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Credit Appraisal of TJSB Bank
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GENESIS OF THE PROJECT
The project is on Credit Appraisal Process of TJSB Bank. Credit Appraisal is an
important activity carried out by the Special Credit Cell department of the bank which
determines whether to accept or reject the proposal for finance. It means an
investigation or assessment done by the bank before providing any Loans and Advances
or Project finance and also checks the commercial, financial and technical viability of
the project proposed, its funding patterns and further check the primary and collateral
security cover available of recovery of such funds.
It is the process of appraising the credit worthiness of a Loan applicant. Factors like
age, income, number of dependents, nature of employment, continuity of employment,
repayment capacity, previous Loans, credit cards, etc. are taken into account while
appraising the credit worthiness of a person.
Proper assessment of credit risk is important as it helps in establishing credit limits. In
assessing credit risks the 5 C’s of credit are crucial & relevant to all borrowers/ lending,
which must be kept in mind, at all times.
Character: The willingness of the customer to honor his obligations. It reflects
integrity, a moral attribute that is considered very important by credit managers.
Capacity: The ability of the customers to meet credit obligations from the operating
cash flows.
Capital: The financial reserves of the customers. If the customer has problems in
meeting credit obligations from operating cash flow, the focus shifts to its capital.
Collateral: The security offered by the customer in the form of pledged assets.
Conditions: The general economic conditions that affect the customers.
To get information on the five C’s a Firm may rely on the Financial Statements, Bank
References, Experience of the firm and Prices and yields on Securities.
1
Numerical Credit Scoring: In traditional credit analysis, customers are assigned to
various risky classes on the basis of the five C’s of credit. Credit Analysts may,
however, want to use a more systematic numerical credit scoring system. Such a system
may involve the following steps:
1. Identify factors relevant for credit evaluation.
2. Assign weights to these factors that reflect their relative importance.
3. Rate the customer on various factors, using suitable rating scale.
4. For each factor, multiply the factor rating with the factor weight to get the factor score.
5. Add all the factor scores to get the overall customer rating index.
6. Based on the rating index, classify the customer.
OVERVIEW OF LOANS
Loans can be of two types fund base & non-fund base:
Fund Base includes:
Working Capital
Term Loan
Non-fund Base includes:
Letter of Credit
Bank Guarantee
2
BACKGROUND OF THE BANKING SECTOR
DEFINITION OF A BANK
The word bank has originated from English word Banco, Bancus or Banque. Its
meaning is bench or table. In Europe in the middle age, the money transactions were
undertaken sitting on a bench.
As per Indian Banking Act, “A service to accept deposits from people with the
intention to invest or lend with the condition of returning it immediately whenever
demanded at any predetermined time. An institute this service is Bank”
Banking is a service helpful to the business, its function is to borrow money from
people and further lend the same. While analyzing definition of bank as per Indian
Banking Act, below mentioned matters are clarified:
(1) Bank accepts monetary deposits from people.
(2) The intention behind accepting these deposits is to invest or lend the respective fund.
(3) The function of accepting deposit or lending money is made under the condition that on
demand or as predetermined otherwise the same amount has to be refunded immedi-
ately.
(4) The institution doing this type of business is called bank.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end
March 2002, there were 296 Commercial banks operating in India. This included 27
Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks.
Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban
cooperative banks and 16 scheduled state co-operative banks.
State Bank of India is still the largest bank in India with the market share of 20% ICICI
and its two subsidiaries merged with ICICI Bank, leading creating the second largest
bank in India. Higher provisioning norms, tighter asset classification norms, dispensing
with the concept of ‘past due’ for recognition of NPAs, lowering of ceiling on exposure
to a single borrower and group exposure etc., are among the measures in order to
improve the banking sector.
3
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the
ability of banks to absorb losses and the ratio has subsequently been raised from 8% to
9%.
Retail Banking is the new mantra in the banking sector. The home Loans alone account
for nearly two-third of the total retail portfolio of the bank. According to one estimate,
the retail segment is expected to grow at 30-40% in the coming years.
Net banking, phone banking, mobile banking, ATMs and bill payments are the new
buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information on
borrowers / potential borrowers by banks and Financial Institutions, the Credit
Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau
provides a framework for collecting, processing and sharing credit information on
borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank
for Agricultural and Rural Development to the private players. Also, the Government
has sought to lower its holding in PSBs to a minimum of 33% of total capital by
allowing them to raise capital from the market. Banks are free to acquire shares,
convertible debentures of corporate and units of equity oriented mutual funds, subject
to a ceiling of 5% of the total outstanding advances (including commercial paper) as on
March 31 of the previous year.
4
CLASSIFICATION OF BANKS:
The Indian banking industry, which is governed by the Banking Regulation Act of
India 1949 can be broadly classified into two major categories, non-scheduled banks
and scheduled banks. Scheduled banks comprise commercial banks and the co-
operative banks. In Terms of ownership, commercial banks can be further grouped into
nationalized banks, the State Bank of India and its group banks, regional rural banks
and private sector banks (the old / new domestic and foreign). These banks have over
67,000 branches spread across the country. The Indian banking industry is a mix of the
public sector, private sector and foreign banks. The private sector banks are again spilt
into old banks and new banks.
