Specialization Project on

“A STUDY ON CREDIT APPRAISAL PROCESS WITH REFERENCE

TO HDFC LTD”

SUBMITTED IN PARTIAL FULFILLMENT FOR

THE AWARD OF THE DEGREE

Master of Management Studies (MMS)

(Under University of Mumbai)

SUBMITTED BY
YANA JOSHI

Roll No - M2224048

Under The Guidance of

Ms. Lata Poojary
Assistant Professor - TIMSR

MMS BATCH- 2022-2024

THAKUR INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

C-Block, Thakur Educational Campus, Shyamnarayan Thakur Marg, Thakur Village,

Kandivali (East), Mumbai 400101

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 CERTIFICATE

This is to certify that project title “A STUDY ON CREDIT APPRAISAL PROCESS

WITH REFERENCE TO HDFC LTD” successfully completed by Ms. YANA JOSHI
during the IV semester in partial fulfillment for the award of Master’s in Management Studies
recognized by University of Mumbai for the academic year 2022-2024 through Thakur
Institute of Management Studies & Research, Mumbai. This project is original and not
submitted earlier for the award of any degree, diploma or associate ship of any other
University / Institution

Name: Signature of Guide

Date: Date

2
 DECLARATION

I, Ms. YANA JOSHI declare that this Project Report submitted by me to the
" A Study on Credit Appraisal Process with reference to HDFC Ltd "is a bonafide work
undertaken by me is not submitted to any other University or Institution for the award of any
degree diploma certificate or publish any time before.

Name: Signature of Student

Roll No

3
 ACKNOWLEDGEMENT

I would like to thank the TIMSR management for providing the necessary facilities required
for completion of this project. I take this opportunity to thank our Director, Dr. Pankaj Natu
for his moral support and guidance. I take this opportunity to express my gratitude towards
my internal guide Ms. Lata Poojary for his supervision and timely support. I thank her for
constant encouragement and guidance. I would also like to thank her for sharing with me her
convivial and perspicacious ideas in order to make this project multifunctional and attractive.

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 EXECUTIVE SUMMARY

The whole research is about the study of credit appraisal of home loans. The procedure of
appraising the loan, how is the appraisal process, what are the documents that are required,
what should be the CIBIL score of that individual who is seeking for loan, what are all the
formalities that need to be done for appraising the loan and so on are studied in the following
project. In the research, problems can be traced that the file or application is put on hold just
because of missing documents which are not provided by the customer. Otherwise, if the
customer is eligible for a loan and has provided all the required documents on time then
the credit manager approves the loan as soon as possible. The loan appraisal is most of the
time dependent upon the ratios like Loan to cost Ratio, Installment to Income Ratio, Fixed
obligation to Income ratio, etc. which are analyzed in the study below. As HDFC Ltd has a
good brand image in the minds of the customers, it lives up to its reputation by providing
good services to their customers. The whole research was carried out in a systematic way and
it takes time to analyze an application to decide on the eligibility of an individual. Appraisal is
done on multiple fronts by checking a person’s entire profile, the company profile where
he/she works in, whether salary payments are regular, whether there are existing obligations,
past repayment track record, personal discussion to cross verify, etc. After the entire credit
appraisal process has taken place, the managers then take a call on whether to grant said
person a loan, how much to grant, at what interest to give loan, tenure to be given and so on.
Throughout the entire process there are legal, technical and credit norms that need to be
followed which are general for all companies and also specific to HDFC Ltd.

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 TABLE OF CONTENTS

Sr. No. Particulars Page No.

1 INTRODUCTION 8
1.1 Introduction to the Study 8
1.2 Industry Profile 9
1.3 About the Organization 11
1.4 Loan against property 17
2 RESEARCH METHODOLOGY 21
2.1 Objectives of the Study 21
2.2 Scope of the Study 21
2.3 Research Design 22
2.4 Sample Population 22
2.5 Data Collection 22
2.6 Scope for further Study 23
3 LITERATURE REVIEW 24
4 DATA ANALYSIS & INTERPRETATION 28
4.1 Introduction to credit appraisal 28
4.2 Need for credit appraisal 28
4.3 Important elements of credit appraisal 29
4.4 Rationale behind the sanction of credit facility 31
4.5 Credit appraisal process 36
4.6 Case study analysis 49
4.7 Data interpretation 52
5 FINDINGS 60
6 CONCLUSION 61
7 REFERENCES 62
8 BIBLIOGRAPHY 63

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 LIST OF CHARTS

Sr. No. Particulars Page No.

4.1 Age of respondents 52
4.2 Occupation of respondents 53
4.3 Income of respondents 54
4.4 If you are looking for a housing loan, which of the 55
following financial institutions would you prefer?
4.5 State the reasons that attract you to a particular 56
institution.
4.6 Are you aware or have knowledge of the credit 57
appraisal processes of financial institutions before
applying for a loan?
4.7 According to you, what is the ideal time to complete 58
the appraisal process?
4.8 What do you think is an important criteria in credit 59
scoring and evaluation?
4.9 Which of these factors is important to showcase your 60
credit worthiness?
4.10 Which of the following documents are difficult to 61
provide before sanction of a loan?
4.11 State your opinion on availing insurance cover and 62
providing a guarantor to the loan as additional security
for the comfort of the institute.
4.12 Do you think taking the help of an agent will make the 63
entire process easier and is it feasible to do so?
4.13 What are the challenges in obtaining a loan? 64
4.14 Does the credit appraisal process satisfy your loan 65
requirements?

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 CHAPTER 1: INTRODUCTION

1.1 Introduction to the Study

The Credit Appraisal is a complete process of assessing a particular loan proposal in a thorough
manner in order to work out the repayment ability of the borrower. Credit appraisal is the
assessment of the feasibility of proposed long-term investments in terms of shareholder wealth
and the analysis of all project costs and benefits which is used to justify the project proposal.
The banks and NBFCs have over the years designed and adopted the Best Practices. This in
effect depicts the bank's philosophy towards valid Corporate Governance. A good appraisal
justifies expenditure on a project. A proper scrutiny of each of the key components of project
appraisal is vitally important.

Both banks and non-banking financial corporations (NBFCs) exercise credit appraisal before
sanctioning a proposal. Each lender will have its own techniques for conducting credit
appraisal processes. A lender will have certain norms, regulations, and standards to evaluate
the creditworthiness of a particular loan applicant. If a borrower has a high creditworthiness,
there is high possibility that his or her loan application will be accepted by the bank. A credit
appraisal is done to circumvent the risk of default on loans.

A Credit appraisal for a home loan is the important part of a loan eligibility evaluation
process. The appraisal is undertaken by the bank. Each NBFCs and banks set their own
parameters and standard for evaluating the credit worth of a potential borrower. The eligibility
for the loan that a person can avail of depends on his credit worthiness. An NBFC evaluates
the repayment capacity of borrower considering factors such as income, age, qualification,
experience, employer, nature of business (if self-employed), security of tenure, tax history,
assets owned, additional source of income, other loan obligation, investments etc. Based
on the parameters of the NBFC or Banks, the maximum loan eligibility is worked out.
The final loan amount sanctioned by the housing finance is according to the Loan to value
norms, instalment to income Ratio norms and the fixed obligation to income Ratio norms
laid down by the NBFC. Financial Institutions and Banks are intermediate between lenders
and borrow. But banks are into other services too, so giving loans is not there primary
function. Here NBFC’s come into picture there are only focused on lending money. They
lend to people, enterprises, or other institutions.

