
Anik
(Roll No: 221020)

FMG XXII

Under the Guidance of

Mr. Anil Jhanji
Manager (Credit)
PNB C.O. Kapurthala

&
Prof. Neeti Shikha
Internal Project Guide

FORE School of Management, New Delhi

B-18, Qutab Institutional Area,
New Delhi
 CERTIFICATE

This is to certify that Mr. Anik, Roll No. 221020, has completed his summer

internship at PNB, and has submitted this project report entitled (Risk

Management in Punjab National Bank for Working Capital and Term Loan)
towards partial fulfillment of the requirements for the award of the Post

Graduate Diploma in Management (FMG-22) 2013-2015.

This Report is the result of his own work and to the best of my knowledge no

part of it has earlier comprised any other report, monograph, dissertation or

book. This project was carried out under my overall supervision.

Date:

Place: ___________________

Internal Faculty Guide

(Prof. Neeti Shikha)

 ACKNOWLEDGEMENT
Behind every fruitful endeavor lies the advice, guidance and inspiration of all

the people directly or indirectly involved with the report. I wish to express my

gratitude to all the people involved in the completion of this report. I am

thankful to all of them for their help and encouragement throughout the

completion of the report. They have been a constant source of support for

me.

I would like to extend my sincere gratitude to the management of PNB for

providing me the enriching opportunity of working with the organization for a

period of 2 months. In particular, I would like to thank my Company Guide,

Mr. Anil Jhanji, for sparing the time to provide me with necessary guidance

and advice from time to time, with utmost patience, in spite of their extremely

busy schedule. I would also like to express my sincere gratitude to Mr.

Sanjeev Sharma and Mr. Rajesh Verma for sparing their time to provide me

with necessary guidance and many helpful comments.

My heartfelt gratitude and warm salutations are also due to Prof. Neeti

Shikha, my Internal Faculty Guide, the faculty of our Institute, for inculcating

in me the principles of dedication and hard work, and proving their guidance

and support throughout the Project.

Their constructive criticism of the approach to the problem and the result

obtained during the course of this work has helped me to a great extent in

bringing work to its present shape.

ANIK
Table of Content

EXECUTIVE SUMMARY..................................................................................................... 1
1. INTRODUCTION............................................................................................................. 2
1.1 Background.......................................................................................................................... 2
1.2 Banking Industry at a Glance......................................................................................... 2
1.3 Structure of Indian Banking Industry.......................................................................... 4
1.4 Company Profile................................................................................................................. 5
1.5 Objective of the Project.................................................................................................... 7
2. LITERATURE REVIEW.................................................................................................. 8
3. METHODOLOGY OF THE STUDY............................................................................12
3.1 Universe of the Study..................................................................................................... 12
3.2 Locale of the Study.......................................................................................................... 12
3.3 Sample Selection.............................................................................................................. 12
3.4 Data Collection................................................................................................................. 13
3.5 Analysis of Data................................................................................................................ 14
4. ANALYSIS....................................................................................................................... 15
4.1 Sources of risks considered in the model................................................................ 16
4.2 Usage of the credit risk rating model........................................................................ 18
4.3 Important factors considered in the rating process of the clients...................20
4.4 Special considerations in case of unavailability of data for clients.................21
4.5 Parameters considered in the PNB’s Credit Risk Model......................................24
4.5.1 Financial Strength Of The Clients.......................................................................................24
4.5.2 Business Performance Of The Clients...............................................................................24
4.5.3 Industry Outlook Of The Clients......................................................................................... 24
4.5.4 Management Evaluation Of The Clients...........................................................................24
4.5.5 Conduct Of Account.................................................................................................................. 25
4.6 Assessment of the Parameters of the Model...........................................................25
4.6.1 Assessment of financial strength........................................................................................ 25
4.6.2 Assessment of business performance..............................................................................29
4.6.3 Assessment of Industry Outlook of the Client...............................................................31
4.6.4 Assessment of Management Quality of the Client........................................................31
4.6.5 Assement of Conduct of Account of the Client..............................................................33
4.7 Comparison Of The Model With The Industry Standard.....................................34
4.8 Review Of The Model Based On Basel-III Norms....................................................35
4.9 Review Of The Model Based On RBI Guidelines.....................................................38
5. RESULTS AND RECOMMENDATIONS....................................................................40
5.1 Major Findings.................................................................................................................. 40
5.2 Recommendations.......................................................................................................... 41
5.3 Further Scope Of The Study.......................................................................................... 42
6. LIMITATIONS............................................................................................................... 43
7. REFERENCES................................................................................................................ 44
ANNEXURES...................................................................................................................... 45
List of Figure

Figure 1 Structure of the Indian Banking Industry..............................................................4

Figure 2: Hierarchical Structure of the Organization...........................................................6

Figure 3: Types of Risks...................................................................................................... 15

Figure 4: CRAR in PNB........................................................................................................ 36

Figure 5: Capital and NPA Levels for PNB.........................................................................37

List of Table

Table 1: Credit Risk Rating Entity Model............................................................................17

Table 2: Weightage of Parameters in the Model................................................................19

Table 3: Risk Rating Classification.....................................................................................20

Table 4: Achievement of Sales Targets by the Management............................................32

 EXECUTIVE SUMMARY

This project report titled “Risk Management in Punjab National Bank for Working

Capital and Term Loans” is concerned with the study of the techniques and

procedures followed by Punjab National Bank for determining and sanctioning the

working capital limits and term loan credits.

The study is related to the review of the existing Credit Risk Model being implemented

in PNB for the credit services. Various secondary data sources such as research

papers, journals and online web portals have been used to arrive at benchmark data

for analysis of the model. The RBI monitors the Credit Risk Models for all the banks in

India and also provides guidelines for the bank to maintain their procedures.

The study helps to understand the working of the Credit Risk Model of PNB in detail

and also the various parameters it uses to rate a client/project. The model being

discussed analyses the financial, operational, historical and industrial aspects of the

business/project of the client. The analysis of the model is also done by comparing it

with the industry benchmarks, and reviewing the compliance with the Basel-III and RBI

norms.

Various proposals and the general procedures followed at the bank were closely

observed and the conclusions, thus, drawn upon.

 1. INTRODUCTION
1.1 Background

In India, the definition of the business of banking has been given in the Banking

Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking

company is a company which transacts the business of banking in India.' Further,

Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or

investment, of deposits of money from the public, repayable on demand or otherwise,

and withdrawable, by cheque, draft, and order or otherwise.'

Banking is the business of providing financial services to consumers, The basic

services a bank provides are saving account, Time deposit, Loans that consumers can

use to purchase goods and services and basic cash management services such as

foreign currency exchange.

1.2 Banking Industry at a Glance

The commercial banking industry in India started in 1786 with the establishment of the

Bank of Bengal in Calcutta. The Indian Government at the time established three

Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay

(established in 1840) and the Bank of Madras (established in 1843). In 1921, the three

Presidency banks were amalgamated to form the Imperial Bank of India, which took up

the role of a commercial bank, a bankers' bank and a banker to the Government. The

Imperial Bank of India was established with mainly European shareholders. It was only

with the establishment of Reserve Bank of India (RBI) as the central bank of the
country in 1935, that the quasi-central banking role of the Imperial Bank of India came

to an end.

To better align the banking system to the needs of planning and economic policy, it

was considered necessary to have social control over banks. In 1969, 14 of the major

private sector banks were nationalized. This was an important milestone in the history

of Indian banking. This was followed by the nationalization of another six private banks

in 1980. With the nationalization of these banks, the major segment of the banking

sector came under the control of the Government. The nationalization of banks

imparted major impetus to branch expansion in un-banked rural and semi-urban areas,

which in turn resulted in huge deposit mobilization, thereby giving boost to the overall

savings rate of the economy. It also resulted in scaling up of lending to agriculture and

its allied sectors. However, this arrangement also saw some weaknesses like reduced

bank profitability, weak capital bases, and banks getting burdened with large non-

performing assets.

To create a strong and competitive banking system, a number of reform measures

were initiated in early 1990s. The thrust of the reforms was on increasing operational

efficiency, strengthening supervision over banks, creating competitive conditions and

developing technological and institutional infrastructure. These measures led to the

improvement in the financial health, soundness and efficiency of the banking system.

