50681920 a Project Report on Credit Appraisal

CREDIT APPRAISAL

A PROJECT REPORTON

CREDIT APPRAISAL IN BANKING SYSTEM

A Project submitted in partial fulfillment for the award of Degree

ofMASTER OF BUSINESS ADMINISTRATION

Submitted to: Submitted by:

Managing Director Parmjeet Singh

Sr. J.S Safri Roll No 511113351

RICDT Professional College MBA- IV SEM.

LC Code : 00899

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CREDIT APPRAISAL

STUDENT DECLARATION

I hereby declare that the project report entitled CREDIT APPRAISAL submitted for the degree of MBA is my original work carried out by me under the guidance of Sr. J.S Safri for the partial fulfillment of the award of the degree of MASTER OF BUSINESS ADMINISTRATION. The matter embodied in this report has not submitted anywhere else for the award of any other degree/diploma.

Place : Roapr Name : Parmjeet Singh

Date : Roll No : 511113351

Forwarded by : RICDT Professional College, Ropar (Pb)

Center Code : 00899

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CREDIT APPRAISAL

RICDT Professional College

Ropar

(Study Centre of Sikkim Manipal University)

Certificate

This is to be certified that the Project work entitled CREDIT APPRAISAL of MBA Revised has been

carried out by is approved and acceptable.

Project Guide : Centre Head :

Mr. Sanjeev Kumar Sr. J.S Safri

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Examiner’s Certificate

This is to certify that Parmjeet Singh has been successfully completed the project entitled as

CREDIT APPRAISAL in partial fulfillment of the requirement for the Award of

MBA

(of Sikkim Manipal University)

On

2011-2012 at

RICDT Professional College Ropar

(Study Centre of Sikkim Manipal University)

Signature Signature

(Internal Examiner) (External Examiner)

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Acknowledgement

Preparing a project was great experience for me which was possible only with the help of people, whom I really want to say thanks.

I would like to express my deepest sense of regards and gratitude RICDT Professional College, (Affiliated to Sikkim Manipal University) for their kind regards and suggestions.

I wish to thanks Sr. J.S Safri Director of the college and to all the teaching and non-teaching staff and friends who help me directly or in-directly in the successful completion of this project.

Parmjeet Singh

Roll No. 511113351

Curriculum Vitae

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Name : Parmjeet Singh

Father Name : S.Sukhwinder Singh

Course : MBA

Roll No. : 511113351

Semester : IV

Session : 2012

LC Code : 00899

Date of Submission :

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TABLE OF CONTENTS

Chapters

1. INTRODUCTION

Reason for selecting the project

Scheme of the project

Research Methodology

Limitation of the study

2. CREDIT POLICY OF COMMERCIAL BANK

Commercial banks and its objectives

Recent policy developments regarding bank credit

Changing phase of bank credit

Trends of bank credit in India

Procedure for providing bank credit

Credit Appraisal

3. THE PROFILE OF THE ORGANIZATION OF PNB

Indian banking sector & its major challenges

Punjab National Bank at a glance

Mission and Vision

Organizational structure of PNB

4. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO PNB

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Credit philosophy

Credit policy

Introduction to loans

Classification of loans

Building up of a proposal

Requirements as per constitution of borrower

Financial Appraisal

5. ANALYSIS AND INTERPRETATION OF DATA

Credit Appraisal techniques

Process of credit appraisal for providing cash credit

Appraisal techniques for retail loans

6. CASE STUDY

7. CONCLUSION

Conclusion

BIBLIOGRAPHY

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CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior

before providing any loans & advances/project finance & also checks the

commercial, financial & technical viability of the project proposed its funding

pattern & further checks the primary & collateral security cover available for

recovery of such funds.

The last year financial crises have become the main cause for recession which

was started in 2006 from US and was spread across the world. The world

economy has been majorly affected from the crisis. The securities in stock

exchange have fallen down drastically which has become the root cause of

bankruptcy of many financial institutions and individuals. The root cause of the

economic and financial crisis is credit default of big companies and individuals

which has badly impacted the world economy. So in the present scenario

analysing one’s credit worthiness has become very important for any financial

institution before providing any form of credit facility so that such situation

doesn’t arise in near future again.

Analysis of the credit worthiness of the borrowers is known as Credit Appraisal.

In order to understand the credit appraisal system followed by the banks this

project has been conducted. The project has analysed the credit appraisal

procedure with special reference to Punjab National Bank which includes

knowing about the different credit facilities provided by the banks to its

customers, how a loan proposal is being made, what are the formalities that is to

be satisfied and most importantly knowing about the various credit appraisal

techniques which are different for each type of credit facility.

Before going further it is necessary to understand the need and basic framework

of the project. Therefore this chapter provides an introduction to the topic,

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objective of the project, reasons for selecting the project and the basic structure

and framework how the project proceeds. In order to understand the importance

of the topic selected an introduction to the overview of the commercial bank ,

its functions, and present trends and growth in bank credit are required and it is

covered in this chapter.

Reasons for selecting the project

Whenever an individual or a company uses a credit that means they are

borrowing money that they promise to repay with in a pre-decided period. In

order to assess the repaying capability i.e. to evaluate their credit worthiness

banks use various techniques that differ with the different types of credit

facilities provided by the bank. In the current scenario where it is seen that big

companies and financial institutions have been bankrupted just because of credit

default so Credit Appraisal has become an important aspect in the banking

sector and is gaining prime importance.

It is the incident of credit defaults that has given rise to the financial crisis of

2008-09. But in India the credit default is comparatively less that other

countries such as US. One of the reasons leading to this may be good appraisal

techniques used by banks and financial institutions in India. Eventually the

importance of this project is mainly to understand the credit appraisal

techniques used by the banks with special reference to Punjab National Bank.

Scheme of the project

It covers the objective and structure of the project which is discussed as

follows:-

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Objective of the project

The overall objective of this project is to under stand the current credit appraisal

system used in banks. The Credit Appraisal system has been analysed as per the

different credit facilities provided by the bank. The detailed explanation about

the techniques and process has been discussed in detail in the further chapters.

Structure or Plan of the project

The project first of all makes a study about the commercial banks- its important

functions. Then it highlights on the concept of Bank Credit & its recent trends.

The project then proceeds towards the lending procedure of banks and here it

highlights about credit appraisal being the first step in building up of a loan

proposal. Then it discusses the bank credit policy with respect to Punjab

National bank where the project was undertaken.

The project then proceeds with the review of literature i.e. review of some past

work regarding credit appraisal by various researchers. The project then moves

towards research methodology where it covers the information regarding the

type of data collected and the theoretical concepts used in the project are

discussed in detail. Then the project proceeds with the next chapter consisting

of the analysis part which covers the analysis of various techniques used by the

banks for the purpose of credit appraisal. Then the project moves to its next

chapter i.e. findings where some results found out are interpreted and then

moving on to the last and the final chapter i.e. the suggestions and conclusions

where some steps are suggested to be implemented to increase the work

efficiency and to reduce to work pressure

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Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checking

accounts, savings accounts, and money market accounts and that accepts time

deposits. Some use the term "commercial bank" to refer to a bank or a division

of a bank primarily dealing with deposits and loans from corporations or large

businesses. This is what people normally call a "bank". The term "commercial"

was used to distinguish it from an investment bank.

Commercial banks are the oldest, biggest and fastest growing financial

intermediaries in India. They are also the most important depositories of public

savings and the most important disbursers of finance. Commercial banking in

India is a unique banking system, the like of which exists nowhere in the world.

The truth of this statement becomes clear as one studies the philosophy and

approaches that have contributed to the evolution of banking policy,

programmes and operations in India.

The banking system in India works under constraints that go with social control

and public ownership. The public ownership of banks has been achieved in

three stages: 1995, july 1969 and April, 1980. Not only the public sector banks

but also the private sector and foreign banks are required to meet the targets in

respect of sectoral deployment of credit, regional distribution of branches, and

regional credit deposit ratios. The operations of banks have been determined by

lead bank scheme, Differential Rate of interest scheme, Credit authorization

scheme, inventory norms and lending systems prescribed by the authorities, the

formulation of credit plans, and service area approach.

Commercial Banks in India have a special role in India. The privileged role of

the banks is the result of their unique features. The liabilities of Bank are money

and therefore they are important part of the payment mechanism of any country.

For a financial system to mobilise and allocate savings of the country

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successfully and productively and to facilitate day-to-day transactions there

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

convenient outlets for its savings. The structure and working of the banking

system are integral to a country’s financial stability and economic growth. It has

been rightly claimed that the diversification and development of Indian

Economy are in no small measure due to the active role banks have played

financing economic activities of different sectors.

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Major objectives of commercial banks

Bank Credit

The borrowing capacity provided to an individual by the banking system, in the

form of credit or a loan is known as a bank credit. The total bank credit the

individual has is the sum of the borrowing capacity each lender bank provides

to the individual.

The operating paradigms of the banking industry in general and credit

dispensation in particular have gone through a major upheaval.

Lending rates have fallen sharply.

Traditional growth and earning such as corporate credit has been either

slow or not profitable as before.

Banks moving into retail finance, interest rate on the once attractive retail

loans also started coming down.

Credit risks has went up and new types risks are surfaced

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Balancing profitability with liquidity managementAs any other business concern, Banks also aim to make profitbut besides that they also need to maintain liquidity beacuse of the nature of their liabilities.

Management of ReservesBanks are expected to hold a part of their deposits in form of ready cash which is known as CASH RESERVES.Central bank decides the reserve ratio known as the CRR.

Creation of CreditBanks are said to create deposits or credit or money or it can be said that every loan given by bank creates a deposit.This has given rise to the important concept of money multiplier.

CREDIT APPRAISAL

Types of credit-

Bank in India provide mainly short term credit for financing working capital

needs although, as will be seen subsequently, their term loans have increased

over the years. The various types of advances provide by them are: (a) Term

Loans, (b) cash credit, (c) overdrafts, (d) demand Loans , (e) purchase and

discounting of commercial bills, and, (f) instalment or hire purchase credit.

Volume of Credit-

Commercial banks are a major source of finance to industry and commerce.

Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to Rs

19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90 ,

Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. Banks have

introduced many innovative schemes for the disbursement of credit. Among

such schemes are village adoption, agriculture development branches and equity

fund for small units. Recently, most of the banks have introduced attractive

education loan schemes for pursuing studies at home or abroad. They have

introduced attractive educational loan schemes for pursuing studies at home or

abroad. They have moved in the direction of bridging certain defects or gaps in

their policies, such as giving too much credit to large scale industrial units and

commerce and giving too little credit to agriculture, small industries and so on.

The Public Sector Banks are still the leading lenders though growth has

declined compared to previous quarter. The credit growth rate has dipped

sharply in foreign and private banks compared to previous quarter. In all, the

credit growth has slipped in this quarter.

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Credit (YOY Growth)

March 28 2008                             March 27

2009

Public Sector Banks 22.5 20.4

The rates have gone down compared to previous quarter when it was seen that

there was no changes in loan rates in private and foreign banks. But then

compared to rate cuts done by RBI, they still need to go lower.

Table 16: Reduction in Deposit and Lending Rates

(October 2008 – April 2009*)

(Basis points)

Bank Group Deposit Rates

Lending Rates

(BPLR)

Public Sector Banks 125-250 125-225

Private Sector Banks 75-200 100-125

Five Major Foreign Banks 100-200 0-100

BPLR Oct – 08 Mar – 09 Apr – 09Change (from

Oct to Apr)

Public Sector Banks 13.75-14.75 11.50-14.00 11.50-13.50 125-225

Private Sector Banks 13.75-17.75 12.75-16.75 12.50-16.75 100-125

Five Major Foreign

Banks   14.25-16.75 14.25-15.75 14.25-15.75 0-100

Sector-wise credit points credit has increased to agriculture, industry and real

estate whereas has declined to NBFCs and Housing. A bank group wise sectoral

allocation is also given which suggests private banks have increases exposure to

agriculture and real estate but has declined to industry. Public sector banks have

increased allocation to industry and real estate. There is a more detailed analysis

in the macroeconomic report released before the monetary policy.

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Sector

As on February

15, 2008 

As on

February

27, 2009

  % share Variations % share Variations

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

Agriculture 9.2 16.4 13 21.5

Industry 45.2 25.9 52.5 25.8

Real Estate 3.1 26.7 8.5 61.4

Housing 7.3 12 4.7 7.5

NBFCs 5.7 48.6 6.6 41.7

Overall Credit 100 22 100 19.5

To sum up, the credit conditions seems to have worsened after January 2009.

The rates have declined but lending has not really picked up. However, the

question still remains – whether credit decline is because banks are not lending

(supply) or because people/corporates are  not borrowing (lack of demand). It is

usually seen that all financial variables as lead indicators say if credit growth

(along with other fin indicators) is picking, actual growth will also rise.

However, it is actually seen the relation is far from clear. In fact, the financial

indicators hardly help predict any change in business cycle. Most rise in good

times and fall in bad times. Most financial indicators failed to predict this global

financial crisis and kept rising making everyone all the more complacent.

Recent policy developments Regarding Bank Credit

Bank lending was done for a long time by assessing the working capital needs

based on the concept of MPBF (maximum permissible bank finance). This

practice has been withdrawn with the effect from April 15 th 1997 in the sense

that the date, banks have been left free to choose their own method ( from the

method such as turnover , cash budget, present MPBF , or any other theory) of

assessing working Capital requirement of the borrowers.

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The cash credit system has been the bane, yet it has exhibited a remarkable

strength of survival all these years. In spite of many efforts which were direct in

nature, only a slow progress has been made to reduce its importance and

increase bill financing. Therefore a concrete and direct policy step was taken on

April 21, 1995 which made it mandatory for banks, consortia, syndicates to

restrict cash credit components to the prescribed limit , the balance being given

in the form of a short term loan, which would be a demand loan for a maximum

period of one year, or in case of seasonal industries , for six months. The

interest rates on the cash credit and loan components are to be fixed in

accordance with the prime lending rates fixed by the banks. This “loan system”

was first made applicable to the borrowers with an MPBF of Rs 20 crore and

above; and in their case , the ratio of cash credit (loan) to MPBF was

progressively reduced(increased) from 75 (25) per cent in April 1995 , to 60

(40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80)

percent in April 1997. With the withdrawal of instructions about the MPBF in

April 1997 , the prescribed cash credit and loan components came to be related

to the working capital limit arrived in banks as per the method of their choice.

With effect from September 3, 1997, the RBI has permitted banks to raise their

existing exposure limit to a business group from 50% to 60%; the additional

10% limit being exclusively meant for investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993,

this limit was raised from Rs 10 crore to Rs 50 crore in case of a loan for a

single project by a single bank, and from Rs 150 crore to Rs 200 crore for a

single project by all the banks. The latter limit was subsequently raised to Rs

500 crore in the case of general projects and Rs 1000 crore for power projects.

From September3, 1997 these caps on term lending by banks were removed

subject to their compliance with the prudential exposure norms.

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The banks can invest in and underwrite shares and debentures of corporate

bodies. At present, they can invest five percent of their incremental deposits in

equities of companies including other banks. Their investment in shares/ Bonds

of DFHI, Securities trading Corporation of India (STCI), all Indian financial

institutions and bonds (debentures) and preference shares of the companies are

excluded from this ceiling of five per cent with affect from April 1997 . From

the same date banks could extend loans within this ceiling to the corporate

against shares held by them. They could also offer overdraft facilities to stock

brokers registered with help of SEBI against shares and debentures held by

them for nine months without change of ownership.

CHANGING PHASE OF BANK CREDIT-

A study group headed by Shri Prakash Tandon, the then Chairman of Punjab

National Bank, was constituted by the RBI in July 1974 with eminent

personalities drawn from leading banks, financial institutions and a wide cross-

section of the industry with a view to study the entire gamut of Bank's finance

for working capital and suggest ways for optimum utilization of Bank credit.

This was the first elaborate attempt by the central bank to organize the Bank

credit. Most banks in India even today continue to look at the needs of the

corporate in the light of methodology recommended by the Group. The report of

this group is widely known as Tandon Committee report.

The weaknesses in the Cash Credit system have persisted with the non-

implementation of one of the crucial recommendations of the Committee. In the

background of credit expansion seen in 1977-79 and its ill effects on the

economy, RBI appointed a working group to study and suggest-

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i) Modifications in the Cash Credit system to make it amenable to better

management of funds by the Bankers and

ii) Alternate type of credit facilities to ensure better credit discipline and co

relation between credit and production. The Group was headed by Sh. K.B.

Chore of RBI and was named Chore Committee.

Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted

the job of looking into the difficulties faced by Small Scale Industries due to the

sophisticated nature of Tandon & Chore Committee recommendations. His

report is applicable to units with credit requirements of less than Rs.50 lacs.

The recommendations made by Tandon Committee and reinforced by Chore

Committee were implemented in all Banks and Bank Credit became much

more organized. However, the recommendations were perceived as too strict by

the industry and there has been a continuous clamor from the Industry for

movement from mandatory control to a voluntary market related restraint. With

recent liberalization of economy and reforms in the financial sector, RBI has

given the freedom to the Banks to work out their own norms for inventory and

the earlier norms are now to be taken as guidelines and not a mandate. In fact,

beginning with the slack season credit policy of 1997-98, RBI has also given

full freedom to all the Banks to devise their own method of assessing the short

term credit requirements of their clients and grant lines of credit accordingly.

Most banks, however, continue to be guided by the principles enunciated in

Tandon Committee report.

Trends of Bank Credit in India

The face of Indian banking has changed radically in the last decade. A perusal

of the Basic Statistical Returns submitted by banks to the Reserve Bank of India

shows that between 1996 and 2005, personal loans have been the fastest

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growing asset, increasing from 9.3 per cent of the total bank credit in 1996 to

22.2 per cent in 2005. Of course, this is partly due to the huge rise in housing

loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the

period, but ‘other personal loans’ — comprising loans against fixed deposits,

gold loans and unsecured personal loans — also rose from 6.1 per cent to 10.7

per cent. Other categories whose share increased were loans to professionals

and loans to finance companies. In contrast, there has been a sharp decline in

the share of lendings to industry. Credit to small scale industries fell from 10.1

per cent of the total in 1996 to 4.1 per cent in 2005.

Reasons for declining trend of bank credit

A major share of the economic growth has been led by the expansion of

the service sector

Capital intensity and investment intensity required for growth in the

current economic context may not be as high as it used to be in the past.

In manufacturing sector more efficient utilization of existing capacities

contributed to the sectoral growth rather rather than any large addition of

fresh capacities. The consequential increase in the demand for credit was

also subdued.

Greater and cheaper avenues for credit resulted in a bigger share of

disintermediation being resorted to by large borrowers.

The other trend has been the substantial drop in the share of rural credit, while

the share of metropolitan centres has increased. While bankers say that up

gradation of rural centres into semi-urban could be one reason (the share of

semi-urban centres has gone up), it is also true that the reforms have been

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urban-centric and have tended to benefit the metros more. The number of rural

bank offices fell from 32,981 in March 1996 to 31,967 by March 2005.

The states have been the main beneficiaries of bank credit are the northern

region as it has increased its share from 18.7 per cent of the total credit in 1996

to 22.2 per cent in 2005. As it was seen that Delhi’s share went up from 9.5 per

cent to 12.1 per cent over the period. This is not due to food credit, the account

of which is maintained in Delhi. Clearly, the national capital has gained a lot

from liberalisation.