Banking System in India
Reserve bank of India (Controlling Authority)
Development Financial institutions Bank
IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI
Commercial Regional Rural Land Development Cooperative Banks
Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign Bank
5
About Co-operative Bank
A Co-operative bank is financial entities which belongs to its members, who are at the
same time the owners and customers of their bank. Co-operative banks are often
created by persons belonging to the same local or professional community or sharing a
common interest. Co-operative banks generally provide their members with wide range
of financial and banking services. (loans, deposits, banking accounts etc).
Co-operative bank differ from stockholder banks by their organization, their goals, their
values and their governance. In most countries, they are supervised and controlled by
banking authorities and have to respect prudential banking regulations, which put them
at a level playing field with stockholder banks. Depending on countries, this control and
supervision can be implemented directly by state entities or delegated to a co-operative
federation or central body. Co-operative banking is retail and commercial banking
organized on a co-operative basis.
Co-operative banking institutions take deposits and lend money in most part of the
world. Co-operative banking institutions take deposits and lend money in most parts of
the world. It includes retail banking, as carried out by credit unions, mutual savings and
loan associations, building societies and co-operatives, as well as commercial banking
services provided by mutual organizations to co-operative businesses.
The structure of commercial banking is of branch –banking type , while the co-
operative banking structure is a 3 tier federal one .
- A state Co-operative bank works at the apex level ( i.e. .works at state level )
- The central Co-operative bank works at the intermediate level. (i.e.District Co-
operative banks ltd. works at district level )
6
INTRODUCTION OF TJSB BANK
Since 1972 TJSB is in co-operative field, the dynamism infused by the Board of
Directors, unflinching loyalties of clientele and devotion of staff has propelled the
sound foundation of The TJSB Sahakari Bank Ltd (TJSB) and has emerged as one of
the leading multi state scheduled co-operative Bank in the country
.
Presently TJSB is catering the needs of the society through close network of 63
branches and 1 Extension counters spread all over the city of Thane, Nashik, Navi-
Mumbai, Pune, Aurangabad, Satara, Nagpur, Kolhapur, Goa, Latur& Karnataka. All
these branches has shown remarkable progress. TJSB focusing on business strategy
solely, has created a Visionary Growth Plan for Stakeholders.
Technology Initiatives :
TJSB was successful in implementing the Core Banking Solution which has helped
Bank to migrate the branches from being the processing centers to marketing customer
centric outfits. It also improved Banks multiple deliver channels such as ATM, Internet,
Mobile etc.
TJSB is the first co-operative sector to install Cheque Depositary System in all their 63
branches, which are operational 24 x 7.
TJSB has also placed Real Time Gross Settlement System (RTGS) to customers.
Automated Cheque Issuance Machine was first introduced by TJSB which enable
customers to take Personalized Cheque Book 24 x 7.
7
Business Process Re-engineering:
With the help of Core Banking Solution TJSB has initiated Business Process Re-
engineering by establishing:
• Specialized Credit Cell
• Specialized Retail Banking Cell
• Centralized Monitoring Cell
• Centralized Back office Processing Cell
• E-lobby
Bancassurance:
TJSB act as an agent for Max New York Life Insurance Company Ltd for life insurance
product and with The Oriental Insurance Company Ltd for general Insurance.
Business Expansion Plan:
Recognizing opportunity, TJSB has done its expansion through Merger and Takeover of
the other Banks. It has recently acquired two Pune based Co-operative Banks namely
The Navjeevan Nagrik Sahakari Bank Ltd and The Sadguru Jungli Maharaj Sahakari
Bank Ltd.
Rewards and Recognition :
TJSB was awarded as TECHNOLOGY BANK OF THE YEAR in the Co-operative
Bank Category for Financial Year 2009.
TJSB has got 1st prize for The Best Co-operative Bank in Maharashtra by “Maharashtra
State Urban Bank’s Federation Ltd” for the Financial year 2004-2005.
TJSB has been awarded 1st prize as “Padmabhushan Vasandada Patil Utkarsha Nagri
Sahakari Bank” for the financial year 2003-2004 from Kokan Region for the second
time consecutively,
TJSB was recognized amongst top 5 co-operative banks in the country, during cente-
nary celebration of Co-operative movement by Kalupur Commercial Co-operative
Bank
8
Organisation Structure -TJSB
BOARD
CEO
CGM
GM
GM GM (Credit, Audit, HR) (IT)
DGM
Forex Accounts PCRO
AGM
Recovery Credit SCC Audit & Admin IT Vigilance
Managers
Officers
9
OBJECTIVES AND SCOPE OF THE PROJECT
Objectives and scope:
To study the credit appraisal system in banks.
To understand the commercial, financial & technical viability of the proposal proposed
and it’s finding pattern.
To study the various funded and non-funded credit facilities offered by the bank
Scope of my project is to know the Credit Appraisal in Co-operative Bank. What are
the parameters and risk factors are taken into consideration in Credit process. How
Specialize Credit Cell (SCC) works.
10
RESEARCH METHODOLOGY
1. Descriptive Research:
TJSB Bank sanctions the limits after proper appraisal of the genuine working capital
requirements of the borrowers keeping in mind their business cycle and short term
credit requirement. Relationship between Credit score and Ratios helps us to know
whether bank has taken viable decision before granting loans.
2. Sampling:
As no Primary data was collected, the whole conclusion was made on the basis of
Secondary data. No Sampling is done.
3. Data Analysis:
Data Analysis is done by using Correlation analysis. In Correlation it explains the
relationship between the Rating and Ratios. Rating is the total score obtained by each
customer based on the various financial parameters. It covers financial risk, Business
Risk, Management Risk and Industry risk. Different Ratios are taken in consideration
such as, Current Ratio, Collateral Coverage, Cash Accruals and TOL-QE/TNW+QE.
