Credit Appraisal Final Report

8/18/2019 Credit Appraisal Final Report

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Table of Contents

CHAPTER 1 INTRODUCTION TO BANKING

SECTOR…………………

………1

1.1 Histor of

Ban!in"………………………...................

...1

1.# Classi$%ation ofBan!s……...................................&

1.& PNB Pro$le……...

……………………………………….........'

CHAPTER # INTRODUCTION TO CREDIT

APPRAISA(……………..………1) #.1 Reasons for sele%tin" t*e

+ro,e%t ………………..……..1) #.# Ob,e%ti-e of t*e +ro,e%t

………………………….………….1 #.& O-er-ie/ of %re0it

……………………………………………..1 #.) Basi% o-er-ie/ of (oans

…………………………………....1

#. 2or!in" Ca+ital…………………………………….…………..#1 #.' Re-ie/ of (iterat3re

………………………….………………#) #. Cre0it A++raisal ………………..

……………………………..#4


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CHAPTER & RESEARCH

5ETHODO(OG6………………………………

……..&1CHAPTER ) TE7

STUD6……………………………………………

…………………CHAPTER 5ARKET8INDUSTR68PRODUCT

ANA(6SIS….…………….&CHAPTER '

BIBI(8E9UI:A;8HIGH5ARK………………

……………………..&<CHAPTER CREDIT RISK

RATING…………………………………………

……..)=CHAPTER < :INANCIA(

ANA(6SIS………………………………………

………..)CHAPTER 4 SECURIT6 O::ERED B6 THE

CO5PAN6……………………..)<CHAPTER 1= RATIO ANA(6SIS

………………………………………………….

…..)4CHAPTER 11 7ARIOUS AUDIT REPORTS …….

………………………………….'CHAPTER 1# POST SANCTION :O((O2 UP B6

(OAN…………………….<CHAPTER 1&

CONC(USION…………………………………

……………………..'=


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CHAPTER 1) CASE

STUD6……………………………………………

…………….'#CHAPTER 1

BIB(IOGRAPH6………………………………

………………………=


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E;ECUTI7E SU55AR6

This study shows that how PNB bank gives the loans to its customers.

Credit appraisal is done to evaluate the credit worthiness of a buyer.

This project has analyzed the credit appraisal procedure with special

reference to PNB which includes knowing about the dierent credit

facilities provided by the banks to its customers! how loan proposal is

being paid! what are the formalities that is to be satis"ed and most

importantly knowing about the various credit appraisal techni#ues

which are dierent for each type of credit facilities. The credit appraisal

for any organization basically follow these steps$ %ssessment of credit

need! "nancial statement analysis! and "nancial ratios of the company!

credit rating! working capital re#uirement! term loan analysis!

submission of documents! NP% classi"cations and recovery.

The main aim of research is to "nd out the truth

which is hidden and which has not been discovered

as yet. Though each research study has its own

speci"c purpose! we may think of the following

broad categories$

• To gain familiarity with the phenomenon or to

achieve new insights into it.

• To portray accurately the characteristics of a

particular individual! situation or a group.

• To determine the fre#uency with which something

occurs or with which it is associated with

something else.

&t is a way to systematically solve the research

problem. &t may be understood as a science of

studying how research is done scienti"cally. &n it we

study the various steps that are generally adopted

by a researcher in studying his research problem

along with the logic behind them.


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CHAPTER 1INTRODUCTION TO

BANKING SECTOR

&n &ndia! the de"nition of business banking hasbeen given in the banking regulation act! 'B(

%ct)! *+,+. %ccording to section -'c) of the B(

%ct! a banking company is a company which

transacts the business of banking in &ndia./

0urther! 1ection -'b) of the B( %ct de"nes

banking as! accepting! for the purpose of

lending and investment! of deposits of money

from the public! repayable on demand or

otherwise and withdrawal by che#ue! draft and

order or otherwise./ This de"nition points to the

three primary activities of a commercial banks

which distinguish it from the other "nancial

institutions. These are$

*) 2aintaining deposit accounts including

current accounts!3) &ssue and pay che#ues! and4) Collect che#ues from the bank/s customers.

1.1>Histor of ban!in"Banking in India has its origin a searly as the Vedic period .It

is believed that the transition from money lending to banking

must have occurred even before Manu, the great Hindu

Jurist, who has devoted a section of his work to deposits and

advances and laid down rules relating to rates of interest.

uring the Mogul period, the indigenous bankers played a

very important role in lending money and financing foreign

trade and commerce. uring the days of the !ast India

"ompany, it was the turn of the agency houses to carry on the

banking business. #he $eneral Bank of India was the first

Joint %tock Bank to be established in the year &'(). #he


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others which followed were the Bank of Hindustan and the

Bengal Bank. #he Bank of Hindustan is reported to have

continued till &*+) while the other two failed in them ean

time.In the first half of the &*th

century the !ast India

"ompany established three banks the Bank of Bengal in

&(+*, the Bank of Bombay in &(-+ and the Bank of Madras

in &(-. #hese three banks also known as /residency Banks

were in depending intuit sand functioned well. #hese three

banks were am alga mated in&*0+ and anew bank, the

Imperial Bank of India was established on 0'th

January &*0&.

1ith the passing of the %tate Bank of India 2ct in &*33 the

undertaking of the Imperial Bank of India was taken over by

the newly constituted %tate Bank of India. #he 4eserve Bank

which is the "entral Bank was created in &*3 by passing

4eserve Bank of India 2ct &*- .In the wake of the %wedishi

Movement, a number of banks with Indian management were

established in the country namely, /un5ab 6ational Bank 7td,

Bank of India 7td, "anara Bank 7td, Indian Bank 7td, the

Bank of Baroda 7td, the "entral Bank of India 7td. 8n July

&*, &*)*, &- ma5or banks of the country were nationali9ed

and in &3th

2pril &*(+ si: more commercial private sector

banks were also taken over by the government. %ince then,

the industry has witnessed substantial growth and radical

changes. 2s of March 0++0, the Indian banking industry

consisted of *' "ommercial Banks, &*) 4egional 4ural

Banks, 30 %cheduled ;rban "o


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may be further divided into three sub


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Commercial bank

It is also known as e:change bank of India that provides services

such as accepting deposits, making business loans, and offering

basic investment products. "ommercial bank can also refer to a

bank or a division of a bank that mostly deals with deposits and

loans from corporations or large businesses, as opposed to

(515(65 B%N7 80 &N9&%

1C59:;59 B%N71

CorporateCommercial Bank

(egional

rural

bank'*+


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individual members of the public .#he term commercial was

used to distinguish it from a investment bank.

