CREDIT APPRAISAL

CREDIT APPRAISAL

TABLE OF CONTENTSChapters

1. INTRODUCTION Reason for selecting the project Scheme of the project Research Methodology Limitation of the study

2. 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. 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

4. 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. ANALYSIS AND INTERPRETATION OF DATA Credit Appraisal techniques Process of credit appraisal for providing cash credit Appraisal techniques for retail loans

6. CONCLUSION Conclusion

BIBLIOGRAPHY

IntroductionThe last year financial crises have become the main cause for recession which was started in 2006 from US and was spread across the world. The world economy has been majorly affected from the crisis. The securities in stock exchange have fallen down drastically which has become the root cause of bankruptcy of many financial institutions and individuals. 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 ones credit worthiness has become very important for any financial institution before providing any form of credit facility so that such situation doesnt arise in near future again.Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to understand the credit appraisal system followed by the banks this project has been conducted. 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, how a loan proposal is being made, 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.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, objective of the project, reasons for selecting the project and the basic structure and framework how the project proceeds. In order to understand the importance of the topic selected an introduction to the overview of the commercial bank , its functions, and present trends and growth in bank credit are required and it is covered in this chapter.

Reasons for selecting the projectWhenever 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. In order to assess the repaying capability i.e. to evaluate their credit worthiness banks use various techniques that differ with the different types of credit facilities provided by the bank. 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.It is the incident of credit defaults that has given rise to the financial crisis of 2008-09. But in India the credit default is comparatively less that other countries such as US. One of the reasons leading to this may be good appraisal techniques used by banks and financial institutions in India. 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.

Scheme of the projectIt covers the objective and structure of the project which is discussed as follows:-Objective of the projectThe overall objective of this project is to under stand the current credit appraisal system used in banks. The Credit Appraisal system has been analysed as per the different credit facilities provided by the bank. The detailed explanation about the techniques and process has been discussed in detail in the further chapters.

Structure or Plan of the projectThe project first of all makes a study about the commercial banks- its important functions. Then it highlights on the concept of Bank Credit & its recent trends. 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. Then it discusses the bank credit policy with respect to Punjab National bank where the project was undertaken.The project then proceeds with the review of literature i.e. review of some past work regarding credit appraisal by various researchers. 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 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. Then the project moves to its next chapter i.e. findings where some results found out are interpreted and then moving on to the last and the final chapter i.e. the suggestions and conclusions where some steps are suggested to be implemented to increase the work efficiency and to reduce to work pressure

Commercial banks and its objectivesA 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 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 countrys 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

Bank CreditThe 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

Types of credit-

Bank in India provide mainly short term credit for financing working capital needs although, as will be seen subsequently, their term loans have increased over the years. The various types of advances provide by them are: (a) Term Loans, (b) cash credit, (c) overdrafts, (d) demand Loans , (e) purchase and discounting of commercial bills, and, (f) instalment or hire purchase credit.

Volume of Credit-

Commercial banks are a major source of finance to industry and commerce. Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90 , Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. Banks have introduced many innovative schemes for the disbursement of credit. Among such schemes are village adoption, agriculture development branches and equity fund for small units. Recently, most of the banks have introduced attractive education loan schemes for pursuing studies at home or abroad. They have introduced attractive educational loan schemes for pursuing studies at home or abroad. They have moved in the direction of bridging certain defects or gaps in their policies, such as giving too much credit to large scale industrial units and commerce and giving too little credit to agriculture, small industries and so on.The Public Sector Banks are still the leading lendersthough growth has declined compared to previous quarter. The credit growth rate has dipped sharply in foreign and private banks compared to previous quarter. In all, the credit growth has slipped in this quarter.Credit (YOY Growth)March 28 2008 March 27 2009

Public Sector Banks22.520.4

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. But then compared to rate cuts done by RBI, they still need to go lower.Table 16: Reduction in Deposit and Lending Rates

(October 2008 April 2009*)

(Basis points)

Bank GroupDeposit RatesLending Rates (BPLR)

Public Sector Banks125-250125-225

Private Sector Banks75-200100-125

Five Major Foreign Banks100-2000-100

BPLROct 08Mar 09Apr 09Change (from Oct to Apr)

Public Sector Banks13.75-14.7511.50-14.0011.50-13.50125-225

Private Sector Banks13.75-17.7512.75-16.7512.50-16.75100-125

Five Major Foreign Banks14.25-16.7514.25-15.7514.25-15.750-100

Sector-wise credit points credit has increased to agriculture, industry and real estate whereas has declined to NBFCs and Housing. 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. Public sector banks have increased allocation to industry and real estate. There is a more detailed analysis in the macroeconomic reportreleased before the monetary policy.

SectorAs on February 15, 2008As on February 27, 2009

% shareVariations% share Variations

in total(per cent)in total(per cent)

Agriculture9.216.41321.5

Industry45.225.952.525.8

Real Estate3.126.78.561.4

Housing7.3124.77.5

NBFCs5.748.66.641.7

Overall Credit1002210019.5

To sum up, the credit conditions seems to have worsened after January 2009. The rates have declined but lending has not really picked up. However, the question still remains whether credit decline is because banks are not lending (supply) or becausepeople/corporates are not borrowing (lack of demand). It is usually seen that all financial variables as lead indicators say if credit growth (along with other fin indicators) is picking, actual growth will also rise. However, it is actually seen the relation is far from clear. In fact, the financial indicatorshardly help predict any change in business cycle. Most rise in good times and fall in bad times. Most financial indicators failed to predict this global financial crisis and kept rising making everyone all the more complacent.

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). This practice has been withdrawn with the effect from April 15th 1997 in the sense that the date, banks have been left free to choose their own method ( from the method such as turnover , cash budget, present MPBF , or any other theory) of assessing working Capital requirement of the borrowers.