One important feature of the reforms of the 1990s was that the entry of new private

sector banks was permitted. Following this decision, new banks such as ICICI Bank,

HDFC Bank, IDBI Bank and UTI Bank were set up.
1.3 Structure of Indian Banking Industry

The Reserve Bank of India (RBI) is the central banking and monetary authority of India,

and also acts as the regulator and supervisor of commercial banks.

Scheduled banks comprise scheduled commercial banks and scheduled co-operative

banks. Scheduled commercial banks form the bedrock of the Indian financial system,

currently accounting for more than three-fourths of all financial institutions' assets.

SCBs are present throughout India, and their branches, having grown more than four-

fold in the last 40 years now number more than 80,500 across the country (see Table

1.1). Our focus in this module will be only on the scheduled commercial banks. A
pictorial representation of the structure of SCBs in India is given in figure
Figure 1 Structure of the Indian Banking Industry

1.4 Company Profile

Punjab National Bank (PNB) was established in 1894 and is the second largest

government owned and over all fourth largest bank in India. It has about 5800

branches across 764 cities and serves over 80 million customers. It has presence

throughout the country and offers a wide variety of banking services that include

corporate and personal banking, industrial finance, agricultural finance, financing of

trade and international banking. Among the clients of the bank are multinational

companies, Indian conglomerates, medium and small industrial units, exporters and

non-resident Indians. The strength of the bank lies in its corporate belief of growth and

stability.
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"

Figure 2: Hierarchical Structure of the Organization

1.5 Objective of the Project

The objective of this project is to study in depth the credit appraisal procedure followed

by PUNJAB NATIONAL BANK, which includes

 Understanding the 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.

 Understanding the different methods available for risk vetting of lending

proposals, different risk assessment models and the different credit rating

procedures used in Punjab National Bank.

 Understanding the appraisal process of Term Loan and working Capital

financing and sanctioning of working capital, issuing term loan, to corporate,

through different case studies, on the job training.

 Assessing the qualitative factors which influence the decision making of lending

to a particular client apart from theoretical parameters.

 2. LITERATURE REVIEW
According to Mann and Srivastava, the fast changing financial environment

exposes the banks to various types of risk. The concept of risk and

management are core of financial enterprise. The financial sector especially the

banking industry in most emerging economies including India is passing through

a process of change. Rising global competition, increasing deregulation,

introduction of innovative products and delivery channels have pushed risk

management to the forefront of today's financial landscape. Ability to gauge the

risks and take appropriate position will be the key to success.

Jain, Mukul in his research paper titled ‘A Critical Review of Basel-III norms

implementation in Indian Banks’ explains that the banking operations worldwide have

undergone phenomenal changes in the last two decades since 1990s. The financial

crisis episodes surfaced since 2006 have highlighted this paradox to a number of

central banks operating in different countries and RBI and Indian banking sector is no

exception to this phenomenon. The global Basel-III requirements, which require all

banks to hold top-quality capital equal to 7% of their assets, adjusted for risk, are

aimed at improving financial stability. But the sharply higher capital requirements have

drawn warnings from analysts and financiers about their impact on banking lending

rates and wider economic growth across the developing world. Buchelt and

Unteregger feel that long before the advent of Basel II, financial institutions had put in

place various control mechanisms and procedures. The process of managing

operational risk is different from those of managing market risk and credit risk only in

so far as operational risk is different from the other two kinds of risk.

Kaiser and Kohne argue that the distinctive feature of operational risk may cause

significant divergence of the individual steps of operational risk management from the

corresponding steps of market and credit risk management. Kingsley state the

following objectives of operational risk management: avoiding catastrophic losses,

generating a broader understanding of operational risk issues, enabling the firm to

anticipate risk more effectively, providing objective performance measurement,

changing behavior to reduce operational risk, providing objective information so that

services offered by the firm take account of operational risk, ensuring that adequate

due diligence is shown when carrying out mergers and acquisitions. All of these

objectives, it seems, fall under the headings, “risk avoidance” and “risk reduction” but

operational risk management is more than that as it encompasses risk transfer and

risk financing.

Raghavan, R.S in his research has found out that there are various key factors that

must be considered for a credit risk model for Indian banks. According to him, the

banks must adopt a disciplined way of looking at Credit Risk and estimation of the

overall health status of an account captured under Portfolio approach as contrasted to

stand-alone or asset based credit management. Impact of a new loan asset on the

portfolio can be assessed. Taking a fresh exposure to the sector in which there already

exists sizable exposure may simply increase the portfolio risk although specific unit

level risk is negligible/minimal. He stresses on the need for relationship managers in

banks to capture, monitor and control the over all exposure to high value customers on

real time basis to focus attention on vital few so that trivial many do not take much of
valuable time and efforts and that rating should be used for the anticipatory

provisioning.

Tarashev and Zhu used a standard portfolio credit risk model to estimate links

between capital and the probability of bank default, which is treated as a signal for a

systemic banking crisis. They interpret the banking system as a portfolio of banks and

estimate the loss distribution arising from bank defaults. They concluded that bank

failures are correlated and the correlations can be estimated from market information.

In a master circular issued by RBI to all the banks in India, it has drafted a certain set

of guidelines that the banks must strictly follow in accordance with the Basel-III

instructions adjusted by RBI. Saran, Prashant summarizes these guidelines that the

banks can outsource the financial services done by them to external companies but

necessary safeguards to address the risks inherent in such a case should be put in

place.

According to the RBI’s journal and guidelines on Risk Management in banks, the

broad parameters of risk management function should encompass an organisational

structure, comprehensive risk measurement approach, risk management policies

approved by the Board, guidelines and other parameters used to govern risk taking

including detailed structure of prudential limits, strong MIS for reporting, monitoring

and controlling risks, well laid out procedures, effective control and comprehensive risk

reporting framework, separate risk management framework independent of operational

Departments and with clear delineation of levels of responsibility for management of

risk and periodical review and evaluation.

 3. METHODOLOGY OF THE STUDY

Methodology is description of the process, rules, methods employed in a study.

Research in common parlance refers to a search for knowledge. One can also define

research as a scientific and systematic search for pertinent information on a specific

topic. In fact, research is an art of scientific investigation. This chapter deals with

universe of the study, locale of the study, method of data collection, tools used for

data collection, types of sampling used, sample sized used for study and analysis of

the study.

3.1 Universe of the Study

The universe of the study consists of all the employees of the organization (Punjab

National Bank).

3.2 Locale of the Study

The locale of the study has been narrowed down to the PNB, Circle Office Kapurthala

(Punjab). The study is categorized into the credit department of PNB. The office

receieved a number of proposals for Working Capital Limits and Term Loans on daily

basis. So the researcher decided to take up these proposals for analysis purpose. The

findings may or may not be similar to the other branches of the company.

3.3 Sample Selection

The sampling of study has been done as per convenience sampling. A convenience
sample is a sample where the samples are selected, in part or in whole, at the

convenience of the researcher. The researcher makes no attempt, or only a limited

attempt, to insure that this sample is an accurate representation of some larger

group or population. Owing to time constraint and being a learning experience the

research was narrowed down to 20 samples out of average number of 70 proposals

received per month so that an in depth analysis can be carried out.

3.4 Data Collection

For the purpose of data collection, two different sources were adopted for the study:

 Primary Sources

 Secondary Sources

The primary data collection method has been used to complete the research activity.

But the researcher has done secondary research study also.

Primary - For this study the researcher has considered the proposals and the observed

the procedures that were followed for the same. Various documents were taken from

the company to complete the analysis. The management was interviewed for

clarifications, wherever required. The researcher also consulted the manuals and

guidelines provided by PNB.

Secondary - The researcher has gathered material from various risk management

related research papers and journals. The official website of PNB, RBI and other web

portals on financial topics were also studied to understand the process.

3.5 Analysis of Data

The gathered data has been analyzed to draw inferences and finding for this research

study on Cedit Risk Management for Working Capital and Term Loan and evaluate the

feasibility and the soundness of the model under discussion.