11
Literature review
Literature review provides available research with respect to the selected topic of the
projector research findings by an author which has been done with respect to the
research to 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 researcher Machiko Nissanke, Ernest Aryeetey in their book: Financial Integra-
tion and Development explained about the loan administration and risk reduction by
formal lenders(i.e. banks), Credit Analysis Standards, Increase Project equity require-
ments, Loan screening of banks and assessing creditworthiness during screening. Banks
consider return on project as an important indicator for appraising the projects
2. A research was conducted by Mr. V.M.V. Subha Rao, on “Monitoring of Advances -
A New look”. The research gave two views on the commencement of monitoring
process-(i)Narrow view- the monitoring starts only after the advance is disbursed,
(ii)Broad view- at the time of conducting credit investigation of the borrower continue
in all other stages of credit cycle.
3. Mritunjay Kumar Pandey conducted a study on Financial Performance Appraisal of
TISCO. The Objectives of the study was to check the profitability and efficiency of the
firm in the near future, to give brief summery about the ratios which affect the organi-
zation‟s financial structure and to point out the relationship between ratios and reasons
behind it.
4. Eleanor Charles in his paper “Appraising the Role of the Appraiser”, talked about the
centralized function of the appraiser to grant the loan and virtually every loan applicant
will have to rely on an appraisal to set a value on the property against which the loan is
to be made.
12
TJSB BANK – CREDIT RATING OF SME’s
About SMEs
In India, small and medium enterprise (SME) is a generic term used to describe small
scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a
total investment in its fixed assets or leased assets or hire-purchase asset up to Rs10
million is considered as a SSI unit and investment up to Rs. 100 million is considered
as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other
industrial unit nor can it be owned or controlled by any other industrial unit.
The SME sector produces a wide range of industrial products such as food products,
beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products,
jute, hemp & jute products, wood & wood products, furniture and fixtures, paper &
paper products, printing publishing and allied industries, machinery, machines,
apparatus, appliances and electrical machinery. SME sector also has a large number of
service industries.
TJSB Bank Services to SMEs
TJSB Bank has special focus for extending credit facilities to Small and Medium Size
Enterprises. Bank has customized solutions for Small Business Enterprises, Small Scale
Industries and Medium Scale Industries. Credit Facilities are offered in the nature of
Term Loans for establishment of new industries, acquisition of machineries, technology
up-gradation, or execution of ad-hoc orders or for expansion, modernization or
diversification programs. Finance offered will be in the form of Fund base as well as
non fund base facilities as per the requirements of the Business. Working Capital Term
Loan requests are considered for viable small and medium size enterprises requiring
infusion of fresh funds by way of one time core working capital assistance.
Products:
13
Establishment \ modernization \up-gradation of Fixed Assets: Bank provide property
loans to SME for purchase of factory premises &modernization of existing factory
building. They also offer hypothecation loans to SME’s for purchase / import of ma-
chinery
Setting up Office, Renovation of the premises: Bank offer property loans to SME to
set-up the business office & branch office for the expansion of business plans. They
also offer term loans to renovate existing office premises.
Purchase of commercial vehicles: Bank offer hypothecation loan to the transport opera-
tors to purchase new commercial vehicles such as Buses, Trucks, Tempo, etc.
Working Capital Limits: Bank offer credit facility in the form of Cash Credit limit,
Working capital term loan to the SME’s against the hypothecation of stock & Book
Debts. It helps to meet working capital requirement and Short term financial need.
Project Finance: Bank offer project finance loans to technically qualified, trained and
experienced Entrepreneurs to execute the prestigious orders in hand.
Export Finance:
Pre-shipment Credit
Pre-shipment Credit facility is offered to an exporter by way of packing credit to enable
him to purchase/import of raw materials, processing and packing of the goods meant
for export order.
Post –shipment credit
Post-shipment Credit facility is offered to an exporter to finance export bills receivables
after the date of shipment of goods till the date of realisation of export proceeds on sub-
mission of documents.
Fund Base:
14
Working capital
Funds required for day to-day working will be to finance production & sales. For
production, funds are needed for purchase of raw materials/ stores/ fuel, for
employment of labour, for power charges etc. financing the sales by way of sundry
debtors/ receivables.
Capital or funds required for an industry can therefore be bifurcated as fixed capital &
working capital. Working capital in this context is the excess of current assets over
current liabilities. The excess of current assets over current liabilities is treated as net,
for storing finishing goods till they are sold out & for working capital or liquid surplus
& represents that portion of the working capital, which has been provided from the
long-Term source.
Term Loan
A Term Loan is granted for a fixed Term of 3 years to 7 years intended normally for
financing fixed assets acquired with a repayment schedule normally not exceeding 8
years.
A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of
land, construction of, buildings, purchase of machinery, modernization, renovation or
rationalization of plant, & repayable from out of the future earning of the enterprise, in
installments, as per a prearranged schedule.
Non-fund Base:
Bank Guarantee Limits & Letter of Credit limit:
Bank offer to issue various types of guarantees such as performance, financial, bid
bond, tenders, customs etc & we have tie-up with Nationalised Banks also to issue BG.
They also issue inland letter of credit facility to our customers to purchase raw material,
machinery etc. They also have tie-up with Nationalised Banks to issue foreign letter of
credit to import machinery, raw material etc.