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1.2 Industry Profile

Housing is a primary necessity in every economy and is a basic indicator of growth and social
well-being. Development of housing is not just important to economic growth but is also one
of the tools for economic development considering the accelerator impact it has on various
industries including construction and infrastructure sector; it generates demand for supporting
industries and leads to creation of job opportunities. Development of housing in a country is a
sign of economic welfare.
For any emerging economy, development of the housing sector has its own challenges. The
biggest of these challenges is access to finance. While investment in real estate is an easy
candidate for borrowing, real estate lending is more opportunity-based. In India, access to
finance for housing needs is largely concentric and focused at higher income groups, as that is
the sector where there are formal evidences of income such as salary slips or income-tax
returns. Since lenders tend to lend to sectors where lending is the easiest, the lower segments
of the population pyramid will remain unserved or underserved if the system was left entirely
to itself. Therefore, there is a need, in every financial system, to enable access to finance by
lower segments of the population pyramid.
While the upper has low or no access to banks for mortgage finance; creating a huge demand
in this segment and lack of access of finance. The fact that the upper segments of the pyramid
are well-served is evident from the highly competitive mortgage lending rates prevailing for
the sector. There is also a much longer way to travel in terms of ensuring the availability of
housing finance to low income to middle income groups.
Housing is an important sector for any economy as it has inter-linkages with nearly 269 other
industries. The development of housing sector can have direct impact on employment
generation,
GDP growth and consumption pattern in the economy. To help develop housing in the
country, there is need to have a well-developed housing finance market. In India, housing
finance market is still in its nascent stage compared to other countries. The outstanding
amount of housing finance from all sources accounts for less than 8 per cent of GDP when
compared with 12 per cent in China, 29 per cent in Malaysia, 46 per cent in Spain and 80 per
cent in the US. The demand for housing is increasingly being made by individuals and

Households given increasing level of income and prosperity. The supply of houses have to
come from builders, developers and construction companies scattered widely across the
country, both

9
in the private and public sector when examined in the context of demand and supply of
housing units, especially in the face of scarce land in the urban areas.
In India, housing finance market is very complex. The government, both at centre and states,
is a facilitator and is assisted by two regulators, Reserve Bank of India (RBI) and National
Housing Bank (NHB). The housing finance market is dominated by commercial banks, both
domestic and foreign. In addition, there are cooperative banks and housing finance companies,
self-help groups, micro-finance institutions, and NGOs. The RBI regulates commercial banks
and partially cooperative banks (which are mainly governed by the State Governments under
State Cooperative Acts) while the NHB regulates the housing finance companies. The others
are not regulated by any authority in the country.
The financial sector reforms initiated in 1985 and 1991 unleashed development forces in the
economy. This resulted in higher employment, increased income levels, faster urbanisation
and higher demand for houses, especially in urban areas.
Therefore, concerted efforts were made by the Government and the Reserve Bank to
encourage housing during the 1990s. The long-term goal of the National Housing Policy,
announced by the Government in 1998, was to eradicate house lessness, improve the housing
conditions of the poor and provide minimum level of basic services and amenities to all.
Fiscal incentives were also granted, in general, to the housing sector. The government has
been initiating as well as strengthening measures to extend housing to the weaker sections of
the society. A number of measures were announced from 2001 but a concerted effort was
made in 2006 after some fears were expressed that there was a housing bubble developing in
India which could eventually burst. It was then recognized that role of housing could be
critical in India and therefore measures announced thereafter aimed to improve business
environment in the country.

1.3 About the Organization

Housing Development Finance Corporation Limited (HDFC) was promoted in October

1977 as a public limited company specializing in providing housing finance to primarily
households and corporates for purchase and construction of residential housing. Prior to 1977,
retail mortgage finance was unknown in India. There were no foreclosure norms, no credit
bureau and no easy access to finance in India. HDFC is India’s first retail housing finance
company

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and is currently one of the largest originators of housing loans in the country. HDFC has
financed over 5.8 million homes.
The HDFC group is considered as a financial conglomerate in the Indian capital market with
the presence of housing finance, banking, life and general insurance, Asset management,
Venture Capital and Education loan.
As a part of development initiatives HDFC has promoted institutions in various fields
including credit rating, consumer finance, leasing, infrastructure and IT enabled Service.
HDFCs distribution network spreads 427 outlets which includes 130 offices of its distribution
company, HDFC sales private limited (HSPL). In addition, HDFC covers several locations
through its outrage programmes. Distribution channel form an integral part of the distribution
network with home loan being sourced through HSPL, HDFC bank limited and other third-
party direct selling associates.

Registration Details:
Housing Development Finance Corporation Limited (HDFC) is a public limited company
incorporated on October 17, 1977, under the Companies Act, 1956 (Corporate Identity
Number L70100MH1977PLC019916). It is registered as a Housing Finance Company with
the National Housing Bank (NHB) under the NHB Act, 1987. The equity shares of the
Corporation are listed on the Bombay Stock Exchange Limited and the National Stock
Exchange of India Limited.

Form of ownership:
HDFC is a public limited company with its stocks listed on BSE ad NSE.

Mission, Vision, Goal and Core Values:

Mission: To enhance the residential housing stock in the country through the provision of
Housing Finance in a systematic and professional manner, and to promote home ownership.

Vision: A socially conscious and responsible organisation with larger and long term impact
projects across the sector.
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Goal: Increase the flow of resources to the housing sector by integrating the housing finance
sector with the overall domestic financial markets.
Core Values: Trust, Integrity, Transparency and Professional Services.

Products and Services:

Various products of HDFC Ltd include:

 Housing Loans
a) Home loans
Salient Features:
• HDFC offers Home Loans for purchase of:
A flat, row house, bungalow from private developers in approved projects.
Properties from Development Authorities such as DDA, MHADA etc.

• Attractive Home Loan interest rates to make your Home Loans affordable and easier on
your pocket.

• Customized repayment options to suit your needs.

• No hidden charges.
• Expert legal and technical counselling to help you make the right home buying decision.
• Integrated branch network for availing and servicing the Home Loans anywhere in India.
• Special arrangement with AGIF for Home Loans for those employed in the Indian Army.

b) Home Improvement Loans

Salient Features:
• Loans for enhancing your home in many ways such as tiling and flooring, internal and
external plaster and painting etc.
• Available for both existing and new customers.
• Easy and hassle free documentation.
• Simple repayments through monthly instalments. Loans at Home Loan interest rates.

c) Home Extension loans

Salient Features:
• Loans to extend or add space to your home such as additional rooms etc.
• Available for both existing and new customers.

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• Easy and hassle-free documentation.
• Simple repayments through monthly instalments.
• Loans at Home Loan interest rates.

d) Plot Loans
Salient Features:
• Loans for:
Purchase of a plot through direct allotment O Purchase of a resale plot
Transferring your outstanding loan availed from another Bank / Financial Institution
• Attractive interest rates that make your Plot Loan affordable and easier on your pocket.
• Customised repayment options to suit your needs. Expert legal and technical counselling.
• No hidden charges.

e) Short Term Bridging Loans

Salient Features:
• Loans for the immediate funds required to purchase a new home while waiting for sale of
your existing home.
• Repayments through monthly instalments of simple interest with lump sum principal
repayment at the end of the term.
• Easy and hassle free documentation. Zero prepayment charges.
• No hidden charges.
• Integrated branch network for availing and servicing the loan anywhere in India.

f) Rural Housing Finance

Salient Features:
• Specially designed loans to Agriculturists, Planters, Horticulturists, Dairy Farmers for:
Purchasing an under construction / new / existing residential property in the rural and
urban areas.
Constructing your home on a freehold / lease hold residential plot in the rural and urban areas.
Enhancing your home in many ways such as tiling and flooring, internal and external plaster
and painting etc.
Extending / adding space to your home such as additional rooms etc.
• Loans also available for the Salaried / Self-Employed for:
• Purchasing a under construction / new / existing residential property in your village.
• Constructing your home on a freehold / lease hold residential plot in your village.

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• Enhancing and extending / adding space to your home in many ways.
• For Agriculturists, no mortgage of agricultural land is required to avail the Home Loan.
• No mandatory requirement of Income Tax Returns from Agriculturists applying for the
Home Loan.
• Longer tenure of 20 years for Agriculturists. Attractive interest rates.
• No hidden charges.
• Customised repayment options to suit your needs.