"ommercial banks are the oldest, biggest and fastest growing

financial intermediaries in India. #hey are the most important

depositories of public saving and the most important disbursersof finance. It is a uniAue banking system which works under

constraints that go with social control and public ownership. #he

public ownership of banks has been achieved in three stages=

&**3, July &*)* and 2pril &*(+. 6ot only the public sector banks

but also the private sector and foreign banks are reAuired to meet

the targets in respect of sectoral development of credit, regional

distribution of branches and regional credit deposit ratios.

"ommercial banks have a special role in India. 7iabilities of

bank are money and therefore they are the important part of the payment mechanism of any company. or a financial system to

mobilise and allocate savings of the country successfully,

productively and to facilitate day to day transactions there must

be class of financial institutions that the public views are safe and

convenient outlet for its savings.

Structure of commercial banks

Commercial

Non@ 1cheduled

banks

1cheduled

banks

0oreignPublicPrivate

1B& and its

subsidiaries

8ther

Nationalized

Banks


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Major objecties of commercial banks

#he main ob5ective of a commercial bank is to generate

profitability for its ownership by providing Auality based

products and services to the residents of the communities

and regions that they represent.Bank cre!it

#he borrowing capacity provided to an individual by the

banking system in the form of credit or a loan is known

as bank credit. #he total bank credit the individual has the

sum of the borrowing capacity each lender bank provides

to the individual.

#he operating paradigms of the banking industry in

general and credits dispensation in particular have gone

through a ma5or upheaval.

>a? 7ending rates have fallen sharply.>b? #raditional growth and earning such as

corporate credits has been either slow or not

profitable as before.

>c? Banks moving into retail finance, interest rate

on the once attractive retail loans also started

coming down.>d? "redit risk has went up and new type risk are

surfaced.

"#$es of loans offere! b# t%e commercial banks• %ecured loan

2 secured loan is a loan in which the borrower pledges

some asset >e.g., a car or property? as collateral for the

loan, which then becomes a secured debt owed to the

creditor who gives the loan. #he debt is thus secured

against the collateral C in the event that the borrower

defaults, the creditor takes possession of the asset used as

collateral and may sell it to regain some or all of the

amount originally lent to the borrower.

• ;nsecured loan;nsecured loans are monetary loans that are not secured

against the borrowerDs assets. #here are small business

unsecured loans such as credit cards and credit lines to

large corporate credit lines. #hese may be available from

financial institutions under many different guises or

marketing packages such as=


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&. Bank overdrafts

0. "orporate bonds

. "redit card debt

-. "redit facilities or lines of credit

3. /ersonal loans


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1.&>PNB Pro$le

/un5ab 6ational Bank was registered on &* May &(*- under the

Indian "ompanies 2ct with its office in 2narkali Ba9aar 7ahore.

#he founding board was drawn from different parts of India professing different faiths and a varied back#he first entirely Indian bank, the 8udh

"ommercial Bank, was established in &((& in ai9abad, but

failed in &*3(.?

/6B has had the privilege of maintaining accounts of nationalleaders such as Mahatma $andhi, %hri Jawaharlal 6ehru,

%hri 7alBahadur%hastri, %hrimati Indira $andhi, as well as the

account of the famous JalianwalaBagh "ommittee.

#he Bank made steady progress right from its inception. It has

shown resilience to tide over many a crisis. It withstood the crisis

in banking industry of &*& and the severe depression of the

thirties.

1ith the passage of time the Bank grew in strength spreading itswings from one corner of the country to another.

It has about 3&++ branches across ')- cities and serves over )

million customers. It has presence throughout the length and

breadth of the country and offers a wide variety of banking

services that include corporate and personal banking, industrial

finance, agricultural finance, financing of trade and international

banking. 2mong the clients of the bank are multinational

companies, Indian conglomerates, medium and small industrial

units, e:porters and non


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#he bank has a three tier structure comprising of head office,

circle office and branch office. #here are )3 circle offices and

-0)' branch offices. #here is decentrali9ed power up to the

branch level which has improved speed of decision making.

&rganizational Structure of P(B


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Circle &ffice unctional structure

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*ision

#o develop an institute of reckoning to serve as an infrastructure

model with high


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EBanking for the ;nbankedF

"ag line of P(B

#he name you can Bank upon.

+iersification of P(B'

iversification initiatives of the bank have shown promising

results. /6B has undertaken business, bullion business, merchant

banking, Insurance business, mutual fund business, /6B ebit

card and has also undertaken foreign e:change business.

"onsistent profit performance, improved fundamentals and

strong technology base have provided /6B distinct advantages

to meet the forces of composition effectively.

/un5ab 6ational Bank has taken a number of initiatives for the

benefit of its invaluable customers and has virtually become one

stop shop for various financial products G services. #he bank has

made Banc assurance #ie


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>8I"7?, a public sector undertaking, which offers variety of

products e.g. ire Insurance, Motor Vehicle Insurance, Marine

Insurance G Misc. Insurance /olicies like %hop6IM?

declined to .&3. 6et /rofit decresed by 0*.-( to reach

4s.- crore. 8perating /rofit is 4s.&&(- crore, ).' up fromlast year. /6B continues to be among leading banks amongst

nationali9ed banks in net profit, operating margins, total business,

deposits, advances, "2%2 deposits and customer base. %ummary

of the financials for this year is as below=


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Parameters Mar/0 Mar/10 Mar/11 Mar/12 Mar/1 M

8perating

/rofit

3)*+ '0) *+3) &+)&- &+*+' &&

6et profit +*& *+3 -- -((- -'-( eposit 0+*')+ 0-*+ &0(** '*3(( *&3)+ -3

2dvance &3-'+ &())+& 0-0&+' 0*''3 +('*) -

#otal

business

)--) -3*& 333+3 )')) '++3) (+

2.2) "ec%nolog# ,!o$te!:

/6B has always looked at technology as a key facilitator to provide better customer service and ensured that its KI# strategy

follows the KBusiness strategy so as to arrive at EBest itF. #he

Bank has made rapid strides in this direction. 2ll branches of the

Bank are under "ore Banking %olution >"B%? since ec+(, thus

covering &++ of its business and providing K2nytime

2nywhere banking facility to all customers including customers

of more than +++ rural G semi urban branches. #he Bank has

also been offering Internet banking services to its customers

which also enables on line booking of rail tickets, payment of

utilities bills, purchase of airline tickets, etc. #owards developing

a cost effective alternative channels of delivery, with )++*

2#Ms.

