A

SYNOPSIS REPORT

ON

A STUDY ON CREDIT APPRAISAL METHOD IN SBI

Submitted

By

PUTTA LAXMI VENKATA NAGA SAI DHANUSHA

H.T.NO: 1302-20-672-018

PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

Department of Business Administration

AURORA’S PG COLLEGE

RAMANTHAPUR

(Affiliated to Osmania University)

2020-2022
 Aurora’s PG College (MBA), Ramanthapur
Department of Management

SYNOPSIS

Title of the Project : A STUDY ON CREDIT APPRAISAL METHOD IN SBI

Student Name : PUTTA LAXMI VENKATA NAGA SAI DHANUSHA

Hall Ticket Number : 1302-20-672-018

Signature of the Student:

Signature of the Guide:

 TABLE OF CONTENTS
S. No. CHAPTER Page No

1.1 INTRODUCTION

1.2 NEED FOR THE STUDY

1.3 SCOPE OF THE STUDY

1.4 OBJECTIVES OF THE STUDY

1.5 RESEARCH METHODOLOGY

2.1 REVIEW OF LITERATIRE

2.2 ARTICLES

3.1 INDUSTRY PROFILE

3.2 COMPANY PROFILE

6 PROPOSED OUTCOMES

7 LIMITATIONS OF THE STUDY

8 CHAPTERISATION

10 BIBLIOGRAPHY

1.1 INTRODUCTION
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans &

advances/project finance & also checks the commercial, financial & technical viability of the project

proposed its funding pattern & further checks the primary & collateral security cover available for recovery

of such funds.

The financial crises have become the main cause for recession which was started in 2020 from US and was

spread across the world. The world economy has been majorly affected from the crisis. The securities in

stock exchange have fallen down drastically which has become the root cause of bankruptcy of many

financial institutions and individuals. The root cause of the economic and financial crisis is credit default of

big companies and individuals which has badly impacted the world economy. So in the present scenario

analysing one’s credit worthiness has become very important for any financial institution before providing

any form of credit facility so that such situation doesn’t arise in near future again.

Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to understand the

credit appraisal system followed by the banks this project has been conducted. The project has analyzed the

credit appraisal procedure with special reference to State Bank of India which includes knowing about the

different credit facilities provided by the banks to its customers, how a loan proposal is being made, what are

the formalities that is to be satisfied and most importantly knowing about the various credit appraisal

techniques which are different for each type of credit facility.

Before going further it is necessary to understand the need and basic framework of the project. Therefore

this chapter provides an introduction to the topic, objective of the project, reasons for selecting the project

and the basic structure and framework how the project proceeds. In order to understand the importance of

the topic selected an introduction to the overview of the commercial bank, its functions, and present trends

and growth in bank credit are required and it is covered in this chapter.

Procedure for providing Bank Credit-

Banks offers different types of credit facilities to the eligible borrowers. For this, there are several

procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring and Asset Recovery

Management comprise the entire gamut of activities in the lending process of a bank which are clearly

shown as below:

Credit
Appraisal

Sanctions

Monitoring & Asset

recovery
Management

Source- Self constructed

From the above chart we can see that Credit Appraisal is the core and the basic function of a bank before

providing loan to any person/company, etc. It is the most important aspect of the lending procedure and

therefore it is discussed in detail as below.

Credit Appraisal

Meaning - The process by which a lender appraises the creditworthiness of the prospective borrower is

known as Credit Appraisal. This normally involves appraising the borrower’s payment history and

establishing the quality and sustainability of his income. The lender satisfies himself of the good intentions

of the borrower, usually through an interview.

  The credit requirement must be assessed by all Indian Financial Institutions or specialized institution

set up for this purpose.

 Wherever financing of infrastructure project is taken up under a consortium / syndication

arrangement – bank’s exposure shall not exceed 25%

 Bank may also take up financing infrastructure project independently / exclusively in respect of

borrowers /promoters of repute with excellent past record in project implementation.