For the research study, 20 proposals were shortlisted such that it covers a number of

situtations that are/are not covered by the existing model that PNB follows. The

proposals were then assessed based on the parameters defined under the model of

the bank. The staff working on the cases and the authorized officials were consulted

for the cases that could not be arrived on a conclusion under standard parameters of

the model. The data gathered from Literature review was used in the comparison of

the current model in use by PNB with the industry requirements from the same.
 4. ANALYSIS

The credit risk rating model has been developed with a view to provide a standard

system for assigning a credit risk rating to the borrowers of the bank according to their

risk profile. This model is applicable to all large corporate borrowal accounts availing

total limits (fund based and non-fund based) of more than Rs. 15 crore or having total

sales of more than Rs. 100 crore.

Inputs to the model are the financial data of the borrower, industry information and the

evaluation of the borrower on various objective and subjective parameters.

The model evaluates the credit risk rating of a borrower on a scale of AAA to D with

AAA indicating minimum risk and D indicating maximum risk. The credit risk-rating

model incorporates and includes possible factors of risk for determining the credit

rating of the borrower. These risks could be internal and specific to the company, the

industry in which the company is operating or the entire economy and can influence

the repayment capacity and / or willingness of the company.

Figure 3: Types of Risks

4.1 Sources of risks considered in the model

Signals for credit risks can be picked up from a number of sources. The credit risk-

rating model considers the following broad areas in evaluating the default risk of a

borrower:

 Financials  Quality of Management

 Business Performance  Conduct of Account
 Industry Outlook
The rating model is focused on the above-mentioned areas for assessing the credit

risk rating of a company. The areas are bifurcated into sub-areas and each sub-area is

further split into a number of parameters. The sub-areas as well as parameters used in

the different sections have been explained in detail in the following part of the report.

There are various models adopted for different projects and accounts which are

categorized and briefly explained below:

Credit Risk Applicability

Rating Model
Total Limits from our Sales Sector
Bank

Large Corporate Above Rs. 15 Crore Above Rs.100 Crore Manufacturing and
OR
Service

Mid Corporate Above Rs. 5 Cr and up Above Rs. 25 Cr. and Manufacturing,
to Rs. 15 Cr. OR
Up to Rs.100 Cr. for Service and
manufacturing and service
industry and irrespective Trading
of limit in case of trading
activities.

Small Loans Above Rs.50.00 lakh Up to Rs.25 Cr. All sectors except NBFC/
and Up to Rs.5 Crores Banks/FIs
AND

Small Loans II Above Rs. 2 lakhs & up Up to Rs.25 Cr. All sectors except NBFC/
to Rs. 50 lakh AND Banks/FIs

NBFC All Non Banking Financial Companies irrespective of Limit

New Projects Above Rs. 5 Cr Cost of Project above All sectors, except
 OR Rs.15Cr. NBFC/Banks/FIs and
trading up to two years of
operations.

Entrepreneur Borrower setting up Cost of project up to Rs. All sectors, except

New Business new business and 15 cr. NBFC/Banks/FIs. However,
requiring finance above all new trading business
Rs. 20 lakh and up to irrespective of limits shall be
Rs. 5 cr. AND rated under this model.

Half Yearly Applicable to all listed companies as well as all accounts having exposure from our
Review of bank (Fund Based+Non Fund Based) of above Rs. 50 crore
Rating

Counter Party All banks and Financial Institutions

Table 1: Credit Risk Rating Entity Model

As shown in the Table above, the bank considers different business clients as different

type of entities based on a certain criteria. These parameters are explained as follows:

 Large Corporates: The clients who have net sales of over Rs. 100 crore are

categorized in this class. This class is qualified to avail limits of more than Rs.

15 crore from the bank. This class generally has clients from Manufacturing and

Service sectors.

 Mid Corporates: The clients who have net sales between Rs 25 crore and Rs

100 crore are categorized as Mid Corporates. This class is qualified for limits

between Rs 5 crore and Rs 15 crore. This class generally has clients from

Manufacturing, Trading and Service sectors.

 Small Loans-I: The firms that have sales upto Rs 25 crore can be classified as

Small Loans-I clients. These can avail limits ranging from Rs 50 lakh to Rs 5

crore. This class is applicable to all the sectors except NBFC/Bank/FIs.

  Small Loans-II: The firms that have sales upto Rs 25 crore can be classified as

Small Loans-II. These can avail limits ranging from Rs 2 lakh to Rs 50 lakh from

the bank. This class is applicable to all the sectors except NBFC/Bank/FIs.

 NBFC: There is no limit to this category in terms of sales or limits. This category

is specially reserved for Non Banking Financial Companies (NBFC).

 New Projects: This class has clients that have cost of project more than Rs 15

crore. A limit of over Rs 5 crore can be availed by these firms. All sectors are

applicable in this class except NBFC/Banks/FIs and trading firms for the first

two years of operations.

 Entrepreneur New Business: The new projects that cost less than Rs 15 crore

qualify for this class. Funding of the project that can be availed by the bank lies

between Rs 20 Lakh and Rs 5 crore.

 Counter Party: All banks and financial Institutions

4.2 Usage of the credit risk rating model

The following text describes the basic rating procedure followed when implementing

the rating model for a client.

1. The scores are assigned to each of the parameters in the different sections on a

scale of 0 to 4 up to two decimal points with 0 being very poor and 4 being

excellent. The scoring of some of these parameters is subjective while for some

others it is done on the basis of pre-defined objective criteria.

Wherever a particular parameter is not applicable, no score should be given.

The parameter should be made ‘NA’ so that the weight assigned to that
 parameter gets distributed among the other parameters in that section

automatically.

2. The scores given to the individual parameters multiplied by allocated weights

are aggregated and a composite score for the company is arrived at in

percentage terms. Weights have been assigned to different parameters based

on their importance.

The following table shows the various parameters and the weights assigned to

them:

S No. Factor Weight Assigned

1 Financial 40
2 Business / Industry 20
3 Management 20
4 Conduct of Account 20
Total 100
Table 2: Weightage of Parameters in the Model

3. The overall percentage score obtained from step 2 on a scale of 0 to 100 is then

translated into a rating on a scale from AAA to D according to a pre-defined

range as under:

Rating Risk Profile Score (%) obtained Grade within the

category (Description) rating category

PNB –AAA Minimum Risk Above 80.00 PNB- AAA

 PNB-AA Marginal Risk Above 77.50 up to 80.00 PNB- AA+

Above 72.50 up to 77.50 PNB- AA

Above 70.00 up to 72.50 PNB- AA-

PNB-A Modest Risk Above 67.50 up to 70.00 PNB- A+

Above 62.50 up to 67.50 PNB- A

Above 60.00 up to 62.50 PNB- A-

PNB-BB Average Risk Above 57.50 up to 60.00 PNB- BB+

Above 52.50 up to 57.50 PNB- BB

Above 50.00 up to 52.50 PNB- BB-

PNB-B Marginally Above 47.50 up to 50.00 PNB- B+

Acceptable Risk
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

Table 3: Risk Rating Classification

4.3 Important factors considered in the rating process of the clients

The rating model contains several qualitative parameters that are to be evaluated

subjectively. It is, therefore, necessary to be adequately familiar with the company and

the industry. Visiting the company and interacting with its management generally helps

the rater in understanding the underlying activity behind the financial data of the

company being analysed; the business prospect of the company and its management.

Information should be collected about the company from all possible sources to

conduct this exercise completely, accurately and in an authenticated manner.

The data used to rate companies should be annualised & made comparable before it

is used for rating purposes. Similarly the financials of the company should be made
comparable with peers in case of change in accounting policies, merger, demerger,

acquisition, sell-off etc.

While evaluating a company against the industry the following points should be kept in

mind:

 The company’s value should be compared only with peers.

 Size / capacity / volume are indicative factors in selecting peers.

 The sample of companies chosen for the industry comparison should be

identical as far as possible for rating all companies under one particular industry

having similar size / capacity / nature of activity.

 The number of companies in sample should be reasonable i.e. neither too low

nor too high.

 The sample size should be of at least 5 companies. The sample should

preferably be selected from the activities in which company is operating.