Trends for the year 2008-09

The aggregate deposits of scheduled commercial banks have expanded during

2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within

aggregate deposits demand deposits have shown an absolute fall (-Rs 4,179

crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 2007-

08,. On the other hand, time deposits have shown an accelerated increase of

22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the

previous year.

In the investment portfolio of banks, the expansion during 2008- 09 at Rs

194,031crore has been much lower than the expansion of Rs 340,250 crore as

increase in net bank credit to government under monetary data for the same

period. This has happened because the latter has a sizeable amount of RBI credit

to government following the increased open market operations. Finally, there

has occurred considerable slowdown in bank credit expansion. Because of

relatively higher procurement of foodgrains, food credit has expanded by Rs

1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in

2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than

in the previous year at Rs 432,846 (23.0%).

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Procedure for providing Bank Credit-

Banks offers different types of credit facilities to the eligible borrowers. For

this, there are several procedures, controls and guidelines laid out. Credit

Appraisal, Sanctions, Monitoring and Asset Recovery Management comprise

the entire gamut of activities in the lending process of a bank which are clearly

shown as below:

Source- Self constructed

From the above chart we can see that Credit Appraisal is the core and the basic

function of a bank before providing loan to any person/company, etc. It is the

most important aspect of the lending procedure and therefore it is discussed in

detail as below.

Credit Appraisal

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Credit AppraisalSanctionsMonitoring & Asset recovery Management

CREDIT APPRAISAL

Meaning - The process by which a lender appraises the creditworthiness of the

prospective borrower is known as Credit Appraisal. This normally involves

appraising the borrower’s payment history and establishing the quality and

sustainability of his income. The lender satisfies himself of the good intentions

of the borrower, usually through an interview.

The credit requirement must be assessed by all Indian Financial

Institutions or specialised institution set up for this purpose.

Wherever financing of infrastructure project is taken up under a

consortium / syndication arrangement – bank’s exposure shall not exceed

25%

Bank may also take up financing infrastructure project independently /

exclusively in respect of borrowers /promoters of repute with excellent

past record in project implementation.

In such cases due diligence on the inability of the projects are well

defined and assessed. State government guarantee may not be taken as a

substitute for satisfactory credit appraisal.

The important thing to remember is not to be overwhelmed by marketing or

profit centre reasons to book a loan but to take a balanced view when booking a

loan, taking into account the risk reward aspects. Generally everyone becomes

optimistic during the upswing of the business cycle, but tend to forget to see

how the borrower will be during the downturn, which is a short-sighted

approach. Furthermore greater emphasis is given on financials, which are

usually outdated; this is further exacerbated by the fact that a descriptive

approach is usually taken, rather than an analytical approach, to the credit. Thus

a forward looking approach should also be adopted, since the loan will be repaid

primarily from future cash flows, not historic performance; however both can be

used as good repayment indicators.

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Indian Banking Sector & Its Major Challenges

It is well recognised by the world that India is one of the fastest growing

economies in the world. Evidence from across the world suggests that a sound

and evolved banking system is required for sustained economic development.

The last decade has seen many positive developments in the Indian banking

sector. The policy makers, which comprise the Reserve Bank of India (RBI),

Ministry of Finance and related government and financial sector regulatory

entities, have made several notable efforts to improve regulation in the sector.

The sector now compares favourably with banking sectors in the region on

metrics like growth, profitability and non-performing assets (NPAs). A few

banks have established an outstanding track record of innovation, growth and

value creation. This is reflected in their market valuation. However, improved

regulations, innovation, growth and value creation in the sector remain limited

to a small part of it. The cost of banking intermediation in India is higher and

bank penetration is far lower than in other markets. India’s banking industry

must strengthen itself significantly if it has to support the modern and vibrant

economy which India aspires to be. While the onus for this change lies mainly

with bank managements, an enabling policy and regulatory framework will also

be critical to their success.

The failure to respond to changing market realities has stunted the

development of the financial sector in many developing countries. A weak

banking structure has been unable to fuel continued growth, which has harmed

the long-term health of their economies. In this “white paper”, we emphasise the

need to act both decisively and quickly to build an enabling, rather than a

limiting, banking sector in India.

Indian banks have compared favourably on growth, asset quality and

profitability with other regional banks over the last few years. The banking

index has grown at a compounded annual rate of over 51 per cent since April

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2001 as compared to a 27 per cent growth in the market index for the same

period. Policy makers have made some notable changes in policy and regulation

to help strengthen the sector. These changes include strengthening prudential

norms, enhancing the payments system and integrating regulations between

commercial and co-operative banks. However, the cost of intermediation

remains high and bank penetration is limited to only a few customer segments

and geographies. While bank lending has been a significant driver of GDP

growth and employment, periodic instances of the “failure” of some weak banks

have often threatened the stability of the system. Structural weaknesses such as

a fragmented industry structure, restrictions on capital availability and

deployment, lack of institutional support infrastructure, restrictive labour laws,

weak corporate governance and ineffective regulations beyond Scheduled

Commercial Banks (SCBs), unless addressed, could seriously weaken the health

of the sector. Further, the inability of bank managements (with some notable

exceptions) to improve capital allocation, increase the productivity of their

service platforms and improve the performance ethic in their organisations

could seriously affect future performance. India has a better banking system in

place Vis a Vis other developing countries, but there are several issues that need

to be ironed out. Major challenges of Indian banking sector are mentioned

below.

Interest rate risk

Interest rate risk can be defined as exposure of bank's net interest income to

adverse movements in interest rates. A bank's balance sheet consists mainly of

rupee assets and liabilities. Any movement in domestic interest rate is the main

source of interest rate risk.

Over the last few years the treasury departments of banks have been responsible

for a substantial part of profits made by banks. Between July 1997 and Oct

2003, as interest rates fell, the yield on 10-year government bonds (a barometer

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for domestic interest rates) fell, from 13 per cent to 4.9 per cent. With yields

falling the banks made huge profits on their bond portfolios. Now as yields go

up (with the rise in inflation, bond yields go up and bond prices fall as the debt

market starts factoring a possible interest rate hike), the banks will have to set

aside funds to mark to market their investment. This will make it difficult to

show huge profits from treasury operations. This concern becomes much

stronger because a substantial percentage of bank deposits remain invested in

government bonds. Banking in the recent years had been reduced to a trading

operation in government securities. Recent months have shown a rise in the

bond yields has led to the profit from treasury operations falling. The latest

quarterly reports of banks clearly show several banks making losses on their

treasury operations. If the rise in yields continues the banks might end up

posting huge losses on their trading books. Given these facts, banks will have to

look at alternative sources of investment.

Interest rates and non-performing assets

The best indicator of the health of the banking industry in a country is its level

of NPAs. Given this fact, Indian banks seem to be better placed than they were

in the past. A few banks have even managed to reduce their net NPAs to less

than one percent (before the merger of Global Trust Bank into Oriental Bank of

Commerce OBC was a zero NPA bank). But as the bond yields start to rise the

chances are the net NPAs will also start to go up. This will happen because the

banks have been making huge provisions against the money they made on their

bond portfolios in a scenario where bond yields were falling.

Reduced NPAs generally gives the impression that banks have strengthened

their credit appraisal processes over the years. This does not seem to be the

case. With increasing bond yields, treasury income will come down and if the

banks wish to make large provisions, the money will have to come from their

interest income, and this in turn, shall bring down the profitability of banks.

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Competition in retail banking

The entry of new generation private sector banks has changed the entire

scenario. Earlier the household savings went into banks and the banks then lent

out money to corporate. Now they need to sell banking. The retail segment,

which was earlier ignored, is now the most important of the lot, with the banks

jumping over one another to give out loans. The consumer has never been so

lucky with so many banks offering so many products to choose from. With

supply far exceeding demand it has been a race to the bottom, with the banks

undercutting one another. A lot of foreign banks have already burnt their fingers

in the retail game and have now decided to get out of a few retail segments

completely.The nimble footed new generation private sector banks have taken a

lead on this front and the public sector banks are trying to play catch up. The

PSBs have been losing business to the private sector banks in this segment.

PSBs need to figure out the means to generate profitable business from this

segment in the days to come.

The urge to merge

In the recent past there has been a lot of talk about Indian Banks lacking in scale

and size. The State Bank of India is the only bank from India to make it to the

list of Top 100 banks, globally. Most of the PSBs are either looking to pick up a

smaller bank or waiting to be picked up by a larger bank. The central

government also seems to be game about the issue and is seen to be encouraging

PSBs to merge or acquire other banks. Global evidence seems to suggest that

even though there is great enthusiasm when companies merge or get acquired,

majority of the mergers/acquisitions do not really work. So in the zeal to merge

with or acquire another bank the PSBs should not let their common sense take a

back seat. Before a merger is carried out cultural issues should be looked into. A

bank based primarily out of North India might want to acquire a bank based

primarily out of South India to increase its geographical presence but their

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cultures might be very different. So the integration process might become very

difficult. Technological compatibility is another issue that needs to be looked

into in details before any merger or acquisition is carried out.

Impact of BASEL-II norms

Banking is a commodity business. The margins on the products that banks offer

to its customers are extremely thin vis a vis other businesses. As a result, for

banks to earn an adequate return of equity and compete for capital along with

other industries, they need to be highly leveraged. The primary function of the

bank's capital is to absorb any losses a bank suffers (which can be written off

against bank's capital).Norms set in the Swiss town of Basel determine the

ground rules for the way banks around the world account for loans they give

out. These rules were formulated by the Bank for International Settlements in

1988. Essentially, these rules tell the banks how much capital the banks should

have to cover up for the risk that their loans might go bad. The rules set in 1988

led the banks to differentiate among the customers it lent out money to.

Different weightage was given to various forms of assets, with zero percentage

weightings being given to cash, deposits with the central bank/govt. etc, and

100 per cent weighting to claims on private sector, fixed assets, real estate etc.

The summation of these assets gave us the risk-weighted assets. Against these

risk weighted assets the banks had to maintain a (Tier I + Tier II) capital of 9

per cent i.e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier

II capital. To put it simply the banks had to maintain a capital adequacy ratio of

9 percent. The problem with these rules is that they do not distinguish within a

category i.e. all lending to private sector is assigned a 100 per cent risk

weighting, be it a company with the best credit rating or company which is in

the doldrums and has a very low credit rating. This is not an efficient use of

capital. The company with the best credit rating is more likely to repay the loan

vis a vis the company with a low credit rating. So the bank should be setting

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aside a far lesser amount of capital against the risk of a company with the best

credit rating defaulting vis a vis the company with a low credit rating. With the

BASEL-II norms the bank can decide on the amount of capital to set aside

depending on the credit rating of the company. Credit risk is not the only type of

risk that banks face. These days the operational risks that banks face are huge.

The various risks that come under operational risk are competition risk,

technology risk, casualty risk, crime risk etc. The original BASEL rules did not

take into account the operational risks. As per the BASEL-II norms, banks will

have to set aside 15 per cent of net income to protect themselves against

operational risks.

Over the last few years, the falling interest rates, gave banks very little incentive

to lend to projects, as the return did not compensate them for the risk involved.

This led to the banks getting into the retail segment big time. It also led to a lot

of banks playing it safe and putting in most of the deposits they collected into

government bonds. Now with the bond party over and the bond yields starting

to go up, the banks will have to concentrate on their core function of lending.

The banking sector in India needs to tackle these challenges successfully to

keep growing and strengthen the Indian financial system.

Furthermore, the interference of the central government with

the functioning of PSBs should stop. A fresh autonomy package for public

sector banks is in offing.  The package seeks to provide a high degree of

freedom to PSBs on operational matters. This seems to be the right way to go

for PSBs. The growth of the banking sector will be one of the most important

inputs that shall go into making sure that India progresses and becomes a global

economic super power.

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Punjab National Bank at a Glance

Punjab National Bank (PNB) was established in 1895 in anarkali bazaar at

Lahore, undivided India, Punjab National Bank (PNB) has the distinction of

being the first Indian bank to have been started solely with Indian capital. The

bank was nationalised in July 1969 along with 13 other banks. From its modest

beginning, the bank has grown in size and stature to become a front-line

banking institution in India at present. Today, the Bank is the second

largest government-owned commercial bank in India with about 5000 branches

across 764 cities. It serves over 37 million customers. The bank has been ranked

248th biggest bank in the world by the Bankers Almanac, London. The bank's

total assets for financial year 2007 were about US$60 billion. It has Strong

correspondent banking relationships with more than 217 international banks of

the world. More than 50 renowned international banks maintain their Rupee

Accounts with PNB. PNB has a banking subsidiary in the UK, as well as

branches in Hong Kong, Dubai and Kabul, and representative offices in

Almaty, Dubai, Oslo, and Shanghai. PNB's founders included several leaders of

the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal

Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu

Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was

actively associated with the management of the Bank in its early years.

HISTORY

1895: PNB commenced its operations in Lahore.

1904: PNB established branches in Karachi and Peshawar.

1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located

in Delhi circle.

1947: Partition of India and Pakistan at Independence. PNB lost its

premises in Lahore, but continued to operate in Pakistan.

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1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat

Bank became Bharat Nidhi Ltd.

1961: PNB acquired Universal Bank of India.

1963: The Government of Burma nationalized PNB's branch

in Rangoon (Yangon).

1965: After the Indo-Pak war the government of Pakistan seized all the

offices in Pakistan of Indian banks, including PNB's head office, which

may have moved to Karachi. PNB also had one or more branches in East

Pakistan Bangladesh.

1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.

1969: The Government of India (GOI) nationalized PNB and 13 other

major commercial banks, on July 19, 1969.

1976 or 1978: PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its London

branch to State Bank of India after the branch was involved in a fraud

scandal.

1988: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue.

The acquisition added Hindustan's 142 branches to PNB's network.

1993: PNB acquired New Bank of India, which the GOI had nationalized

in 1980.

1998: PNB set up a representative office in Almaty, Kazakhstan.

2003: PNB took over Nedungadi Bank, the oldest private sector bank

in Kerala. At the time of the merger with PNB, Nedungadi Bank's shares

had zero value, with the result that its shareholders received no payment

for their shares.

PNB also opened a representative office in London

2004: PNB established a branch in Kabul, Afghanistan.

PNB also opened a representative office in Shanghai.

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PNB established an alliance with Everest Bank in Nepal that permits

migrants to transfer funds easily between India and Everest Bank's 12

branches in Nepal.

2005: PNB opened a representative office in Dubai.

2007: PNB established PNBIL - Punjab National Bank (International) - in

the UK, with two offices, one in London, and one in South Hall. Since

then it has opened a third branch in Leicester, and is planning a fourth in

Birmingham.

2008: PNB opened a branch in Hong Kong.

2009: PNB opened a representative office in Oslo, Norway, and a second

branch in Hong Kong, this in Kowloon.

2010: PNB received permission to upgrade its representative office in

the Dubai International Financial Centre to a branch.

Bank with over 56 million satisfied customers and 5002 offices,

PNB continue to retain its leadership position among nationalised banks. The

bank enjoys strong fundamental, large franchise value and good brand image.

Besides being ranked  as one of India's top service brands, PNB has remained

fully committed to its guiding principles of sound and prudent banking. Apart

from offering banking products, the bank has also entered the credit card &

debit card business; bullion business; life and non-life insurance business; Gold

coins & asset management business, etc.

PNB has achieved significant growth in business which at the end of

March 2010 amounted to Rs 435931 crore. Today, with assets of more than Rs

2,96,633 crore, PNB is ranked as the 3rd largest bank in the country (after SBI

and ICICI Bank) and has the 2nd largest network of branches (5002 offices

including 5 overseas branches ).During the FY 2009-10, with 40.85% share of

CASA deposits, the bank achieved a net profit of Rs 3905 crore. Bank has a

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strong capital base with capital adequacy ratio of 14.16% as on Mar’10 as per

Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As

on March’10, the Bank has the Gross and Net NPA ratio of 1.71% and 0.53%

respectively. During the FY 2009-10, its’ ratio of Priority Sector Credit to

Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank

Credit at 19.7% was also higher than the stipulated requirement of 40% &

18%. The Bank has maintained its stake holder’s interest by posting an

improved NIM of 3.57% in Mar’10 (3.52% Mar’09) and a Return on Assets of

1.44% (1.39% Mar’09). The Earning per Share improved to Rs 123.98 (Rs

98.03 Mar’09) while the Book value per share improved to Rs 514.77 (Rs

416.74 Mar’09) 

Punjab National Bank continues to maintain its frontline position in the Indian

banking industry. In particular, the bank has retained its NUMBER ONE

position among the nationalized banks in terms of number of branches, Deposit,

Advances, total Business, Assets, Operating and Net profit in the year 2009-10.

The impressive operational and financial performance has been brought about

by Bank’s focus on customer based business with thrust on CASA deposits,

Retail, SME & Agri Advances and with more inclusive approach to banking;

better asset liability management; improved margin management, thrust on

recovery and increased efficiency in core operations of the Bank. The

performance highlights of the bank in terms of business and profit are shown

below: Rs in Crore

Parameters Mar'08 Mar'09 Mar'10 CAGR (%)Operating Profit 4006 5744 7326 22.29Net Profit 2049 3091 3905 23.98Deposit 166457 209760 249330 14.42Advance 119502 154703 186601 16.01Total Business 285959 364463 435931 15.09

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PNB has always looked at technology as a key facilitator to provide better

customer service and ensured that its ‘IT strategy’ follows the ‘Business

strategy’ so as to arrive at “Best Fit”. The bank has made rapid strides in this

direction. All branches of the Bank are under Core Banking Solution (CBS)

since Dec’08, thus covering 100% of its business and providing ‘Anytime

Anywhere’ banking facility to all customers including customers of more than

3000 rural & semi urban branches. The bank has also been offering Internet

banking services to the customers of CBS branches like booking of tickets,

payment of bills of utilities, purchase of airline tickets etc. Towards developing

a cost effective alternative channels of delivery, the bank with more than 3500

ATMs has the largest ATM network amongst Nationalized Banks. 

With the help of advanced technology, the Bank has been a

frontrunner in the industry so far as the initiatives for Financial Inclusion is

concerned. With its policy of inclusive growth in the Indo-Genetics belt, the

Bank’s mission is “Banking for Unbanked”. The Bank has launched a drive for

biometric smart card based technology enabled Financial Inclusion with the

help of Business Correspondents/Business Facilitators (BC/BF) so as to reach

out to the last mile customer. The Bank has started several innovative initiatives

for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers,

construction workers, etc. Under Branchless Banking model, the Bank is

implementing 40 projects in 16 States. The Bank launched an ambitious ‘Project

Namaskar’ under which 1 lakh touch points will be established in unbanked

villages by 2013 to extend the Bank’s outreach. Under this, 30 Kiosks have

been opened covering 119 Villages reaching 1.32 Lakh beneficiaries.

Backed by strong domestic performance, the bank is planning to realize its

global aspirations. Bank continues its selective foray in international markets

with presence in 9 countries, with branches at Kabul and Dubai, Hong Kong &

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representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned

subsidiary in UK, a joint venture with Everest Bank Ltd. Nepal and a JV

banking subsidiary “DRUK PNB Bank Ltd.” in Bhutan. Bank is pursuing up

gradation of its representative offices in China & Norway and is in the process

of setting up a representative office in Sydney, Australia and taking controlling

stake in JSC Dana Bank in Kazakhstan. 