 In such cases due diligence on the inability of the projects are well defined and assessed. State

government guarantee may not be taken as a substitute for satisfactory credit appraisal.

The important thing to remember is not to be overwhelmed by marketing or profit center reasons to book a

loan but to take a balanced view when booking a loan, taking into account the risk reward aspects. Generally

everyone becomes optimistic during the upswing of the business cycle, but tend to forget to see how the

borrower will be during the downturn, which is a short-sighted approach. Furthermore greater emphasis is

given on financials, which are usually outdated; this is further exacerbated by the fact that a descriptive

approach is usually taken, rather than an analytical approach, to the credit. Thus a forward looking approach

should also be adopted, since the loan will be repaid primarily from future cash flows, not historic

performance; however both can be used as good repayment indicators.

 1.2 NEED FOR THE STUDY

A credit appraisal is an important part of determining the eligibility for a various loans. A prospective

borrower has to go through the various stages of the credit appraisal process of the bank. Each bank has its

own criteria to satisfy itself on the credit worthiness of the borrower.

The eligibility for the loan that a person can get depends on his credit worthiness, determined in terms of the

norms and standards of the bank. Being a crucial step in the loan process, a borrower needs to be careful in

planning his financing modes. The credit worthiness, basically, assures the repayment capacity of the

borrower - whether the borrower is capable of repaying the loan and dues on time.

Hence, the study is undertaken for the purpose of analyzing the percentage of borrowers able to repay

with comparison to assessment.

1.3 SCOPE OF THE STUDY

The topic selected is credit appraisal system with respect to banking industry which means how the

managers in banks appraise the corporate firms lending process and how the whole process carried forward

like a system keeping certain aspects like risk, legal into concern. The scope lays in way a bank finances its

potential borrowers which is tailor made at time to meet the client need and help with all the services the

bank can deliver in order to meet its persons goals and objectives.
 1.4`OBJECTIVES OF THE STUDY

 To study the Credit Appraisal tools and techniques of State Bank of India.

 To study the credit policies and procedures of State Bank of India.

 To study the credit rating methods followed by the bank for different credit ranges.

1.5 RESEARCH METHODOLOGY

Analytical in nature. Research methodology is a way to systematically solve the research problem. The

research methodology not only talks about the research methods but also considers the logic behind the

method used in the context of the research study.

RESEARCH DESIRE

It is totally based on descriptive and diagnostic research. It is prepared on structure way to find out the

problem on the descriptive and diagnostic research. The data gone through secondary for data analysis to

study the credit appraisal of State Bank Of India to show the credit appraisal and its various methods

Data Collection

Secondary Data

 Books and magazines

 Internal reports of the banks

 Library research

 Websites
 2.0 REVIEW OF LITERATURE
2.1 THEORETICAL REVIEW

Credit Appraisal – Initial due diligence & financial analysis

The process of credit appraisal would begin with the selection of the borrower. The process would broadly

cover:

(i) Appraising the borrower/business

(ii) Appraising/assessing the credit requirement and structuring the credit delivery, security,

covenants etc. Appraisal of the borrower would include background check and assessment of

managerial, commercial, technical and financial capability/strength, project

execution/management ability, success in joint venture for technology/ market, retention of

professional talent at various levels, management control, promoters’ shareholding etc.

Both the above aspects need to be appraised/ examined at the time of the initial entry of a customer to the

SBI BANK as also at the time of subsequent periodic reviews. Naturally, the appraisal would be different in

respect of:

- Retail segment like personal loans for consumer durables, house etc

- Small business like loans to business enterprises

- Farming sector/agriculturists

- Corporates in manufacturing, infrastructure, services, wholesale trade and other sectors.