1ith the help of advanced technology, the Bank has been a

frontrunner in the industry so far as the initiatives for inancial

Inclusion is concerned. 1ith its policy of inclusive growth, the

Banks mission is EBanking for ;nbankedF. #he Bank has

launched a drive for biometric smart card based technology

enabled inancial Inclusion with the help of Business

"orrespondentsBusiness acilitators >B"B? so as to reach out

to the last mile customer. #he Bank has started several innovative

initiatives for marginal groups like rickshaw pullers, vegetable

vendors, dairy farmers, construction workers, etc. ;nder

Branchless Banking model, the Bank is implementing -+ pro5ects

in &) %tates.


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4lobal oot$rint'

Bank %as establis%e! oerseas footprints in &+ countries via -

overseas branches and an offshore banking unit in Mumbai,

wholly owned subsidiary in ;L with ' branches G a subsidiary

each in La9akhstan G Bhutan 3 4epresentative offices in

2ustralia, 6orway, ubai, "hina and La9akhstan and one 5oint

venture with !verest Bank 7td., 6epal.

Backed by strong domestic performance, the Bank is planning to

reali9e its global aspirations. Bank continues its selective foray in

international markets with presence in &+ countries, with 0

branches at Hongkong, & each at Labul and ubai

representative offices at 2lmaty, ubai, %hanghai and 8slo a

wholly owned subsidiary in ;L a 5oint venture with !verest

Bank 7td. 6epal and a JV banking subsidiary E4;L /6B

Bank 7td.F in Bhutan. Bank is pursuing up gradation of its

representative offices in "hina G 6orway and is in the process of

setting up a representative office in %ydney, 2ustralia and takingcontrolling stake in J%" ana Bank in La9akhstan.

/un5ab 6ational Bank also maintains strong correspondent

banking relationship with 0++ leading international banks all

over the world. It enhances its capacities to handle transaction

world


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Cre!it +iision 5C+) at P(B'

"ommercial lending organi9ation structure in /6B consists of

Branches, Mid "orporate Branches >M"Bs?, 7arge "orporate

Branches >7"Bs? and Head 8ffice >"?."redit ivision >"?

looks after the loan proposals which fall into the purview of

$Ms"redit? 2bove 4s.3 cro

crore

6&C,C Leel- %enior most ! 2bove 4s.3+ crore

6&C,C Leel- "M 2bove 4s.&++

crore

%imilarly, at "ircle 8ffice level, two "redit 2pproval

"ommittees shall be set up as under=

C,C at C& leel 6ea!e! b# Cre!it $ro$osals

C&C,C Leel- "ircle Head Beyond loaning powers of

branch but within vested loan

Head >2$M$M as the case

C&C,C Leel- $M Beyond loaning powers of "

e:ceeding 4s.3 crore

"2 looks after all proposals for all types of loans which fall

within the purview of $Ms


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#he bank has introduced E$rid"ommitteeF system in credit

sanction process wherein every loan proposal falling within the

vested powers of $M and above is discussed in a credit

committee which on the merit of the case recommends the

proposal to the sanctioning authority. %uch committees have been

formed both at H8 and N8 level the credit committee at H8

includes $M "redit and "$M$M


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- Circle Risk Management Departments (CRMDs)

4isk Management epartments at circle level are known

as "4M.

#heir responsibilities include monitoring and initiating

steps to improve the Auality of the credit portfolio of the

"ircle, tracking down the health of the borrower accounts

through regular risk rating, besides assisting the respective

"redit "ommittee in addressing the issues on risk.

- Risk Management Committee (RMC)

It is a sub


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storage of data G analysis thereof. #he analysis also involves

analy9ing the pro5ections for the future years.


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C6,P"R 2

("R&+7C"&( "& CR+"

,PPR,S,L

"redit 2ppraisal means an investigationassessment done by the

banks before providing any loans and advancespro5ect finance

and also checks the commercial, financial and technical

viability of the pro5ect proposed, its funding pattern and further

checks the primary and collateral security cover available for

recovery of such funds.

"redit appraisal is a process to ascertain the risks associated with

the e:tension of the credit facility. It is generally carried by the

financial institutions, which are involved in providing financial

funding to its customers. "redit risk is a risk related to non<

repayment of the credit obtained by the customer of a bank. #hus

it is necessary to appraise the credibility of the customer in order

to mitigate the credit risk. /roper evaluation of the customer is

performed this measures the financial condition and the ability

of the customer to repay bank the 7oan in future. $enerally thecredits facilities are e:tended against the security known as

collateral. But even though the loans are backed by the

collateral, banks are normally interested in the actual loan

amount to be repayed along with the interest. #hus, the

customers cash flows are ascertained to ensure the timely

payment of principle and the interest. It is the process of

appraising the credit worthiness of a 7oan applicant.

2.2) Reasons for selecting t%e $roject

1henever an individual or a company uses a credit that means

they are borrowing money that they promise to within a pre<

decided period. In order to assess the repay capability i.e to


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evaluate the credit worthiness banks use various techniAues that

differ with the different type of credit facilities provided by the

bank. In the current scenario where it is seen that big countries

and financial institutions have been bankrupted 5ust because of

bank default so credit appraisal has been become an important

aspect of banking sector and is gaining prime importance.