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Mission and Vision

VISION

"To be a Leading Global Bank with Pan India footprints and become a

household brand in the Indo-Gangetic Plains providing entire range of

financial products and services under one roof"

MISSION

"Banking for the unbanked"

“TO provide excellent professional services and improve its position as a

leader in financial and related services; build and maintain a team of

motivated and committed workforce with high work ethos; use latest

technology aimed at the customer satisfaction and act as effective catalyst

for socio- economic development”

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Products and Services

Corporate banking

Personal banking

Industrial finance

Agriculture finance

Financing of trade

International banking

Home loan

Auto loan

ATM/Debit card

Deposit interest rate

Credit interest rate

Other services: lockers facility, internet banking, EFT & Clearing services etc

Award & Achievements

Best IT Team of the year Award

SKOTCH Challenger Awardfor Change Management for the year 2005-06

Best IT User in Banking & Financial Services Industry - 2004

by NASSCOM in partnership with Economic Times

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

FICCI's Rural Development Award

for Excellence in Rural Development – 2005

Skotch Challenger Award for Exemplary use of Technology

for becoming a pioneer in Public Banks - 2005

Golden Peacock National Training - 2004 & 2005

by Institute of Directors

National Award for Excellence in SSI Lending

Ranked 2nd for 4 consecutive years - 2002, 2003, 2004 & 2005

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Banking Technology Awards 2004 Runner up in 'Best IT Team of the Year Award 2005'

Jointly Adjudged by IBA, Finacle & TFCI

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

Niryat Bandhu Gold Trophy

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

21st Amongst Top 500 Companies

by the leading Financial Daily The Economic Times, June 2005

9th amongst India's Top 50 Most Trusted Service Brands

A.C Nielson Survey, The Economic Times Dec 2004

3rd Rank amongst Banking Sector in India 323rd Rank in the World

The Bankers' Almanac, January 2006

368 amongst Top 1000 Global Banks

The Banker, London July 2005

Skoch Challenger Award for Exemplary Use of Technology

Winner for becoming a pioneer in public banks by Skoch consultancy services pvt ltd, Gurgaon 2005

FICCI's Rural Development Award

Award for excellence in rural development 2005

Amity Global Corporate Excellence Award

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

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

PC Quest Users’ Choice AwardBest IT Implementation 2007& 2005

Symantec Visionary Award Information Security Impact 2005

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

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

Golden Peacock Innovative Product/Service Award

2010 (for BCP implementation)

Golden Peacock Award for Excellence in Corporate Governance

Winner in the ‘Large Joint Entry’.2009 &2007 & 2005

Skoch Challenger Award for Change Management

For upliftment of Weaker sections of society 2006

IDRBT Banking Technology Awards

Best IT Team of the Year Award 2006

National Award For Excellence in lending to Tiny sector

First Prize by By Ministry of Small Scale Industries.2006

Skoch Challenger Award for capacity building for FTC initiative

Skoch Consultancy Services Pvt Ltd 2007

Computer Associates Excellence Award

Excellence in EMS Roll Out. 2007

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

National Award for Excellence in Lending to Micro Enterprises

For Lending to Micro enterprises 2007

Award for the use of Technology for Financial Inclusion.

Institute for Development and Research in Banking Technology (IDRBT), Hyderabad. 2008

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

Dun & Bradstreet 2009

National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in NORTH ZONE

Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Interest Subsidy Eligibility Certificate Scheme)2009

National Award for Excellence Khadi & Village IndustryCommission,

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in Lending for Institutional Finance in Propagating KVI Programmes in CENTRAL ZONE

Ministry of Micro, Small & Medium Enterprises, Govt. of India

(Interest Subsidy Eligibility Certificate Scheme)

2009

National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in NATIONAL LEVEL

Khadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India

(Interest Subsidy Eligibility Certificate Scheme) 2009 

National Award for Excellence in Lending for Institutional Finance for Propagating KVI Programmes in NORTH ZONE

Khadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India

(Prime Minister Employment Generation Programme) 2009 

National Award for Excellence in Lending for Institutional Finance for Propagating KVI Programmes in CENTRAL ZONE

Khadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India

(Prime Minister Employment Generation Programme) 2009 

India Pride Award by dainik Bhaskar and Daily News analysis

Excellence in PSU 2009

Indira Gandhi Rajbhasha Shield

Promoting Hindi 2009

 Emerson Uptime Champion Awards

2009

 “Best InfoSphere Warehouse Solution” Award by IBM

2009 (for implementation of Enterprise Wide Data Warehouse)

Organizational structure of Punjab National Bank

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Page 45

Head Office7, Bhikhaji Cama Place, New Delhi-110066

Circle OfficeBranches

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Hierarchy

Page 46

Chairman

Executive Director

General Manager (GM)

Deputy GM

Assistant GM

Chief Manager

Senior Manager

Manager

Officers

Subordinate clerks

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Board of Directors

Sh.K.R. Kamath:- He has been appointed as a chairman and managing director of Punjab National Bank by Govt. Of India.

Sh. M.V.Tanksale:- Executive Director

Sh. Nagesh Pydah:- Executive Director

 Smt. Ravneet Kaur:- Govt. of India Nominee Director

Shri L.M.Fonseca:- Reserve Bank of India Nominee Director

Shri Mushtaq A Antulay:- Part-time non-official Director

Shri Gautam P. Khandelwal:- Part-time non-official Director

Shri Vinod Kumar Mishra:- Part-time non-official Director

Shri Tribhuwan Nath  Chaturvedi :- Share Holder Director

Shri G R Sundaravadivel:- Share Holder Director

Shri Devinder Kumar Singla: Share Holder Director

Sh. M P Singh:- Workmen Employees Director

Sh. Pradeep Kumar:- Officer Director 

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Review of Literature

Literature review provides available research with respect to the selected topic

of the project or the research findings by an author which has been done with

respect to the research topic. This chapter provides the overall view of the

available literature with respect to the topic of the project. The review of the

related research works are described as under:-

1. A research work on the topic “ On the appraisal on consumer credit

banking products with the asset quality frame: A multiple criteria

application.” done by Panagiotis Xidonas, Alexandros Flamos, Sortirios

Koussouris, Dimitrious Askouins & Ioannis Psarras from National Technical

University of Athens in 2007 says that Asset quality refers to the likelihood that

the bank's earning assets will continue to perform and requires both a qualitative

and quantitative assessment. Decision problems like the "internal appraisal of

banking products", are problems with strong multiple-criteria character and it

seems that the methodological framework of Multiple Criteria Decision Making

could provide a reliable solution. In this paper, the Asset Quality banking

indicators are the, so called, "criteria", the value of these indicators are the, so

called, "scores" in each criterion and the P.R.O.METH.E.E. [Preference

Ranking Organization Method of Enrichment Evaluations, Brans & Vincke

(1985)] Multiple Criteria method is applied, towards modelling banking

products appraisal problems. A Multiple Criteria process, strictly

mathematically defined, integrates the behaviour of each indicator-criterion and

utilizes each score in order to rank the so called "alternatives", i.e. categories of

banking products.

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2. The research Paper on “Evaluation of decision support systems for credit

management decisions” by S. Kanungo, S.Sharma, P.K. Jain from Department

of studies, IIT Delhi have

conducted a study to evaluate the efficiency of decision support system (DSS)

for credit management. This study formed a larger initiative to access the

effectiveness of the I.T based credit management process at SBI. Such a study

was necessitated since credit appraisal has become an integral sub-function of

the Indian banks in view of growing incidence of non-performing assets. The

DSS they have assessed was a credit appraisal system developed by Quuattro

pro at SBI. This system helps in analysis of balance sheets, Calculation of

financial ratios, cash flow analysis, future projections, sensitivity analysis and

risk evaluation as per SBI norms. They have also used a strong Quassi

experimental design called Solomon’s four group design for the assessment. In

the experiment the managers of SBI who attended the training programme were

the subjects the experiment consisted of the measurements that were taken as

pre and post tests. An experimental intervention was applied between the pre-

tests and the pro-tests. The intervention or stimulus consisted of DSS training

and use. There were four groups in the experiment. The stimulus remained

constant as the they took care to ensure that the course content as well as the

instructors remained the same during the course of the experiment. Two were

experimental groups and two were control groups. All four groups underwent

training in credit management between the pre and the post tests. Results from

research shows that while the DSS is effective, improvement needs to be done

in the methodology to assess such improvements. Moreover such assessment

frameworks while being adequate from a DSS-centric viewpoint do not respond

to the assessment of DSS in an organizational setting . In the concluding section

they have discussed how this evaluative framework can be strengthened to

initiate an activity that will allow the long term and possibly the only

meaningful evaluation framework for such a system.

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3. The research paper on the topic “Towards an appraisal of the FMHA farm

credit program: A case study of the efficiency of borrower by S. Mehdian,

Wm. McD. Herr, Phil Eberle, and Richard Grabowski” have studied that the a

production frontier methodology is used to measure the overall efficiency of a

sample of farmers home administration(FMHA) compared to non participants.

The study did not find evidence that the efficiency FMHA farms improved

between a time period Results indicated that overall efficiency of FMHA

borrowers is associated with selected financial characteristics of the farms. A

review of the literature shows that agricultural finance specialists have not been

successful in evaluating whether FMHA pro- grams improve the efficiency and

income of probability of success. Liberal loan policies

Eligible borrowers. Inadequate evaluation of the FMHA program occurs partly

because of because the difficulty of adequately deter-mining the impacts of

changes in the econ- borrowers in a more normal period of the loan. This study

addressed these difficulties by utilizing a nonparametric production frontier

technique to measure overall efficiency and a matched pair statistical procedure

to measure how efficiency of farms receiving FMHA credit changed relative to

a Non-FMHA farmers.

4. The book named “Financial Analysis for Bank Lending in Liberalised

Economy” by Sampat.P.Singh and Dr.S.Singh have discussed the subject

financial analysis for bank lending has assumed considerable importance,

particularly since early 1990's when, like most of the countries, India opted for

the policy of liberalisation and globalisation after 1991.

The present volume is meant to be a standard reference as well as text book on

the varied facets of financial analysis with reference to credit management by

Banks and Financial Institutions. The book consists of three parts. Part I

discusses the concepts and tools of Financial Analysis; Part II explains various

concepts of working capital in its historical context; while Part III demonstrates

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the application of these tools in the changing context of liberalised economy by

focusing on new concepts like 'Credit Worthiness', Risk-Analysis, Credit

Rating, Products-Differentiation, Pricing-Differentiation, Asset-Liability

Management, etc. The book contains- Bank Lending and Industrial Finance in

India ,Basic Economics for Bankers and Business Managers ,Introduction to

Fundamentals Accounting Principles ,Profit and Loss Account (Operating

Statement) ,Analysis of Profit and Loss Account (Operating

Statement) ,Structure and Analysis of Balance Sheet ,Ratios as Tools of

Financial Statements Analysis ,Accounting Flows : Income, Cash and

Funds ,Break-even Analysis and Margin of Safety ,Appraisal of Capital Projects

,New Conceptual Framework for Analysis, Liberalised Era and New Focus of

Bank Lending ,Managing Working Capital by Strategic Choice , Financing

Working Capital : Conceptual and Historical Exposition,Creditworthiness and

Credit Rating : At Centre stage Nucleus of Credit Appraisal , Working Capital

Management-I : MPBF System of Appraisal and Bifurcation of Fund-Based

Limit in Two Components Working Capital Management-II : Alternative

Methods of Appraisal ,Working Capital Management-III : Follow-up and

Supervision , Appraisal of a New Project Involving Term Loan , Management

of Problem Accounts , Management of Non-Performing Assets (NPAs),

Rehabilitation of Sick Industrial Units, Working Capital Management :

Concepts and Techniques , 1st Committee on Financial Sector Reform and the

2nd Committee on Banking System Reform (Known as Narasimham

Committee Report, 1998).

5. The research paper on the topic “Competitive analysis in banking: Appraisal

of the methodologies” by Nicola Cetorelli has discussed about the U.S. banking

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industry has experienced significant structural changes as the result of an

intense process of consolidation. From 1975 to 1997, the number of commercial

banks decreased by about 35 percent, from 14,318 to 9,215. Since the early

1980s, there have been an average of more than

400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998).

The relaxation of intrastate branching restrictions, effective to differing degrees

in all states by 1992, and the passage in 1994 of the Riegle.Neal Interstate

Banking and Branching Efficiency Act, which allows bank holding companies

to acquire banks in any state and, since June 1, 1997, to open interstate

branches, is certainly accelerating the process of consolidation. These

significant changes raise important policy concerns. On the one hand, one could

argue that banks are merging to fully exploit potential economies of scale and/or

scope. The possible improvements in efficiency may translate into welfare gains

for the economy, to the extent that customers pay lower prices for banks.

services or are able to obtain higher quality services or services that could not

have been offered before.1 On the other hand, from the point of view of public

policy it is equally important to focus on the

effect of this restructuring process on the competitive conditions of the banking

industry. Do banks gain market power from merging? If so, they will be able to

charge higher than competitive prices for their products, thus inflicting welfare

costs that could more than offset any presumed benefit associated with mergers.

In this article, analysis of competition in the banking industry is done

highlighting a very fundamental issue: How market power is measured and how

do regulators rely on accurate and effective procedures to evaluate the

competitive effects of a merger.

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Credit Philosophy & Policy with regards to Punjab National

Bank

An ideal advance is the one given to a reliable customer for an approval purpose

with adequate experience, safe in knowledge that the money will be used to

advantage and repayment will be made within a reasonable period from trade

receipts or known maturities due on or about given dates.

Credit philosophy – “To achieve credit expansion required for sustaining

the profitability of the bank and emphasis on quality assets, profitable

relationships and prudent growth.”

CREDIT POLICY

Bank follows following broad policy imperatives:-

Reduction in dependence upon short term corporate loans, especially

unsecured exposures.

Aiming to achieve more sanctions at levels closer to the customer.

Changing the mix of the portfolio in favour of better diffused and higher

yielding credit.

Building competencies in credit management through training &

promotion of self directed learning.

Objectives of credit policy

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CREDIT APPRAISAL

1. A balanced growth of credit portfolio, which does not compromise safety.

2. Adoption of a forward looking and market responsive approach for

moving into profitable new areas on lending which emerge, within the pre

determined exposure ceilings.

3. Sound risk management practices to identify measure, monitor and

control risks.

4. Maximize interest yields from credit portfolio through a judicious

management of varying spreads of loan assets based upon their size,

credit rating and tenure.

5. Leverage on strong relationships with existing long-standing clients to

source a bulk of new business by addressing their requirements

comprehensively.

6. Ensure due compliance of various regulatory norms including CAR,

income recognition and asset classification

7. Accomplish balanced development of credit to various sectors and

geographical regions.

8. Achieve growth of credit to priority sectors / subsectors and continue to

surpass the targets stipulated by reserve bank of India.

9. Using of pricing as a tool of competitive advantage ensuring however that

earnings are protected.

10.Develop and maintain enhanced competencies in credit management at

all levels through a combination of training initiatives, promotion of self

directed learning and dissemination of best practices.

Objectives in Credit

To maintain healthy balance between-

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Credit volumes

Earnings

Asset quality

within the framework of regulatory prescriptions, corporate goals and bank’s

social responsibilities.

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CREDIT APPRAISAL

Introduction to loans

Loans are advances for fixed amounts repayable on demand or in instalment.

They are normally made in lump sums and interest is paid on the entire amount.

The borrower cannot draw funds beyond the amount sanctioned.

A key function of the Bank is deploying funds for income-

yielding assets. A major part of Bank’s assets are the loans and advances

portfolio and investments in approved securities. Loans & Advances refer to

long-term and short-term credit facilities to various types of borrowers and non-

fund facilities like Bank Guarantees, Letters of Credit, Letters of Solvency etc.

Bill facilities represent structured commitments which are negotiable claims

having a market by way of negotiable instruments. Thus, Banks extend credit

facilities by way of fund-based long-term and short-term loans and advances as

also by way of non-fund facilities.

Classification of Loans

Loans/Advances

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Loans/Advances

Fund Based Non-Fund Based

Retail Loan

Cash Credit

Term Loan

Bill Discounting

Export Finance

Bank Guarantee

Letter of Credit

Post shipment Finance

Pre-shipment Finance

CREDIT APPRAISAL

Bank provides credit in various forms. These are broadly classified into two

categories- Fund based and Non –Fund Based. Fund based refers to the type

of credit where cash is directly involved i.e. where bank provides money to the

seeker in anticipation of getting it back. Where as in a Non-fund Based, Bank

doesn’t pay cash directly but gives assurance or takes guarantee on behalf of its

customer to pay if they fail to do so. In case on Fund Based there are different

categories of loans which are discussed as follows:-

I. RETAIL LOANS -

Retail banking in India is not a new phenomenon. It has always been prevalent

in India in various forms. For the last few years it has become synonymous with

mainstream banking for many banks.

The typical products offered in the Indian retail banking segment are:-

Housing loans

Consumer loans for purchase of durables

Auto loans

Educational loans

Credit Cost.

Personal loans

Retail loan is the practice of loaning money to individuals rather than

institutions. Retail lending is done by banks, credit unions, and savings and loan

associations. These institutions make loans for automobile purchases, home

purchases, medical care, home repair, vacations, and other consumer uses.

Retail lending has taken a prominent role in the lending activities of banks, as

the availability of credit and the number of products offered for retail lending

have grown. The amounts loaned through retail lending are usually smaller than

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those loaned to businesses. Retail lending may take the form of instalment

loans, which must be paid off little by little over the course of years, or non-

instalment loans, which are paid off in one lump sum.

These loans are marketed under attractive brand names to differentiate the

products offered by different banks. As the Report on Trend and Progress of

India, 2007-08 has shown that the loan values of these retail lending typically

range between Rs.20, 000 to Rs.100 lakh. The loans are generally for duration

of five to seven years with housing loans granted for a longer duration of 15

years. Credit card is another rapidly growing sub-segment of this product group.

In recent past retail lending has turned out to be a key profit driver for banks

with retail portfolio. The overall impairment of the retail loan portfolio worked

out much less then the Gross NPA ratio for the entire loan portfolio. Within the

retail segment, the housing loans had the least gross asset impairment. In fact,

retailing make ample business sense in the banking sector.

Basic reasons that have contributed to the retail growth in India are-

First, economic prosperity and the consequent increase in purchasing

power has given a fillip to a consumer boom. Note that during the 10

years after 1992, India's economy grew at an average rate of 6.8 percent

and continues to grow at the almost the same rate – not many countries in

the world match this performance.

Second, changing consumer demographics indicate vast potential for

growth in consumption both qualitatively and quantitatively. India is one

of the countries having highest proportion (70%) of the population below

35 years of age (young population). The BRIC report of the Goldman-

Sachs, which predicted a bright future for Brazil, Russia, India and China,

mentioned Indian demographic advantage as an important positive factor

for India.

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Third, technological factors played a major role. Convenience banking in

the form of debit cards, internet and phone-banking, anywhere and

anytime banking has attracted many new customers into the banking

field. Technological innovations relating to increasing use of credit / debit

cards, ATMs, direct debits and phone banking has contributed to the

growth of retail banking in India.

Fourth, the Treasury income of the banks, which had strengthened the

bottom lines of banks for the past few years, has been on the decline

during the last two years. In such a scenario, retail business provides a

good vehicle of profit maximisation. Considering the fact that retail’s

share in impaired assets is far lower than the overall bank loans and

advances, retail loans have put comparatively less provisioning burden on

banks apart from diversifying their income streams.

Fifth, decline in interest rates have also contributed to the growth of retail

credit by generating the demand for such credit.