Background of the borrower/management

Background of the borrower needs to be done through scrutiny of antecedents, experience in the line of

business, managerial, marketing, technical competence, organizational strength, integrity etc. Track record

with us, status report from the other SBI bank, reports in the sector from our borrowers in similar business,

RBI/CIBIL reports on defaulters, Corporate action taken by SEBI/NSE/BSE, reports from their

vendors/dealers who may be customers, reasonability of CMA projections, actual performance vs estimates,

frequent overdrawing, history of restructuring/OTS etc.

In case of adverse report in any of the above areas, there could be justifications/mitigations which should be

looked into. If needed the appraising officer may personally visit the other SBI BANK for personal

discussions. The gist of such oral discussion may be recorded in the file of the borrower and brought out in

the proposal. KYC guidelines as framed by RBI and adopted by SBI BANK are to be followed by the

branches.

Commercial appraisal

The nature of the product, demand for the same, the existing and perceived competition in the segment,

ability of the proponents to withstand the same, government policies governing the industry, etc. need to be

taken into consideration. The trade practices in respect of the product should be thoroughly understood.

Technical appraisal

Technical appraisal of the project needs to be carried out for industrial activity beyond the cut-off limits

prescribed from time to time. Such appraisal may be carried out in-house by Technical Officers working in

Technical Appraisal Department/ Technical Appraisal Cells or officers having technical expertise for the

same or by an outside agency as determined by the appropriate authority. Where technical appraisal is

carried out by All India Financial Institutions, SBI bank/other leading banks having expertise in the area,

their report may be accepted for appraisal purposes.

Financial appraisal

Analysis of financial parameters/ratios should be done. Aspects like

i. Balance sheet strength

ii. Growth in TNW, sales, etc

iii. Borrower’s ability to service the principal and interest, meet the cash flow requirement in respect of

payments under LC opened, absorb additional burden due to escalation of raw material cost etc

iv. Position of receivables/inventory etc should be looked into.

 2.2 JOURNAL ARTICLES

Review 1:

Article: Measurement of Credit appraisal system in Banking Sector of SBI Bank, Hisar

Author: Aman

Publisher:  Ignited Minds Journals, Journal of Advances and Scholarly Researches in Allied Education

[JASRAE](Vol:16/Issue:4)DOI: 10.29070/JASRAE

Abstract:

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. This study will help in understanding the credit appraisal system in banks & to reduce various risk

parameters, which are broadly categorized into financial risk, business risk, industrial risk & management

risk associated in providing any loans or advances or project finance. The study is based on secondary data.
Review 2:

Article: Risk Management

Author: Mrs. P. Dhanya, Dr. K. Vanaja

Publisher: International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470,

Volume-3 | Issue-1 , December 2018

Abstract:

This study helps in understanding the credit appraisal system of Banks in India and to understand how to

reduce various parameters, which are broadly categorized into financial risk, business risk, industrial risk

and management risk associated in providing any loans or advances or project finance. The research design

was analytical in nature. Only secondary data was collected to this project.
Review 3:

Article: Credit Management

Author: S. Kanungo, S. Sharma, P.K Jain

Publisher: Evaluation of decision support systems for credit management decisions”

Abstract:

This study formed a larger initiative to access the effectiveness of the I.T based credit management process

at SBI. Such a study was necessitated since credit appraisal has become an integral sub-function of the

Indian banks in view of growing incidence of non-performing assets. This system helps in analysis of

balance sheets, Calculation of financial ratios, cash flow analysis, future projections, sensitivity analysis and

risk evaluation as per SBI norms. They have also used a strong Quassi experimental design called Solomon’s

four group design for the assessment. In the experiment the managers of SBI who attended the training

programme were the subjects the experiment consisted of the measurements that were taken as pre and post

tests. All four groups underwent training in credit management between the pre and the post tests. Results

from research shows that while the Decision Support System (DSS) is effective, improvement needs to be

done in the methodology to assess such improvements. Moreover such assessment frameworks while being

adequate from a DSS-centric view point do not respond to the assessment of DSS in an organizational

setting . In the concluding section they have discussed how this evaluative framework can be strengthened to

initiate an activity that will allow the long term and possibly the only meaningful evaluation framework for

such a system.
Review 4:

Article: Credit Risk

Author: Ajay Kumar Choudhary, B Nethaji, Anirban Basu

Publisher: RBI WPS (DEPR): 06/2017: Risk-weighting under Standardized Approach of Computation of

Capital for Credit Risk in Basel Framework – An Analysis of Default Experience of Credit Rating Agencies

in India.