It is the incident of credit defaults that has been given to the

financial crises of 0++(


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+ifferent t#$es of cre!it

#here are different types of credit. %ome type of credit costsmore money than others. %ome credit is for a short time and

some foer a long time like several years.

,) 6ig% cost cre!it

a) Payday loans(short term loans):- 2 payday loan is ashort term loan. It is usually for a small amount, like a

few hundred dollars. #hese loans cost a lot of money.#he lender charges a high interest rates and must be paid

back by a certain date. #o pay back your loan you

arrange to have money taken from your account when

you get paid. #his money is given to the lender. Oou may

also be charged a fee to access the loans. #he amount ofthe fee differs depending on how long you loan is for.

%ome paid a loans will charge your client an upfront feeinstead of interest. However, 5ust because your client is

not paying interest it does not mean this loan is cheap.

Because the term of loan is for a short time< usually only

+ days< the upfront fee can be 5ust as much as a veryhigh interest rate.

b) Interest-free deals:- Interest&? By instalments< Oou make regular payments each

month, to pay off your purchase by the end of the

interest free period. #he instalment periods may not

be enough to pay off the full price before the interestfree period ends. 1hen this happen the lender will

charge you high interest.

>0? By now, pay later< Oou do not make any paymentuntil the end of interest free period. #hen you pay the

full amount, plus fees and charges. #he lender does

not need to tell you when this period ends. It is upto


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you to keep a track of this date. If you do not pay

everything you owe by the end of the interest period

the lender will charge you interest.

c) Credit cards:- Oou use a credit card to buy things. Oou

can only spend upto a certain amount of money on acard, which is called the credit limit. Oou get accredit

card from a lender who will ask you to repay the amount

you have spend on the card in monthly amounts. #here

may be interest, fees and charges for spending in thecard. 1ith most credit cards ypu pay a fee every yaer to

be able to use a card. 1ith credit cards you get a bill that

tell you how much you owe that month. If you do not pay this amount you are charged interests and sometimes

other fees. ees add a lot to the cost of using a credit

card. Oou can pay fees for=

2nnual accounts

4ewards programs

7ate payments

!:ceeding your credit limits

1ith a credit card you can often get a secondary card.#his allows your partner or other family member, fore:ample, to buy goods or services using your credit. Oou

have to pay any debts caused when someone else using

your card.

!) Store cards:- %ome large retail stores issues their ownstore cards, but you can normally only use them in their

stores or stores they are connected with. Oou use store

cards 5ust like regular credit cards but you usually payhigher interest for doing so. %ome big stores in 2ustralia

offers these cards.

e) Consumer leases:< "onsumer lease lets you rent anitem>for e:ample, a home computer or television? over a

period of time. Oou make regular rental payments>usually monthly? until the leases over. #he

total amount you pay however, will be more than if you


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paid for the item with cash. Oou may also have to pay

fees and charges.

f) Rent to buy:< 2 purchasing arrangement where you buyan item by renting it for a amount of time. Oou make

regular rental payments, for e:ample, every month over years.

B)Lo8 cost cre!it

a) Car loan:- 2 car loan is for buying a new car or usedcar< not for any other item. 1ith a car loan, you

borrow an amount of money to pay for your car. Oou

have to repay it in an amount of time. Oou have to

sign a credit contract that tells you how much you

have borrowed and how much you have to pay backevery month. 6ot all car loans are for the same

amount of time. #hey are usually between &0 monthsand 3 years. "ar loans are nearly always fi:ed rate

loans. #his means you pay the same interest rate

throughout the loan. Oou also have to pay fees andcharges. #hese are included in the total cost of your

loan.

b) Personal loans:- 2 personal loan is normally forsomething you need or something you want to do like

fi:ing things in your home or taking a holiday. Oourrepayments are made within an amount of time. #his

is usually between &0months and 3years. /ersonalloans can be secured or unsecured. Oou have to pay

interest, fees and charges on the amount you borrow.

c) Home loans:- Home loan is for buying a home< notfor any other item. #here are many different types of

home loans. #he interest rates, terms and fees are not

all the same. %o you need to look at different loans tosee which one is best for you.

C)Consoli!ation Loans' "onsolidation loan iswhen you put all your loans into one loan. 2n advantageof consolidation loan is that you only make one

repayment each month and you can get a lower interest

rate. Oou might not have to pay as many fees and


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charges. 1ith a consolidation loan, you are repaying all

your debts in the one loan, over a longer period of time.

2.9) Basic oerie8 of loans

2 loan is a amount of money that you can borrow, from a bank, with a contractual obligation to pay it back with

interest, which represents payment for the service of providing loan.

Classifications of loans

un! Base!'- It is credit facility to a borrower would result in

depletion of actual liAuidity of a banker immediately.


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unctions of a bank are those in which banks make deployment

of their funds either by granting advances or by making

investments for meeting gaps in funds reAuirement of theircustomers and borrowers.

und based functions of a bank can be classifies into two parts=<

&? $ranting of loans and advances

0? Making investment in sharesdebenturesbonds.

(on-un! Base!'- In this the credit facilities to a borrower mayor may not affect the bankers liAuidity. It is perceived that non

fund based business is very remunerative to bank, besides getting

hadsome commission or fees and some other service charges also

get the low cost deposits in the shape of margin and ancillary

business.

#he funds of the borrower are not blocked in advances to be

given to the supplier or beneficiaries and this keeps his liAuidity position comfortable, production smooth and cost low.

6on< fund based working capital financing comprises=

&. 7etter of "redit >7" s?

0. Bank $uarantees >B$ s?

#he basic difference between fund


33/66

0? "onsumer loan for purchase of durables

? 2uto loans

-? !ducational loans

3? "redit cost

)? 7oans 4etail

2.Cas% Cre!it'- 2 cash credit is a short


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3.Bill !iscounting'- Bill discounting is a ma5oractivity with some of the smaller banks. ;nder this typeof lending, banks take the bill drawn by the borrower on

his >borrowers? customer and pay him immediately

deducting some amount as discountcommission. #he

bank then presents the bill to the borrowers customer onthe due date of the bill and collects the total amount. Ifthe bill is delayed, the borrower or his customer pays the bank a predetermined interest depending upon the terms

of transaction.