According to K V Kamath, the changing demographic profile and a downward

trend of the interest rates will propel retail credit in India."There is a huge retail

credit opportunity that is surfacing. Banks have low penetration in this segment

currently. But it is the one area that is providing the momentum in the banking

business now,” India has among the lowest penetration of retail loans in Asia.

Though the sector has been growing at around 15 per cent, there is still a huge

opportunity to tap into.

Middle and -high-income homes in India has increased to 2.57 crore (25.7

million). Interest rates on retail loans have been dropping rapidly too. For

instance residential mortgages slumped by 7 per cent over the last four

years."The entry of a number of banks in India in the last few years has helped

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provide increased coverage and a number of new products in the market," says

Kamath.

II. WORKING CAPITAL / CASH CREDIT

Cash credit is a short-term cash loan to a company. A bank provides this type of

funding, but only after the required security is given to secure the loan. Once a

security for repayment has been given, the business that receives the loan can

continuously draw from the bank up to a certain specified amount. The bank

provides certain amount to the company for its day to day working keeping

certain margin in hand.

III. TERM LOANS

A bank loan to a company, with a fixed maturity and often featuring

amortization of principal. If this loan is in the form of a line of credit, the funds

are drawn down shortly after the agreement is signed. Otherwise, the borrower

usually uses the funds from the loan soon after they become available. Bank

term loans are very a common kind of lending.

Term loans are the basic vanilla commercial loan. They typically carry fixed

interest rates, and monthly or quarterly repayment schedules and include a set

maturity date. Bankers tend to classify term loans into two categories:

Intermediate-term loans: Usually running less than three years, these loans

are generally repaid in monthly instalments (sometimes with balloon

payments) from a business's cash flow. According to the American Bankers

Association, repayment is often tied directly to the useful life of the asset

being financed.

Long-term loans: These loans are commonly set for more than three years.

Most are between three and 10 years, and some run for as long as 20 years.

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Long-term loans are collateralized by a business's assets and typically require

quarterly or monthly payments derived from profits or cash flow. These loans

usually carry wording that limits the amount of additional financial

commitments the business may take on (including other debts but also

dividends or principals' salaries), and they sometimes require that a certain

amount of profit be set-aside to repay the loan.

Appropriate For: Established small businesses that can leverage sound

financial statements and substantial down payments to minimize monthly

payments and total loan costs. Repayment is typically linked in some way to the

item financed. Term loans require collateral and a relatively rigorous approval

process but can help reduce risk by minimizing costs. Before deciding to

finance equipment, borrowers should be sure they can they make full use of

ownership-related benefits, such as depreciation, and should compare the cost

with that leasing.

Supply: Abundant but highly differentiated. The degree of financial strength

required to receive loan approval can vary tremendously from bank to bank,

depending on the level of risk the bank is willing to take on.

IV. BILL DISCOUNTING

While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or

Promissory Note) before it is due and credits the value of the bill after a

discount charge to the customer's account. The transaction is practically an

advance against the security of the bill and the discount represents the interest

on the advance from the date of purchase of the bill until it is due for payment.

Bills of exchange- A bill of exchange or "draft" is a written order by the drawer

to the drawee to pay money to the payee. A common type of bill of exchange is

the cheque (check in American English), defined as a bill of exchange drawn on

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a banker and payable on demand. Bills of exchange are used primarily in

international trade, and are written orders by one person to his bank to pay the

bearer a specific sum on a specific date. Prior to the advent of paper currency,

bills of exchange were a common means of exchange. They are not used as

often today.

A bill of exchange is an unconditional order in writing addressed by one person

to another, signed by the person giving it, requiring the person to whom it is

addressed to pay on demand or at fixed or determinable future time a sum

certain in money to order or to bearer. It is essentially an order made by one

person to another to pay money to a third person.

A bill of exchange requires in its inception three parties--the drawer, the

drawee, and the payee.

The person who draws the bill is called the drawer. He gives the order to pay

money to third party. The party upon whom the bill is drawn id called the

drawee. He is the person to whom the bill is addressed and who is ordered to

pay. He becomes an acceptor when he indicates his willingness to pay the bill.

The party in whose favor the bill is drawn or is payable is called the payee.

Promissory Note- A promissory note is a written promise by the maker to pay

money to the payee. Bank note is frequently transferred as a promissory note, a

promissory note made by a bank and payable to bearer on demand. A maker of

a promissory note promises to unconditionally pay the payee (beneficiary) a

specific amount on a specified date.

A promissory note is an unconditional promise to pay a specific amount to

bearer or to the order of a named person, on demand or on a specified date.

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A negotiable promissory note is unconditional promise in writing made by one

person to another, signed by the maker, engaging to pay on demand, or at fixed

or determinable future time, sum certain in money to order or to bearer

V. EXPORT FINANCE -

This type of a credit facility is provided to exporters who export their goods to

different places. It is divided into two parts- pre-shipment finance and post-

shipment finance.

Pre Shipment Finance is issued by a financial institution when the seller

want the payment of the goods before shipment.

Post Shipment Finance is a kind of loan provided by a financial

institution to an exporter or seller against a shipment that has already

been made. This type of export finance is granted from the date of

extending the credit after shipment of the goods to the realization date of

the exporter proceeds. Exporters don’t wait for the importer to deposit the

funds.

Non Fund Based loans generate income for the bank without committing the

funds of the bank. Bank generates substantial income under this head. There are

two types of credit under this category which are discussed as follows:-

I. BANK GUARANTEE-

A contract of guarantee is defined as ‘a contract to perform the promise or

discharge the liability of the third person in case of the default’. The parties to

the contract of guarantees are:

a) Applicant: The principal debtor – person at whose request the guarantee

is executed

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b) Beneficiary: Person to whom the guarantee is given & who can enforce it

in case of default.

c) Guarantee: The person who undertakes to discharge the obligations of the

applicant in case of his default.

Thus, guarantee is a collateral contract, consequential to a main contract

between the applicant & the beneficiary.

Purpose of Bank Guarantees

Bank Guarantees are used to for both both preventive & remedial purposes. The

guarantees executed by banks comprises both performance guarantees &

financial guarantees. The guarantees are structured according to the terms of

agreement, viz., security, maturity & purpose.

Branches may issue guarantees generally for the following purposes:

a) In lieu of security deposit/earnest money deposit for participating in

tenders;

b) Mobilization advance or advance money before commencement of the

project by the contractor & for money to be received in various stages

like plant layout, design/drawings in project finance;

c) In respect of raw materials supplies or for advances by the buyers;

d) In respect of due performance of specific contracts by the borrowers &

for obtaining full payment of the bills;

e) Performance guarantee for warranty period on completion of contract

which would enable the suppliers to realize the proceeds without waiting

for warranty period to be over;

f) To allow units to draw funds from time to time from the concerned

indenters against part execution of contracts, etc.

g) Bid bonds on behalf of exporters

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h) Export performance guarantees on behalf of exporters favouring the

Customs Department under EPCG scheme.

Guidelines on conduct of Bank Guarantee business

Branches, as a general rule, should limit themselves to the provision of financial

guarantees & exercise due caution with regards to performance guarantee

business. The subtle difference between the two types of guarantees is that

under a financial guarantee, a bank guarantee’s a customer financial worth,

creditworthiness & his capacity to take up financial risks. In a performance

guarantee, the bank’s guarantee obligations relate to the performance related

obligations of the applicant (customer).

While issuing financial guarantees, it should be ensured that customers should

be in a position to reimburse the Bank in case the Bank is required to make the

payment under the guarantee. In case of performance guarantee, branches

should exercise due caution & have sufficient experience with the customer to

satisfy themselves that the customer has the necessary experience, capacity,

expertise, & means to perform the obligations under the contract & any default

is not likely to occur.

Branches should not issue guarantees for a period more than 18 months without

prior reference to the controlling authority. Extant instructions stipulate an

Administrative Clearance for issue of BGs for a period in excess of 18 months.

However, in cases where requests are received for extension of the period of

BGs as long as the fresh period of extension is within 18 months. No bank

guarantee should normally have a maturity of more than 10 years. Bank

guarantee beyond maturity of 10 years may be considered against 100% cash

margin with prior approval of the controlling authority.

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More than ordinary care is required to be executed while issuing guarantees on

behalf of customers who enjoy credit facilities with other banks. Unsecured

guarantees, where furnished by exception, should be for a short period & for

relatively small amounts. All deferred payment guarantee should ordinarily be

secured.

Appraisal of Bank Guarantee Limit

Proposals for guarantees shall be appraised with the same diligence as in the

case of fund-base limits. Branches may obtain adequate cover by way of margin

& security so as to prevent default on payments when guarantees are invoked.

Whenever an application for the issue of bank guarantee is received, branches

should examine & satisfy themselves about the following aspects:

a) The need of the bank guarantee & whether it is related to the applicant’s

normal trade/business.

b) Whether the requirement is one time or on the regular basis

c) The nature of bank guarantee i.e., financial or performance

d) Applicant’s financial strength/ capacity to meet the liability/ obligation

under the bank guarantee in case of invocation.

e) Past record of the applicant in respect of bank guarantees issued earlier;

e.g., instances of invocation of bank guarantees, the reasons thereof, the

customer’s response to the invocation, etc.

f) Present o/s on account of bank guarantees already issued

g) Margin

h) Collateral security offered

Format of Bank Guarantees

Bank guarantees should normally be issued on the format standardized by

Indian Banks Association (IBA). When it is required to be issued on a format

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different from the IBA format, as may be demanded by some of the beneficiary

Government departments, it should be ensured that the bank guarantee is

a) for a definite period,

b) for a definite objective enforceable on the happening of a definite event,

c) for a specific amount

d) in respect of bona fide trade/ commercial transactions,

e) contains the Bank’s standard limitation clause

f) not stipulating any onerous clause, &

g) not containing any clause for automatic renewal of the bank guarantee on

its expiry

II. LETTER OF CREDIT-

Letter of Credit  L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as: 

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :

Is to make a payment to or to the order  third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.

Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).

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Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.

Parties to Letters of   Credit

Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions.

Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and

takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. The payments has to be made to the beneficiary within seven working days from the date of receipt of documents at their end, provided the documents are in accordance with the terms and conditions of the letter of credit. If the documents are discrepant one, the rejection thereof to be

communicated within seven working days from the date of of receipt of documents at their end.  

Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c.If L/c is a transferable one and he transfers the credit to another party, then he is referred to as the first or original beneficiary.

Advising Bank : An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary.

Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of only the issuing bank. 

Negotiating Bank:  The Negotiating Bank is the bank who negotiates the documents submitted to them by the beneficiary under the credit either advised

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through them or restricted to them for negotiation. On negotiation of the documents they will claim the reimbursement under the credit and makes the payment to the beneficiary provided the documents submitted are in accordance with the terms and conditions of the letters of credit. 

Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made. 

Second Beneficiary : Second Beneficiary is the person who represent the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

Types of Letter of Credit

1. Revocable Letter of Credit L/C

A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification.  It is rarely used in international trade and not considered satisfactory for the exporters but has an advantage over that of the importers and the issuing bank.

There is no provision for confirming revocable credits as per terms of UCPDC, Hence they cannot be confirmed. It should be indicated in LC that the credit is revocable. if there is no such indication the credit will be deemed as irrevocable.

2. Irrevocable Letter of Credit L/C

In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary.  Form an exporters point of view it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. 

3. Confirmed Letter of Credit  L/C

Confirmed Letter of Credit is a special type of L/C in which another bank apart from the issuing bank has added its guarantee. Although,  the cost of confirming

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by two banks makes it costlier, this type of  L/C is more beneficial for the beneficiary as it doubles the guarantee.

4. Sight Credit and Usance Credit  L/C

Sight credit states that the payments would be made by the issuing bank at sight, on demand or on presentation. In case of usance credit, draft are drawn on the issuing bank or the correspondent bank at specified usance period. The credit will indicate whether the usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank.

5. Back to Back Letter of Credit  L/c

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as backtoback credit when a L/c is opened with security of another L/c.

A backtoback credit which can also be referred as credit and countercredit is actually a method of financing both sides of a transaction in which a middleman buys goods from one customer and sells them to another.

The parties to a BacktoBack Letter of Credit are:     1.  The buyer and his bank as the issuer of the original Letter of Credit.     2.  The seller/manufacturer and his bank,     3.  The manufacturer's subcontractor and his bank.

The practical use of this Credit is seen when L/c is opened by the ultimate buyer in favour of a particular beneficiary, who may not be the actual supplier/ manufacturer offering the main credit with near identical terms in favour as security and will be able to obtain reimbursement by presenting the documents received under back to back credit under the main L/c.

The need for such credits arise mainly when :

The ultimate buyer not ready for a transferable credit

The Beneficiary do not want to disclose the source of supply to the openers.

The manufacturer demands on payment against documents for goods but the beneficiary of credit is short of the funds

6. Transferable Letter of Credit  L/c

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A transferable documentary credit is a type of credit under which the first beneficiary which is usually a middleman may request the nominated bank to transfer credit in whole or in part to the second beneficiary. 

The L/c does state clearly mentions the margins of the first beneficiary and unless it is specified the L/c cannot be treated as transferable. It can only be used when the company is selling the product of a third party and the proper care has to be taken about the exit policy for the money transactions that take place. 

This type of L/c is used in the companies that act as a middle man during the transaction but don’t have large limit. In the transferable L/c there is a right to substitute the invoice and the whole value can be transferred to a second beneficiary.

The first beneficiary or middleman has rights to change the following terms and conditions of the letter of credit:

Reduce the amount of the credit.

Reduce unit price if it is stated

Make shorter the expiry date of the letter of credit.

Make shorter the last date for presentation of documents.

Make shorter the period for shipment of goods.

Increase the amount of the cover or percentage for which insurance cover must be effected.

Substitute the name of the applicant (the middleman) for that of the first beneficiary (the buyer). 

Standby Letter of Credit   L/c

Initially used by the banks in the United States, the standby letter of credit is very much similar in nature to a bank guarantee. The main objective of issuing such a credit is to secure bank loans. Standby credits are usually issued by the applicant’s bank in the applicant’s country and advised to the beneficiary by a bank in the beneficiary’s country.

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 Unlike a traditional letter of credit where the beneficiary obtains payment against documents evidencing performance, the standby letter of credit allow a beneficiary to obtains payment from a bank even when the applicant for the credit has failed to perform as per bond.  

A standby letter of credit is subject to "Uniform Customs and Practice for Documentary Credit" (UCP), International Chamber of Commerce Publication No 500, 1993 Revision, or "International Standby Practices" (ISP), International Chamber of Commerce Publication No 590, 1998.

Import Operations Under   L/c

The Import Letter of Credit guarantees an exporter payment for goods or services, provided the terms of the letter of credit have been met.

A bank issue an import letter of credit on the behalf of an importer or buyer under the following Circumstances

When a importer is importing goods within its own country.

When a trader is buying good from his own country and sell it to the another country for the purpose of merchandizing trade.

When an Indian exporter who is executing a contract outside his own country

requires importing goods from a third country to the country where he is

executing the contract.

The first category of the most common in the day to day banking

Fees And Reimbursements

The different charges/fees payable under import L/c is briefly as follows

1. The issuing bank charges the applicant fees for opening the letter of credit. The fee charged depends on the credit of the applicant, and primarily comprises of :

(a) Opening Charges  This would comprise commitment charges and usance charged to be charged upfront for the period of the L/c.

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 The fee charged by the L/c opening bank during the commitment period is referred to as commitment fees. Commitment period is the period from the opening of the letter of credit until the last date of negotiation of documents under the L/c or the expiry of the L/c, whichever is later.

Usance is the credit period agreed between the buyer and the seller under the letter of credit. This may vary from 7 days usance (sight) to 90/180 days. The fee charged by bank for the usance period is referred to as usance charges

(b)Retirement Charges

1. This would be payable at the time of retirement of LCs. LC opening bank scrutinizes the bills under the LCs according to UCPDC guidelines , and levies charges based on value of goods.

2. The advising bank charges an advising fee to the beneficiary unless stated otherwise The fees could vary depending on the country of the beneficiary. The advising bank charges may be eventually borne by the issuing bank or reimbursed from the applicant

3. The applicant is bounded and liable to indemnify banks against all obligations and responsibilities imposed by foreign laws and usage.

4. The confirming bank's fee depends on the credit of the issuing bank and would be borne by the beneficiary or the issuing bank (applicant eventually) depending on the terms of contract.

5. The reimbursing bank charges are to the account of the issuing bank.

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Building Up of a Proposal

1. GATHERING CREDIT INFORMATION :-

An appraisal of a proposal begins with the gathering of adequate background

knowledge about borrower’s character and credit worthiness. In the concept of

appraisal, much reliance is placed on the credentials of the borrower. Therefore,

there is a necessity for evaluation of the borrower in regard to his standing in

the business, means and respectability. The result of the elaborate scrutiny

concerning all these aspects is required to be put into a precise credit report

which helps in taking decision on a credit proposal. Each individual case has to

be examined in the light of its own circumstances and judgment exercised on

issues enumerated above and a final decision has to be arrived at on the basis of

scrutiny of all the issues.

Information by definition is that data which is relevant and meaningful for

making decisions. An information system is an aid to the decision making,

carrying out and altering decisions. All information required by the banker in

the pre-sanction period should become part of a system. It should flow into the

information system from various sources, such as the borrower, bank’s own

record, environment etc. A significant basis of banker-borrower relationship is

governed by the information which flows between the two parties. After

ascertaining the credit needs of the borrower, the banker looks towards

information about his borrower’s credit worthiness. He seeks out the credit

information etc. from his co-bankers, other borrowers and market information.

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2. VARIOUS SOURCES OF CREDIT INFORMATION

Information regarding character, honesty, and financial position has to be

discreetly gathered from following sources:

a. The borrower: the bank should develop as much credit information as

possible during the initial interview with the borrower/partners of firm/

directors of company/ proposed guarantor /co-obligator and principal

officials of firms/company, nature of its business, past and expected

profitability, the degree of competition that the firm/company faces and

whether or not it has had or anticipated any difficulty etc.

Information regarding its principal officers should be collected during such

interview.

b. Borrower’s financial statements: for lending decisions, financial

information is a significant part of the total information system. It is

derived basically from borrowers:

Trading and profit and loss statement

Balance sheet

Cash and fund flow statements

c. Banks own records: If he is an existing borrower, bank’s own records are

a rich source of additional information. Operations in the borrower’s

account and other dealings at the bank level in regard to collections,

discounting/retirement of bills etc. often useful clues to borrower’s

operating and financial transactions. A review of the previous year’s

operations in the account and assessments of borrowers’ financial

statements relating to that period will provide a rich source of information

about the borrower.

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d. Opinions: Bank should compile opinions on their borrowers. They

should contain full and reliable records of the character, estimated means

and business activities of all firms and individuals who are under any form

of liability to the bank, whether as direct borrowers or as co-obligators.