 Non-Housing Loans
a) Loan Against property
Salient Features:
• Loan against fully constructed, freehold residential and commercial properties for:
Business Needs
Marriage, medical expenses and other personal needs
• Transferring your outstanding loan availed from another Bank / Financial Institution
• Longer tenure, smaller EMIs. Attractive interest rates.
• Easy and hassle free documentation.
• Simple repayments through monthly instalments.
• Integrated branch network for availing and servicing the loan anywhere in India.

b) Top-up Loans
Salient Features:
• Loans for a variety of personal or professional needs (other than for speculative purposes).
• Avail of a maximum Top Up Loan of Rs. 50 lacs.
• Loans for existing customers as well as new customers availing of our Balance
• Transfer Facility.
• Attractive interest rates.
• Easy and hassle free documentation.
• Simple repayments through monthly instalments.
• Integrated branch network for availing and servicing the loan anywhere in India.

c) Non-Residential premises loans

i.) Built up Property -
Salient Features:
• Loans for:

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The purchase of a new or existing clinic or office
The extension, improvement or construction of an office or clinic
Transferring your outstanding loan availed from another Bank / Financial Institution
• Expert legal and technical counselling to help you make the right property buying decision.
• Attractive interest rate.
• Easy and hassle free documentation.
• Simple repayments through monthly instalments.
• Integrated branch network for availing and servicing the loan anywhere in India.

ii.) Plot -
Salient Feature:
• Loans for:
Purchasing a new or existing commercial plot
Transferring your outstanding loan availed from another Bank / Financial Institution
• Expert legal and technical counselling. Attractive interest rates.
• Easy and hassle free documentation.
• Simple repayments through monthly instalments.

Various Services offered by HDFC Ltd are:

1) Pre-payment
2) PMAY subsidy
3) Property identification and sales service
4) Property Valuation
5) Interest rate conversion
6) Legal clearance
7) Technical clearance
8) Balance transfers
9) Accounting services

1.4 Loan against property

Mortgage loan is derived from a Law French term used in Britain in the Middle
Ages meaning "death pledge" and refers to the pledge ending (dying) when either
the obligation is fulfilled or the property is taken through foreclosure. A
mortgage is

15
referred as "a borrower giving consideration within the sort of an interest and
collateral for a benefit (loan)".
A mortgage loan is a loan used by existing property owners to raise funds for any
purpose while putting a lien on the property being mortgaged. The loan is "secured"
on the borrower's collateral through a process known as mortgage. This means that a
legal mechanism is put into place which allows the lender to acquire the possession
and sell the secured property ("foreclosure" or "repossession") to pay off the loan if
the borrower defaults on the loan or otherwise fails to abide by its terms.

Mortgage borrowers are often individuals mortgaging their home or they are
businesses mortgaging commercial property (for example, their own business
premises, residential property let to tenants, or an investment portfolio). The lender
will typically be a financial institution, such as a bank, Depository financial
Institution which varies from country to country, and the loan arrangements are
often made either directly or indirectly through intermediaries.
Characteristics of mortgage loans such as the ticket size, maturity of the loan, Rate
of Interest, method of paying off the loan, and other characteristics can vary
considerably. The lender's rights over the secured property take priority over the
borrower's other creditors, which suggests that if the borrower becomes bankrupt or
insolvent, the other creditors will only be repaid the debts owed to them from a
purchase of the secured property if the mortgage lender is repaid in full first.

In many jurisdictions, it is normal for home buyers to avail a mortgage loan. Few
individuals have enough savings or liquid funds to enable them to take a position
within the purchase of property outright. Mortgages can either be funded through
the banking sector (that is, through short-term deposits.

Basic Concepts:
• Property: The physical residence/commercial space being financed. The exact sort of
ownership varies from country to country and might restrict the kinds of lending that
are possible.
• Mortgage: the security interest of the lender in the property, which may demand
restrictions on the disposal of the property. Restrictions may include requirements to
get the home insurance and mortgage insurance, or pay off outstanding debt before
selling the property.

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• Borrower: the person who is borrowing either has joint/single ownership of
property/collateral or is creating an ownership interest in the property/collateral.
• Lender: any lender, but usually a bank or other financial institution. The payments
from the borrower are thereafter collected by a loan servicer.
• Principal: the initial size of the loan or the amount still owed on the loan which may
or may not include other costs. Principal amount goes down in size if any is repaid.
• Interest: a financial charge levied for use of the lender's money. And is a percentage
of principal.
• Foreclosure or repossession: Full repayment of the outstanding loan amount in
single payment instead of payment in multiple installments, ahead of due date.
• Completion: legal completion of the mortgage deed, and hence the start of the
mortgage.
• Redemption: final repayment of the amount outstanding, which may be a "natural
redemption" at the end of the scheduled term or a lump sum redemption, typically
when the borrower decides to sell the property. A full repayment of a mortgage
account is said to be "redeemed".

Benefits of Loan Against Property:

LAP is preferred by SMEs as well as individual. This product provides SMEs or businesses:
• Access to finance for longer tenure which otherwise may be limited due to lack of
options. Since Loan Against Property may be a secured loan, the interest rates are
comparatively lower for the borrower, leading to lower EMIs and reduced overall
financial burden.

• Loan for longer tenure at competitive interest rate, thus allowing them to manage their
cash flows more efficiently as compared to other forms of credit.

• To leverage their asset available, as Real Estate is generally invested and available
asset with the business owner.

• Tax benefits from interest payments flexible repayment tenure going up to 15 years in
comparison to a personal loan, which generally goes for 5 to 7 years. This reduces the
financial pressure on the borrower. Larger sanction can be availed on lower interest rate
generally ranging between 7% to 13%.

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 .

CHAPTER 2: RESEARCH METHODOLOGY

2.1 Objectives of the Study

1) To study the meaning and importance of the credit appraisal process.
2) To analyse the housing finance sector and the process of obtaining loans from banks and
NBFC’s.
3) To study the overall credit appraisal process with reference to HDFC Ltd.

2.2 Scope of the Study

The research is based on understanding the credit appraisal process that financial institutions have
to undertake in order to grant loans to borrowers as they cannot just hand them out. Institutions
need to be sure that the money that they are lending will be returned along with interest which is
the major source of their income. For this purpose, every institution has its own way of appraising
the eligibility of a borrower and to decide the credit worthiness of the said borrower. Here, in this
study we are looking particularly at the credit appraisal process of HDFC Ltd which is one the
leading housing finance institutions in the country. The study helps us to understand the
importance of this appraisal process while also giving insights into how the entire process of
obtaining loans from banks and non-banking financial companies takes place. With the help of
both primary and secondary data, a lot of information was available to go in depth and understand
what does HDFC Ltd actually look for in an application and how they are able to come to the
conclusion of whether a borrower will be able to repay the loan given to him/her. This study is
useful to help the general public to understand the various spending and banking behaviours that
they should follow in order to be credit worthy in the eyes of such institutions.

2.3 Research Design

This study follows a descriptive structure of research. The housing sector has been described in
detail from discussions and other sources to understand what the current situation of the sector is
in the market and if investors can look forward to astonishing performances from the companies
within this sector. The entire credit appraisal process was analysed especially with reference to
HDFC Ltd

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 .

with a detailed analysis being done on the company profile as well. In depth research is done by
carrying out surveys to understand the usefulness and challenges of such a process.

2.4 Sample Population

This entire study was done with reference to just one company i.e. HDFC Ltd as it is the leading
housing finance lender in the country. Also, to understand the perception of the borrowers to such
an appraisal process, a survey was conducted on sample population of around 50 respondents.

2.5 Data Collection

Data has been collected from both primary as well as secondary sources with most of the data
coming from secondary sources. Primary data is the first-hand data that is collected in real time
while secondary data is data collected from already published sources.
Primary sources for this study include-
• Surveyed the seniors, alumni and peers to learn from their experience.
• Discussion with the members of credit team from HDFC Ltd.
• Discussion with superiors and team members at HDFC Ltd.
• Talks with some customers on their experience.
Secondary sources for this study include-
• Collected information regarding the appraisal process and sector related information in general
from various websites.
• Referred various financial journals and books as well as newspapers.
• Read some papers published by various researchers and scholars.