Eligibility:
• Individuals/Partnership Firms/Companies.
15
• Experience /qualification in the proposal line of activity..
Loan Amount:
• Cash credit limit, Property loan & Hypothecation loan will be assessed according to the project requirement.
Rate of interest:
• Bank’s PLR is 13.50 % p.a. & Bank offer attractive rate of interest to SME’s
based on their credit ratings.
Security:
• Hypothecation of Asset financed
• Mortgage of immovable property
• Personal Guarantee of Director / Partner.
Period:
• Period for cash credit account will be of 12 months and limits being renewed
yearly.
• Period for Terms loans will be 36 months to 84 months.
• Moratorium period will be 6 months.
• Period for project finance variable from project to project and reviewed on yearly
basis.
TJSB Bank Commercial Loan Processing:
16
The commercial loans provide an attractive source of income in terms of interest,
lenders exercise a lot of care and study in evaluating borrowers to ensure that funds lent
out are along with the earnings.
TJSB Bank provides separate loan for different categories of borrowers. The loan
application form contains information relating to Background of borrower, personal and
professional details, purpose of loan, nature of facility, period of repayment, nature of
security offered, and financial status of borrower.
Types of Borrowers
Category
Type of Borrower
P-1 Individuals for activities allied to agriculture.
P-2 Small Scale Industrial units and
equipment/systems for
Development of new and renewable sources of
energy.
P-3 Road and water transport operators.
P-4 Retail Traders
P-5 Small Business Enterprises
P-6 Professional and Self-Employed persons.
P-7 State sponsored organisations for Scheduled
Castes/Scheduled Tribes
P-8 Educational Loans
P-9 Housing Loans
P-10 Consumption Loans
P-11 Software
P-12 Food & Agro Processing Sector
P-13 Investment by banks in venture capital
CREDIT APPRAISAL PROCESS
17Receipt of Applications from Applicant
Required Documents for Process of Loans
18
Communicate with client documents required for the said proposal
Follow-up Sheet
Pre-sanction visit by bank officers
Check for RBI defaulters list, CIBIL data, ECGC, Caution list etc
Assessment of proposal
Title clearance reports of the properties to be obtained from Empanelled
Valuation reports of the properties to be obtained from Empanelled
Preparation of financial data
Proposal preparation
Sanction/approval of proposal by appropriate sanctioning authority
Documentation, agreement, mortgages, pre-disbursement requirements
Disbursement of loans
Post sanction activities
1. Audited / Provisional P& L A/c, Balance Sheet for Current Year i.e. upto31.03.2012.
2. IT Return Copy of the Firm for A.Y 2012-2013 or latest filed.
3. Reason for increase or decrease (as applicable) in sales / net worth / profits in compari-
son with earlier year’s figures.
4. Month wise Sales & Purchase for Current year April 2012.
5. Latest Debtors / Creditors / Stock statements. (Debtors statement should be age-wise)
6. Projected sales turnover of the Firm for, 2012-2013.
7. I.T Returns copy along with individual Balance sheet of all partners / Directors / Propri-
etors for A.Y 2012-2013 (F.Y 2011-2013) or else latest filed.
8. Approximate amount of Bad Debts as on last month.
9. Undertaking for No change in constitution.
10. Current status of payments of statutory dues (E.g. PF/Excise/Sales Tax etc) Salary/LIC
deductions etc.
11. Copy of Sales Tax annual returns for F.Y 2011-2012 and copy of latest return filed in
2012-2013, if applicable.
12. Statement of payment of statutory dues as on 31.03.2012 duly certified by CA.
13. Dully filled CC Renewal form signed by Borrowers / Guarantors.
14. Board Resolution for Renewal Credit limits. (Incase of PVT Ltd and Ltd Company).
15. Guarantors ITd Return Copies along with Balance sheet, Profit & loss A/c for F.Y.
2011-2012.
16. Xerox copy of registration certificate under shop and establishment Act, 1948.
Credit Rating of TJSB Bank
19
Credit Rating is done before sanctioning any finance to customer. Under this method
marks are assigned to each of the parameters.
The following are the parameters have been considered for determining the rating of
borrowers in the SME category:
Financial Risk
Business Risk
Industry Risk
Management Risk
Within each of these broad areas, various parameters have been used for obtaining an
overall rating of the borrower. The total marks a borrower can be awarded on being
analyzed using these parameters shall be 100.
Marks Obtained By Borrower
Weighted Marks in % =
Total Marks assigned to various Parameters
As per Banks guideline, concession in Rate of Interest is provided which is subject to
credit rating of the borrower.
The Credit Rating Scale to be used to rate the applicant is as follows:
1) PRIMARY REQUIRE-
MENTS :
20
Marks of the
Applicant
Rating of the
Applicant
75 & Above A+
Between 60 to75 A
Between 50 to
60
B
Between 35 to
50
C
Between 0 to 35 D
A business loan requires detailed documents stating entire business profile that states
the general background of the business and its operations. Borrower is required to
primarily submit personal financial statements listing all the assets and liabilities,
income tax details along with audited profit & loss account and balance sheet of
previous 2 to 3 years along with current year. Bank may also demand borrower to
submit estimated future projections and statements, expansion plans and details of
guarantors.
Security
Another fundamental requirement for loan application is details of Prime and collateral
security offered by the borrower. Collateral Security for loan may include assets such as
real estate, stocks or bonds, hard goods such as machinery & equipment and various
other personal assets.
