CHAPTER-I

INTRODUCTION

1
 CHAPTER 1 :- INTRODUCTION TO THE STUDY

1.1. INTRODUCTION

State Bank of India has been playing a vital role in the development of small
scale industries since 1956. The Bank has developed a wide array of products to meet
the changing needs of the industry. It provides end -to -end solutions for the financial
needs of the industry. To service the specific credit needs of small and medium
enterprise (SME) the Bank established the Small & Medium Enterprise business unit
in 2004.

The title of the project is “A Study of Credit Appraisal System For Small &
Medium Enterprise Group” of “State Bank of India”.

The company is a market leader in banking sector in India is engaged in all the
banking services. The project is carried out in the Small & Medium Group Division of
the bank. Specifically, Ichalkaranji branch of SBI is a specialized SME branch of SBI.
The study was conducted to identify the customer satisfaction in the process of Credit
appraisal system of SBI for SME sector.

Hence, I have studied one of the cases, a small enterprise, whose SME loan
was sanctioned and analyzed its financial statements to get familiar with the appraisal
system followed by the bank.

Customer’s perceptions also placed as an important part in judging the overall

system of appraisal. The data collected was then analyzed with the help of statically
tools like Chi-Square & internal estimation. The findings & suggestions of my study
were then forwarded to the concerned department of bank.

Traditionally, banking is defined as process of accepting deposits from surplus

units in the economic system (lenders) with the objective of lending these funds to the
deficit units in the economic system (borrowers).

Currently, the banks are offering a wide range of loans such as housing loan,
business loan, educational loans, personal loans, vehicle loans, etc. Nowadays banks
are more concentrating on the segment of business enterprise & offer working capital

2
loan to SME sectors. Before providing loan the bank will appraise thoroughly about
the credibility of borrower based on both financial & non financial parameters.

Credit appraisal is a technique used by a banker or any financial agency

including financial institutions (FIs) to estimate the soundness of a credit proposal or
a project appraisal from the point of view of technical & financial liabilities or
feasibility. Commercial lending is the mainstay of Indian banking – its bread & butter
activity. Historically, this activity had been regarded as to a secondary position. Banks
were driven by the desire to excel themselves in what it is known as ‘Priority Sector
Banking’. Yet it is this part of their loan portfolio, which has kept them afloat & helps
to meet the cost. Fresh & innovative products are launched to attract the corporate
customers who form the core of this business. There is big competition among banks
to secure bigger share of this business.

State Bank of India is next to Reserve Bank of India in banking sector in India.
SBI have upgraded their corporate credit risk measurement system considerably over
the last two - three years. SBI followed a process of credit appraisal namely SME
Smart Score Card. Specialized software has been installed in the credit department &
risk grading scales have been elongated from the earlier four points to the more
sensitive ten points or higher.

The input variables are new more elaborate than the traditional. Profitability,
debt equity ratios & credit evaluations, are more reliable than before. In this scenario,
this project titled “A Study of Credit Appraisal System For Small & Medium
Enterprise Group” of “State Bank of India” is carried out to study the customer
satisfaction towards the credit risk measurement system followed for SME loan in
SBI Ichalkaranji branch.

3
1.2. OBJECTIVES

 To study the process of credit appraisal system of SBI.

 To study the procedure adopted in evaluating credit proposals in consideration
with previous sanctioned proposals.
 To evaluate customer satisfaction level on appraisal system.
 To understand the rationale behind various guidelines observed by State Bank
of India.

1.3. IMPORTANCE OF THE STUDY:

 Since Lending continues to be a primary function in banking, the customers

play an important role.
 In the liberalized economy like India, clientele have a wide choice. External
Commercial Borrowings and the domestic capital markets compete with the banks. In
another dimension, retail lending-both personal advances and SME advances-
competes with corporate lending for funds and for human resources. Hence banks
have to tap the new customers and retain them.
 Lending by nature cannot be an aggressive selling activity, as it involves risks.
Bank has to be competitive without compromising on the basic integrity of lending.
The quality of the Bank’s credit portfolio has a direct and deep impact on the Bank’s
profitability.

4
1.4. SCOPE OF THE STUDY

 The study involves benchmarking the appraisal process of SBI by analyzing

the appraisal process followed.
 The study involves evaluating the customer satisfaction level on the appraisal
process with special reference to bank is done through questionary, interviews.
 The study seeks to collect the information from among the existing customers
about their satisfaction level with regards to bank services.

1.5. LIMITATIONS OF THE STUDY

 The information related to credit appraisal system is very confidential. Hence

details regarding clients cannot be openly shared.
 The sample size is limited to 100.
 The time frame for the study was limited to 60 days.
 The scope of the study is limited to information gathered from SBI and to
SME sector.
 This study is limited to advance lending by Ichalkaranji branch of SBI

1.6. RESEARCH METHODOLOGY

“Research comprises defining and redefining problems, formulating, hypothesis or

suggested solutions; collecting, organizing and evaluating data, making deductions
and at last carefully testing the conclusions to determine whether they fit the
formulating hypothesis.”

There are the different steps that come under the research methodology these are as
following

1. Identifying and defining problem/opportunity

2. Planning the research design

5
3. Selecting a research method

4. Selecting a sampling procedure

Types of data:

Data can be of two types:

Primary data: In primary data collection, you collect the data yourself using methods
such as interviews and questionnaires. The key point here is that the data you collect
is unique to you and your research and, until you publish it, no one else can have
access to it. There are many methods of collecting primary data and the main methods
include:

 Questionnaires
 Interviews
 Observation

Secondary data: Secondary data is data that has already been collected by someone
else for a different purpose to yours. For example, this could mean using:

 Annual Financial Reports.

 Government statistics.
 Internet.
 Previous Studies done by others.
 Annual Report

Application of the Techniques for the study

Sampling Technique:-Convenience and judgmental -sampling technique is used to

collect the data. Convenience Sampling is a technique in which Sample are selected
on the basis of pure choice of the investigator, convenient to his statistical
investigation. Judgmental sampling is used to collect the data according to the
requirements of the investigator to fulfill some particulars objectives.

Data Collection: - Data has been collected from both the Primary (Questionnaire and
personal meetings) and the secondary (Internet, Books, journals) sources.
6
Sample Size: - 100

Area of data collection: - Ichalkaranji

Tools and techniques used: - Chi Square test as a test of independence, Hypothesis
testing, Pie Charts, bar graphs, Column graph, ranking, probability distribution, tables
etc.

7
 CHAPTER-II

INTRODUCTION TO THE
ORGANISATION

8
 CHAPTER 2 :-INTRODUCTION TO THE ORGANISATION

2.1. Name of the unit: State Bank of India

2.2. Location of the unit & address: Ichalakaranji Branch

VISION STATEMENT OF THE BANK

 My SBI.
 My customer first.
 My SBI: First in customer satisfaction.

MISSION STATEMENT OF THE BANK

 We will be prompt, polite and proactive with our customers.

 We will speak the language of the young India.
 We will create products and services that help our customers achieve their
goals.
 We will go beyond of the duty to make our customers feel valued.
 We will be of service even in the remotest part of our country.
 We will offer excellence in services to those abroad as much as we do to those
in India.
 We will imbibe state of art technology to drive excellence.

9
2.3. HISTORY

The origin of the State Bank of India goes back to the first decade of the
nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2
June 1806. Three years later the bank received its charter and was re-designed as the
Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock
bank of British India sponsored by the Government of Bengal. The Bank of Bombay
(15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal.
These three banks remained at the apex of modern banking in India till their
amalgamation as the Imperial Bank of India on 27 January 1921. Primarily Anglo-
Indian creations, the three presidency banks came into existence either as a result of
the compulsions of imperial finance or by the felt needs of local European commerce
and were not imposed from outside in an arbitrary manner to modernize India's
economy. Their evolution was, however, shaped by ideas culled from similar
developments in Europe and England, and was influenced by changes occurring in the
structure of both the local trading environment and those in the relations of the Indian
economy to the economy of Europe and the global economic framework.

Bank of Bengal H.O

Establishment

The establishment of the Bank of Bengal marked the advent of limited

liability, joint-stock banking in India. So was the associated innovation in banking,
viz. the decision to allow the Bank of Bengal to issue notes, which would be accepted
for payment of public revenues within a restricted geographical area. This right of
note issue was very valuable not only for the Bank of Bengal but also its two siblings,
the Banks of Bombay and Madras. It meant an accretion to the capital of the banks, a

10
capital on which the proprietors did not have to pay any interest. The concept of
deposit banking was also an innovation because the practice of accepting money

for safekeeping (and in some cases, even investment on behalf of the clients)
by the indigenous bankers had not spread as a general habit in most parts of India.
But, for a long time, and especially upto the time that the three presidency banks had a
right of note issue, bank notes and government balances made up the bulk of the
investible resources of the banks.

