CREDIT APPRAISAL IN BANKING SECTOR

WHAT IS CREDIT APPRAISAL?
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed. Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future Credit appraisal is the process of appraising the credit worthiness of the loan applicant

WHAT IS CREDIT APPRAISAL? (CONT’D)
Factors like:» Age » Income » Number of dependents » Nature of employment » Continuity of employment » Repayment capacity » Previous loans, etc. are taken into account while appraising the credit worthiness of a person. 3 ‘C’ of credit are must be kept in mind for lending funds:- » Character » Capacity » Collateral If any one of these are missing in the lending officer must question the viability of credit

financial & technical viability of the project proposed & its funding pattern To check the primary & collateral security cover available for recovery of such funds . OBJECTIVES: To study the Credit Appraisal at SBI To check the commercial. Ahmedabad.RESEARCH METHODOLOGY PROBLEM STATEMENT: To study the Credit Appraisal System in SME sector. at State Bank of India (SBI).

RESEARCH METHOLOGY (CONT’D) » RESEARCH DESIGN : Analytical in nature » DATA COLLECTION : Secondary Data: E-circulars of SBI Books & Journals Database at SBI Library research Websites .

some of the technicalities are not revealed which may cause destruction to the information .RESEARCH METHODOLOGY (CONT’D) LIMITATION OF THE STUDY: Due to the constraint limited study on the project has been done Access to data (Credit Appraisal data in detail is not available) As the credit appraisal is one of the crucial areas for any bank.

BRIEF OVERVIEW OF LOANS Loans can be of two types fund based & non-fund based: » FUND BASED includes:  Working Capital  Term Loan » NON-FUND BASED includes:  Letter of Credit  Bank Guarantee .

MEASURES Debt Equity Coverage Ratio Concept Proportion of Debt fund of a company in relation to its equity Debt Service Concept The amount of cash flow available to meet annual interest and principal payments Ratio Formula Long Term Debt Tangible Net worth Formula Net Operating Income Total Debt Service Comments This ratio is an indicator of leverage of a company It measures a company’s ability to borrow and repay money Comments DSCR less than 1 means negative cash flows .

 These have been categorized broadly into financial.CREDIT RISK ASSESSMENT (CRA)  The CRA models adopted by the Bank take into account all possible factors into appraising the risks.  These factors duly weighted are aggregated to arrive at a credit decision whether loan should be given or not Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. business. industrial & management risks are rated separately. associated with a loan. which assessed in .

KYC papers. etc. CIBIL data. ECGC caution list. registration no.CREDIT APPRAISAL PROCESS Receipt of application from applicant | Receipt of documents (Balance sheet. AOA.. Different govt. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | . willful defaulters list. and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list. MOA.

renew of accounts. agreements. mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements. review of accounts.CREDIT APPRAISAL PROCESS (CONT’D) Preparation of financial data | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations. etc (on regular basis) .

if there is a track record to go by  Opinion reports from existing bankers & published data if available . Group & Industry  View is taken about bank’s past experience with the promoters.CREDIT APPRAISAL STANDARDS QUALITATIVE:  The proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower.

75:1 . 1.00 DSCR Net (min.) 3.00 (For FBWC limits upto Rs.CREDIT APPRAISAL STANDARDS (CONT’D) QUANTITATIVE: (i)Working capital Sector/ Parameters Current Ratio (min.) Gross (min.) 2:1 2:1 1.33 Others 1.20 (For FBWC limits above Rs.75:1 1.) Mfg. 5cr) 5.00 (ii)Term Loan Technical Feasibility Economic Feasibility Financial Feasibility TOL/ TNW Managerial Competency (max. 5cr) 1.

RATING SCALES FOR GIVING LOANS S. No. 1 Borrower Rating SB1 Range of scores 94-100 Risk level Virtually Zero risk Comfort Level Virtually Absolute safety 2 3 4 5 6 SB2 SB3 SB4 SB5 SB6 90-93 86-89 81-85 76-80 70-75 Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average risk Acceptable Risk (Risk Tolerance Threshold) Highest safety Higher safety High safety Adequate safety Moderate Safety Above Safety Threshold Safety Threshold 7 8 9 10 SB7 SB8 SB9 SB10 64-69 57-63 50-56 45-49 .

Bank gives loans to the borrower as per their rating like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. Rating is given on the basis of scores out of 100. So banks does not give loans after SB8 rating. . From SB9 rating the risk increases.RATING SCALES FOR GIVING LOANS 11 12 SB11 SB12 40-44 35-39 Borderline risk High Risk Inadequate safety Low safety 13 14 15 SB13 SB14 SB15 30-34 25-29 <24 Higher risk Substantial risk Pre-Default Risk (extremely Vulnerable to default) Default Grade Lower safety Lowest safety Nil 16 SB16 - Banks has introduced New Rating Scales for borrower for giving loans.

SBI NORMS FOR CREDIT APPRAISAL LOAN ADMINISTRATION – PRE SANCTION PROCESS Preliminary appraisal: Sound credit appraisal involves analysis of the viability of operations of a business and the capacity of the promoters to run it profitably and repay the bank the dues The company’s Memorandum and Articles of Association should be scrutinized carefully to ensure that there are no clauses prejudicial to the Bank’s interests .

SBI NORMS FOR CREDIT APPRAISAL Towards this end the preliminary appraisal will examine the following aspects of a proposal. Bank’s lending policy and other relevant guidelines/RBI guidelines: •Industry related risk factors •Credit risk rating •Profile of the promoters/senior management personnel of the project •List of defaulters •Caution lists •Government regulations impacting on the industry • Financial status whether it is acceptable .

