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A PROJECT REPORT
CREDIT APPRAISAL IN BANKING SYSTEM
A Project submitted in partial fulfillment for the award of Degree of MASTER OF BUSINESS ADMINISTRATION
Submitted to: Managing Director Sr. J.S Safri RICDT Professional College LC Code : 00899
Submitted by: Parmjeet Singh Roll No 511113351 MBA- IV SEM.
I hereby declare that the project report entitled CREDIT APPRAISAL submitted for the degree of MBA is my original work carried out by me under the guidance of Sr. J.S Safri for the partial fulfillment of the award of the degree of MASTER OF BUSINESS ADMINISTRATION. The matter embodied in this report has not submitted anywhere else for the award of any other degree/diploma.
Place : Roapr Date :
Name : Parmjeet Singh Roll No : 511113351
Forwarded by : RICDT Professional College, Ropar (Pb) Center Code : 00899
RICDT Professional College Ropar (Study Centre of Sikkim Manipal University)
Certificate This is to be certified that the Project work entitled CREDIT APPRAISAL of MBA Revised has been carried out by is approved and acceptable.
Project Guide : Mr. Sanjeev Kumar
Centre Head : Sr. J.S Safri
CREDIT APPRAISAL Examiner’s Certificate This is to certify that Parmjeet Singh has been successfully completed the project entitled as CREDIT APPRAISAL in partial fulfillment of the requirement for the Award of MBA (of Sikkim Manipal University) On 2011-2012 at RICDT Professional College Ropar (Study Centre of Sikkim Manipal University) Signature (Internal Examiner) Signature (External Examiner) Page 4 .
S Safri Director of the college and to all the teaching and non-teaching staff and friends who help me directly or in-directly in the successful completion of this project. whom I really want to say thanks. I would like to express my deepest sense of regards and gratitude RICDT Professional College. (Affiliated to Sikkim Manipal University) for their kind regards and suggestions. J. 511113351 Page 5 . I wish to thanks Sr.CREDIT APPRAISAL Acknowledgement Preparing a project was great experience for me which was possible only with the help of people. Parmjeet Singh Roll No.
Sukhwinder Singh MBA 511113351 IV 2012 00899 Date of Submission : Page 6 . Semester Session LC Code : : : : : : : Parmjeet Singh S.CREDIT APPRAISAL Curriculum Vitae Name Father Name Course Roll No.
INTRODUCTION Reason for selecting the project Scheme of the project Research Methodology Limitation of the study 2.CREDIT APPRAISAL TABLE OF CONTENTS Chapters 1. THE PROFILE OF THE ORGANIZATION OF PNB Indian banking sector & its major challenges Punjab National Bank at a glance Mission and Vision Organizational structure of PNB Page 7 . CREDIT POLICY OF COMMERCIAL BANK Commercial banks and its objectives Recent policy developments regarding bank credit Changing phase of bank credit Trends of bank credit in India Procedure for providing bank credit Credit Appraisal 3.
CASE STUDY 7. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO PNB Credit philosophy Credit policy Introduction to loans Classification of loans Building up of a proposal Requirements as per constitution of borrower Financial Appraisal 5.CREDIT APPRAISAL 4. CONCLUSION Conclusion BIBLIOGRAPHY Page 8 . ANALYSIS AND INTERPRETATION OF DATA Credit Appraisal techniques Process of credit appraisal for providing cash credit Appraisal techniques for retail loans 6.
CREDIT APPRAISAL Page 9 .
The world economy has been majorly affected from the crisis. The last year financial crises have become the main cause for recession which was started in 2006 from US and was spread across the world. Analysis of the credit worthiness of the borrowers is known as Credit Appraisal.CREDIT APPRAISAL CREDIT APPRAISAL Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial. In order to understand the credit appraisal system followed by the banks this project has been conducted. how a loan proposal is being made. The root cause of the economic and financial crisis is credit default of big companies and individuals which has badly impacted the world economy. So in the present scenario analysing one‘s credit worthiness has become very important for any financial institution before providing any form of credit facility so that such situation doesn‘t arise in near future again. The securities in stock exchange have fallen down drastically which has become the root cause of bankruptcy of many financial institutions and individuals. The project has analysed the credit appraisal procedure with special reference to Punjab National Bank which includes knowing about the different credit facilities provided by the banks to its customers. financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. what are the formalities that is to be satisfied and most importantly knowing about the various credit appraisal techniques which are different for each type of credit facility. Page 10 .
objective of the project. reasons for selecting the project and the basic structure and framework how the project proceeds. Eventually the importance of this project is mainly to understand the credit appraisal techniques used by the banks with special reference to Punjab National Bank. But in India the credit default is comparatively less that other countries such as US.e. In order to assess the repaying capability i. One of the reasons leading to this may be good appraisal techniques used by banks and financial institutions in India. Reasons for selecting the project Whenever an individual or a company uses a credit that means they are borrowing money that they promise to repay with in a pre-decided period. It is the incident of credit defaults that has given rise to the financial crisis of 2008-09.CREDIT APPRAISAL Before going further it is necessary to understand the need and basic framework of the project. Therefore this chapter provides an introduction to the topic. In the current scenario where it is seen that big companies and financial institutions have been bankrupted just because of credit default so Credit Appraisal has become an important aspect in the banking sector and is gaining prime importance. to evaluate their credit worthiness banks use various techniques that differ with the different types of credit facilities provided by the bank. and present trends and growth in bank credit are required and it is covered in this chapter. its functions. Scheme of the project Page 11 . In order to understand the importance of the topic selected an introduction to the overview of the commercial bank .
review of some past work regarding credit appraisal by various researchers. The project then proceeds towards the lending procedure of banks and here it highlights about credit appraisal being the first step in building up of a loan proposal. The detailed explanation about the techniques and process has been discussed in detail in the further chapters. The project then proceeds with the review of literature i.e. Then the project proceeds with the next chapter consisting of the analysis part which covers the analysis of various techniques used by the banks for the purpose of credit appraisal. The Credit Appraisal system has been analysed as per the different credit facilities provided by the bank.its important functions. Then it highlights on the concept of Bank Credit & its recent trends.CREDIT APPRAISAL It covers the objective and structure of the project which is discussed as follows:- Objective of the project The overall objective of this project is to under stand the current credit appraisal system used in banks. Structure or Plan of the project The project first of all makes a study about the commercial banks.e.e. the suggestions and conclusions where some steps are suggested to be implemented to increase the work efficiency and to reduce to work pressure Page 12 . findings where some results found out are interpreted and then moving on to the last and the final chapter i. The project then moves towards research methodology where it covers the information regarding the type of data collected and the theoretical concepts used in the project are discussed in detail. Then it discusses the bank credit policy with respect to Punjab National bank where the project was undertaken. Then the project moves to its next chapter i.
CREDIT APPRAISAL Page 13 .
Commercial banks and its objectives
A commercial bank is a type of financial intermediary that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. Some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Commercial banks are the oldest, biggest and fastest growing financial intermediaries in India. They are also the most important depositories of public savings and the most important disbursers of finance. Commercial banking in India is a unique banking system, the like of which exists nowhere in the world. The truth of this statement becomes clear as one studies the philosophy and approaches that have contributed to the evolution of banking policy, programmes and operations in India. The banking system in India works under constraints that go with social control and public ownership. The public ownership of banks has been achieved in three stages: 1995, july 1969 and April, 1980. Not only the public sector banks but also the private sector and foreign banks are required to meet the targets in respect of sectoral deployment of credit, regional distribution of branches, and regional credit deposit ratios. The operations of banks have been determined by lead bank scheme, Differential Rate of interest scheme, Credit authorization scheme, inventory norms and lending systems prescribed by the authorities, the formulation of credit plans, and service area approach. Commercial Banks in India have a special role in India. The privileged role of the banks is the result of their unique features. The liabilities of Bank are money and therefore they are important part of the payment mechanism of any country. For a financial system to mobilise and allocate savings of the country
CREDIT APPRAISAL successfully and productively and to facilitate day-to-day transactions there must be a class of financial institutions that the public views are as safe and convenient outlets for its savings. The structure and working of the banking system are integral to a country‘s financial stability and economic growth. It has been rightly claimed that the diversification and development of Indian Economy are in no small measure due to the active role banks have played financing economic activities of different sectors.
Major objectives of commercial banks Balancing profitability with liquidity management
• As any other business concern, Banks also aim to make profit • but besides that they also need to maintain liquidity beacuse of the nature of their liabilities.
Management of Reserves
• Banks are expected to hold a part of their deposits in form of ready cash which is known as CASH RESERVES. • Central bank decides the reserve ratio known as the CRR.
Creation of Credit
• Banks are said to create deposits or credit or money or it can be said that every loan given by bank creates a deposit. • This has given rise to the important concept of money multiplier.
The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan is known as a bank credit. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.
The operating paradigms of the banking industry in general and credit dispensation in particular have gone through a major upheaval. Lending rates have fallen sharply. Traditional growth and earning such as corporate credit has been either slow or not profitable as before. Banks moving into retail finance, interest rate on the once attractive retail loans also started coming down. Credit risks has went up and new types risks are surfaced
Rs 2. small industries and so on. the credit growth has slipped in this quarter. Page 17 . Among such schemes are village adoption. their term loans have increased over the years. Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19.CREDIT APPRAISAL Types of creditBank in India provide mainly short term credit for financing working capital needs although. as will be seen subsequently. agriculture development branches and equity fund for small units. (d) demand Loans . to Rs 69. They have moved in the direction of bridging certain defects or gaps in their policies.124 crore in 1978. (b) cash credit.453 crore in 1989-90 . (c) overdrafts. In all.713 crore in 1986. such as giving too much credit to large scale industrial units and commerce and giving too little credit to agriculture.82. (f) instalment or hire purchase credit. The various types of advances provide by them are: (a) Term Loans.053 crore in 2002.702 crore in 1997 and to Rs 6. Banks have introduced many innovative schemes for the disbursement of credit. (e) purchase and discounting of commercial bills. The credit growth rate has dipped sharply in foreign and private banks compared to previous quarter. Recently.09. Rs 1. and. most of the banks have introduced attractive education loan schemes for pursuing studies at home or abroad. The Public Sector Banks are still the leading lenders though growth has declined compared to previous quarter. They have introduced attractive educational loan schemes for pursuing studies at home or abroad. Volume of CreditCommercial banks are a major source of finance to industry and commerce.01.
75 12.25-15.75 11.50 12. A bank group wise sectoral allocation is also given which suggests private banks have increases exposure to agriculture and real estate but has declined to industry. But then compared to rate cuts done by RBI. Page 18 .75 13.5 20.4 March 27 The rates have gone down compared to previous quarter when it was seen that there was no changes in loan rates in private and foreign banks. they still need to go lower. There is a more detailed analysis in the macroeconomic report released before the monetary policy.75 14.CREDIT APPRAISAL Credit (YOY Growth) March 28 2008 2009 Public Sector Banks 22.50-14.75 14.25-15.75 Sector-wise credit points credit has increased to agriculture.50-13.75 14. Public sector banks have increased allocation to industry and real estate.75-14.75-17. industry and real estate whereas has declined to NBFCs and Housing.50-16.00 13.25-16. Table 16: Reduction in Deposit and Lending Rates (October 2008 – April 2009*) (Basis points) Lending Bank Group Public Sector Banks Private Sector Banks Five Major Foreign Banks BPLR Public Sector Banks Private Sector Banks Five Banks Major Foreign Oct – 08 Rates Deposit Rates (BPLR) 125-250 75-200 100-200 Mar – 09 125-225 100-125 0-100 Change (from Oct to Apr) 125-225 100-125 0-100 Apr – 09 11.75-16.
Recent policy developments Regarding Bank Credit Bank lending was done for a long time by assessing the working capital needs based on the concept of MPBF (maximum permissible bank finance).5 41. 2009 % share in total 13 52. it is actually seen the relation is far from clear. Most financial indicators failed to predict this global financial crisis and kept rising making everyone all the more complacent.5 4.5 8.CREDIT APPRAISAL As on February Sector 15.2 3.2 45. present MPBF . This practice has been withdrawn with the effect from April 15 th 1997 in the sense that the date. In fact.7 19.3 5. the financial indicators hardly help predict any change in business cycle.8 61.6 22 As February 27.4 7. However. However.7 100 Variations (per cent) 16.5 25.1 7.4 25. It is usually seen that all financial variables as lead indicators say if credit growth (along with other fin indicators) is picking. banks have been left free to choose their own method ( from the method such as turnover . actual growth will also rise. the credit conditions seems to have worsened after January 2009.7 12 48. cash budget. 2008 % share in total Agriculture Industry Real Estate Housing NBFCs Overall Credit 9. the question still remains – whether credit decline is because banks are not lending (supply) or because people/corporates are not borrowing (lack of demand). Page 19 .7 6.9 26. or any other theory) of assessing working Capital requirement of the borrowers. Most rise in good times and fall in bad times.5 on To sum up.6 100 Variations (per cent) 21. The rates have declined but lending has not really picked up.
consortia. and from Rs 150 crore to Rs 200 crore for a single project by all the banks. or in case of seasonal industries . only a slow progress has been made to reduce its importance and increase bill financing. and in their case . and 20 (80) percent in April 1997. With the withdrawal of instructions about the MPBF in April 1997 . yet it has exhibited a remarkable strength of survival all these years. to 60 (40) percent in September 1995. the ratio of cash credit (loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April 1995 . In 1993. The term lending by banks also has subject to the limits fixed by RBI. The interest rates on the cash credit and loan components are to be fixed in accordance with the prime lending rates fixed by the banks. the prescribed cash credit and loan components came to be related to the working capital limit arrived in banks as per the method of their choice. Page 20 . which would be a demand loan for a maximum period of one year. From September3. With effect from September 3. the additional 10% limit being exclusively meant for investment in infrastructure projects. 40 (60) per cent in April 1996 . syndicates to restrict cash credit components to the prescribed limit . the balance being given in the form of a short term loan. this limit was raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank. In spite of many efforts which were direct in nature. 1997 these caps on term lending by banks were removed subject to their compliance with the prudential exposure norms. 1997. Therefore a concrete and direct policy step was taken on April 21. 1995 which made it mandatory for banks.CREDIT APPRAISAL The cash credit system has been the bane. The latter limit was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for power projects. This ―loan system‖ was first made applicable to the borrowers with an MPBF of Rs 20 crore and above. for six months. the RBI has permitted banks to raise their existing exposure limit to a business group from 50% to 60%.
From the same date banks could extend loans within this ceiling to the corporate against shares held by them. they can invest five percent of their incremental deposits in equities of companies including other banks. They could also offer overdraft facilities to stock brokers registered with help of SEBI against shares and debentures held by them for nine months without change of ownership. was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks. The weaknesses in the Cash Credit system have persisted with the nonimplementation of one of the crucial recommendations of the Committee. RBI appointed a working group to study and suggest- Page 21 . Securities trading Corporation of India (STCI). all Indian financial institutions and bonds (debentures) and preference shares of the companies are excluded from this ceiling of five per cent with affect from April 1997 . In the background of credit expansion seen in 1977-79 and its ill effects on the economy. CHANGING PHASE OF BANK CREDITA study group headed by Shri Prakash Tandon. the then Chairman of Punjab National Bank.CREDIT APPRAISAL The banks can invest in and underwrite shares and debentures of corporate bodies. financial institutions and a wide crosssection of the industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilization of Bank credit. The report of this group is widely known as Tandon Committee report. At present. Their investment in shares/ Bonds of DFHI. This was the first elaborate attempt by the central bank to organize the Bank credit. Most banks in India even today continue to look at the needs of the corporate in the light of methodology recommended by the Group.
CREDIT APPRAISAL i) Modifications in the Cash Credit system to make it amenable to better management of funds by the Bankers and ii) Alternate type of credit facilities to ensure better credit discipline and co relation between credit and production.R. However. In fact. continue to be guided by the principles enunciated in Tandon Committee report. personal loans have been the fastest Page 22 . beginning with the slack season credit policy of 1997-98. however. Most banks. A perusal of the Basic Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996 and 2005. Another group headed by Sh.50 lacs. With recent liberalization of economy and reforms in the financial sector. His report is applicable to units with credit requirements of less than Rs. the recommendations were perceived as too strict by the industry and there has been a continuous clamor from the Industry for movement from mandatory control to a voluntary market related restraint. The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much more organized. The Group was headed by Sh. RBI has also given full freedom to all the Banks to devise their own method of assessing the short term credit requirements of their clients and grant lines of credit accordingly. K. Trends of Bank Credit in India The face of Indian banking has changed radically in the last decade. P. RBI has given the freedom to the Banks to work out their own norms for inventory and the earlier norms are now to be taken as guidelines and not a mandate. Nayak (Nayak Committee) was entrusted the job of looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of Tandon & Chore Committee recommendations. Chore of RBI and was named Chore Committee.B.
it is also true that the reforms have been Page 23 . which rose from 2.1 per cent to 10.CREDIT APPRAISAL growing asset. Greater and cheaper avenues for credit resulted in a bigger share of disintermediation being resorted to by large borrowers. this is partly due to the huge rise in housing loans.8 per cent of the bank credit to 11 per cent over the period. there has been a sharp decline in the share of lendings to industry.2 per cent in 2005.1 per cent of the total in 1996 to 4. In manufacturing sector more efficient utilization of existing capacities contributed to the sectoral growth rather rather than any large addition of fresh capacities. While bankers say that up gradation of rural centres into semi-urban could be one reason (the share of semi-urban centres has gone up). Other categories whose share increased were loans to professionals and loans to finance companies. while the share of metropolitan centres has increased.7 per cent. Credit to small scale industries fell from 10. The other trend has been the substantial drop in the share of rural credit.1 per cent in 2005. but ‗other personal loans‘ — comprising loans against fixed deposits. Reasons for declining trend of bank credit A major share of the economic growth has been led by the expansion of the service sector Capital intensity and investment intensity required for growth in the current economic context may not be as high as it used to be in the past. increasing from 9. The consequential increase in the demand for credit was also subdued.3 per cent of the total bank credit in 1996 to 22. In contrast. Of course. gold loans and unsecured personal loans — also rose from 6.
179 crore) in contrast to the sizeable increase (Rs 94.967 by March 2005. Trends for the year 2008-09 The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a somewhat slower rate (19. The number of rural bank offices fell from 32. Within aggregate deposits demand deposits have shown an absolute fall (-Rs 4.812 crore during 2008-09 as against an absolute fall of Rs 2. On the other hand.806 crore) as against 21.121 crore in 2007-08.844 crore) in the previous year.7 per cent of the total credit in 1996 to 22.981 in March 1996 to 31.5%) has been slower than in the previous year at Rs 432. there has occurred considerable slowdown in bank credit expansion. Because of relatively higher procurement of foodgrains. the national capital has gained a lot from liberalisation.2 per cent in 2005.4%).8%) than in 2007-08 (22.CREDIT APPRAISAL urban-centric and have tended to benefit the metros more. the expansion during 2008. The states have been the main beneficiaries of bank credit are the northern region as it has increased its share from 18. Clearly. Non-food credit growth at Rs 406.6% (or Rs 647. food credit has expanded by Rs 1.5 per cent to 12.579 crore or by 22%) in 200708. Finally..287 (17.0%). Page 24 .1 per cent over the period. the account of which is maintained in Delhi. In the investment portfolio of banks.250 crore as increase in net bank credit to government under monetary data for the same period.031crore has been much lower than the expansion of Rs 340.846 (23.8% (Rs 512. As it was seen that Delhi‘s share went up from 9.09 at Rs 194. This has happened because the latter has a sizeable amount of RBI credit to government following the increased open market operations. This is not due to food credit. time deposits have shown an accelerated increase of 22.
