TABLE OF CONTENTS

SR.

NO.CONTENTS PAGE NO.

1 Declaration 2

2 Certificate from Company 3

3 Acknowledgement 4

4 Abstract 7

5 Executive Summary 9

6 Introduction To The Study 13

7 Reasons for selecting the Project 15

8 Objective Of The Study 17

9 Place of Study 19

10 Limitation Of The Study 21

11 Research Methodology 19

12

Banking Sector Overview

Introduction - Banking sector an overview

Indian banking Scenario

INDIAN BANKING STRUCTURE

MARKET PLAYERS OF BANKING

PRODUCT AND TECHNOLOGY

INNOVATION

23

13

The State Bank of Indian Overview

Mission&Vsio n

About Bank

Board of Director

34

14 Loan process and credit analysis 40

15 Forms Of Bank Finance 44

16Factors to be taken into consideration while determining

requirements for working capital53

17 Securities Required in bank finance 58

18 Documentation Formalities 61

19 NPA 63

20 Case Study 68

21 Recommendations & Suggestions 85

22 Conclusion 88

23 MY TAKE AWAY- KEY LEARNING’S 91

24 Bibliography 93

ABSTRACT

The project undertaken is Credit Appraisal of The State Bank of India.. The project

emphasis on understanding the procedure and process used by The State Bank of India to

assess the credit worthiness of the borrower.

The credit appraisal process is the systematic technique of giving the credit to client

by scrutinizing the credit worthiness of the concern through different parameters. The first

step in credit appraisal project is to understand the Indian banking industry.

The credit appraisal for company starts with Understanding the need of loan to the

borrower i.e. for which purpose the loan is required. After this next step is to analyze the

financial statement of the company to whom the loan is to be sanctioned. The main things

which are taken into consideration while analyzing the financial statement are type of

statement, nature of activity, accounting policy, qualities of assets and liabilities , unit wise

performance result of the company & director’s report.

After analyzing the financial statement the second step is to analyze the key financial

ratios of the company such as:

Creditors Ratio, Debtors Ratio, Debt Equity Ratio, Debt-service coverage ratio, liquidity

ratio, turnover ratio, Stock Velocity Ratio etc.

The next step is to understand the methodology used to determine the credit rating.

Since the credit rating methodology differ from bank to bank in term of the weight age given

to the parameters but the parameter used by the banks to assess credit worthiness are almost

same to all company.

The sensitivity analysis is used to check the company ability to pay back the loan by

changing the independent variables and consequently monitoring the effect on dependent

variables. The last step is to understand the classifications of Non-Performing Assets and the

provision to recovery of NPA. The research report contains the whole procedure & process

which is used by the bank to give credit.

EXECUTIVE SUMMARY

Once a project opportunity is conceived and it is considered after the preliminary

screening, a detailed feasibility study has to be undertaken covering marketing, technical, and

financial aspects of the project. The study in the form of cases deal with calculations of

MPBF (Maximum Permissible Finance), along with going through the borrower’s

information, general information of the proposal, past record of borrower and details of

security mortgaged. Financial records of the borrower audited, provisional and projected such

as Profit and loss account statements, Balance Sheet and Cash and Fund Flow Statements

needed to be considered. The ratios such as current Ratio, Debt Service Coverage Ratio etc

are also checked. The ultimate decision whether to grant the credit to borrower for the

application or not and how to go about it , is undertaken after this study which discloses

whether the borrower has good past record and information provided are true and fair.

My project concerns with the Calculations of MPBF i.e. Credit Appraisal, in which I

need to asses if the borrower should be granted credit, and what should be the recommended

loan amount. This all is done after carefully evaluating the financials and securities provided

by the borrower.

Various financial ratios are calculated for the past and future data provided by the

borrower after checking the veracity of the same. The various ratios, which are frequently

calculated include:  

Current ratio:

[(Receivables + material and finished good inventory)/ (creditors for goods and

expenses)]

Long term debt-equity ratio

[Long Term Debt/ Net worth]

Interest coverage ratio

[(Profit before Interest – Provision for Tax)]/(Interest payments due for the year]

Fixed assets coverage ratio

[Fixed Assets/ (Term loan and other long term debt obligations)]

Debt-service coverage ratio

[{(Profit after tax + Interest on term loan + Depreciation} + Other non-cash charges]/ 

[Interest on term loan + Principle Repayment]

Debtors Velocity

[Average Receivables/Credit Sales* No. of days in a year.]

Creditors Velocity

[Average Payables/Credit Purchase* No. of days in a year.]

Stock Velocity

[Average Stocks/Cost of goods Sold* No. of days in a year.]

Two other important criterions are IRR and DSCR

Financial institutions calculate the Internal Rate of Return (IRR). The Internal Rate of

Return refers to the rate of return that the project is expected to generate based on its

projected cash flows accruing over its expected lifespan. Institutions have a threshold IRR

that the project needs to surpass to assess its viability.

DSCR refers to the ability of the project to generate sufficient cash flows to repay the

debt taken to finance the project. This includes the principal along with the interest

component.

The above ratios are taken and matched with the standard, though a certain amount of

flexibility is exercised depending on the perception and personal judgment of the appraising

officer. A rating is assigned to the project based on the scores of the different ratios. A cut-off

rating determines financing decision (whether the project would finance or not. Above the

rating, the projects may be categorized into excellent, good and average. Based on this and

the project characteristics, the final terms and conditions of financial assistance are decided

upon like:

Moratorium

Repayment period

Availability period

Security (like first charge, personal guarantee etc.)

Interest rate

All the expenses like service fee, processing fee, document fee and other expenses like

inspection of site, factory, etc. are charged to the applicant and are a source of income for the

lending institution.