4.4 Special considerations in case of unavailability of data for clients

For companies where industry data is not available, data for other ‘comparable’

industries can be used. For example, blade-manufacturing companies can be

compared with combined sample of companies manufacturing blade and other

shaving products etc. Similarly Hindustan Aeronautics Ltd. may be compared with

other heavy engineering companies, which also uses intensive technologies and have

a similar size, say in terms of sales turnover.

For multi-divisional companies, which are involved in more than one industry,

evaluation should be done separately for each business. Thus the management
evaluation, conduct of account and financial evaluation will be done on a common

basis. For the business section, each business should be evaluated and scored

separately, taking into account the different industries involved. A weighted average of

these business scores should be calculated, where the weights are proportional to the

contribution of each business to the company’s total sales. This weighted average

should then be combined with the scores in the other sections to arrive at the overall

rating for the company.

The credit risk rating exercise should be done immediately after receipt of audited

financial results of the company and should be delinked invariably from the regular

renewal exercise. The updating of the credit ratings should be undertaken normally at

quarterly intervals or at least at half-yearly intervals, operationalising of Preventive

Monitoring System (PMS) will be an aid in this regard.

In case latest data of peers is not available for industry comparison, then last available

data, not more than one year old, may be considered.

For companies, which have not been banking with PNB earlier, the score obtained

excluding conduct of account should be scaled up to 100 and the rating assigned

accordingly, as the PMS score will not be available.

The Credit Policy and Risk Management Department (CPRMD), Head Office will provide the

industry score to be used for all major industries, progressively. Until such time the industry

score may be assigned as 50%.

4.5 Parameters considered in the PNB’s Credit Risk Model

4.5.1 Parameter 1: Financial Strength Of The Clients

The financials of a company are indicative of the health of the company and potential

risks in lending to the company e.g. if the company already has a large amount of debt

on its balance sheet, compared to its cash flow generation capacity, a loan to this

company would be risky.

4.5.2 Parameter 2: Business Performance Of The Clients

The business performance of a company has a direct relationship with the credit risk of

the company as the business performance determines the generation of cash for debt

repayment.

The company’s competence in its activities as well as its position relative to its

competitors are key indicators of how a company is expected to perform and its ability

to generate funds to repay its debts.

4.5.3 Parameter 3: Industry Outlook Of The Clients

The credit rating of a company cannot be assessed without considering the outlook of

the industry in which the company is operating. Industry performance very often has a

direct bearing on the performance of a company. Two companies in different industries

would have different credit worthiness depending on the outlook for their industries.

4.5.4 Parameter 4: Management Evaluation Of The Clients

The quality of management and management structure are very important indicators of

a company’s credit risk. The performance of a company driven by a strong

management is likely to be better than that of a company having a poor management

irrespective of the industry to which it belongs.

Evaluation of management is important not only due to its impact on the company’s

performance, which determines its capability to repay, but also from the point of view

of its integrity. This is because the intentions of the management determine the

willingness of the company to repay its debts.

The management quality thus influences both aspects of default risk, the ability as well

as the willingness of the borrower to repay its debts. Thus the evaluation of

management quality is an essential input for credit risk assessment.

4.5.5 Parameter 5: Conduct Of Account

The conduct of account refers to as to how the borrower’s existing accounts with our

Bank as also with other banks are being conducted and whether any problems are

being faced. The conduct of account provides useful indications about the ability and

willingness of the borrower to meet his obligations. The manner in which a borrower

has been conducting his accounts in the past is a good indicator of how the account is

likely to behave in future as well.

4.6 Assessment of the Parameters of the Model

4.6.1 Assessment of financial strength

The financial strength of a company may be assessed by critically analysing the past

financial performance, its trend and expected future performance. This analysis help in
predicting the potential risk involved. These parameters are taken normally from the

annual financial statements of the company i.e. Balance Sheet, Profit & Loss

Statement and the Cash Flow statement. Past performance is taken as a guide to

realistically assess future performance.

Besides, it is essential to determine the quality of these financial statements as to what

extent these can be accepted at face value. Further, the trends in financial

performance over the past few years also indicate how the company’s performance

has been changing over the past few years.

The financials are evaluated under four broad areas as under:

1. Past financial performance

While credit risk rating is done to evaluate the ability of a company to repay its debts in

future, evaluation of past financials is very important as it reflects the present financial

health of a company, which is a good indicator of how a company is expected to

perform in future.

The past performance is evaluated on the basis of figures given in the financial

statements of the company as well as industry data. Some of the parameters are

evaluated against absolute benchmarks while some are judged in comparison to

peers. In respect of certain parameters percentage growth of the company over the

past few years are compared while in respect of certain parameters, the ratios derived

from the previous year’s financial reports are compared. The evaluation of each of the

individual parameters is explained in detail in the following pages.

2. Future risk expectations

The expectation of future financial risk is an important input to the credit rating

process. This is used to evaluate the cash flows of a company as well as any major

risks, which the company might be facing in future that may adversely impact its

financial performance.

The evaluation of future risk expectations is a subjective matter based on the

assessment of the company’s future performance. These expectations are based on

the performance of the company in the past as well as its plans for the future. The

contingent liabilities of the company, the Foreign Transaction Risk and the cash flow

adequacy etc. are considered in this section.

3. Subjective assessment of quality of financial figures

The assessment of the financial figures of a company is very essential to determine

the extent of reliability of the figures given in the financial statements of a company.

Companies often resort to tactics meant to distort the figures in the financial

statements such as adjustments in depreciation method, income recognition,

capitalisation of interest/expenses, pricing of inventory etc. Hence there is a need to

assess the extent to which the figures given in the balance sheet are reliable and how

transparent the accounts of the company are.

Further, the actual realisable value for these assets may also be different from that

given in the balance sheet. These aspects are to be taken into consideration while

evaluating the financials of a company.

4. Trends in financial performance over the past few years

The assessment of past financials relies on figures for the previous year. The pattern

of change over the previous years is an important indicator of the company’s future

performance. The evaluation of trends in respect of certain identified parameters is

done using the figures given in the financial statements of the company. The

evaluation of these parameters takes into account the direction & magnitude of

changes over the past years.

Within these areas, parameters are defined to determine the company’s position on

each of these areas. Scores are assigned to the parameters within these areas and

they are combined to arrive at a score for each of the above areas. The scores for

these areas are then combined according to the weights assigned to different areas to

arrive at the cumulative financial score.

The subjective assessment of financials as well as trends in financial performance is

used to adjust the score obtained under past financials.

Past financial performance

The assessment of past financial performance is done on the following parameters

and each of them is assigned a different weightage in order to arrive at a cumulative

rating for the past performance.

 Gross Sales Growth Rate  Debt-Equity ratio

 OPBDIT  Total Net Worth
 Short Term Borrowings  Current Ratio
 Operating Cash flow  Interest Coverage Ratio
 Net Cash Flow  DSCR
4.6.2 Assessment of business performance
The performance of a company is influenced both by its own set up as well as its

competitive position within the industry. Thus the two broad sub-areas used to assess

the business performance of a company are:

1. Operating Efficiency

2. Market Position

Within these areas parameters are defined separately for manufacturing and service

sectors. The parameters defined for Service Sector and detailed guidance for

evaluating these parameters are given under Section 4.5. Scores are assigned to the

parameters within these areas and they are combined to arrive at a score for each of

the above areas. The scores for these areas are then aggregated according to the

weights assigned to different areas to arrive at the cumulative score for the company

on business performance.

1. Operating Efficiency of the Client

This covers the operations of a company and how efficient it is at performing its core

activities and takes care of aspects like the asset utilisation of the company, its

working capital management, cost effectiveness of operations etc. These factors play

an important role in determining the business performance of a company and thus are

evaluated for determining the business performance.

The evaluation of the parameters under this area is done on an objective basis using

the figures in the financial statements of the company. Within these, some parameters

might require a subjective assessment and have to interpret from the financial

statements. This would be applicable specifically to parameters like Credit Period

Availed and Credit Period Allowed. e.g. if credit period availed is very high as obtained

from the financial statements, then it could be due to a very good reputation of
company in the market, or because the company is not paying its suppliers in time.

Thus an interpretation of these figures will have to be made to decide what score is to

be assigned.