Sanctions. It is the most important aspect of the lending procedure and therefore it is discussed in detail as below.Self constructed From the above chart we can see that Credit Appraisal is the core and the basic function of a bank before providing loan to any person/company. Credit Appraisal Page 25 . controls and guidelines laid out. etc. there are several procedures. Monitoring and Asset Recovery Management comprise the entire gamut of activities in the lending process of a bank which are clearly shown as below: Credit Appraisal Sanctions Monitoring & Asset recovery Management Source. Credit Appraisal.CREDIT APPRAISAL Procedure for providing Bank CreditBanks offers different types of credit facilities to the eligible borrowers. For this.
however both can be used as good repayment indicators. to the credit. this is further exacerbated by the fact that a descriptive approach is usually taken. rather than an analytical approach.The process by which a lender appraises the creditworthiness of the prospective borrower is known as Credit Appraisal. taking into account the risk reward aspects. Page 26 . since the loan will be repaid primarily from future cash flows. The important thing to remember is not to be overwhelmed by marketing or profit centre reasons to book a loan but to take a balanced view when booking a loan. In such cases due diligence on the inability of the projects are well defined and assessed. State government guarantee may not be taken as a substitute for satisfactory credit appraisal.CREDIT APPRAISAL Meaning . which is a short-sighted approach. This normally involves appraising the borrower‘s payment history and establishing the quality and sustainability of his income. Generally everyone becomes optimistic during the upswing of the business cycle. but tend to forget to see how the borrower will be during the downturn. usually through an interview. Thus a forward looking approach should also be adopted. The credit requirement must be assessed by all Indian Financial Institutions or specialised institution set up for this purpose. Wherever financing of infrastructure project is taken up under a consortium / syndication arrangement – bank‘s exposure shall not exceed 25% Bank may also take up financing infrastructure project independently / exclusively in respect of borrowers /promoters of repute with excellent past record in project implementation. not historic performance. Furthermore greater emphasis is given on financials. which are usually outdated. The lender satisfies himself of the good intentions of the borrower.
CREDIT APPRAISAL Page 27 .
have made several notable efforts to improve regulation in the sector. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. an enabling policy and regulatory framework will also be critical to their success. The policy makers. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. The sector now compares favourably with banking sectors in the region on metrics like growth. A weak banking structure has been unable to fuel continued growth. profitability and non-performing assets (NPAs). While the onus for this change lies mainly with bank managements. The banking index has grown at a compounded annual rate of over 51 per cent since April Page 28 . The last decade has seen many positive developments in the Indian banking sector. India‘s banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. asset quality and profitability with other regional banks over the last few years. Ministry of Finance and related government and financial sector regulatory entities. However. growth and value creation. banking sector in India. growth and value creation in the sector remain limited to a small part of it. innovation. we emphasise the need to act both decisively and quickly to build an enabling. which comprise the Reserve Bank of India (RBI). improved regulations. This is reflected in their market valuation. rather than a limiting. which has harmed the long-term health of their economies. Indian banks have compared favourably on growth. A few banks have established an outstanding track record of innovation. In this ―white paper‖.CREDIT APPRAISAL Indian Banking Sector & Its Major Challenges It is well recognised by the world that India is one of the fastest growing economies in the world.
CREDIT APPRAISAL 2001 as compared to a 27 per cent growth in the market index for the same period. Over the last few years the treasury departments of banks have been responsible for a substantial part of profits made by banks. the inability of bank managements (with some notable exceptions) to improve capital allocation. periodic instances of the ―failure‖ of some weak banks have often threatened the stability of the system. the yield on 10-year government bonds (a barometer Page 29 . Any movement in domestic interest rate is the main source of interest rate risk. could seriously weaken the health of the sector. restrictive labour laws. the cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. However. Further. as interest rates fell. While bank lending has been a significant driver of GDP growth and employment. increase the productivity of their service platforms and improve the performance ethic in their organisations could seriously affect future performance. lack of institutional support infrastructure. but there are several issues that need to be ironed out. Major challenges of Indian banking sector are mentioned below. Between July 1997 and Oct 2003. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. A bank's balance sheet consists mainly of rupee assets and liabilities. India has a better banking system in place Vis a Vis other developing countries. restrictions on capital availability and deployment. enhancing the payments system and integrating regulations between commercial and co-operative banks. unless addressed. Interest rate risk Interest rate risk can be defined as exposure of bank's net interest income to adverse movements in interest rates. These changes include strengthening prudential norms. weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs). Structural weaknesses such as a fragmented industry structure.
CREDIT APPRAISAL for domestic interest rates) fell. treasury income will come down and if the banks wish to make large provisions. If the rise in yields continues the banks might end up posting huge losses on their trading books. bond yields go up and bond prices fall as the debt market starts factoring a possible interest rate hike).9 per cent. This does not seem to be the case. shall bring down the profitability of banks. But as the bond yields start to rise the chances are the net NPAs will also start to go up. banks will have to look at alternative sources of investment. With increasing bond yields. Banking in the recent years had been reduced to a trading operation in government securities. the money will have to come from their interest income. Given these facts. Page 30 . Interest rates and non-performing assets The best indicator of the health of the banking industry in a country is its level of NPAs. from 13 per cent to 4. Given this fact. This will happen because the banks have been making huge provisions against the money they made on their bond portfolios in a scenario where bond yields were falling. This will make it difficult to show huge profits from treasury operations. Recent months have shown a rise in the bond yields has led to the profit from treasury operations falling. With yields falling the banks made huge profits on their bond portfolios. and this in turn. Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal processes over the years. Now as yields go up (with the rise in inflation. This concern becomes much stronger because a substantial percentage of bank deposits remain invested in government bonds. the banks will have to set aside funds to mark to market their investment. Indian banks seem to be better placed than they were in the past. The latest quarterly reports of banks clearly show several banks making losses on their treasury operations. A few banks have even managed to reduce their net NPAs to less than one percent (before the merger of Global Trust Bank into Oriental Bank of Commerce OBC was a zero NPA bank).
Now they need to sell banking. A bank based primarily out of North India might want to acquire a bank based primarily out of South India to increase its geographical presence but their Page 31 . The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks. with the banks jumping over one another to give out loans. The State Bank of India is the only bank from India to make it to the list of Top 100 banks. with the banks undercutting one another. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired.The nimble footed new generation private sector banks have taken a lead on this front and the public sector banks are trying to play catch up. is now the most important of the lot. majority of the mergers/acquisitions do not really work. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a larger bank. The urge to merge In the recent past there has been a lot of talk about Indian Banks lacking in scale and size. A lot of foreign banks have already burnt their fingers in the retail game and have now decided to get out of a few retail segments completely. The PSBs have been losing business to the private sector banks in this segment. So in the zeal to merge with or acquire another bank the PSBs should not let their common sense take a back seat. Earlier the household savings went into banks and the banks then lent out money to corporate. With supply far exceeding demand it has been a race to the bottom.CREDIT APPRAISAL Competition in retail banking The entry of new generation private sector banks has changed the entire scenario. The consumer has never been so lucky with so many banks offering so many products to choose from. Before a merger is carried out cultural issues should be looked into. globally. PSBs need to figure out the means to generate profitable business from this segment in the days to come. which was earlier ignored. The retail segment.
Impact of BASEL-II norms Banking is a commodity business. deposits with the central bank/govt. all lending to private sector is assigned a 100 per cent risk weighting.Norms set in the Swiss town of Basel determine the ground rules for the way banks around the world account for loans they give out. The margins on the products that banks offer to its customers are extremely thin vis a vis other businesses. The problem with these rules is that they do not distinguish within a category i. with zero percentage weightings being given to cash. Against these risk weighted assets the banks had to maintain a (Tier I + Tier II) capital of 9 per cent i. fixed assets. The summation of these assets gave us the risk-weighted assets. Different weightage was given to various forms of assets. Technological compatibility is another issue that needs to be looked into in details before any merger or acquisition is carried out. Essentially. real estate etc. for banks to earn an adequate return of equity and compete for capital along with other industries. they need to be highly leveraged. be it a company with the best credit rating or company which is in the doldrums and has a very low credit rating.e. So the bank should be setting Page 32 . The company with the best credit rating is more likely to repay the loan vis a vis the company with a low credit rating. these rules tell the banks how much capital the banks should have to cover up for the risk that their loans might go bad. So the integration process might become very difficult.e. To put it simply the banks had to maintain a capital adequacy ratio of 9 percent. As a result. and 100 per cent weighting to claims on private sector. The primary function of the bank's capital is to absorb any losses a bank suffers (which can be written off against bank's capital). This is not an efficient use of capital. The rules set in 1988 led the banks to differentiate among the customers it lent out money to. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital. These rules were formulated by the Bank for International Settlements in 1988.CREDIT APPRAISAL cultures might be very different. etc.
The banking sector in India needs to tackle these challenges successfully to keep growing and strengthen the Indian financial system. Now with the bond party over and the bond yields starting to go up. The original BASEL rules did not take into account the operational risks. Page 33 . These days the operational risks that banks face are huge. With the BASEL-II norms the bank can decide on the amount of capital to set aside depending on the credit rating of the company.CREDIT APPRAISAL aside a far lesser amount of capital against the risk of a company with the best credit rating defaulting vis a vis the company with a low credit rating. the interference of the central government with the functioning of PSBs should stop. casualty risk. Over the last few years. The growth of the banking sector will be one of the most important inputs that shall go into making sure that India progresses and becomes a global economic super power. crime risk etc. banks will have to set aside 15 per cent of net income to protect themselves against operational risks. the banks will have to concentrate on their core function of lending. As per the BASEL-II norms. gave banks very little incentive to lend to projects. This led to the banks getting into the retail segment big time. The various risks that come under operational risk are competition risk. The package seeks to provide a high degree of freedom to PSBs on operational matters. the falling interest rates. It also led to a lot of banks playing it safe and putting in most of the deposits they collected into government bonds. Furthermore. A fresh autonomy package for public sector banks is in offing. Credit risk is not the only type of risk that banks face. as the return did not compensate them for the risk involved. technology risk. This seems to be the right way to go for PSBs.
CREDIT APPRAISAL Punjab National Bank at a Glance Punjab National Bank (PNB) was established in 1895 in anarkali bazaar at Lahore. the Bank is the second largest government-owned commercial bank in India with about 5000 branches across 764 cities. Shri Kali Prosanna Roy. More than 50 renowned international banks maintain their Rupee Accounts with PNB. but continued to operate in Pakistan. a scheduled bank located in Delhi circle. Dubai. the bank has grown in size and stature to become a front-line banking institution in India at present. From its modest beginning.C. 1947: Partition of India and Pakistan at Independence. Jessawala. Dubai and Kabul. 1904: PNB established branches in Karachi and Peshawar. The bank's total assets for financial year 2007 were about US$60 billion. Shri E. undivided India. The bank was nationalised in July 1969 along with 13 other banks. 1940: PNB absorbed Bhagwan Dass Bank. It serves over 37 million customers. London. HISTORY 1895: PNB commenced its operations in Lahore. Bakshi Jaishi Ram. and Lala Dholan Dass. Today. and Shanghai. PNB lost its premises in Lahore. PNB has a banking subsidiary in the UK. The bank has been ranked 248th biggest bank in the world by the Bankers Almanac. Shri Prabhu Dayal. and representative offices in Almaty. Lala Lajpat Rai was actively associated with the management of the Bank in its early years. as well as branches in Hong Kong. Oslo. Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital. Page 34 . PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal Lala Lalchand. It has Strong correspondent banking relationships with more than 217 international banks of the world.
1976 or 1978: PNB opened a branch in London. the oldest private sector bank in Kerala. Kazakhstan. Nedungadi Bank's shares had zero value.CREDIT APPRAISAL 1951: PNB acquired the 39 branches of Bharat Bank (est. 2003: PNB took over Nedungadi Bank. 1943) in a rescue. At the time of the merger with PNB. 1960s: PNB amalgamated Indo Commercial Bank (est. PNB also opened a representative office in Shanghai. which the GOI had nationalized in 1980. PNB also had one or more branches in East Pakistan Bangladesh. PNB also opened a representative office in London 2004: PNB established a branch in Kabul. 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon). Bharat Bank became Bharat Nidhi Ltd. 1961: PNB acquired Universal Bank of India. on July 19. 1988: PNB acquired Hindustan Commercial Bank (est. 1969: The Government of India (GOI) nationalized PNB and 13 other major commercial banks. The acquisition added Hindustan's 142 branches to PNB's network. with the result that its shareholders received no payment for their shares. Afghanistan. 1933) in a rescue. 1998: PNB set up a representative office in Almaty. Page 35 . 1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal. 1942). 1993: PNB acquired New Bank of India. including PNB's head office. which may have moved to Karachi. 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks. 1969.
Bank has a Page 36 . PNB has remained fully committed to its guiding principles of sound and prudent banking. and is planning a fourth in Birmingham. with 40. The bank enjoys strong fundamental. Bank with over 56 million satisfied customers and 5002 offices. Gold coins & asset management business. 2010: PNB received permission to upgrade its representative office in the Dubai International Financial Centre to a branch. Besides being ranked as one of India's top service brands.in the UK.During the FY 2009-10.96. Norway. bullion business. the bank achieved a net profit of Rs 3905 crore. one in London. PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest network of branches (5002 offices including 5 overseas branches ). 2007: PNB established PNBIL . life and non-life insurance business. PNB continue to retain its leadership position among nationalised banks. and one in South Hall. PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 435931 crore. Since then it has opened a third branch in Leicester. 2005: PNB opened a representative office in Dubai. 2008: PNB opened a branch in Hong Kong.633 crore. 2009: PNB opened a representative office in Oslo. Today.CREDIT APPRAISAL PNB established an alliance with Everest Bank in Nepal that permits migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal. the bank has also entered the credit card & debit card business. etc. with two offices. with assets of more than Rs 2. large franchise value and good brand image. Apart from offering banking products.85% share of CASA deposits. this in Kowloon. and a second branch in Hong Kong.Punjab National Bank (International) .
The performance highlights of the bank in terms of business and profit are shown below: Rs in Crore Parameters Operating Profit Net Profit Deposit Advance Total Business Mar'08 4006 2049 Mar'09 5744 3091 Mar'10 7326 3905 249330 186601 435931 CAGR (%) 22.71% and 0.39% Mar‘09). Retail.53% respectively. In particular. The Bank has maintained its stake holder‘s interest by posting an improved NIM of 3.CREDIT APPRAISAL strong capital base with capital adequacy ratio of 14. The Earning per Share improved to Rs 123.29 23. As on March‘10. the Bank has the Gross and Net NPA ratio of 1.57% in Mar‘10 (3. total Business. Assets. Advances.74 Mar‘09) Punjab National Bank continues to maintain its frontline position in the Indian banking industry.16% as on Mar‘10 as per Basel II with Tier I and Tier II capital ratio at 9. Operating and Net profit in the year 2009-10.52% Mar‘09) and a Return on Assets of 1.01% respectively. During the FY 2009-10. better asset liability management. The impressive operational and financial performance has been brought about by Bank‘s focus on customer based business with thrust on CASA deposits.42 16.09 Page 37 166457 209760 119502 154703 285959 364463 . SME & Agri Advances and with more inclusive approach to banking.98 (Rs 98.15% and 5.01 15. thrust on recovery and increased efficiency in core operations of the Bank.98 14.77 (Rs 416.03 Mar‘09) while the Book value per share improved to Rs 514.44% (1. the bank has retained its NUMBER ONE position among the nationalized banks in terms of number of branches. improved margin management.7% was also higher than the stipulated requirement of 40% & 18%. its‘ ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19. Deposit.
the Bank is implementing 40 projects in 16 States. Hong Kong & Page 38 . 30 Kiosks have been opened covering 119 Villages reaching 1. payment of bills of utilities.CREDIT APPRAISAL PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its ‗IT strategy‘ follows the ‗Business strategy‘ so as to arrive at ―Best Fit‖. The Bank launched an ambitious ‗Project Namaskar‘ under which 1 lakh touch points will be established in unbanked villages by 2013 to extend the Bank‘s outreach. purchase of airline tickets etc.32 Lakh beneficiaries. the Bank‘s mission is ―Banking for Unbanked‖. With its policy of inclusive growth in the Indo-Genetics belt. With the help of advanced technology. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers. Under Branchless Banking model. the bank is planning to realize its global aspirations. dairy farmers. The bank has also been offering Internet banking services to the customers of CBS branches like booking of tickets. Towards developing a cost effective alternative channels of delivery. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer. with branches at Kabul and Dubai. the bank with more than 3500 ATMs has the largest ATM network amongst Nationalized Banks. All branches of the Bank are under Core Banking Solution (CBS) since Dec‘08. etc. Bank continues its selective foray in international markets with presence in 9 countries. the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. thus covering 100% of its business and providing ‗Anytime Anywhere‘ banking facility to all customers including customers of more than 3000 rural & semi urban branches. vegetable vendors. Backed by strong domestic performance. construction workers. The bank has made rapid strides in this direction. Under this.
Dubai. Shanghai and Oslo. a wholly owned subsidiary in UK. Nepal and a JV banking subsidiary ―DRUK PNB Bank Ltd. a joint venture with Everest Bank Ltd. Australia and taking controlling stake in JSC Dana Bank in Kazakhstan.‖ in Bhutan. Bank is pursuing up gradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney.CREDIT APPRAISAL representative offices at Almaty. Page 39 .
economic development” Page 40 .CREDIT APPRAISAL Mission and Vision VISION "To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof" MISSION "Banking for the unbanked" “TO provide excellent professional services and improve its position as a leader in financial and related services. build and maintain a team of motivated and committed workforce with high work ethos. use latest technology aimed at the customer satisfaction and act as effective catalyst for socio.
internet banking.CREDIT APPRAISAL Products and Services Corporate banking Personal banking Industrial finance Agriculture finance Financing of trade International banking Home loan Auto loan ATM/Debit card Deposit interest rate Credit interest rate Other services: lockers facility. EFT & Clearing services etc Award & Achievements Best IT Team of the year Award SKOTCH Challenger Award Best IT User in Banking & Financial Services Industry 2004 Golden Peacock Award for Change Management for the year 2005-06 by NASSCOM in partnership with Economic Times for Excellence in Corporate Governance 2005 by Institute of Directors FICCI's Rural Development for Excellence in Rural Development – Award 2005 Skotch Challenger Award for for becoming a pioneer in Public Banks Exemplary use of Technology 2005 Golden Peacock National by Institute of Directors Page 41 .
2004 Runner up in 'Best Bank (public Sector) of the year Award' -2005 for excellence in export perforamnce for 3 consecutive years 2001. 2002 & 2003 Niryat Bandhu Gold Trophy by Federation of Indian Exporters Organization (FIEO) 21st Amongst Top 500 Companies 9th amongst India's Top 50 Most Trusted Service Brands 3rd Rank amongst Banking Sector in India 323rd Rank in the World 368 amongst Top 1000 Global Banks by the leading Financial Daily The Economic Times. January 2006 The Banker. after an indepth research to analyse the strengths and Amity Global Corporate core competencies of the Global 500 Excellence Award companies and banks which have already made an indelible most admired impression on the Indian economy. 2003. Finacle & TFCI Runner up in 'Best IT Team of the Year Award 2005' Money Outlook Award .2004 & 2005 National Award for Excellence Ranked 2nd for 4 consecutive years in SSI Lending 2002. Noida has conferred the Award to PNB. London July 2005 Winner for becoming a pioneer in public Skoch Challenger Award for banks by Skoch consultancy services pvt Exemplary Use of Technology ltd. 2004 & 2005 Banking Technology Awards 2004 Jointly Adjudged by IBA.C Nielson Survey. The Economic Times Dec 2004 The Bankers' Almanac.CREDIT APPRAISAL Training . June 2005 A. 2008 & 2007 & 2005 Banking Technology Awards IBA. Gurgaon 2005 FICCI's Rural Development Award for excellence in rural Award development 2005 Amity Business School. Finacle & TFCI jointly adjudged Page 42 .
2007. Inclusion.2006 Skoch Challenger Award for capacity building for FTC Skoch Consultancy Services Pvt Ltd 2007 initiative Computer Associates Excellence in EMS Roll Out. Page 43 . Ltd.CREDIT APPRAISAL PNB as runner up in "Best IT Team of the year Award" 2005 Best IT Implementation 2007 PC Quest Users‘ Choice Award & 2005 Symantec Visionary Award Information Security Impact 2005 Money Outlok adjudged PNB as runner Money Outlook Award up in "Best Bank (Public Sector) of the year Award" 2005 IBA. 2005 Golden Peacock Innovative 2010 (for BCP implementation) Product/Service Award Golden Peacock Award for Winner in the ‗Large Joint Entry‘. Finacle & TFCI runner up Award for Banking Technology Awards Outstanding Achiever of the Year (Individual). Hyderabad. 2008 & 2009 National Award for Excellence in Lending to Micro For Lending to Micro enterprises 2007 Enterprises Award for the use of Institute for Development and Research in Technology for Financial Banking Technology (IDRBT). 2008 Dun & Bradstreet Award for ―Priority Sector Lending Dun & Bradstreet 2009 including Financial Inclusion‖. 2007 Excellence Award For Best IT Implementation by IDG CIO 100 Award Media Pvt.2009 & Excellence in Corporate 2007 & 2005 Governance Skoch Challenger Award for For upliftment of Weaker sections of Change Management society 2006 IDRBT Banking Technology Best IT Team of the Year Award 2006 Awards National Award For Excellence First Prize by By Ministry of Small Scale in lending to Tiny sector Industries.