Abstract:

All scheduled commercial banks in India currently follow the Standardized Approach of computation of

capital for credit risk under Basel framework for calculation of regulatory capital requirement. Under this

approach, credit rating agencies play a crucial role as the regulatory capital requirement for credit risk of

banks is determined based on the credit rating assigned by these agencies and corresponding risk weight

prescribed in Basel framework. The paper attempts to find out whether the credit risk regulatory capital of

Indian banks is commensurate with the default experience associated with ratings assigned by the Indian

rating agencies. The paper also compares the relative assessment standards of the rating agencies, accredited

by the Reserve Bank, in terms of ratings assigned to common borrowers and the time taken for the rated

borrowers to default.
Review 5:

Article: Elements of Credit Rating

Author(s): Prashant Ubarhande, Arti Chandani

Publisher: Cogent Business & Management, Volume 8,2021 https://doi.org/10.1080/23311975.2021.1878977

Abstract:

Creditworthiness is acknowledged worldwide as focal point of debt processing. Credit Rate, an output of

credit-rating process, reflects such creditworthiness. We reviewed literature on elements of credit rating, viz.

Credit Rate, credit-rating agencies (CRAs) and credit-rating model. Credit Rating is an independent

evaluation of creditworthiness. CRAs perform this evaluation to support financial institutions in processing

debts. Literature added in credit-rating domain from January 2001 to November 2020 is analyzed to explore

the opportunities for further research. Bibliometric analysis is used to comprehend the existing literature.

Subsequently, through structured review theories, methodologies used by researchers and CRAs are

explored. Further, a hybrid literature review is developed by integrating bibliometric and structured review

of research papers from widely recognized databases. A sample of 153 papers is constructed and studied to

identify gaps in credit-rating domain and to develop suitable remedy to fill such gaps. We found that most of

the studies emerged as after-effects of financial crisis reported in 2008 and 2016. The review revealed that

48% studies focused on development of new credit-rating mechanism without evaluating existing structure

in-depth. This paper contributes to existing literature by encouraging researchers and CRAs to develop a

sector-specific credit-rating system by evaluating existing models and improvising them by adopting

advanced techniques like Multiple Regression, Neural Networking and Artificial Intelligence. We have

provided a feasible research agenda to further explore credit-rating domain. In this study we have identified

that the factors determining creditworthiness are different for different sectors.
Review 6:

Article: Construction Risk

AUTHOR(S): P.J. Edwards, P.A. Bowen (2002)

PUBLISHER: Risk and risk management in construction: a review and future directions for research,

Volume3, Issue 2/2020

Abstract:

The literature on construction and project risk management published during the period from 1960 to 1997 is

reviewed and analyzed to identify trends and practice. This analysis is used to identify gaps and

inconsistencies in the knowledge and treatment of construction and project risk. The findings suggested that

political, economic, financial and cultural categories of construction risk deserve greater research attention,

as do those associated with quality assurance, and occupational health and safety.
Review 7:

ARTICLE: Credit Scoring

AUTHOR: Gabriele Sabato

PUBLISHER: Credit scoring for Risk Managers, ISSN:2984-1689.

Abstract:

Credit scoring models play a fundamental role in the risk management practice at most banks. They are used

to quantify credit risk at counterparty or transaction level in the different phases of the credit cycle. The

credit score empowers users to make quick decisions or even to automate decisions and this is extremely

desirable when banks are dealing with large volumes of clients and relatively small margin of profits at

individual transaction level. In this article, we analyze the history and new developments related to credit

scoring models. We conclude that banks that are going to implement the most advanced approach to

calculate their capital requirements under Basel Ⅱ will need to increase their attention and consideration of

credit scoring models in the near future.