The three banks were governed by royal charters, which were revised from
time to time. Each charter provided for a share capital, four-fifth of which were
privately subscribed and the rest owned by the provincial government. The members
of the board of directors, which managed the affairs of each bank, were mostly
proprietary directors representing the large European managing agency houses in
India. The rest were government nominees, invariably civil servants, one of whom
was elected as the president of the board.

Group Photograph of Central Board (1921)

Business

The business of the banks was initially confined to discounting of bills of exchange or
other negotiable private securities, keeping cash accounts and receiving deposits and
11
issuing and circulating cash notes. Loans were restricted to Rs.one lakh and the period
of accommodation confined to three months only. The security for such loans was
public securities, commonly called Company's Paper, bullion, treasure, plate, jewels,
or goods 'not of a perishable nature' and no interest could be charged beyond a rate of
twelve per cent. Loans against goods like opium, indigo, salt woolens, cotton, cotton
piece goods, mule twist and silk goods were also granted but such finance by way of
cash credits gained momentum only from the third decade of the nineteenth century.
All commodities, including tea, sugar and jute, which began to be financed later, were
either pledged or hypothecated to the bank. Demand promissory notes were signed by
the borrower in favor of the guarantor, which was in turn endorsed to the bank.
Lending against shares of the banks or on the mortgage of houses, land or other real
property was, however, forbidden.
Indians were the principal borrowers against deposit of Company's paper, while the
business of discounts on private as well as salary bills was almost the exclusive
monopoly of individuals Europeans and their partnership firms. But the main function
of the three banks, as far as the government was concerned, was to help the latter raise
loans from time to time and also provide a degree of stability to the prices of
government securities.

Old Bank of Bengal

Major changes in the condition

A major change in the conditions of operation of the Banks of Bengal,

Bombay and Madras occurred after 1860. With the passing of the Paper Currency Act
of 1861, the right of note issue of the presidency banks was abolished and the
Government of India assumed from 1 March 1862 the sole power of issuing paper
12
currency within British India. The task of management and circulation of the new
currency notes was conferred on the presidency banks and the Government undertook
to transfer the Treasury balances to the banks at places where the banks would open
branches. None of the three banks had till then any branches (except the sole attempt
and that too a short-lived one by the Bank of Bengal at Mirzapore in 1839) although
the charters had given them such authority. But as soon as the three presidency bands
were assured of the free use of government Treasury balances at places where they
would open branches, they embarked on branch expansion at a rapid pace. By 1876,
the branches, agencies and sub agencies of the three presidency banks covered most
of the major parts and many of the inland trade centers in India. While the Bank of
Bengal had eighteen branches including its head office, seasonal branches and sub
agencies, the Banks of Bombay and Madras had fifteen each.

Bank of Madras Note Dated 1861 for Rs.10

Presidency bank act

The presidency Banks Act, which came into operation on 1 May 1876,
brought the three presidency banks under a common statute with similar restrictions
on business. The proprietary connection of the Government was, however, terminated,
though the banks continued to hold charge of the public debt offices in the three
presidency towns, and the custody of a part of the government balances. The Act also
stipulated the creation of Reserve Treasuries at Calcutta, Bombay and Madras into
which sums above the specified minimum balances promised to the presidency banks
at only their head offices were to be lodged. The Government could lend to the
presidency banks from such Reserve Treasuries but the latter could look upon them
more as a favor than as a right.
13
 Bank of Madras

The decision of the Government to keep the surplus balances in Reserve

Treasuries outside the normal control of the presidency banks and the connected
decision not to guarantee minimum government balances at new places where
branches were to be opened effectively checked the growth of new branches after
1876. The pace of expansion witnessed in the previous decade fell sharply although,
in the case of the Bank of Madras, it continued on a modest scale as the profits of that
bank were mainly derived from trade dispersed among a number of port towns and
inland centers of the presidency.
India witnessed rapid commercialization in the last quarter of the nineteenth century
as its railway network expanded to cover all the major regions of the country. New
irrigation networks in Madras, Punjab and Sind accelerated the process of conversion
of subsistence crops into cash crops, a portion of which found its way into the foreign
markets. Tea and coffee plantations transformed large areas of the eastern Terais, the
hills of Assam and the Nilgiris into regions of estate agriculture par excellence. All
these resulted in the expansion of India's international trade more than six-fold. The
three presidency banks were both beneficiaries and promoters of this
commercialization process as they became involved in the financing of practically
every trading, manufacturing and mining activity in the sub-continent. While the
Banks of Bengal and Bombay were engaged in the financing of large modern
manufacturing industries, the Bank of Madras went into the financing of large modern
manufacturing industries; the Bank of Madras went into the financing of small-scale
industries in a way which had no parallel elsewhere. But the three banks were
rigorously excluded from any business involving foreign exchange. Not only was
such business considered risky for these banks, which held government deposits, it
14
was also feared that these banks enjoying government patronage would offer unfair
competition to the exchange banks which had by then arrived in India. This exclusion
continued till the creation of the Reserve Bank of India in 1935.

Bank of Bombay

Presidency bank of bengal

The presidency Banks of Bengal, Bombay and Madras with their 70 branches
were merged in 1921 to form the Imperial Bank of India. The triad had been
transformed into a monolith and a giant among Indian commercial banks had
emerged. The new bank took on the triple role of a commercial bank, a banker's bank
and a banker to the government. But this creation was preceded by years of
deliberations on the need for a 'State Bank of India'. What eventually emerged was a
'half-way house' combining the functions of a commercial bank and a quasi-central
bank.

The establishment of the Reserve Bank of India as the central bank of the country in
1935 ended the quasi-central banking role of the Imperial Bank. The latter ceased to
be bankers to the Government of India and instead became agent of the Reserve Bank
for the transaction of government business at centres at which the central bank was
not established. But it continued to maintain currency chests and small coin depots
and operate the remittance facilities scheme for other banks and the public on terms
stipulated by the Reserve Bank. It also acted as a bankers' bank by holding their
surplus cash and granting them advances against authorised securities. The
management of the bank clearing houses also continued with it at many places where

15
the Reserve Bank did not have offices. The bank was also the biggest tendered at the
Treasury bill auctions conducted by the Reserve Bank on behalf of the Government.

The establishment of the Reserve Bank simultaneously saw important amendments

being made to the constitution of the Imperial Bank converting it into a purely
commercial bank. The earlier restrictions on its business were removed and the bank
was permitted to undertake foreign exchange business and executor and trustee
business for the first time.

Imperial bank

The Imperial Bank during the three and a half decades of its existence
recorded an impressive growth in terms of offices, reserves, deposits, investments and
advances, the increases in some cases amounting to more than six-fold. The financial
status and security inherited from its forerunners no doubt provided a firm and
durable platform. But the lofty traditions of banking which the Imperial Bank
consistently maintained and the high standard of integrity it observed in its operations
inspired confidence in its depositors that no other bank in India could perhaps then
equal. All these enabled the Imperial Bank to acquire a pre-eminent position in the
Indian banking industry and also secure a vital place in the country's economic life.

Stamp of Imperial Bank of India

When India attained freedom, the Imperial Bank had a capital base (including
reserves) of Rs.11.85 corers, deposits and advances of Rs.275.14 crores and Rs.72.94

16
corers respectively and a network of 172 branches and more than 200 sub offices
extending all over the country.

First five year plan

In 1951, when the First Five Year Plan was launched, the development of rural
India was given the highest priority. The commercial banks of the country including
the Imperial Bank of India had till then confined their operations to the urban sector
and were not equipped to respond to the emergent needs of economic regeneration of
the rural areas. In order, therefore, to serve the economy in general and the rural
sector in particular, the All India Rural Credit Survey Committee recommended the
creation of a state-partnered and state-sponsored bank by taking over the Imperial
Bank of India, and integrating with it, the former state-owned or state-associate banks.
An act was accordingly passed in Parliament in May 1955 and the State Bank of
India was constituted on 1 July 1955. More than a quarter of the resources of the
Indian banking system thus passed under the direct control of the State. Later,
the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the
State Bank of India to take over eight former State-associated banks as its
subsidiaries (later named Associates).

The State Bank of India was thus born with a new sense of social purpose aided by
the 480 offices comprising branches, sub offices and three Local Head Offices
inherited from the Imperial Bank. The concept of banking as mere repositories of the
community's savings and lenders to creditworthy parties was soon to give way to the
concept of purposeful banking subserving the growing and diversified financial needs
of planned economic development. The State Bank of India was destined to act as the
pacesetter in this respect and lead the Indian banking system into the exciting field of
national development.

17
2.4. TRANSFORMATION JOURNEY IN STATE BANK OF INDIA

The State Bank of India, the country’s oldest Bank and a premier in terms of
balance sheet size, number of branches, market capitalization and profits is today
going through a momentous phase of Change and Transformation – the two hundred
year old Public sector behemoth is today stirring out of its Public Sector legacy and
moving with an agility to give the Private and Foreign Banks a run for their money.