The cash credit system has been the bane, yet it has exhibited a remarkable strength of survival all these years. In spite of many efforts which were direct in nature, only a slow progress has been made to reduce its importance and increase bill financing. Therefore a concrete and direct policy step was taken on April 21, 1995 which made it mandatory for banks, consortia, syndicates to restrict cash credit components to the prescribed limit , the balance being given in the form of a short term loan, which would be a demand loan for a maximum period of one year, or in case of seasonal industries , for six months. 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. This loan system was first made applicable to the borrowers with an MPBF of Rs 20 crore and above; and in their case , the ratio of cash credit (loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April 1995 , to 60 (40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80) percent in April 1997. With the withdrawal of instructions about the MPBF in April 1997 , 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.

With effect from September 3, 1997, the RBI has permitted banks to raise their existing exposure limit to a business group from 50% to 60%; the additional 10% limit being exclusively meant for investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993, 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, and from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for power projects. From September3, 1997 these caps on term lending by banks were removed subject to their compliance with the prudential exposure norms.

The banks can invest in and underwrite shares and debentures of corporate bodies. At present, they can invest five percent of their incremental deposits in equities of companies including other banks. Their investment in shares/ Bonds of DFHI, 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 . From the same date banks could extend loans within this ceiling to the corporate against shares held by them. 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.

CHANGING PHASE OF BANK CREDIT-A study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section 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. 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. The report of this group is widely known as Tandon Committee report.The weaknesses in the Cash Credit system have persisted with the non-implementation of one of the crucial recommendations of the Committee. In the background of credit expansion seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study and suggest- 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. The Group was headed by Sh. K.B. Chore of RBI and was named Chore Committee.Another group headed by Sh. P.R. 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. His report is applicable to units with credit requirements of less than Rs.50 lacs.The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much more organized. However, 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. With recent liberalization of economy and reforms in the financial sector, 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. In fact, beginning with the slack season credit policy of 1997-98, 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. Most banks, however, continue to be guided by the principles enunciated in Tandon Committee report.Trends of Bank Credit in IndiaThe face of Indian banking has changed radically in the last decade. A perusal of the Basic Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996 and 2005, personal loans have been the fastest growing asset, increasing from 9.3 per cent of the total bank credit in 1996 to 22.2 per cent in 2005. Of course, this is partly due to the huge rise in housing loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the period, but other personal loans comprising loans against fixed deposits, gold loans and unsecured personal loans also rose from 6.1 per cent to 10.7 per cent. Other categories whose share increased were loans to professionals and loans to finance companies. In contrast, there has been a sharp decline in the share of lendings to industry. Credit to small scale industries fell from 10.1 per cent of the total in 1996 to 4.1 per cent in 2005.

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. In manufacturing sector more efficient utilization of existing capacities contributed to the sectoral growth rather rather than any large addition of fresh capacities. The consequential increase in the demand for credit was also subdued. Greater and cheaper avenues for credit resulted in a bigger share of disintermediation being resorted to by large borrowers.

The other trend has been the substantial drop in the share of rural credit, while the share of metropolitan centres has increased. 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), it is also true that the reforms have been urban-centric and have tended to benefit the metros more. The number of rural bank offices fell from 32,981 in March 1996 to 31,967 by March 2005.The states have been the main beneficiaries of bank credit are the northern region as it has increased its share from 18.7 per cent of the total credit in 1996 to 22.2 per cent in 2005. As it was seen that Delhis share went up from 9.5 per cent to 12.1 per cent over the period. This is not due to food credit, the account of which is maintained in Delhi. Clearly, the national capital has gained a lot from liberalisation.Trends for the year 2008-09The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within aggregate deposits demand deposits have shown an absolute fall (-Rs 4,179 crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 2007-08,. On the other hand, time deposits have shown an accelerated increase of 22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the previous year.In the investment portfolio of banks, the expansion during 2008- 09 at Rs 194,031crore has been much lower than the expansion of Rs 340,250 crore as increase in net bank credit to government under monetary data for the same period. This has happened because the latter has a sizeable amount of RBI credit to government following the increased open market operations. Finally, there has occurred considerable slowdown in bank credit expansion. Because of relatively higher procurement of foodgrains, food credit has expanded by Rs 1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in 2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than in the previous year at Rs 432,846 (23.0%).

Procedure for providing Bank Credit-Banks offers different types of credit facilities to the eligible borrowers. For this, there are several procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring and Asset Recovery Management comprise the entire gamut of activities in the lending process of a bank which are clearly shown as below:

Source- 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, etc. It is the most important aspect of the lending procedure and therefore it is discussed in detail as below.

Credit AppraisalMeaning - The process by which a lender appraises the creditworthiness of the prospective borrower is known as Credit Appraisal. This normally involves appraising the borrowers payment history and establishing the quality and sustainability of his income. The lender satisfies himself of the good intentions of the borrower, usually through an interview. 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 banks 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. 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.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, taking into account the risk reward aspects. 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, which is a short-sighted approach. Furthermore greater emphasis is given on financials, which are usually outdated; this is further exacerbated by the fact that a descriptive approach is usually taken, rather than an analytical approach, to the credit. Thus a forward looking approach should also be adopted, since the loan will be repaid primarily from future cash flows, not historic performance; however both can be used as good repayment indicators.