Full particulars of parties immovable properties where they are situated,

whether they are free from encumbrance and in the case of land, acreage

should be recorded together with fair estimates of their value. As far as

possible written statements of their properties should be taken in

evaluating properties owned by parties jointly with others and as a rule

such properties should be disregarded in arriving at the net means.

e. From other banks: in respect of fresh proposals, enquiries with local

banks should be made before entertaining the proposal to avoid multiple

financing without our full knowledge. In case of new customer having

dealings with other banks, confidential opinion of his banker has to be

obtained.

f. Income tax assessment order- Income tax assessment orders agricultural

income tax assessment orders give an insight into the borrower’s account

and the extent to which it is profitable. Comments thereon by the income

tax office shall indicate the shortcomings (lacunae) in the business. In the

case of estate owners agricultural tax assessment orders to be obtained to

arrive at parties credit worthiness.

g. Sales tax assessment orders: Sales tax assessment orders will reveal the

turnover in business and when read with trading/ manufacturing and profit

& loss account, it may be possible to have a fair assessment of tendencies

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in trade i.e., whether over-trading or carefully trading within recourses at

command or trading entirely on the borrowed funds.

h. Wealth tax assessment orders: wealth tax assessment order will indicate

the net worth of individuals and reveals the liquid source available to bring

the required margin money for the venture.

i. Market sources: Constant touch with the market will help to have first

hand information about the gains or losses in particular business

transactions of the borrowers.

j. Property statements: The property statement of borrower will give an

idea of his worth, liabilities and his income from real estate’s (immovable

properties).

k. Municipal property registers: reference to municipal property registers

will give an idea of building owned within the municipality, Rental Values

and house tax payable. It may be noted that the said registers are open for

reference to all persons.

l. Other external sources: other external sources, if any, like stock

exchange directory, business periodicals/magazines/journals etc.

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REQUIREMENTS AS PER CONSTITUTION OF BOROWER:

Following Requirements as per constitution of borrower should be collected for

proposals emanating from-

1. Partnership:

Copy of partnership deed

Copy of certificate of registration of firm (if registered)

2. Company :

Memorandum and articles of association

Certificate of incorporation

Certificate of commencement of business

Search report indicating subsisting charges on the assets of the

company.

Board resolution for borrowings, creation on the assets of the

company and execution of the documents.

3. Cooperative societies

Bylaws

Permission from registrar for the borrowings, creation of charge on

the assets of the society and execution of documents.

4. Trusts

Trust deed

Resolution for the borrowings and execution of documents.

5. Industrial units :

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Project report with cash flow, fund flow statements etc.

Industrial licenses/SSI registration certificate.

License from local authority, compliance of legal requirements or

conditions as applicable and clearance from regulatory bodies.

FINANCIAL APPRAISAL

On receipt of a loan application the banker begins the process of financial

appraisal. The first thing done is to analyze the financial statements. Therefore,

an understanding of these financial statements is important for the appraiser.

Once balance sheet is taken for analysis the following items are checked up:

1. Fixed assets: To find out any revaluation of fixed assets done by the

company to improve their net worth.

The schedules of the fixed assets should be checked up.

Study notes on accounts and comments of auditors should be

checked.

Schedule for reserve should be studied

Any change in the accounting procedure of depreciation should be

checked

2. Current assets: to find out whether the assets stated are really liquid or

not.

The schedules under current liabilities and current assets to

ascertain any obsolete or slow moving raw material or finished

good and old debtors or receivables should be checked

The auditor’s report should be read and understood properly.

The claims lodged against receivables must be studied

The receivables due from sister/associate concerns must be studied.

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3. Other Current Assets: Their reasonableness and their need to maintain

them for the business.

Various components of other current assets and if the same is more

than 5% -10%, ascertain the nature and need for maintaining such

amount ; any assets which is not used in the into day business

activity shall be removed and proper treatment is to be made

accordingly.

Bank guarantee or letter of credit margin shall be shown as non-

current assets.

4. Contingent liabilities: To find out any unrecognized liabilities or losses

if any.

The CDD/DBD other bills discounted liability, if any ,is reported in

the auditor’s report , then increase the bank borrowing to the extent

liability was not taken in the balance sheet and also increases the

debits/receivables to that extent.

5. Term liabilities: To find out whether the liabilities are long term or short

term, and its needs and regularity

This shall be decreasing year after year; if it has increased, then the

reason for the same is to be looked into (may be irregular or new

term loan availed for expansion etc.)

The term liabilities with repayment of the same and the amount

payable during the year shall be deducted from the term liabilities

as current liabilities for finding out liquidity position of the

company should be checked.

6. Stocks:

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The stock statements and QIS forms to find the authenticity of the

figures reported under stock/receivables.

Change in the valuation of the stock/finished goods, if any, is to be

verified to find out its effect on the profitability of the company.

7. Intangible assets :

Any abnormal increase in this figure shall be studied to find out the

reasons for the same; this may be due to take over by others also.

8. Accounting Norms:

Any change in the accounting norms from the past shall be studied

to find out the reasons for the same; its effect on the net profit, net

worth of the company is to be ascertained.

BALANCE SHEET ANALYSIS

1. Comments on the performance of the unit vis-à-vis last year sales-

Increased in last year sales are always good; if the net profit also

has increased correspondingly the performance can be noted as

satisfactory.

If the sales has come down or the net profit has also come down

then the reason has to be ascertained. If the unit earned at least cash

profit then the position may be considered as satisfactory.

If the NP to N/sales is positive, that is sufficient for accepting as

satisfactory; but as per the credit rating chart maximum marks are

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assigned if the borrower achieves 8% as percentage of net profit/net

sales.

Return on investment or Return on equity may also be used to find

out the return on capital invested.

2. Long term Strength of a company is calculated based on the level of

the net worth of the company /promoters stake/loans from close relatives-

If the net worth has increased due to infusion of fresh capital or

plough back of profit, it can be termed as satisfactory; even

increase of loan from friends & relatives is a good sign.

If the net worth is decreasing, reason may due to net loss or

diversion; true reason needs to be ascertained.

If the D/E ratio is less than 2:1 the same is good; further if the

TOL/TNW is less than 5:1 then the unit’s solvency is noted to be

satisfactory. The ratio indicates that borrower has not borrowed

much and the outside debts within a reasonable limit.

3. Liquidity position of the party-Current ratio

If the current ratio is increasing and nearer to 1.5 and above then

we can note the position is satisfactory.

Expected Current ratio is 1.22:1 and above; if the ratio is less than

1.22:1 then the promoter’s margin (Net working capital) towards

Working Capital may not be sufficient to cover the working capital

limit; care shall be taken to ensure that sufficient Net working

capital for the working capital enjoyed is available.

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When the Current ratio is poor and the Net working capital is not

sufficient to cover the existing limit, no further term loan shall be

sanctioned and the party is to be advised not to take up any fresh

investment in fixed assets.

4. Quality of current assets :

The current assets holding period must be less than 3 months for

traders and the 5 months for the industries depending upon the type

of industry ;holding level more than the above needs proper

justification.

It should be ensured that the current assets turnover is at least more

than four times in a year.

5. Contingent liability:

The effect of this liability on the net worth of the company; if

it’s effect is less than 5-10 % of the net worth of the company ,the

same may be noted; but if it threatens the existence of the company

then the position needs serious analysis.

6. Diversion from the business needs to be viewed carefully.

Reduction in Net working capital position( below the required

level) when the unit has earned cash profit and clearing of term

loan installments when the unit is making cash loss needs to be

viewed seriously.

Reduction in the net worth of the firm (when they have shown net

profit needs further probing.

MOVEMENT OF CREDIT PROPOSALS

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With reference to Punjab National Bank the movements of credit proposals are

studied carefully and the detailed process is discussed as follows:

The movement of credit proposals follows a pre-defined path which has been

structured in keeping with the risk management principle that the credit granting

process should involve multiple credit approvers who should subject the

proposals to credit approvals at various stages accordingly.

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Credit Appraisal Techniques

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Credit appraisal techniques act as tool for the credit portfolio managers to take

right decisions. It is the first and the prime most function performed by the

Credit Appraisal Cell before providing any sort loans or advances. The

appraisal technique for each type of loan is separate from each other. Each type

of loan whether secured or unsecured has to be analyzed in a different way. The

different techniques of credit analysis or credit appraisal are discussed as under:

Process of Credit appraisal for Term Loans

Term loans- Loans which are repayable in not less than 36 months are referred

to as term loans. In the interest of sound risk management practices, banks

monitor the percentage of Term loans in their credit portfolio with a view to

keeping the term loan component within a pre-determined percentage.

Requirements to be obtained with the proposal:

a) Copies of project report

b) Where loan is on participation basis, a copy of the appraisal note of the lead

institution / bank should be obtained.

c) Scrutiny of proposals

The scope of the project:

Background of promoters

Government consents

The technical appraisal

Cost of the project

Sources of finance

The schedule of implementation

The financial projections and profitability

Cash flow statements

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Calculation of debt service coverage ratio (DSCR)

Breakeven analysis

d) Disbursement

e) Follow up (post sanction)

Assessment :

For assessment purposes the forms prescribed are used and debt equity ratio,

average DSCR, BEP, pay back period, etc. are taken into consideration. The

following minimum financial parameters are required to be satisfied for a Term

loan proposal to merit consideration:

Debt Equity

Ratio

Not more than 2.33:1(1.7:1 may be

accepted in the case of real estate sector

and generally for different type of

industry different level of DER is

acceptable.)

Average DSCR

Not less than 1.5to 2 (ratio lower than this

is to be looked into)

Ratios for appraising term loans:

Debt equity ratio: long term debt

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Tangible net worth

Average DSCR : Net profit + Depreciation + interest on TL

Term loan installment + interest on TL

Breakeven point : Fixed cost_______

Sales-Variable cost (contribution)

It should be noted that the banks generally consider only term loans

repayable within 5 to 7 yrs. Term loans with maturity beyond 7 yrs are

normally not experienced except infrastructure loans.

Debt Equity Ratio:

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and

debt the company is using to finance its assets.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to

personal financial statements as well as companies'.

A high debt/equity ratio generally means that a company has been

aggressive in financing its growth with debt. This can result in volatile

earnings as a result of the additional interest expense. If a lot of debt

is used to finance increased operations (high debt to equity), the

company could potentially generate more earnings than it would have

without this outside financing. If this were to increase earnings by a

greater amount than the debt cost (interest), then the shareholders

benefit as more earnings are being spread among the same amount of

shareholders. However, the cost of this debt financing may outweigh

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the return that the company generates on the debt through investment

and business activities and become too much for the company to

handle. This can lead to bankruptcy, which would leave shareholders

with nothing.

The debt/equity ratio also depends on the industry in which the

company operates. For example for large projects (with project cost

Rs. 100 crore and above) in Power, acceptable level of DER is 2.33:1,

in Iron and Steel Industry 2.25:1 , in Infrastructure and Capital

Intensive projects 2:1 and in Real Estate, level of DER is 1.75:1. The

CH, GM, ED and CMD have powers to further relax.

Debt Service Coverag Ratio (DSCR):

The ultimate purpose of project appraisal is to ascertain the viability of a project

which has a direct bearing on the repayment of the instalments under the

proposed term loan / deferred payment guarantee. While the repayment program

will depend upon the profitability of a project, the quantum of annual

instalments has to be related to the size of the annual cash flows. The repayment

schedule should, therefore, be fixed after ascertaining the annual servicing by

the debt service coverage ratio.

The debt service coverage ratio is the core test ratio in project financing. This

ratio indicates the degree of viability of a project and influences in fixing the

repayment period, and the quantum of annual instalments. For the purpose of

this ratio , “debt” means maturing term obligations viz. instalments payable

during a year under all the term loans/ deferred payment guarantees and

‘service’ means cash accruals (service) available to cover the maturing

obligation (debt) during each year.

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The debt service coverage ratio indicates the ability of the firm to

generate cash accruals for repayment of installment and interest. For example, a

DSCR of 3:1 indicates that for each Re.1/-long term debt including interest to

be paid the business generates cash accrual of Rs.3/- to be utilized for

repayment of debt. The difference between the accruals and debt is known as

margin of safety (Rs.2/- in this case).

The ratio of 1.5 to 2 is considered reasonable. Ratio lower than

this should be further looked into. A very high ratio may indicate the need for

lower moratorium period/repayment of loan in a shorter schedule. This ratio

provides a measure of the ability of an enterprise to service its debts i.e.

`interest' and `principal repayment' besides indicating the margin of safety. The

ratio may vary from industry to industry but has to be viewed with

circumspection when it is less than 1.5.

BREAK EVEN POINT OR COST VOLUME PROFIT (CVP) ANALYSIS:

A. The breakeven point is calculated to note the level of production at which the

unit neither earns profit nor incur loss. BEP is the level of operations (in terms

of sales or production or capacity utilization) at which total revenues are equal

to total operating costs (fixed and variable) or, in other words, the operating

profit is equal zero. He firm starts earning operating profits only after the break-

even is reached. At BEP, “contribution” exactly equals the “fixed costs.

B. The formula for calculating the break-even point for each year is as under:

Total fixed cost/Contribution

C. Certain items of the cost that are to be incurred by the unit irrespective of the

level of production are called as fixed cost. The same includes depreciation,

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repairs and maintenance, interest, certain portion of salaries, rent, insurance,

selling expenses other than variable items and administrative expenses

D. The variable cost changes with the levels of production. It includes cost of

raw materials, direct wages and other items, which are apportion able to unit of

production.

E. The breakeven point is generally expressed in terms of percentage of

capacity utilization

Break even analysis is generally expressed in terms of percentage of capacity

utilisation.

The CVP analysis provides answers to such questions

as: level of operations needed to avoid loss, level of sales required to achieve

targeted profit, effect of product mix on profits, impact of expansion, most and

least profitable products etc. Break-even analysis is the most widely used form

of the CVP analysis.

Break-even analysis is one of the most useful

techniques of profit planning and controlling. The break-even analysis can help

in making vital decisions relating to fixation of selling price make or buy

decision, maximizing production of the item giving higher contribution etc.

Further, the break-even analysis can help in understanding the impact of

important cost factors, such as, power, raw material, labor, etc. and optimizing

product-mix to improve project profitability.

It is a useful method for considering also the risk implications of alternative

actions. From one alternative a firm may expect higher profit and also a higher

break-even point, while another alternative may produce comparatively lower

profit but at a lower break-even point. The firm has to weigh the probability

(riskiness) of reaching the break-even in the first case before choosing that

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alternative. Generally, the preferred alternative would be where the break-even

will be reached earlier.

Caution:

Relationship between revenue, variable costs and volume may not be

linear.

It is not always easy to have a clean separation of costs into fixed and

variable components.

Fixed costs may be ‘stepped’ – not fixed over all volumes.

Complexity involved in using BEP analysis in multi-product businesses

Illustration:

Assumed:

Normal year

production

75 lakh units (93.75% of

installed capacity)

Fixed Costs Rs. 13.71 lakh

Variable Costs Rs. 13.35 lakh

Sales realization Rs. 41.25 lakh

Contribution Rs. 27.90 lakh

BEP (production) : (Fixed cost / Contribution)* 75 lakh = 36.85 lakh

units

BEP (capacity utilization): (Fixed cost / Contribution)* 93.75 = 46.07%

BEP (sales) : (Fixed cost / Contribution)* Rs. 41.25 lakh = Rs.

20.27 lakh

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SENSITIVITY ANALYSIS

Projects do not always run to plan. Costs and benefits estimated at an early

stage of a project may indicate a profitable project, but this profit could be

eroded by an increase in costs or a decrease in the value of the benefits (the

revenue). Sensitivity Analysis involves changing input variable estimates

from an original set of estimates (called the base case) and determine their

impact on a project’s measured results, such as NPV (or IRR) from investor’s

viewpoint, or DSCR from banker’s point of view.

The Sensitivity Analysis helps in arriving at profitability of the project wherein

critical or sensitive elements are identified which are assigned different values

and the values assigned are both optimistic and pessimistic such as increasing

or reducing the sale price/sale volume, increasing or reducing the cost of inputs

etc. and then the project viability is ascertained.

The critical variables can then be thoroughly examined by generally selecting

the pessimistic options so as to make possible improvements in the project and

make it operational on viable lines even in the adverse circumstances.

In the absence of any defined factors and its values for carrying out the

sensitivity analysis, a common 5% sensitivity factor on sale price/cost price of

major raw materials is to be applied in appraisals of all the projects

irrespective of the industry. However, 10% sensitivity factor may be applied in

highly volatile industries by assessing the expected volatility in sale price/ cost

price of major raw materials in future on case to case basis.

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Process of Credit Appraisal for providing Cash Credit / Working

Capital Limits

Working capital for any unit means the total amount of circulating funds

required for meeting day to day requirements of the unit. For proper working a

manufacturing unit needs a specific level of current assets such as raw material,

stock in process, finished goods, receivables and other current assets such as

cash in hand/ bank and advances etc. So the working capital means the funds

invested in current assets. The trading units need the working capital for storing

the goods and allowing credit to its customers.

Gross Working Capital and Net Working capital

Gross working capital means the total funds required for financing the total

current assets. Net Working capital means the difference the current assets and

liabilities. In other words , net working capital denotes the portion of gross

working capital contributed from long term sources. As per practice of Indian

banks net working capital should normally be 25% of total current assets which

will give a current ratio of 1.33 to the unit. When net working capital is

negative, it implies that the short term funds have been diverted / used for long

term uses and the unit is facing a liquidity crunch. Such situation may also arise

due to losses. In such a situation, the need of the hour is for raising long term

sources. A unit needs working capital because the production, sales and

realizations are not simultaneous. The unit needs cash to purchase the raw

material and pay expenses as there may not be perfect matching between cash

inflows and outflows. The stock of raw material is kept to ensure the

uninterrupted and smooth production. It may also be required to cover the

situations of shortages etc.

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Factors affecting the requirement of working capital:

1. Nature of activity: Manufacturing units need more working capital as

compared to trading and service units.

2. The length of operating cycle: More the length of operating cycle, more

the requirement of working capital. lengthy the process of manufacture,

more the need of working capital due to increase of length of working

capital cycle

3. Market trend: The market trend of allowing credit to customers also

varies from industry to industry and city to city. More the credit allowed

to customers, more the need of working capital.

4. Availability of raw materials: When the availability of raw material is

assured and comfortable, lower stock maintenance is required. When

there is expectation of shortage or expectation of rise in prices, more

amounts is blocked in raw materials.

5. Location of the unit: When the unit is located near the source of raw

material, lower stock maintenance is required.

6. Type of customers: When there are regular customers, low stock of

finished products is needed. When the sales are to be made to walk- in

customers, more level of stock of finished products is required.

7. Seasonality Factor: When the raw material required is available in a

particular season, the stock for whole of year is to be purchased in the

particular season. E.g. Sugarcane, Cotton, Paddy etc. Similarly the

woollen products and products required in a particular season such as

ACs, for keeping the production running, higher level of finished stocks

have to be kept.

Role of Banker:

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The unit should have sufficient amount of working capital. A portion of it is to

be financed from long term sources called the liquid surplus or net working

capital (NWC). The remaining is normally financed by the bank in the form of

working capital limits. Excess maintenance of working capital may result in idle

resources and high interest cost whereas less amount of working capital may

mean disruption in the working. So both the situations are to be avoided. That is

why the technique of calculation of right amount of working capital assumes

significance. For financing of working capital, a banker should be able to

calculate right amount of working capital needed by the unit being financed. It

shall mean right amount of financing which will result in higher profitability for

the unit and safety of funds of the bank.

Parameters for various stages in computation of working capital:

Stage Time Value

i Raw Material Holding period value of RM consumed

during the period

ii SIP Time taken in RM + Mfg.Exp. during the

converting the period (Cost of

RM into FG production)

iii FG Holding period of R.M + Mfg. Exp. +Adm

FG before being overheads for the

sold period (Cost of sales)

iv Receivables Credit allowed RM+ Mfg. Exp. + Adm.

to buyer Exp.+ Profit for the

period

(sales)

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The assessment of working capital requirement of business unit has been

engaging the attention of the Govt., RBI and a series of committees were set up

to suggest appropriate modalities of financing working capital as under.