To ensure the safety of funds lent, the first and most important factor considered by a
bank is the capacity of borrowers to repay the amount of loan but bank can hardly
afford to take any risk in this regard. The bank therefore relies primarily on the nature
of security offered by the borrower. In case borrower fails to repay the amount banks
recover money by attaching the assets. Bank can sell the assets offered as security and
realise the amount.
For security purpose banks create charge on assets offered by borrower in
following ways:
a. Hypothecation:
It is the most common and popular mode of charge whose important features are as
under
It is not defined under any law.
Extended idea of pledge.
It relates to goods/commodities, movable machinery, vehicles, book-debts.
Ownership remains with the borrower.
21
Possession is also with the borrower.
Symbolic/constructive possession with creditor (Bank).
It creates an equitable charge.
Hypothecation Agreement gives Banker a right to take possession of hypothecated
goods, machines.
b. Pledge:
Under section 172 of Indian Contract Act pledge means “Bailment of Goods as a
security for repayment of a debt or performance of a promise”.
A common example of pledge is gold ornaments, which are pledged with the bank
as a security against which Gold Loan is given.
Important features of Pledge are –
Actual delivery of security is given to the Bank.
Ownership remains with bailers (Borrower).
Liable to return after fulfillment of promise or repayment of loan amount.
Disposal possible only after default and giving due notice to the Borrower.
c. Mortgage:
Transfer of Property Act 1882 defines Mortgage as: -“Transfer of an interest in specific
immovable property for the purpose of securing the payment of money advanced by
way of loan, on existing or future debt or the performance of an engagement which may
give rise to pecuniary liability”.
Mortgagor must be the owner or a person having interest in immovable property.
Mortgagor must have a contractual capacity.
Property must be a specific immovable property.
Purpose is to secure the loan repayment.
2) PROCESSING APPLICATION :
22
After receiving all the required documents from the borrower a loan officer will then
review the application and documentary attachments. Loan officer will then analyse and
review various credit reports, documentation as well as income details provided by the
borrower.
There are three principals of bank lending:
Safety: As Bank lends funds entrusted to it by the depositors, the first and foremost
principal of lending is to ensure safety of the funds lent. Safety mean by capacity and
willingness of borrower to repay.
Liquidity: Liquidity mean by granting loan against security of assets which are easily
marketable without much loss.
Profitability: The sound principle of lending is not to sacrifice safety or liquidity for
the sake of higher profitability. Bank should not grant advances to unsound parties even
if they are ready to pay high interest.
Bank therefore has to consider creditworthiness of borrower, borrower’s background,
soundness of his project or business activity. Banker has to ensure that the business of
the borrower is permissible for lending as per the guidelines & policy of the bank. For
assessing credit worthiness of borrower, banker has to collect information through
number of sources.
This is important stage in loan process as it involves preparation of Process Note, and
analysis of loan application. Important steps carried out by loan officer are as follows.
Analysis of financial statements:
23
Banks approach towards analysis of financial statement is to find and study the
solvency or repaying capacity of the borrower. Bank is concerned with the estimation
of the risks if any, involved in lending to the borrower.
Processing officer carefully analyses all the financial statements and records of the
borrower. Financial Statement analysis assists the loan officer in assessing the financial
and administrative efficiency of the borrower. Various financial ratios are calculated
and trend analysis is carried out to check the consistency and growth of business.
Various recommendations and observations are drawn based on the ratios.
Ratios computed are as follows:
Tangible Net Worth
Debt-Equity Ratio
Unsecured Loans
Asset Turnover Ratio
Liquidity Ratio
Sales
Profitability & DSCR
Visit Report
Loan processing officer conduct visit to the commercial or factory site of the borrower
and also to its registered office for inspection. Objective behind visit is to verify the
operational setup and soundness of the borrower in respect of loan. After the visit
detailed visit report is prepared containing observations of visit and recommendations.
Working Capital Assessment :
24
Working capital facilities are required by industries .trading concerns and also units
engaged in extending services. Need of working capital in majority of cases remain
more or less constant throughout the year.
Methods of Assessment of working capital
a. Maximum Permissible Bank Finance (MPBF) Method:
Audited financial statements of last two years have to be studied. The data in Profit &
Loss Statement & in the Balance Sheet in whatever format is first reconstructed in the
prescribed format.
The total build-up of current assets & current liabilities is to be studied. The inventory,
Debtors & Creditors which have been expressed in the monetary terms in balance sheet
should be converted into holding into months or days.
Current assets & current liabilities are assessed based on projected sales.
Finding the Working Capital Gap & deciding the contribution of Borrower & Banks
contribution for bridging the Gap
b. Turnover Method:
Under this method, working capital is assessed on the basis of 20% of the projected /
actual sales of the borrower.
c. Operating Cycle Method:
Under this method, working capital requirement is assessed on the basis of the average
time intervening between the acquisition of material or services entering the process
and the final cash realization.
Calculation of Drawing Power/ Limit
25
Drawing power is calculated based on the value of security provide i.e. Stock and debts
or property. Drawing power is calculated after considering margin which is fixed to
certain extent e.g. For the traders is 30% whereas to a manufacture it is fixed at 40 %.
Margin:
Margin is provided by way of liquid surplus i.e. from long term liabilities. Current
assets shall partly finance by capital and long term liabilities for any going concern.
Financial accommodation up to 100 % of the value of goods will not be granted by
banks, banks fix certain margin on the value of goods which must be financed by
borrower and remaining will be financed by bank. The percentage of margin fixed on
any security depends on its nature and type of borrower.