The Bank is forging ahead with cutting edge technology and innovative new
banking models, to expand its Rural Banking base, looking at the vast untapped
potential in the hinterland and proposes to cover 100,000 villages in the next two
years. It is also focusing at the top end of the market, on whole sale banking
capabilities to provide India’s growing mid / large Corporate with a complete array of
products and services. It is consolidating its global treasury operations and entering
into structured products and derivative instruments. Today, the Bank is the largest
provider of infrastructure debt and the largest arranger of external commercial
borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list.

The Bank is changing outdated front and back end processes to modern
customer friendly processes to help improve the total customer experience. With
about 8500 of its own 10000 branches and another 5100 branches of its Associate
Banks already networked, today it offers the largest banking network to the Indian
customer. The Bank is also in the process of providing complete payment solution to
its clientele with its over 21000 ATMs, and other electronic channels such as Internet
banking, debit cards, mobile banking, etc.

With four national level Apex Training Colleges and 54 learning Centres
spread all over the country the Bank is continuously engaged in skill enhancement of
its employees. Some of the training programs are attended by bankers from banks in
other countries. The bank is also looking at opportunities to grow in size in India as
well as internationally. It presently has 82 foreign offices in 32 countries across the
globe. It has also 7 Subsidiaries in India – SBI Capital Markets, SBICAP
Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a

18
formidable group in the Indian Banking scenario. It is in the process of raising capital
for its growth and also consolidating its various holdings.

Throughout all this change, the Bank is also attempting to change old
mindsets, attitudes and take all employees together on this exciting road to
Transformation. In a recently concluded mass internal communication programme
termed ‘Parivartan’ the Bank rolled out over 3300 two day workshops across the
country and covered over 130,000 employees in a period of 100 days using about 400
Trainers, to drive home the message of Change and inclusiveness. The workshops
fired the imagination of the employees with some other banks in India as well as other
Public Sector Organizations seeking to emulate the programme.

The CNN IBN, Network 18 recognized this momentous transformation

journey, the State Bank of India is undertaking, and has awarded the prestigious
Indian of the Year – Business, to its Chairman, Mr. O. P. Bhatt in January 2008.
The elephant has indeed started to dance.

2.5. VARIOUS TYPES OF BUSINESS

The bank is entering into many new businesses with strategic tie ups –
Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile
Banking, Point of Sale Merchant Acquisition, Advisory Services, structured
products etc – each one of these initiatives having a huge potential for growth.

1972: A merchant banking division was set up in the central office to cater to
promotional needs of the corporate sector.

1977: During the year bank introduced the perennial Pension plan scheme under
which if the depositors make a regular monthly payment of a fixed amount for a
period of 84 to 132 months, they become eligible from the 86 th to 134th months
respectively for getting a monthly pension of predetermined amount forever.

19
1980: Bank introduced the cash certificate scheme under which deposit certificate
are issued for a fixed period on payment of issue price specified for the respective
maturity period & the face value corresponding to the issue price plus interest
compounded at quarterly intervals is paid on maturity.

1983: SBI launched self employment scheme, for providing self employment to
educated unemployed youth.

1986: On 1st August a new subsidiary named SBI Capital Market was functioning
independently, took up leasing business & certain other new services.

1988: During the year bank initiated UPTECH an Industrial Technology group to
direct & guide program aimed at facilitating technology up gradation. Also a scheme
to develop entrepreneurship among women under the name Stree Shakti was
launched. Several concessions in respect of margin & rate of interest have been built
into the package especially for women.
On 20th September, the bank inaugurated SBINET, an integrated communication
project aimed at improving customer services, operational efficiency & administrative
convenience.

1989: SBI CAP, in their capacity as Trustee & Manager of mutual fund, launched
two scheme viz., Magnum Monthly Income Scheme 1989 & Magnum Tax Services
Scheme 1990.

1990: New products launched during the year included a Regular Income Scheme,
offering an assured return in excess of 12% & the first pure growth scheme aimed at
capital appreciation.
During Kharif 1990, the bank introduced an agricultural credit card, known as SBI
Green Card to give greater liquidity & flexibility to farmers in procuring agricultural
inputs.

20
1992: During the period bank introduced ‘Stock invest’ scheme. Also introduced a
Gyan jyoti that replaced earlier education loan schemes & offers substantial
augmented assistant to students pursuing higher studies.

1998: State Bank of India wills kick-start its credit card business on July 1st floating
two joint ventures with GE Capital.

1999: SBI proposes to introduce a value added services for card holder where by
the credit card can also be used as an ATM card.
The State Bank of India (SBI) has decided to take over SBI home finance (SBIHF)
with its assets & liabilities.

2000: SBI is also forming a subsidiary – SBI Gold & precious Metals Pvt. Ltd. with
50 % equity participation. The Bank launched the Metal (Gold) loan scheme in
Coimbatore. The Bank has become the first public sector bank to offer fixed- rate
home loans.

2001: The Bank has incorporated a subsidiary SBI life Insurance Company Ltd., for
doing life insurance business. In a significant move, the State Bank of India has
decided to distance itself from its subsidiaries- SBI Capital Market, SBI gilts, SBI
AMC & State Bank of credit & commerce International.
SBI Cards on July 3 announced the launch of the SBI International card & the SBI
global Card for global travelers in India.
SBI launches a new credit appraisal system targeting the Small & Medium
Enterprises (SME) for loans up to Rs 25 lakhs.

2003: Unveils new retail bank loan product Credit Khazana, which targets the banks
housing loan account holder.

2004: GAIL ties up SBI for e-banking system. SBI join hands with Visa for travel
Card. Join hands with VST Tillers to launch SBI – VST Shakti, a new loan scheme
for farm mechanization program.

21
2.6. ASSOCIATES BANKS

The eight banking subsidiaries are:

1-State Bank of Bikaner and Jaipur (SBBJ)

2-State Bank of Hyderabad (SBH)

3-State Bank of India (SBI)

4-State Bank of Indore (SBIR)

5-State Bank of Mysore (SBM)

6-State Bank of Patiala (SBP)

7-State Bank of Saurashtra (SBS)

8-State Bank of Travancore (SBT)

FOREIGN SUBSIDIARIES:

1. State Bank of India (Canada)

2. State Bank of India (California)
3. SBI (Mauritius) Ltd
4. PT Bank Indomonex (Indonesia)
5. SBI Cap (UK) Ltd
6. Commercial Bank of India LLC (Russia)
7. SBI Funds Management (International) Private Ltd (Mauritius)

JOINT VENTURE:

1. C.Edge Technologies Ltd.

2. G. E. Capital Business Process Management Services (Pvt.) Ltd

22
 Products and Services

SBI offers Corporate and Retail Internet Banking Products and Other Value Added
Services.
Products

 Advantage (Khata)
 Advantage Plus (KhataPlus)
 Privilege (Vyapaar)
 Freedom (Vistaar)
 Electronic Vendor Finance
 Electronic Dealer Finance
 Direct Debit
 E-Collection

Services

 Access to multiple users

 Account view / Statement
 Funds Transfer
 Third party funds transfer (RTGS/NEFT)
 Demand Draft request
 Utility Bill Payment
 Bulk transaction through file upload
 Direct and indirect tax payment
 SMS/Email alerts
 User hierarchy with discretionary access/rights to accounts
 MIS reports
 Host to Host integration
 Demat View facility

23
 FINACIAL POSITION & MANPOWER

 Deposits & Advances (In corers)

Deposit & Adavances

1000000 933933
900000
804116
800000 742073 756719
700000 631914
Amount in crore

600000 542503 Deposites

500000 Advances
400000
300000
200000
100000
0
2008-09
2014-15 2009-10
2015-16 2010-11
2016-17
Year

 Business Per Employee (‘000)

Business per Employee

80000

70000

60000
Amount in thousand

50000
Column2
40000 70465
63600
30000 55600

20000

10000

0
2008-09
2014-15 2009-10
2015-16 2010-11
2016-17
Year

24
 Profit Per Employee (‘000)

Profit Per Employee

500
450
400
Amount in Thousand

350
300
Column2
250 473.77 446.03
200 384.63

150
100
50
0
2008-09
2014-15 2009-10
2015-16 2010-11
2016-17
Year

 Return on Assets (%)

Return on Assets
1.2

0.8
Percentage

0.6 Column1
1.04
0.88
0.4 0.71000000000000
1
0.2

0
2008-09
2014-15 2009-10
2015-16 2010-11
2016-17
Year

25
 Net NPA ratio(%)

Net NPA ratio

1.85

1.8
1.79

1.75
1.72
1.7 Net NPA ratio

1.65
1.63
1.6

1.55

1.5
2014-15
2008-09 2015-16
2009-10 2016-17
2010-11

26
 CHAPTER-III

THEROTICAL BACKGROUND

27
 CHAPTER 3:-THEROTICAL BACKGROUND

PART I
3.1. REVIEW OF RELATED LITERATURE

 BRIEF OVERVIEW OF CREDIT

Credit Appraisal is a process to ascertain the risks associated with the

extension of the credit facility. It is generally carried by the financial institutions
which are involved in providing financial funding to its customers. Credit risk is a risk
related to non repayment of the credit obtained by the customer of a bank. Thus it is
necessary to appraise the credibility of the customer in order to mitigate the credit
risk. Proper evaluation of the customer is performed this measures the financial
condition and the ability of the customer to repay back the loan in future. Generally
the credits facilities are extended against the security know as collateral. But even
though the loans are backed by the collateral, banks are normally interested in the
actual loan amount to be repaid along with the interest. Thus, the customer's cash
flows are ascertained to ensure the timely payment of principal and the interest.