TANDON COMMITTEE RECOMMENDATIONS

Realising the absence of a proper control system in the flow of bank credit for

working capital, RBI constituted a working group “Tandon Committee’ in July

1974 under the chairmanship of Shri P.L. Tandon. The main task of the group

was:

1. To suggest guidelines to commercial banks to follow up and supervise credit

from the view of ensuring proper end use of the funds and keeping a watch

on the safety of the advances.

2. To suggest as to what constitutes the working capital requirements of

industry and to suggest the sources for financing the minimum working

capital requirements.

3. To suggest the maximum level of bank finance and the method to compute

the same.

4. To make recommendations as to whether the existing pattern of financing

working capital requirements by cash credit or overdraft etc. requires to be

modified. If so, to suggest suitable modifications.

The group submitted its final report during December 1975. The

recommendations of this Committee are summarised below:

(i) Norms for Inventory and Receivables

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With a view to curbing speculative and hoarding tendencies, the Committee

fixed norms (in terms of the weeks/month consumption) in respect inventory

and receivables which industrial units may hold. The norms were fixed for 15

major industries and indicate the maximum permissible limits for inventory

holding. Deviations from norms not allowed for meeting unforeseen situations.

(ii) Approach to Lending.

The three methods of lending as suggested by the committee are:

First Method: 75% of Working Capital Gap (Total Current Assets –

Other Current liabilities)

Second Method: 75% Total Current Assets – Other Current

liabilities

Third Method: 75% [(Total Current Assets – Core Current Assets) –

Other Current liabilities)

Third method of lending was not accepted by RBI and hence rejected.

(iii) Style of Credit.

Tandon Committee suggested that instead of making available entire limit by

way of cash credit it may be bifurcated into demand loan and cash credit

component (modified by Chore Committee).

(iv) Quarterly Follow-up and Supervision

Tandon Committee suggested quarterly forms under the information system

made applicable to borrowers with working capital credit of Rs. 1 crore and

over from the banking system. These forms aim at ensuring proper end-use of

credit.

CHORE COMMITTEE RECOMMENDATIONS

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In April 1979, a working group under the chairmanship of Sh K.B.Chore was

constituted to review the system of cash credit. The committee submitted the

report in Dec 1980. The lending discipline, as enunciated by Tandon

Committee, has been streamlined by certain recommendations made by Chore

Committee. The gist of these recommendations is as follows:

(a) Annual Review

All working capital credit limits of Rs. 50 lacs and above from the banking

system should be reviewed at least once a year. These reviews are intended to

ensure that the limits are need-based and continue to be viable propositions.

(b) Information System

The scope of the quarterly information system originally envisaged by the study

group to frame guidelines for follow-up of bank credit has been enlarged

bringing into its ambit all borrowers having credit limits of Rs. 50 lacs and over

from the banking system.

Presently this limit of Rs. 50 lac has been raised to Rs. 1 Crore.

(c) Withdrawal of bifurcation of cash credit

The recommendation of the Tandon Study Group to bifurcate cash credit

accounts into demand loan and cash credit components has been withdrawn.

(d) Separate limit for peak level and non-peak level

A recommendation that will induce a greater degree of credit planning pertains

to the separate 'Peak-level' and `non-peak level' credit limits, wherever

considered feasible. The period during which these limits will be utilised will

now be indicated in the bank's advice conveying sanction of credit. This

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recommendation is based on the pronounced seasonal trends in agriculture-

based industries, (such as tea. coffee, sugar, jute, vegetable oils, etc.), and in the

case of some consumer industries such as those manufacturing fans,

refrigerators etc. One of the major determinants of borrower's peak-level and

non-peak level credit limits will be their availment during the corresponding

period in the past. Borrower in whose cases there are no pronounced seasonal

trends, may be sanctioned only one limit as peak-level and non-peak level

concepts will not be relevant in such cases.

(e) Determination of Quarterly Operative limits

Before the commencement of each quarter, the borrowers will now be required

to indicate limits sanctioned for their requirements of funds during the ensuing

quarter. This will be termed as the operative limit for the relevant quarter. The

operative limit indicated by the borrower would virtually set the level of

drawing in that quarter subject to tolerances of 10% either way. Hence forth,

excess-utilisation or under- utilisation of the operative limit, beyond the

tolerance level referred to above would be considered as an irregularity in the

account. This will be treated as an indication of defective credit planning by the

borrower.

Dialogue with the borrower will be initiated to set right the position in regard to

defective credit planning and to ensure that such instances are avoided in future.

(f) Penalty for delayed or non submission of returns

Non-submission of returns, within the prescribed time limit, will henceforth

entail penal of 2% per annum on the total outstanding for the period of default

in the submission of returns. Simultaneously, a notice would be issued to the

borrower stating that if the default persists it would be open to the bank to

freeze the account without further notice to the borrower. lf the default persists

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despite imposition of penal interest and the bank is satisfied that deterrent action

is warranted, the operations in the account may be frozen on the basis of the

notice issued to the borrower.

(g) Adhoc or temporary limits

The working group has conceded that in exceptional cases, ad-hoc or temporary

limits could be sanctioned to borrowers through demand loan or non-operatable

cash credit accounts. On those limits, banks are required to charge additional

1% interest per annum over the normal rate. However, in certain cases like

natural calamities it would be the discretion of the bank to charge interest of 1%

per annum.

(h) Switching over to Second Method of lending

A major recommendation of the working group relates to switching over the

borrowers from the first to the second method of lending. Recognising that in

some cases this may not be possible immediately, Reserve Bank has stipulated

that in such cases, the excess borrowings are to be segregated and treated as

WCTL (Working Capital Term Loan), which should be made repayable in half-

yearly instalments within a definite period but not exceeding five years in any

case.

(i) Encouragement of Bills system

To encourage bills systems of financing purchase of raw material inventory,

the Working Group has recommended that banks should extend at least 50%

of the cash credit limit against raw materials to manufacturing units, whether

in the public or private sector, by way of drawee bills only.

Present Status:

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The concept of MPBF was the cornerstone of financing which had emerged as a

result of recommendation of Tandon and Chore. However RBI has now

abolished the guidelines for MPBF and advised the banks to draw the guidelines

for credit dispensation. Our bank is still following MPBF system. However the

relaxations on case to cases are being allowed.

NAYAK COMMITTEE REC OMMENDATIONS

To give a comprehensive and straight line method for the assessment of

working capital requirement of the borrowers, RBI constituted a working

group under the chairmanship of Sh P.R.Nayak. The study group gave its

recommendations in March 1993. In April, 1993, RBI implemented the

recommendations of Nayak Committee for assessing the credit requirements of

village industries, tiny industries and other SSI units . Initially the

recommendations were for SSI units only but now other units have also been

covered. Presently units covered under these guidelines are those having

aggregate fund-based working capital credit limits less than Rs.200 lacs for

other than SSI and Rs. 500 lacs for SSI from the banking system.

It has been advised not to apply the norms for inventory and receivables as also

the Methods of Lending. Instead such units be provided working capital limits

computed on the basis of a minimum of 20% of their Projected Annual Turn-

Over (PATO) for new as well as existing units. Their working capital

requirement be assessed at a minimum of 25% of their Projected Annual Turn-

Over (PATO) assessed on realistic basis for new as well as existing units. Out

of this, at least 4/5th(20% of their PATO) be provided by the bank and the

borrower should contribute 1/5th of this estimated working capital requirement

(5% of PATO) as margin money of working capital.

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- In case the margin with the party is more than 5% , PBF may be adjusted

accordingly.

- The 20% limit is the minimum. As a temporary relief measure for SME

Units, RBI has allowed banks to finance upto 25% under stimulus

package. The same shall be reviewed after 30.6.09. However if the

working capital cycle is longer than 3 months, higher limit may be fixed.

If the working capital cycle is less than 3 months, the limit may be fixed

@ 20 % of turnover but actual withdrawal should be allowed only on the

basis of actual D.P. However lower limit can be sanctioned if requested in

writing by the borrower.

LENDING DISCIPLINE - QUARTERLY MONITORING SYSTEM

(QMS)

Consequent to operational freedom granted by RBI in regard to submission of

statements under QIS/Monthly Cash Budget System prescribed under CMA,

Bank reviewed the same and submission of QIS was replaced with Quarterly

Monitoring System (QMS)

The QMS discipline is to be enforced on all borrowers enjoying working capital

limits of Rs.1 crore and over from the banking system, irrespective of whether

they are exporters or otherwise

In case the limits have been sanctioned on the basis of Naik Committtee, QMS

forms and CMA data need not be submitted.

The forms for QMS and time period for submission are as under.

Form- 1 To be submitted within 6 weeks from the close of quarter to which

it relates

Form-11 To be submitted within 2 months from the close of Half Year to

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which it relates.

QMS form I gives us the quarterly data of production and sales and quarterly

levels of current assets and current liabilities.

QMS form II gives us half yearly profitability statement and fund flow

statements.

By comparing with the projections as given in CMA, we can see whether the

performance is going on as projected.

QIS I:

QIS I which was earlier discontinued has been reintroduced and is to be

submitted in addition to QMS I and QMS II.

- For all borrowed accounts availing fund based working capital credit

limits of Rs.5 crore & above from our bank, Quarterly Information

System (QIS) Form-I may be obtained for fixing up of quarterly operative

limits in addition to the QMS Forms. The QIS Form-I is to be submitted

in the week preceding the commencement of the quarter to which it

relates.

- Non adherence to the operative limits will attract penal interest.

COMMITMENT CHARGES

To discourage the borrowers from non-availment of credit already provided to

them by banking institutions and to indirectly help the banks in their Asset

Management, RBI has permitted bank to charge penalty on unavailed portion of

sanctioned limit known as a commitment charge. It is applicable to the working

capital limits of Rs.5 crore or above and charged @ 1% per annum with a

tolerance limit of 15% based upon the limit sanctioned.

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The unutilized part of the limit is found out by calculating the average

utilization during the quarter. While calculating the average utilization,

overdrawn portion or excess portion is not taken into consideration. If the average

utilization is less than 85% than commitment charges is levied on the entire

unavailed position.

Commitment charge is not applicable in case of export unit and sick unit.

PENAL INTEREST

In order to instil a sense of credit discipline among the borrowers, RBI has

permitted banks to levy penal intt. over and above the sanctioned rate of interest

in case of non compliance of various terms and conditions

The broad areas of non compliance where bank charges penal interest are:

Default in repayment of loans

Irregularity in cash credit account

Non submission of stock statements and other financial data

Default in adhering to borrowing covenants

Non payment of bills

Excess borrowings arising out of excess current assets

Non submission of information under Quarterly Monitoring

System

EXEMPTION FROM PENAL INTEREST

o All advances up to 25000/-

o Sick unit under rehabilitation

o Sick unit remained closed

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o Advance against deposits/LIC policy/Govt. securities/Gold &

Jewellery where the drawings are within available value of

security

o Account transferred to Protested category

RATE OF PENAL INTEREST

2% above the sanctioned rate where irregularity and default and non-

compliance of terms and conditions as given earlier.

2% above the sanctioned rate where adhoc/temporary limit are sanctioned

to borrower.

3% above the sanctioned rate in case of non compliance of terms and

conditions in adhoc/temporary limit

AMOUNT ON WHICH PENAL INTEREST TO BE CHARGED

Amount of default in – instalment /excess drawals or borrowings or

amount of irregularities in account/overdue bill not debited to account.

Total amount of outstanding – for non-submission of stock statement

and other financial data/default adhering to borrowing covenants/non-

submission of information under QMS.

APPRAISAL TECHNIQUES FOR RETAIL LOANS

I. EDUCATION LOANS

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Till some year’s back higher education and quality education was not affordable

to some illustrious students because of the financial constraints. There was no

any alternative but to jump in the job market prematurely. And this led to

untimely end of budding talents and their forceful transformation into to the

mediocrity. Scholarships were there, but those were so less in numbers that only

luckier few could avail them. But now the scene has changed drastically. The

boom in the banking sector has led to release of large amount of funds for

education loans

Student loans in India (popularly known as Education loans) have become a

popular method of funding higher education in India with the cost of

educational degrees going higher. The spread of self-financing

institutions(which has less to no funding from the government) for higher

education in fields of engineering, medical and management which has higher

fees than their government aided counterparts have encouraged the trend in

India. Most large public sector and private sector banks offer educational loans.

Under section 80(e) of the Indian Income tax act, a person can exempt the

amount paid against the interest of the education loan - either for self or for

his/her spouse or children - for eight years from the year (s)he starts to repay the

loan or for the duration the loan is in effect, whichever is lesser.

Education loan is becoming popular day by day because of the rising fee

structure of higher education. It came into existence in 1995 started first by SBI

bank and after that many banks started offering study loan.

The education loan provided by Punjab National bank is known as

Vidyalakshyapurti scheme. The details regarding its eligibility, processing,

documentation etc. are given as follows:-

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Concept VIDYALAKSHYAPURTI Scheme is the main scheme

and its variant PNB Sarvotam Shiksha scheme stands

merged with the main scheme with effect from 20.12.2008

Courses eligible

Studies in IndiaSchool level including. +2, Graduation, Post graduation,

Professional courses, Computer courses and Evening

courses, other courses leading to diploma /degree approved

by UGC, Govt, AICTE, AIBMS, ICMR etc. and Advance

diploma in Banking Tech. It includes professional &

commercial & pilot training courses in India and abroad.

For study in India. Institutes approved by DGCA are

included.

Studies Abroad

Graduation, PG and Courses offered by CIMA London ,

CPA in USA

Eligibility Indian National

Secured Admission

Secured pass marks in qualifying exam. Branches need not

go into technicalities of admission process (selection

through management quota etc.) and may consider loan

based on admission advice. ( RBD Cir. No. 60/08 dt.

20.12.2008)

More than one loan in a family

In case of more than one loan in a family, the family as a

unit is to be taken into account for considering the loan and

security taken in relation to total quantum of loan subject to

margin and repaying capacity of the parents.

Top up Loans

Top up loans may be sanctioned to students for pursuing

further studies within overall eligibility limits with

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appropriate reschedulement of existing loans and required

permission by the CH

Age of student

There is no restriction with regard to age of student for

being eligible for the loan.

Income Criteria

No Income criteria are prescribed for the parents. However

amount of loan be decided by judging Income of the

parents.

Amount of loan

Rs. 10.00 lac in India and 20.00 lac for abroad. CH can

exercise higher powers.

Priority Sector

Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.

Capital Requirement

Risk Weight as per BASEL-I 100%

Risk Weight as per BASEL-

II

75%

Margin NIL Up to Rs. 4.00 lac

5% Above Rs. 4.00 lac in India

15% Above Rs. 4.00 lac abroad

(Scholarship/assistance may be included in the margin)

Security NIL Up to Rs. 4.00 lac

3rd party guarantee for loans above 4.00 lac upto Rs. 7.5 lac

(Exemption from taking guarantee for loan up to 7.50 lakh

for students of IIT, IIM, XLRI etc.

EM of IP or other Coll. Security for loans above 7.50 lac

(should be interpreted as loan amount of Rs. 7.51 lac and

above in terms

Hypothecation of assets if created out of loan amount.

Co-obligation of students’ parents as well as assignment of

future income of student in loan above Rs. 7.5 lac. For

married persons, co-obligator can be spouse or parents or

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CREDIT APPRAISAL

parents-in-law. Grand parents can also become co-obligants.

Security for staff members

Lien on Terminal dues

Extension of EM of IP

Fresh Mortgage if there is no HL

Co-obligation of employee

Penal Interest

Up to 25000/- ----NIL , Above 25000/- @ 2% on

OVERDUE AMOUNT

Upfront fee NIL

0.50% (Maximum 5000/-) for studies abroad which is

eligible for refund on availment of loan.

Documentation Charges

Upto 4.00 lac - Rs. 270/- plus service tax

Above 4.00 lac Rs. 450/- plus service tax

Repayment 5 to 7 years with moratorium period equal to Course period

+ 1 year or 6 months after getting job whichever is earlier.

BM is empowered to permit extension in moratorium period

up to 2 years as against present provision of max. 1 year in

deserving cases under reporting to circle head.

Calculation of interest

Simple interest is to be charged during moratorium period

and kept in a separate account. The accrued interest during

repayment holiday will be added to Principal for fixing of

EMI.

Interest concession

1% interest concession is allowed if it is serviced during

holiday period. The concession will be given at start of

repayment and EMI will be fixed accordingly.

Rebate of 0.5% is allowed to students of IITs, IIMs etc.

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CREDIT APPRAISAL

Constitutes

of loan

Tuition fees, Hostel charges, Exam fees, Library/Lab charges,

Books, Equipment, Instruments, Uniform, Building fund,

Refundable deposit, Travel expenses & Computers. (Advances

for Computers are allowed in Computer/Management courses

only.)

Fees re-

imbursement

Within 6 months. Circle Head can allow beyond a period of 6

months also on merits.(RBD Cir. No. 12/10 Dt. 16/02/2010)

Documents Documents will be executed both by student and the

parent/guardian.

1. Letter of admission and proof of last qualifying exam.

2. Loan application

3. Agreement on PNB 1116 if student is minor.

4. Agreement on PNB 1117 if student is major.

5. Letter of guarantee if loan is above Rs. 4.00 lac.

6. EM of IP if loan amount is above Rs. 7.5 lac

Post sanction

Follow up

Follow up with the college/university for getting progress

report at regular intervals.

Life

Insurance by

Kotak

Mahindra

In terms of guidelines contained in RBD-A cir no. 16/08 dt.

26.3.08, Insurance policy can be obtained to meet the

exigencies in case of death of student borrower between age

group of 18-33 years. The coverage is between 20000-15 lac.

Single premium will be paid. It will vary according to age and

total insurance Tenor. The scheme is valid for one year.

Relaxations

for students

of IIT,IIM,

MDI, XLRI,

ISB

It has been decided to permit the following relaxations to the

students securing admission in IITs/IIMs/MDI Gurgaon/XLRI

Jamshedpur and ISB Hyderabad:

Exemption from making parent/guardian as co-borrower.

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CREDIT APPRAISAL

Exemption from taking guarantee for loans up to 7.50 l

Other

provisions

CR of the borrower is not required. Brief CR of the

guarantor to be prepared.

“No due Certificate” is not to be insisted upon. Application

will be rejected by next higher authority.

2nd time loan can be considered by the CH within limits.

Capability Certificated may be issued for studies abroad.

Education loan to the institutions previously under

Sarvotam Shiksha Scheme can be sanctioned by the branch

(other than place of residence of parents) convenient to the

borrower depending upon genuineness, accessibility and

aspect of recovery.

On-line applications are being accepted for grant of

education loan. Loan applications are to be disposed of

within 15 days under branch/hub sanction and 21 days

under CH and above.

CH has full powers to relax eligibility, margin and security

norms.

Parents, grandparents, spouse, parents-in-law can be co-

obligants.

Passport and Visa is required for study abroad.

Disposal of

loan

applications

It has been decided to curtail the period of disposal of

education loan applications to maximum 1 week except cases

of CH and above level where the outer limit of disposal will be

2 weeks from the date of receipt of complete application.

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II. VEHICLE LOANS

Today, vehicles can be financed using a number of options such as loans, lease,

or hire purchase agreement. Obtaining a vehicle loan is one of the more

straightforward ways of financing a two or four wheeler. In this manner, the

vehicle purchased is actually possessed by the bank or lending institution. This

means the car or motorbike is hypothecated. Therefore, though the consumer

owns the vehicle, the bank or the lending institution is actually using it as a

security against the loan that the consumer has obtained.