Govt. Small & Medium Enterprises. Small & Medium in Lending for Institutional Finance for Propagating KVI Enterprises.CREDIT APPRAISAL Khadi & Village Industry Commission. Govt. Small & Medium in Lending for Institutional Finance for Propagating KVI Enterprises. of India Programmes in NORTH ZONE (Prime Minister Employment Generation Programme) 2009 Khadi & Village IndustryCommission. of India Finance in Propagating KVI (Interest Subsidy Eligibility Certificate Programmes in NORTH ZONE Scheme) 2009 Khadi & Village IndustryCommission. National Award for Excellence Ministry of Micro. Govt. National Award for Excellence Ministry of Micro. National Award for Excellence Ministry of Micro. National Award for Excellence Ministry of Micro. of India Finance in Propagating KVI Programmes in (Interest Subsidy Eligibility Certificate NATIONAL LEVEL Scheme) 2009 Khadi & Village IndustryCommission. of India in Lending for Institutional Finance in Propagating KVI (Interest Subsidy Eligibility Certificate Programmes in Scheme) CENTRAL ZONE 2009 Khadi & Village IndustryCommission. Govt. Govt. of India Programmes in (Prime Minister Employment Generation CENTRAL ZONE Programme) 2009 India Pride Award by dainik Bhaskar and Daily News Excellence in PSU 2009 analysis Indira Gandhi Rajbhasha Promoting Hindi 2009 Shield Emerson Uptime Champion 2009 Awards ―Best InfoSphere Warehouse 2009 (for implementation of Enterprise Solution‖ Award by IBM Wide Data Warehouse) Page 44 . Small & Medium in Lending for Institutional Enterprises. National Award for Excellence Ministry of Micro. Small & Medium in Lending for Institutional Enterprises.
Bhikhaji Cama Place.CREDIT APPRAISAL Organizational structure of Punjab National Bank Head Office 7. New Delhi-110066 Circle Office Branches Page 45 .
CREDIT APPRAISAL Hierarchy Chairman Executive Director General Manager (GM) Deputy GM Assistant GM Chief Manager Senior Manager Manager Officers Subordinate clerks Page 46 .
He has been appointed as a chairman and managing director of Punjab National Bank by Govt. M P Singh:.Reserve Bank of India Nominee Director Shri Mushtaq A Antulay:.Tanksale:.Part-time non-official Director Shri Tribhuwan Nath Chaturvedi :.Workmen Employees Director Sh.CREDIT APPRAISAL Board of Directors Sh.Fonseca:.R.Part-time non-official Director Shri Gautam P. M. Sh. Pradeep Kumar:. Nagesh Pydah:.Share Holder Director Shri Devinder Kumar Singla: Share Holder Director Sh.K.Executive Director Smt.Govt. Ravneet Kaur:. Kamath:.V. Of India.Officer Director Page 47 .M.Executive Director Sh. of India Nominee Director Shri L. Khandelwal:.Part-time non-official Director Shri Vinod Kumar Mishra:.Share Holder Director Shri G R Sundaravadivel:.
categories of banking products.‖ done by Panagiotis Xidonas. towards modelling banking products appraisal problems. Brans & Vincke (1985)] Multiple Criteria method is applied.CREDIT APPRAISAL Review of Literature Literature review provides available research with respect to the selected topic of the project or the research findings by an author which has been done with respect to the research topic. so called. i. so called. Dimitrious Askouins & Ioannis Psarras from National Technical University of Athens in 2007 says that Asset quality refers to the likelihood that the bank's earning assets will continue to perform and requires both a qualitative and quantitative assessment. "criteria". Alexandros Flamos. Decision problems like the "internal appraisal of banking products". The review of the related research works are described as under:- 1. integrates the behaviour of each indicator-criterion and utilizes each score in order to rank the so called "alternatives". This chapter provides the overall view of the available literature with respect to the topic of the project.E. the value of these indicators are the. A research work on the topic ― On the appraisal on consumer credit banking products with the asset quality frame: A multiple criteria application.e.E.R. "scores" in each criterion and the P. [Preference Ranking Organization Method of Enrichment Evaluations. Page 48 . In this paper.METH. A Multiple Criteria process. Sortirios Koussouris. the Asset Quality banking indicators are the.O. are problems with strong multiple-criteria character and it seems that the methodological framework of Multiple Criteria Decision Making could provide a reliable solution. strictly mathematically defined.
Moreover such assessment frameworks while being adequate from a DSS-centric viewpoint do not respond to the assessment of DSS in an organizational setting . sensitivity analysis and risk evaluation as per SBI norms. In the concluding section they have discussed how this evaluative framework can be strengthened to initiate an activity that will allow the long term and possibly the only meaningful evaluation framework for such a system. Results from research shows that while the DSS is effective. Page 49 . improvement needs to be done in the methodology to assess such improvements. The intervention or stimulus consisted of DSS training and use. This system helps in analysis of balance sheets. Such a study was necessitated since credit appraisal has become an integral sub-function of the Indian banks in view of growing incidence of non-performing assets. P. An experimental intervention was applied between the pretests and the pro-tests. The stimulus remained constant as the they took care to ensure that the course content as well as the instructors remained the same during the course of the experiment. There were four groups in the experiment. future projections. This study formed a larger initiative to access the effectiveness of the I. All four groups underwent training in credit management between the pre and the post tests.K. cash flow analysis. The research Paper on “Evaluation of decision support systems for credit management decisions‖ by S.Sharma. Calculation of financial ratios.T based credit management process at SBI. Two were experimental groups and two were control groups. The DSS they have assessed was a credit appraisal system developed by Quuattro pro at SBI. IIT Delhi have conducted a study to evaluate the efficiency of decision support system (DSS) for credit management. They have also used a strong Quassi experimental design called Solomon‘s four group design for the assessment. Kanungo. Jain from Department of studies. S. In the experiment the managers of SBI who attended the training programme were the subjects the experiment consisted of the measurements that were taken as pre and post tests.CREDIT APPRAISAL 2.
The book consists of three parts.borrowers in a more normal period of the loan. Part II explains various concepts of working capital in its historical context.P. Herr.grams improve the efficiency and income of probability of success.Singh have discussed the subject financial analysis for bank lending has assumed considerable importance. and Richard Grabowski” have studied that the a production frontier methodology is used to measure the overall efficiency of a sample of farmers home administration(FMHA) compared to non participants. This study addressed these difficulties by utilizing a nonparametric production frontier technique to measure overall efficiency and a matched pair statistical procedure to measure how efficiency of farms receiving FMHA credit changed relative to a Non-FMHA farmers. 4. like most of the countries. Liberal loan policies Eligible borrowers. particularly since early 1990's when. India opted for the policy of liberalisation and globalisation after 1991. The study did not find evidence that the efficiency FMHA farms improved between a time period Results indicated that overall efficiency of FMHA borrowers is associated with selected financial characteristics of the farms.Singh and Dr. Wm. Mehdian. Part I discusses the concepts and tools of Financial Analysis. The book named ―Financial Analysis for Bank Lending in Liberalised Economy” by Sampat. McD. Phil Eberle. The research paper on the topic “Towards an appraisal of the FMHA farm credit program: A case study of the efficiency of borrower by S. A review of the literature shows that agricultural finance specialists have not been successful in evaluating whether FMHA pro. while Part III demonstrates Page 50 .S. The present volume is meant to be a standard reference as well as text book on the varied facets of financial analysis with reference to credit management by Banks and Financial Institutions.CREDIT APPRAISAL 3. Inadequate evaluation of the FMHA program occurs partly because of because the difficulty of adequately deter-mining the impacts of changes in the econ.
Pricing-Differentiation.Profit and Loss Account (Operating Statement) .Basic Economics for Bankers and Business Managers . Working Capital Management : Concepts and Techniques .Managing Working Capital by Strategic Choice . Financing Working Capital : Conceptual and Historical Exposition.Appraisal of Capital Projects . Credit Rating. Products-Differentiation. banking industry has experienced significant structural changes as the result of an Page 51 .CREDIT APPRAISAL the application of these tools in the changing context of liberalised economy by focusing on new concepts like 'Credit Worthiness'. The book contains.Accounting Flows : Income. Risk-Analysis.S. 1st Committee on Financial Sector Reform and the 2nd Committee on Banking System Reform (Known as Narasimham Committee Report. Liberalised Era and New Focus of Bank Lending . The research paper on the topic ―Competitive analysis in banking: Appraisal of the methodologies‖ by Nicola Cetorelli has discussed about the U.Bank Lending and Industrial Finance in India .Structure and Analysis of Balance Sheet . Management of Problem Accounts .Introduction to Fundamentals Accounting Principles . etc.Working Capital Management-III : Follow-up and Supervision . Appraisal of a New Project Involving Term Loan .Analysis of Profit and Loss Account (Operating Statement) . 1998).New Conceptual Framework for Analysis. Working Capital Management-I : MPBF System of Appraisal and Bifurcation of Fund-Based Limit in Two Components Working Capital Management-II : Alternative Methods of Appraisal . Management of Non-Performing Assets (NPAs).Creditworthiness and Credit Rating : At Centre stage Nucleus of Credit Appraisal . Rehabilitation of Sick Industrial Units.Break-even Analysis and Margin of Safety . Cash and Funds . Asset-Liability Management. 5.Ratios as Tools of Financial Statements Analysis .
Neal Interstate Banking and Branching Efficiency Act. The possible improvements in efficiency may translate into welfare gains for the economy. From 1975 to 1997. from 14. and Simmons and Stavins. they will be able to charge higher than competitive prices for their products. effective to differing degrees in all states by 1992. In this article. 1998).318 to 9. 1997.. there have been an average of more than 400 mergers per year (see Avery et al. from the point of view of public policy it is equally important to focus on the effect of this restructuring process on the competitive conditions of the banking industry. which allows bank holding companies to acquire banks in any state and.1 On the other hand. services or are able to obtain higher quality services or services that could not have been offered before. Do banks gain market power from merging? If so. to open interstate branches. Page 52 . the number of commercial banks decreased by about 35 percent. On the one hand. to the extent that customers pay lower prices for banks. one could argue that banks are merging to fully exploit potential economies of scale and/or scope.CREDIT APPRAISAL intense process of consolidation. and the passage in 1994 of the Riegle. These significant changes raise important policy concerns. is certainly accelerating the process of consolidation. Since the early 1980s. thus inflicting welfare costs that could more than offset any presumed benefit associated with mergers.215. The relaxation of intrastate branching restrictions. 1997. analysis of competition in the banking industry is done highlighting a very fundamental issue: How market power is measured and how do regulators rely on accurate and effective procedures to evaluate the competitive effects of a merger. since June 1.
CREDIT APPRAISAL Page 53 .
profitable relationships and prudent growth. Aiming to achieve more sanctions at levels closer to the customer. especially unsecured exposures. Building competencies in credit management through training & promotion of self directed learning.‖ CREDIT POLICY Bank follows following broad policy imperatives: Reduction in dependence upon short term corporate loans.CREDIT APPRAISAL Credit Philosophy & Policy with regards to Punjab National Bank An ideal advance is the one given to a reliable customer for an approval purpose with adequate experience. Page 54 . Credit philosophy – ―To achieve credit expansion required for sustaining the profitability of the bank and emphasis on quality assets. Changing the mix of the portfolio in favour of better diffused and higher yielding credit. safe in knowledge that the money will be used to advantage and repayment will be made within a reasonable period from trade receipts or known maturities due on or about given dates.
CREDIT APPRAISAL Objectives of credit policy 1. 3. Adoption of a forward looking and market responsive approach for moving into profitable new areas on lending which emerge. 5. Sound risk management practices to identify measure. A balanced growth of credit portfolio. 9. within the pre determined exposure ceilings. 2.Develop and maintain enhanced competencies in credit management at all levels through a combination of training initiatives. 10. Maximize interest yields from credit portfolio through a judicious management of varying spreads of loan assets based upon their size. 4. Ensure due compliance of various regulatory norms including CAR. monitor and control risks. Leverage on strong relationships with existing long-standing clients to source a bulk of new business by addressing their requirements comprehensively. Achieve growth of credit to priority sectors / subsectors and continue to surpass the targets stipulated by reserve bank of India. 6. credit rating and tenure. promotion of self directed learning and dissemination of best practices. 8. income recognition and asset classification 7. Using of pricing as a tool of competitive advantage ensuring however that earnings are protected. which does not compromise safety. Page 55 . Accomplish balanced development of credit to various sectors and geographical regions.
corporate goals and bank‘s social responsibilities. Page 56 .CREDIT APPRAISAL Objectives in Credit To maintain healthy balance between Credit volumes Earnings Asset quality within the framework of regulatory prescriptions.
Banks extend credit facilities by way of fund-based long-term and short-term loans and advances as also by way of non-fund facilities. Loans & Advances refer to long-term and short-term credit facilities to various types of borrowers and nonfund facilities like Bank Guarantees. Thus. They are normally made in lump sums and interest is paid on the entire amount. Letters of Solvency etc. The borrower cannot draw funds beyond the amount sanctioned. Bill facilities represent structured commitments which are negotiable claims having a market by way of negotiable instruments.CREDIT APPRAISAL Introduction to loans Loans are advances for fixed amounts repayable on demand or in instalment. Letters of Credit. A key function of the Bank is deploying funds for incomeyielding assets. A major part of Bank‘s assets are the loans and advances portfolio and investments in approved securities. Classification of Loans Loans/Advances Loans/Advances Fund Based Non-Fund Based Fund Based Retail Loan Bank Guarantee Post shipment Finance Cash Credit Export Finance Letter of Credit Bill Discounting Pre-shipment Finance Page 57 Term Loan .
as the availability of credit and the number of products offered for retail lending Page 58 . Retail lending is done by banks. The typical products offered in the Indian retail banking segment are: Housing loans Consumer loans for purchase of durables Auto loans Educational loans Credit Cost. In case on Fund Based there are different categories of loans which are discussed as follows:I. where bank provides money to the seeker in anticipation of getting it back. vacations. Personal loans Retail loan is the practice of loaning money to individuals rather than institutions. Fund based refers to the type of credit where cash is directly involved i. RETAIL LOANS- Retail banking in India is not a new phenomenon. credit unions. It has always been prevalent in India in various forms.Fund based and Non –Fund Based. For the last few years it has become synonymous with mainstream banking for many banks.e. Retail lending has taken a prominent role in the lending activities of banks. and savings and loan associations.CREDIT APPRAISAL Bank provides credit in various forms. home purchases. medical care. and other consumer uses. Where as in a Non-fund Based. home repair. These institutions make loans for automobile purchases. Bank doesn‘t pay cash directly but gives assurance or takes guarantee on behalf of its customer to pay if they fail to do so. These are broadly classified into two categories.
Page 59 . India's economy grew at an average rate of 6. 000 to Rs. In fact.20.CREDIT APPRAISAL have grown. 2007-08 has shown that the loan values of these retail lending typically range between Rs. which predicted a bright future for Brazil. the housing loans had the least gross asset impairment.8 percent and continues to grow at the almost the same rate – not many countries in the world match this performance. As the Report on Trend and Progress of India. Second. which must be paid off little by little over the course of years. Within the retail segment. changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. or noninstalment loans. The amounts loaned through retail lending are usually smaller than those loaned to businesses. India is one of the countries having highest proportion (70%) of the population below 35 years of age (young population). The loans are generally for duration of five to seven years with housing loans granted for a longer duration of 15 years.100 lakh. In recent past retail lending has turned out to be a key profit driver for banks with retail portfolio. Russia. retailing make ample business sense in the banking sector. These loans are marketed under attractive brand names to differentiate the products offered by different banks. Note that during the 10 years after 1992. Basic reasons that have contributed to the retail growth in India are First. The BRIC report of the GoldmanSachs. economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer boom. Credit card is another rapidly growing sub-segment of this product group. The overall impairment of the retail loan portfolio worked out much less then the Gross NPA ratio for the entire loan portfolio. which are paid off in one lump sum. Retail lending may take the form of instalment loans. India and China.
the Treasury income of the banks. retail business provides a good vehicle of profit maximisation.CREDIT APPRAISAL mentioned Indian demographic advantage as an important positive factor for India. In such a scenario. Though the sector has been growing at around 15 per cent. has been on the decline during the last two years. internet and phone-banking.7 million). Third. technological factors played a major role. Banks have low penetration in this segment currently."There is a huge retail credit opportunity that is surfacing. retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams. there is still a huge opportunity to tap into. According to K V Kamath. which had strengthened the bottom lines of banks for the past few years. But it is the one area that is providing the momentum in the banking business now. Technological innovations relating to increasing use of credit / debit cards. Fifth. Considering the fact that retail‘s share in impaired assets is far lower than the overall bank loans and advances. Convenience banking in the form of debit cards. Fourth. anywhere and anytime banking has attracted many new customers into the banking field. direct debits and phone banking has contributed to the growth of retail banking in India. the changing demographic profile and a downward trend of the interest rates will propel retail credit in India. For Page 60 . Interest rates on retail loans have been dropping rapidly too. decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit. Middle and -high-income homes in India has increased to 2.57 crore (25. ATMs.‖ India has among the lowest penetration of retail loans in Asia.
II. According to the American Bankers Association. III. TERM LOANS A bank loan to a company. The bank provides certain amount to the company for its day to day working keeping certain margin in hand. the borrower usually uses the funds from the loan soon after they become available. Otherwise. If this loan is in the form of a line of credit. the business that receives the loan can continuously draw from the bank up to a certain specified amount. the funds are drawn down shortly after the agreement is signed. Bank term loans are very a common kind of lending. Once a security for repayment has been given. Term loans are the basic vanilla commercial loan."The entry of a number of banks in India in the last few years has helped provide increased coverage and a number of new products in the market. but only after the required security is given to secure the loan. repayment is often tied directly to the useful life of the asset being financed. with a fixed maturity and often featuring amortization of principal. these loans are generally repaid in monthly instalments (sometimes with balloon payments) from a business's cash flow. Bankers tend to classify term loans into two categories: Intermediate-term loans: Usually running less than three years. WORKING CAPITAL / CASH CREDIT Cash credit is a short-term cash loan to a company. A bank provides this type of funding." says Kamath. and monthly or quarterly repayment schedules and include a set maturity date. Page 61 .CREDIT APPRAISAL instance residential mortgages slumped by 7 per cent over the last four years. They typically carry fixed interest rates.
Page 62 . and some run for as long as 20 years. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment. the Bank buys the bill (i. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry wording that limits the amount of additional financial commitments the business may take on (including other debts but also dividends or principals' salaries). Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. such as depreciation. depending on the level of risk the bank is willing to take on.e. Supply: Abundant but highly differentiated. and should compare the cost with that leasing. IV. borrowers should be sure they can they make full use of ownership-related benefits. Appropriate For: Established small businesses that can leverage sound financial statements and substantial down payments to minimize monthly payments and total loan costs. The degree of financial strength required to receive loan approval can vary tremendously from bank to bank. BILL DISCOUNTING While discounting a bill. Most are between three and 10 years. and they sometimes require that a certain amount of profit be set-aside to repay the loan.CREDIT APPRAISAL Long-term loans: These loans are commonly set for more than three years. Before deciding to finance equipment. Repayment is typically linked in some way to the item financed.
The party upon whom the bill is drawn id called the drawee. He becomes an acceptor when he indicates his willingness to pay the bill. He gives the order to pay money to third party. bills of exchange were a common means of exchange.A promissory note is a written promise by the maker to pay money to the payee. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date. The party in whose favor the bill is drawn or is payable is called the payee. Promissory Note. signed by the person giving it. They are not used as often today. Prior to the advent of paper currency.A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A bill of exchange requires in its inception three parties--the drawer.CREDIT APPRAISAL Bills of exchange. The person who draws the bill is called the drawer. Bills of exchange are used primarily in international trade. A bill of exchange is an unconditional order in writing addressed by one person to another. and the payee. requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. He is the person to whom the bill is addressed and who is ordered to pay. Page 63 . a promissory note made by a bank and payable to bearer on demand. It is essentially an order made by one person to another to pay money to a third person. Bank note is frequently transferred as a promissory note. the drawee. A common type of bill of exchange is the cheque (check in American English). defined as a bill of exchange drawn on a banker and payable on demand. and are written orders by one person to his bank to pay the bearer a specific sum on a specific date.
engaging to pay on demand. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. EXPORT FINANCE- This type of a credit facility is provided to exporters who export their goods to different places.CREDIT APPRAISAL A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person. BANK GUARANTEE- A contract of guarantee is defined as ‗a contract to perform the promise or discharge the liability of the third person in case of the default‘. sum certain in money to order or to bearer V. It is divided into two parts. Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. on demand or on a specified date. A negotiable promissory note is unconditional promise in writing made by one person to another. Exporters don‘t wait for the importer to deposit the funds. Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. Non Fund Based loans generate income for the bank without committing the funds of the bank. There are two types of credit under this category which are discussed as follows:I. or at fixed or determinable future time. signed by the maker. The parties to the contract of guarantees are: Page 64 . Bank generates substantial income under this head.pre-shipment finance and postshipment finance.