It is the process of appraising the credit worthiness of a loan applicant. Factors like
age, income, number of dependents, nature of employment, continuity of
employment, repayment capacity, previous loans, credit cards, etc. are taken into
account while appraising the credit worthiness of a person. Every bank or lending
institution has its own panel of officials for this purpose.

However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending which
must be kept in mind at all times.

 Character
 Capacity
 Collateral

If any one of these is missing in the equation then the lending officer must question
the viability of credit.

28
 There is no guarantee to ensure a loan does not run into problems; however if
proper credit evaluation techniques and monitoring are implemented then naturally
the loan loss probability / problems will be minimized, which should be the objective
of every lending officer.

Credit is the provision of resources (such as granting a loan) by one party to

another party where that second party does not reimburse the first party immediately,
thereby generating a debt, and instead arranges either to repay or return those
resources (or material(s) of equal value) at a later date. The first party is called a
creditor, also known as a lender, while the second party is called a debtor, also known
as a borrower.

Credit allows you to buy goods or commodities now, and pay for them later.
We use credit to buy things with an agreement to repay the loans over a period of
time. The most common way to avail credit is by the use of credit cards. Other credit
plans include personal loans, home loans, vehicle loans, student loans, small business
loans, trade.

A credit is a legal contract where one party receives resource or wealth from
another party and promises to repay him on a future date along with interest. In simple
terms, a credit is an agreement of postponed payments of goods bought or loan. With
the issuance of a credit, a debt is formed.

MEANING OF CREDIT APPRAISAL

The process by which a lender appraises the credit worthiness of the

prospective borrower is Credit Appraisal. This normally involves appraising the
borrowers’ payment history & establishing the quality & sustainability himself of the
good intentions of the borrower, usually though an interview.

Basic types of credit:

There are four basic types of credit. By understanding how each works, you will be
able to get the most for your money and avoid paying unnecessary charges. Service
credit is monthly payments for utilities such as telephone, gas, electricity, and water.

29
You often have to pay a deposit, and you may pay a late charge if your payment is not
on time.

Loans let you borrow cash. Loans can be for small or large amounts and for a
few days or several years. Money can be repaid in one lump sum or in several regular
payments until the amount you borrowed and the finance charges are paid in full.
Loans can be secured or unsecured.

Installment credit may be described as buying on time, financing through the

store or the easy payment plan. The borrower takes the goods home in exchange for a
promise to pay later. Cars, major appliances, and furniture are often purchased this
way. You usually sign a contract, make a down payment, and agree to pay the balance
with a specified number of equal payments called installments. The finance charges
are included in the payments. The item you purchase may be used as security for the
loan.

Credit cards are issued by individual retail stores, banks, or businesses. Using
a credit card can be the equivalent of an interest-free loan--if you pay for the use of it
in full at the end of each month.

CREDIT APPRAISAL

The purpose of the study was to study the credit appraisal system followed by
SBI as well as to find out customers satisfaction level on banks appraisal system. In
today’s modern, fast & competitive world all banks are following credit risk
assessment. The major objective of credit rating is to determine the ability &
willingness of a borrower to pay an agreed term, rating does a bit more than just
classifying the borrowers in to pass & fail category. The most important benefits for
bank in using the rating system to assess their loans include:

 Identify & decline potential risky applications.

 Reduce the losses due to default.
 Price the loan property.
 Increase the liquidity.
 Maximize the profit.

30
 Improve the monitoring process.
 Reduce the monitoring cost.
 Minimizes administrative cost with debt collection.
 Help banks to achieve their objective.
 Allow allocation of resources where they are more productive.
 Avoid loan concentration.

Credit appraisal focuses on:

1. Borrowers / Managements appraisal.

2. Technical appraisal of the project.
3. Market appraisal determining viability of the project./ Inspection of the
property
4. Financial appraisal of the cash flow to meet the loan repayment requirement.

 MODERN APPROCH

The modern approaches for credit appraisal are statistical in nature. These
approaches are more objective as they are based on some statistical model. One of the
commonly used approaches is Credit scoring.

Credit scoring: Credit scoring is a technique used in discriminating between good &
bad accounts based on past repayment & default experience relating a particular
customer. The credit scoring is given for each such customer & credit facility extends
if he succeeds the cutoff score.

Credit evaluation by using a credit score model:

SBI is following Credit Risk Assessment (CRA) model for Credit evaluation
in their system. For that bank created software in their system. Once the company’s
financial indicator such as BEP, NWC, Net sales, PAT, PBIT, Debt Equity Ratio,
Current Ratio, Cash accruals, etc. in the format, software automatically creates credit
rating score of that particular company which are used by bank for credit rating
assessment. If that company score certain marks led down by rules the company’s
proposal is valid for further procedure.

31
 Parameters Minimum marks
scored by business
Financial risk: working 11
capital
Business risk 10
Industry risk statement 5
Management risk analysis 24
Term loan 11

Thus, Credit Rating of the business takes into consideration various aspects that
directly or indirectly bear an effect the performance of the business.

After evaluating the risk level involved the lender bank decided on lending interest
rate. They are categorized in 9 segments:

1. Lowest risk CR -1
2. Low risk CR- 2
3. Medium risk CR-3
4. Moderate / satisfactory risk CR- 4
5. Fair risk CR-5
6. High risk CR-6
7. Higher risk CR- 7
8. Highest risk CR- 8
9. NPA CR - 9

Working Capital Assessment

Working capital is the amount of funds necessary to cover the cost of

operating the enterprise. There are two concepts of working capital:

i. Gross Working Capital

ii. Net Working Capital

Gross Working Capital represents the amount of funds invested in Current assets of
the enterprise.
32
 Net Working Capital is the excess of Current assets over current liabilities.
Bank is interested in the assessment of Working capital for the following reasons:

1. It is the qualitative concept which indicates the firm’s ability to meet its
operating expenses and short term liabilities.
2. It indicates the margin of protection available to the short term creditors.
3. It is an indicator of the financial soundness of an enterprise.
4. It suggests the need for financing a part of the working capital requirements
out of permanent source of funds.

In working capital assessment, bank is calculating first projected turnover as

per Nayak Committee Method. And then does assessment as per Traditional method.
Thus, for financing any enterprise bank go in for Working Capital assessment to
check whether the need of credit sources for attaining working capital requirements of
an enterprise.

Corporate credit

Corporate credit is an agreement reached between a corporation and a vendor

or lender that allows the corporation to acquire something of value now and pay for
the acquisition at a later date. The acquired goods and services may include anything
from financial loans to raw materials for production and manufacturing. Corporations
often function with the use of corporate credit rather than relying on purchases made
on a strictly cash basis.

Business credit

Business credit is a measure of an organization's ability to obtain goods or

services based on a promise to pay for them later. This term can refer to the ability of
a business to secure loan money as well. The goods, services, or cash obtained using
business credit are usually not personally guaranteed by the owner or representative of
the organization. Essentially, business credit allows for borrowing against the assets
of the organization, instead of the owner's personal property.

ADVANCES (CREDIT FACILITY)

33
 Granting of advances is the primary function of a bank. A major portion of its
funds is used for this purpose and this is also the major source of bank's income.
However, lending money is not without risk and, therefore a banker must take proper
precautions.
Different forms of advances:
The advances can broadly be classified into categories.
a) Overdrafts/ Cash credit
b) Term loan
c) Bill purchased/discounted
d) Letter of credit
e) Bank guarantee
SBI provides the following type of credit facility to its customer. They are classified
as Fund based & Non fund based.