Indian Banking Sector & Its Major ChallengesIt is well recognised by the world that India is one of the fastest growing economies in the world. Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. Indias banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. A weak banking structure has been unable to fuel continued growth, which has harmed the long-term health of their economies. In this white paper, we emphasise the need to act both decisively and quickly to build an enabling, rather than a limiting, banking sector in India. Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. While bank lending has been a significant driver of GDP growth and employment, periodic instances of the failure of some weak banks have often threatened the stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously weaken the health of the sector. Further, the inability of bank managements (with some notable exceptions) to improve capital allocation, increase the productivity of their service platforms and improve the performance ethic in their organisations could seriously affect future performance. India has a better banking system in place Vis a Vis other developing countries, but there are several issues that need to be ironed out. Major challenges of Indian banking sector are mentioned below. Interest rate riskInterest rate risk can be defined as exposure of bank's net interest income to adverse movements in interest rates. A bank's balance sheet consists mainly of rupee assets and liabilities. Any movement in domestic interest rate is the main source of interest rate risk.Over the last few years the treasury departments of banks have been responsible for a substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield on 10-year government bonds (a barometer for domestic interest rates) fell, from 13 per cent to 4.9 per cent. With yields falling the banks made huge profits on their bond portfolios. Now as yields go up (with the rise in inflation, bond yields go up and bond prices fall as the debt market starts factoring a possible interest rate hike), the banks will have to set aside funds to mark to market their investment. This will make it difficult to show huge profits from treasury operations. This concern becomes much stronger because a substantial percentage of bank deposits remain invested in government bonds. Banking in the recent years had been reduced to a trading operation in government securities. Recent months have shown a rise in the bond yields has led to the profit from treasury operations falling. The latest quarterly reports of banks clearly show several banks making losses on their treasury operations. If the rise in yields continues the banks might end up posting huge losses on their trading books. Given these facts, banks will have to look at alternative sources of investment.Interest rates and non-performing assetsThe best indicator of the health of the banking industry in a country is its level of NPAs. Given this fact, Indian banks seem to be better placed than they were in the past. 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). But as the bond yields start to rise the chances are the net NPAs will also start to go up. 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.Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal processes over the years. This does not seem to be the case. With increasing bond yields, treasury income will come down and if the banks wish to make large provisions, the money will have to come from their interest income, and this in turn, shall bring down the profitability of banks.Competition in retail bankingThe entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporate. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose from. With supply far exceeding demand it has been a race to the bottom, with the banks undercutting one another. 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 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. The PSBs have been losing business to the private sector banks in this segment. PSBs need to figure out the means to generate profitable business from this segment in the days to come.The urge to mergeIn the recent past there has been a lot of talk about Indian Banks lacking in scale and size. The State Bank of India is the only bank from India to make it to the list of Top 100 banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a larger bank. The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired, majority of the mergers/acquisitions do not really work. So in the zeal to merge with or acquire another bank the PSBs should not let their common sense take a back seat. Before a merger is carried out cultural issues should be looked into. 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 cultures might be very different. So the integration process might become very difficult. Technological compatibility is another issue that needs to be looked into in details before any merger or acquisition is carried out.Impact of BASEL-II normsBanking is a commodity business. The margins on the products that banks offer to its customers are extremely thin vis a vis other businesses. As a result, for banks to earn an adequate return of equity and compete for capital along with other industries, they need to be highly leveraged. 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).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. These rules were formulated by the Bank for International Settlements in 1988. Essentially, these rules tell the banks how much capital the banks should have to cover up for the risk that their loans might go bad. The rules set in 1988 led the banks to differentiate among the customers it lent out money to. Different weightage was given to various forms of assets, with zero percentage weightings being given to cash, deposits with the central bank/govt. etc, and 100 per cent weighting to claims on private sector, fixed assets, real estate etc. The summation of these assets gave us the risk-weighted assets. Against these risk weighted assets the banks had to maintain a (Tier I + Tier II) capital of 9 per cent i.e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital. To put it simply the banks had to maintain a capital adequacy ratio of 9 percent. The problem with these rules is that they do not distinguish within a category i.e. all lending to private sector is assigned a 100 per cent risk weighting, be it a company with the best credit rating or company which is in the doldrums and has a very low credit rating. This is not an efficient use of capital. The company with the best credit rating is more likely to repay the loan vis a vis the company with a low credit rating. So the bank should be setting 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. 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 risk is not the only type of risk that banks face. These days the operational risks that banks face are huge. The various risks that come under operational risk are competition risk, technology risk, casualty risk, crime risk etc. The original BASEL rules did not take into account the operational risks. As per the BASEL-II norms, banks will have to set aside 15 per cent of net income to protect themselves against operational risks.

Over the last few years, the falling interest rates, gave banks very little incentive to lend to projects, as the return did not compensate them for the risk involved. This led to the banks getting into the retail segment big time. It also led to a lot of banks playing it safe and putting in most of the deposits they collected into government bonds. Now with the bond party over and the bond yields starting to go up, the banks will have to concentrate on their core function of lending. The banking sector in India needs to tackle these challenges successfully to keep growing and strengthen the Indian financial system. Furthermore, the interference of the central government with the functioning of PSBs should stop. A fresh autonomy package for public sector banks is in offing. The package seeks to provide a high degree of freedom to PSBs on operational matters. This seems to be the right way to go for PSBs. 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.