Vehicle loan provided by Punjab National Bank are under two categories know

as PNB SARTHI and CAR Loan & details about its processing, eligibility,

margin etc are discussed below:-

PNB SARATHI

Eligibility Individuals with Income proof

Students above 18 years with parents as co-borrowers

Business concerns

Individuals without income proof but residing at the

given address for the last at least 3 years.

Individuals with good repayment track without default.

Purpose &

Extent

Purchase of Scooter/Motor Cycle/Moped

Maximum Rupees. 100000/-.

Margin 5% where salary is disbursed through branch or check-

off facility is available.

25% for students where parents are co-borrowers.

30% for business or where there is no income proof.

10% for others.

Income

criteria

10000/- pm. Is the minimum criteria.

Income of parents be considered in case of students.

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Income of spouse can be added.

Switch over

to new

scheme

On flat fee of 2%

Guarantee Generally it is not required. In cases where there is no

Income proof, Guarantee of some family member or 3 rd.

party

In cases where income of spouse is to be added,

Guarantee of spouse can be taken.

Insurance Comprehensive Insurance with bank clause and policy to

remain with the bank.

Security

Inspection

PNB 551 is required for the Ist time. In case account is

regular, PNB 551 is not required thereafter.

In case the account is irregular, Qtrly. Inspection is must.

Upfront fee Rs 200/- + Service Tax For students – Nil

Documentati

on Charges

Rs. 270/- plus service tax

Other

Requirement

s

Driving License is required.

Statement of account for the last 3 years is required.

Income Tax Proof

Salary certificate

Income of spouse can be considered if he/she is made

guarantor.

CAR LOAN

Conveyance Loan (Public) for Car

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Eligibility Individual & Business concerns, Professionals &

Agriculturists with 6M transaction records.

Purpose &

Extent

Car, Van & Jeep,

Multi Utility

Vehicles/Sports

Utility Vecles

New or Old (not older than 3 years –

CH powers)

Individuals 25 times of net monthly salary or

Rs. 25 lac whichever is lower for

one or more vehicles.

CH may relax the criteria within

powers keeping in view the

repayment capacity.

Income of spouse can be

considered provided he/she stands

as additional guarantor

Business Corporate

and non-corporate

No Ceiling. One or more vehicle can

be purchased. Earning and repaying

capacity will be considered.

Agriculturists --do--

Margin General 20% - Cost of Insurance and

one-time road tax can be

considered as margin.

Govt./PSU employees 15% (Repayment in 84

EMIs)

If net income is more than 6

lac

Margin can be reduced to

15% by Sanctioning

Authority.

Old Vehicles 30%

CH may reduce up to 10% in deserving cases.

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CREDIT APPRAISAL

Repayment Maximum 7 years without any Moratorium period

Old Vehicles – 5 years

Agriculturists – 14 H/years as per crop pattern

CH and above empowered to relax repayment by 12M

Maximum age for EMI 65 years relaxable up to 70 years.

Carry home pay should not be more than 50% of gross

salary

Advance cheques equal to no. of installments be

obtained.

Rate of

Interest

The rate is on fixed option with reset clause of 1 year. Rate

of interest is linked with tenure of loan. Presently 0.5%

extra interest is charged if repayment period is 3 years and

above.

Upfront fee 1% of loan subject to maximum 6000/- exclusive of service

tax.

Documentati

on charges

Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac

+ ST

Rs. 450/- (Tie up arrangement Rs.1700/- ) Above Rs. 2.00

lac + ST

Security Hypothecation of the vehicle

RC in joint name of borrower and bank

Bill of the vehicle will also be in the joint name.

Guarantee Spouse if employed or Suitable 3rd party guarantee or

Collateral Security in shape of IP/liquid security equal to

100% of loan amount.

CH and above can waive the guarantee/collateral security.

Insurance Comprehensive Insurance with bank clause and policy to

remain with the bank.

Security PNB 551 is required for the 1st. time. In case account is

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CREDIT APPRAISAL

Inspection regular, PNB 551 is not required thereafter.

In case the account is irregular, Qtrly. Inspection is must.

Other

Provisions

15% depreciation on St. line method is to be applied in

case of Old Car

Driving License is not at all required.

Statement of account for the last 6 M. is required.

Car loan finance to business concerns for personal use of

executives shall be outside the purview of corporate

banking and may be sanctioned by officials under vested

powers even in case where existing facilities have been

sanctioned by higher authorities in terms of RBD cir. No.

51 dt. 15/09/09.

III. 5.8.3 HOUSING LOANS

IV. Housing loans have emerged as an attractive avenue for credit

deployment for banks in the recent past. Industry level statistics reveal

that NPAs in this segment is relatively low. Housing loans are fully

secured as they are backed by mortgages of residential properties.

Small housing loans up to Rs 10 lakhs can be classified as priority

sector credit and hence help in achieving/ maintaining the mandated

priority sector lending targets. Risk weightage for housing loans is

only 50 % , enabling expansion of the credit portfolio with lesser

capital requirement. The prevailing lower interest rates, which have

resulted in greater affordability and the tax concessions offered by the

government have made this one of the fastest growing financial

products. Further since the housing loan portfolio typically comprises a

large pool of small and medium sized loans, risk is distributed over a

large number of accounts, which is ideal from Risk Management point

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CREDIT APPRAISAL

of view. Hence growth of quality assets under Housing Finance is one

of the major areas of focus for the bank.

  PNB-(Punjab National Bank) Home Loan offers the most

consumer friendly home loans and housing finance schemes at attractive rates.

PNB Housing Loans, with an aim to make purchase and construction of homes

a comfortable task, provides fixed as well as floating home loans at different

rate of interest for different tenures. PNB Housing Finance covers 80% of the

cost of your home or renovation / repairing of your home loan up to Rs. 10

Lacs for buying land and up to Rs. 2 Lacs for furnishing can be availed from

PNB Home Loan. 

The details of housing loan product of Punjab National Bank

regarding its purpose, eligibility criteria, assessment, processing,

documentation, cut back, margin, pre-sanction follow ups, etc. are as foll

2. HOUSING FINANCE (PUBLIC)

Eligibility Individual & Joint Owners

Purpose &

Extent

Purchase of Plot Rs.20 lac. However, RM &

above may consider Loan

upto 50 lac.

Construction of House Need based

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Semi -built House/flat from

Pvt Builders

Small/Medium branch Rs.

10 lac

Large branch Rs.

20 lac

ELB/VLBs Rs.

40 lac

CH (AGM) Rs.

100 lac

CH (DGM) Rs

100 lac

GM

Rs.150 lac

Repair & Renovation Rs. 20 lac

Cost of furnishing Max. 10% of the loan upto

maximum of Rs. 2.00 lac

Pari pasu Charge CH powers up to 20 lac to

Govt. Employees

Freehold &

Lease hold

The loan can be granted both for freehold and for

leasehold property.

In case of Leasehold, loan can be granted on the basis

of P/A from original allottee where

DDA/PUDA/HUDA permit conversion of leasehold

into freehold property.

Otherwise advance is not permitted against plots

purchased on Power of Attorney basis.

Capital

Requirement

Loan limit up to 30 lac Risk Weight is 50%

Loan limit above 30 lac Risk Weight is 75%

LTV Ratio more than

75%

Risk Weight is 100%

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Margin Land/Plot 40%

Construction/repair/

addition

25%

Rate of

Interest

Rate of Interest as per LA Circulars issued from time to

time.

0.50 % extra will be charged on H/L for 3rd House.

The interest can be fixed or floating

Option can be changed from fixed to floating and vice

versa with flat charges of 2% fee on Balance

outstanding

Fixed Interest rate be reviewed/reset after a block of 5

years in respect of loans disbursed on or after

1.8.2006.

Concessional

Rate of

Interest for

Defense

Employees

Bank has decided to extend concessions to Defense

personnel who are raising Housing Loans under bank’s

regular Housing Loan scheme for public as under:

25 bps relaxation in interest rates

50 bps relaxation in processing fee

These relaxations are to be made applicable in all new

cases where defense personnel avail housing loan either in

single name or along with spouse.

(RBD Cir. No. 11/2010 dt. 16.2.2010)

Repayment Maximum 25 years including Moratorium period of 18

months

Installment can be fixed up to maximum age of 65

years. Hub Incharge of Scale-IV and above besides

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Circle Head can relax the age up to 70 years,

Repayment of loan for

repair/renovation/addition/alteration restricted to 10

years including moratorium period of 6M.

All deductions should not exceed 50% of Gross

monthly income. However where gross monthly salary

is above 50000/-, the deduction can be up to 60% and

if gross monthly salary is above 100000/-, the

deduction can be up to 70% with the permission of

CH. The income of earning spouse and children can be

taken into account.

The Income of spouse and earning children can be

taken into account provided they are made co-

borrowers.

Father/mother can also be made co-borrowers in cases

where property is in the single name of his/her son and

also clubbing of their income is permitted for

determining eligibility criteria.

Minimum 24 advance cheques should be obtained. As

and when, 6 cheques remain, fresh lot be obtained. Out

of 24, 23 cheques should be of installments and 1

cheque should be of the amount equal to the balance

amount.

Graduated

EMI

PNB offers benefit of graduated EMI. This means that the

customer has the option of choosing EMI that can

increase or decrease during repayment period rather than

being given a fixed EMI over repayment tenor.

Upfront fee 0.90 % of loan amount + service tax & education cess

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CREDIT APPRAISAL

(10.30%) on loans above 300 crore.

Processing fees @ 0.50% of loan amount (max. 20000)

+service tax for loans up to 300 crore.

Documentation

charges

Rs.1350 + service tax

Security Equitable/Registered Mortgage of Immovable Property

Tripartite agreement be executed amongst Housing

Board/Dev Authority/Coop Society/Builder, the

borrower and the bank where mortgage cannot be created

immediately. In such cases, 3rd party guarantee is also to

be obtained.

EM of other IP or pledge of NSC etc. up to 125% of loan

amount if property is being purchased from 1st P/A

holder and where there is delay in execution of Tripartite

agreement or where the mortgage of property is not

possible being an ancestral property (without title deeds)

or Lal Dora Land.

Verification of security is required once in 2 years. In

case of NPAs accounts, security is to be verified on Half

yearly basis.

Guarantee In general, no guarantee is to be asked for. But while

preparing RBL score sheet, if score is less than 50%,

then 3rd party guarantee can be obtained to raise score of

the applicant.

Insurance In case of building at Re-construction cost.

Page 123

CREDIT APPRAISAL

Priority

Sector

inclusion

Repair & Renovation Rs.1.00 lac (Rural &

Semi/Urban)

Rs.2.00 lac (Urban)

Others Rs. 20.00 lac

Other

features

Loan can be sanctioned by the branch/hub near to the

present place of work/posting/residence of the borrower.

However, if the property is situated at other place,

services of branch/hub located at that center may be

availed for verification of Security and NEC/Valuation

etc.

Loan can be granted even if property is in the name of

wife/parents provided that the owner is made co-

borrower.

Loan can be granted for 2nd house in the same city.

Loan can be granted for purchase of house for rental

purpose.

For take over, permission of higher authority is not

required

Important

conditions

Loan cannot be granted

For construction in Un-authorized colonies

If property is to be used for commercial purpose

Without approved Map

( In Compliance of Delhi High Court Orders)

Pre-payment charges of 2% be recovered on account

being taken over by another bank. In case, the loan is

pre-paid out of own sources or the loan is taken over

by another bank with in 30 days from date of circular

Page 124

CREDIT APPRAISAL

by which either the interest is raised or any important

term or condition is changed, there will be no pre-

payment charges.

Flat pre-payment charges of 2% be recovered from

borrowers who pre-pay without construction on the

plot before 5 years.

Powers of concessions in rate of interest/other

charges stand withdrawn vide RBD cir no. 52/07 dt.

13.11.07.

In case, the construction of house is not completed

within 3 years or in case the plot is sold, penal interest

@2% over and above the applicable rate be charged.

Expression

of Interest

It is a letter issued by the bank/branch wherein the lender

expresses intention to make advance to the intended

borrower on the basis of eligibility criteria subject to the

fulfillment of terms and conditions.

Grih Raksha

Kavach

It is Mortgage Reducing Term Assurance Policy issued in

Tie up arrangement with TATA-AIG. There is one-time

premium of 2.5% (approx) and that amount can also be

financed. The coverage of the scheme is 1-20 years. The

sum assured is between Rs.10000 to Rs. 1.00 crore. In case

of death of the borrower, receipt from insurance company

can be utilized towards adjustment of loan amount as per

amortization table. Prior permission of TATA-AIG is

required if amount is over Rs. 80.00 lac.

Iffco Tokyo

general

insurance co.

The coverage for accidental death and permanent total

disability (due to accident) along with mandatory insurance

“Fire Policy – including earthquake” is offered in tie up

Page 125

CREDIT APPRAISAL

arrangement with Iffco Tokyo General Insurance Co. Ltd.

To all existing as well as new borrowers.

Earnest

Money

Deposit

Scheme

To meet the requirement of earnest money to apply for

plot/flat/house from State Housing Boards and Urban

Development authorities.

These authorities undertake to refund or issue allotment

letter to the bank subject to eligibility of the bank for

proposed loan and future requirement of Housing Loan.

Extent of loan is 90% of EMD or max. Rs 2.00 lac in the

shape of Demand Loan

ROI is BPLR – 1.75%

Repayment through Refund order/Housing Loan/Bullet

Payment.

Guarantee clause deleted

OD Facility

to existing

H/L

borrowers

OD facility can be allowed to existing Housing Loan

borrowers there is no IR irregularity. Other features of the

scheme are as under:

Minimum 50000/- and Maximum Rs. 5.00 lac.

Additional limit and present o/s should not exceed

75% of current market price of the house so as to

maintain margin of 25%.

Upfront fees is NIL and documentation charges are

Rs. 500/-.

Take home salary should not be less than 40% of

gross salary.

Loaning powers are SB-Nil, MB- Rs.4.00 lac, LB,

ELB & VLB

Rs. 5.00 lac.

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CREDIT APPRAISAL

ROI is equal to BPLR

After HL is repaid, OD can be continued/ renewed

provided the sanctioning authority is satisfied about

repaying capacity of the borrower and Value of

security.

OD facility for personal use should not be

sanctioned to the borrowers, who have availed

loan for plot , construction on which is yet to be

completed in terms of RBD cir. no. 43 dt.21/08/09

On review, it has been decided to do away with the

condition of minimum 2 year of repayment track record of

the borrower for considering OD facility up to 5 lac.

However this is subject to compliance of all other terms and

conditions such as KYC norms, CIBIL database, takeover

guidelines, security norms, maintenance of margin etc.

This facility is outside the purview of “Hub and Spoke“

model in the accounts of existing HL borrowers.

(RBD Cir. No. 64 dt. 19.12.2009)

PNB Flexible

Housing

Loan

Scheme

This is an attractive variant of Housing Loan Scheme

offered by the PNB for its customers. Under this scheme,

OD facility is made available to the HL borrower. He can

deposit his savings and withdraw the same as per his

requirement. The features of the scheme are as under:

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CREDIT APPRAISAL

Eligibility Age of the applicant must be less than 50.

Existing HL borrowers can also apply

provided their loan account is regular and no

IR irregularity persists.

Purpose All purposes as per original scheme except

Purchase of Land / Plot.

Extent Term Loan 80%

Overdraft 20%

After lapse of 3 years, enhancement in

OD will be allowed equal to reduction in

Term Loan and thereafter on yearly basis.

After lapse of 5 years, 20% increase in

original limit is allowed in the shape of

TL/OD for personal needs.

Market Value of Property should be

sufficient to cover the margin of 25%

After attaining age of 55 years, OD

facility will be reduced on monthly basis

so that whole limit and T/L are adjusted

by the end of 65 years.

Maximum OD limit should not exceed

50% of Total limit.

HL can be sanctioned by the branch/hub

situated near the

workplace/posting/residence.

Security verification can be done by

nearby branch.

Rate of Interest as given above in the

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CREDIT APPRAISAL

table in Housing Loan scheme (general)

For Overdraft portion, R/I is equal to BPLR

IV. 5.8.4 Personal Loan For Pensioner & Public

Two types of personal loans are being offered by PNB. Personal loan for

pensioner is special category of retail lending scheme being offered by Punjab

National Bank to pensioner. The main intension of this loan is to meet each and

every personal needs including medical expense of senior citizen. Details

regarding the same are mentioned below.

Eligibility Pensioners drawing pension from the branch, Family

Pensioners, DPDO Pensioners, Ex-employees

Purpose &

Extent

Personal needs

Up to 75 years of age: 1.50 lac (Minimum Rs. 25000/-)

Above 75 years of age: 0.70 lac (Minimum Rs. 25000/-)

Limit

calculation

Equivalent to 18 months net pension or Rs. 150000 (for

borrowers up to 75 years’ age) and 12 months net pension

or Rs 70000 (for borrowers above 75 years’ age)

whichever is lower. For defense retirees, the loan

equivalent to 20 M net Pension can be granted. Take home

Pension should not be less than 50% of monthly pension

Nature DL or TL or OD on monthly reducing DP

Margin NIL

Guarantee Personal guarantee of spouse eligible for family pension

or any other family member or 3rd party guarantee.

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CREDIT APPRAISAL

Upfront fee NIL

Documentation

charges

Rs. 270/- plus service tax

Repayment 60 EMIs . 24 EMIs in case age is more than 75 years which

can be extended up to 48 months by the sanctioning

authority.

Miscellaneous PPO be kept with the loan documents

Affidavit from the pensioner that present disbursing

branch will not be changed without bank’s consent.

The loan can be availed more than once only after

adjustment of earlier loan

PERSONAL LOANS FOR PUBLIC

Eligibility Only PNB Account holders are eligible. Minimum 6

months’ salary should be routed in the account or 6 months

satisfactory transaction record for non salary saving

accounts.

Permanent Defence, CRPF, BSF & ITBP Personnel

(Not to be granted to those who are due to retirement

within next 24 M.

Confirmed permanent employees of Central/state

Govt./PSUs/Reputed Co./Schools/Institutions who

fulfill any of the following 2 conditions:

Route of salary through branch

Check-off facility

Professionally qualified practicing doctors viz.

MBBS, BDS and above having customer

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CREDIT APPRAISAL

relationship with PNB at least for 6 months having

annual income of Rs. 4.00 lac and above. Doctors

should be tax payers for 3 years and ITRs be kept on

record.

Check off

Facility

It means that the employer undertakes to deduct monthly

installment from the salary and remit the same towards

adjustment of the loan till its liquidation and also confirms

attachment of terminal dues of the borrower/employee.

Purpose &

Extent

Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00

lac or 20 times net salary whichever is lower depending

upon the repaying capacity & Rs. 5.00 lac for those

salaried persons who have completed 3 years in the present

organization and drawing net monthly salary not less than

Rs. 30000/-.

Nature TL or OD

Sanction and

Disbursement

All branches can generate leads for processing at Retail

Hubs/CCPCs. However disbursement can be made only by

branches having recovery percentage of not less than

90% under Personal Loan segment as at end of previous

half year.

Minimum net

monthly

income

Metro Rs. 15000/- p.m.

Urban Rs. 12500/- p.m.

SU & Rural areas Rs. 10000/- p.m.