There are various parameters on which the evaluation is done but the most important

parameters out of these will be selected and scores assigned to them. The selection of

these parameters may be made on the basis of its relevance in a particular industry &

these will be decided by the Credit Systems and Tools Team and updated from time to

time as needed.

2. Market Position of the Client

The business performance of a company is not governed simply by its own operations

but also by the competition in the industry as well as the company’s position vis-à-vis

its competitors. This also covers risks related to buyers, suppliers and technology used

by the company. An evaluation of the parameters helps in determining how well the

company is placed to compete in the market and how efficient its operations are. It

also reflects how fluctuations in the market and developments in the industry would

influence the operations of the company.

The parameters that would be used for evaluating the market position of a company

would vary from industry to industry. Also, within these parameters, assignment of

scores would require a large number of sub-parameters to be considered. The Credit

Systems & Tools Team in association with the industry specialist teams would decide

these parameters and sub-parameters for different industries.

The rater assigns scores to the individual sub-parameters, which would then lead to a

final score for the parameters, after combination of weightage assigned to the
individual sub-parameter. Assignment of scores to the parameters/sub-parameters will

be subjective.

4.6.3 Assessment of Industry Outlook of the Client

The industry rating is used to adjust the score obtained by a company on business

performance. The rationale for this is that a company belonging to an industry that

score highly on industry rating would be in a better position to strengthen its business

position. Conversely a company belonging to an industry with a poor industry outlook

would have adverse impact on its business position.

Good performers are given greater benefit and penalised less for the industry outlook

because they would be in a better position to exploit the opportunities in the industry

as well as protect against the uncertainties in the industry.

The Credit Policy and Risk Management Department (CPRMD) provide the industry

score to be used for all major industries, progressively. Until such time the industry

score may be assigned as 50%.

4.6.4 Assessment of Management Quality of the Client

Evaluation of management is done to determine both their competence as well as their

integrity.

The two sub-areas considered for this purpose are:

 Achievement of past targets by the company

 Subjective assessment of management quality

Within these two sub-areas, parameters are defined which enable us to determine the

company’s position on each of these sub-areas. Scores are assigned to the

parameters within these areas and they are combined to arrive at a score for each of

the above areas. The scores for these areas are then aggregated in accordance with

the weights assigned to different areas to arrive at the cumulative score for the

company on management quality.

1. Achievement of targets by the Client

The targets quoted by the company at the beginning of the year are used as the

benchmark with which the actual performance is compared. This gives an indication of

the management’s ability to drive the company by properly gearing it to the

performance target set by them.

The actual results of the company are compared to the targets that had been set by

the company at the beginning of the year and the extent to which the targets have

been achieved is used to assign scores to the parameters.

Achievement of actual sales against estimated/projected sales Score

< 75% 0

75% to 79% 1

80% to 89% 2

90% to 95% 3

> 95% 4

Table 4: Achievement of Sales Targets by the Management

2. Subjective assessment of the management of the client

The assessment of management on criteria like integrity, honesty, and track record is

assessed in this section. This area is important as this indicates both the quality as

well as integrity of management. Hence it is essential to be completely familiar with the

management of the company and its track record, organisation structure and reporting

relationships within the organisation as well as the qualifications of the top

management personnel.

4.6.5 Assement of Conduct of Account of the Client

The evaluation of the conduct of an account is done on the basis of its PMS Rank or

PMS Index Score (Maximum). The outlook and performance of an industry depend on

a number of parameters that include the structure of the industry as well as its

financials. Some of the broad parameters that are used for evaluating an industry are:

1. Expected industry growth rate

2. Capital market perception: The industry P/E ratio is a useful indicator in this regard

3. Regulatory framework

 Tax Concessions

 Tariff Protection

4. Demand-supply mismatch

5. Financial performance of industry

 Return on capital employed

 Price stability

 Operating profit margins

 Earning stability

6. Threat from globalisation

7. Structural attractiveness

 Supplier power

 Buyer power
  Threat of product substitution

 Threat of new entrants and entry barriers

 Competition within the industry

4.7 Comparison Of The Model With The Industry Standard

The current Credit Risk Model of PNB can be compared to the Industry standard that

has been arrived at by the secondary research done through research papers. The

model used by PNB is evaluated on the basis of each of those parameters that are

considered important for a bank’s credit rating system as follows:

 Disciplined way of looking at Credit Risk and estimation of the overall

health status of an account: The model has predefined sub parameters in

different sub areas that help the bank to evaluate a project on various different

areas that can affect the Credit Risk to the bank. The financial, management,

operation, industrial and historical data is all taken into consideration while

evaluating an account.

 Assessment of impact of a new loan asset on the portfolio: The bank

follows strict guidelines that limit the funding of the projects. These limits are

prescribed as a percentage of the total funding available to the bank. This helps

the bank to limit the risk involved in its operations. This characteristic of the

model helps the bank to cover for the losses in case of defaults.

 Sector wise Risk monitoring: The bank has operational poilicies in the credit

risk model that helps the bank to monitor its activites in a particular sector. This
 helps the bank to limit the risk involved in case of changing traditions and

policies of the entire industry that might have an adverse effect.

 Relationship managers for high value accounts: Bank does not have a

policy of appointing relationship managers for high value account. However,

bank has included a structure of approval of the projects such that the projects

are looked into by the different offices in terms of power and hierarchy. High

Value projects are generally handled by Regional or Zonal Offices while smaller

projects can be handled at the District Headquarter level or Branch Office level.

 Rating procedures should be implemented: PNB has a rating system of the

clients set up in place that considers a number of parameters and sub-

parameters to calculate the worthiness and risk quotient of the client. These

parameters are based on financial, environmental, internal, operational and

historical performance of the firms.

4.8 Review Of The Model Based On Basel-III Norms

Under Basel III the total capital a bank is required to hold is 8.0% of its risk-weighted

assets. Total capital is divided into two broad categories: Tier I capital and Tier II

capital.

Broadly speaking, Tier I capital is capital that is available to absorb losses on a "going-

concern" basis, or capital that can be depleted without placing the bank into

insolvency, administration or liquidation. Tier II capital is capital that can absorb losses

on a "gone-concern" basis, or capital that absorbs losses in insolvency prior to

depositors losing any money. Additional Tier I capital mainly consists of instruments

issued by the bank, which are able to meet specific criteria (and are not included in
Common Equit y Tier I capital). Basel III has introduced stricter criteria for determining

what constitutes Additional Tier I capital in order to ensure these instruments absorb

losses of a bank on a going- concern basis.

Basel III has also introduced a capital conservation buffer that requires an additional

2.5% of Common Equity Tier I capital to be held over and above the absolute minimum

requirements. This buffer is intended to be available to be deployed during periods of

stress. If the buffer falls below 2.5%, constraints on a bank's ability to distribute

earnings will be progressively applied on a sliding scale. The regulator has been given

authority to determine the level of the buffer according to its perception of the systemic

risk that has built up in the banking system as a result of excess credit growth.

12

10

6 Tier-I Capital %
Tier-II Capital %
4

0
2012 2013

Figure 4: CRAR in PNB

The graph shown above clearly shows that there has been consistent increase in tier I

capital (except 2011), which has not been supported by Tier II.
 Figure 5: Capital and NPA Levels for PNB

As shown in graph above, at present the bank is satisfactory capital adequacy but Net

NPA has rose to almost 400% in past five years, which calls for additional provision. A

combined impact of this could adversely affect overall capital adequacy especially in

terms of Basel III. The Bank’s profit in the latest year has grown by about 10 %.

Government ownership is above 54 % and last Public Issue by the bank was brought

in 2005 so if needed bank can look for raising public equity.

4.9 Review Of The Model Based On RBI Guidelines

The model used by PNB for Credit Risk Mangement can be reviewed as per the RBI

guidelines and evaluated on those terms as follows:

1. Organisational structure: PNB has an organizational structure defined and set

up in place. Hierarchy and power distribution has clearly been defined on

individual as well as office terms.

2. Comprehensive risk measurement approach: PNB has developed and adopted

a risk management model that verifies the viability of the project to be funded

rigorously.