A. Fund based
1. Term loan
2. Overdrafts/ Cash credit
3. Bill purchased/discounted

B. Non fund based

1. Letter of credit
2. Bank guarantee

a) Overdrafts/ Cash credit:

The customer may be allowed to overdraw his current account, with or without
security if he requires temporary accommodation. This arrangement, like the Cash
credit, is advantageous from the customer's point of view as he is required to pay
interest on the actual amount used by him. A cash credit differ from the overdraft in
the that the former is used for long terms by commercial, Industrial concerns doing
regular business, while the latter is supposed to be a

34
 A cash credit is an arrangement by which a banker allows his customer to
barrow money up to a certain limit. Cash credit arrangement are usually made against
the security of commodities Hypothecated or pledged with the bank.

b) Term loan:

Term loan are the loan that banks advances lump sum for certain period at an
agreed rate of interest for business purpose. Term loans may be medium or long term
loan. Medium term loans are granted for a period ranging from one year to six year
for any business purpose. Long term loans are granted for capital expenditure such as
purchase of land, machinery, construction of factory building& modernization of
plant.
Term loans are also known as term/ project financial the primary sources of such
loans are financial institutions. Commercial banks also provide term finance in a
limited way. The financial institutions provide term finance in limited way. The
financial institutions provide project finance for new projects as also for expansion
/diversification and modernization where as the bulk of term loans extended by banks
is in the form of working capital term loan to finance the working capital gap.
Through they are permitted to finance infrastructure projects on a long-term basis; the
quantum of such financing is marginal.

c) Bills discounted and purchased:

The bank also gives advances to their customers by discounting their bills. The
net amount after deducting the amount of discount is credited to the account of the
customer. The bank may discount the bills with or without security from the debtor in
addition to the personal security of one or more parsons already liable on the bill.

d) Letter of credit:

A letter of credit is a letter issued by the importers bank in favor of the exporters
authorizing him to draw bills up to an amount specified in it & assuring him of
payment against the delivery of the documents in his own country.

35
The letter of credit is a sort of a guarantee to the exporter that his draft will be
honored by a bank up to a certain amount as per the specified terms. The importer
who wishes to import goods approaches his banker & requests him to open a letter of
credit in favor of the over as supplier. The importer is called opener & his bank is
known as opening bank. The letter of credit is sent to the foreign branch of the bank
or to the correspondent bank, which is called as negotiating bank. After satisfying
itself about the authenticity of the credit, the bank forwards it to the exporters who is
called beneficiary.
The exporter ship sends the goods, prepares the documents and draws a bill on his
importer. The negotiating banks receive the bill & pay the amount if it is in advance
with the LOC. The opening bank receives the bills & documents & presents them for
acceptance if they are D/A bills and for payments if D/P bills. Documents are
delivered on payment or acceptance, as the case may be, to the importer who takes the
delivery of the goods from the ship.

e) Bank Guarantee:

Bankers issue Guarantees of various types on behalf of their customers to third

parties. The guarantees issued by bank are two types
1. Money guarantee
2. Performance guarantee
Money guarantee is a promise by the banker to pay the money due by the
customer to a third party in the event of failure to pay on the due date as agreed by the
customer. Such guarantees are issued for deferred payment installments in case of
import of machinery from foreign countries. Performance guarantee is given to
government or public bodies on behalf of contractors in the event of non fulfillment of
the contract. Bank give indemnities to shipping companies or transport companies for
release of goods in the absence of documents, in case goods arrive before the receipt
of such documents.

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STATE BANK OF INDIA’S LOAN POLICY

The basic tenets of SBI’s Loan Policy include the following:

 The policy applies to all domestic lending. Foreign branches have their own
policies Optimum exposure levels are set out in the Policy to different sectors in order
to ensure growth of assets in an orderly manner.
 The policy sets out minimum scores/hurdle rates
 The policy lays down norms for takeover of advances from other banks/
financial institutions
 As a matter of policy the bank does not take over any Non-performing
Asset(NPA) from other banks.

PART II

3.2 SME (Small & Medium Enterprise)

DEFINATION OF SMEs

SBI launches a new credit appraisal system targeting the Small & Medium
Enterprises for loans up to Rs.25 lakhs.

A Small Scale Industrial Unit is an undertaking in which investment in plant

& machinery (original cost), does not exceed Rs.1.00 corer, except in respect of
certain specified items under Hosiery, Hand tools, drug & pharmaceuticals, Stationery
items & Sports goods, where this investment limit has been enhanced to Rs. 5.00
corers.

A comprehensive legislation which would enable paradigm shift from Small

scale industries to Small & Medium Enterprise is under consideration of parliament.
SSI/Tiny Industries unit with investment in plant and machinery, in excess of SSI
limit up to Rs. 10.00 corers and the annual sales turnover should not exceed Rs.100.00
corers, may be treated as Medium Enterprises (ME).

37
 State Bank of India has been playing a vital role in the development of small
scale industries since 1956. The bank has financed over 8 lakh SSI units in the
country. It has 55 specialized SSI branches, 99 branches in industrial estates and more
than 400 branches with SIB divisions.

The bank finances for small businesses activities which are of special
significance to a large number of people as many of these activities can be started
with relatively lower investment and with no special skills on the part of the
entrepreneurs. The concept of SME is for to quicken the process of loan processing
from the SME sector, is planning to replicate the model in rural and semi-urban areas.

OBJECTIVE:

1. To ensure timely and transparent mechanism for restructuring of SMEs which

are viable or potentially viable, affected by certain internal and external factors.
2. To provide bank credit to SME at concessional rate of interest towards
working capital & term loan for acquiring any fixed assets for business development
purpose.

COVERAGE OF SME SECTOR

a) All SSI/Tiny industries.

b) Units with investment in plant and machinery in excess of SSI limit and up to
Rs.10.00 corers will be treated as Medium enterprises.
c) Only SSI financing will be included in priority sector.

Definitions

1. Small scale and Ancillary Industries:

Small scale industrial units are those engaged in the manufacture, processing or
preservation of goods and whose investment in plant and machinery (original cost)
does not exceed Rs. 1 crore. These would inter alia; include units engaged in mining
or quarrying, servicing & repairing of machinery.
In the case of ancillary units, the investment in plant and machinery (original
cost) should also not exceed Rs. 1 corer to be classified under small-scale industry.
38
 The investment limit of Rs.1 corer for classification as SSI has been enhanced
to Rs.5 corers in respect of certain specified items under hosiery, hand tools, drugs
pharmaceuticals and stationery items & sports goods by the Government of India.

2. Tiny Enterprises:
The status of ‘Tiny Enterprises’ may be given to all small scale units whose
investment in plant & machinery is up to Rs. 25 lakhs, irrespective of the location of
the unit.
Industry related service & business enterprises with investment up to Rs. 10 lakhs, in
fixed assets, excluding land & building will be given benefits of small scale sector.
For computation of value of fixed assets, the original price paid by the original owner
will be considered irrespective of the price paid by subsequent owners.

ELIGIBLITY

The following entities, which are viable or potentially viable:

a) All non-corporate SMEs banking with us irrespective of the level of dues.

b) All corporate SMEs, which are enjoying banking facilities only from our bank,
irrespective of the level of the dues to the bank.

c) All corporate SMEs, which have funded and non-funded outstanding up to Rs. 10
corers under multiple/consortium banking arrangement.

VIABILITY CRITERIA:

A unit may be regarded as viable if it would be in a position, after

implementation of a relief package spread over a period not exceeding seven years
from the commencement of the package, to continue to service its repayment
obligation as agreed upon including those forming part of the package, without the
help of the concessions. The repayment period for restructured debts should not
exceed ten years from the date of implementation of the package.

39
 LINES OF CREDIT

Banks may consider on merit, proposals received from State Industrial

Development Corporations (SIDCs) and State Financial Corporation’s (SFCs) for
sanction of term finance /loan in the form of lines of credit.

Such term finance/loan to the extent granted for/to the Small Scale Industries
(SSI) Units will be treated as priority sector lending, subject to the observation of
following Conditions:

I. SFC/SIDC should maintain separate and distinct accounts of fresh

disbursements made to SSI units and outstanding amounts there against.
II. Periodical statements to be obtained from SFC/SIDC to monitor the position.
III. Annually, a certificate issued by SFC/SIDC statutory auditors certifying that
the outstanding borrowings from banks were fully covered by the non-overdue loans
outstanding in respect of fresh disbursements made to SSI units from out of term
finance/lines of credit granted by banks.
IV. The rate of interest to be charged by banks on such term finance/loan/lines of
credit will be in conformity with the directives on interest rates issued by the Reserve
Bank from time to time.

In order to ensure adequate credit to this sector, the credit requirements of

village industries and other SSI units having aggregate fund based working capital
limits up to Rs.5 corers from the banking system, will be computed on the basis of a
minimum of 20 percent of their projected annual turnover for new as well as existing
units.

DETERMINATION OF INTEREST RATE

The interest rate is determined from the interest rate guidelines circular. This
circular is regularly updated to reflect the banks latest credit policies. The rupee credit
is based on BPLR and the foreign exchange loans are based on LIBOR. The
guidelines define how much interest rate is to be assigned for a particular credit rating
and credit duration. However, credit rating and its use in determining interest rate is a
theoretical concept and the bank may allow a reduction in interest rate under the
following conditions:
40
Good client

 The organization is a long term client and brings good business to the bank.
 The organizations’ actions show that it intends to become a long term
customer of the bank.
Interest shall be charged at a rate as prescribed by Head Office from time to
time as per Prime Lending Rate (PLR). Interest shall be charged von this outstanding
debit balance on working capital and on reducing balance in case of term loan.