2.6 Scope of further study

This study is limited to just the credit appraisal process which is specific to HDFC Ltd and hence
the overall performance of the sector cannot be really grasped. Although, there are similarities
between how different institutions appraise a loan, there are also their own unique ways and ideas
and justifications and judgements on different cases and hence there is further scope on the current
study as this same can be studied for other banks and NBFC’s which will help to compare and
understand which process is efficient or much comfortable both for the companies as well as the
general public. With respect to HDFC, since the news of the merger has come out, it could slightly
bring about a change in the credit appraisal process. There could be a mix and match to try and

19
 .

modify the existing process to help smoothen the entire process which could also be studied later
once the merger has successfully taken place.

CHAPTER 3: LITERATURE REVIEW

GANDHI PRIYAM (2016)

Credit appraisal is the major focus of banking industries these days which helps in
understanding and analyzing the situation prevailing currently. This research paper was
commissioned to examine the Credit Appraisal Process for Corporate Banking Customers in
HDFC Bank. Because of the lot of risk involved in fulfilling the huge financial needs of
corporate clients, it is important to know the credit worthiness of the customer in advance.
Different banks use different techniques to assess the credit worthiness of the client. In HDFC
bank, it is assessed with the help of preparation of CAM (Credit Assessment Memorandum)
which includes both qualitative and quantitative analysis. Afterwards, additional assessment has
been made. The primary as well as secondary research has been followed in order to analyze and
interpret the credit appraisal process and various solutions have been arrived at in order to
remove inadequacies related to credit appraisal system.

NANCY ARORA, Dr. ARTI GAUR AND Ms. BABITA (2013)

They say that to mitigate the credit risk, legitimate assessment of the clients is to be done. In this
paper we contemplate the credit risk evaluation model of SBI bank and to check the practicality of
the business, monetary and technical parts of the clients of the undertaking proposed and its
financing pattern. It is additionally important to lessen the different risk parameters, hence
observation of movement of loan procedure is required.

SATYA VARATHAN (2018)

The author explains about the important activities exercised by the credit bureau of the bank to
decide if to acknowledge or dismiss the application for loan. The article bargains in banking, such
as working capital and its administration, strategies for evaluation, gathering of credit reports. The
techniques to be utilized by the banks so as to compute as far as possible are Turnover strategy,
MBPF framework and money spending framework.

DR. ROSY KALRA (2012)

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 .

She explains that finance is required at every stage of the business either for starting up the
businesses or in order to monitor it in meeting the day-to-day expenses of business. The primary
function of any financial institution is to lend the loan for commercial purpose. She also explains
that how the lender is supposed to verify the credit worthiness of the customer? What are the
criterions to be grant the loan proposal? What are the tools to be used in the banks to mitigate the
credit risk?

HRISHIKES BHATTACHARYA (2020)

The author explains about the vital structure which must include around the benefit goals in order
to develop the quality credit resources portfolios and to guarantee sufficient capital growth. The
investigation of loaning techniques, credit evaluation, risk examination and loaning choices inside
the general destinations of loaning associations. The effect of capital guidelines on the risk attitude
and gainfulness of the banks, procedures to protect banks from a liquidity emergency, and the
need of a portfolio approach in developing models for credit introduction and advance
administration inside a risk return framework.

MOHAN (2022)
He observed that lending rates of have not come down as much as deposit rates and interest rates
on Government bonds. While some institutions have reduced their prime lending rates (PLRs) to
some extent and are also extending sub-PLR loans, effective lending rates continue to remain high.
This development has adverse systemic implications especially in a country like India where
interest cost as a proportion of sales or corporate are much higher as compared to many emerging
economics.

AKILA AND PATHMAVATHY (2014)

They studied on the topic Credit appraisal procedure and disbursement of loans to MSME. their
study finalized with the proper evaluation of customers is performed this measures the financial
condition and the ability of the customer to repay back the Loan in future .generally the credit
facilities are extended against the security know as collateral. Thus the customers’ cash flows are
ascertained to ensure the timely payment of principal and the interest.

BRAR JASMINDEEP (2005)

The objectives of this study were to study the operational performance, and the financial
performance of the selected institutions. The study covers three institutions viz. HDFC, LIC &

21
 .
PNB.

22
 .

The study is based on the secondary data that have been collected from the annual reports and web
sites of the institutions selected under study. It covers the period from 1990-91 to 200304. The
performance of the selected institutions has studied by using percentages, compound growths rates
and various ratios. HDFC Ltd. comes at the top among all the institutions as far as loan sanctioned,
disbursements and the loan outstanding are concerned, PNB has the last rank for both loans
sanctioned and disbursed. However, the compound growth rate for the loan sanctioned,
disbursement and outstanding has been highest in the case of LIC Housing Finance. It stood at
26.49%, 30.89%, 36.16%. Against PNB showed the lowest compound growth rates of 18.62% and
19.90%, for the loan sanctioned and disbursement over the same period. However, the compound
growth rate of the loan outstanding in the case of PNBHF was higher than the growth rate of
HDFC.

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CHAPTER 4 : DATA ANALYSIS AND INTERPRETATION

4.1 Introduction to credit appraisal

The Credit Appraisal is a complete process of assessing a particular loan proposal in a thorough
manner in order to work out the repayment ability of the borrower. Credit appraisal is the
assessment of the feasibility of proposed long-term investments in terms of shareholder wealth and
the analysis of all project costs and benefits which is used to justify the project proposal.
The banks and NBFCs have over the years designed and adopted the Best Practices. This in effect
depicts the bank's philosophy towards valid Corporate Governance. A good appraisal justifies
expenditure on a project. A proper scrutiny of each of the key components of project appraisal is
vitally important.
Both banks and non-banking financial corporations (NBFCs) exercise credit appraisal before
sanctioning a proposal. Each lender will have its own techniques for conducting credit appraisal
processes. A lender will have certain norms, regulations, and standards to evaluate the
creditworthiness of a particular loan applicant. If a borrower has a high creditworthiness, there is
high possibility that his or her loan application will be accepted by the bank. A credit appraisal is
done to circumvent the risk of default on loan

4.2 Need for Credit Appraisal

• A crucial need of appraisal is gaining an understanding of the foreseeable expenditure and
advantages of a project, usually expressed in terms of its costs and results.

• The anticipated timing of this must also be made clear.

• While thorough appraisal is generally essential before decisions can be taken and offers made.

• It will enable any obviously ineligible ones to be rejected, avoid replication and give an early
overall view of the success of the process.

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4.3 Important Elements /Five Cs of Credit Appraisal

Credit analysis by a lender is used to determine the pitfalls associated with the proposal.
Regardless of the type of funding needed, the lending institution will be interested in both
borrower’s business establishment and personal finances. Credit analysis is governed by the “5
Cs:” character, capacity, condition, capital and collateral.

Character (Background):

Honesty and integrity is of utmost importance while considering any proposal. Additionally,
background, education, industry knowledge and experience required to successfully operate the
business play very important role while appraising any given proposal. Lending institutions may
require some amount of management and/or ownership expertise. Choosing a right type of
borrower is also crucial.
As past performance is the best foreseer of the future, examining the credit of all borrowers and
guarantors should be involved in the proposal. Sound establishment and personal credits are a
must. Proper inspection regarding the previous transactions of the proposed client should be
enquired from the market and area surrounding his place of establishment.

Capacity (Cash Flows):

This states the management's ability to run the business and repayment capacity of borrower. The
funds are safe and secure if the management of the company is able and sound. The cash flows
should support its business, personal expenses and debts comfortably. The potential of the
borrower for business is to be judged in the light of his qualification, expertise and leadership
qualities.

Condition:
Particularly in case of industrial funding, the position of the proposed borrower's business in the
industrial cycle at the time of application is significant. Lender has to examine the existing
business conditions and government regulations. One has to factor into the overall business cycle,
the general condition of the industry as a whole in which this company is engaged, international
circumstances that could influence the company and the technological advancements that are
taking place in the field in which the company is engaged.
Lender should also consider the volume of advance margin, source of repayment and profitability.
A credit analyst, even at the preliminary stage, should view all these things in totality before

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coming

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to a decision of taking proposal into consideration. The success or failure of the lender would
largely depend upon the quality of proposals and advances.

