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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
» Character » Capacity » Collateral If any one of these are missing in the lending officer must question the viability of credit . 3 ‘C’ of credit are must be kept in mind for lending funds:.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.
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 .
business. associated with a loan. 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.CREDIT RISK ASSESSMENT (CRA) The CRA models adopted by the Bank take into account all possible factors into appraising the risks. which assessed in . These have been categorized broadly into financial. industrial & management risks are rated separately.
ECGC caution list. | Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | . CIBIL data. Different govt. willful defaulters list. AOA. registration no.. KYC papers. MOA. and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list.CREDIT APPRAISAL PROCESS Receipt of application from applicant | Receipt of documents (Balance sheet. etc.
renew 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) . agreements. mortgages | Disbursement of loan | Post sanction activities such as receiving stock statements. review of accounts.
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.
00 3. 5cr) 1.) 1.CREDIT APPRAISAL STANDARDS (CONT’D) QUANTITATIVE: (i)Working capital Sector/ Parameters Mfg.) 1.20 (For FBWC limits above Rs. 5cr) 5.00 DSCR Net (min.75:1 1.33 (ii)Term Loan Technical Feasibility Economic Feasibility Financial Feasibility TOL/ TNW Managerial Competency (max.) 2:1 2:1 1.) Gross (min.00 (For FBWC limits upto Rs. Others Current Ratio (min.75:1 .
No.RATING SCALES FOR GIVING LOANS S. 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 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. 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. .
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 .
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 Towards this end the preliminary appraisal will examine the following aspects of a proposal.
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 .
Industry:.1 Company:.Janak Transport Co.295 lacs The company is in this business since incorporation .Partnership established in 1982 for carrying a transport business.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. Firm:. 363. The total project cost estimated to be Rs.CASE STUDY . Proposed Credit Requirement:Fund Based=Rs.44 lacs.
Rs. 1.42 12. 3.20 lacs for year 2006-07 and Rs.2. 2.80* 2.002 18. 1. 10 % Company's level as on 31/03/2008 1.00 Min.90 lacs for year 2007-08* .33 Max.00 Min.00 lacs with rising trend FGHFG Actual profit Rs.86% Liquidity TOL/TNW DSCR Promoters contribution (under tie-up) profits in the last two years Min.3.Deviations in Loan Policy/ Scheme Parameters Min/Max level as per Scheme Min.
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 18.86% which is above the margin requirement The current ratio is 1.42 that is satisfactory .
02 which is satisfactory The net sales & PAT of the company is increasing year after year so overall profitability is good . has done multiple banking it has o/s loans with other banks also but the co. 3 lacs with rising trend TOL/TNW should be max. 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. Rs. as the co. is regularly making the payment of principal amount along with the interest so the loan is given.Min.
etc.2.00 crores.Partnership Firm (M/S Umiya Polymers) Industry:.2 Company:.2.CASE STUDY . fertilizer. which are widely used as packaging material in cement. . AKSHAT POLYMERS (AP) has been established as a partnership firm on 19th November.25 crores and Fresh Term Loan of Rs.Akshat Polymers Firm:. 2007 at Kadi. Proposal for sanction of FBWC limits of Rs.Manufacturing Activity:.Maufacturing of HDPP woven sacks. The partnership was constituted for manufacturing and selling of HDPP woven sacks to be manufactured from HDPP granules.
03.25% .PRISING/ RATE OF INTEREST Proposal: Sanction for.00 crores Approval for: i) CRA rating of SB.00% above SBAR @13.2.25 crores ii) Fresh Term Loan of Rs.75and for TL 1. i) FBWC limits of Rs.6 (71 marks) based on projected financials as on 31.50% above SBAR @14.2010.2. ii) Pricing for WC facilities @1.
11 2.03:1 . 1.03. 2:1 2.52 TOL/TNW TOL/Adj.80 Min.01:1 1. TNW Average gross DSCR (TL) Debt / equity Max.00 4.Deviations in Loan Policy Parameter s Liquidity Indicative Min/Max level as per loan policy Min.2009 @ 1. 1.34 Company's level as on 31.03. 3.75 2.64 2.2010 1.50 1.33 Company's level as on 31.54 Max.54 2.
77 crores. Rajasthan and sale to Central Govt. .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. 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 12.40%. The unit plans to initially market its product in Gujarat.19. Maharashtra.
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.50 crores is expected to be finalized by end of August. 2008 Projected financials are in line with the financials of the some of the unit in similar line of activity and production level .2.
even though loan was sanctioned due to some other strong parameters such as the unit has got confirm order.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. 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. we 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 .
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 .
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