3. Risk management policies approved by the Board: The board of PNB has set

up its internal risk management policies in tandem with the guidelines set by the

RBI.

4. Strong MIS for reporting, monitoring and controlling risks: The Finacle from

Infosys has been implemented by PNB as their MIS which is used by them for

their services to their customers as well as for their internal functioning. PNB

also uses CIBIL to verify the reliability, history and background of the clients

before proceeding with their proposals.

5. Separate risk management framework independent of operational Departments:

PNB has set up in place their risk management model named TRAC that is

used for all the credit services offered by the bank.

6. Periodical review and evaluation: High value and large funded projects are

reviewed at least bi-annually and others at least annually to have an updated

information about the project and their credit status. This review helps PNB to
moderate the funding that it has provided to the project and to establish a check

on the credit risk it has from those projects.

5. RESULTS AND RECOMMENDATIONS

This chapter deals with the findings conclusions and suggestions of the report.

So that relevant facts does not get lost in heap of information generated during

the analysis and the interviews.

5.1 Major Findings

The major findings from the study can be listed as follows:

 The Credit Risk Model of PNB is very well incorporated.

 The Model follows RBI Guidelines and strictly adheres to the instructions issued

by RBI.

 The Model is quite ready for RBI’s milestone set for the PSU banks to comply

with the procedures as per Basel-III norms.

 The model does not comply well with the Basel-III norms of maintaining the

ratios of Tier-I and Tier-II Capital

 The financial status of the clients is a very important factor in determining the

funding limits and loans to the firms.

 For new projects, viability of the projects is an essential factor in determining

whether the project should be funded or not.

 For large corporate accounts, PMS rating and account history is the most

crucial factors along with the project viability.

  The subjectivity in evalutating the parameters for a project provide the bank with

a provision to incorporate the reports made by Lending Engineers for the

projects.

 The model also has a provision for including the reviews of external rating

agencies (CRISIL, ICRA etc.) in case of need of external verificaton.

5.2 Recommendations

Based on the analysis and the results arrived from the research, various

recommendation that can be made to enhance the existing model for PNB are:

 Financial and operational performance of the company applying for loan should

be compared with its industry peers. Relative performance comparisons will not

only highlight the management capability but also help in identifying any

abnormalities in the information submitted by the company.

 Compliance with Basel-III norms has to be met by 2018, as prescribed by the

RBI. The bank must be pro-active in developing and designing the policies to

meet the requirements and stabilize the Tier-I and Tier-II capital ratios.

 Forward looking statements with respect to sales, profitability etc. provided in

the DPR and other reports submitted by the company should be treated with

caution. Market analysis, demand analysis, sales projections etc. should be

evaluated on with prevailing norms of the RBI.

  If any of the critical ratios is marginally unfavorable, then additional collaterals

could be charged or pricing of the loan could be revised upward to compensate

for the additional risk

 Due to increased activism and regulatory crisis like that with spectrum allocation,

mining leases, land acquisitions issues, environmental considerations etc.

viability of otherwise sound projects is threatened. Social, political and

economical risks should also be taken into consideration while deciding project

viability. Evaluation of these risks should be made mandatory in TEV report

 Bank should be more stringent now as RBI has changed the norms for

restructuring of the accounts and the time period for declaration of a bad

account as NPA has also been shortened which will certainly effect the

performance of the bank.

5.3 Further Scope Of The Study

As it is known no study is an end in itself, scope exists for further exploration of the

study. So, more samples can be studied and an in-depth analysis can be carried out.

Due to time constraints study is restricted to credit risk management for working capital

and term loans and it can be extended to other areas as well.

The scope could be increased by taking projects of different industries and different

regions of India and evaluating them to enhance the visibility and efficiency of the

model.
 6. LIMITATIONS

 The data availability is proprietary, not readily shared for dissemination and is

highly confidential.

 Due to non availability of data, peer comparision could not be done.

 Constraints related to non-disclosure of the confidential data hindered the inclusion

in the study and thus, limiting the scope of the study.

 Assumptions and projections are based on current market conditions and have not

taken into account the price volatility.

 The staff although was very helpful but was not able to give much of its time due to

its own work constraints.

 The study is being done keeping in mind the policies of the Head Office.

 Due to the ongoing process of globalization and increasing competition, no single

model or method will suffice over a long period of time and constant up gradation

will be required.
 7. REFERENCES

 Kanchu, Thirupathi & Kumar, M. Manoj (2013) “Risk Management in Indian

Banking Sector- An Empirical Study” - International Journal of Marketing and

Finance

 Arora, Swarnjeet (2013) “Credit Risk Analysis in Indian Commercial Banks – An

Investigation” – Asia-Pacific Finance and Accounting Review

 Bhaskar, Patil Jaykar (2014) “Credit Risk Management in Indian Banks” –

International Journal of Advance Research in Management Studies

 ALShubiri, Faris Nasif (2011) “The Effect of Working Capital Practices on Risk

Management” – Global Journal of Business Research

 Jain, Mukul (2013) “A Critical Review of Basel-III Norms for Indian PSU Banks”

 Balasubramaniam, C.S. (2011) “Indian Banking and Basel Norms” – National

Monthly Refreed Journal of Research in Commerce & Management”

 http://www.ssrn.com/ accessed on May 17, 2014

 http://pnbindia.com accessed on May 21, 2014

 http://www.researchjournali.com/ accessed on May 21, 2014

 http://jetems.scholarlinkresearch.com/ accessed on May 25, 2014

 http://www.rbi.org.in/SCRIPTs/BS_ViewMasCirculardetails.aspx?id=8121

accessed on June 01, 2014

 Risk Policy Manual, Punjab National Bank

 Master Circular on Credit Risk Policies, Reserve bank of India

 Instruction Manual on Loan, Punjab National Bank

 ANNEXURES

ANNEXURE-I
CRAR for PNB:

The full document is available at:

http://pnbindia.in/new/Upload/English/Financials/PDFs/Disclosure_Basel_II_Pillar_3.pd

NPA LEVELS for PNB:

The full document is available at:

http://pnbindia.in/new/Upload/English/Financials/PDFs/Disclosure_Basel_II_Pillar_3.pd

f
 ANNEXURE-II

Term Loans And Working Capital Limits Proposal Format:

Annexure-I

SANCTIONING AUTHORITY

MC CMD ED Others

The proposal falls under the powers of GM/ED/CMD/MC on account of

____________________

Reference No. / Date :

1. Name of the Borrower and BO & Controlling Office :

Rs. In _________
GIST OF THE PROPOSAL

A. Sanction of Working Capital Limits

Existing Proposed

FB

NFB

B. For Term Loan

Purpose

Cost of Project

Total Debt

Promoter’s contribution

Proposed TL (our share)

DER

Repayment Period

Door to door tenor

C. Approval of ROI/ Service charges as under:-

 Facility Existing Proposed Applicable Income Earned

rate

Last Year Current year

upto_______

Intt. Non- Intt. Non-

Rate of Intt. Intt.

interest CC

PC

TL

Processing

Fee

Upfront Fee

Lead Bank

Fee

Commission

on NFB

Other

charges, if
 any

D. Approval of other Issues, if any :

Whether fresh/renewal/
enhancement
Asset Classification as
on________ and last PMS score
Credit Risk Rating by Bank is ---- Rating Date of Score ABS Reasons for
------ indicating ------------ risk Rating degradation
Present
Previous
Rating from External Agency (The Facility Rating Date of Rating Remarks
external rating should be mapped to rated rating Agency
the internal rating)

Whether priority/non priority sector

as per PS&LB guidelines (Latest
being PS&LB/LBC/Codified
Circular No. 11 dated 16.7.2011)
Sub-sector may also be
mentioned.
Whether Agriculture/Retail/
SME/Others (Please specify)
a) Whether Sensitive Sector –
Real Estate/Capital Market
b) Applicable Risk weight
Consortium/Multiple Banking
Lead Bank
PNB’s Share %
Date of application

Date of receipt of proposal

- At BO/CO/HO

Date of clarifications, if any,

received at CO/HO

Date of submission of proposal

Remarks
Date of last sanction &
authority/’In Principle’ Consent
Customer ID No.
Activity code (as per ladder)
PART – I

2. Borrower’s Profile

a. Group Name
b. Address of Regd./Corporate Office
b. Works/Factory
c. Constitution and constitution code as per
ladder
d. Date of incorporation/
Establishment
 e. Dealing with PNB since
f. Industry/Sector
g. Business Activity (Product)/
Installed Capacity.