The guarantees are structured according to the terms of agreement. Branches may issue guarantees generally for the following purposes: a) In lieu of security deposit/earnest money deposit for participating in tenders. maturity & purpose. security. Thus. b) Mobilization advance or advance money before commencement of the project by the contractor & for money to be received in various stages like plant layout. viz.CREDIT APPRAISAL a) Applicant: The principal debtor – person at whose request the guarantee is executed b) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default. etc. The guarantees executed by banks comprises both performance guarantees & financial guarantees. consequential to a main contract between the applicant & the beneficiary. f) To allow units to draw funds from time to time from the concerned indenters against part execution of contracts. d) In respect of due performance of specific contracts by the borrowers & for obtaining full payment of the bills.. guarantee is a collateral contract. Page 65 . design/drawings in project finance. Purpose of Bank Guarantees Bank Guarantees are used to for both both preventive & remedial purposes. e) Performance guarantee for warranty period on completion of contract which would enable the suppliers to realize the proceeds without waiting for warranty period to be over. c) In respect of raw materials supplies or for advances by the buyers. c) Guarantee: The person who undertakes to discharge the obligations of the applicant in case of his default.
Bank guarantee beyond maturity of 10 years may be considered against 100% cash margin with prior approval of the controlling authority. Extant instructions stipulate an Administrative Clearance for issue of BGs for a period in excess of 18 months. However. should limit themselves to the provision of financial guarantees & exercise due caution with regards to performance guarantee business. in cases where requests are received for extension of the period of BGs as long as the fresh period of extension is within 18 months. a bank guarantee‘s a customer financial worth. While issuing financial guarantees. Branches should not issue guarantees for a period more than 18 months without prior reference to the controlling authority. Guidelines on conduct of Bank Guarantee business Branches. Page 66 . & means to perform the obligations under the contract & any default is not likely to occur.CREDIT APPRAISAL g) Bid bonds on behalf of exporters h) Export performance guarantees on behalf of exporters favouring the Customs Department under EPCG scheme. capacity. as a general rule. it should be ensured that customers should be in a position to reimburse the Bank in case the Bank is required to make the payment under the guarantee. the bank‘s guarantee obligations relate to the performance related obligations of the applicant (customer). No bank guarantee should normally have a maturity of more than 10 years. In case of performance guarantee. branches should exercise due caution & have sufficient experience with the customer to satisfy themselves that the customer has the necessary experience. expertise. creditworthiness & his capacity to take up financial risks. In a performance guarantee. The subtle difference between the two types of guarantees is that under a financial guarantee.
financial or performance d) Applicant‘s financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. When it is required to be issued on a format Page 67 .CREDIT APPRAISAL More than ordinary care is required to be executed while issuing guarantees on behalf of customers who enjoy credit facilities with other banks. should be for a short period & for relatively small amounts. instances of invocation of bank guarantees. where furnished by exception. All deferred payment guarantee should ordinarily be secured. branches should examine & satisfy themselves about the following aspects: a) The need of the bank guarantee & whether it is related to the applicant‘s normal trade/business.g. f) Present o/s on account of bank guarantees already issued g) Margin h) Collateral security offered Format of Bank Guarantees Bank guarantees should normally be issued on the format standardized by Indian Banks Association (IBA).. Whenever an application for the issue of bank guarantee is received. the reasons thereof. Unsecured guarantees. e) Past record of the applicant in respect of bank guarantees issued earlier. Branches may obtain adequate cover by way of margin & security so as to prevent default on payments when guarantees are invoked. etc.e. b) Whether the requirement is one time or on the regular basis c) The nature of bank guarantee i. the customer‘s response to the invocation. Appraisal of Bank Guarantee Limit Proposals for guarantees shall be appraised with the same diligence as in the case of fund-base limits.. e.
e) contains the Bank‘s standard limitation clause f) not stipulating any onerous clause.CREDIT APPRAISAL different from the IBA format. Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft). Page 68 . LETTER OF CREDIT- Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. b) for a definite objective enforceable on the happening of a definite event. whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf : Is to make a payment to or to the order third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary. c) for a specific amount d) in respect of bona fide trade/ commercial transactions. & g) not containing any clause for automatic renewal of the bank guarantee on its expiry II. it should be ensured that the bank guarantee is a) for a definite period. Buyer also provide the necessary instructions in preparing the document. The document is issued by a financial organization at the buyer request. however named or described. as may be demanded by some of the beneficiary Government departments. The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as: "An arrangement.
CREDIT APPRAISAL Authorised another bank to negotiate against stipulated documents provided that the terms are complied with. A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit. Parties to Letters of Credit Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions. Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and
takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. The payments has to be made to the beneficiary within seven working days from the date of receipt of documents at their end, provided the documents are in accordance with the terms and conditions of the letter of credit. If the documents are discrepant one, the rejection thereof to be communicated within seven working days from the date of of receipt of documents at their end.
Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c. If L/c is a transferable one and he transfers the credit to another party, then he is referred to as the first or original beneficiary. Advising Bank : An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary. Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of only the issuing bank. Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents submitted to them by the beneficiary under the credit either advised
CREDIT APPRAISAL through them or restricted to them for negotiation. On negotiation of the documents they will claim the reimbursement under the credit and makes the payment to the beneficiary provided the documents submitted are in accordance with the terms and conditions of the letters of credit. Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made. Second Beneficiary : Second Beneficiary is the person who represent the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer. Types of Letter of Credit 1. Revocable Letter of Credit L/C A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. It is rarely used in international trade and not considered satisfactory for the exporters but has an advantage over that of the importers and the issuing bank. There is no provision for confirming revocable credits as per terms of UCPDC, Hence they cannot be confirmed. It should be indicated in LC that the credit is revocable. if there is no such indication the credit will be deemed as irrevocable. 2. Irrevocable Letter of Credit L/C In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. 3. Confirmed Letter of Credit L/C Confirmed Letter of Credit is a special type of L/C in which another bank apart from the issuing bank has added its guarantee. Although, the cost of confirming
CREDIT APPRAISAL by two banks makes it costlier, this type of L/C is more beneficial for the beneficiary as it doubles the guarantee. 4. Sight Credit and Usance Credit L/C Sight credit states that the payments would be made by the issuing bank at sight, on demand or on presentation. In case of usance credit, draft are drawn on the issuing bank or the correspondent bank at specified usance period. The credit will indicate whether the usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank. 5. Back to Back Letter of Credit L/c Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as backtoback credit when a L/c is opened with security of another L/c. A backtoback credit which can also be referred as credit and countercredit is actually a method of financing both sides of a transaction in which a middleman buys goods from one customer and sells them to another. The parties to a BacktoBack Letter of Credit are: 1. The buyer and his bank as the issuer of the original Letter of Credit. 2. The seller/manufacturer and his bank, 3. The manufacturer's subcontractor and his bank. The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of a particular beneficiary, who may not be the actual supplier/ manufacturer offering the main credit with near identical terms in favour as security and will be able to obtain reimbursement by presenting the documents received under back to back credit under the main L/c. The need for such credits arise mainly when : The ultimate buyer not ready for a transferable credit The Beneficiary do not want to disclose the source of supply to the openers. The manufacturer demands on payment against documents for goods but the beneficiary of credit is short of the funds 6. Transferable Letter of Credit L/c
Page 72 . the standby letter of credit is very much similar in nature to a bank guarantee. Increase the amount of the cover or percentage for which insurance cover must be effected. The L/c does state clearly mentions the margins of the first beneficiary and unless it is specified the L/c cannot be treated as transferable. It can only be used when the company is selling the product of a third party and the proper care has to be taken about the exit policy for the money transactions that take place. Substitute the name of the applicant (the middleman) for that of the first beneficiary (the buyer). Standby Letter of Credit L/c Initially used by the banks in the United States. Reduce unit price if it is stated Make shorter the expiry date of the letter of credit.CREDIT APPRAISAL A transferable documentary credit is a type of credit under which the first beneficiary which is usually a middleman may request the nominated bank to transfer credit in whole or in part to the second beneficiary. Make shorter the period for shipment of goods. Make shorter the last date for presentation of documents. This type of L/c is used in the companies that act as a middle man during the transaction but don‘t have large limit. The main objective of issuing such a credit is to secure bank loans. Standby credits are usually issued by the applicant‘s bank in the applicant‘s country and advised to the beneficiary by a bank in the beneficiary‘s country. The first beneficiary or middleman has rights to change the following terms and conditions of the letter of credit: Reduce the amount of the credit. In the transferable L/c there is a right to substitute the invoice and the whole value can be transferred to a second beneficiary.
When a trader is buying good from his own country and sell it to the another country for the purpose of merchandizing trade. provided the terms of the letter of credit have been met. The issuing bank charges the applicant fees for opening the letter of credit. Import Operations Under L/c The Import Letter of Credit guarantees an exporter payment for goods or services. Page 73 .CREDIT APPRAISAL Unlike a traditional letter of credit where the beneficiary obtains payment against documents evidencing performance. and primarily comprises of : (a) Opening Charges This would comprise commitment charges and usance charged to be charged upfront for the period of the L/c. The fee charged depends on the credit of the applicant. A bank issue an import letter of credit on the behalf of an importer or buyer under the following Circumstances When a importer is importing goods within its own country. International Chamber of Commerce Publication No 500. When an Indian exporter who is executing a contract outside his own country requires importing goods from a third country to the country where he is executing the contract. 1998. 1993 Revision. The first category of the most common in the day to day banking Fees And Reimbursements The different charges/fees payable under import L/c is briefly as follows 1. International Chamber of Commerce Publication No 590. or "International Standby Practices" (ISP). the standby letter of credit allow a beneficiary to obtains payment from a bank even when the applicant for the credit has failed to perform as per bond. A standby letter of credit is subject to "Uniform Customs and Practice for Documentary Credit" (UCP).
The applicant is bounded and liable to indemnify banks against all obligations and responsibilities imposed by foreign laws and usage.CREDIT APPRAISAL The fee charged by the L/c opening bank during the commitment period is referred to as commitment fees. The confirming bank's fee depends on the credit of the issuing bank and would be borne by the beneficiary or the issuing bank (applicant eventually) depending on the terms of contract. and levies charges based on value of goods. Page 74 . 2. The reimbursing bank charges are to the account of the issuing bank. The advising bank charges an advising fee to the beneficiary unless stated otherwise The fees could vary depending on the country of the beneficiary. This may vary from 7 days usance (sight) to 90/180 days. whichever is later. LC opening bank scrutinizes the bills under the LCs according to UCPDC guidelines . Commitment period is the period from the opening of the letter of credit until the last date of negotiation of documents under the L/c or the expiry of the L/c. The fee charged by bank for the usance period is referred to as usance charges (b)Retirement Charges 1. Usance is the credit period agreed between the buyer and the seller under the letter of credit. 4. The advising bank charges may be eventually borne by the issuing bank or reimbursed from the applicant 3. This would be payable at the time of retirement of LCs. 5.
much reliance is placed on the credentials of the borrower. All information required by the banker in the pre-sanction period should become part of a system. environment etc. In the concept of appraisal. Therefore. A significant basis of banker-borrower relationship is governed by the information which flows between the two parties. means and respectability.CREDIT APPRAISAL Building Up of a Proposal 1. An information system is an aid to the decision making. bank‘s own record. After ascertaining the credit needs of the borrower. Each individual case has to be examined in the light of its own circumstances and judgment exercised on issues enumerated above and a final decision has to be arrived at on the basis of scrutiny of all the issues.GATHERING CREDIT INFORMATION:An appraisal of a proposal begins with the gathering of adequate background knowledge about borrower‘s character and credit worthiness. the banker looks towards information about his borrower‘s credit worthiness. It should flow into the information system from various sources. He seeks out the credit information etc. such as the borrower. The result of the elaborate scrutiny concerning all these aspects is required to be put into a precise credit report which helps in taking decision on a credit proposal. Page 75 . other borrowers and market information. from his co-bankers. Information by definition is that data which is relevant and meaningful for making decisions. carrying out and altering decisions. there is a necessity for evaluation of the borrower in regard to his standing in the business.
discounting/retirement of bills etc. often useful clues to borrower‘s operating and financial transactions. past and expected profitability. A review of the previous year‘s operations in the account and assessments of borrowers‘ financial statements relating to that period will provide a rich source of information about the borrower. the degree of competition that the firm/company faces and whether or not it has had or anticipated any difficulty etc. and financial position has to be discreetly gathered from following sources: a. It is derived basically from borrowers: Trading and profit and loss statement Balance sheet Cash and fund flow statements c. Operations in the borrower‘s account and other dealings at the bank level in regard to collections. nature of its business. bank‘s own records are a rich source of additional information. b.CREDIT APPRAISAL 2. financial information is a significant part of the total information system. VARIOUS SOURCES OF CREDIT INFORMATION Information regarding character. honesty. The borrower: the bank should develop as much credit information as possible during the initial interview with the borrower/partners of firm/ directors of company/ proposed guarantor /co-obligator and principal officials of firms/company. Page 76 . Information regarding its principal officers should be collected during such interview. Banks own records: If he is an existing borrower. Borrower’s financial statements: for lending decisions.
it may be possible to have a fair assessment of tendencies Page 77 . Comments thereon by the income tax office shall indicate the shortcomings (lacunae) in the business.Income tax assessment orders agricultural income tax assessment orders give an insight into the borrower‘s account and the extent to which it is profitable. In the case of estate owners agricultural tax assessment orders to be obtained to arrive at parties credit worthiness. Full particulars of parties immovable properties where they are situated. whether as direct borrowers or as co-obligators. Sales tax assessment orders: Sales tax assessment orders will reveal the turnover in business and when read with trading/ manufacturing and profit & loss account.CREDIT APPRAISAL d. e. g. Opinions: Bank should compile opinions on their borrowers. confidential opinion of his banker has to be obtained. estimated means and business activities of all firms and individuals who are under any form of liability to the bank. Income tax assessment order. From other banks: in respect of fresh proposals. In case of new customer having dealings with other banks. enquiries with local banks should be made before entertaining the proposal to avoid multiple financing without our full knowledge. whether they are free from encumbrance and in the case of land. f. As far as possible written statements of their properties should be taken in evaluating properties owned by parties jointly with others and as a rule such properties should be disregarded in arriving at the net means. acreage should be recorded together with fair estimates of their value. They should contain full and reliable records of the character.
j. i. Rental Values and house tax payable.. Wealth tax assessment orders: wealth tax assessment order will indicate the net worth of individuals and reveals the liquid source available to bring the required margin money for the venture. Other external sources: other external sources. whether over-trading or carefully trading within recourses at command or trading entirely on the borrowed funds.e. l. Page 78 . Municipal property registers: reference to municipal property registers will give an idea of building owned within the municipality. h. Property statements: The property statement of borrower will give an idea of his worth. if any. business periodicals/magazines/journals etc. like stock exchange directory. It may be noted that the said registers are open for reference to all persons.CREDIT APPRAISAL in trade i. Market sources: Constant touch with the market will help to have first hand information about the gains or losses in particular business transactions of the borrowers. liabilities and his income from real estate‘s (immovable properties). k.
creation of charge on the assets of the society and execution of documents. 5. creation on the assets of the company and execution of the documents. Trusts Trust deed Resolution for the borrowings and execution of documents. Industrial units : Page 79 . Partnership: Copy of partnership deed Copy of certificate of registration of firm (if registered) 2. 4. Cooperative societies Bylaws Permission from registrar for the borrowings. 3.CREDIT APPRAISAL REQUIREMENTS AS PER CONSTITUTION OF BOROWER: Following Requirements as per constitution of borrower should be collected for proposals emanating from- 1. Board resolution for borrowings. Company : Memorandum and articles of association Certificate of incorporation Certificate of commencement of business Search report indicating subsisting charges on the assets of the company.
fund flow statements etc. The schedules of the fixed assets should be checked up. an understanding of these financial statements is important for the appraiser. Fixed assets: To find out any revaluation of fixed assets done by the company to improve their net worth. Study notes on accounts and comments of auditors should be checked. compliance of legal requirements or conditions as applicable and clearance from regulatory bodies. Therefore. Schedule for reserve should be studied Any change in the accounting procedure of depreciation should be checked 2. Once balance sheet is taken for analysis the following items are checked up: 1. Industrial licenses/SSI registration certificate. The first thing done is to analyze the financial statements. Current assets: to find out whether the assets stated are really liquid or not.CREDIT APPRAISAL Project report with cash flow. The claims lodged against receivables must be studied Page 80 . The schedules under current liabilities and current assets to ascertain any obsolete or slow moving raw material or finished good and old debtors or receivables should be checked The auditor‘s report should be read and understood properly. License from local authority. FINANCIAL APPRAISAL On receipt of a loan application the banker begins the process of financial appraisal.
then the reason for the same is to be looked into (may be irregular or new term loan availed for expansion etc. 4. and its needs and regularity This shall be decreasing year after year. The CDD/DBD other bills discounted liability. 3. Term liabilities: To find out whether the liabilities are long term or short term. Bank guarantee or letter of credit margin shall be shown as noncurrent assets. if it has increased. Page 81 . then increase the bank borrowing to the extent liability was not taken in the balance sheet and also increases the debits/receivables to that extent. 5.CREDIT APPRAISAL The receivables due from sister/associate concerns must be studied. any assets which is not used in the into day business activity shall be removed and proper treatment is to be made accordingly. if any . ascertain the nature and need for maintaining such amount .is reported in the auditor‘s report . Other Current Assets: Their reasonableness and their need to maintain them for the business. Contingent liabilities: To find out any unrecognized liabilities or losses if any. Various components of other current assets and if the same is more than 5% -10%.) The term liabilities with repayment of the same and the amount payable during the year shall be deducted from the term liabilities as current liabilities for finding out liquidity position of the company should be checked.
is to be verified to find out its effect on the profitability of the company. If the sales has come down or the net profit has also come down then the reason has to be ascertained. Intangible assets : Any abnormal increase in this figure shall be studied to find out the reasons for the same. net worth of the company is to be ascertained.CREDIT APPRAISAL 6. Change in the valuation of the stock/finished goods. this may be due to take over by others also. If the unit earned at least cash profit then the position may be considered as satisfactory. Accounting Norms: Any change in the accounting norms from the past shall be studied to find out the reasons for the same. 7. BALANCE SHEET ANALYSIS 1. if the net profit also has increased correspondingly the performance can be noted as satisfactory. Comments on the performance of the unit vis-à-vis last year sales- Increased in last year sales are always good. its effect on the net profit. Page 82 . 8. if any. Stocks: The stock statements and QIS forms to find the authenticity of the figures reported under stock/receivables.
The ratio indicates that borrower has not borrowed much and the outside debts within a reasonable limit. but as per the credit rating chart maximum marks are assigned if the borrower achieves 8% as percentage of net profit/net sales. 2. If the D/E ratio is less than 2:1 the same is good.22:1 and above. Liquidity position of the party-Current ratio If the current ratio is increasing and nearer to 1. true reason needs to be ascertained. If the net worth is decreasing. if the ratio is less than 1. that is sufficient for accepting as satisfactory. it can be termed as satisfactory. Long term Strength of a company is calculated based on the level of the net worth of the company /promoters stake/loans from close relatives- If the net worth has increased due to infusion of fresh capital or plough back of profit.CREDIT APPRAISAL If the NP to N/sales is positive. 3. Return on investment or Return on equity may also be used to find out the return on capital invested.22:1 then the promoter‘s margin (Net working capital) towards Working Capital may not be sufficient to cover the working capital Page 83 . even increase of loan from friends & relatives is a good sign. Expected Current ratio is 1. reason may due to net loss or diversion. further if the TOL/TNW is less than 5:1 then the unit‘s solvency is noted to be satisfactory.5 and above then we can note the position is satisfactory.
