Credit Appraisal

Types of Facilities – Fund Based and Non-Fund

Based
Fund Based – C/C, T/L, B/P, WCTL etc.
Non-Fund Based – L/G, L/C, Acceptances etc.
 Questions
ISO

1. What is Gross Working Capital?

2. What is Net Working Capital ?
3. What is Working Capital Cycle ?
4. Turnover of an Unit is Rs. 100 lacs. How much W.C
could be sanctioned to it?
5. What is the minimum Current Ratio that Bank would
desire an unit to have while granting working capital ?
6. What is Quick Ratio?
7. What is ideal Quick Ratio
8. What is Working Capital Gap?
9. What is Working Capital Term Loan?
10. What is Consortium Finance ?
ISO

 Objective of a Banker is to find out the

liabilities that are payable in the short term
and to compare the same to the short term
assets to ensure that all short term liabilities
are covered by sufficient short term assets.
ISO
What is Appraisal ?
 It is a process by which a banker examines a loan
proposal comprehensively.
 It includes examination of technical feasibility and
economic viability
 Effectively a SWOT analysis that helps the banker
to take a decision
 Takes into account the Credit Requirements of the
applicant whether fund based or non-fund based or
both
ISO
Important Questions to ask

 Who are the Promoters and what are their

credentials ?
 What are the Products ?
 Cost of the Project and stake of the
Promoters
 Type of technology to be used
 Capacity utilization and break-even
ISO

 Are Projections/ Estimates realistic and

achievable
 Adequacy of Credit facilities sought
 Cash Accruals – are they sufficient to
service the debt ?
 Any risk hedging mechanism in place to
protect both bank’s and proponent’s interest
ISO
Types of Appraisals

 Managerial Appraisal
 Technical Appraisal
 Financial and Commercial Appraisal
 Risk Appraisal
Managerial Appraisal –
ISO

Entrepreneurial Qualities
 Character  Initiative
 Involvement in the  Knowledge, Drive and
venture energy, Past
 Financial Resources experience
 Self abilities
 Competence  Technical expertise,
market study etc
ISO

 Depth of their financial strength

 Without Return how long can they survive?
 Examination of their accounts
 For new proponents/guarantors :
Status Report from their banker
Enquiry about their experience,
educational/technical qualifications
Marketing report on the family background
Documentary evidence about the assets owned by
them
ISO

 Check RBI web site about information on

high value suit filed accounts and defaulters
 SAL of ECGC is a source of information on
delinquent exporters
 CIBIL will be able to provide information
on applicant’s credit history
Source of information on
ISO

applicants
 Loan Application form
 Assets and Liability Statement
 Project Report / Financial Statement
 Status Report
ISO
Personal Interview

 One of the very important sources of

information
 Notes should be taken to use the
information for improved decision making
 Banker should ask only relevant and leading
questions.
ISO

For existing borrowers –

Checking of accounts – Bouncing of Inward
cheques
Frequent TOD / Overlimit
Servicing of interest
ISO

For Promoters-
Family disputes
Reputation vis-à-vis Suppliers, Buyers,
Competitors
Whether defaulters with any Bank.
ISO
Account

 Terms of Sanction
 Average Utilisation
 Drawings against uncleared effects
 Turnover
 Profits – utilisation
 Sundry Creditors – Age, Average payment
period compared with that in the industry
ISO

 Fixed Assets – In the name of the firm or

promoters? Any plan for replacement
 Investments – In group companies ? In
financial securities ?
 Sundry Debtors – Age, Average collection
period, compare with industry norms
 Bad Debts – Provision
ISO

 Inventories – Local or Imported ?

Just in Time
 Finished Goods – Age and value ? Sold locally or
imported ?
 Margin
 Limit vs D/P
 Submission of stock statements
 Site visit
ISO

 Inadequate Provision –
disputed liabilities or for erosion in value of
stocks
Losses not booked for impairment in value
of assets held in foreign currency due to
adverse exchange movements
Overdue receivables shown as good assets
ISO

 Sales – Actual vs Projected, Low level,

Industry Scenario, Projected sales not
achieved despite increase in W/C
 Liquidity – Currrent ratio, piling up of
finished goods, steep rise/ high level of
b/d,long outstanding in overdue export bills
 Bills are drawn between group companies,
no incidence of actual movement of goods
ISO

General –
Deterioration in financial parameters
 Heavy discount offered to remain in the market
 Margins are narrowing year after year
 Frequent return of bills – payment received
directly by the company in some cases, frequent
devolvement of L/Cs, non-availability of Primary
Security, frequent borrowings outside arrangement
ISO
Technical Appraisal
 Requirement of the infra-structure facility at the
unit
 Type of Plant and Machinery to be installed
 Raw-material and other consumables to be used in
the process
 Rate of obsolescence
 Technical competence of the employee(s) –
background, experience etc
 Commitment of the employee
ISO

 Availability of R/M – Proximity

 Market
 Energy requirement – position of power cut
 DG set ?
 Water requirement – Pipe line or bore well
 Govt. incentives / subsidies
 Labour intensive or Capital intensive
ISO

 Examination of govt. policy and related issues

 Viability depends on Cash generation and Cash
flow depends on the future growth
 Demand forecasting – Demand and supply gap for
the product
 Reasonableness of the sales projection
 Confidence of the proponent counts a lot
 Reports about major industries
COMMERCIAL APPRAISAL
ISO

 Nature of the Product

 Demand for the Product – existing / future
 Competition - existing / perceived
 Use of the product and users of the product
 Standard or Tailor-made. Any alternative
uses?
 Essential commodity or luxery product
 Govt.restriction, if any, on the product
Source of information on a
ISO

particular industry
 Various magazines
 Market research companies
 Newspapers
 Web sites
 CSIR
ISO

