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PROJECT APPRAISAL / CREDIT APPRAISAL Project / Credit appraisal is a skill which has to be acqu i r e d b y s t u d y a n d supplemented by practice.

Intuitive guess work has little place in appraising thecredit rating or credit needs of a corporate unit. The credit managers of banks andN o n B a n k i n g F i n a n c e C o m p a n i e s ( N B F C s ) a r e d u t y b o u n d t o a c c e p t o r r e j e c t a proposal on the basis of its viability or non - viability. TECHNIQUES USED IN CREDIT APPRAISAL A.BY THE BANKS OR FINANCIAL INSTITUTIONS.B . B Y T H E C O M P A N Y ( B O R R OW E R ) . Project / Credit appraisal is done by banks or financial institutions by obtaining creditinformation of the borrowing company. Credit information of the borrowing company can b e o b t a i n e d b y t h e following sources: 1. BANKS AND FINANCIAL INSTITUTIONS: The source of primary information can be from the banks and financial institutionst h e m s e l v e s wh i c h a r e t h e m o s t o r i g i n a l , t h e m o s t d e t a i l e d a n d b y f a r t h e m o s t trustworthy source, and as much relevant information as possible may be sought from the prospective banks. 2. BANK REFERENCES: Information about the general financial health of the companies would come from thebankers with whom the company has its account, but also th e bankers who mighthave lent to the company. Getting a reference through the companys bankers makesit easy to get correct information and the lending banker may remain disguised. 3. TRADE REFERENCE: They are references from the companys customers, suppliers, etc. S u p p l i e r s information would be particularly useful because, that would give an idea of the usualpayment policies of the company. 4. CREDIT RATING AGENCIES: Credit rating agencies like CRISIL C r e d i t R a t i n g I n f o r m a t i o n S e r vi c e s o f I n d i a Limited, An RBI credit rating agency is CARE Credit Analysis and Research Limited &other agencies are ICRA Investment Information and Credit Rating Agency of India,& DCR INDIA Duff and Phelps Credit Rating India Private Limited, & ONICRA CreditRating Agency of India Limited are the main credit rating agencies in India. T h e s e a g e n c i e s p r o vi d e r e a d y a n d d e t a i l e d i n f o r m a t i o n r e q u i r e d b y b a n k s a n d financial institutions for financing the capital requirements of the companies whichare credit rated by these agencies. 5. PUBLISHED BOOKS: Preliminary and basic information about a company may be taken from printedsources like the Stock Exchange Year book, Corporate Path finders data base, etc. 6. COMPANY FINANCIAL REPORTS: One of the most convenient and commonly used tools of credit evaluation by thebanks is the companys annual accounts which are statutorily prepared annually andlaid before the shareholders. Apart from the annual accounts, a listed company hasto publish half yearly un audited results in the newspapers twice a year. 7. PRESS REPORTS

The financial press comes out regularly with reports about companies. All the threeleading financial papers in India The Economic Times, The Financial Express andBusiness Standard publish some sort of periodic guides which give some key ratiosand figures about well known companies.Key indicators and periodic guides given in the above financial papers and magazineshelp bank to assess Companies financial standing and can take a positive decisionregarding financing the capital requirements of the company.8. STOCK MARKET OPINION: Investors perception is best judged by the market opinion about the company. Thismarket opinion also has an indirect impact on the companys health. Hence, a bankor a financial institution may also refer to shareholders or share dealers to know themarket sentiments about the prospective company. 9. CHARGES REGISTERED: Charges created on the assets of a company have to be registered with the Registrarof Companies. This information which would indicate to what extent the companysassets present and future are charged. OTHER TECHNIQUES USED IN CREDIT APPRAISAL: 1.Personal discussion2 . F a c t o r y v i s i t 3.Study of financial statements 1. PERSONAL DISCUSSION: This is the most significant source of primary information which is original, detailedand most trustworthy. Type of borrower: H i s t o r y o f t h e c o m p a n y, b a c k g r o u n d o f t h e p r o m o t e r s , n a t u r e o f t h e companys business, that is whether first generation entrepreneur (newlystarted) or established (in the field). a.Character: I f t h e c u s t o m e r i s h o n e s t a n d i s p r o m p t i n p a yi n g t h e d u e s t h a t h e h a s undertaken to pay.b.Market, product (share of market, competition, price, sales volume).c.Investors perception (dividend policy). 2. FACTORY VISIT: Under factory visit information collected are:a . o p e r a t i n g c a p a c i t y b.infrastructure and other utilitiesc . l a b o u r r e l a t i o n s d.internal control system for raw material (imported, indigenous)e . I S O c e r t i f i c a t e 3. STUDY OF FINANCIAL STATEMENTS: F i n a n c i a l s t a t e m e n t s c o n t a i n a we a l t h o f i n f o r m a t i o n . I f p r o p e r l y a n a l y ze d a n d i n t e r p r e t e d , t h e y c a n p r o v i d e va l u a b l e i n s i g h t s i n t o a f i r m s p e r f o r m a n c e a n d position.Financial analysis determines the significant operating and financial characteristics of a firm form accounting data and financial statements. The goal of such analysis is todetermine the efficiency and performance of the firms management as reflected inthe financial records and reports.Analysis can be done through:A . R a t i o A n a l y s i s B . T r e n d a n a l y s i s C.Reading of notes to accounts and other information A. RATIO ANALYSIS: Ratio analysis is the science of deriving certain conclusions by a study of such ratios.Some uses of ratios are:

To compare different companies in the same industry. To compare different industries. To compare performance in different time periods. The ratios to be looked into are: Liquidity ratio

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