SBI NORMS FOR CREDIT APPRAISAL Whether the project cost acceptable or not Debt/ Equity ratio whether acceptable Organizational set up with a list of Board of Directors & indicating the qualifications & experience in the industry Demand and supply projections based on the overall market prospects together with a copy of the market survey report Estimates of sales. cost of production and profitability Projected profit and loss account and balance sheet for the operating year Audited profit loss account and balance sheet for the past three years .

SBI NORMS FOR CREDIT APPRAISAL LOAN ADMINISTRATION – POST SANCTION PROCESS The post-sanction credit process can be broadly classified into three stages: Follow-up Supervision Monitoring which together facilitate efficient and effective credit management and maintaining high level of standard assets .

 Firm:.  Industry:. 363.CASE STUDY .1  Company:.  The total project cost estimated to be Rs.Transport Activity  Banking with SBI :-16 years as a current A/C holder  Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up arrangement with ONGC.Partnership established in 1982 for carrying a transport business.  Proposed Credit Requirement:Fund Based=Rs.295 lacs  The company is in this business since incorporation .44 lacs.Janak Transport Co.

2. 10 % Company's level as on 31/03/2008 1.42 12.3.002 18.33 Max.2.00 Min.86% Liquidity TOL/TNW DSCR Promoters contribution (under tie-up) profits in the last two years Min.00 Min.00 lacs with rising trend FGHFG Actual profit Rs. 1.20 lacs for year 2006-07 and Rs. 3.90 lacs for year 2007-08* . Rs.Deviations in Loan Policy/ Scheme Parameters Min/Max level as per Scheme Min. 1.80* 2.

86% which is above the margin requirement The current ratio is 1.ANALYSIS OF THE CASE 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 The promoters contribution to the project is 18.42 that is satisfactory .

3 lacs with rising trend TOL/TNW should be max. as the co. Rs. has done multiple banking it has o/s loans with other banks also but the co. is regularly making the payment of principal amount along with the interest so the loan is given.02 which is satisfactory The net sales & PAT of the company is increasing year after year so overall profitability is good .Min. 3 which is 12.ANALYSIS OF THE CASE (CONT’D) Profits in the last two years:.80 here. The bank checks commercial viability of the company & found that the DSCR for term loan is 2.

 The partnership was constituted for manufacturing and selling of HDPP woven sacks to be manufactured from HDPP granules.  Proposal for sanction of FBWC limits of Rs.  AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th November. fertilizer.Maufacturing of HDPP woven sacks.Partnership Firm (M/S Umiya Polymers) Industry:.Manufacturing Activity:.2.00 crores.25 crores and Fresh Term Loan of Rs. which are widely used as packaging material in cement. etc.2.2     Company:. . 2007 at Kadi.Akshat Polymers Firm:.CASE STUDY .

ii) Pricing for WC facilities @1.25% .6 (71 marks) based on projected financials as on 31.25 crores ii) Fresh Term Loan of Rs.00 crores Approval for: i) CRA rating of SB.00% above SBAR @13.2.PRISING/ RATE OF INTEREST Proposal: Sanction for.50% above SBAR @14.03.75and for TL 1. i) FBWC limits of Rs.2.2010.

54 Max. 1.Deviations in Loan Policy Parameter s Liquidity Indicative Min/Max level as per loan policy Min.03:1 . 2:1 2.54 2.52 TOL/TNW TOL/Adj.00 4.2009 @ 1.34 Company's level as on 31. 3. TNW Average gross DSCR (TL) Debt / equity Max.01:1 1.11 2.03.33 Company's level as on 31.75 2.80 Min.50 1.03. 1.2010 1.64 2.

ANALYSIS OF THE CASE The unit will have installed capacity of 2520 MT The unit is projected to achieve capacity utilization of 80% during the year 2009-10 and accordingly the sale for the year is projected at Rs.77 crores. Maharashtra. The unit plans to initially market its product in Gujarat.19.40%. Rajasthan and sale to Central Govt. . who purchases the HDPP woven sacks for grains through open tenders As per ICRA report. grading and research services Flexible packaging sector is expected to grow at the rate of 12.

ANALYSIS OF THE CASE The promoters have sufficient experience of 15 years in the line of activity The firm has also started marketing activity for their products & are having very good market contacts for the sales of the Finished Goods The orders worth Rs. 2008 Projected financials are in line with the financials of the some of the unit in similar line of activity and production level .50 crores is expected to be finalized by end of August.2.

even though loan was sanctioned due to some other strong parameters such as the unit has got confirm order. financial performance of the firm was poor. loan is sanctioned due to strong financial parameters  From the case study analysis it was also found that in some cases. the unit was an existing profit making unit & letter of authority was received for direct payment to the bank from ONGC which is public sector . we found that in some cases.FINDINGS  SBI loan policy contains various norms for sanction of different types of loans  These all norms does not apply to each & every case  SBI norms for providing loans are flexible & it may differ from case to case  After case study.

CONCLUSION Credit is the core activity of the banks & important source of their earnings which go to pay interest to depositors. salaries to employees & dividend to shareholders Credit & risk go hand in hand Bank’s main function is to lend funds/ provide finance but it appears that norms are taken as guidelines not as a decision making A banker’s task is to indentify/assess the risk factors/parameters & manage/mitigate them on continuous basis .

.Thank You…..

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