 Land & Buildings – examination of the title

 Leasehold or Free hold
 If leasehold, period of lease
 Cost of land including registration and
levelling
 Cost of building, shed, godown, office etc
ISO

 Preliminary expenses
 Pre-operative expenses
 Provision for contingencies
 Margin on working capital
ISO
Means of Finance

 Equity
 Capital Subsidy, if any
 Debentures / Bonds issued by the company
 Public Deposits
 Unsecured loans from friends and relatives
 Term Loans, W/C
 Lease Finance
ISO

It is important to know :
1. Liquidity
2. Total indebtedness
3. Interest and debt service capacity of the
Unit
ISO
Risk Analysis

 Intensity of competition
 Product substitution
 Seasonality of business
 Entry barriers
 Profile of the end-users
 Stress testing of parameters such as cash
generation, operating profit, DSCR etc
What is Working Capital ?

It is the Total Current Assets

Met out of funds from three sources:
(i) OCL (ii) NWC (iii) BB
ISO

 Total Current Assets = Chargeable Current

Assets (Inventories, Receivables etc) +
Other Current Assets (Cash, Investments,
Prepaid Expenses etc)
ISO

 Other Current Liabilities (Sundry Creditors, Bills

payable, Advances from Customers, Provision for
Tax etc) are very attractive and common form of
source for financing CA
 NWC is surplus of Long Term Source over Long
Term Use which is also equal to CA-CL
 In case, these two sources are inadequate to
finance the TCA requirement, Bank borrowing is
needed
ISO
Example
 CA 1000
 OCL 400
 Bank finance 475
 Total CL 875
Calculate MPBF
CA 1000 1000
Less OCL 400 400
WCG 600 600
Less Margin 150 250
MPBF 450 350
Excess loan 25 125
ISO

EARLY WA RNING SIGNALS

SIGNALS NOTICEABLE WITHIN
ISO

THE BANK.
 1. Non compliance with the terms of sanction
regarding documentation/ security.
 2.Unplanned borrowing for margin contribution.
 3.Delay in payment of interest beyond 15 days.
 4.More than one installment and beyond 30 days.
 5. Return of cheques on financial reasons.
 6. Reduction in credit summations.
SIGNALS NOTICEABLE WITHIN
ISO

THE BANK.
 7. Longer outstanding in the bills purchased
accounts.
 8.Longer credit on sales and frequent
returns by the buyers.
 9. Constant utilisation of the wc limits upto
the hilt.
 10. Unexplained delay in submission of the
stipulated statements/information.
SIGNALS NOTICEABLE WITHIN
ISO

THE BANK.
 11. Frequent requests for overlimit / additional
limit or for extension of time for repayment of
interest/installments.
 12. Adhoc/overlimit/Bill purchase overdue.
 13.L/c devolvement/BG invocation.
 14.Lack of transparency.
 15.Constant failure or unwillingness to mention
unpaid stock in stock statement or age of book
debts in the Book debt statement.
SIGNALS NOTICEABLE
ISO

OUTSIDE THE BANK.

 1. Undue and unreported delay in project
implementation.
 2. Installation of sub standard machinery or
machinery not as per the project report/approved
quotations
 3.Frequent breakdown in plant/ machinery.
 4. Production noticeably below projected level of
capacity utilization.
 5. Labour problems and frequent interruptions in
manufacturing.
SIGNALS NOTICEABLE
ISO

OUTSIDE THE BANK

 6. Production of unplanned items without
reporting to the Bank.
 7. Disposal/replacement of vital plant and
machinery without bank’s knowledge.
 8. Higher rate of rejection at process stage/final
stage/after sales.
 9. Delay in or failure to pay statutory dues.
 10. Diversion of working capital to capital
expenditure or for other purpose.
SIGNALS NOTICEABLE
ISO

OUTSIDE THE BANK.

 11. Abnormal increase in debtors and
creditors.
 12. Increase in inventory which may include
quantity of slow and non moving items.
 13. General decline in the particular
industry combined with many failures.
 14. Rapid turnover of key personnel.
 15. Filing of suits against the Co.
SIGNALS NOTICEABLE
ISO

OUTSIDE THE BANK.

 16. Unjustified rapid expansion within a short time
without appropriate financial tie up.
 17. Sudden and frequent changes in
Management/infighting within the Management.
 18. Reduction in profit/unit beginning to incur losses.
 19. Dependence on single or few buyers/ no alternate
market for the product.
 20. Threat of action against the borrowers by the
statutory authorities.
SIGNALS NOTICEABLE
ISO

OUTSIDE THE BANK

 21. Poor or dubious maintenance of records and
plant/machinery.
 22. Loss of key product lines, franchises,
distribution rights or sources of supply.
 23. Speculative inventory acquisition not in line
with normal purchasing practice.
 24. Apathy of promoters/owners in running the
business.
 25. Adverse market reports on the borrowers
/concern.
 26. Loss of crucial customers.
ISO
BENCH MARKS
 1. A/c is overdrawn for more than 30 days.
 2. Interest over due 15 days.
 3. Shortfall in achievement >25%
 4.Delay:QIS I & II >30 days.
 5.MSOD, stock and B/D statement >1 month.
 6. Return of cheques on financial grounds:> 2
occasions in a month.
 7.BG invocation/LC devolvement > 1 case in a
month.
ISO
BENCH MARKS
 8. Non regularization of devolvement/ invocation
within 30 days.
 9. No credit for consecutive 30 days.
 10.Delay in term loan installment > 30 days.
 11. Return of bills purchased > 2 bills in a month.
 12. Past due bills > 30 days.
 13. Overdue EPC > 30 days.
ISO
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