The manager is expected to make comprehensive enquiries about the prospective borrowers and
their credit proposals. It is insignificant whether the final decision is to be taken at Branchlevel or
at Zonal / Head office level. All the information is to be gathered and evaluation has to be done by
the Manager /Credit Officer, initially.

Capital:
This refers to the amount invested in the business establishment by the borrower. In other words, it
represents the share of the owner in the business establishment. It is of utmost important that the
prospective borrowers have adequate stake in the business. Capital is the measure of credit that
may be sanctioned to those who have earned the right to borrow.

Collateral:
To the lender, security is important in order to be assured of the credit exposure it offers. The
security should have good title, stability of value and ready marketability. Security is acquired as
an indemnification against any unforeseen developments. A security cannot make an NPA good
but it definitely makes a good loan better.
Security is not an alternative for character or capacity of borrower. By overpassing character and
capacity in favor of security, the lender is simply asking for trouble because the negligence of
these two factors will ultimately drain the security to the extent where it would become valueless.
Lender has to make sure that, obtained security is adequately charged and a valid equitable
mortgage is done and all necessary legal formalities are completed so that it can be realized
without any difficulty in case of unforeseen development.
These five components that make up a credit analysis help the lender understand the owner and the
business and evaluate the credit worthiness. By knowing each of the “5 Cs,” one will have a better
understanding of what is needed and how to prepare for the loan application process.

4.4 Rationale behind the sanction of credit facility

The rationale behind the sanction of credit facility must be based on favourable outcome of
information collection and appraisal is done on the following aspect of the credit proposal.

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• The prospective borrower: He must be mentally and physically aware about his scheme of
business and the trustworthiness required for fair dealings with the bank. The market
conditions and its cyclicality must be conducive for:

• Adequate demand for the relative product/service.

• Creation of adequate surplus to meet the business expenses, bank instalment/interest and
required drawing by the prospective borrower.

• Technical feasibility: The proposed borrower must possess/have confirmed access to

knowhow, location, land, building, machinery, fixed assets, transport, factory shed (where
required), electricity, raw material and other inputs required viz. the requisite license/clearance
from the concerned authorities etc.

• Financial feasibility: The cost of the project must be realistic and should be based on
optimized scale of business and the sources of fund must be satisfactory and acceptable from
the point of view of safety and security of the proposed loan. Availability of collateral security
is also part of financial feasibility.

• Each of the above aspects is of extreme significance. Tapping of following aspects is

necessary for collecting above information:

Personal discussion (PD) or interview of the prospective borrower:

The approach of interviewing the borrower effectively is:

• Encouraging prospective borrower to talk more about his proposal and making him feel at ease
while interviewing but not allowing the conversation to drift from the topic. Listening
carefully with an open mind and also watching non-verbal communication like gesture,
manner of talking etc.

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• While interviewing, analyst should keep an eye on other activities happening in the office
setup, behaviour of prospective borrower with his employees, but not making it obvious.
Prospective borrower should be encouraged to answer the incoming phone calls of vendors if
any, this reflects the relationship he/she is having with his stakeholders.

• Asking intense questions or highlighting or asking questions about problematic areas in the
beginning should be avoided but gradually collecting all relevant information. Avoiding
communication gaps and allowing the borrower to connect emotionally so that a free and frank
discussion takes place. Discussion should focus on solving problems rather than finding faults.

• Market inquiries: Contacts should be made with the other business establishments in the same
line of business, particularly those who know him, as well as friends and relatives associated
with his venture, as revealed during the personal interview. Enquiries should be made within
the area of his office setup. Political connections of prospective borrower should be checked
beforehand.

• Report from other banks: Confidential credit report has to be obtained if borrower is dealing
with other banks. Credit report has to be obtained directly from the bank to avoid any
fraudulent activities.

Common Credit Bureau Norms and Obligation Norms:

Credit bureau Norms:

• Minimum Credit Bureau score of 725 in CIBIL Credit report in version 1 and 675 in version 2.
(Deviation for the score less than 650 to be approved by BH)

• Following trade line behaviour as per credit information report are permitted

• Write-off on credit cards upto Rs. 10000 if there are other open/ closed cards with good
performance

• DPD up to 90 on credit card over 12 months back with no current outstanding/ overdue

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• DPD up to 30 on loan product not more than twice in the last12 months with no current
overdue and NIL DPD in last 6 months

• DPD up to 60 on closed loan product over 24 months back subject to no write-off/ settlement/
overdue

• There is a separate Credit Bureau Norms worked out and put as BRE in the LOS system.

Note:
Any deviation on the Bureau should be taken after collecting the necessary documentary proofs and
with the approval from NCM.

Obligation Norms:
To be considered in Loan obligation -
• Any obligation which has a fixed monthly/quarterly repayment schedule.

• EMIs of loans with balance tenor <= 12 not to be considered in Obligations.

Credit Pricing:
Pricing includes following components:
Base rate/ MCLR (Marginal Cost of Funds based Lending Rate) - The rate below which a bank will
not lend loan to anyone. It is decided on the basis of-
• Cost of funds- It comprises interest cost of resources raised & cost of reserve requirements,
determined periodically.

• Operational cost- It includes day to day cost like staff salary, electricity bills, & other operating.

• Margin- This the minimum profit of the bank.

• Tenure of the credit- Higher the tenure, higher will be the pricing

• Rating of the company- Two ratings are considered for pricing.

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• External rating- Rating given by external agencies like CARE/ ICRA/ FITCH/ CRISIL.
AAA being the highest & D being the lowest.

• Internal rating- Rating given by the bank, known as Credit Rating Assessment (CRA)

4.5 Credit Appraisal Process

Receipt of application from the applicant

Receiving documents from the applicant (KYC compliant, Statement of means, Registered deeds,
Memorandum of partition if required, Mortgage Deed, Project Report of the firm constituting its
projected balance sheet, all financial indicators etc., hypothecation of goods clause papers.)

Credit Rating (CIBIL DATABASE provides vital information about the defaulters list.

A clearance report of the property to be obtained from the valuer assigned by the
bank

as well as a legal opinion is taken. In case of mortgage of property, encumbrance

certificate is obtained & memorandum of partition in case of property jointly owned.

Financial statement analysis

Conducting Personal Discussion and other verifications before sanction

Sanction of loan by the higher authorities & disbursement of loan according to

customer's need

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Housing finance is basically required by both suppliers and users. The builders need finance for
land acquisition, purchase of building materials and for construction related activities. The
household-users need finance for purchase / construction of new house or flat, for repairs,
renovation or extension of already existing houses. Housing being a long durable asset, the
finance required is generally long term credit in nature. As a durable asset, housing finance
structure provides security for house finance. Hence it is made usually against mortgage of
house itself as a security. Naturally it follows that to become eligible for house finance, the
borrower should be the owner of the house with clear title of ownership. Housing finance
enables individual households to acquire land and build their own house with the basic
amenities for a better standard of living. This is an analytical research area where we evaluate
the data with the help of following information. This analysis leads to the simple conclusions
of whether to lend money to the customer or not. How much an applicant can borrow?
Home loans starting from 1 lakh to the capacity of the repayment of the customers. Your
repayment period can vary form 1 year to 30 years depending upon your capacity to repay and age
of the customer.

Eligibility:

Age: - Min you should be at least 21 years of age.

Max: - At the time of loan maturity, you should not exceed 65 years or retirement age, whichever is
earlier.

Individual: You should have completed a minimum of 2 years of service (with a minimum of 1
year in the current job)

Eligibility Criteria:

1. Present age and remaining working years:

The age of the applicant plays a major role in determining the ho me loan eligibility. With the
maximum loan term generally capped at 30 years or the age of retirement, a young person can
avail a longer term loan; for the old, the loan term will be comparatively shorter. Further, the
longer

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working life that a young individual will enjoy will enable him/her to enjoy better loan terms vis -
à-vis the old.

2. Financial position:
To ensure that you are ab le to service the loan regularly, your present and future income will have
a significant impact on determining the loan amount. Along with the quantum of income, the
stability and the quality of income is also considered.