Article 8:

ARTICLE: Credit Risk Models

AUTHOR: Jean‐Paul Laurent (2008)

PUBLISHER: Risk Model Validation, 2nd Edison,2020, https://scribd.org/11.1291/311975.2020.1439827

Abstract:

We first describe specific features of credit risk subsequently, we consider the computation of loss

distributions for credit portfolios in an individual model, also known in the credit literature as a bottom-up

approach. This allows to deal with discrepancies between marginal default probabilities. Dependence

between default dates is modeled through a factor model. We focus on the Gaussian copula, which has

become a standard in the credit derivatives market. In that framework, the characteristic function of the loss

can be written in closed-form.

Article 10:

ARTICLE: Risk Management: Historical Perspectives

AUTHOR: Philippe Jorion

PUBLISHER: Financial Risk Management, Volume 5,2017

Abstract:

Financial risk management builds on the work of pioneers in financial theory. Spurred by the rapid

expansion of derivatives markets, new risk-management tools were developed in response to the need to

manage financial risks better. This lead to the development of position-based risk measures such as Value at

Risk (VAR), which are now widely used. Later, these methods were extended to other types of risk such as

credit and operational risk. Even so, risk management has now become an essential function for financial

institutions.
 3.1 INDUSTRY PROFILE

A bank is a financial institution that accepts deposits and channels those deposits into lending activities.

Banks primarily provide financial services to customers while enriching investors. Government restrictions

on financial activities by banks vary over time and location. Banks are important players in financial markets

and offer services such as investment funds and loans. In some countries such as Germany, banks have

historically owned major stakes in industrial corporations while in other countries such as the United States

banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of a cross-

share holding entity known as the keiretsu. In France, bancassurance is prevalent, as most banks offer

insurance services (and now real estate services) to their clients.

Introduction:

India’s banking sector is constantly growing. Since the turn of the century, there has been a noticeable

upsurge in transactions through ATMs, and also internet and mobile banking.

Following the passing of the Banking Laws (Amendment) Bill by the Indian Parliament in 2012, the

landscape of the banking industry began to change. The bill allows the Reserve Bank of India (RBI) to make

final guidelines on issuing new licenses, which could lead to a bigger number of banks in the country. Some

banks have already received licences from the government, and the RBI's new norms will provide incentives

to banks to spot bad loans and take requisite action to keep rogue borrowers in check.

Over the next decade, the banking sector is projected to create up to two million new jobs, driven by the

efforts of the RBI and the Government of India to integrate financial services into rural areas. Also, the

traditional way of operations will slowly give way to modern technology.

Market size:

In FY18-FY21, bank assets across sectors increased. Total assets across the banking sector (including public

and private sector banks) increased to US$ 2.48 trillion in FY21.

In FY21, total assets in the public and private banking sectors were US$ 1,602.65 billion and US$ 878.56

billion, respectively.

During FY16-FY21, bank credit increased at a CAGR of 0.29%. As of FY21, total credit extended surged to

US$ 1,487.60 billion. During FY16-FY21, deposits grew at a CAGR of 12.38% and reached US$ 2.06

trillion by FY21.

According to the RBI, bank credit stood at Rs. 110.46 trillion (US$ 1.47 trillion) and credit to non-food

industries stood at Rs. 109.82 trillion (US$ 1.46 trillion) as of September 24, 2021.
 3.2 COMPANY PROFILE

It was founded in 1806, Bank of Calcutta was the first bank established in India and over a period of time

evolved into State Bank of India (SBI). SBI represents a sterling legacy of over 200 years. It is the oldest

commercial bank in the Indian subcontinent, strengthening the nation’s trillion-dollar economy and serving

the aspirations of its vast population. The Bank is India’s largest commercial Bank in terms of assets,

deposits, branches, number of customers and employees, enjoying the continuing faith of millions of

customers across the social spectrum.