Punjab National Bank at a Glance Punjab National Bank(PNB) was established in 1895 in anarkali bazaar at Lahore, undivided India, Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital. The bank was nationalised in July 1969 along with 13 other banks. From its modest beginning, the bank has grown in size and stature to become a front-line banking institution in India at present. Today, the Bank is the second largestgovernment-ownedcommercial bankinIndiawith about 5000 branches across 764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bank in the world by theBankers Almanac, London. The bank's total assets for financial year 2007 were about US$60 billion. It has Strong correspondent banking relationships with more than 217 international banks of the world. More than 50 renowned international banks maintain their Rupee Accounts with PNB. PNB has a banking subsidiary in the UK, as well as branches inHong Kong, Dubai andKabul, and representative offices in Almaty,Dubai,Oslo, andShanghai. PNB's founders included several leaders of theSwadeshi movement such asDyal Singh Majithia and Lala HarKishen Lal Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass.Lala Lajpat Raiwas actively associated with the management of the Bank in its early years. HISTORY 1895: PNB commenced its operations inLahore. 1904: PNB established branches in Karachi andPeshawar. 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located inDelhicircle. 1947:Partition of Indiaand Pakistan at Independence. PNB lost its premises in Lahore, but continued to operate in Pakistan. 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became Bharat Nidhi Ltd. 1961: PNB acquired Universal Bank of India. 1963: The Government ofBurmanationalized PNB's branch inRangoon(Yangon). 1965: After theIndo-Pak warthe government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which may have moved to Karachi. PNB also had one or more branches inEast PakistanBangladesh. 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue. 1969: TheGovernment of India(GOI) nationalized PNB and 13 other major commercial banks, on July 19, 1969. 1976 or 1978: PNB opened a branch inLondon. 1986 TheReserve Bank of Indiarequired PNB to transfer its London branch toState Bank of Indiaafter the branch was involved in a fraud scandal. 1988: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition added Hindustan's 142 branches to PNB's network. 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980. 1998: PNB set up a representative office inAlmaty,Kazakhstan. 2003: PNB took overNedungadi Bank, the oldest private sector bank inKerala. At the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that its shareholders received no payment for their shares. PNB also opened a representative office inLondon 2004: PNB established a branch inKabul,Afghanistan.PNB also opened a representative office inShanghai.PNB established an alliance withEverest BankinNepalthat permits migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal. 2005: PNB opened a representative office inDubai. 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with two offices, one inLondon, and one in South Hall. Since then it has opened a third branch in Leicester, and is planning a fourth in Birmingham. 2008: PNB opened a branch in Hong Kong. 2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong Kong, this inKowloon. 2010: PNB received permission to upgrade its representative office in theDubai International Financial Centreto a branch. Bank with over 56 million satisfied customers and 5002 offices, PNB continue to retain its leadership position among nationalised banks. The bank enjoys strong fundamental, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card & debit card business; bullion business; life and non-life insurance business; Gold coins & asset management business, etc. PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 435931 crore. Today, with assets of more than Rs 2,96,633 crore, 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 ).During the FY 2009-10, with 40.85% share of CASA deposits, the bank achieved a net profit of Rs 3905 crore. Bank has a strong capital base with capital adequacy ratio of 14.16% as on Mar10 as per Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As on March10, the Bank has the Gross and Net NPA ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher than the stipulated requirement of 40% & 18%.The Bank has maintained its stake holders interest by posting an improved NIM of 3.57% in Mar10 (3.52% Mar09) and a Return on Assets of 1.44% (1.39% Mar09). The Earning per Share improved to Rs 123.98 (Rs 98.03 Mar09) while the Book value per share improved to Rs 514.77 (Rs 416.74 Mar09)Punjab National Bank continues to maintain its frontline position in the Indian banking industry. In particular, the bank has retained its NUMBER ONE position among the nationalized banks in terms of number of branches, Deposit, Advances, total Business, Assets, Operating and Net profit in the year 2009-10. The impressive operational and financial performance has been brought about by Banks focus on customer based business with thrust on CASA deposits, Retail, SME & Agri Advances and with more inclusive approach to banking; better asset liability management; improved margin management, thrust on recovery and increased efficiency in core operations of the Bank. The performance highlights of the bank in terms of business and profit are shown below:Rsin CroreParametersMar'08Mar'09Mar'10CAGR (%)

Operating Profit40065744732622.29

Net Profit20493091390523.98

Deposit16645720976024933014.42

Advance11950215470318660116.01

Total Business28595936446343593115.09

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 has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution (CBS) since Dec08, 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. The bank has also been offering Internet banking services to the customers of CBS branches like booking of tickets, payment of bills of utilities, purchase of airline tickets etc. Towards developing a cost effective alternative channels of delivery, the bank with more than 3500 ATMs has the largest ATM network amongst Nationalized Banks. With the help of advanced technology, the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. With its policy of inclusive growth in the Indo-Genetics belt, the Banks mission is Banking for Unbanked. 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. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. Under Branchless Banking model, the Bank is implementing 40 projects in 16 States. The Bank launched an ambitious Project Namaskar under which 1 lakh touch points will be established in unbanked villages by 2013 to extend the Banks outreach. Under this, 30 Kiosks have been opened covering 119 Villages reaching 1.32 Lakh beneficiaries.Backed by strong domestic performance, the bank is planning to realize its global aspirations. Bank continues its selective foray in international markets with presence in 9 countries, with branches at Kabul and Dubai, Hong Kong & representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK, a joint venture with Everest Bank Ltd. Nepal and a JV banking subsidiary DRUK PNB Bank Ltd. 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, Australia and taking controlling stake in JSC Dana Bank in Kazakhstan.

Mission and VisionVISION"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- economic development

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, internet banking, EFT & Clearing services etc

Award & AchievementsBest IT Team of the year Award

SKOTCH Challenger Awardfor Change Management for the year 2005-06

Best IT User in Banking & Financial Services Industry - 2004by NASSCOM in partnership with Economic Times

Golden Peacock Awardfor Excellence in Corporate Governance - 2005 by Institute of Directors

FICCI's Rural Development Awardfor Excellence in Rural Development 2005

Skotch Challenger Award for Exemplary use of Technologyfor becoming a pioneer in Public Banks - 2005

Golden Peacock National Training - 2004 & 2005by Institute of Directors

National Award for Excellence in SSI LendingRanked 2nd for 4 consecutive years - 2002, 2003, 2004 & 2005

Banking Technology Awards 2004Runner up in 'Best IT Team of the Year Award 2005'Jointly Adjudged by IBA, Finacle & TFCI

Money Outlook Award - 2004Runner up in 'Best Bank (public Sector) of the year Award' -2005

Niryat Bandhu Gold Trophyfor excellence in export perforamnce for 3 consecutive years 2001, 2002 & 2003by Federation of Indian Exporters Organization (FIEO)