FINANCIAL PARAMETERS- Acceptable viability bench mark

levels
Following quantitative parameters as set out in the loan policy document have been
examined.
a. Debt Service Coverage Ratio(DSCR)
It is important for the lender bank to assess the firm’s debt paying capacity over a
period. Such capacity is derived by calculating ratio like Debt Service Coverage
Ratio.
Average DSCR should be at least 1.75 and minimum 1 for any particular year during
the pendency of the loan may be considered adequate.

b. Current Ratio
Current Ratio is to be maintained at the minimum level of 1.33 to satisfy under 1 st
method of lending during seven years of operation after implementation of the
package which is expected to improve at minimum level of 1.75 in the subsequent
years.

c. TOL/TNW
At the initial stage the ratio may be considered up to 6:1 which is expected to improve
gradually over the years to reach desired level of 3:1 at the end of 8th year.
Variation to the extent of 10 % benchmark parameters at (a),(b),& (c) above may be
considered on merit. Variation beyond 10 % requires prior approval of the head
office.

41
d. Tenure of the loan
The unit became viable in seven years. The unit should contribute at least 25 % of the
additional fund required for restructuring, 50% of the contribution should be brought
in within first (6) months of implementation of the package and the balance 50 %
within the next (6) months.

e. Gross Profit Margin (GPM)

Gross profit or profit before interest, depreciation and tax (EBIDTA) is considered a
good measure to compare the performance of a company in relation to the industry.
The variation, if any of the company’s GPM with industry average would require to
be explained with qualitative information.

42
 CHAPTER IV

DATA ANALYSIS AND

INTERPRETATION

43
 CHAPTER 4:- DATA ANALYSIS & INTERPRETATION

CREDIT APPRAISAL SYSTEM OF SBI

IV.1. CREDIT APPRAISAL SYSTEM FOLLOWED IN SBI

State bank of India has created its own credit appraisal system for SME sector
namely, SME Smart Score Card and SBI Card.

Under SBI Card, loans for SSI & SBF up to 5 lakhs to 10 lakhs are
applicable. Loans above 10 lakhs are applicable under SME Smart Score Card.

 Attractive features:
 Less paper work.
 Borrower to be issued a small plastic card.
 Half yearly inspection.
 Simplified application.
 Simplified scoring model for appraisal.
 Annual review based on the conduct of the account.
 Repayment of term loan component up to 6 year.

44
IV.2. SBI CARD SCHEM

Purpose: Easy credit delivery to SSI & SBF segment.

Eligibility: SSI units with satisfactory track records of 2 years.

Quantum of finance: Up to 5 to 10 lakhs.

Interest Rates: Up to Rs.50, 000 ---- 8.5%

Above Rs. 50,000 to 2 lakhs ---- 9.5 %

Above Rs.2 lakhs to Rs.5 lakhs ----- 10.25 %

Validity: 3 years.

Margin: Up to Rs. 20,000 ---- Nil.

Above Rs. 20,000 to Rs. 5 lakhs ---- 25%.

IV.3. SME SMART SCORE CARD SCHEME:

Under SME smart score card, bank consider following segment.

1. Personal details
2. Business details/Greenfield venture
3. Collateral conditions.

The proposals conform to the extant instructions of the scheme. The scores awarded
under credit scoring criteria are as under,

SEGMENT MINIMUM SCORE

Personal Details 15/30

Business Details (or) 25/50

Greenfield ventures
Collateral conditions 10/20

Total score 50/100

To be eligible under
the scheme, the
45
unit should get a minimum score of 60% with a minimum of 50% under each sub
head.

Bank also provides various facilities for SME customers. There are two types of
current accounts facilities, bank providing to its SME customers.

SME Power pack:

If borrowers current accounts average quarterly balance for certain period is Rs. 5
lakh, he can get 100% free concession in all banking facilities. Any how, if balance
falls below Rs. 5 , the bank will charge Rs. 5000/- penalty on that account. This type
of account is called SME power pack.

SME Power Gain:

SME Power Gain is available for average quarterly balance of Rs. 100,000/-. Such
type of account will get 50% concession in all banking facilities.

Real Time Gross Settlement (RTGS):

RTGS enable funds settlement across banks in the country on real time basis to
minimize costs and maximize benefits, increase velocity of fund flow both
inter-city and inter-bank, reduce ambiguity of payments and better liquidity
management.

In RTGS system, inter-bank payment instructions are proposed and settled transaction
by transaction and continuously (online) through out the day. Minimum Rs. 1 lakh
and maximum no limit for fund transfers. Settlement of funds are on real time basis.

NEFT (National Electronic Fund Transfer):

United rapid remit (NEFT )is a National Electronic Fund Transfer Settlement System
where transmission, processing is done for a set of transaction at a particular point of
time and the settlement takes place on a pre-fixed interval of time or at the end of the
day. Minimum and maximum no limits for fund transfer.

46
IV.4. PROCEDURE

Step1: Proposal under credit facilities are received by bank directly from customers.

Step2: These proposals put forward to the credit officer & Senior Manager who will
analyze the proposal.

Step3: Then they will submit a report to the Chief Manager.

Step4: On the basis of Cost & demand of the proposal, they will check the proposal
whether eligible under SME Smart Score Card or SBI Card.

Step5: For advance up to Rs. 1 corer, the Chief Manager will sanction the loan. And
for advances above Rs. 1 corer, the proposal goes to the committee.

Step6: The proposals are firstly analyzed and appraised at branch & then goes to the
concerned credit committee.

Thus after going through the proposal & on the basis of pros & cons, the proposal
goes through brief analysis.

Analysis by Credit Officials

4.1. The nature & constitution of the borrower, profile of the proposal & pattern of
Shareholding, nature of the industry and new developments in the cycle of industry is
seen.

4.2. Credit report cum opinion report, containing details about company credit
worthiness of the borrower & opinion collected from various source.

4.3. Banks past experience with borrower (for existing borrower) or the experience of
the borrower with past bankers (for new borrower).this will include annual turnover
(sum of credit entries in account, number of cheques returned, details about
repayment of existing & old loans etc.)

4.4. Banks present exposure to the company group and borrowers present request.

4.5. Purpose for which loan is required.

47
4.6. Compliance with central, state Government & other competent authority and
socio economic feasibility of the project.

4.7. Market feasibility of the project, location of the factory, environmental &
pollution clearance etc.

4.8. Analysis of financial statements by using various tools such as cash flow analysis,
ratio analysis, funds flow analysis, analysis of income generation capacity.

4.9. The appraisal of the financial figures, qualifications in the auditor’s reports,
accounting practices &directors report.

4.10. Analysis of managerial competency by studying educational qualification,

experience, knowledge & capacity of the management & its workforce.

4.11. Details about primary & collateral security. This includes details about creation
of EM, insurance, legal opinion of the property, encumbrance.

Certificate for the property engineers, valuation for the assets & field visit details etc.

4.12. Details about guarantor, their net worth, credibility etc.

4.13. Terms &conditions to be fulfilled for sanctioning the loan.

Beyond these SBI also does credit checks on the borrowers to actually determine
borrower’s ability to pay & willingness to pay.

Step7: Every proposal goes to Circle Credit Committee (CCC) and Network Credit
Committee (NCC) for sanctioning.

Step8: At last if the proposal fulfills all the conditions of loan appraisal, the proposal
will sanction by bank, otherwise rejected.

Step9: As far as possible, disbursement of loan amount sanctioned should be made

directly to the suppliers of inputs such as raw materials implements, machinery, etc.
however, bank may continue the practice of obtaining receipts from borrowers.
Sanctioned proposals will get disbursement only after completion of security
documentation & formalities of mortgage/extension.In respect of companies, in

48
addition to these two requirements, charge to be filled with the Registrar of Company
within the prescribed period for creating a charge in favor of bank

CREDIT APPRAISAL PROCEDURE

PROPOSAL RECEIVED

PROCESSING OF APPLICATION

Issue of Acknowledgement of loan Applications

Disposal of Application

Register of rejected applications

Assessment of working capital

Collaterals

Margin

CRA PROPOSAL SUBMISSION TO CRA COMMITTEE

CRA VALIDATION

COMPANY REPRESENTATIVE CALLED

ALL INFORMATION RECEIVED FROM COMPANY

PROPOSAL SUBMITTED TO ASSESSOR

ASSESSMENT COMPLETED

PROPOSAL SUBMITTED TO CCC- COMMITTEE

PROPOSAL RECOMMANDATIONBY COMMITTEE

PROPOSAL SANCTIONED BY COMMITTEE & THEN BY BRANCH

MANAGER

INSPECTION OF A UNIT/FACTORY/ESTABLISHMENT BY MANAGER

DISBURSEMENT OF LOAN

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IV.5. CONDUCTING FEASIBILITY STUDY

The success of a feasibility study is based on the careful identification and

assessment of all of the important issues for business success. A detailed project
report is submitted by an entrepreneur, prepared by approved agency or a consultancy
organization. Such report provides in- depth details of the project requesting finance.
It includes the technical aspects, Managerial aspects, the market condition and
projected performance of the company. It is necessary for the appraising officer to
cross check the information provided in the report for determining the worthiness of
the project.