9."erm Loan'- #erm 7oans are the countered parts offi:ed deposits in the bank. Banks lend money in thismode when the repayment is sought to be made in fi:ed,

predetermined instalments. #his type of loan is normally

given to the borrowers for acAuiring long term assets i.e.

assets which will benefit the borrower over a long period>e:ceeding atleast one year?. /urchases of plant

and machinery, constructing building for factory, settingup new pro5ects fall in this category. inancing for

purchase of automobiles, consumer durables, real estate

and creation of infrastructure also fall in this category.

(on-un! Loans'

1.Bank 4uarantee'- 2 guarantee from a lending

institution ensuring that the liabilities of the debtor will be met. In other words, if the debtor fails to settle a debt,

the bank will cover it.

or e:ample=< Bank guarantee might be used when a

buyer obtain goods from the seller then runs into a cashflow difficulties and cannot pay the seller. #he bank

guarantee would pay an agreed upon sum to the seller.

%imilarly if the supplier was unable to provide the goods,

the bank would then pay the purchaser the agreed uponsum. !ssentially the bank guarantee act as a safety

measure for the opposing party in the transaction.

2.Letter of Cre!it'- 2 letter of credit is a documentfrom a bank guaranteeing that a seller will receive

payment in full as long as a certain delivery conditionshave been met. In the event that the buyer is unable to

make payment on the purchase, the bank will cover the

outstanding amount. #hey are often used in international


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transactions to ensure that the payment will be received

where the buyer and the seller may not know each other

and are operating in different countries. In this case theseller is e:posed to number of risks such as credit risk,

and legal risk caused by the distance, differing laws and

difficulty in knowing each party personally. 2 letter ofcredit provides the seller with the guarantee that they will

get paid as long as certain delivery conditions have been

met. or this reason the use of letters of credit has become a very important aspect of international trade.

#he bank that writes the letter of credit will act on the

behalf of the buyer and make sure that all delivery

conditions have been met before making the payment tothe seller. 7etters of credit are typically used by importing

and e:porting companies particularly for large purchases

and will often negate the need by the buyer to pay adeposit before delivery is made.

#he basic difference between the two is 7etter of "redit

ensures that the transaction proceeds as planned, while

the bank guarantee reduce the loss if the transactiondoesnt go as planned.

2.;)


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$ross working capital concept focuses attention on two

aspects of current assests management, they are=

a? 8ptimum investment in current asset and

b? inancing of current assets

O+ti3 in-estent in %3rrent assets

investment in working capital must be just

ade#uate to the needs of the "rm. &n other words!

current assets investment should not be inade#uate

or eFcessive. &nade#uate working capital can

disturb production and can also threaten the

solvency of the "rm! if it fails to meet its current

obligation. 1o eFcessive investment in current

assets should be avoided since it impairs "rm/spro"tability.

:inan%in" of %3rrent assets 1ometimes surplusfunds may arise! which should be invested in shortterm securities. There should not be kept as idlecash.

Net /or!in" %a+ital 5Fcess of current assetsover current liabilities. &t can be positive ornegative.

&t mainly focus on the two aspects of current assetmanagement! they are$

>a? 2aintaining ;i#uidity Position$@ Net workingcapital decide the eFtent of long term capitalin "nancing current assets.

>b? To decide upon the eFtent of long termcapital in "nancing current assets$ Aere NGCconcept helps in indicating the eFtent of longterm funds re#uired to "nance current assets.

=in!s of


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7n d

s

o f

w o

r k i

n g

c ap i t

a l

Co

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c

e

p

t

b

a

s

r o s sG o r k i

g

C a p i t a

o r

H u a n

a t i v e

N e tG o r k i

n g

C a p i t

a l o r

H u a n

i t a t i v e

P e r m an e n t

o r

( e g u l

a r

G o r k i

n g

C a p i t al

T e m pr a r y o

6 a r i a b

e

G o r k i

g

C a p i t a

Ti

m

e

B

a

se

r o s sG o r k i

g

C a p i t a

o r

H u a n

a t i v e

N e tG o r k i

n g

C a p i t

a l o r

H u a n

i t a t i v e

P e r m an e n t

o r

( e g u l

a r

G o r k i

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C a p i t al

T e m pr a r y o

6 a r i a b

e

G o r k i

g

C a p i t a

permanently andor temporarily. It may be classified into gross

working capital and net working capital.

Permanent


38/66

!ffective management of working capital involves effective

control over the current assets and current liabilities, which are

the main components of working capital.

1) Com$onents of current assets'- "urrent assets are those

assets which can be turned into cash within an accounting period. It consists of cash, marketable securities,

inventories, sundry debtors, one year fi:ed deposits with banks, prepaid e:penses.

2)

Com$onents of current Liabilities'- "urrent liabilities

are those liabilities intended to be paid in the ordinarycourse of business out of the current assets. It consists of

sundry creditors, loans and advances, bank overdraft,short


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40/66


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8rgani9ation Method of !nrichment !valuations, Brans

GVincke >&*(3?R Multiple "riteria method is applied,

towards modelling banking products appraisal problems.2 Multiple "riteria process, strictly mathematically

defined, integrates the behaviour of each indicator<

critedron and utili9es each score in order to rank the socalled EalternativesF, i.e. categories of banking products.

. #he research paper on Ealuation of !ecision su$$orts#stems for cre!it management !ecisions? by %.

Lanungo, %.%harma, /.L. Jain from epartment ofstudies, II# elhi have conducted a study to evaluate the

efficiency of decision support system >%%? for credit

management. #his study formed a larger initiative toaccess the effectiveness of the I.# based credit

management process at %BI. %uch a study was

necessitated since credit appraisal has become an integralsub


42/66

will allow the long term and possibly the only meaningful

evaluation framework for such a system.

. #he research paper on the topic @"o8ar!s an a$$raisal

of t%e M6, farm cre!it $rogram' , case stu!# of t%e

efficienc# of borro8er b# S. Me%!ianA MH2? compared to non

participants. #he study did not find evidence that theefficiency MH2 farms improved between a time period.