21st Amongst Top 500 Companiesby the leading Financial Daily The Economic Times, June 2005

9th amongst India's Top 50 Most Trusted Service BrandsA.C Nielson Survey, The Economic Times Dec 2004

3rd Rank amongst Banking Sector in India323rd Rank in the WorldThe Bankers' Almanac, January 2006

368 amongst Top 1000 Global BanksThe Banker, London July 2005

Skoch Challenger Award for Exemplary Use of TechnologyWinner for becoming a pioneer in public banks by Skoch consultancy services pvt ltd, Gurgaon 2005

FICCI's Rural Development AwardAward for excellence in rural development 2005

Amity Global Corporate Excellence AwardAmity Business School, Noida has conferred the Award to PNB, after an in-depth research to analyse the strengths and core competencies of the Global 500 companies and banks which have already made an indelible most admired impression on the Indian economy. 2008& 2007 & 2005

Banking Technology AwardsIBA, Finacle & TFCI jointly adjudged PNB as runner up in "Best IT Team of the year Award" 2005

PC Quest Users Choice AwardBest IT Implementation 2007& 2005

Symantec Visionary AwardInformation Security Impact 2005

Money Outlook AwardMoney Outlok adjudged PNB as runner up in "Best Bank (Public Sector) of the year Award" 2005

Banking Technology AwardsIBA, Finacle & TFCI runner up Award for Outstanding Achiever of the Year (Individual). 2005

Golden Peacock Innovative Product/Service Award2010 (for BCP implementation)

Golden Peacock Award for Excellence in Corporate GovernanceWinner in the Large Joint Entry.2009 &2007 & 2005

Skoch Challenger Award for Change ManagementFor upliftment of Weaker sections of society 2006

IDRBT Banking Technology AwardsBest IT Team of the Year Award 2006

National Award For Excellence in lending to Tiny sectorFirst Prize by By Ministry of Small Scale Industries.2006

Skoch Challenger Award for capacity building for FTC initiativeSkoch Consultancy Services Pvt Ltd 2007

Computer Associates Excellence AwardExcellence in EMS Roll Out. 2007

CIO 100 AwardFor Best IT Implementation by IDG Media Pvt. Ltd.2007, 2008 & 2009

National Award for Excellence in Lending to Micro EnterprisesFor Lending to Micro enterprises 2007

Award for the use of Technology for Financial Inclusion.Institute for Development and Research in Banking Technology (IDRBT), Hyderabad. 2008

Dun & Bradstreet Award for Priority Sector Lending including Financial Inclusion.Dun & Bradstreet 2009

National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in NORTH ZONEKhadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Interest Subsidy Eligibility Certificate Scheme)2009

National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes inCENTRAL ZONEKhadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Interest Subsidy Eligibility Certificate Scheme)2009

National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes inNATIONAL LEVELKhadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Interest Subsidy Eligibility Certificate Scheme) 2009

National Award for Excellence in Lending for Institutional Finance for Propagating KVI Programmes inNORTH ZONEKhadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Prime Minister Employment Generation Programme) 2009

National Award for Excellence in Lending for Institutional Finance for Propagating KVI Programmes inCENTRAL ZONEKhadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Prime Minister Employment Generation Programme) 2009

India Pride Award by dainik Bhaskar and Daily News analysisExcellence in PSU 2009

Indira Gandhi Rajbhasha ShieldPromoting Hindi 2009

Emerson Uptime Champion Awards2009

Best InfoSphere Warehouse Solution Award by IBM2009 (for implementation of Enterprise Wide Data Warehouse)

Organizational structure of Punjab National Bank

Hierarchy

Board of Directors Sh.K.R. Kamath:- He has been appointed as a chairman and managing director of Punjab National Bank by Govt. Of India. Sh. M.V.Tanksale:- Executive Director Sh. Nagesh Pydah:- Executive Director Smt. Ravneet Kaur:- Govt. of India Nominee Director Shri L.M.Fonseca:- Reserve Bank of India Nominee Director Shri Mushtaq A Antulay:- Part-time non-official Director Shri Gautam P. Khandelwal:- Part-time non-official Director Shri Vinod Kumar Mishra:- Part-time non-official Director Shri Tribhuwan Nath Chaturvedi:- Share Holder Director Shri G R Sundaravadivel:- Share Holder Director Shri Devinder Kumar Singla: Share Holder Director Sh. M P Singh:- Workmen Employees Director Sh. Pradeep Kumar:- Officer Director

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. This chapter provides the overall view of the available literature with respect to the topic of the project. The review of the related research works are described as under:-

1. A research work on the topic On the appraisal on consumer credit banking products with the asset quality frame: A multiple criteria application. done by Panagiotis Xidonas, Alexandros Flamos, Sortirios Koussouris, 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. Decision problems like the "internal appraisal of banking products", are problems with strong multiple-criteria character and it seems that the methodological framework of Multiple Criteria Decision Making could provide a reliable solution. In this paper, the Asset Quality banking indicators are the, so called, "criteria", the value of these indicators are the, so called, "scores" in each criterion and the P.R.O.METH.E.E. [Preference Ranking Organization Method of Enrichment Evaluations, Brans & Vincke (1985)] Multiple Criteria method is applied, towards modelling banking products appraisal problems. A Multiple Criteria process, strictly mathematically defined, integrates the behaviour of each indicator-criterion and utilizes each score in order to rank the so called "alternatives", i.e. categories of banking products.