Thus Process note comprise of entire analysis of the loan application and borrower
including drawing power of the borrower, his working capital requirements, security
details, valuation reports, details of guarantors, financial statement analysis, visit report
and other terms and conditions of sanctioning of loan. Once process note is completed
it is forwarded to sanctioning authority for final review and assessment
3) APPLICATION REVIEW AND SANCTIONING OF LOAN
After the loan application is processed and all the findings are satisfactory, the loan
application is then submitted to sanctioning authority. Sanctioning authority then
assesses and eventually decides whether the loan will be approved.
Sanctioning authority & Delegation of Authority
To regulate the deployment of the credit as well as for speedy sanction and disposal of
the credit, the Board of Directors of the bank determines the lending and discretionary
powers of various authorities at different level.
As per the level of the official from Manager to CEO powers are assigned for sanctions.
Authority includes per party Exposure, Group exposure, Funded and Non -funded
26
limits, Waiver in processing fee, concessions in Interest rate etc. Board is the apex level
of authority and all the proposals beyond the powers of CEO will be looked into by the
Directors. Board of Directors also formulates overall policy of the bank with regard to
credit.
Insurance Details of the assets and securities offered by the borrower against the loan
are also mandatory to ensure credit recovery. Hence the details of amount of insurance
along with the insuring company and their due dates are mentioned in process notes.
After the approval from the sanctioning authority the processing officer then forwards
the sanction letter to the borrower. Sanction letter includes amount of financing, terms
& conditions of payment, details of Prime and collateral security, and other conditions
regarding loan sanction.
4) Loan Disbursement
Once borrower is agreed on all the conditions mentioned in sanction letter, Borrower is
required to sign final set of loan documents. With all the requirements met and all
closing documents in order, loan officer generates Disbursement Order (DO) and loan
is finally disbursed.
Documentation
Banks generally lend for productive purpose. Documentation is done to create legally
valid and effective charge over assets which bind the borrower and guarantors
personally. Documents contains specifically and precisely the terms and conditions to
the contract between the borrower and bank. Which is examined by the court of law
incase of legal recourse. It is therefore necessary that right type of documents properly
filled up, adequately stamped and executed are obtained on record.
Purpose and importance of documentation
27
Documents are prepared and executed to record the fact that borrower has taken a loan
from the Bank and thereby evidence is created. The second purpose of documents is to
incorporate the terms and conditions on which the loan has been given. This is very
necessary to avoid confusion and ambiguities in future. The third important purpose is
to create a charge in favour of the Bank on the assets offered as a security.
By and large the loans are repaid by the Borrowers as per agreed terms and conditions.
But when the Borrower fails to repay or does not adhere to the agreed terms and
conditions, the Bank has to take action. It may be by way of realizing the asset given as
security or enforce the agreed terms and conditions or to take legal action to recover the
bank dues. At that time the loan documents prepared and executed are required to
produce. Documents, which are not properly executed, cannot be enforced against the
borrower and their purpose itself is defeated.
REGISTRATION OF CHARGES OF COMPANIES WITH ROC
The charge on the assets of the company created in favour of the Bank as security for
loan is required to be registered with Registrar of Companies. Failure to do so renders
such charge void as against liquidator or other registered creditors. Thus in order to
protect the interest of the Bank every charge created in favour of the bank needs to be
registered.
The registration of charge is a notice to the general public of Banks charge on the assets
of the company. Charges such as hypothecation, mortgage requires registration. The
charge is required to be registered within a period of 30 days from the date of creation.
The delay, however, can be condoned by the Registrar of Companies.
For creation of charge Form No 8 together with the original instrument creating a
charge or certified copy is to be filed with the Registrar. Requisite fee prescribed is also
to be paid. Registrar after due verification of the charge form and registering the charge
on company’s records with him issues a certificate of Registration of Charge.
28
Where a modification of charge is to be done e.g. when limit is enhanced, additional
security is charged etc Form No 13 is also to be filed along with Form No 8. Procedure
for filing modification of charge is similar to filing original charge.
Post Sanction Monitoring Of Advances
The most important stage in the loan begins after the full disbursal of the loan. All the
care taken in appraising the project will be nullified due to faulty monitoring. Thus a
good asset/loan account can turn bad for the bank if danger signals or negative
indicators are not looked into or analysed properly.
When input cost goes up small industries can come under strain. Depending on their
ability they may either pass on the cost to the customer or absorb the cost or they may
have to sacrifice the profits. In such case accounts will turn bad.
The bank should have a strong monitoring mechanism in place at various levels, which
will help capture the account before it moves into an NPA. Bank should carefully
monitor the end use of funds and see that the funds are used for the purpose intended
for. An advance given for working capital used for trading in stock market increases the
risk of default.
A monitoring mechanism should look out for early warning signs in the following
areas.
Unusual increase in debtor level.
Substantial decline in sales levels.
Status of borrowers with other banks.
Information of group companies.
High projection of sales/ Profits should be analysed.
Correlation Analysis
29
Keeping in mind, the above process of credit appraisal of TJSB, it would be interesting
to understand how the financial ratios form a very important part of determining credit
scores of the borrowers. In order to establish the above relationship, simple correlation
analysis is done between the ratios and the scores. It also helps in knowing whether
bank has taken viable decision before granting loans.