4esults indicated that overall efficiency of MH2

borrowers is associated with selected financialcharacteristics of the farms. 2 review of the literature

shows that agriculture finance specialists have not been

successful in evaluating whether MH2 pro


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book contains8perating %tatement?,

2nalysis of /rofit and 7oss 2ccount>8perating

%tatement?, %tructure and 2nalysis of Balance %heet,4atios as #ools of inancial %tatements 2nalysis,

2ccounting lows= Income, "ash and unds, Break


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efficiency may translate into 1elfare gains for the

economy, to the e:tent that customers pay lower prices

for banks services or are able to obtain higher Aualityservices or services that could not have been offered

before. 8n the other hand, from the point of view of

public policy it is eAually important to focus on the effectof this restructuring process on the competitive conditions

of the banking industry. o banks gain market power

from mergingS If so, they will be able to charge higherthan 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 avery 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.

2.) Cre!it ,$$raisal'-

&t is a process by which the lender assesses thecredit worthiness of the borrower. &t revolvesaround character! collateral capability and capacity.&t takes into account various factors like income ofthe applicants! number of dependents! monthlyeFpenditure! repayment capacity! employmenthistory! number of years of service and other

factors which aect credit rating of the borrower. Itis an important part of determining the eligibility for a home

loan, and the Auantum of the loan. 2 prospective borrower has togo through the various stages of the credit appraisal process of

the bank. !ach bank has its own criteria to satisfy itself on the

credit worthiness of the borrower.

#he eligibility for the loan that a person can get depends on hiscredit worthiness, determined in terms of the norms and

standards of the bank. Being a crucial step in the loan process, a

borrower needs to be careful in planning his financing modes.

#he credit worthiness, basically, assures the repayment capacityof the borrower < whether the borrower is capable of repaying the

loan and dues on time.

"%e cre!it reuirement must be assesse! b# all n!ian

inancial nstitutions or s$ecialize! institutions set u$ for t%is

$ur$ose.


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• 1herever financing of infrastructure pro5ects is taken up

syndication arrangement< banks e:posures shall not

e:ceed 03.

• Bank may also take up financing infrastructure pro5ects

independentlye:clusively in respect of promoters of

repute with e:cellence past record in implementation.

• In such cases due diligence on the ability of the pro5ects

are well defined and accessed. %tate government

guarantee may not be taken as a substitute of satisfactory

credit appraisal.


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CHAPTER &

RESEARCH 5ETHODO(OG6

The objective of research methodology is to studythe Credit %ppraisal of PNB Bank and to check the

commercial! "nancial and technical viability of the

project proposed and its funding pattern.

The methodology being used involves two basic

sources of information primary sources and

secondary sources.

Priar so3r%es of Inforation

2eetings and discussion with the Chief

2anager and the 1enior 2anager of both

Credit and Credit (isk 2anagement

9epartment

2eetings with the clients

Se%on0ar so3r%es of Inforation

;oan Policy and &nternal Circulars of the Bank

(esearch papers! power point presentations

and P90 "les prepared by the bank and its

related ocials

(eferring to information provided by C&B&;!

&ncome TaF "les! (egistrar of Companies

'2inistry of Corporate %airs)! and %uditor

reports.


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C%a$ter-3

"C6(C,L C&(&MC

*,BL"D S"7+D

"* Stu!# 5"ec%nical conomic *iabilit#)

Techno 5conomic 6iability 1tudy and 0easibility

reports provides appraisal of technological

parameters of a project and its impact on the

"nancial viability of project. T56 study is a risk

mitigation task undertaken in respect of any

industrial activity prior to decision taken by

bank! whether Bank should lend for such project

or not.

The feasibility studyDT56 consultancy starts with

developing the project concept to the point of

evaluating its economic! "nancial and technical

viability. The Company with our support leads a

turn@key team to produce a 9etailed Project

(eport with full "nancial analysis for submissions

with the overnmentDinvestors. 8nce submitted

our team also supports their fund raising

program.

P3r+ose of TE7 St30

The purpose of T56 1tudy is to provide utility to

the sanctioning authority to conclude at an

informed judgment as regards acceptance of the

project for lending 'or investment) purpose.

T56 study takes into account market! regulatory!

and standards@ related product and also

"nancials. 6iability study! as simple meaning isthe study to arrive at the two criteria to judge

feasibility of the proposal which considers the

cost consumption and desired value to be

attained. This involves keeping in consideration!

historical background of the business or project!

description of the product or service! accounting


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statements! details of the operations and

management! marketing research and policies!

"nancial data! legal re#uirements and taF

obligations. enerally! feasibility studies precede

technical development and project

implementation.

:easibilit st30

0easibility study is carried out with the aim to

determine the strengths and weaknesses of the

eFisting business or proposed venture. The

objective of conducting feasibility study is to

assess the threats presented by the

environmentI the resources re#uired and the

prospects for success. (atio of eFpectedoutcomes and costs re#uired for

implementation! feasibility of technology

deployment within the circumstances of

prevailing local and national regulations and

availability of resources to keep the project

operational are some of the major criteria to

determine the viability of a proposed

ventureDeFisting business.

% well@designed feasibility study should provide

a historical background of the business or

project! a description of the product or service!

accounting statements! details of the operations

and management! marketing research and

policies! "nancial data! legal re#uirements and

taF obligations. enerally! feasibility studies

precede technical development and project

implementation.

% feasibility study evaluates the project/s

potential for successI therefore! perceived

objectivity is an important factor in the

credibility of the study for potential investors

and lending institutions.


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Carrin" o3t te%*ni%al -iabilit broa0l

reF3ires analsis of follo/in" +araeters

Technical 0easibility

5conomical 0easibility

0inancial 0easibility

8perational 0easibility

Te%*ni%al :easibilit The technical feasibility

assessment is focused on gaining an

understanding of the present technical

resources of the organization and their

applicability to the eFpected needs of the

proposed system. &t is an evaluation of the

hardware and software and how it meets the

need of the proposed system.

E%onoi%al :easibilit The purpose of the

economic feasibility assessment is to determine

the positive economic bene"ts to the

organization that the proposed system will

provide. &t includes #uanti"cation and

identi"cation of all the bene"ts eFpected. This

assessment typically involves a costDbene"ts

analysis.