2. The research Paper on Evaluation of decision support systems for credit management decisions by S. Kanungo, S.Sharma, P.K. Jain from Department of studies, IIT Delhi have conducted a study to evaluate the efficiency of decision support system (DSS) for credit management. This study formed a larger initiative to access the effectiveness of the I.T based credit management process at SBI. 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. The DSS they have assessed was a credit appraisal system developed by Quuattro pro at SBI. This system helps in analysis of balance sheets, Calculation of financial ratios, cash flow analysis, future projections, sensitivity analysis and risk evaluation as per SBI norms. They have also used a strong Quassi experimental design called Solomons four group design for the assessment. 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. An experimental intervention was applied between the pre-tests and the pro-tests. The intervention or stimulus consisted of DSS training and use. There were four groups in the experiment. 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. Two were experimental groups and two were control groups. All four groups underwent training in credit management between the pre and the post tests. Results from research shows that while the DSS is effective, improvement needs to be done in the methodology to assess such improvements. Moreover such assessment frameworks while being adequate from a DSS-centric viewpoint do not respond to the assessment of DSS in an organizational setting . 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.3. 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. Mehdian, Wm. McD. Herr, Phil Eberle, 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. 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. A review of the literature shows that agricultural finance specialists have not been successful in evaluating whether FMHA pro- grams improve the efficiency and income of probability of success. Liberal loan policiesEligible borrowers. Inadequate evaluation of the FMHA program occurs partly because of because the difficulty of adequately deter-mining the impacts of changes in the econ- borrowers in a more normal period of the loan. 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. The book named Financial Analysis for Bank Lending in Liberalised Economy by Sampat.P.Singh and Dr.S.Singh have discussed the subject financial analysis for bank lending has assumed considerable importance, particularly since early 1990's when, like most of the countries, India opted for the policy of liberalisation and globalisation after 1991. 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. The book consists of three parts. Part I discusses the concepts and tools of Financial Analysis; Part II explains various concepts of working capital in its historical context; while Part III demonstrates the application of these tools in the changing context of liberalised economy by focusing on new concepts like 'Credit Worthiness', Risk-Analysis, Credit Rating, Products-Differentiation, Pricing-Differentiation, Asset-Liability Management, etc. The book contains- Bank Lending and Industrial Finance in India ,Basic Economics for Bankers and Business Managers ,Introduction to Fundamentals Accounting Principles ,Profit and Loss Account (Operating Statement) ,Analysis of Profit and Loss Account (Operating Statement) ,Structure and Analysis of Balance Sheet ,Ratios as Tools of Financial Statements Analysis ,Accounting Flows : Income, Cash and Funds ,Break-even Analysis and Margin of Safety ,Appraisal of Capital Projects ,New Conceptual Framework for Analysis, Liberalised Era and New Focus of Bank Lending ,Managing Working Capital by Strategic Choice , Financing Working Capital : Conceptual and Historical Exposition,Creditworthiness and Credit Rating : At Centre stage Nucleus of Credit Appraisal , 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 ,Working Capital Management-III : Follow-up and Supervision , Appraisal of a New Project Involving Term Loan , Management of Problem Accounts , Management of Non-Performing Assets (NPAs), Rehabilitation of Sick Industrial Units, Working Capital Management : Concepts and Techniques , 1st Committee on Financial Sector Reform and the 2nd Committee on Banking System Reform (Known as Narasimham Committee Report, 1998).

5. The research paper on the topic Competitive analysis in banking: Appraisal of the methodologies by Nicola Cetorelli has discussed about the U.S. banking industry has experienced significant structural changes as the result of an intense process of consolidation. From 1975 to 1997, the number of commercial banks decreased by about 35 percent, from 14,318 to 9,215. Since the early 1980s, there have been an average of more than400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998). The relaxation of intrastate branching restrictions, effective to differing degrees in all states by 1992, and the passage in 1994 of the Riegle.Neal Interstate Banking and Branching Efficiency Act, which allows bank holding companies to acquire banks in any state and, since June 1, 1997, to open interstate branches, is certainly accelerating the process of consolidation. These significant changes raise important policy concerns. On the one hand, one could argue that banks are merging to fully exploit potential economies of scale and/or scope. The possible improvements in efficiency may translate into welfare gains for the economy, to the extent that customers pay lower prices for banks. services or are able to obtain higher quality services or services that could not have been offered before.1 On the other hand, from the point of view of public policy it is equally important to focus on theeffect of this restructuring process on the competitive conditions of the banking industry. Do banks gain market power from merging? If so, they will be able to charge higher than competitive prices for their products, thus inflicting welfare costs that could more than offset any presumed benefit associated with mergers. In this article, 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.

Credit Philosophy & Policy with regards to Punjab National BankAn ideal advance is the one given to a reliable customer for an approval purpose with adequate experience, 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 philosophy To achieve credit expansion required for sustaining the profitability of the bank and emphasis on quality assets, profitable relationships and prudent growth. CREDIT POLICY Bank follows following broad policy imperatives:- Reduction in dependence upon short term corporate loans, especially unsecured exposures. Aiming to achieve more sanctions at levels closer to the customer. Changing the mix of the portfolio in favour of better diffused and higher yielding credit. Building competencies in credit management through training & promotion of self directed learning.

Objectives of credit policy

1. A balanced growth of credit portfolio, which does not compromise safety.2. Adoption of a forward looking and market responsive approach for moving into profitable new areas on lending which emerge, within the pre determined exposure ceilings.3. Sound risk management practices to identify measure, monitor and control risks.4. Maximize interest yields from credit portfolio through a judicious management of varying spreads of loan assets based upon their size, credit rating and tenure.5. Leverage on strong relationships with existing long-standing clients to source a bulk of new business by addressing their requirements comprehensively.6. Ensure due compliance of various regulatory norms including CAR, income recognition and asset classification 7. Accomplish balanced development of credit to various sectors and geographical regions.8. Achieve growth of credit to priority sectors / subsectors and continue to surpass the targets stipulated by reserve bank of India.9. Using of pricing as a tool of competitive advantage ensuring however that earnings are protected.10. Develop and maintain enhanced competencies in credit management at all levels through a combination of training initiatives, promotion of self directed learning and dissemination of best practices.