Headquartered at Mumbai, SBI provides a wide range of products and services to personal, commercial

enterprises, large corporates, public bodies and institutional customers through its various branches and

outlets joint ventures, subsidiaries and associate companies.

State Bank of India (SBI) a Fortune 500 company, is an Indian Multinational, Public Sector Banking

and Financial services statutory body headquartered in Mumbai. The rich heritage and legacy of over 200

years, accredits SBI as the most trusted Bank by Indians through generations.

SBI, the largest Indian Bank with 1/4th market share, serves over 45 crore customers through its vast

network of over 22,000 branches, 62617 ATMs/ADWMs, 71,968 BC outlets, with an undeterred focus on

innovation, and customer centricity, which stems from the core values of the Bank - Service, Transparency,

Ethics, Politeness and Sustainability.

The Bank has successfully diversified businesses through its various subsidiaries i.e SBI General

Insurance, SBI Life Insurance, SBI Mutual Fund, SBI Card, etc. It has spread its presence globally and

operates across time zones through 229 offices in 31 foreign countries.

Growing with times, SBI continues to redefine banking in India, as it aims to offer responsible and

sustainable Banking solutions.

 LIMITATIONS OF THE STUDY

 As the credit rating is one of the crucial areas for any bank, some of the technicalities are not

revealed which may have cause destruction to the information and our exploration of the problem.

 As some of the information is not revealed, whatever suggestions generated, are based on certain

assumptions.

 Credit appraisal system includes various types of detail studies for different areas of analysis, but due

to time constraint, our analysis was of limited areas only.

PROPOSED OUTCOMES:

 The study is conducted in a short period, due to which the study may not be detailed in all aspects.

 As the credit rating is one in every of the crucial areas for any bank, a number of the

technicalities don't seem to be disclosed which can have cause destruction to the data and our

exploration of the matter.

 As a number of the data isn't disclosed, no matter suggestions

generated, are supported bound assumptions.

 This study was conducted through  restricted areas only.

 BIBLIOGRAPHY

BOOKS/JOURNALS:

 Srivastava, R.M & Nigam, Divya (2010): Management of Indian Financial Institution (10th

edition), Himalya Publishing House.

 Bhole, L.M (2009):Financial Institution and Markets(5th edition), Tata Mc Graw- Hills.

 M.Y.Khan’s, Corporate Finance and Its Basic Usage.

 Credit Appraisal, Risk Analysis and Decision Makingbook, by DD Mukherjee.

 Banking Strategy, Credit Appraisal and Lending Decisions: A Risk-Return Framework. By

Bhattacharya, Hrishikesh.

 Ignited Minds Journals, Journal of Advances and Scholarly Researches in Allied Education

[JASRAE](Vol:16/Issue:DOI: 10.29070/JASRAE)

 International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470,

Volume-3 | Issue-1 , December 2018

 Financial Risk Management, Volume 5,2017

 Credit scoring for Risk Managers, ISSN:2984-1689.

 Risk Model Validation, 2nd Edison,2020, https://scribd.org/11.1291/311975.2020.1439827

WEBSITES

 www.onlinesbi.com

 https://www.ibef.org/industry/banking-india.aspx#:~:text=The%20Indian%20banking%20system

%20consists,ATMs%20in%20India%20reached%20213%2C145.

 https://www.tandfonline.com/doi/full/10.1080/23311975.2021.1878977
 https://issuu.com/ijtsrd.com/docs/18_a_study_on_credit_appraisal_syst

 http://ignited.in/I/a/89513

 https://www.scribd.com/document/97950919/Lit-Rview-Credit-Appraisal

 https://rbi.org.in/scripts/PublicationsView.aspx?Id=17453