ParticularsScores
RatiosCurrent Ratio
TOL-QE / TNW+QE
Cash Accruals/ Net Sales
Collateral Coverage
Refex Air Ltd 89
0.96 3.21 - 50%
Kulkarni Cranes Ltd 77
0.84 4.87 9% 29%
Moksh Raymond 148 2.11 1.06 3% 427%Oman Laboratories Ltd 128 0.8 1.14 3% 51%Suraj Lifters Pvt Ltd 133
2.45 3.03 -3% 49%
Current Ratio
Current ratio shows the relation between Current Assets and Current Liabilities. In
30
CORREL
ATION
Particulars
(Ratings/Ratios)
Score Obtained
Current Ratio 0.70346368
TOL-QE/
TNW+QE
-0.8451471
Cash Accruals/Net
Sales
-0.7758631
Collateral
Coverage
0.63527706
Correlation the results shows that every enterprise whose rating shows better short term
working capital, which can be easily turned into finished goods within a less debtors
turnover days. If the ratings are been negative then it can be said that debtors may be
responding late.
TOL-QE/TNW+QE
Quasi equity is a debt taken on by a company that has some traits of equity, such as
having flexible repayment options or being unsecured. In total outside liability includes
both liability of bank as well as outside. Negative correlation shows that there is not
much investment made as Quasi Equity.
Cash Accruals
Cash Accrual is the profit earned by company including depreciation. As per the
ratings, accrual income is showing negative sign which says repayable capacity is not
much stronger.
Collateral Coverage
Collateral is "an additional form of security which can be used to assure a lender that
you have a second source of loan repayment. In this, higher the security higher the
ratings. Security is given on behalf of the Term loan and not applicable in Overdraft
and Cash Credit. As Correlation shows positive sign, i.e Bank can able to sustain even
the loan goes unpaid.
OUTCOME OF THE STUDY
31
Credit appraisal is done to check the commercial, financial & technical viability of the
project proposed, its funding pattern & further checks the primary or collateral security
cover available for the recovery of such funds
Credit is core activity of the banks and important source of their earnings which goes to
pay interest to depositors, salaries to employees and dividend to shareholders
Credit and risk go hand in hand
In the business world, risk arises out of:-
o Deficiencies /lapses on the part of the management
o Uncertainties in the business environment
o Uncertainties in the industrial environment
o Weakness in the financial position
A banker’s task is to identify/ assess the risk factors/ parameters and manage/ mitigate
them on continuous basis
These risks have been categorized broadly into financial, business, industrial and man-
agement risks which are rated separately
The assessment of financial risk involves appraisal of the financial strength of the bor-
rower based on performance & financial indicators
To determine the Credit worthiness of a particular customer the above factor mentioned
come into play. All the factors were studied in detail while carrying out the project.
LIMITATION OF THE PROJECT
32
As the credit appraisal is one of the crucial areas for any bank, some of the technicali-
ties are not revealed
As some of the information is not revealed, whatever suggestions generated, are based
on certain assumptions.
Credit appraisal system includes various types of detail studies for different areas of
analysis, but due to time constraint, my analysis is restricted to few sectors.
LEARNING FROM THE PROJECT
33
I had a valuable experience doing my summer internship at TJSB Bank in Thane. The
duration for my internship was 2 months, starting from 2nd May 2012 to 2nd 2012 in
Thane Main branch and, I was working on the “CREDIT APPRISAL”
My Project Guide was Mr. Pravin Pandurang Pandit, Chief Executive officer for Thane
SCC branch, respectively of his department.
This was my First exposure to the corporate world and had an experience of working in
banking. I was working on the credit appraisal, which I feel is the basic requirement of
any bank. While working I observed the significance of the Credit in a bank, its
working.
The project, which was given to me in this period of my summer internship, project was
to know the credit appraisal. For that, I have to talk to manager and try to understand
concept of credit in the bank.
Thus during this internship-period working on project and simultaneously observing
has proved to be a great experience in all as I have got to see and understand various
situations of the employees. I would like to conclude by saying that it is been a great
learning for me through this internship. I understand some realities of the bank, as I was
part of the everyday activities of the organization. I also learned the fact that no
department can work on its own each department have to depend on other in one-way
or the other.
BIBLIOGRAPHY/REFERENCE
34
BIBLIOGRAPHY
Financial Management, Theory and Practice (Seventh Edition)
-Prasanna Chandra
Link
www.rbi.org.in
www.thanejanata.co.in
www.dsir.gov.in
www.sidbi.com
www.ijmra.us
Reference
Business Standards
35
.
Branch: SCC/ Date: 12.06.2012
NOTE TO BE PLACED BEFORE
NAME OF APPLICANT :
(Membership No:)
A. PRESENT PROPOSAL :
B. BRIEF BACKGROUND :
1. CONSTITUTION :
2. ASSET CLASSIFICATION :
3. ADDRESS :
FACTORY: (Owned/Rented/Leased) :
OFFICE: (Owned/Rented/Leased) :
4. DATE OF ESTABLISHMENT :
5. BANKING SINCE :
6. CATEGORY :
7. ACTIVITY:
(a) Main Activity :
(b) Industry :
(c) List of major clients :
37
8. NAME(S) OF DIRECTORS/PARTNERS/PROPRIETOR & THEIR NET WORTH
(Amount in RsLacs)
NAME AG
E
ANNUA
L
INCOM
E
NETWOR
TH
9. NAME OF THE GUARANTORS OTHER THAN DIRECTORS / PARTNERS /
PROPREITOR & THEIR NET WORTH (Amount in Rs. Lacs)
NAME AGE ANNUAL
INCOME
NETWORTH
(Specific mention if Directors/ Partners / proprietor are not guarantors in their individual
capacity)
BRIEF ABOUT THE PARTNERS :
ABOUT THE PRODUCTS:
ABOUT THE PRODUCTION PROCESS:
10. POSITION OF ACCOUNT:
10.1 POSITION OF THE ACCOUNT OF FIRM / COMPANY
38
(As on 02.08.201) (Amount in Rs. Lacs)
FACILIT
Y
SAN
C.