Objectives in CreditTo maintain healthy balance between- Credit volumes Earnings Asset qualitywithin the framework of regulatory prescriptions, corporate goals and banks social responsibilities.

Introduction to loansLoans are advances for fixed amounts repayable on demand or in instalment. They are normally made in lump sums and interest is paid on the entire amount. The borrower cannot draw funds beyond the amount sanctioned. A key function of the Bank is deploying funds for income-yielding assets. A major part of Banks assets are the loans and advances portfolio and investments in approved securities. Loans & Advances refer to long-term and short-term credit facilities to various types of borrowers and non-fund facilities like Bank Guarantees, Letters of Credit, Letters of Solvency etc. Bill facilities represent structured commitments which are negotiable claims having a market by way of negotiable instruments. Thus, 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/AdvancesClassification of LoansLoans/Advances

Pre-shipment Finance Post shipment Finance Letter of Credit Bank Guarantee Term LoanExport FinanceBill Discounting Cash Credit Retail Loan Non-Fund Based Fund BasedFund Based

Bank provides credit in various forms. These are broadly classified into two categories- Fund based and Non Fund Based. Fund based refers to the type of credit where cash is directly involved i.e. where bank provides money to the seeker in anticipation of getting it back. Where as in a Non-fund Based, Bank doesnt pay cash directly but gives assurance or takes guarantee on behalf of its customer to pay if they fail to do so. In case on Fund Based there are different categories of loans which are discussed as followsI. RETAIL LOANS-Retail banking in India is not a new phenomenon. It has always been prevalent in India in various forms. For the last few years it has become synonymous with mainstream banking for many 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. Personal loans Retail loan is the practice of loaning money to individuals rather than institutions. Retail lending is done by banks, credit unions, and savings and loan associations. These institutions make loans for automobile purchases, home purchases, medical care, home repair, vacations, and other consumer uses. Retail lending has taken a prominent role in the lending activities of banks, as the availability of credit and the number of products offered for retail lending have grown. The amounts loaned through retail lending are usually smaller than those loaned to businesses. Retail lending may take the form of instalment loans, which must be paid off little by little over the course of years, or non-instalment loans, which are paid off in one lump sum.These loans are marketed under attractive brand names to differentiate the products offered by different banks. As the Report on Trend and Progress of India, 2007-08 has shown that the loan values of these retail lending typically range between Rs.20, 000 to Rs.100 lakh. The loans are generally for duration of five to seven years with housing loans granted for a longer duration of 15 years. Credit card is another rapidly growing sub-segment of this product group. In recent past retail lending has turned out to be a key profit driver for banks with retail portfolio. The overall impairment of the retail loan portfolio worked out much less then the Gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least gross asset impairment. In fact, retailing make ample business sense in the banking sector. Basic reasons that have contributed to the retail growth in India are- First, economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer boom. Note that during the 10 years after 1992, India's economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate not many countries in the world match this performance. Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35 years of age (young population). The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India. Third, technological factors played a major role. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth of retail banking in India. Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. Considering the fact that retails share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams. Fifth, decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit.

According to K V Kamath, the changing demographic profile and a downward trend of the interest rates will propel retail credit in India."There is a huge retail credit opportunity that is surfacing. Banks have low penetration in this segment currently. But it is the one area that is providing the momentum in the banking business now, India has among the lowest penetration of retail loans in Asia. Though the sector has been growing at around 15 per cent, there is still a huge opportunity to tap into.Middle and -high-income homes in India has increased to 2.57 crore (25.7 million). Interest rates on retail loans have been dropping rapidly too. For instance residential mortgages slumped by 7 per cent over the last four years."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," says Kamath.II. WORKING CAPITAL / CASH CREDITCash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount. The bank provides certain amount to the company for its day to day working keeping certain margin in hand.III. TERM LOANSA bank loan to a company, with a fixed maturity and often featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending.Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates, and monthly or quarterly repayment schedules and include a set maturity date. Bankers tend to classify term loans into two categories: Intermediate-term loans: Usually running less than three years, these loans are generally repaid in monthly instalments (sometimes with balloon payments) from a business's cash flow. According to the American Bankers Association, repayment is often tied directly to the useful life of the asset being financed. Long-term loans: These loans are commonly set for more than three years. Most are between three and 10 years, and some run for as long as 20 years. 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), and they sometimes require that a certain amount of profit be set-aside to repay the loan.Appropriate For: Established small businesses that can leverage sound financial statements and substantial down payments to minimize monthly payments and total loan costs. Repayment is typically linked in some way to the item financed. Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing.Supply: Abundant but highly differentiated. The degree of financial strength required to receive loan approval can vary tremendously from bank to bank, depending on the level of risk the bank is willing to take on.IV. BILL DISCOUNTINGWhile discounting a bill, the Bank buys the bill (i.e. 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. 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.Bills of exchange- A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. 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. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, 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. It is essentially an order made by one person to another to pay money to a third person.A bill of exchange requires in its inception three parties--the drawer, the drawee, and the payee.The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn id called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee.Promissory Note- A promissory note is a written promise by the maker to pay money to the payee. Bank note is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date.A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date.A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money to order or to bearerV. EXPORT FINANCE- This type of a credit facility is provided to exporters who export their goods to different places. It is divided into two parts- pre-shipment finance and post-shipment finance. Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. 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. 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. Exporters dont wait for the importer to deposit the funds.Non Fund Based loans generate income for the bank without committing the funds of the bank. Bank generates substantial income under this head. There are two types of credit under this category which are discussed as follows:-I. BANK GUARANTEE-A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.

Any one can apply for a bank guarantee, if his or her company has obligations towards a third party for which funds need to be blocked in order to guarantee that his or her company fulfils its obligations (for example carrying out certain works, payment of a debt, etc.).