3. Past and present credit history and credit score:

A clean repayment record will add credence to your loan application. In addition a good credit
score implies that the chances of your defaulting would be minimal. This augurs well for the ho
me loan lenders.

4. Other financial liabilities:

The ho me loan lender will also evaluate your existing liabilities such as car loan, credit card debt,
etc. to ensure that you would be able to bear all the incremental burden of the additional loan.

5. Personal profile:
Your overall personal pro file viz. background, educational qualifications, etc. will also play a role
in loan approval.

6. Traits of the desired property:

Home loan lenders may have specifications which the underlying property must adhere to, such as
age of the property, its size, etc. If it does not comply, the loan application will be rejected.

7. Guarantor to an existing loan:

In case the borrower defaults, it may have a direct negative impact on your credit worthiness.
Together, the above factors will allow the home loan lenders to determine the loan terms and the
repayment schedule.

Salaried Person:
Here the Credit Appraisal is done for a salaried person .We try to compute the creditworthiness of
a salaried person .By saying that we mean that the person is employed as an employee in a

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recognised organization. The organization may be public or private. The person must have proof
to prove his employment like credit documents etc.

Some of the acceptable relationships where loan clubbing on the basis of income is possible:-

• Husband-Wife – YES
• Parent-Son YES(if only son)
• Parent- Daughter YES (if only child)
• Brother- Brother YES (if currently staying together and intend staying together in new
property)
• Brother- Sister NO
• Sister – Sister NO
• Parent Minor child not eligible for loan

1. The minimum age for the applicant and the co applicant to become eligible for the
commencement of the loan is 23 years, and co applicant can be of 18 years of age if their income
is not clubbed to calculate the loan eligibility.

2. The maximum age at the time of loan maturity for applicant or co-applicant is 60 years or
the retirement age whichever is earlier.

Terms And Conditions:

The following are the terms and conditions applicable to basic home loan product only. These are
likely to change on the basis of the variations of the home loan products. Typically in general
home loan, the following conditions are applicable:

1) The loan to value ratio (LTV) cannot exceed a particular percentage. This differs from
product to product and from one financial institutional bank to another. The component of the
value of property calculated here is covered under the cost of property.

2) The maximum tenure of the bank is normally fixed by HFI/Bs. However, HFI/Bs do
provide for different tenure with different terms and conditions.

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3) The instalment that one pay is normally restricted to about 50% of the monthly gross
income of the candidate.

4) The total monthly outflow towards all the loans that have been availed of, including the
current loan is normally restricted to 50% of the gross monthly income.

5) One will be eligible for the loan amount which is lowest as per one’s eligibility. This is
calculated as per the LTV norms, the IIR and the FOIR norms as mentioned above.

6) Some HFI/Bs insist on guarantees from other individuals for the repayment of the loan. In
such cases, the customers have to arrange for the personal guarantee before the disbursement of
the loan take place.

7) The property should be technically clear before the HFI/Bs disburse the loan amount to the
customer. Most of the institutions and banks have the teams of technical experts who visit the site
to get the technical report before the disbursement of the loan. This is also beneficial to the
customer as they check for the technical quality and compliance with local laws.

8) The property should be legally clear before one can avail of a disbursement of the loan
amount. Housing finance institutions/ Banks take legal clearance from their lawyers before the
disbursement of loan amount. This proves to be beneficial to the customers as well as legal experts
checks his/her documentation to ensure that he/she get a proper title to the property.

9) The disbursement of the loan is as per the process of the construction of the property unless
it is a ready property in which case the disbursement will be by one single cheque. PEMI or
simple interest on the loan amount disbursed to the customer in case of the part disbursement will
be payable by the customer on the disbursement.

10) The disbursement in most cases will be favouring the builder or the seller or the society or
the development authority as the case may be. The disbursement will be come in the customer’s
favour under special circumstances only.

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11) The repayment of the loan can be made either through deduction against salary, post-dated
cheque, standing instructions or auto debit instructions to banks.

12) The principle is amortised either or annual reducing or monthly reducing basis as the case
may be. The above terms and conditions are generally true for most of the HFI/Bs with respect to
the general home loans. However, the specific terms and conditions vary with respect to special
Housing Finance Institutions or Banks.

Required Documents:
The Credit Appraisal is an important step in sanctioning loan applications.
Hence the Credit Appraiser needs to have certain important documents to compute the credit
worthiness of the applicant .

In the case of salaried person these include the following:

1. Proof of the age of any one of the following if considered for proof of the age:-
Passport/ Voter’s ID card / PAN card/ Ration card/ Employer’s identity card/ School leaving
certificate/ Birth certificate

2. Bank statements (6 months current)

The bank statement contains the various transactions that the applicant performs in his bank
account. It has some components -
Date
Descriptions-It contains the brief and standardised description of the activity or the account related
to the transaction .E.g. Clearing cheque 166129,Transfer deposit
Withdrawal –It contains the amounts that were debited to the account. This is carefully studied to
find out about any regular withdrawals or a series of checks so that any existing loans may be
revealed and there can be a correct estimate of the repayment capacity.
Balance- It shows effect of transaction on the pre-existing account balance
Special feature HDFC will not consider any loans without standing EMI of or below 6 months

3. Copy of latest credit card statement

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4. Passport size photograph

5. Signature verification the your banker

6. Proof of residence:
Ration card/ PAN card/ Passport/ Rent agreement if any, if you currently staying on rent/ Allotment
letter from your company if you are residing in company’s quarter.
The documents required to be provided by the salaried class are as follows:

• Salary slip for the last three month

• Appointment letter

• Salary certificate

• Retainer ship agreement, if appointed as consultant.

• Form-16 issued by the employer in your name.

Proof of Employment:
• Identity card issued by the employer.

• Visiting card

Employer’s details (in case of private Ltd. Companies)

The employer’s details are to be provided in addition to the above documents for documents for a
private sector employee, they are:

• Name of the Promoter/ Director

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• Background of the Promoter/ Director

• Number of employees

• List of branches/ factories

• List of clients/Customers.

• Turnover of your employer

• Annual report of your employer for the last two or three years.

The documents required to be submitted by the businessmen are as follows:

• Last three years profit & loss A/C statement duly attested by the charted accountant.

• Last three years balance sheet duly attested by the Charted accountant

• Last three years Income Tax return duly filed and certified by income tax authorities.

Proof of Investments
• Bank statements for the last six months of all current accounts.

• Any other photocopies of investments held, as required by the HFI.

Loan application contains various stages, they are as follows:

1) Serial number generation
This is the stage the Application Form first reaches the concerned Service Centre/workstation. In
this stage quick data entry of the loan application is done to create a serial no. Of the application.
After that another page appears and more data is entered. A special and unique loan a/c no. is
created in which all the loan process is being carried out. The number that has been generated is
communicated to the applicant by means of the email. The system electronically record the data

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helps to create ready reference, a proof, helps in quick and easy processing of the data. It also
helps to very easily and quickly share data with other employees of HDFC. If NRI does belongs to
other country and does not have any other contact here then POA card is given to them.

2) Scanning
In this stage various important documents of the applicant are scanned. This helps to create their
electronic copy of which act as a ready reference, as proof and even can be shared and utilised by
the other employees of the HDFC Ltd.

3) Application Stage
Here all the documents in the application form are reviewed to see whether all documents present
are in their proper place, if the documents are duly filled, not fake, attested by authority and
present in order. In case any document is missing the applicant is contacted electronically or by
mail or by telephone and requested for the document to be submitted. This exercise is called
follow up. The credit appraisal of the loan application starts at this stage. Than after compute the
gross salary, IIR (Instalment to income ratio), FOIR (Fixed Obligation to income Ratio), Loan
Eligibility ratio etc. The credit worthiness of the applicant is calculated here.

FOIR = Current Obligation + Existing Obligation Gross salary

Gross Salary =Gross Income + Bonus + Rent +Performance Incentives

IIR = Current Obligation Gross Salary

4) Filling Interview Sheet

The next and important processing performed is filling up a document known as the interview
sheet for processing individual loans. It contains various simple entries like

1. Name of borrower
2. Name of co-borrower
3. Income details
4. Family background and permanent address etc

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5. Gross Salary
6. Rental
7. Other incomes
8. Obligations
9. Remarks
10. CIBIL report

Remarks column contains various findings that has found out after review of the applicants
documents such as bank statement, salary slip, CIBIL etc. After this the file is sent to the HUB
(Senior Officer) where further processing takes place (like Technical, Legal, Residence and Office
Verification).