Reduction in Net working capital position( below the required level) when the unit has earned cash profit and clearing of term loan installments when the unit is making cash loss needs to be viewed seriously. care shall be taken to ensure that sufficient Net working capital for the working capital enjoyed is available. Diversion from the business needs to be viewed carefully. 5. but if it threatens the existence of the company then the position needs serious analysis. When the Current ratio is poor and the Net working capital is not sufficient to cover the existing limit.holding level more than the above needs proper justification. Page 84 . Quality of current assets : The current assets holding period must be less than 3 months for traders and the 5 months for the industries depending upon the type of industry .CREDIT APPRAISAL limit.the same may be noted. 6. It should be ensured that the current assets turnover is at least more than four times in a year. no further term loan shall be sanctioned and the party is to be advised not to take up any fresh investment in fixed assets. 4. if it‘s effect is less than 5-10 % of the net worth of the company . Contingent liability: The effect of this liability on the net worth of the company. Reduction in the net worth of the firm (when they have shown net profit needs further probing.
Page 85 .CREDIT APPRAISAL MOVEMENT OF CREDIT PROPOSALS With reference to Punjab National Bank the movements of credit proposals are studied carefully and the detailed process is discussed as follows: The movement of credit proposals follows a pre-defined path which has been structured in keeping with the risk management principle that the credit granting process should involve multiple credit approvers who should subject the proposals to credit approvals at various stages accordingly.
CREDIT APPRAISAL Page 86 .
Each type of loan whether secured or unsecured has to be analyzed in a different way.CREDIT APPRAISAL Credit Appraisal Techniques Credit appraisal techniques act as tool for the credit portfolio managers to take right decisions. The appraisal technique for each type of loan is separate from each other. The different techniques of credit analysis or credit appraisal are discussed as under: Process of Credit appraisal for Term Loans Term loans. In the interest of sound risk management practices. banks monitor the percentage of Term loans in their credit portfolio with a view to keeping the term loan component within a pre-determined percentage. c) Scrutiny of proposals The scope of the project: Background of promoters Government consents The technical appraisal Cost of the project Page 87 . a copy of the appraisal note of the lead institution / bank should be obtained.Loans which are repayable in not less than 36 months are referred to as term loans. Requirements to be obtained with the proposal: a) Copies of project report b) Where loan is on participation basis. It is the first and the prime most function performed by the Credit Appraisal Cell before providing any sort loans or advances.
) Not less than 1. etc. are taken into consideration.33:1(1. pay back period. The following minimum financial parameters are required to be satisfied for a Term loan proposal to merit consideration: Not more than 2. average DSCR.7:1 may be Debt Ratio Equity accepted in the case of real estate sector and generally for different type of industry different level of DER is acceptable. BEP.CREDIT APPRAISAL Sources of finance The schedule of implementation The financial projections and profitability Cash flow statements Calculation of debt service coverage ratio (DSCR) Breakeven analysis d) Disbursement e) Follow up (post sanction) Assessment : For assessment purposes the forms prescribed are used and debt equity ratio.5to 2 (ratio lower than this Average DSCR is to be looked into) Page 88 .
CREDIT APPRAISAL Ratios for appraising term loans: Debt equity ratio: long term debt Tangible net worth Average DSCR : Net profit + Depreciation + interest on TL Term loan installment + interest on TL Breakeven point : Fixed cost_______ Sales-Variable cost (contribution) It should be noted that the banks generally consider only term loans repayable within 5 to 7 yrs. Also known as the Personal Debt/Equity Ratio. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. this ratio can be applied to personal financial statements as well as companies'. If a lot of debt is used to finance increased operations (high debt to equity). Debt Equity Ratio: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. the Page 89 . This can result in volatile earnings as a result of the additional interest expense. Term loans with maturity beyond 7 yrs are normally not experienced except infrastructure loans.
GM. The debt/equity ratio also depends on the industry in which the company operates. This can lead to bankruptcy. The CH. acceptable level of DER is 2. therefore. While the repayment program will depend upon the profitability of a project. the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. Debt Service Coverag Ratio (DSCR): The ultimate purpose of project appraisal is to ascertain the viability of a project which has a direct bearing on the repayment of the instalments under the proposed term loan / deferred payment guarantee. ED and CMD have powers to further relax.CREDIT APPRAISAL company could potentially generate more earnings than it would have without this outside financing. which would leave shareholders with nothing. For example for large projects (with project cost Rs. in Iron and Steel Industry 2. This ratio indicates the degree of viability of a project and influences in fixing the Page 90 . level of DER is 1. 100 crore and above) in Power. then the shareholders benefit as more earnings are being spread among the same amount of shareholders. in Infrastructure and Capital Intensive projects 2:1 and in Real Estate. The debt service coverage ratio is the core test ratio in project financing. However.33:1.25:1 . be fixed after ascertaining the annual servicing by the debt service coverage ratio. The repayment schedule should. the quantum of annual instalments has to be related to the size of the annual cash flows.75:1. If this were to increase earnings by a greater amount than the debt cost (interest).
to be utilized for repayment of debt. The difference between the accruals and debt is known as margin of safety (Rs. BREAK EVEN POINT OR COST VOLUME PROFIT (CVP) ANALYSIS: A.2/. For the purpose of this ratio . and the quantum of annual instalments.3/. He firm starts earning operating profits only after the breakeven is reached.in this case). `interest' and `principal repayment' besides indicating the margin of safety. Ratio lower than this should be further looked into. the operating profit is equal zero. The ratio of 1. instalments payable during a year under all the term loans/ deferred payment guarantees and ‗service‘ means cash accruals (service) available to cover the maturing obligation (debt) during each year. BEP is the level of operations (in terms of sales or production or capacity utilization) at which total revenues are equal to total operating costs (fixed and variable) or. a DSCR of 3:1 indicates that for each Re. For example. A very high ratio may indicate the need for lower moratorium period/repayment of loan in a shorter schedule.5 to 2 is considered reasonable.e. Page 91 . The breakeven point is calculated to note the level of production at which the unit neither earns profit nor incur loss. The debt service coverage ratio indicates the ability of the firm to generate cash accruals for repayment of installment and interest. in other words.5. ―contribution‖ exactly equals the ―fixed costs.1/-long term debt including interest to be paid the business generates cash accrual of Rs. This ratio provides a measure of the ability of an enterprise to service its debts i.CREDIT APPRAISAL repayment period. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1. At BEP. ―debt‖ means maturing term obligations viz.
direct wages and other items. The breakeven point is generally expressed in terms of percentage of capacity utilization Break even analysis is generally expressed in terms of percentage of capacity utilisation. The break-even analysis can help in making vital decisions relating to fixation of selling price make or buy decision. effect of product mix on profits. The CVP analysis provides answers to such questions as: level of operations needed to avoid loss. which are apportion able to unit of production. interest. labor. such as. rent. most and least profitable products etc. selling expenses other than variable items and administrative expenses D. Break-even analysis is one of the most useful techniques of profit planning and controlling. The formula for calculating the break-even point for each year is as under: Total fixed cost/Contribution C. E.CREDIT APPRAISAL B. The variable cost changes with the levels of production. level of sales required to achieve targeted profit. insurance. It includes cost of raw materials. the break-even analysis can help in understanding the impact of important cost factors. The same includes depreciation. Certain items of the cost that are to be incurred by the unit irrespective of the level of production are called as fixed cost. and optimizing product-mix to improve project profitability. repairs and maintenance. Break-even analysis is the most widely used form of the CVP analysis. impact of expansion. raw material. power. certain portion of salaries. Further. maximizing production of the item giving higher contribution etc. etc. Page 92 .
Fixed costs may be ‗stepped‘ – not fixed over all volumes. From one alternative a firm may expect higher profit and also a higher break-even point.71 lakh Rs. the preferred alternative would be where the break-even will be reached earlier. 27. It is not always easy to have a clean separation of costs into fixed and variable components. 13. Caution: Relationship between revenue.CREDIT APPRAISAL It is a useful method for considering also the risk implications of alternative actions. 13.35 lakh Rs.25 lakh Rs. Complexity involved in using BEP analysis in multi-product businesses Illustration: Assumed: Normal production Fixed Costs Variable Costs Sales realization Contribution year 75 lakh units (93. Generally. The firm has to weigh the probability (riskiness) of reaching the break-even in the first case before choosing that alternative. variable costs and volume may not be linear. 41.90 lakh Page 93 . while another alternative may produce comparatively lower profit but at a lower break-even point.75% of installed capacity) Rs.
07% BEP (sales) 20. such as NPV (or IRR) from investor‘s viewpoint. SENSITIVITY ANALYSIS Projects do not always run to plan. Page 94 . Sensitivity Analysis involves changing input variable estimates from an original set of estimates (called the base case) and determine their impact on a project‘s measured results. Costs and benefits estimated at an early stage of a project may indicate a profitable project. and then the project viability is ascertained.CREDIT APPRAISAL BEP (production) units : (Fixed cost / Contribution)* 75 lakh = 36. increasing or reducing the cost of inputs etc.25 lakh = Rs. The critical variables can then be thoroughly examined by generally selecting the pessimistic options so as to make possible improvements in the project and make it operational on viable lines even in the adverse circumstances. The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or sensitive elements are identified which are assigned different values and the values assigned are both optimistic and pessimistic such as increasing or reducing the sale price/sale volume. but this profit could be eroded by an increase in costs or a decrease in the value of the benefits (the revenue).85 lakh BEP (capacity utilization): (Fixed cost / Contribution)* 93.27 lakh : (Fixed cost / Contribution)* Rs. 41.75 = 46. or DSCR from banker‘s point of view.
10% sensitivity factor may be applied in highly volatile industries by assessing the expected volatility in sale price/ cost price of major raw materials in future on case to case basis. sales and Page 95 . a common 5% sensitivity factor on sale price/cost price of major raw materials is to be applied in appraisals of all the projects irrespective of the industry. receivables and other current assets such as cash in hand/ bank and advances etc. However. So the working capital means the funds invested in current assets. the need of the hour is for raising long term sources.CREDIT APPRAISAL In the absence of any defined factors and its values for carrying out the sensitivity analysis. When net working capital is negative. In other words . Net Working capital means the difference the current assets and liabilities. finished goods. A unit needs working capital because the production. net working capital denotes the portion of gross working capital contributed from long term sources. For proper working a manufacturing unit needs a specific level of current assets such as raw material. As per practice of Indian banks net working capital should normally be 25% of total current assets which will give a current ratio of 1.33 to the unit. Gross Working Capital and Net Working capital Gross working capital means the total funds required for financing the total current assets. stock in process. Process of Credit Appraisal for providing Cash Credit / Working Capital Limits Working capital for any unit means the total amount of circulating funds required for meeting day to day requirements of the unit. Such situation may also arise due to losses. it implies that the short term funds have been diverted / used for long term uses and the unit is facing a liquidity crunch. The trading units need the working capital for storing the goods and allowing credit to its customers. In such a situation.
The stock of raw material is kept to ensure the uninterrupted and smooth production. more the need of working capital. 7. Availability of raw materials: When the availability of raw material is assured and comfortable. Factors affecting the requirement of working capital: 1. lower stock maintenance is required. lower stock maintenance is required. more the need of working capital due to increase of length of working capital cycle 3. more the requirement of working capital. Nature of activity: Manufacturing units need more working capital as compared to trading and service units.in customers. the stock for whole of year is to be purchased in the Page 96 . lengthy the process of manufacture. more amounts is blocked in raw materials. When there is expectation of shortage or expectation of rise in prices. 2. more level of stock of finished products is required. It may also be required to cover the situations of shortages etc. low stock of finished products is needed. Seasonality Factor: When the raw material required is available in a particular season. Location of the unit: When the unit is located near the source of raw material. The length of operating cycle: More the length of operating cycle. Type of customers: When there are regular customers.CREDIT APPRAISAL realizations are not simultaneous. When the sales are to be made to walk. More the credit allowed to customers. The unit needs cash to purchase the raw material and pay expenses as there may not be perfect matching between cash inflows and outflows. 6. 4. 5. Market trend: The market trend of allowing credit to customers also varies from industry to industry and city to city.
E.g. So both the situations are to be avoided. Exp. Similarly the woollen products and products required in a particular season such as ACs. That is why the technique of calculation of right amount of working capital assumes significance. Cotton. Sugarcane. Paddy etc. Excess maintenance of working capital may result in idle resources and high interest cost whereas less amount of working capital may mean disruption in the working.Exp. A portion of it is to be financed from long term sources called the liquid surplus or net working capital (NWC).M + Mfg. +Adm overheads for the Page 97 .CREDIT APPRAISAL particular season. Parameters for various stages in computation of working capital: Stage i Raw Material Time Holding period Value value of RM consumed during the period ii SIP Time taken in converting the RM into FG RM + Mfg. during the period (Cost of production) iii FG Holding period of FG before being R. for keeping the production running. For financing of working capital. The remaining is normally financed by the bank in the form of working capital limits. Role of Banker: The unit should have sufficient amount of working capital. higher level of finished stocks have to be kept. It shall mean right amount of financing which will result in higher profitability for the unit and safety of funds of the bank. a banker should be able to calculate right amount of working capital needed by the unit being financed.
+ Adm.CREDIT APPRAISAL sold period (Cost of sales) iv Receivables Credit allowed to buyer RM+ Mfg. To suggest as to what constitutes the working capital requirements of industry and to suggest the sources for financing the minimum working capital requirements.L. RBI and a series of committees were set up to suggest appropriate modalities of financing working capital as under. RBI constituted a working group ―Tandon Committee‘ in July 1974 under the chairmanship of Shri P. Exp. 3. To suggest guidelines to commercial banks to follow up and supervise credit from the view of ensuring proper end use of the funds and keeping a watch on the safety of the advances.+ Profit for the period (sales) The assessment of working capital requirement of business unit has been engaging the attention of the Govt. TANDON COMMITTEE RECOMMENDATIONS Realising the absence of a proper control system in the flow of bank credit for working capital. Page 98 . The main task of the group was: 1. 2. To suggest the maximum level of bank finance and the method to compute the same. Tandon.. Exp.
The norms were fixed for 15 major industries and indicate the maximum permissible limits for inventory holding. the Committee fixed norms (in terms of the weeks/month consumption) in respect inventory and receivables which industrial units may hold. (ii) Approach to Lending. (iii) Style of Credit. Deviations from norms not allowed for meeting unforeseen situations. Tandon Committee suggested that instead of making available entire limit by way of cash credit it may be bifurcated into demand loan and cash credit component (modified by Chore Committee). Page 99 . If so. The recommendations of this Committee are summarised below: (i) Norms for Inventory and Receivables With a view to curbing speculative and hoarding tendencies. The three methods of lending as suggested by the committee are: First Method: 75% of Working Capital Gap (Total Current Assets – Other Current liabilities) Second Method: 75% Total Current Assets – Other Current liabilities Third Method: 75% [(Total Current Assets – Core Current Assets) – Other Current liabilities) Third method of lending was not accepted by RBI and hence rejected.CREDIT APPRAISAL 4. The group submitted its final report during December 1975. requires to be modified. to suggest suitable modifications. To make recommendations as to whether the existing pattern of financing working capital requirements by cash credit or overdraft etc.
The gist of these recommendations is as follows: (a) Annual Review All working capital credit limits of Rs. has been streamlined by certain recommendations made by Chore Committee. The lending discipline.B.CREDIT APPRAISAL (iv) Quarterly Follow-up and Supervision Tandon Committee suggested quarterly forms under the information system made applicable to borrowers with working capital credit of Rs. The committee submitted the report in Dec 1980. These forms aim at ensuring proper end-use of credit.Chore was constituted to review the system of cash credit. as enunciated by Tandon Committee. These reviews are intended to ensure that the limits are need-based and continue to be viable propositions. (b) Information System The scope of the quarterly information system originally envisaged by the study group to frame guidelines for follow-up of bank credit has been enlarged bringing into its ambit all borrowers having credit limits of Rs. 50 lac has been raised to Rs. CHORE COMMITTEE RECOMMENDATIONS In April 1979. 50 lacs and above from the banking system should be reviewed at least once a year. 1 crore and over from the banking system. 1 Crore. (c) Withdrawal of bifurcation of cash credit Page 100 . a working group under the chairmanship of Sh K. 50 lacs and over from the banking system. Presently this limit of Rs.
may be sanctioned only one limit as peak-level and non-peak level concepts will not be relevant in such cases. wherever considered feasible. The period during which these limits will be utilised will now be indicated in the bank's advice conveying sanction of credit. (e) Determination of Quarterly Operative limits Before the commencement of each quarter. coffee. Borrower in whose cases there are no pronounced seasonal trends. etc.). Hence forth. This will be termed as the operative limit for the relevant quarter. The operative limit indicated by the borrower would virtually set the level of drawing in that quarter subject to tolerances of 10% either way. vegetable oils. the borrowers will now be required to indicate limits sanctioned for their requirements of funds during the ensuing quarter. This will be treated as an indication of defective credit planning by the borrower. refrigerators etc. sugar. excess-utilisation or under. (such as tea. One of the major determinants of borrower's peak-level and non-peak level credit limits will be their availment during the corresponding period in the past. This recommendation is based on the pronounced seasonal trends in agriculturebased industries. (d) Separate limit for peak level and non-peak level A recommendation that will induce a greater degree of credit planning pertains to the separate 'Peak-level' and `non-peak level' credit limits. jute.utilisation of the operative limit. and in the case of some consumer industries such as those manufacturing fans.CREDIT APPRAISAL The recommendation of the Tandon Study Group to bifurcate cash credit accounts into demand loan and cash credit components has been withdrawn. beyond the tolerance level referred to above would be considered as an irregularity in the account. Page 101 .
(h) Switching over to Second Method of lending A major recommendation of the working group relates to switching over the borrowers from the first to the second method of lending. will henceforth entail penal of 2% per annum on the total outstanding for the period of default in the submission of returns. the excess borrowings are to be segregated and treated as WCTL (Working Capital Term Loan).CREDIT APPRAISAL Dialogue with the borrower will be initiated to set right the position in regard to defective credit planning and to ensure that such instances are avoided in future. ad-hoc or temporary limits could be sanctioned to borrowers through demand loan or non-operatable cash credit accounts. the operations in the account may be frozen on the basis of the notice issued to the borrower. in certain cases like natural calamities it would be the discretion of the bank to charge interest of 1% per annum. Reserve Bank has stipulated that in such cases. banks are required to charge additional 1% interest per annum over the normal rate. Page 102 . within the prescribed time limit. a notice would be issued to the borrower stating that if the default persists it would be open to the bank to freeze the account without further notice to the borrower. which should be made repayable in halfyearly instalments within a definite period but not exceeding five years in any case. Recognising that in some cases this may not be possible immediately. (g) Adhoc or temporary limits The working group has conceded that in exceptional cases. (f) Penalty for delayed or non submission of returns Non-submission of returns. On those limits. However. lf the default persists despite imposition of penal interest and the bank is satisfied that deterrent action is warranted. Simultaneously.
NAYAK COMMITTEE RECOMMENDATIONS To give a comprehensive and straight line method for the assessment of working capital requirement of the borrowers. RBI constituted a working group under the chairmanship of Sh P. by way of drawee bills only. Presently units covered under these guidelines are those having aggregate fund-based working capital credit limits less than Rs. the Working Group has recommended that banks should extend at least 50% of the cash credit limit against raw materials to manufacturing units.200 lacs for other than SSI and Rs. 500 lacs for SSI from the banking system. The study group gave its recommendations in March 1993. In April. Instead such units be provided working capital limits Page 103 . Present Status: The concept of MPBF was the cornerstone of financing which had emerged as a result of recommendation of Tandon and Chore. RBI implemented the recommendations of Nayak Committee for assessing the credit requirements of village industries. whether in the public or private sector. However the relaxations on case to cases are being allowed. Our bank is still following MPBF system. It has been advised not to apply the norms for inventory and receivables as also the Methods of Lending. 1993. However RBI has now abolished the guidelines for MPBF and advised the banks to draw the guidelines for credit dispensation.Nayak. Initially the recommendations were for SSI units only but now other units have also been covered.CREDIT APPRAISAL (i) Encouragement of Bills system To encourage bills systems of financing purchase of raw material inventory.R. tiny industries and other SSI units .