:inan%ial :easibilit in case a new project!

"nancial viability can be judged on the following

parameters$

• Total 5stimated Cost 8f The Project

• 0inancing 8f The Project &n Terms 8f &ts

Capital 1tructure! 9ebt 5#uity (atio %nd

Promoter/s 1hare 8f Total Cost• 5Fisting &nvestment by The Promoter &n

%ny 8ther Business

• Projected Cash 0low %nd Pro"tability

The "nancial viability of a project should provide

the following information$


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• 0ull 9etails of the %ssets to be "nanced

and how li#uid those assets are.

• (ate 8f Conversion To Cash@;i#uidity 'i.e.

Aow 5asily Can The 6arious %ssets Be

Converted To CashJ).

• Project/s 0unding Potential %nd (epayment

Terms.

1ensitivity in the repayments capability to the

following factors$

• Time 9elays.

• 2ild 1lowing 8f sales.

• %cute (eductionD1lowing 8f sales.

• 1mall &ncrease &n Cost.

• ;arge &ncrease &n Cost.• %dverse 5conomic Conditions.

O+erational :easibilit 8perational

feasibility is a measure of how well a proposed

system solves the problems! and takes

advantage of the opportunities identi"ed during

scope de"nition and how it satis"es the

re#uirements identi"ed in the re#uirements

analysis phase of system development.

The operational feasibility assessment focuses

on the degree to which the proposed

development projects "ts in with the eFisting

business environment and objectives with

regard to development schedule! delivery date!

corporate culture! and eFisting business

processes.

To ensure success! desired operational outcomes

must be imparted during design anddevelopment. These include such design@

dependent parameters such as reliability!

maintainability! supportability! usability!

producibility! disposability! sustainability!

aordability and others. These parameters are

re#uired to be considered at the early stages of


52/66

design if desired operational behaviours are to

be realized. % system design and development

re#uires appropriate and timey application of

engineering and management eorts to meet

the previously mentioned parameters. % system

may serve its intended purpose most eectively

when its technical and operating characteristics

are engineered into the design. Therefore

operational feasibility is a critical aspect of

systems engineering that needs to be an

integral part of the early design phases.


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C6,P"R - 9

5ARKET8INDUSTR68PRODUCT

ANA(6SIS

2arket analysis helps in determining whether the

loan should be given to the borrower or not. %

company does not operate in isolation there are

various market forces that acts in either favourable

or unfavourable manner towards its performance.

Thus the rating would not give true picture if does

take market or demand situationDmarket potential

plays an important role in determining the growth

level of the company like

*. ;evel of competition$ 2onopoly! 0avourable!

:nfavourable.3. 1easonality in demand$ aected by short K

term seasonality! long@term seasonality or

may not be aected by seasonality in

demand.4. (aw material availability.,. ;ocation issues like proFimity to market!

inputs! infrastructure! favourable! neutral!

unfavourable.-. Technology i.e. proven technology not to be

changed in immediate future! technology

undergoes outdated technology.


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section is re#uired! as savvy lenders or investors

will need to know that the business you/re pitching

has viable market appeal. 5ither way! a solid

business plan complete with market analysis will be

invaluable. Lou/ll need to identify your potential

customers and attract investors! and it will help you

to be clear about what you want to do with your

business! both now and in the future.

T*e t*in"s /*i%* s*o3l0 be ention in t*e

ar!et analsis are

2arket analysis should include an overview of your

industry! a look at your target market! an analysis

of your competition! your own projections for your

business! and any regulations you/ll need to complywith.

In03str 0es%ri+tion an0 o3tloo!

Aere the current state of your industry overall and

where it/s headed should be mentioned. (elevant

industry metrics like size! trends! life cycle! and

projected growth should all be included here. This

will let banks or investors see that you know what

you/re doing.

Tar"et ar!et

&n the previous section of your market analysis! you

were able to look at the general scope. &n this

section! you/ve got to be speci"c. &t/s important to

establish a clear idea of your target market early

on. % lot of new entrepreneurs make the rookie

mistake of thinking that everyone is their potential

market. The target market section of your businessplan should include the following$

• User Persona an0 C*ara%teristi%s Lou/ll

want to include demographics such as age!

income! and location here. Lou/ll also need to

dial into your customers psychographics as


55/66

well. Lou should know what their interests and

buying habits are! as well as be able to

eFplain why you/re in the best position to

meet their needs.

• 5ar!et sie This is where you want to get

real! both with the potential readers of your

business plan and with yourself. 9o you

research and "nd out who and where your

competitors are! and how much your

customers spend annually on your product or

service. Aow big is the potential market for

your businessJ

Co+etiti-e analsis This is the section in

which you get to dissect your competitors! which is

important for a couple of reasons. The competitive

analysis should contain the following components$

• 5ar!et Aow big is the market for goods and

services similar to what you plan on oeringJ

Ghat/s the growth rateJ &nclude the general

outlook and trends for this market. Gho are

your main competitorsJ %re there any

secondary competitors who could impact your

businessJ• Co+etitor stren"t*s an0 /ea!nesses

Ghat is your competition good atJ Ghere do

they fall behindJ et imaginative to spot

opportunities to eFcel where others are falling

short.

• Barriers to entr Ghat are the potential

pitfalls of entering your particular marketJ

Ghat/s the cost of entryMis it prohibitively

high! or can anyone enter your marketJ This

is where you eFamine your weaknesses. Behonest! with investors and yourself. Being

unrealistic is not going to make you look

good.

Pro,e%tions


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57/66

C%a$ter-;

CBLEF7GE64M,

R=

#hree more credit information companies are into business after

the 4BI approval. But the e:isting local credit bureau "IBI7

>"redit Information Bureau India 7td.? is only approved by the

banking regulators to maintain credit histories of insurance and

telecom customers.

"IBI7 collects and maintains records of an individuals payments

pertaining to loans and credit cards. #hese records are submitted

to "IBI7 by member banks and credit institutions, on a monthly

basis. #his information is then used to create "redit Information

4eports >"I4? and credit scored which are provided to credit

institutions in order to help evaluate and approve loan

applications. "IBI7 was created to play a critical role in Indias

financial system, helping loan providers manage their business

and helping consumers secure credit Auicker and on better terms.