3. Directors (S/Shri)

Name and Address/Mobile No./e-mail Whether Promoter/

Designation address of Main Directors/ Professional/Nominee
Guarantor Directors/
Key persons

a) If any of them, in the list of Caution Advices Yes/No

circulated by the Bank from time to Details be furnished in case of
time/RBI's/Wilful defaulters' list/Caution List of Yes
ECGC/
b) If any one of them connected in the past with any
NPA/OTS/Compromise/unscrupulous defaulters
c) If any of them, related to Directors/Senior Officers
of PNB:
d) i) Management Change since last sanction, if any
e) i) Report on due diligence carried out in terms of
L&A Circular No. 170 dated 25.10.2008 and
comments on adverse features, if any.
ii) In case of multiple banking/consortium lending
Due diligence report on prescribed format as per
L&A Circular No. 24/09 and 139/09 has been
obtained
ii) Confirmation that CRs have been
compiled/reviewed as per extant guidelines
iii) Confirmation that CRs have been drawn
from CIBIL Database and comments on adverse
features, if any
:

f) Share Holding Pattern as on:

Name of the Promoters/Major Share No. of Amt. in Rs. %

holders shares Crores. Holding
Promoters Holding
FIs/ Mutual Funds/UTI/Banks/FIIs
NRI’s/OCBs
Public
Total
g) Whether Shares pledged to any Bank/FI/others Yes/No
If yes, Percentage of shares pledged
Institution
Purpose
h) Brief history

Profile of the borrowing concern alongwith brief about the various divisions and their activities and
any other borrower specific major/significant features to be mentioned.

4.A Facilities Recommended : (Rs. in Crore)

Nature Existing Proposed Secured/Unsecured along with
Fund Based the basis thereof
(As per RBI’s guidelines)
CC(H)
WCDL
FOBP/FOUBP/FABC
Others
Fund Based Ceiling
Non Fund Based
ILC/FLC
ILG/ FLG
Non Fund Based Ceiling
Term Loan
Limit of credit exposure on
account of all derivative
products
TOTAL COMMITMENT

4.B Our Commitment and Maximum Permissible Exposure Norms

Existing Proposed %age of Bank’s Capital Funds As per Exposure Norms

as on 31.03.______
Amount (%age)
Company
Group

4. C Short Term Loans sanctioned by PNB in last 12 months, if any

Date of sanction Amount Period ROI Date of

Adjustment Roll over

4. D Details of facilities provided outside consortium including exposure on account of

derivatives, if any

Name of the Nature of Security O/s Purpose Rate of

Institution facility as on Interest

a)
b)
5.A Facilities from PNB Subsidiaries/Exposure by way of investment in
Equity/Debentures/Derivatives/Foreign Exchange etc. : (Rs. in Crore)

Name of the Nature of Security O/s Purpose Overdue, if

Institution facility as on any
a)
b)
5.B Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease,
ICDs, Corporate Loans, Debentures etc.)
(Rs. in Crore)
Name of the Bank/FI Facility Balance O/s Overdue, if Rate of
Sanctioned As on any Interest

5.C Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such

rating.
Agency Rating Date of Significance Purpose Validity
Rating of Rating Date

5D. Details of Working Capital Limits from the Consortium/Multiple Banking

(Rs. in Crore)
Name of the Existing Share % Proposed Share % ROI
Bank FB NFB FB NFB FB NFB FB NFB

6. Details of Group /Allied/Associate firms and the facilities sanctioned to them along with
conduct of these accounts with our Bank/ other Banks and comments on adverse
indicators, if any.

As per Appendix – II
7.A(i) Financial Position of the Company as on close of financial year for last three years
and estimated for last year and projected for the next year
(Rs. in Crore)
Two years One year Previous year (say Projections
earlier earlier 31.3.09) for the
(say (say current year
31.3.07) 31.3.08) (say 31.3.10)
Audited Audited Estimated Audited
Gross Sales
- Domestic
- Export
% growth *
Net sales (net of
excise duty etc.)
Other Income
Operating Profit/Loss
*
Profit before tax
Profit after tax
Depreciation/
Amortization of
expenses
Cash profit/ (Loss) *
EBIDTA/PBIDTA
Paid up capital
Reserves and Surplus
excluding
revaluation reserves
Misc. expenditure not
written off
Accumulated losses *
Deferred Tax
Liability/Asset
a) Tangible Net Worth
b) Investment in allied
concerns and amount
of cross holdings

c) Net owned
funds/Adjusted TNW
(a –b) *
Share application
money
Total Borrowings
Secured
Unsecured
Other investments
(excluding investment
in allied concerns
considered for arriving
at Net Owned Funds)

Total Assets

¾ Current assets
¾ Non current
assets
Out of which net fixed
assets
Net Working Capital *
Current Ratio
Debt Equity Ratio
Term liability/
Adjusted TNW
TOL/Adjusted TNW
Operating Profit/Sales
Long Term Sources
Long Term Uses
Surplus/ Deficit
Short Term Sources
Short Term Uses
Surplus/ Deficit **
* In case of negative growth/loss/erosion in TNW and NWC, the figures should be prefixed with
-ve sign.
* To match with NWC

7A (ii) Key Financials upto last quarter

(as per published Un-audited Results in case of listed companies)
(Rs. Crore)
Period Cumulative Corresponding % Accepted %age Remarks
ended position as on position of Change for the achievement
 last quarter/HY/Q3 current upto latest
quarter/HY/Q3 of last year year quarter/HY/Q3
ended
Sales
Other
Income
Period Cumulative Corresponding % Accepted %age Remarks
ended position as on position of Change for the achievement
last quarter/HY/Q3 current upto latest
quarter/HY/Q3 of last year year quarter/HY/Q3
ended
PBT
PAT

7B. Brief discussion on Financial Indicators (Interpretation/inference drawn in

respect of Latest financial/ last FY indicators to be discussed)

(The financial parameters of the borrowing company may be discussed/commented upon

as mentioned hereunder. However, it is only an indicative list. The appraising authority
should also discuss parameters showing abnormal variation/trend and any other proposal
specific parameters.)

Paid up capital/TNW

(Details of authorised/issued/paid up capital alongwith share application money to be

given.)

Reconciliation of TNW
(Rs. in lacs)
TNW as on close of FY ended 31.3.2011
Add
Less
TNW as on close of FY ended 31.3.2012

(In case TNW is lower than the estimates or if there is fall in TNW, reasons for the same
should be duly incorporated. In case there is movement in paid up capital, reasons viz.
issue of fresh capital, issue of bonus shares, conversion of FCCB into equity, buy back of
shares, etc. should be mentioned. In case of issue of fresh capital, premium amount, if
any, IPO or private placements, should also be mentioned. There should be comment
whether the company is making provisions for redemption of FCCB on due date.
Comments on residual period of preference shares should be given.)

(In case of partnership/proprietorship firm, stipulation is to be made that the firm would
maintain the capital at the actual/estimated level during the currency of advance.)

Sales

(Actual sales should be compared to the sales of the last year/estimated sales (in actual
and percentage terms). The reasons for decrease in sales from last year/variations from
the estimated sales should be given. The current year estimates and its acceptability with
due justification should be mentioned. Justification for accepting the increase in sales, viz.
expansion, diversification, marketing strategies should be given.)

Other income

(The sources of other income should be mentioned and any variation from the estimates
should be commented upon. The income from the core activity vis-a-vis other income
 should also be commented.)

Profitability

(Reasons for positive/negative movement in profitability of the borrowing company should

be given. Actual EBIDTA and net profit compared to the figures of last year/the estimated
figures should be commented upon. The current year estimates of net profit and its
acceptability with due justification should be mentioned.)

Investments

(Details and nature of investments including cross holdings, investment in

subsidiaries/group companies should be mentioned. The key financials parameters of the
companies in which the borrowing company has invested should be given.)