QUARTERLY MONITORING SYSTEM (QMS) Consequent to operational freedom granted by RBI in regard to submission of statements under QIS/Monthly Cash Budget System prescribed under CMA. Out of this. However lower limit can be sanctioned if requested in writing by the borrower. The same shall be reviewed after 30.P. LENDING DISCIPLINE . PBF may be adjusted accordingly.6.CREDIT APPRAISAL computed on the basis of a minimum of 20% of their Projected Annual TurnOver (PATO) for new as well as existing units. However if the working capital cycle is longer than 3 months. higher limit may be fixed.09. - The 20% limit is the minimum. Their working capital requirement be assessed at a minimum of 25% of their Projected Annual TurnOver (PATO) assessed on realistic basis for new as well as existing units. If the working capital cycle is less than 3 months. - In case the margin with the party is more than 5% . the limit may be fixed @ 20 % of turnover but actual withdrawal should be allowed only on the basis of actual D. As a temporary relief measure for SME Units. at least 4/5th(20% of their PATO) be provided by the bank and the borrower should contribute 1/5th of this estimated working capital requirement (5% of PATO) as margin money of working capital. RBI has allowed banks to finance upto 25% under stimulus package. Bank reviewed the same and submission of QIS was replaced with Quarterly Monitoring System (QMS) Page 104 .
CREDIT APPRAISAL The QMS discipline is to be enforced on all borrowers enjoying working capital limits of Rs. irrespective of whether they are exporters or otherwise In case the limits have been sanctioned on the basis of Naik Committtee. Page 105 . QMS form I gives us the quarterly data of production and sales and quarterly levels of current assets and current liabilities. QMS forms and CMA data need not be submitted. QMS form II gives us half yearly profitability statement and fund flow statements. The forms for QMS and time period for submission are as under. The QIS Form-I is to be submitted in the week preceding the commencement of the quarter to which it relates. we can see whether the performance is going on as projected.1 To be submitted within 6 weeks from the close of quarter to which it relates Form-11 To be submitted within 2 months from the close of Half Year to which it relates. Quarterly Information System (QIS) Form-I may be obtained for fixing up of quarterly operative limits in addition to the QMS Forms. By comparing with the projections as given in CMA. QIS I: QIS I which was earlier discontinued has been reintroduced and is to be submitted in addition to QMS I and QMS II. For all borrowed accounts availing fund based working capital credit limits of Rs. Form.1 crore and over from the banking system.5 crore & above from our bank.
Commitment charge is not applicable in case of export unit and sick unit. RBI has permitted banks to levy penal intt.CREDIT APPRAISAL Non adherence to the operative limits will attract penal interest. It is applicable to the working capital limits of Rs. overdrawn portion or excess portion is not taken into consideration. COMMITMENT CHARGES To discourage the borrowers from non-availment of credit already provided to them by banking institutions and to indirectly help the banks in their Asset Management. PENAL INTEREST In order to instil a sense of credit discipline among the borrowers. RBI has permitted bank to charge penalty on unavailed portion of sanctioned limit known as a commitment charge. The unutilized part of the limit is found out by calculating the average utilization during the quarter. While calculating the average utilization. If the average utilization is less than 85% than commitment charges is levied on the entire unavailed position. over and above the sanctioned rate of interest in case of non compliance of various terms and conditions The broad areas of non compliance where bank charges penal interest are: Default in repayment of loans Irregularity in cash credit account Non submission of stock statements and other financial data Default in adhering to borrowing covenants Page 106 .5 crore or above and charged @ 1% per annum with a tolerance limit of 15% based upon the limit sanctioned.
3% above the sanctioned rate in case of non compliance of terms and conditions in adhoc/temporary limit AMOUNT ON WHICH PENAL INTEREST TO BE CHARGED Amount of default in – instalment /excess drawals or borrowings or amount of irregularities in account/overdue bill not debited to account.CREDIT APPRAISAL Non payment of bills Excess borrowings arising out of excess current assets Non submission of information under Quarterly Monitoring System EXEMPTION FROM PENAL INTEREST o All advances up to 25000/o Sick unit under rehabilitation o Sick unit remained closed o Advance against deposits/LIC policy/Govt. securities/Gold & Jewellery where security o Account transferred to Protested category the drawings are within available value of RATE OF PENAL INTEREST 2% above the sanctioned rate where irregularity and default and noncompliance of terms and conditions as given earlier. 2% above the sanctioned rate where adhoc/temporary limit are sanctioned to borrower. Page 107 .
Most large public sector and private sector banks offer educational loans. The spread of self-financing institutions(which has less to no funding from the government) for higher education in fields of engineering. Page 108 . APPRAISAL TECHNIQUES FOR RETAIL LOANS I. EDUCATION LOANS Till some year‘s back higher education and quality education was not affordable to some illustrious students because of the financial constraints. And this led to untimely end of budding talents and their forceful transformation into to the mediocrity. But now the scene has changed drastically. The boom in the banking sector has led to release of large amount of funds for education loans Student loans in India (popularly known as Education loans) have become a popular method of funding higher education in India with the cost of educational degrees going higher. Scholarships were there. but those were so less in numbers that only luckier few could avail them.CREDIT APPRAISAL Total amount of outstanding – for non-submission of stock statement and other financial data/default adhering to borrowing covenants/nonsubmission of information under QMS. There was no any alternative but to jump in the job market prematurely. medical and management which has higher fees than their government aided counterparts have encouraged the trend in India.
AIBMS. are given as follows:- Concept VIDYALAKSHYAPURTI Scheme is the main scheme and its variant PNB Sarvotam Shiksha scheme stands merged with the main scheme with effect from 20. Post graduation. ICMR etc.2008 Courses eligible Studies in India School level including. The education loan provided by Punjab National bank is known as Vidyalakshyapurti scheme. other courses leading to diploma /degree approved by UGC. and Advance diploma in Banking Tech. For study in India. Computer courses and Evening courses.for eight years from the year (s)he starts to repay the loan or for the duration the loan is in effect. +2.CREDIT APPRAISAL Under section 80(e) of the Indian Income tax act.either for self or for his/her spouse or children . PG and Courses offered by CIMA London . included. a person can exempt the amount paid against the interest of the education loan . processing.12. Education loan is becoming popular day by day because of the rising fee structure of higher education. It includes professional & commercial & pilot training courses in India and abroad. Institutes approved by DGCA are Studies Abroad Graduation. Govt. The details regarding its eligibility. Page 109 . Graduation. AICTE. whichever is lesser. documentation etc. Professional courses. It came into existence in 1995 started first by SBI bank and after that many banks started offering study loan.
) and may consider loan based on admission advice. Branches need not go into technicalities of admission process (selection through management quota etc. However amount of loan be decided by judging Income of the parents. 60/08 dt. ( RBD Cir. 10. No Income criteria are prescribed for the parents.75% II Page 110 .00 lac for abroad.00 lac in India and Rs. Risk Weight as per BASEL-I 100% Capital Requirement Risk Weight as per BASEL. 10. 20. Top up Loans Top up loans may be sanctioned to students for pursuing further studies within overall eligibility limits with appropriate reschedulement of existing loans and required permission by the CH Age of student Income Criteria There is no restriction with regard to age of student for being eligible for the loan. 20.12. CH can exercise higher powers. the family as a unit is to be taken into account for considering the loan and security taken in relation to total quantum of loan subject to margin and repaying capacity of the parents. No.2008) More than one loan in a family In case of more than one loan in a family. Amount of loan Priority Sector Rs. Rs.00 lac for abroad.CREDIT APPRAISAL CPA in USA Eligibility Indian National Secured Admission Secured pass marks in qualifying exam.00 lac in India and 20.
7. IIM.CREDIT APPRAISAL Margin NIL 5% Up to Rs.50 lac (should be interpreted as loan amount of Rs. 4.50% (Maximum 5000/-) for studies abroad which is eligible for refund on availment of loan.00 lac in India 15% Above Rs.00 lac upto Rs.----NIL . Security for staff members Lien on Terminal dues Extension of EM of IP Fresh Mortgage if there is no HL Co-obligation of employee Penal Interest Upfront fee Up to 25000/. 4. co-obligator can be spouse or parents or parents-in-law. XLRI etc. EM of IP or other Coll.5 lac (Exemption from taking guarantee for loan up to 7.plus service tax 5 to 7 years with moratorium period equal to Course period Page 111 . 4. Co-obligation of students‘ parents as well as assignment of future income of student in loan above Rs.@ 2% on OVERDUE AMOUNT NIL 0.plus service tax Rs.00 lac Rs. Grand parents can also become co-obligants. Security for loans above 7.50 lakh for students of IIT.00 lac Above Rs. Above 25000/.00 lac 3rd party guarantee for loans above 4.00 lac Above 4. 7.00 lac abroad (Scholarship/assistance may be included in the margin) Security NIL Up to Rs.5 lac. 270/.51 lac and above in terms Hypothecation of assets if created out of loan amount. Documentati on Charges Repayment Upto 4. 450/. 4. 7. For married persons.
Rebate of 0. Calculation of interest Simple interest is to be charged during moratorium period and kept in a separate account. BM is empowered to permit extension in moratorium period up to 2 years as against present provision of max.CREDIT APPRAISAL + 1 year or 6 months after getting job whichever is earlier. The concession will be given at start of repayment and EMI will be fixed accordingly. Interest concession 1% interest concession is allowed if it is serviced during holiday period. Page 112 . 1 year in deserving cases under reporting to circle head. The accrued interest during repayment holiday will be added to Principal for fixing of EMI.5% is allowed to students of IITs. IIMs etc.
Relaxations for students of IIT. Uniform. 5. MDI. EM of IP if loan amount is above Rs. Travel expenses & Computers. Instruments. (Advances for Computers are allowed in Computer/Management courses only. Insurance policy can be obtained to meet the Kotak Mahindra exigencies in case of death of student borrower between age group of 18-33 years. 4.CREDIT APPRAISAL Constitutes of loan Tuition fees. Building fund. 12/10 Dt. 16/02/2010) Documents Documents will be executed both by student and the parent/guardian. Insurance by 26. The coverage is between 20000-15 lac. Equipment.08.IIM. Exemption from making parent/guardian as co-borrower. 2. No. Page 113 It has been decided to permit the following relaxations to the students securing admission in IITs/IIMs/MDI Gurgaon/XLRI Jamshedpur and ISB Hyderabad: . Hostel charges. Refundable deposit. 4. Agreement on PNB 1117 if student is major.(RBD Cir. Letter of admission and proof of last qualifying exam. Single premium will be paid. Agreement on PNB 1116 if student is minor. Exam fees. In terms of guidelines contained in RBD-A cir no. 16/08 dt. Books.) Fees re. Circle Head can allow beyond a period of 6 imbursement months also on merits. The scheme is valid for one year.5 lac Post sanction Follow up with the college/university for getting progress Follow up Life report at regular intervals. 6.3.Within 6 months. 7. 1. Loan application 3. It will vary according to age and total insurance Tenor. Letter of guarantee if loan is above Rs. Library/Lab charges. XLRI.00 lac.
2nd time loan can be considered by the CH within limits. parents-in-law can be coobligants. Education loan to the institutions previously under Sarvotam Shiksha Scheme can be sanctioned by the branch (other than place of residence of parents) convenient to the borrower depending upon genuineness. Parents. spouse. Disposal of loan applications It has been decided to curtail the period of disposal of education loan applications to maximum 1 week except cases of CH and above level where the outer limit of disposal will be 2 weeks from the date of receipt of complete application. CH has full powers to relax eligibility. ―No due Certificate‖ is not to be insisted upon. On-line applications are being accepted for grant of education loan. Application will be rejected by next higher authority. margin and security norms. Capability Certificated may be issued for studies abroad. Brief CR of the guarantor to be prepared.50 l CR of the borrower is not required. Page 114 . Passport and Visa is required for study abroad. accessibility and aspect of recovery. Loan applications are to be disposed of within 15 days under branch/hub sanction and 21 days under CH and above. grandparents.CREDIT APPRAISAL ISB Other provisions Exemption from taking guarantee for loans up to 7.
Vehicle loan provided by Punjab National Bank are under two categories know as PNB SARTHI and CAR Loan & details about its processing. VEHICLE LOANS Today. or hire purchase agreement. 25% for students where parents are co-borrowers. Purpose Extent Margin & Purchase of Scooter/Motor Cycle/Moped Maximum Rupees. Therefore. This means the car or motorbike is hypothecated. Obtaining a vehicle loan is one of the more straightforward ways of financing a two or four wheeler. Page 115 . vehicles can be financed using a number of options such as loans. margin etc are discussed below:PNB SARATHI Eligibility Individuals with Income proof Students above 18 years with parents as co-borrowers Business concerns Individuals without income proof but residing at the given address for the last at least 3 years. eligibility. 5% where salary is disbursed through branch or checkoff facility is available. lease. 30% for business or where there is no income proof. In this manner. the bank or the lending institution is actually using it as a security against the loan that the consumer has obtained. Individuals with good repayment track without default. though the consumer owns the vehicle. the vehicle purchased is actually possessed by the bank or lending institution. 10% for others. 100000/-.CREDIT APPRAISAL II.
pm. Guarantee of some family member or 3 rd. Is the minimum criteria. Requirement Statement of account for the last 3 years is required. Income Tax Proof Salary certificate Income of spouse can be considered if he/she is made guarantor. party In cases where income of spouse is to be added. In case the account is irregular. Upfront fee Documentati on Charges Other Driving License is required. Inspection is must. Security Inspection PNB 551 is required for the Ist time. 270/.+ Service Tax For students – Nil Rs. In cases where there is no Income proof. In case account is regular. Guarantee of spouse can be taken. Qtrly. Income of parents be considered in case of students. Switch over On flat fee of 2% to scheme Guarantee Generally it is not required. PNB 551 is not required thereafter.CREDIT APPRAISAL Income criteria 10000/. s Rs 200/. Income of spouse can be added. Insurance Comprehensive Insurance with bank clause and policy to remain with the bank.plus service tax new CAR LOAN Page 116 .
Van & Jeep.CREDIT APPRAISAL Conveyance Loan (Public) for Car Eligibility Individual & Business concerns. CH may relax the criteria within powers keeping in view the repayment capacity. Earning and repaying capacity will be considered. Govt./PSU employees 15% EMIs) (Repayment in 84 Page 117 . 25 lac whichever is lower for one or more vehicles. Professionals & Agriculturists with 6M transaction records. New or Old (not older than 3 years – Multi Utility CH powers) Vehicles/Sports Utility Vecles Individuals 25 times of net monthly salary or Rs. One or more vehicle can and non-corporate be purchased.Cost of Insurance and one-time road tax can be considered as margin. Agriculturists Margin General --do-20% . Income of spouse can be considered provided he/she stands as additional guarantor Business Corporate No Ceiling. Purpose & Extent Car.
2.00 lac + ST Security Hypothecation of the vehicle RC in joint name of borrower and bank Bill of the vehicle will also be in the joint name. Rate of interest is linked with tenure of loan.5% extra interest is charged if repayment period is 3 years and above. 450/.(Tie up arrangement Rs. 270/.00 lac + ST Rs.exclusive of service tax.) up to Rs.) Above Rs. Carry home pay should not be more than 50% of gross salary Advance cheques equal to no.1270/. 2.1700/. Upfront fee 1% of loan subject to maximum 6000/. Rate of Interest The rate is on fixed option with reset clause of 1 year.(Tie up arrangement Rs.CREDIT APPRAISAL If net income is more than 6 Margin can be reduced to lac 15% by Sanctioning Authority. Repayment Maximum 7 years without any Moratorium period Old Vehicles – 5 years Agriculturists – 14 H/years as per crop pattern CH and above empowered to relax repayment by 12M Maximum age for EMI 65 years relaxable up to 70 years. of installments be obtained. Presently 0. Guarantee Spouse if employed or Suitable 3rd party guarantee or Page 118 . Old Vehicles 30% CH may reduce up to 10% in deserving cases. Documentati on charges Rs.
5. Risk weightage for housing loans is only 50 % . III. Housing loans are fully secured as they are backed by mortgages of residential properties. IV.8. time. 15/09/09. Other Provisions 15% depreciation on St. No. Qtrly. Inspection is must. Statement of account for the last 6 M. CH and above can waive the guarantee/collateral security. Car loan finance to business concerns for personal use of executives shall be outside the purview of corporate banking and may be sanctioned by officials under vested powers even in case where existing facilities have been sanctioned by higher authorities in terms of RBD cir. Insurance Comprehensive Insurance with bank clause and policy to remain with the bank. In case account is regular. PNB 551 is not required thereafter.3 HOUSING LOANS Housing loans have emerged as an attractive avenue for credit deployment for banks in the recent past. Industry level statistics reveal that NPAs in this segment is relatively low. Security Inspection PNB 551 is required for the 1st. Small housing loans up to Rs 10 lakhs can be classified as priority sector credit and hence help in achieving/ maintaining the mandated priority sector lending targets. enabling expansion of the credit portfolio with lesser Page 119 . 51 dt. is required. line method is to be applied in case of Old Car Driving License is not at all required.CREDIT APPRAISAL Collateral Security in shape of IP/liquid security equal to 100% of loan amount. In case the account is irregular.
are as foll 1. etc. Eligibility Purpose & Extent HOUSING FINANCE (PUBLIC) Individual & Joint Owners Purchase of Plot Rs. documentation. with an aim to make purchase and construction of homes a comfortable task. PNB-(Punjab National Bank) Home Loan offers the most consumer friendly home loans and housing finance schemes at attractive rates. pre-sanction follow ups. margin.CREDIT APPRAISAL capital requirement. 10 Lacs for buying land and up to Rs. The details of housing loan product of Punjab National Bank regarding its purpose. cut back. The prevailing lower interest rates. RM & above may consider Loan upto 50 lac. assessment. 2 Lacs for furnishing can be availed from PNB Home Loan.20 lac. risk is distributed over a large number of accounts. However. Further since the housing loan portfolio typically comprises a large pool of small and medium sized loans. PNB Housing Loans. Hence growth of quality assets under Housing Finance is one of the major areas of focus for the bank. provides fixed as well as floating home loans at different rate of interest for different tenures. PNB Housing Finance covers 80% of the cost of your home or renovation / repairing of your home loan up to Rs. which is ideal from Risk Management point of view. eligibility criteria. processing. which have resulted in greater affordability and the tax concessions offered by the government have made this one of the fastest growing financial products. Construction of House Need based Page 120 .
CREDIT APPRAISAL Semi -built House/flat from Small/Medium branch Rs. Pvt Builders 10 lac Large branch 20 lac ELB/VLBs 40 lac CH (AGM) 100 lac CH (DGM) 100 lac GM Rs.150 lac Repair & Renovation Cost of furnishing Rs. 20 lac Max. 10% of the loan upto maximum of Rs. 2.00 lac Pari pasu Charge CH powers up to 20 lac to Govt. Employees Freehold & Lease hold The loan can be granted both for freehold and for leasehold property. In case of Leasehold, loan can be granted on the basis of P/A from original allottee where Rs Rs. Rs. Rs.
DDA/PUDA/HUDA permit conversion of leasehold into freehold property. Otherwise advance is not permitted against plots purchased on Power of Attorney basis. Capital Requirement Loan limit up to 30 lac Loan limit above 30 lac Risk Weight is 50% Risk Weight is 75%
LTV Ratio more than Risk Weight is 100%
CREDIT APPRAISAL 75% Margin Land/Plot 40%
Construction/repair/addition 25% Rate of Interest Rate of Interest as per LA Circulars issued from time to time. 0.50 % extra will be charged on H/L for 3rd House. The interest can be fixed or floating Option can be changed from fixed to floating and vice versa with flat charges of 2% fee on Balance outstanding Fixed Interest rate be reviewed/reset after a block of 5 years in respect of loans disbursed on or after 1.8.2006.
Concessional Rate of Interest for Defense Employees
Bank has decided to extend concessions to Defense personnel who are raising Housing Loans under bank‘s regular Housing Loan scheme for public as under: 25 bps relaxation in interest rates 50 bps relaxation in processing fee These relaxations are to be made applicable in all new cases where defense personnel avail housing loan either in single name or along with spouse. (RBD Cir. No. 11/2010 dt. 16.2.2010)
Maximum 25 years including Moratorium period of 18 months Installment can be fixed up to maximum age of 65 years. Hub Incharge of Scale-IV and above besides
CREDIT APPRAISAL Circle Head can relax the age up to 70 years, Repayment of loan for
repair/renovation/addition/alteration restricted to 10 years including moratorium period of 6M. All deductions should not exceed 50% of Gross monthly income. However where gross monthly salary is above 50000/-, the deduction can be up to 60% and if gross monthly salary is above 100000/-, the deduction can be up to 70% with the permission of CH. The income of earning spouse and children can be taken into account. The Income of spouse and earning children can be taken into account provided they are made coborrowers. Father/mother can also be made co-borrowers in cases where property is in the single name of his/her son and also clubbing of their income is permitted for determining eligibility criteria. Minimum 24 advance cheques should be obtained. As and when, 6 cheques remain, fresh lot be obtained. Out of 24, 23 cheques should be of installments and 1 cheque should be of the amount equal to the balance amount. Graduated EMI PNB offers benefit of graduated EMI. This means that the customer has the option of choosing EMI that can increase or decrease during repayment period rather than being given a fixed EMI over repayment tenor.