Project details:

 Definition of the project & alternatives scenarios and models.

 List the type & quality of product(s) or service(s) to be marketed.
 Outline the general business model (i.e. how the business will make money).
 Include the technical processes, size, location, kind of inputs.
 Specify the time horizon from the time the project is initiated until it is up &
running at capacity.

Market feasibility

 Industry description.
 Describes the size & scope of the industry, market &/or market segment(s).
 Estimates the future direction of the industry, market &/or market segment(s).
 Describes the nature of the industry, market &/or market segment(s). (Stable
or going through rapid change & restructuring).
 Identifies the life-cycle of the industries, market &/or market segment(s).
(emerging, mature) Market potential.
 Will the product be sold into a commodity or differentiated product/services
market?
 Identifies the demand and usage trends of the market or market segment in
which the proposed product or service will participate.
 Examine the potential for emerging, niche or segmented market opportunities.
 Explores the opportunity and potential for a “branded product”.
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 Assesses estimated market usage and potential share of the market or market
segment.

Organizational / Managerial feasibility

 Business structure.
 Outline alternative business model(s) (how the business will make money).
 Identified the proposed legal structure of the business.
 Identify any potential joint venture partners, alliances or other important
stakeholders.
 Identify availability of skilled and experienced business managers.
 Identify availability of consultants and service providers with the skills needed
to realize the project, including legal, accounting, industry experts, etc.

Technical feasibility

Technology plays an important role in maintaining a competitive position in

this highly competitive market conditions. Investing in the proper technology is the
key to success irrespective of size of business thus for achieving its projected
performance, it is important for it to have sound technological background. Such
technical competence of the project can be determined by having detailed study done
on following key aspects:

 Determining Facility Needs.

 Estimates the size and type of production facilities.
 Investigates the need for related buildings, equipment, and rolling stock.
 Suitability of Production Technology.
 Investigates and compare technology providers.
 Determines reality and competitiveness of technology (proven or unproven,
state-of –the-art).
 Identifies limitations or constraints of technology.
 Availability and Suitability of Location.
 Accesses to markets.
 Accesses to raw materials.
 Raw materials
51
  Estimates the amount of raw materials needed.
 Investigates the current and future avaibility and accesses to raw materials.
 Assesses the quality and cost of raw materials and markets of easily
substituted inputs.
 Estimates the profit margin and expected net profit.
 Estimates the sales or usage needed to break-even.
 Estimates the returns under various production, price and sales levels.
 Assesses the reliability of the underlying assumptions of the financial analysis
(prices, production, efficiency, market access, market penetration, etc.)
 Creates a benchmark against industry averages and/or competitors (cost,
margin, profits, ROI, etc.).
 Identifies limitations or constraints of the economic analysis.
 Determines project expected cash flow during the start-up period.
 Identifies project an expected income statement, balance sheet, etc. when
reaching full operation.

IV.6. CREDIT APPRAISAL TOOLS

1. Background information/ company profile.
2. Industry analysis, market analysis.
3. Financial Indicators.
i. Tangible Net Worth: The owner’s interest or proprietors stake is called
TNW. TNW is the excess of total amount of assets over total amount of outside
liabilities.
TNW= Total Assets- Total liabilities.
ii. Paid up capital(PUC)
iii. Debt Equity Ratio:
Debt Equity Ratio= Long term debt/ Shareholders funds
* Shareholders funds= Share capital + Reserve & surplus
iv. Current Ratio:
Current Ratio= Current assets/ Current liabilities
v. Net Working Capital:
Net Working Capital= Current assets - Current liabilities

52
 vi. Annual Sales:
Annual sales of a company for last three year & estimated for next two to three years
is viewed.
vii. Depreciation
viii. Profit after Tax (PAT):
Sales – Expenses = PBT- Depreciation – Tax = PAT
ix. Cash Accruals:
Cash Accruals= Opening profit + Depreciation & noncash charge
x. Debt Service Coverage Ratio (DSCR):
DSCR= Cash accruals/ Repayment obligation
*Repayment obligation=Principle amount + Fixed Interest charges
xi. Sensitivity to DSCR:
a. Sensitivity according to changes in variable cost and changes in sales.
xii. BEP:
BEP = Fixed cost / PV ratio.
xiii. Sensitivity to BEP:
a. Sensitivity according to changes in variable cost and changes in sales.

xiv. PAT/Sales
xv. PVIT/Sales
xvi. Installed Capacity Quantity:
a. Company’s total production capacity in terms of quantity.
xvii. Total Debt Gearing:
TDG = TOL / TNW
xviii. IRAC (Income Recognition & Asset Classification) Status:
Income Recognition is based on actual receipt. The four fold classification of assets
into Standard, Sub-standard, Doubtful and Loss has been applied.

IV.7. CASE STUDY ANALYSIS:

 METHODS OF DATA COLLECTION: Secondary data is collected
through study and analysis of number of cases & proposals of bank.
 TOOLS OF ANALYSIS: Annual reports, financial statement of company
have been used. In case study, I have analyzed that bank had gone through all
53
 financial statements of the company. Banks demands Memorandum of
Association & Article of Association as well as Certificate from Registrar of
Company in case of limited company. Also last three year financial statement
as well as projected financial parameters for coming two to three years. Bank
analyzes Stock statements of a business. Bank becomes very strict as far as
Analysis of company’s financial statements is concerned.

Table 1: Showing details regarding various types of loans:

SR TYPES OF RECOVRY PURPOSE OF LOAN TYPES OF

LOAN PEROID ASSETS
NO. MORTGAGED
1 Hypothecation 3 years New business, for Against stocks,
loan existing business book debts,
expansion machinery,
buildings
2 Cash credit 12 months Fulfillment of working Against primary
capital requirement, for stocks, book debts
daily business of business
transactions.
3 Demand loan 6 to 36 months On demand of the Against TDR,
customers & staff RD, NSC,
Magnum
4 SME loan Min.72 months, Establishment of new Against assets of
Max. 84 months business, for existing borrowers, against
business expansion. business assets in
case of existing
business
5 Personal loan 48 months Personal reasons Against salary
statement, income
sources.
6 Housing loan 15 to 20 years For purchase & Against new land,
construction of new land, building,
building, business premises.
premises

54
CUSTOMER SURVEY

TABLE 2: TABLE SHOWING CUSTOMERS RELATIONSHIP

WITH BANK

Responses No. of respondent %

Less than 5 years 4 8

5 to 1o years 24 48
11 to 20 years 10 20
More than 20 years 12 24
Total 50 100

Customer Relationship with Bank

4

12

Less than 5 years

5 to 10 years
11 to 20 years
More than 20 years

24
10

Interpretation: from the given table & pie chart we can interpret that 24% customers
are having relationship with bank more than 20 years,8% having less than 5
years,20% & 48% having relationship of 11 to 20 years & 5 to 10 years respectively
with bank

55
TABLE 3: TABLE SHOWING TYPES OF CREDIT FACILITIES,
CUSTOMERS ENJOYING WITH BANK

Responses No. of Respondent %

Term loan 14 28

CC/OD 4 8

Demand loans 20 40

LC 12 24

Others 16 32
Total 50 100

Types of Credit Facilites

14 Termloan
16
cc/od
Demand loan
Lc
other

6
10

Interpretation: from the given table & pie chart we can interpret that 8% & 20%
customers are having CC/OD & Demand loans of bank. 28% customers are having
Term loan & 12% customers are having LC facilities & 32 % have other facilities of
bank

56
TABLE 4: TABLE SHOWING TYPES OF OTHER FACILITIES

Responses No. of respondent %

Saving A/c 14 28

Current A/c 10 20

Fixed deposits 16 32

Recurring deposits 10 20

Total 50 100

Typer Of Other Facilities

20
28

Saving A/c
current A/c
fixed deposit
Recurring deposits

32
20

Interpretation: From the given table & pie chart we can Interpret that 20% of
customers having current A/c with the bank. 28% & 32 % having saving A/c & Fixed
deposits & only 20 % of them had recurring deposits.

57
TABLE5: TABLE SHOWING CUSTOMERS OPINION ABOUT
CRITERIAS SET OUT BY BANK FOR CREDIT APPRAISAL

Responses No. of respondent %

Very stringent 2 4
Stringent & cumbersome 15 30

Normal & appropriate 6 12

Easy 22 44
Very easy 5 10
Total 50 100

Customers opinion About Criteria Set By

Bank
10 4

very strigent
30
Strigent & cumbersome

Normal & Appropriate

44

12 Easy

very easy

Interpretation: from the given table & pie chart we can interpret that 44% customers
said that criteria for credit appraisal are easy where as 30 % said its stringent &
cumbersome. Only 4% said, it is very stringent, 12% said, Normal & appropriate &
10 % said it is very easy.