LIM
IT
O
/S
B
A
L.
OV
ER
DU
E
INTERE
ST RATE
SECU
RITY
Cash
Credit
ADVHYP
PRLN
TOTAL
DETAILS OF COLLATERAL SECURITY VALUE
Prime
TOTAL SECURITY VALUE
10.2 POSITION OF THE ACCOUNT OF ASSOCIATE FIRM /COMPANY (Not
Applicable)
(As on )
Facility L
i
m
i
t
O/
S
Ba
l
O
v
e
r
D
u
e
s
R
.
O
.
I
.
Primary
Security
Type
Value
Funded [A]
Non Funded
39
[B]
Total [A+B]
Security
details & its
value
Detail Description of security: Value:
TOTAL OF PRIMARY +
COLLATERAL:
Value:
Security Coverage of the Group
NAME OF
A/CEXPOSURE
TOTAL
SECURITIES
%
TOTAL
VALUATION DETAILS:
Name of Valuer
Date of Valuation
Valuation of land Rs.
Valuation of Building / Residential Property Rs.
Valuation of Machinery Rs.
Valuation of Vehicles / Cranes Rs.
Valuation of Dies / Tools and other misc.
equipments
Rs.
DEPOSIT RELATIONSHIP (Amount in
Lacs)
40
12. CONDUCT OF THE ACCOUNT:
a) General Conduct :
A] TURNOVER
PARTICULARS Credit Debit
Current Year
TOTAL
1) General Conduct :
2) Comments on Turnover: Comments on turnover: (Diff. in turnover / Multiple Banking arrange-
ments / Submission of Bank a/c statements of the Banks etc)
B] DRAWING POWER
Drawing Power (As on 30.06.2011)
Particulars Debtors up to
90 days
Upto180
days
Entire
Debtors
Stock
Add: Debtors
Sub total (a)
Less Creditors
Sub total (b)
Margin © = @ 30 %
41
S
r
n
o
PARTICUALA
RS
TOTAL
AMOUN
T OF
DEPOSI
T
COLLATER
AL
SECURITY
FREE
DEPOSI
TS
a.
TOTAL
of (b)
Drawing Power (b-c)
Average Drawing Power Rs.
Whether operations within DP :
iv) Date of Last Renewal
13. TOTAL EARNINGS FROM ACCOUNT:
Previous Year Current Year
i. Interest
ii. Commission
iii
.
Other
TOTAL
VISIT DETAILS:
14.1 Visit Details
Date of
visit
18.08.201
0
14.2 Observations during Visit in Brief:
15. INSURANCE DETAILS
Security Description Amount (in Due Date
42
lacs)
Whether existing securities are adequately insured:
16. Compliance of all Terms and Conditions of earlier sanction (YES/NO)
(If NO – Terms which are pending and reasons, No reason for if YES)
17. A] Noting of Charge with ROC (in case of Ltd./ Pvt. Ltd. Co.)
B] Noting of Charge with R.T.O [For Vehicles / Cranes]
Report only pending compliances with reasons and plans to comply the same.
18. Reserve Bank of India/ Statutory Auditors/Concurrent Auditors/Internal Auditors
observations, if any Steps taken by Branch for compliance of the same.
19. BRIEF FINANCIAL INDICATORS:-
(Rs. In Lacs)
PARTICULARS 2009-10
(AUDITED)
2010-11
(AUDITED)
2011-12
(PROV.)
Tangible Net Worth
Debt /Equity Ratio
Current Ratio
Net Working Capital
Receivables Ratio
Creditors Turnover
Stock Turnover
Net Sales
% of
increase/(decrease)
Net Profit
% to sales
43
Sales from April 10 to
June 10
COMMENTS BASED ON PROVISIONAL FINANCIALS OF 2011-2012 :
1) Tangible Net Worth:
2) Debt-Equity Ratio:
3) Current Ratio & Net Working Capital:-
4) Turnover Ratios:-
5) Net Sales and Profitability:-
6) Future projections / D.S.C.R.:-
DELEGATION POWERS:
Parameters Benchmark Actual
Committee II Committee I
Current Ratio 1.17:1 1:1
TOL/TNW 6:1 8:1
Debt Equity
Ratio
3:1 4:1
DSCR 1.75 1.50
Margin 25% 20%
Repayment Pe-
riods
7 Years 10 Years
Collateral Se-
curity
50% 25%
ROI Not below 13% Not below
12.50%
44
Processing
waiver
25% 75%
Considering deviation in delegation of power in case of collateral security, the note is put
up before Committee I
7) Recommendation
8) TERMS AND CONDITIONS:
Pre-disbursement:
Post-disbursement:
OFFICER CHIEF MANAGER ASST.GEN. MANAGER (SCC) (SCC) (SCC)
Decision of Credit Committee-II
Additional Terms & Conditions :
CHAIRMANCREDIT COMMITTEE-IIDATE:
45