In case of NPAs accounts. EM of other IP or pledge of NSC etc. no guarantee is to be asked for. In such cases. Guarantee In general. Page 124 . then 3rd party guarantee can be obtained to raise score of the applicant.90 % of loan amount + service tax & education cess (10. security is to be verified on Half yearly basis. 20000) +service tax for loans up to 300 crore. Processing fees @ 0.50% of loan amount (max. But while preparing RBL score sheet.1350 + service tax charges Security Equitable/Registered Mortgage of Immovable Property Tripartite agreement be executed amongst Housing Board/Dev Authority/Coop Society/Builder.30%) on loans above 300 crore. if score is less than 50%. Documentation Rs. Verification of security is required once in 2 years. 3rd party guarantee is also to be obtained. the borrower and the bank where mortgage cannot be created immediately. up to 125% of loan amount if property is being purchased from 1 st P/A holder and where there is delay in execution of Tripartite agreement or where the mortgage of property is not possible being an ancestral property (without title deeds) or Lal Dora Land.CREDIT APPRAISAL Upfront fee 0.
1.2. if the property is situated at other place.00 lac Loan can be sanctioned by the branch/hub near to the present place of work/posting/residence of the borrower. For take over.00 lac (Urban) Rs. permission of higher authority is not required Important conditions Loan cannot be granted For construction in Un-authorized colonies If property is to be used for commercial purpose Without approved Map ( In Compliance of Delhi High Court Orders) Pre-payment charges of 2% be recovered on account being taken over by another bank. However. services of branch/hub located at that center may be availed for verification of Security and NEC/Valuation etc. Loan can be granted even if property is in the name of wife/parents provided that the owner is made coborrower. 20. Loan can be granted for purchase of house for rental purpose.00 lac (Rural & Semi/Urban) Rs. In case. Loan can be granted for 2nd house in the same city. the loan is Page 125 .CREDIT APPRAISAL Insurance Priority Sector inclusion Others Other features In case of building at Re-construction cost. Repair & Renovation Rs.
In case.CREDIT APPRAISAL pre-paid out of own sources or the loan is taken over by another bank with in 30 days from date of circular by which either the interest is raised or any important term or condition is changed.07. receipt from insurance company can be utilized towards adjustment of loan amount as per amortization table. 1. penal interest @2% over and above the applicable rate be charged.10000 to Rs. Powers of concessions in rate of interest/other charges stand withdrawn vide RBD cir no. The sum assured is between Rs.00 lac. 13. Expression of Interest It is a letter issued by the bank/branch wherein the lender expresses intention to make advance to the intended borrower on the basis of eligibility criteria subject to the fulfillment of terms and conditions. The coverage of the scheme is 1-20 years.5% (approx) and that amount can also be financed. In case of death of the borrower. there will be no prepayment charges. the construction of house is not completed within 3 years or in case the plot is sold. 52/07 dt. There is one-time premium of 2. 80. Flat pre-payment charges of 2% be recovered from borrowers who pre-pay without construction on the plot before 5 years. Prior permission of TATA-AIG is required if amount is over Rs.11. Grih Raksha It is Mortgage Reducing Term Assurance Policy issued in Kavach Tie up arrangement with TATA-AIG. Iffco Tokyo The coverage for accidental death and permanent total Page 126 .00 crore.
LB. Upfront fees is NIL and documentation charges are Rs. ―Fire Policy – including earthquake‖ is offered in tie up arrangement with Iffco Tokyo General Insurance Co.00 lac. 500/-. To all existing as well as new borrowers. MB.75% Repayment through Refund order/Housing Loan/Bullet Payment. Additional limit and present o/s should not exceed 75% of current market price of the house so as to maintain margin of 25%.4. Take home salary should not be less than 40% of gross salary.CREDIT APPRAISAL general disability (due to accident) along with mandatory insurance insurance co. Ltd.00 lac.Rs.and Maximum Rs. Other features of the scheme are as under: Minimum 50000/. 5. Page 127 . Rs 2. Guarantee clause deleted OD Facility to existing H/L borrowers OD facility can be allowed to existing Housing Loan borrowers there is no IR irregularity. Earnest Money Deposit Scheme To meet the requirement of earnest money to apply for plot/flat/house from State Housing Boards and Urban Development authorities.00 lac in the shape of Demand Loan ROI is BPLR – 1. Loaning powers are SB-Nil. Extent of loan is 90% of EMD or max. These authorities undertake to refund or issue allotment letter to the bank subject to eligibility of the bank for proposed loan and future requirement of Housing Loan.
5. OD can be continued/ renewed provided the sanctioning authority is satisfied about repaying capacity of the borrower and Value of security. it has been decided to do away with the condition of minimum 2 year of repayment track record of the borrower for considering OD facility up to 5 lac. 64 dt. construction on which is yet to be completed in terms of RBD cir. However this is subject to compliance of all other terms and conditions such as KYC norms. takeover guidelines. security norms. 43 dt. The features of the scheme are as under: Page 128 .21/08/09 On review. who have availed loan for plot . maintenance of margin etc.12. OD facility for personal use should not be sanctioned to the borrowers. 19. Under this scheme.CREDIT APPRAISAL ELB & VLB Rs. ROI is equal to BPLR After HL is repaid.2009) PNB Flexible This is an attractive variant of Housing Loan Scheme Housing Loan Scheme offered by the PNB for its customers.00 lac. CIBIL database. (RBD Cir. No. This facility is outside the purview of ―Hub and Spoke― model in the accounts of existing HL borrowers. OD facility is made available to the HL borrower. no. He can deposit his savings and withdraw the same as per his requirement.
Purpose All purposes as per original scheme except Purchase of Land / Plot. OD facility will be reduced on monthly basis so that whole limit and T/L are adjusted by the end of 65 years. HL can be sanctioned by the branch/hub situated near the workplace/posting/residence. enhancement in OD will be allowed equal to reduction in Term Loan and thereafter on yearly basis. Maximum OD limit should not exceed 50% of Total limit. Extent Term Loan Overdraft 80% 20% After lapse of 3 years. 20% increase in original limit is allowed in the shape of TL/OD for personal needs. Security verification can be done by nearby branch. Market Value of Property should be sufficient to cover the margin of 25% After attaining age of 55 years.CREDIT APPRAISAL Eligibility Age of the applicant must be less than 50. Existing HL borrowers can also apply provided their loan account is regular and no IR irregularity persists. After lapse of 5 years. Page 129 .
R/I is equal to BPLR IV. 25000/-) Limit calculation Equivalent to 18 months net pension or Rs. the loan equivalent to 20 M net Pension can be granted.4 Personal Loan For Pensioner & Public Two types of personal loans are being offered by PNB. Family Pensioners. DPDO Pensioners. 150000 (for borrowers up to 75 years‘ age) and 12 months net pension or Rs 70000 (for borrowers above 75 years‘ age) whichever is lower.8. Details regarding the same are mentioned below. Personal loan for pensioner is special category of retail lending scheme being offered by Punjab National Bank to pensioner. 25000/-) Above 75 years of age: 0. For defense retirees.50 lac (Minimum Rs. Take home Pension should not be less than 50% of monthly pension Nature Margin DL or TL or OD on monthly reducing DP NIL Page 130 .70 lac (Minimum Rs. 5. The main intension of this loan is to meet each and every personal needs including medical expense of senior citizen. Ex-employees Purpose & Extent Personal needs Up to 75 years of age: 1. Eligibility Pensioners drawing pension from the branch.CREDIT APPRAISAL Rate of Interest as given above in the table in Housing Loan scheme (general) For Overdraft portion.
The loan can be availed more than once only after adjustment of earlier loan PERSONAL LOANS FOR PUBLIC Eligibility Only PNB Account holders are eligible. 24 EMIs in case age is more than 75 years which can be extended up to 48 months by the sanctioning authority. Permanent Defence./Schools/Institutions who fulfill any of the following 2 conditions: Route of salary through branch Page 131 .plus service tax charges Repayment 60 EMIs ./PSUs/Reputed Co. Confirmed permanent employees of Central/state Govt. Minimum 6 months‘ salary should be routed in the account or 6 months satisfactory transaction record for non salary saving accounts. BSF & ITBP Personnel (Not to be granted to those who are due to retirement within next 24 M. 270/.CREDIT APPRAISAL Guarantee Personal guarantee of spouse eligible for family pension or any other family member or 3rd party guarantee. Miscellaneous PPO be kept with the loan documents Affidavit from the pensioner that present disbursing branch will not be changed without bank‘s consent. CRPF. Upfront fee NIL Documentation Rs.
00 lac and above. 4. MBBS. Purpose & Extent Personal needs. However disbursement can be made only by branches having recovery percentage of not less than 90% under Personal Loan segment as at end of previous half year.p. 4.p. Check off Facility It means that the employer undertakes to deduct monthly installment from the salary and remit the same towards adjustment of the loan till its liquidation and also confirms attachment of terminal dues of the borrower/employee.p. Nature Sanction and Disbursement TL or OD All branches can generate leads for processing at Retail Hubs/CCPCs.m. Rs. 12500/. 5.00 lac for those salaried persons who have completed 3 years in the present organization and drawing net monthly salary not less than Rs. Minimum Rs. Rs. 10000/. 15000/.p.CREDIT APPRAISAL Check-off facility Professionally qualified practicing doctors viz.m. 50000 & Maximum Rs.m. 7500/.m. 30000/-. . Doctors should be tax payers for 3 years and ITRs be kept on record. Minimum net monthly income Metro Urban SU & Rural areas Defence personnel and Teachers Margin NIL Page 132 Rs.00 lac or 20 times net salary whichever is lower depending upon the repaying capacity & Rs. Rs. BDS and above having customer relationship with PNB at least for 6 months having annual income of Rs.
2. Docm. be obtained. Guarantee RBL Sheet Suitable 3rd party guarantee.CREDIT APPRAISAL Repayment TL – 60 EMIs OD. Page 133 . Other Requirements In case of Army personnel. 450/. Copy of IT return for previous 3 years be obtained. Defence Personnel – 36 M. Form 16 be taken if loan is granted to employee. Upfront fee % of loan amount + service tax NIL for defense personnel.Reducing DP spread over 60 M. Affidavit that no other loan from other bank is availed be obtained. Amount of EMI should not be more than 50% of net monthly income.00 lac. RM/CM may waive PNB Score system will be applicable and the applicant will have to score at least 50% marks to avail loan.up to Rs. 2. Rs. 60 advance cheques (maximum) signed by the borrower along with letter of deposit be obtained.Above Rs. 270/.00 lac + ST NIL for defense personnel. A Registered letter be sent to the employer informing about details of loan raised by the employee. Obtention of advance cheques is applicable where check off facility is not available. Charges Rs. a copy of authority letter be sent to Controller of Defense Account (CDAO) Pune so that salary is remitted till liquidation of loan Statement of account for at least 6 m.
The other spouse should be at least 58 years old.5 PNB Baghban scheme for senior citizen PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based product for senior citizen titled "PNB Baghban". there must be will in favors of spouse and it should be registered. If there is no spouse.CREDIT APPRAISAL RBD Cir. V. 26. The main objective of this scheme is to address the financial needs of senior citizens owning self occupied property (house). 5. loan Page 134 . In case of joint property.8. If property in single name. 27/09 dt. The product addresses one of the very important requirements of the society in the fast changing culture of Indian society. The salient features of the product are given hereunder: Eligibility Senior citizens owning Self-occupied property. No. The genuineness of salary certificates be independently got verified from HR Deptt. for leading a decent life.2009 It is clarified that the branches eligible for disbursement/maintaining the accounts shall obtain blanket permission from CH for disbursement in the next 25 accounts submitting performance of the branch under the portfolio.5. Of the employer of applicant. one of the spouses must be of 60 years and above.Hubs should ensure drawing of CIRs from CIBIL Data base for considering request of Personal Loans.
CREDIT APPRAISAL will be made in favor of single. Purpose & Extent To lead a decent life Maximum qualifying amount can be Rs. 1.00 crore which will depend upon realizable value of property after maintaining margin of 20%. The monthly payment will be made to the borrower on the basis of reverse mortgage annuity table. Margin 20% of realizable value of the property to arrive at the qualifying amount Income criteria Rate Interest Disbursement In the shape of monthly instalments (to be calculated on of loan reverse annuity basis) during loan tenor of 15-20 years for age group of individuals between 60-70 years and 10-15 years for age group of over 70 years or till death of last surviving spouse, whichever is earlier. For example, if Qualifying amount is Rs. 1.00 lac, On 10 year tenor of loan, monthly installment will be Rs. 475/-, On 15 year tenor, monthly instalment will be Rs. 230/- and on 20 year tenor, monthly instalment will be Rs. 125/The series of monthly instalments would continue after death of first spouse during life time of surviving spouse. Tenor of loan Age group of 60-70 years 15-20 years
of 10.5% with reset clause of 5 years.
CREDIT APPRAISAL Age group above 70 years Insurance 10 –15 years
Against fire, Earthquake and other calamities at the cost of the borrower
EM of IP in favor of the bank. Valuation of property to be got done from approved valuer. Revaluation be also got done once in a span of 5 years. Amount equal to half month‘s loan subject to maximum of Rs. 15000/- + Service Tax @10.30%
Docm. Charges Repayment
The loan becomes due for payment after 6 months from death of both the spouses. In case the loan is not repaid by legal heirs within 6 months from the death, the bank is within its right to sell the property for adjustment of the loan in case the consent of the legal heirs is not received within 6 months from the death of last survivor. Residual life of property should be at least 20 years. Purpose of loan should not be speculation or trading. It should be ensured that the will executed by the borrower is the last will. Life certificate is to be obtained once in a year in November.
Age of Property
Residual life of property should be at least 20 years. A certificate from architect at the time of first valuation be obtained. Revaluation of property will be done once in 5 years.
Now it has been decided to accept ancestral property
CREDIT APPRAISAL property as security provided bank is satisfied that there are no other legal heirs or original title deed is not available. For this, documentary evidence is required. Circle Head will deal such proposals. TERM LOANS A lump sum Term loan can be sanctioned up to Rs. 15.00 lac. The cases can be considered on selective basis by HO
UNDER PNB only for medical purpose to senior citizens for treatment of BAGHBAN SCHEME Amendments in PNB Baghban Scheme Following two amendments have been carried out in IT Act, 1961. 1. Reverse Mortgage does not tantamount self, spouse and dependents.
to transfer; therefore there is no Capital Gain Tax. Income tax is levied only at the time of alienation of Mortgaged property by mortgagee for recovery of loan. 2. Stream of payment received by Sr. Citizen would not be treated as Income. Therefore, bank has to obtain the following at the time of application of loan: Cost and year of acquisition of Capital asset. Cost and year of improvement. PAN No. of all legal heirs. Changes, if any made in the Registered Will.
CREDIT APPRAISAL Page 138 .
Tal-Kadi.RS No. Kadi Thol Road. 2008.07 Banking arrangement:.Manufacturing Activity:.CREDIT APPRAISAL CASE STUDY-1 Details of case: Company:.Partnership Firm (M/S Umiya Polymers) * Shri Amrutbhai Laljibhai Desai * Shri Gunvantbhai Ambaramdas Patel * Shri Natvarlal Mohanlal Patel * Shri Dharamsinhbhai Lallubhai Desai * Shri Kanjibhai Maljibhai Desai Industry:.Sole Banking Regd.SSI Date of Incorporation:. 840.19.Maufacturing of HDPP woven sacks Segment:.Akshat Polymers Firm:. The unit is expected to start commercial production from first week of September. The capacity utilization for the year 2008-09 has been projected at 70% of installed capacity Page 139 . Office:. Dist-Mehsana The unit will have installed capacity of 2520 MT.11. & Admin.
40%.77 crores. etc. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: Indian Farmers Fertilizers Company Limited GUJCOMASOL Birla cement Sanghi Cement Ambuja cement Various grain & Food Export units of Gujarat. The projections are considered acceptable in view of the following factors: i) The unit plans to initially market its product in Gujarat. Rajasthan and sale to Central Govt.CREDIT APPRAISAL in terms of the utilization of the machines.19. Maharastra. storage of the AGL commodities. All these segments are reported to have good demand for the HDPP/PE woven sacks in the Indian market. Accordingly the unit is projected to achieve a sale of Rs. iii) As per ICRA report. Further.9. Fertiliser. ii) HDPP woven sacks are widely used as packaging material in Cement. grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12. the unit is projected to achieve capacity utilization of 80% during the year 2009-10 (the first full year of operations) and accordingly the sale for the year is projected at Rs. who purchases the HDPP woven sacks for grains through open tenders.26 crores for the year 2008-09 in the first six months of operations. iv) The promoters have sufficient experience in the line of activity. The unit has started negotiating for booking of the orders for the proposed plant and results are promising as advised. Page 140 .
vi) The orders worth Rs.09 2217 21.2.CREDIT APPRAISAL v) The firm has also started marketing activity for their products by making personnel contacts & writing introductory letters to potential customers & as the promoters are in the same line of business activity for the last 15 years they are having very good market contacts for the sales of the Finished Goods. Proposal: Sanction for.6 (71 marks) based on projected financials as on 31. in Crores) 2012 2520 2013 2520 2014 2520 2142 21. 2008 and before commissioning of the plant as advised. Pricing for WC facilities @1. 2009 2520 2010 2520 2011 2520 (Rs.) Net Sales Qty.34 Page 141 .50% above SBAR minimum @14.75and for TL 1.2.25% Performance & Financial Indicators: Year Installed (MT/pa.77 2091 20.03.26 2016 19.25 crores Fresh Term Loan of Rs.2010.50 crores is expected to be finalized by end of August.2. i) ii) FBWC limits of Rs. (approx) (MT) Net Sales (Value) 1029 9.82 2268 22.58 cap Qty.00 crores Approval for: i) ii) CRA rating of SB.00% above SBAR as applicable for SB-5 minimum @13.
In crores ) Page 142 .18 0.81 1.09 1.38 Adjusted TNW 1.95 0.00 1.96 5.19 4.24 1.23 1.15 1.95 0.53 0.27 1.53 0.51 2.64 Current ratio 1.66 1.30 0.34 1.62 4.80 3.00 1.40 2.00 1.67 4.CREDIT APPRAISAL (Export) Operating profit Profit before tax 0.30 1.10 1.01 1.71 2.95 0.66 TOL/Adjusted TNW 2.74 3.91 Profit after tax 0.01 2.57 0.97 2.95 0.12 1.88 0.11 2.22 0.05 Paid up capital 0.78 0.23 2.73 5.50 3.04 1.18 1.92 1.28 Balance Sheet: (Rs.52 1.96 1.99 0.33 1.00 1.88 Cash accruals 0.31 1.44 0.20 2.49 5.80 1.95 0.62 1.87 0.17 0.92 5.43 0.02 2.19 1.64 5.29 0.00 0.95 Tangible net worth 1.00 1.81 NWC 1.88 5.57 2.79 0.82 0.73 TOL/TNW 4.32 PBT/Net sales (%) 4.32 PBDIT 1.78 5.
99 6.40 0.98 1.67 0.99 0.67 0.00 0.03 5.29 2.03 6.03.10 0.37 Page 143 31.36 .14 2.85 0.03.73 1.23 0. Expenditure (To the extent not written off or adjusted ) Non-Current Assets/ Deposits Total 0.25 1.07 2.30 2.2009 0.25 2.15 0.13 2.2010 0.37 2.95 0.31 0.37 2.69 1.60 0.50 31.12 0.50 5.CREDIT APPRAISAL Sources of funds Share Capital Reserves and Surplus Secured Loans : short term CC : long term TL Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments Inventories Sundry debtors Cash & bank balances Loans & advances to suppliers of Raw material / spares Advance tax ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc.66 4.67 3.15 0.95 1.
27 0.Change in Int.2011 2.23 0.CREDIT APPRAISAL Movement in TNW: - Movement in TNW Projected 31. of prior year exp.14 0.95 -0.79 Opening TNW + PAT + Inc.78 31.01 0.2010 0.33 (Rs.Adj.57 Deviations in Loan Policy: Page 144 .00 0.Dividend payment Closing in TNW 0.01 0.23 2.03.01 1.2009 31.01 2.03.03 0.03. in crores) Projection 31. in Equity / Premium +/.2009 WC Int.29 0.29 0. LC BG Bill Others loan processing Total 0.80 Bank Income Analysis From Projection 31.2010 1.03. Assets +/. TL Int.16 0.03. .