The documents checked are:

IF CUSTOMER IS SELF EMPLOYED:-

• I.D Proof :- Pan card / Driving license / Voter Id card / Aadhaar card / Passport

• Address Proof :- Aadhaar card / Voter card / Electricity bill / Telephone bill (landline/ postpaid)
/ Ration card / Rent agreement with stamp duty (if customer are living on rent) / Government id
/ Appointment letter from employer

• Business Proof :- Visiting card / Company profile / Letter head

• Latest six months bank statement a/c

• Latest three years ITRs

• Form 16

• Form 26AS

IF CUSTOMER IS SALARY BASED :-

• I.D Proof :- Pan card / Driving license / Voter Id card / Aadhaar card / Passport

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• Address Proof :- Aadhaar card / Voter card / Electricity bill / Telephone bill ( landline/ postpaid)
/ Ration card / Rent agreement with stamp duty ( if customer are living on rent) / Government
ID / Appointment letter from employer

• Latest six months bank statement a/c

• Latest two year ITRs

• Form 16

• Form 26AS

• Last three month salary slip

Understanding The Formulae:

Once the home loan lender has all your information, it computes certain ratios to calculate your
eligibility.

• Instalment To Income Ratio -

This ratio calculates the EMI that a person has to pay for a home loan and compares it with the
income of the customer to know what percentage of income will be going towards the EMI
payment and accordingly grant loans.

• Fixed Obligation To Income Ratio -

Here, the lender considers the instalments of all other loans already taken by you and still due in
addition to the home loan applied for. It would be maximum 55% -60% (can be more than 60%,
depends upon the profile of the customer).

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4.6 Case Study Analysis

Case 1:
Customer name - Raj Kumar Ghosh
File no. - 633827077
Product - Home loan Resale
Interest rate - 7.65%
Loan application was for Rs. 750000
Cost of the property - Rs. 13,00,000
Loan term - 10 years
Gross salary - 80618
Existing Loan EMI = 16263
New home loan EMI = 12687
Missing documents which are provided by the customer later for the process :-
Last 2 month’s salary i.e. march and April
Form 16 – 2017-18, & 2018-19
ITR 2017-18

Solution:

Loan to Cost Ratio = Loan required / Cost of the property *100

= 750000/1300000 = 57.69%

IIR = Current Obligation / Gross Salary *100

= 12687/80618 = 15.73%

FOIR = Current Obligation + Existing Obligation / Gross salary *100

=12687 + 16263 / 80618 = 35.91%

Loan approved because customer’s IIR & FOIR are fulfilling the requirements.

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Case 2:

Customer name - Akshay Sawant

File no. - 639874510
Product - Home loan Purchase
Interest rate - 7.65%
Loan application was for Rs. 60,00,000
Cost of the property - Rs. 73,00,000
Loan term - 25 years
Gross salary - 71550
Existing obligations = 0
New home loan EMI = 34326 All
documents provided.

Solution:

Loan to Cost Ratio = Loan required / Cost of the property *100

= 6000000/7300000 = 82%

IIR = Current Obligation / Gross Salary *100

= 54326/71550 = 75.4%

FOIR = Current Obligation + Existing Obligation / Gross salary *100

=154326 + 0 / 71550 = 75.4%

Loan cannot be approved and the loan has to be downsized because the IRR, FOIR and
LCR have exceeded the norms set by HDFC Ltd.

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Case 3:

Customer name - Mihir Shah

File no. - 630063877
Product - Home loan Purchase
Interest rate - 6.55%
Loan application was for Rs. 20,00,000
Cost of the property - Rs. 33,00,000
Loan term - 30 years
Gross salary - 71550
Existing obligation EMI = 13442
Delays in existing housing loan for 140 days.
New home loan EMI = 14877
All documents provided but no savings / investment proof.

Solution:

In this case, the ratios are not calculated because there are delays in the housing loan which
the customer has already availed because of which the cibil score of the customer is in a high
risk zone. This raises red flags for the appraiser because how can a company lend more money
to someone who has defaulted before. Also, the customer does not have any savings /
investment in his name which is not at all comforting for the appraiser and it means that the
customer cannot justify the repayment of the loan.

Loan cannot be processed and need to close the application.

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4.7 Data Interpretation

1. AGE

INTERPRETATION:

There were a total of 50 respondents that were sampled for the study. We can see the majority
of the people that were surveyed were youngsters and youths who have just started earning or
are in their initial stages of their career. This age group believes in the concept of availing
credit to make smart financial decisions as it can help to reduce burden and still help to get
what they need. Around 86% of the respondents belong to this age category of 21 - 27 years
of age. 8 % of the respondents are in the age group of 28-35 years of age where they have
sufficient savings/investments to not rely on borrowing money.
A menial percentage of the respondent were in the age group of 36-45 years and above 45 years.

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2. OCCUPATION

INTERPRETATION:

Out of the total respondents, majority of them are salaried and earn their major income in the
form of salary by working for different organisations. Around 58% of the respondents are
salaried while only 2% are self employed wherein they run their own business or start-up of
some sort and their major income is from the profits derived by the business.
38% of the respondents are students who do not earn a high income or are working part time or are
entering the initial stage of their career.
2 % of respondents are retired and they are only eligible for a loan if they have regular pension
income coming in because it is an important criteria of credit appraisal.

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3 INCOME

INTERPRETATION:

The percentage of respondents earning less than 4 lakhs and 4-8 lakhs are the same from the
sample that was surveyed. 44 % respondents are earning less than 4 lakhs which makes them
eligible for a lower loan amount and 44% respondents are earning in between 4-8 lakhs which
makes them eligible for a loan of around 40-45 lakhs for a tenure of 25-30 years.
The high income bracket of 8-15 lakhs is earned by only 10% of the respondents making them
eligible for high loan amounts.
However, only the 2% who earn more than 15 lakhs can avail a loan of more than 1 crore as per
the norms of HDFC Ltd.

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4 IF YOU ARE LOOKING FOR A HOUSING LOAN, WHICH OF THE FOLLOWING

FINANCIAL INSTITUTIONS WOULD YOU PREFER?

INTERPRETATION:

We tried to survey the respondents to know which of the banks or NBFC’s would they prefer
while applying for a housing loan. This study is with reference to HDFC Ltd because it is the
leading private lender in the country and that can be seen by the strong consumer base that it
has wherein 70% of the respondents would prefer HDFC Ltd for availing a housing loan.
16 % of the respondents prefer ICICI bank which is the next big name that they trust.
Few respondents looked to the other options like LIC housing finance and India bulls housing
finance whereas some of them preferred other banks like IDFC first bank and Bank of India to
avail loans. Some of the respondents would take a loan from anyone who provides the lowest
interest rate.

48
 .

5. ARE YOU AWARE OR HAVE KNOWLEDGE OF THE CREDIT APPRAISAL

PROCESSES OF FINANCIAL INSTITUTIONS BEFORE APPLYING FOR A
LOAN?

INTERPRETATION:

Credit appraisal process of various institutes are different in nature and each of them have a
unique way to decide on who should be given loans and how much should they be given. It is
not that public as to how each of them appraises a file and it is tough for a commoner to gauge
what exactly are they looking for and how he/she can convince them for a loan. It is not easy
to understand the appraisal process or even know anything about the same as is evident in the
fact that 50% of the respondents have no idea about such a process.
36% of the respondents have some knowledge about the credit appraisal process because of prior
loans availed by them and 14% are not so sure about the same.

49
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6 ACCORDING TO YOU, WHAT IS THE IDEAL TIME TO COMPLETE THE

APPRAISAL PROCESS?