Diversion of funds

Details of use of funds for the purpose other than the one for which the sanction is
accorded alongwith the reasons and proposed action thereof

Current ratio/Debt Equity Ratio

(Reasons for movement and steps taken to improve the same be given.)

Balance Sheet analysis to be enclosed.

7C Capital Market Perception

Listing BSE/NSE
Face Value
Current Share Price as on
52 weeks High / Low
Market Capitalisation as on

7.D Details of investment in Shares, Debentures, Units or investment of funds outside the
business etc. (Along with comments in case of increase)

Particulars No. of shares/ Face Market value, if Remarks

debentures/ units value quoted

TOTAL

7.E Details of Liabilities not accounted for/Contingent liabilities

Particulars Amoun Period (for likely devolvement Remarks

Invocation
Disputed taxes
Corporate guarantee
Bank guarantee
Pending court cases
Any other

Details of derivatives transactions

7.F Position of assessment of income tax/sales tax/wealth tax of the borrowing
concern/partners/proprietor/promoter directors/guarantors

7.G Information on litigation initiated by other banks/FIs against the borrower as per latest
Audited Balance Sheet, if any

7.H Overall likely impact of (7.C to 7.G) on the financial position of the borrowing unit

8. SECURITY

A. Primary

i) For working capital limits

ii) For Term Loan

B. Collateral (Information in respect of mortgage of IP to be given only in the

following format:

i) Hypothecation/ Mortgage of Block Assets Immovable Properties

(Rs. in Crore)
Security Area Ownership Value Basis for Date Whether
Description in Sq Last Present Realisable valuation existing/
M or sanction book value fresh
Sq Ft value

ii) First/Second/Third charge/Paripassu charge

(Rs. in Crore)
Nature of Security Value of block Value of block Extent of Balance / residual
limits assets as on: assets first / value of charge
(as per excluding second available to bank/
B/Sheet) specific charge charge consortium
if any holders
Term
Loan
Working
Capital

iii) Personal /Corporate Guarantee

Name of Relationship Net Worth Immovable property Date of

Guarantor with confidential report
borrower
Prev. Present Prev. Present Prev. Present
As at As at …. As at As at ….
…. ….

iv) Comments on changes, if any.

v) Status of creation of charge:

8. C Security Margin ( Fixed Asset Coverage Ratio – for term loans)

Existing Proposed
Nature Book value FACR Book Value FACR on project
completion
Primary
Collateral
Total

9. Position of Account as on
(Rs. in _____)
Nature Limit* VS DP Balance Irregularity

* To be reported strictly as per sanction. Any irregularity to be reported separately

10.A Conduct of the Account including details of terms & conditions not complied with.
Comments on following should be given

¾ Availment of limit, overdrawings,

¾ Routing of proportionate business in consortium, routing of sale proceeds, honouring of
commitment in non fund based facilities(details of LC/LG devolved/invoked with amount),

¾ Regularity in submission of CMA data/ financial statement/QMS/Stock Statement.

¾ The information regarding no. of cheques returned with amount involved due to financial
reasons during the review period should be mentioned.
¾ The amount/frequency of irregularity in the account during the review period should be
mentioned.

10.B i) Value of the Account

(Rs. in _______)
Limit Last year Current year
Nature Amount Interest/ Yield(%) Interest/ Yield(%)
Commission Commission
Working capital (FB)
NFB
Term Loan
Bills purchased/
collected
Any other income
such as Escrow
account fee, etc.
Total

Details of other ancillary business such as opening of staff salary account/ availment of retail
lending schemes by staff members/opting of cash management system of the bank, etc.
10.B ii) Deposits including Escrow/TRA account with details

Current year Last year

No. of A/c Amount * Average balance O/S
Saving
Current
Escrow
Term deposit
Total
* Whether as margin money or free float

10.B (iii) Value of group accounts

10.C Review of the Account and Summary of irregularities under zero tolerance
level and fraud sensitive index pointed out by Bank’s Inspectors, Concurrent
Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors, Statutory
Auditors, observations of Stock Audit Report, Comment on Preventive
Monitoring Score Trends, (and status of rectification of these irregularities)

As per Appendix – III

10.D(i) CONFIRMATION

1. Compliance of last sanctioned terms Yes/No

2. Security documents are valid/duly vetted/enforceable Yes/No

3. Proper charge on securities created Yes/No
4. Confirm that company/directors are not under bank/RBI/ECGC/ Yes/No
CIBIL defaulters/caution list
5. Confirm that payment of statutory liabilities is not in arrears Yes/No

6. Confirm that no litigation against/by the company is pending Yes/No

7. Corporate governance practices are being followed as per Yes/No

Auditor’s report
8. Confirm that no deviations are made from usual norms/policy Yes/No
guidelines
9. Confirm that Exposure is within bank’s internal ceilings/RBI Yes/No
prudential norms

In case of No, details alongwith the reasons, justifications and action proposed should be
furnished.
 10.D(ii) AUDIT/INSPECTION/MEETINGS

Particulars Last date Remarks/Observations/Steps taken

a) Annual inspection
b) Stock audit
c) Consortium meeting
d) Closure of IR

Indicative list of pre-disbursement conditions

• Lead bank/processing/upfront/syndication/documentation fee etc. to be

recovered prior to disbursement.

• Authorised capital/paid up capital to be raised to at least Rs....................

which should be supported by resolution passed by the company/certificate
from the company’s CA/stamped undertaking from the company.

• Unsecured loans to be raised to Rs................. before release of facilities and

supported by the company’s CA/stamped undertaking from the company.

• Total term loan and working capital requirements to be tied up fully before
release of limits.

• The company to execute necessary security/renewal documents duly supported

by Board resolution and to get the charge registered within the time limit.

• In case of sharing of securities on pari passu basis, the disbursement shall be

made after receipt of pari passu letter/execution of interest agreement with the
other lenders. In case of creation of 2nd charge, stamped letter from the first
charge holder confirming 2nd charge favouring our bank should be obtained for
release of limits for which suitable stamped undertaking to be obtained from the
borrower.

• All statutory approvals/NOCs applicable/related to the project/

business/activity should be submitted before release of funds.

• Disbursement of Term Loan to be made subject to the promoters bringing in

their contribution strictly as per terms of sanction.

• Sanction of any credit facility to the borrower outside the consortium

arrangement should be duly informed to the consortium members.

• A stamped undertaking to be submitted in favour of the bank to the following

effect that during the currency of bank’s credit facilities, the company/firm shall
not without our permission in writing:

¾ Effect any adverse changes in company’s/firm’s capital structure.

¾ Formulate any scheme of amalgamation or merger or reconstruction.
¾ Implement any scheme of expansion on diversification or capital expenditure
except normal replacements indicated in funds flow statement submitted to
and approved by the bank.
¾ Enter into any borrowing or non borrowing arrangements either secured or
 unsecured with any other bank, Financial Institution, company, firm or
otherwise or accept deposits in excess of the limits laid down by Reserve
Bank of India.
¾ Invest by way of share capital or lent or advance funds to or place deposits
with any other company/firm, concern including group
companies/associates/persons. Normal trade credit or security deposit in the
normal course of business or advance to employees can, however, be
extended.
¾ Undertake guarantee obligations on behalf of any other
company/firm/person.
¾ Declare dividend for any year except out of profits relating to that year after
meeting all the financial commitments to the bank and making all due and
necessary provisions.
¾ Make any drastic change(s) in the management set up.
¾ Approach capital market for mobilising additional resources either in the
form of debts or equity.
¾ Sell or dispose off or create security or encumbrances on the assets charged
to the bank in favour of any other bank, Financial Institutions, company,
firm, individual.
¾ Repay moneys brought in by the promoters, partners, directors, share
holders, their relatives and friends in the business of the company/firm by
way of deposits/loans/share application money etc.
¾ Avail credit facilities/loan from outside the bank/consortium arrangement
without their knowledge and permission.

• The release of credit facilities is also subject to:

¾ Vetting of security documents by the bank’s approved advocate and bank’s

internal procedure of Credit Audit. The charges for vetting of documents by
the bank’s advocate are payable by firm/company.

*************