75 Debt / equity Debt/Quasi equity Any others 2:1 1.12. TNW Average gross DSCR (TL) 1.03.03:1 0.54 2.CREDIT APPRAISAL Parameters Indicative level as per loan policy Liquidity TOL/TNW TOL/Adj. report Not applicable new unit No Page 145 .01:1 1.64:1 - Defaulters List:Whether names of promoters.03.50 1. company.64 2.15:1 1.34 4.09.2007 Wilful defaulters‘ list No dated No 31. directors. group concerns figure in : RBI defaulters‘ list dated 30.2007 ECGC caution list Warning signals / Major irregularities in Credit audit: inspection report : Other audit reports : Adverse observations in Balance Not applicable new unit sheet Adverse observations in Auditors Nil.00 Min/Max Company's Company's level level as on as on 31.52 2.80 2.54 1.2010 31.33 3.2009 @ 1.11 2.
2007 at Kadi. Sri Amrutbhai Laljibhai Desai 43 Sri Desai is SSC and have 15 years of experience as Production Manager in reputed Gopala Polyplast Ltd.CREDIT APPRAISAL Any NPAs among associate concerns None About unit and the promoters: AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th November. M/s Umiya Polymers are engaged in plastic waste recycling at Kadi.. The partnership was constituted for manufacturing and selling of HDPP woven sacks to be manufactured from HDPP granules.. Sri Prahaladbhai is SSC and have 10 years of experience as Production Manager in Asia Woven Sacks Ltd. He had good contacts in the market Page 146 . Kadi who are engaged in similar activity. The brief background of the partners is as follows : Name M/s Umiya Polymers Age Brief Background 46 Sri Prahaladbhai Hargovandas Patel is the main partner in M/s Umiya Polymers with 30 share. Santej. The firm consists of total six partners.
82 0.88 1.CREDIT APPRAISAL and will look after production department & raw material purchases.56 0. Shri Gunvantbhai Ambaramdas Patel 42 Sri Gunvantbhai also is a partner in M/s Ajay ginning Industires.09 0. and has 10 years of experience in accounting.10 0. The overall quality of the management is considered satisfactory.09 0.05 6.Com. Shri Desai Dharamsingbhai Lallubhai 35 Sri Dharamsinhbhai is a partner in the local unit M/s Ajay Ginning Industries.87 1.15 0. in crores) Year ending 200831st March Net Sales Net Profit 09 9. Shri Natvarlal Mohanlal Patel 48 Shri Natvarlal Patel is a B. He is also partner in M/s Shiv Shakti Steel.22 21.26 0.82 1. Commercial viability: (Rs.77 0.58 0.97 Page 147 Cash Accruals 0.11 22.79 1. He will be looking after general administration and accounts of the firm.78 1.24 0. Kadi and has been inducted in the partnership as a investment partner.34 0.29 2009-10 2010-11 2011-12 2012-13 2013-14 Total 19.27 20.32 0. Kadi Shri Kanjibhai Malibhai Desai 44 Sri Kanjibhai is a farmer by profession and sleeping partner.66 Interest on 0. Kadi.16 .16 21.
00 0.16 0.26 0.16 0.65 0.00 0. in crores) 31-MarBreak even analysis Capacity Utilization Net Sales (A) Variable costs Raw material Consumable spares Power and Fuel Other operating Exp.00 31/03/09 10 70% 9.97 2.CREDIT APPRAISAL TLs Sub (A) Total repayment Interest on TL 0.26 80% 19.36 Page 148 .28 DSCR 2.62 2.10 3.67 2.09 0.13 0.53 0.17 0.00 0.00 0.82 31-Mar14 90% 22.22 0.27 0.40 0.74 0.31 1.00 0.34 0.58 30-Mar12 85% 21.04 20.53 19.88 3.50 0.56 0.97 0.77 31-Mar11 83% 20.86 18.45 3.04 0.40 0.20 0.59 0.34 Variable 8.31 1.09 31-Mar13 88% 21.47 0.73 17.03 18.34 17.11 0.37 7.27 0.16 Sub Total (B) 0.84 0.51 2.00 0.11 0.15 0.18 0. Stock Changes Total 8.16 DSCR (Gross) Net DSCR Average Gross DSCR Average Net 3.73 2.30 5.13 0.00 0.82 1.05 0.40 2.75 2.37 1.56 2.40 0.54 2.00 Total 0.77 0.06 18.04 19.13 0.04 0.39 17.40 0.36 18.35 1.53 Break-even and sensitivity analysis and whether acceptable: (Rs.
Singhal Industries Pvt.42 0.11 9.CREDIT APPRAISAL Cost(B) Fixed Costs Direct Labour Selling.10 9.10 0.35 0.16 TOL / TNW CR Page 149 .90 3.08 6.14 0.11 0. Admin.11 9.29 0.30 1.36 0.90 1. & 0.06 0.37 1.90 0.95 46.) (Amt in Cr) Name of Company FBL NFBL Year Sales PBT / Sales % Ahmedabad Packaging Industries Ltd.16 0.44 1.53 3. 7. Ltd Asia Woven Sacks Pvt.20 2007 23.08 0.98 4.10 10.30 1.37 0.38 45.15 0.04 2.10 0.03 2.33 1.10 10.19 6.11 2.48 0.23 0.44 1.34 0.17 0.29 0.00 2008 22.47 1.43 0.12 0.48 43.55 0.10 2.22 0.52 2.13 0.14 0.40 98.10 0.27 46.14 1.01 2.13 0.16 1.29 46.17 General Expenses Interest Expenses Depreciation Total Fixed Cost ( C) Contribution (D=A-B) Contribution (E=D/A) BE sales (F=C/E) BE sales as % of Net Sales ratio 0.12 9.55 Interfirm Comparison: (To be given only where data from comparable units is available.91 0.27 0.32 1.02 2.40 0.70 -2010 15.
25 -2010 19. Any variation in the cost of raw material is proposed to be passed on to the finished products and will not affect the profitability. As per ICRA report. fertilizer.52 Raw material – The major raw material for this plant is HDPP in the form of granules. grading and research services (2006) Flexible packaging sector is expected to grow at the rate of 12. Sharada Polymers IPCL The raw materials are purchased from the suppliers against the advance payment only and cash discounts are offered resulting in the increase n profitability. Akshat Polymers 4.50 1.CREDIT APPRAISAL Ltd. etc. This raw material is available locally by sales & distribution network of the major suppliers as under: Reliance Industries Limited Nand Agencies Labdhi International Hadlia petrochemicals Ltd. Page 150 .40%.92 2.77 5. Analysis:- The firm is into manufacturing of HDPP woven sacks which are widely used as packaging material in cement.
03. The promoters had already made negotiations of the some of the industries as detailed under for selling the HDPP woven sacks: GUJCOMASOL Birla cement Sanghi cement Ambuja cement Various grain & Food Export Unit of Gujarat The orders worth Rs.54. The affairs of the firm are expected to be managed on professional lines based on their past experience.2. The company‘s borrower rating is SB-6 based on projected financials as on 31.566%.50 crores is expected to be finalized by end of Agust. Gross average DSCR of 2. The promoters are having experience of more than 15 years in the line of the activity. Projected financials are in line with the financials of the some of the unit in similar line of activity and production level. Average security margin of 48%. The conduct of accounts of associate with the existing bankers has been satisfactory. 2008 and before commissioning of the plant as advised.2010 (the first full year of operations). Page 151 . The short and medium term outlook for the industry is stable Availability of collateral security reflected in collateral coverage of 50.CREDIT APPRAISAL The promoters have sufficient experience in the line of activity.
CREDIT APPRAISAL The company has adequate management skills and production/marketing infrastructure in place to achieve the projected trajectory. There is steady demand for the product. Page 152 .
Page 153 . Nr. Mehsana. * Shri Jesangbhai Lavjibhai Chaudhari.09.CREDIT APPRAISAL CASE STUDY.82 Banking with SBI since:.16 years as a current A/C holder Banking arrangement:.Transport Activity Segment:. Firm:. * Shri Pratapbhai Lavjibhai Chaudhari. * Shri Vinodkumar Lavjibhai Chaudhari.Opp. Simandhar Flat.Janak Transport Co. Pashabhai Petrol Pump.Multiple Banking Arrangement Regd. Office:. & Admin.2 Details of case study Company:.C& I Date of Incorporation:.& * Shri Janakkumar Jesangbhai Chaudhari Industry:.03. Highway.Partnership * Shri Harisinghbhai Lavjibhai Chaudhari.
363. Additional/ km charges beyond 3000 km.57 (3). Fixed hire charges/ taxi/ month: Rs. 295 lacs Page 154 . the ONGC outlook of the business is considered positive. 3. is a partnership firm established in 1982 for carrying a transport business. 295 lacs to finance the purchase of Mahindra-Bolero. As the company is in this business since incorporation & the unit has good contracts with ONGC since last 26 years so it has a good repo with ONGC. The total project cost is estimated to be Rs. Rs. Duration of contract = 3 Years Proposed Credit Requirement: Fund Based = Rs. Brief of Contract: (1).CREDIT APPRAISAL Janak Transport Co. As the company has a good repo with ONGC. The firm has approached for term loan of Rs. 29150 (with fixed 3000 Km run/ month & 12 hours duty/ day) (2).44 lacs.
90 40.65 125.10 256.80 1.01 1.42 22.65 713.27 6.72 91.04 12.57 182.27 0.51 151.06 2.69 374.99 247.78 Aud.08 113.64 1.92 234.56 12.47 143.00 113. 31st March Net Sales Operating Profit (after interest) PBT PBT/Sales (%) PAT Cash Accruals PBDIT Paid up Capital TNW Adjusted TNW TOL/TNW TOL/Adjusted TNW Current Ratio 149.22 2.51 151.47 Page 155 .08 427.04 5.80 12.10 256. 2010 Proj.04 21.01 266.04 21.74 224.47 143.66 200.05 54.91 2007 501.47 3.96 129.08 425.47 0.44 21.24 326.36 150.51 52.53 1.80 0.57 340.24 1.25 233.48 181.48 92.90 0.01 2.97 16. 2008 Esti.32 404.22 12.62 10.56 22.48 181.65 898. 2009 Proj.82 898.31 92.57 340.71 0.15 2.65 898. 2013 546.20 39.21 226.65 898.41 22.20 0.08 427.20 203.15 22.62 125. 2012 Proj.56 22.CREDIT APPRAISAL Performance Details a) PERFORMANCE AND FINANCIAL INDICATORS: (Rs.96 15.57 340.15 2.25 212.48 181.53 2.48 3. in lacs) Aud.96 13. 2011 Proj.10 256.04 113.22 1.04 2.04 5.
04 31.83 6.3 134.57 102. TL instalments) NWC 100.49 Page 156 .92 14.66 100.03.66 5.2008 22.18 323.14 349.20 103.2007 21.61 11.25 2.29 438.93 4.34 1.CREDIT APPRAISAL Current Ratio (Excl.40 173.58 10.66 78.80 361.70 48.97 3.56 Secured Loans : short term : long term Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments Inventories (Movable Assets) Sundry debtors Cash & bank balances Loans & advances to subsidiaries and group companies Loans & advances to others 2.87 39.21 166.15 10.49 5.47 b) Synopsis of Balance Sheet : Sources of funds Share Capital Reserves and Surplus 31.87 386.93 39.03.59 92.10 36.53 52.48 110.
04 22. in lacs) 2012 2013 17.74 1.56 22.22 2.57 113.08 92.63 21.00 Page 157 .42 2.10 256.08 427.56 113.51 151.04 Dividend 6.53 109.CREDIT APPRAISAL ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc./Subtract change in intangible assets Adjust prior year expenses Deduct Payment /Withdrawals Closing TNW 21.20 8. Increase in 2008 2009 22.10 256.44 2010 2011 (Rs.00 65.17 113.40 173.57 340.04 1.47 143.00 50.03 134.96 equity / premium Add.48 68.48 181.90 10.55 25.92 136.62 125.21 11.48 181.23 c) Movement in TNW 2007 Opening TNW Add PAT Add.57 340. Expenditure (To the extent not written off or adjusted ) Total 166.00 60.
47 Debt: Total 295. b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up ONGC.44 .00 363.00 lacs under the Transport Plus Scheme.4 4 Page 158 Means Equity : 68.328.44 3 15.34 19.6 2WD Insurance RTO Tax WC Margin Total 363.295.CREDIT APPRAISAL Appraisal Memorandum for term loan: Circle: Ahmedabad Branch: Mehsana Company: Janak Transport Company(JTC) Term Loan : a) Proposal: Term Loan of Rs. arrangement with c) Appraised by: Inhouse examined by the Branch and found to be economically viable d) Cost of Project & Means of finance: Cost MAHINDRA Bolero DI.
Mehsana.89 304. Total cost of vehicle including the insurance and R.00 lacs and firm shall raise capital of Rs.68 48.57 253.89 268.295.76 44.65 223.44 lacs as a margin.16 lacs as per details given below: Basic Price: Rs.33 lacs Insurance : Rs. 6.52 90.57 253.26 lacs The cost mentioned above is as per the quotation submitted by Shrijee Motors.44 lacs. The project is proposed to be financed by way of medium term loan of Rs.68 50.68 55.65 898.66 72. The firm is required to purchase 59 Mahindra Bolero for this purpose.07 253. is Rs.65 898.98 309. 5.72 94.40 85.O. Break-even and sensitivity analysis and whether acceptable: Break even analysis 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13 Net Sales (A) Variable costs Power and Fuel Other operating Exp. 0. 0.89 302.57 lacs RTO : Rs.39 301.07 Page 159 .363.52 87.68 47.65 898.82 898.65 253.CREDIT APPRAISAL e) Remarks on Cost of project & Means of finance (in brief): Each vehicle shall cost Rs. Total Variable Cost(B) Fixed Costs Direct Labour 713.T. 68.
39 219.50 9.53 Page 160 .66 0.35 183.97 21.77 141.27 597.40 Total Fixed Cost ( C) 208.54 3.08 594.99 0.66 239.12 98. & 8.58 596.50 11.76 184.96 13.15 48.62 336.66 445.76 594.17 0.66 332.33 Contribution (D=A-B) Contribution (E=D/A) BE sales (F=C/E) BE sales as % of Net Sales Fixed cost with out ratio 445.50 10.99 0.17 0.89 47.50 General Expenses Interest Expenses 20.42 37.30 166.66 Cash BE sales (J=G/I) CASHBE sales as % of Net Sales 163.58 120.78 69.05 31.76 33.66 175.08 588.17 128.CREDIT APPRAISAL Selling.98 596.08 115.17 597.97 194.50 12.91 158.62 0.93 588.97 0.43 269.10 45.18 0.18 26.69 depriciation G Contribution (H=A-B) Contribution (I=D/A) ratio 101.63 20.08 109.66 280.25 22.66 0. Admin.36 Depreciation 106.66 408.56 22.40 19.39 0.52 18.
47 143.78 69.25 212.23 1.11 2.87 541.65 898.39 4.51 151.37 2.77 141.76 33.51 166.38 4.36 1000.76 2.61 1.25 94.96 13.48 92.12 129.54 43.01 266.10 2.15 48.12 93.CREDIT APPRAISAL Commercial viability: Year March Capacity utilization % Sales Net Profit Depreciation Cash Accruals Interest TOTAL TL / DPG repayments Interest TOTAL Gross DSCR Net DSCR Average Gross DSCR Average Net DSCR 100% 100% 100% 100% 100% ending 31st 2009 2010 2011 2012 2013 Total 713.66 448.33 1.66 200.74 224.82 898.96 93.72 1094.99 104.92 33.27 Deviations in Loan Policy/ Scheme: Parameters Indicative Company's level as on Min/Max level as 31/03/2008 per Scheme Liquidity Min.02 2.96 98.54 3.75 20.20 203.65 22.99 247.22 106.76 132. 1.54 107.54 2.42 Page 161 .25 233.26 20.62 125.13 83.58 22.21 226.65 898.04 464.40 536.87 150.02 3.85 13.17 117.39 1.36 93.65 898.44 1.36 46.25 22.
00 12.20 Max.3.90 lacs for year 200708* Others Nil Nil Analysis:Janak Transport Company is an existing profit making unit The main chunk behind giving loan is that Janak Transport Company is doing contract with ONGC since incorporation The promoters are having considerable experience as transport contractor with ONGC The unit has got confirm order/ tie-up with ONGC A letter of authority from ONGC was received. 10 % lacs for year 2006-07 and Rs.2.00 lacs Actual profit Rs. 3.86% which is above the margin requirement Page 162 . Rs. with rising trend 1. that if Janak Transport Company will not make the payment than ONGC will directly make the payment to the bank The promoters contribution to the project is 18.00 Min.002 18. 2.80* 2.CREDIT APPRAISAL TOL/TNW Average gross DSCR (TL) Promoters (under tie-up) profits in the last two Min.86% contribution Min.
is regularly making the payment of loans of principal amount along with the interest so the loan is given. as the co. The bank also checks commercial viability of the company & found that the DSCR for term loan is 2. Page 163 .10% of net sales for this current year The net sales & PAT of the company is increasing year after year so overall profitability is good. 4. the profit for the year ended 31.CREDIT APPRAISAL The current ratio is 1.80 here. 3 which is 12.20 lacs for year 2006-07 & Rs. 6. surety of repayment is assured. 1.42 that is satisfactory Profits in the last two years:- Min.E.02 which is considered satisfactory Despite that the bank has also done B.21 lacs TOL/TNW should be max. has done multiple banking arrangement it has o/s loans with other banks also but the co.E. 3 lacs with rising trend Actual profit Rs.81 lacs & Rs.03.08 is Rs. Also the contract awarded is backed by guarantee from ONGC regarding direct payment of monthly bills to SBI.03. Hence. analysis & found that the B. 2.07 & 31. The overall projected performance & financial of the unit are considered satisfactory.90 lacs for the 200708 If the partners remuneration & interest is included. sales was 47. Rs.
CREDIT APPRAISAL Page 164 .
Therefore my analyses regarding credit appraisal procedure of Punjab National Bank are as follows: In case of retail lending bank strictly follow it‘s circular and fulfils all requirement of necessary documents required for different types of loan so that bank do not suffer any types of loss. Bank lending process in case of retail loan is very much fast after compiling with all the criteria of bank. Bank is very much particular about CIBIL report of borrowers in case of each type of lending. thereby ensure the security for fund deposited by depositors. In case of project financing bank follow lengthy norms to check the feasibility of the project such as:I. II. valuation of property by government Page 165 .CREDIT APPRAISAL Conclusion Credit appraisal is a process of appraising the credit worthiness of loan applicants. Thus it is extremely important for lender bank to assess the risk associated with credit. Secondly detail study about the technical aspect is done to find the technical soundness of project such as proper scrutiny of financial report is done. The fund of depositors i. Firstly personal appraisal of promoter is done by the bank to ensure that promoters are experienced in the line of business and capable to implement and run the project efficiently. general public are mobilised by means of such advances / investments.e.
A detail study relating financial viability of project is done by detail study of cash flow. Page 166 . V. With sensitive analysis feasibility of project is determined under worsened condition. III. DER etc. the main purpose of financial appraisal is insure that project will ensure sufficient surplus to repay the instalment and interest. management. Credit rating or PNB scoring is done of various parameters such as personal.CREDIT APPRAISAL approved valuer is done and view regarding each and every area of project is done under technical analysis. fund flow statements and by calculating import ratio which is very much necessary for project appraisal such as DSCR. a collateral security to be given by borrower is determined. It is on basis of credit risk level. This shows that Punjab National Bank has sound credit appraisal system. Risk analysis is done by bank to determine the risk associated with the project. IV. financial etc . thereby determine credit worthiness of customer. This is mainly done by sensitivity analysis and by PNB credit rating or scoring.
GURGAON MUMBAI MANAGEMENT OF INDIAN FINANCIAL INSTITUTION.2010.com v. HIMALYA PUBLISHING HOUSE.google.M & NIGAM DIVYA. iii. NEW DELHI iv.in www. PUNJAB NATIONAL BANK ANNUAL REPORT PNB JOURNALS BOOKS SRIVASTAVA R.2009. FINANCIA INSTITUTION AND MARKETS.pnbindia.com www.gov.CREDIT APPRAISAL BIBLIOGRAPHY i.rbi.HILLS. BHOLE L. WEBSITE www. NEWSPAPER Page 167 . TATA Mc GRAW. 10TH EDITION.M. ii. 5TH EDITION.7 WEST PATEL NAGAR.
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