&bjecties of CBL

•or credit grantors to gain a complete picture of the paymenthistory of a credit applicant, they must be able to gain access

to the applicants complete credit record that may be spread

over different institutions.

• "IBI7 collects commercial and consumer credit


58/66

"I4%core in order to determine the applicants eligibility.

!ligibility basically means the applicants ability to take

additional debt and repay additional outflows given their

current commitments. /ost completion of these first 0 first

steps the loan provider will reAuest for the applicants income

proof and other relevant documents in order to finally

sanction the loan.

• #he "I4 and "redit %core not only help loan providers

identify consumers who are likely to be able to pay back their

loans, but also help them to do this more Auickly and

economically. #his translates into faster loan approvals for

consumers. 2n individual with a credit score above '3+ has

better bargaining power with the lenders, since he is

perceived as a responsible borrower. %ince consumers cannow access their "redit %cores and "I4s directly from "IBI7

at the cost of I64 -'+, they can see for themselves how they

are perceived by the lenders before applying for a loan.

Hence, "IBI7 empowers both loan providers and individuals

to see their financial and credit history more clearly and

hence, take better and more informed decisions.

!Auifa: "redit Information %ervices, !:perian "redit Information

"ompany, and Highmark "redit Information %ervices are the

three new entrants. #hese entities were short-+?,

H">-+?, un G Bradstreet Information %ervices India

>&+?? and #rans ;nion International >&+?. %ubseAuently, the


59/66

company inducted more investors including I"I"I Bank , H%B",

%tan "hart, "iticorp, Bank of Baroda, I8B, %undaram finance.

Bank of India, $!, ;BI and /6B. I"I"I Bank,%BI, GB and

#rans ;nion hold &+ stake each in "IBI7. 8thers own 0.3<

3 each.


60/66

C6,P"R H >

CR+" RS= R,"(4

2 credit rating is an evaluation of the credit worthiness of

a debtor, especially a business >company? or a government, but

not individual consumers. #he evaluation is made by a credit

rating agency of the debtorDs ability to pay back the debt and the

likelihood of default. !valuations of individualsD credit

worthiness are known as credit reporting and done by credit

bureaus, or consumer credit reporting agencies, which

issue credit scores.

"redit ratings are determined by credit ratings agencies. #he

credit rating represents the credit rating agencyDs evaluation of

Aualitative and Auantitative information for a company or

government including non


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e:cluding borrowers covered under /6B %core %coring models

>i.e e:cluding all retail loans, #rading G %M! loans up to 4s.3+

7acs and all irect 2griculture loans? should invariably be rated

on these models.

1e have devised and implemented !ight efault 4ating models,

two #ransaction 4ating Model, one Half Oearly 4ating model G

one 6/2 Marking Model as detailed below=<

S.(o Cre!it Risk Rating Mo!el "otal Limits

&. 7arge "orporate 2bove 4s. &3 "rore

>84?

0. Mid "orporate 2bove 4s.3 "r and up to

4s.&3 "r. >84?

2ll trading concerns falling

in the 7arge "orporate

category shall also be rated

under this model

. 6ew /ro5ects 4ating Model 2bove 4s. 3 "r. >84?

-. %mall 7oans 2bove 4s.3+ lakh G up to

4s.3 "r >26?

3. %mall 7oans II 2bove 4s.0 lakh G up to

4s.3+ lakhs

). 6B" 2ll 6on Banking inancial

"ompanies irrespective of

7imit

'. !ntrepreneur 6ew Business Borrower setting up new


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Model business and reAuiring

finance above 4s 0+ lac

upto 4s. 3 "r >26

(. "redit 4isk 4ating models

for Banks I

2ll banks and inancial

Institutions.

S.(o. "ransaction Rating Mo!el ,$$licabilit#

&. acility >!:pected 7oss?

4ating ramework

2ssigning rating to fac

sanctioned to the borrodefault rating and secur

available.

0. uture 7ease 4ental Model 2dvances to property o

against future lease ren

S.(o. 6alf Dearl# Rating

Mo!el

,$$licabilit#

&. Half Oearly 4ating Model i? 2ll listed companies

large mid corporate ratin

ii? 8ther borrowal accoun

large mid corporate rati

availing limits >BU6

4s.3+.++ crores from our

S.(o. (P, Mo!el ,$$licabilit#


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&. 6/2 Model or marking 6/2 accou

line /6B #rac "redit 4

%ystem

2. Cre!it Risk rating 4ra!es

#he credit risk rating model provides for evaluating the

borrower on a ' point scale from E222F to EF. 1ith a view

to have better and wider differentiation among the borrowers

within a rating category, the rating grades have been further

split i.e. suffi:ed >U?>


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2bove 30.3+ up to

3'.3+

2bove 3+.++ up to

30.3+

/6B ield ? "ircle

8ffice

i? !7BsV7Bsbranches ii?

7"Bs and identified branches

$M2

"8


65/66

in respect of proposals falling

under $M powers #he

assistance of "4M

unctional Manager >"redit?

of "ircle 8ffice may be takenin case of need.

Branch 8fficerManager, "redit

%ection

2n officia

Incumbent

processing

concerned lo

It is further clarified that in case of takeover of accounts,

rating and its approval should be done by the competent

authority in the office of loan sanctioning authority. 2fter theapproval of the rating, case should be referred to ne:t higher

authority along with rating of the borrower for getting

permission to take over of the account as per e:tant

guidelines.

3. Portfolio ,nal#sis of rate!

accounts

or the purpose of analysis of the rated portfolio, the 7arge"orporate, Mid "orporate and %mall 7oans, are redefined as

under=

Categor# :$osure C


66/66

7arge corporate 2ggregate e:posure abov

Mid "orporate 2ggregate e:posure abov

up to 4s. &3 crore

%mall loans 2ggregate e:posure abov

up to 4s. 3 crore

Credit Appraisal Final Report

Documents

Transcript of Credit Appraisal Final Report