In case of any changes or cancellation during the transaction process, a bank guarantee remains valid until the customer dully releases the bank from its liability.

In the situations, where a customer fails to pay the money, the bank must pay the amount within three working days. This payment can also be refused by the bank, if the claim is found to be unlawful.

II. LETTER OF CREDIT-A standard, commercial letter of credit is a document issued mostly by a financil institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking.The LC can also be the source of payment for traction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment were insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

Building Up of a Proposal1.GATHERING CREDIT INFORMATION:-An appraisal of a proposal begins with the gathering of adequate background knowledge about borrowers character and credit worthiness. In the concept of appraisal, much reliance is placed on the credentials of the borrower. Therefore, there is a necessity for evaluation of the borrower in regard to his standing in the business, means and respectability. 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. 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.

Information by definition is that data which is relevant and meaningful for making decisions. An information system is an aid to the decision making, carrying out and altering decisions. All information required by the banker in the pre-sanction period should become part of a system. It should flow into the information system from various sources, such as the borrower, banks own record, environment etc. A significant basis of banker-borrower relationship is governed by the information which flows between the two parties. After ascertaining the credit needs of the borrower, the banker looks towards information about his borrowers credit worthiness. He seeks out the credit information etc. from his co-bankers, other borrowers and market information.

2. VARIOUS SOURCES OF CREDIT INFORMATION Information regarding character, honesty, and financial position has to be discreetly gathered from following sources:a. 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, nature of its business, past and expected profitability, the degree of competition that the firm/company faces and whether or not it has had or anticipated any difficulty etc.

Information regarding its principal officers should be collected during such interview.

b. Borrowers financial statements: for lending decisions, financial information is a significant part of the total information system. It is derived basically from borrowers: Trading and profit and loss statement Balance sheet Cash and fund flow statements

c. Banks own records: If he is an existing borrower, banks own records are a rich source of additional information. Operations in the borrowers account and other dealings at the bank level in regard to collections, discounting/retirement of bills etc. often useful clues to borrowers operating and financial transactions. A review of the previous years operations in the account and assessments of borrowers financial statements relating to that period will provide a rich source of information about the borrower.

d. Opinions: Bank should compile opinions on their borrowers. They should contain full and reliable records of the character, estimated means and business activities of all firms and individuals who are under any form of liability to the bank, whether as direct borrowers or as co-obligators. Full particulars of parties immovable properties where they are situated, whether they are free from encumbrance and in the case of land, acreage should be recorded together with fair estimates of their value. 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.

e. From other banks: in respect of fresh proposals, enquiries with local banks should be made before entertaining the proposal to avoid multiple financing without our full knowledge. In case of new customer having dealings with other banks, confidential opinion of his banker has to be obtained.

f. Income tax assessment order- Income tax assessment orders agricultural income tax assessment orders give an insight into the borrowers account and the extent to which it is profitable. Comments thereon by the income tax office shall indicate the shortcomings (lacunae) in the business. In the case of estate owners agricultural tax assessment orders to be obtained to arrive at parties credit worthiness.

g. Sales tax assessment orders: Sales tax assessment orders will reveal the turnover in business and when read with trading/ manufacturing and profit & loss account, it may be possible to have a fair assessment of tendencies in trade i.e., whether over-trading or carefully trading within recourses at command or trading entirely on the borrowed funds.

h. 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.

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.

j. Property statements: The property statement of borrower will give an idea of his worth, liabilities and his income from real estates (immovable properties).

k. Municipal property registers: reference to municipal property registers will give an idea of building owned within the municipality, Rental Values and house tax payable. It may be noted that the said registers are open for reference to all persons.

l. Other external sources: other external sources, if any, like stock exchange directory, business periodicals/magazines/journals etc.

REQUIREMENTS AS PER CONSTITUTION OF BOROWER:

Following Requirements as per constitution of borrower should be collected for proposals emanating from-

1. Partnership: Copy of partnership deed Copy of certificate of registration of firm (if registered)

2. 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. Board resolution for borrowings, creation on the assets of the company and execution of the documents.

3. Cooperative societies Bylaws Permission from registrar for the borrowings, creation of charge on the assets of the society and execution of documents.

4. Trusts Trust deed Resolution for the borrowings and execution of documents.

5. Industrial units : Project report with cash flow, fund flow statements etc. Industrial licenses/SSI registration certificate. License from local authority, compliance of legal requirements or conditions as applicable and clearance from regulatory bodies.

FINANCIAL APPRAISAL

On receipt of a loan application the banker begins the process of financial appraisal. The first thing done is to analyze the financial statements. Therefore, an understanding of these financial statements is important for the appraiser.Once balance sheet is taken for analysis the following items are checked up:

1. Fixed assets: To find out any revaluation of fixed assets done by the company to improve their net worth. The schedules of the fixed assets should be checked up. Study notes on accounts and comments of auditors should be checked. Schedule for reserve should be studied Any change in the accounting procedure of depreciation should be checked 2. Current assets: to find out whether the assets stated are really liquid or not. 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 auditors report should be read and understood properly. The claims lodged against receivables must be studied The receivables due from sister/associate concerns must be studied.

3. Other Current Assets: Their reasonableness and their need to maintain them for the business. Various components of other current assets and if the same is more than 5% -10%, ascertain the nature and need for maintaining such amount ; any assets which is not used in the into day business activity shall be removed and proper treatment is to be made accordingly. Bank guarantee or letter of credit margin shall be shown as non- current assets.

4. Contingent liabilities: To find out any unrecognized liabilities or losses if any. The CDD/DBD other bills discounted liability, if any ,is reported in the auditors report , 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. Term liabilities: To find out whether the liabilities are long term or short term, and its needs and regularity This shall be decreasing year after year; if it has increased, then the reason for the same is to be looked into (may be irregular or new term loan availed for expansion etc.) The term liabilities with repayment of the same and the amount payable