INTERPRETATION:

Credit appraisal is a lengthy process because a person’s entire credit has to be checked
thoroughly before making a decision. This is useful for the institute to know and justify
whether the person will be able to repay the loan or is there a chance they will go in default.
However, such a lengthy process could also cause hinderance to the customers as they have to
complete registration formalities of the property to be purchased. Hence, we asked the
respondents what do they think is the ideal time to complete the appraisal process.
Majority of the respondents agree on 2-3 weeks being ideal while 28% of them think it should
be much faster within a week. 8% of them think up to a month is a suitable time to give the
institutes to complete the process while 4% of them agree to more than a month.

50
 .

7 WHAT DO YOU THINK IS AN IMPORTANT CRITERIA IN CREDIT SCORING

AND EVALUATION?

INTERPRETATION:

We tried to know the perception of the respondents as to what they think is an important criteria
in evaluating a customer in the credit appraisal process.
18% of the respondents think that their account performance and their banking behaviour is
what is important while 10% of them think it has everything to do with the collateral that they
have provided or will provide and 8% of them think that their previous relationship with the
bank or institution will help to smoothen the evaluation process.
However, majority of the people, to be exact 64% of the respondents feel that their credit
worthiness is what the institutions check and that is what determines the outcome of their loan
application.

51
 .

8 WHICH OF THESE FACTORS IS IMPORTANT TO SHOWCASE YOUR

CREDIT WORTHINESS?

INTERPRETATION:

Credit worthiness shows how much worthy a person is in clearing his dues and what is the
past credit history of that person and if that person is worthy enough to avail a loan and repay
the same without going default. Every person has to convince the lenders of their credit
worthiness so as to get a loan amount of their need. The respondents feel that past repayment
track record of their previous obligations has a major impact on this score with 60% believing
the same. Around 18% of them believe that having good savings/investments is enough to
justify repayment while 10% think that income is the only factor to be considered important.
8% respondents say that their spending patterns are studied and have an impact on this score
while only 4% believe that their place of employment is checked and adds to the score.

52
9 WHICH OF THE FOLLOWING DOCUMENTS ARE DIFFICULT TO
PROVIDE BEFORE SANCTION OF A LOAN?

INTERPRETATION:

There is a lot of documentation that has to be done before availing a loan. To check a
person’s eligibility there are a lot of documents that the institutes need in order to properly
assess an individuals worthiness. Some of these documents are hard to arrange before the
sanction of the loan which delays the entire appraisal process. 28% of the respondents
believe that getting existing obligation documents is very tedious while 22% of them each
think that property documents and tax return documents are tough to come by and provide
before sanctioning the loan. Income documents are hard to come by for 16% of
respondents while 12% have trouble in providing valid KYC proof before sanction.
10 STATE YOUR OPINION ON AVAILING INSURANCE COVER AND
PROVIDING A GUARANTOR TO THE LOAN AS ADDITIONAL SECURITY
FOR THE COMFORT OF THE INSTITUTE.

INTERPRETATION:

Many institutes urge their customers to avail insurance cover on the loan amount or
provide a guarantor to the loan so that the institutes offering the loan can have an
additional safety margin and comfort. Sometimes they make it mandatory for customers
whom they have deemed as medium risk or high risk but are still willing to offer them the
loan.
The respondents do not have a problem with the same as only 14% have disagreed with this
concept and 4 % have strongly disagreed.
Majority of the respondents believe it is a good idea to insure your loan and hence, 62% of
them agree and 22% of them strongly agree to this opinion.
11 DO YOU THINK TAKING THE HELP OF AN AGENT WILL MAKE THE
ENTIRE PROCESS EASIER AND IS IT FEASIBLE TO DO SO?

INTERPRETATION:

An agent is someone who will help source the loan for various institutes for a commission
but at the same time they help the customer with all document related queries and always
keep an update on where the appraisal process has reached and how long it might take.
They play an additional part in convincing the institute to grant their customers loans. This
eases the need for customers to run around and try and solve the queries of the appraisal
committee.
48% of the respondents think it is a good idea to have an agent helping them out while
12% of them think it is a waste of money as it won’t be of much help. 40% of respondents
are unsure and think maybe having a agent is not a bad idea.
12 DOES THE CREDIT APPRAISAL PROCESS SATISFY YOUR LOAN
REQUIREMENTS?

INTERPRETATION:

Lastly, we asked the respondents if such an appraisal process was a nuisance to them or in
spite of such a process they were able to get the loan requirements that they wanted with
respect to the loan amount and tenure and rate of interest etc. 46% of the respondents
agreed that they in fact were satisfied with the process as their requirements were fulfilled.
48% of them felt that their requirements were only partially fulfilled but they were still
happy with the same and 6% of them were not at all satisfied as this appraisal process
ended up in not fulfilling any of their loan requirements.
 CHAPTER 5: FINDINGS

• HDFC Ltd. Is having good brand image in the minds of the customers.
• Some of the Customer’s feel that the interest rate is somewhat high.
• Some of the customers do not have good faith on private institutions but they are trusting
the company because of the service which HDFC Ltd is providing.
• Some of the Customers of HDFC already benefited through HDFC home loan products
& services.
• Customer awareness is medium about HDFC products.
• The biggest competitors of HDFC Ltd are ICICI Bank, SBI, LIC housing finance, etc.
• Credit appraisal process of HDFC Ltd is very thorough and their level of NPA’s is quite
low as compared to other institutions.
• Customers are satisfied with the appraisal process as it meets majority of their loan
requirements.
 CHAPTER 6: CONCLUSION

The credit appraisal is done by involving the Evaluation of management, technical feasibility,
financial viability, Risk analysis and Credit rating. It is on the basis of the credit risk level,
collateral securities to be given by the borrower are determined. The credit department
thoroughly analyses the credit requirement of the company and the capacity to service the debt.
The banks have conservative norms to appraise the project the bank at the max. The credit
appraisal passes through various stages and evaluations before it is appraised. The financial
and banking system has placed before the MSME sector a fully dressed up and it is the
appreciation of the efforts and also as an incentive to work hard. The sector should avail of the
opportunities and scale new heights. With this the sector will be benefited and the society too.
This shows MSME has sound system for credit appraisal. The credit appraisal process carried
out at MSME has good parameters to appraise.
Finally, the whole research was carried out in a systematic way to reach at exact results. The
whole research and findings were based on the objectives. However, the study had some
limitations also such as lack of time, lack of data, non-response, reluctant attitude and illiteracy
of respondent, which posed problems in carrying out the research. But proper attention was
made to carry out research in proper way and to make accurate conclusion for the HDFC Ltd.
which may beneficial for the banks to enhance their customer base. This research gave the
deep information about how to analyse the data and information of the customer who are
seeking for the for-home loan. The credit appraisal is done by involving the Evaluation of
management, technical feasibility, financial viability, Risk analysis and Credit rating. It is on
the basis of the credit risk level, collateral securities to be given by the borrower are
determined. The credit department thoroughly analyses the credit requirement of the company
and the capacity to service the debt. The banks have conservative norms to appraise the project
the bank at the max. The credit appraisal passes through various stages and evaluations before
it is appraised. The financial and banking system has placed before the MSME sector a fully
dressed up and it is the appreciation of the efforts and also as an incentive to work hard. The
sector should avail of the opportunities and scale new heights. With this the sector will be
benefited and the society too. This shows MSME has sound system for credit appraisal. The
credit appraisal process carried out at MSME has good parameters to appraise.
 CHAPTER 7: BIBLIOGRAPHY

WEBSITE:

• www.wikipedia.com

• www.business-standard.com

• www.moneycontrol.com

• www.economictimes.com

• www.goodreturns.in

• www.hdfc.com

• www.businesstoday.in

• NANCY ARORA, Dr. ARTI GAUR AND Ms. BABITA (2013), Credit appraisal process,
University Of Arkansas Journal

• SATYA VARATHAN (2012), Credit policy and credit appraisal of canara bank , K.V.
Institute of Management Journal

• DR. ROSY KALRA (2012), Credit appraisal system, International Journal of Managment,

• HRISHIKES BHATTACHARYA (2011), Credit appraisal and lending decisions, Indian

Institute Of Management Journal
PLAGIARISM REPORT