58
TABLE 6: TABLE SHOWING CUSTOMERS OPINION ABOUT
PROCEDURE OF CREDITAPPRAISAL.

Responses No. of respondent %

More time 30 60
consuming

Normal time 12 24

Less time 8 16
consuming
Total 50 100

Customers Opinion About Procedure Of

Credit Apprisal

16 more time consuming

Normal time
less time consuming

24
60

Interpretation : from the given table & pie chart we can interpret that 60% customers
said procedure of credit appraisal is more time consuming where as 16% said less
time consuming. 24% said that procedure has normal time.

59
TABLE 7: TABLE SHOWING DOCUMENTATION
REQUIRMENT FOR LOAN PROCESSING APPLICATION

Response No. of Responses %

s
Heavy 15 30

Normal 8 16

Less 6 12

Very less 6 12

Total 50 100

Document Requirement For Loan

Processing Application
12

Heavy
12 Normal
less
very less

60
16

Interpretation: from the given table & pie chart we can interpret about documentation
requirement for credit appraisal system that,60% customers said they are heavy, 16%
of them said they are normal, 12% said its less& only 12% of them said its very less.

60
TABLE 8: TABLE SHOWING CUSTOMERS SATISFACTION
LEVEL FOR RECOMMANDATIONS

Response No. of Respondent %

s
Yes 40 80

No 10 20

Total 50 100

Customers Satisfaction Level

20

Yes
No

80

Interpretation: from the given table & pie chart we can interpret that 80% customers
are satisfied in services of SBI bank & only 20% are not satisfied.

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TABLE 9: TABLE SHOWING CUSTOMERS OPINION ABOUT
PRODUCT OF BANK

Responses No. of Respondent %

Excellent 10 20

Good 26 52

Average 14 28

Poor/bad 0 0

Total 50 100

Customers Opinion About Product Of Bank

20
28
Excellent
Good
Average
poor /bad

52

Interpretation: from the given table & pie chart we can interpret that 52% customers
are saying well about banks products. 20% says excellent &28% said average.

62
 CHAPTER-V

FINDINGS, SUGGESTIONS
AND CONCLUSION

63
 FINDINGS

 Most of the customers i.e. 80% are satisfied with the banks system & services.

 It has been found that there is less direct interaction between customers and
bank.

 Loan processing time ranges from 0 to 7 months.

 Loans to education and transport sector SMEs are very less.

 Too much critical documentation is required to get the sanction of the loan.

SUGGESTIONS

 The current appraisal process for credit appraisal is good so there is no need to
change this process.

 Direct interaction with the customers should be improved.

 The loan processing time should be reduced.

 The bank should increase the proportion of education & transport sectors.

 Document requirement for processing the loan should be reduced.

 The bank should concentrate more on advertisement & should increase

awareness among the people about banks’ various schemes available.
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 CONCLUSION

It is boom time for those working in the financial sector. There are
opportunities galore in finance and more will come in the next few years so finance is
exciting is exciting both as a subject and a career option with the greater expansion of
the global economy.

Finance management is the backbone of any organizations and hence yields a

number of job options ranging from strategic financial planning to sales.

SBI loan policy contains various norms for sanction of different types of
loans. There all norms do not apply to each & every case. SBI norms for providing
loans are flexible & it may differ from case to case.

The CRA models adopted by the bank take into account all possible factors,
which go into appraising the risk associated with a loan, these have been categorized
broadly into financial, business, industrial, and management risks & are rated
separately.

Usually, it is seen that credit appraisal is basically done on the basis of

fundamental soundness. But, after different types of case studies, my conclusion was
such that, in SBI, credit appraisal system is not only looking for financial wealth.
Other strong parameters also play an important role in analyzing creditworthiness of
the firm.

Moreover, the study at SBI gave a vast learning experience to me and has
helped to enhance my knowledge. During the study i learnt how the theoretical
financial analysis aspects are used in practice during the working capital finance
assessment. We have realized during my project that a credit analyst must own multi-
disciplinary talents like financial, technical as well as legal know-how.

65
 The credit appraisal for working capital finance system has been devised in a
systematic way. There are clear guidelines on how the credit analyst or lending officer
has to analyze a loan proposal. It includes phase-wise analysis which consists of 5
phases:

1. Financial statement analysis

2. Working capital and its assessment techniques
3. Credit risk assessment
4. Documentation
5. Loan administration

To ensure asset quality, proper risk assessment right at the beginning, is

extremely important. That is why Credit Risk Assessment system is an essential
ingredient of the Credit Appraisal exercise. The SBI was the first to formulate a
Credit Risk Assessment model. It considers important parameters like profitability,
repayment capacity, efficiency of the unit, historical / industry comparisons etc…
which were not factored in other models. It is equally efficient as the SIDBI’s CART
(Credit Assessment and Rating Tool) model.

In all, the viability of the project from every aspect is analyzed, as well as type
of business, industry, promoters, past records, experience, projected data and
estimates, goals, long term plans also plays crucial role in increasing chances of
getting project approved for loan.

66
 CHAPTER-VI

ANNEXURE & BIBLIOGRAPHY

67
 ANNEXURE

SME: Small & Medium Enterprise

SSI: Small Scale Industries

SBF: Small Business Firm

SIB: Small Industries & Business

TNW: Total Net Worth

TOL: Total Outstanding Liabilities

DSCR: Debt Service Coverage Ratio

PUC: Paid Up Capital

TL: Term Loan

CC: Cash Credit

LC: Letter of Credit

C&I: Commercials & institutions

PER: Personal

MISC: Miscellaneous

TDR: Term Deposits Receipt

RD: Recurring Deposits

NSC: National Savings Certificates

BPLR: Basic Primary Lending Rate

68
 QUESTIONNAIR

FOR ANALYSIS OF CUSTOMER SATISFACTION

(Tick the Following Right Options With (√) This Symbol)

1. Name:

2. Age:

a) 25yrs- 35 yrs b) 36 yrs - 45yrs

c) 46 – 55 yrs d) Above 55yrs

3. Educational Qualification:

a) Illiterate . b) School. c) Under Graduate. d) Post Graduate.

e) Professional Course. f) Other

4. Income level:

a) Rs5 0,000 – Rs.1,50 000 b) Rs.1,50, 001-Rs.2,5 0,000

c) Rs.2,50 001- Rs.3,50, 000 d) Rs.35, 001-Rs.4,50, 000

e) Above Rs. 4,50,000

5)Which is your preferred bank for availing loan ?

a)SBI b)ICICI c)Bank of India d) Bank of Maharashtra

6) Are you aware of various credit facilities of banks ?

a) Yes b) No

7) What are the credit facilities enjoy with SBI Bank?

a) term loan b) letter of credit c) cash credit /overdraft

69
 d) housing loan e) demand loan f) personal loan

8) How long do you have the relationship SBI Bank ?

a)less than 5 years b) 5 to 10 years

c) 11 to 20 years d) More than 20 years.

9) What are the other facilities, you enjoy with SBI bank?

a) Fixed deposits b) Current account c) Recurring deposits

d) saving account e) Any other please specify

10) What did you feel about criteria set for sanctioning credit?

a) very stringent b) stringent & cumbersome c)Normal & appropriate

d) Easy e) Very easy

11) What did you feel about time for sanctioning the credit ?

a)More time consuming b)Normal time c)less time consuming

12) What did you feel about documentation requirement for approval of the bank?

a) Heavy b)Normal c)less d) Very less

13) What did you feel about the interest rate & processing fees charged on credit by
the bank ?

a) Heavy b) Normal c) less d) Very less

14) Will you recommend any other organization to avail credit facilities than SBI
bank?

15) How do you feel about the SBI banks product?

70
a) Excellent b) good c) average d) poor / Bad

16) Are you enjoying the new facilities or new changes in the bank i e . internet
banking, Mobile banking?

a) Yes b)No

17) Are you satisfied with your SBI bank ?

a) Yes b) No

18) Do you want to give any suggestions to SBI banks?

…………………………………………………………………………………………

71
 BIBLIOGRAPHY

BOOKS

KOTHARI C. R. “Research Methodology” (2001) 2nd Edition

TANNA B.R. & RANADIVE M. R. “Banking Law & Practices in India” (1979)
Thacker & Co. Ltd.

MACHIRJU H. R. “Indian Financial System” 2nd Edition, Vikas House (p) Ltd.

WEBSITES:

www.rbi.org.in

www.sbi.co.in

www.indianbankassociation.com

www.bankersindia.com

www.wikipedia.com

www.iibf.co.in

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