Defence personnel and Teachers Rs. 7500/- p.m.

Margin NIL

Repayment TL – 60 EMIs

OD- Reducing DP spread over 60 M.

Defence Personnel – 36 M.

Amount of EMI should not be more than 50% of net

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CREDIT APPRAISAL

monthly income.

60 advance cheques (maximum) signed by the borrower

along with letter of deposit be obtained. Obtention of

advance cheques is applicable where check off facility is

not available.

Guarantee Suitable 3rd party guarantee. RM/CM may waive

RBL Sheet PNB Score system will be applicable and the applicant will

have to score at least 50% marks to avail loan.

Upfront fee % of loan amount + service tax

NIL for defense personnel.

Docm. Charges Rs. 270/- up to Rs. 2.00 lac. Rs. 450/- Above Rs. 2.00 lac

+ ST

NIL for defense personnel.

Other

Requirements

In case of Army personnel, a copy of authority letter

be sent to Controller of Defense Account (CDAO)

Pune so that salary is remitted till liquidation of loan

Statement of account for at least 6 m. be obtained.

Affidavit that no other loan from other bank is

availed be obtained.

Copy of IT return for previous 3 years be obtained.

Form 16 be taken if loan is granted to employee.

A Registered letter be sent to the employer

informing about details of loan raised by the

employee.

RBD Cir. No.

27/09 dt.

26.5.2009

It is clarified that the branches eligible for

disbursement/maintaining the accounts shall obtain

blanket permission from CH for disbursement in the

next 25 accounts submitting performance of the

branch under the portfolio.

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CREDIT APPRAISAL

The genuineness of salary certificates be independently got

verified from HR Deptt. Of the employer of applicant.Hubs

should ensure drawing of CIRs from CIBIL Data base for

considering request of Personal Loans.

V. 5.8.5 PNB Baghban scheme for senior citizen

PNB is the first Public Sector Bank to come out with a Reverse Mortgage

concept based product for senior citizen titled "PNB Baghban". The product

addresses one of the very important requirements of the society in the fast

changing culture of Indian society. The main objective of this scheme is to

address the financial needs of senior citizens owning self occupied property

(house), for leading a decent life. The salient features of the product are given

hereunder:

Eligibility Senior citizens owning Self-occupied property. If property

in single name, there must be will in favors of spouse and it

should be registered. In case of joint property, one of the

spouses must be of 60 years and above. The other spouse

should be at least 58 years old. If there is no spouse, loan

will be made in favor of single.

Purpose &

Extent

To lead a decent life

Maximum qualifying amount can be Rs. 1.00 crore

which will depend upon realizable value of property

after maintaining margin of 20%. The monthly

payment will be made to the borrower on the basis of

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CREDIT APPRAISAL

reverse mortgage annuity table.

Margin 20% of realizable value of the property to arrive at the

qualifying amount

Income

criteria

No

Rate of

Interest

10.5% with reset clause of 5 years.

Disbursement

of loan

In the shape of monthly instalments (to be calculated on

reverse annuity basis) during loan tenor of 15-20 years for

age group of individuals between 60-70 years and 10-15

years for age group of over 70 years or till death of last

surviving spouse, whichever is earlier.

For example, if Qualifying amount is Rs. 1.00 lac,

On 10 year tenor of loan, monthly installment will be Rs.

475/-, On 15 year tenor, monthly instalment will be Rs.

230/- and on 20 year tenor, monthly instalment will be Rs.

125/-

The series of monthly instalments would continue after

death of first spouse during life time of surviving spouse.

Tenor of loan Age group of 60-70 years 15-20 years

Age group above 70 years 10 –15 years

Insurance Against fire, Earthquake and other calamities at the cost of

the borrower

Security EM of IP in favor of the bank. Valuation of property to be

got done from approved valuer. Revaluation be also got

done once in a span of 5 years.

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CREDIT APPRAISAL

Upfront fee Amount equal to half month’s loan subject to maximum of

Rs. 15000/- + Service Tax @10.30%

Docm.

Charges

NIL

Repayment The loan becomes due for payment after 6 months from

death of both the spouses. In case the loan is not repaid by

legal heirs within 6 months from the death, the bank is

within its right to sell the property for adjustment of the loan

in case the consent of the legal heirs is not received within 6

months from the death of last survivor.

Others Residual life of property should be at least 20 years.

Purpose of loan should not be speculation or trading.

It should be ensured that the will executed by the

borrower is the last will.

Life certificate is to be obtained once in a year in

November.

Age of

Property

Residual life of property should be at least 20 years. A

certificate from architect at the time of first valuation be

obtained. Revaluation of property will be done once in 5

years.

Ancestral

property as

security

Now it has been decided to accept ancestral property

provided bank is satisfied that there are no other legal heirs

or original title deed is not available. For this, documentary

evidence is required. Circle Head will deal such proposals.

TERM

LOANS

UNDER PNB

BAGHBAN

A lump sum Term loan can be sanctioned up to Rs. 15.00

lac. The cases can be considered on selective basis by HO

only for medical purpose to senior citizens for treatment of

self, spouse and dependents.

Page 135

CREDIT APPRAISAL

SCHEME

Amendments

in PNB

Baghban

Scheme

Following two amendments have been carried out in IT Act,

1961. 1. Reverse Mortgage does not tantamount

to transfer; therefore there is no Capital Gain Tax. Income

tax is levied only at the time of alienation of Mortgaged

property by mortgagee for recovery of loan. 2. Stream of

payment received by Sr. Citizen would not be treated as

Income. Therefore, bank has to obtain the following at the

time of application of loan:

Cost and year of acquisition of Capital asset.

Cost and year of improvement.

PAN No. of all legal heirs.

Changes, if any made in the Registered Will.

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CREDIT APPRAISAL

CASE STUDY-1

Details of case:

Company:- Akshat Polymers

Firm:- Partnership Firm (M/S Umiya Polymers)

Page 137

CREDIT APPRAISAL

* Shri Amrutbhai Laljibhai Desai

* Shri Gunvantbhai Ambaramdas Patel

* Shri Natvarlal Mohanlal Patel

* Shri Dharamsinhbhai Lallubhai Desai

* Shri Kanjibhai Maljibhai Desai

Industry:- Manufacturing

Activity:- Maufacturing of HDPP woven sacks

Segment:- SSI

Date of Incorporation:- 19.11.07

Banking arrangement:- Sole Banking

Regd. & Admin. Office:- RS No. 840,

Kadi Thol Road,

Tal-Kadi, Dist-Mehsana

The unit will have installed capacity of 2520 MT. The unit is expected to start

commercial production from first week of September, 2008. The capacity

utilization for the year 2008-09 has been projected at 70% of installed capacity

in terms of the utilization of the machines. Accordingly the unit is projected to

achieve a sale of Rs.9.26 crores for the year 2008-09 in the first six months of

operations.

Further, the unit is projected to achieve capacity utilization of 80% during the

year 2009-10 (the first full year of operations) and accordingly the sale for the

Page 138

CREDIT APPRAISAL

year is projected at Rs.19.77 crores. The projections are considered acceptable

in view of the following factors:

i) The unit plans to initially market its product in Gujarat, Maharastra,

Rajasthan and sale to Central Govt. who purchases the HDPP woven

sacks for grains through open tenders. The unit has started negotiating

for booking of the orders for the proposed plant and results are

promising as advised.

ii) HDPP woven sacks are widely used as packaging material in Cement,

Fertiliser, storage of the AGL commodities. All these segments are

reported to have good demand for the HDPP/PE woven sacks in the

Indian market.

iii) As per ICRA report, grading and research services (2006) Flexible

packaging sector is expected to grow at the rate of 12.40%.

iv) The promoters have sufficient experience in the line of activity. The

promoters had already made negotiations of the some of the industries

as detailed under for selling the HDPP woven sacks:

Indian Farmers Fertilizers Company Limited

GUJCOMASOL

Birla cement

Sanghi Cement

Ambuja cement

Various grain & Food Export units of Gujarat, etc.

v) The firm has also started marketing activity for their products by

making personnel contacts & writing introductory letters to potential

customers & as the promoters are in the same line of business activity

for the last 15 years they are having very good market contacts for the

sales of the Finished Goods.

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CREDIT APPRAISAL

vi) The orders worth Rs.2.50 crores is expected to be finalized by end of

August, 2008 and before commissioning of the plant as advised.

Proposal:

Sanction for;

i) FBWC limits of Rs.2.25 crores

ii) Fresh Term Loan of Rs.2.00 crores

Approval for:

i) CRA rating of SB- 6 (71 marks) based on projected financials as on 31.03.2010.

ii) Pricing for WC facilities @1.00% above SBAR as applicable for SB-5 minimum

@13.75and for TL 1.50% above SBAR minimum @14.25%

Performance & Financial Indicators: (Rs. in Crores)

 Year 2009 2010 2011 2012 2013 2014

Installed cap Qty.

(MT/pa.)

2520 2520 2520 2520 2520 2520

Net Sales Qty.

(approx) (MT) 1029 2016 2091 2142 2217 2268

Net Sales (Value) 9.26 19.77 20.58 21.09 21.82 22.34

(Export) 0.00 0.00 0.00 0.00 0.00 0.00

Operating profit 0.44 1.18 1.19 1.23 1.31 1.33

Profit before tax 0.43 1.17 1.18 1.22 1.30 1.32

PBT/Net sales (%) 4.64 5.92 5.73 5.78 5.96 5.91

Profit after tax 0.29 0.78 0.79 0.82 0.87 0.88

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CREDIT APPRAISAL

Cash accruals 0.66 1.10 1.09 1.15 1.24 1.32

PBDIT 1.20 2.04 1.96 1.97 2.02 2.05

Paid up capital 0.95 0.95 0.95 0.95 0.95 0.95

Tangible net worth 1.23 2.01 2.80 3.62 4.49 5.38

Adjusted TNW

1.73 2.51 3.30 4.12 4.99 5.88

TOL/TNW 4.11 2.50 1.67 1.19 0.88 0.66

TOL/Adjusted TNW

2.64 1.80 1.27 0.92 0.81 0.62

Current ratio 1.34 1.52 1.53 1.53 1.57 1.81

NWC 1.01 1.71 2.40 2.57 2.74 3.28

Balance Sheet: (Rs. In crores )

Sources of funds 31.03.2009 31.03.2010

Share Capital 0.95 0.95

Reserves and Surplus 0.29 1.07

Secured Loans : short term CC 2.25 2.25

: long term TL 2.00 1.60

Unsecured Loans 0.50 0.50

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CREDIT APPRAISAL

Deferred Tax Liability

Total 5.99 6.37

Application of Funds

Fixed Assets (Gross Block) 2.67 2.67

Less Depreciation 0.37 0.69

Net Block 2.30 1.98

Capital Work in Progress

Investments

Inventories 1.73 2.13

Sundry debtors 1.85 2.40

Cash & bank balances 0.15 0.15

Loans & advances to suppliers of

Raw material / spares

0.14 0.12

Advance tax 0.10 0.23

( Less : Current liabilities ) 0.31 0.67

(Less : Provisions )

Net Current Assets 3.66 4.36

Misc. Expenditure

(To the extent not written off or

adjusted )

Non-Current Assets/ Deposits 0.03 0.03

Total 5.99 6.37

Movement in TNW: -

Movement in TNW Projected

31.03.2009 31.03.2010 31.03.2011

Opening TNW 0.00 1.23 2.01

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CREDIT APPRAISAL

+ PAT 0.29 0.78 0.79

+ Inc. in Equity / Premium 0.95

+/- Change in Int. Assets -0.01

+/- Adj. of prior year exp.

- Dividend payment

Closing in TNW 1.23 2.01 2.80

Bank Income Analysis (Rs. in crores)

From Projection

31.03.2009

Projection

31.03.2010

WC Int. 0.16 0.27

TL Int. 0.14 0.29

LC - -

BG - -

Bill - -

Others loan processing 0.03 0.01

Total 0.33 0.57

Deviations in Loan Policy:

Parameters Indicative Min/Max

level

as per loan policy

Company's

level as on

31.03.2009 @

Company's level

as on 31.03.2010

Liquidity 1.33 1.34 1.52

TOL/TNW

TOL/Adj. TNW

3.00 4.11

2.64

2.50

1.80

Average gross DSCR (TL) 1.75 2.54 2.54

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CREDIT APPRAISAL

Debt / equity

Debt/Quasi equity

2:1 2.01:1

1.15:1

1.03:1

0.64:1

Any others - - -

Defaulters List:-

Whether names of promoters, directors, company, group concerns figure in :

RBI defaulters’ list dated 30.09.2007 No

Wilful defaulters’ list dated

31.12.2007

No

ECGC caution list No

Warning signals / Major irregularities

in

Credit audit:

inspection report :

Other audit reports :

Not applicable new unit

Adverse observations in Balance

sheet

Not applicable new unit

Adverse observations in Auditors

report

Nil.

Any NPAs among associate concerns None

About unit and the promoters:

AKSHAT POLYMERS (AP) has been established as a partnership firm on 19 th

November, 2007 at Kadi. The partnership was constituted for manufacturing

and selling of HDPP woven sacks to be manufactured from HDPP granules.

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CREDIT APPRAISAL

The firm consists of total six partners. The brief background of the partners is as

follows :

Name Age Brief Background

M/s Umiya Polymers 46 Sri Prahaladbhai Hargovandas Patel is

the main partner in M/s Umiya

Polymers with 30 share. Sri

Prahaladbhai is SSC and have 10

years of experience as Production

Manager in Asia Woven Sacks Ltd.,

Kadi who are engaged in similar

activity. M/s Umiya Polymers are

engaged in plastic waste recycling at

Kadi.

Sri Amrutbhai Laljibhai Desai 43 Sri Desai is SSC and have 15 years of

experience as Production Manager in

reputed Gopala Polyplast Ltd., Santej.

He had good contacts in the market

and will look after production

department & raw material purchases.

Shri Dharamsingbhai Lallubhai

Desai

35 Sri Dharamsinhbhai is a partner in the

local unit M/s Ajay Ginning

Industries, Kadi

Shri Kanjibhai Malibhai Desai 44 Sri Kanjibhai is a farmer by profession

and sleeping partner.

Shri Gunvantbhai Ambaramdas Patel 42 Sri Gunvantbhai also is a partner in

M/s Ajay ginning Industires, Kadi and

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CREDIT APPRAISAL

has been inducted in the partnership as

a investment partner.

Shri Natvarlal Mohanlal Patel 48 Shri Natvarlal Patel is a B.Com. and

has 10 years of experience in

accounting. He is also partner in M/s

Shiv Shakti Steel, Kadi. He will be

looking after general administration

and accounts of the firm.

The overall quality of the management is considered satisfactory.

Commercial viability: (Rs. in crores)

Year ending

31st March

2008-

09

2009-10 2010-11 2011-12 2012-13 2013-14 Total

Net Sales 9.26 19.77 20.58 21.09 21.82 22.34

Net Profit 0.29 0.78 0.79 0.82 0.87 0.88

Cash Accruals 0.66 1.10 1.09 1.15 1.24 1.32 6.56

Interest on

TLs

0.16 0.27 0.22 0.16 0.11 0.05 0.97

Sub Total

(A)

0.82 1.37 1.31 1.31 1.35 1.37 7.53

Total

repayment

0.00 0.40 0.40 0.40 0.40 0.40 2.00

Interest on TL 0.16 0.27 0.22 0.16 0.11 0.05 0.97

Sub Total (B) 0.16 0.67 0.62 0.56 0.51 0.45 2.97

DSCR

(Gross)

5.13 2.04 2.11 2.34 2.65 3.04

Net DSCR - 2.75 2.73 2.88 3.10 3.30

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CREDIT APPRAISAL

Average

Gross DSCR

2.54

Average Net

DSCR

3.28

Break-even and sensitivity analysis and whether acceptable: (Rs. in crores)

Break even analysis 31/03/09

31-Mar-

10

31-Mar-

11

30-Mar-

12

31-Mar-

13

31-Mar-

14

Capacity Utilization 70% 80% 83% 85% 88% 90%

Net Sales (A) 9.26 19.77 20.58 21.09 21.82 22.34

Variable costs            

Raw material 8.74 17.13 17.77 18.20 18.84 19.27

Consumable spares 0.00 0.00 0.00 0.00 0.00 0.00

Power and Fuel 0.26 0.47 0.50 0.53 0.56 0.59

Other operating Exp. 0.09 0.13 0.15 0.16 0.17 0.18

Stock Changes 0.73 0.39 0.06 0.03 0.04 0.04

Total Variable

Cost(B) 8.36 17.34 18.36 18.86 19.53 20.00

Fixed Costs            

Direct Labour 0.08 0.13 0.14 0.15 0.16 0.17

Selling, Admin. &

General Expenses 0.06 0.10 0.11 0.12 0.13 0.14

Interest Expenses 0.40 0.55 0.48 0.42 0.35 0.29

Depreciation 0.37 0.32 0.30 0.33 0.37 0.44

Total Fixed Cost ( C) 0.91 1.10 1.03 1.02 1.01 1.04

Contribution (D=A-B) 0.90 2.43 2.22 2.23 2.29 2.34

Contribution ratio

(E=D/A) 0.10 0.12 0.11 0.11 0.10 0.10

BE sales (F=C/E) 9.10 9.17 9.36 9.27 10.10 10.40

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CREDIT APPRAISAL

BE sales as % of Net

Sales 98.27 46.38 45.48 43.95 46.29 46.55

Interfirm Comparison: (To be given only where data from comparable

units is available.)

(Amt in Cr)

Name of Company FBL NFBL Year Sales PBT /

Sales

%

TOL /

TNW

CR

Ahmedabad Packaging

Industries Ltd.

3.30 1.20 2007 23.11 2.16 1.47 1.16

Singhal Industries Pvt.

Ltd

6.70 -- 2010 15.19 6.52 2.901.90

Asia Woven Sacks Pvt.

Ltd.

7.44 1.00 2008 22.98 4.53 3.141.08

Akshat Polymers 4.25 -- 2010 19.77 5.92 2.501.52

Raw material – The major raw material for this plant is HDPP in the form of

granules. This raw material is available locally by sales & distribution network

of the major suppliers as under:

Reliance Industries Limited

Nand Agencies

Labdhi International

Hadlia petrochemicals Ltd.

Sharada Polymers

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IPCL

The raw materials are purchased from the suppliers against the advance

payment only and cash discounts are offered resulting in the increase n

profitability. Any variation in the cost of raw material is proposed to be passed

on to the finished products and will not affect the profitability.

Analysis:-

The firm is into manufacturing of HDPP woven sacks which are widely

used as packaging material in cement, fertilizer, etc.

As per ICRA report, grading and research services (2006) Flexible

packaging sector is expected to grow at the rate of 12.40%.

The promoters have sufficient experience in the line of activity. The

promoters had already made negotiations of the some of the industries as

detailed under for selling the HDPP woven sacks:

GUJCOMASOL

Birla cement

Sanghi cement

Ambuja cement

Various grain & Food Export Unit of Gujarat

The orders worth Rs.2.50 crores is expected to be finalized by end of

Agust, 2008 and before commissioning of the plant as advised.

The company’s borrower rating is SB-6 based on projected financials as

on 31.03.2010 (the first full year of operations).

Projected financials are in line with the financials of the some of the unit

in similar line of activity and production level.

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CREDIT APPRAISAL

The promoters are having experience of more than 15 years in the line of

the activity.

The affairs of the firm are expected to be managed on professional lines

based on their past experience.

The conduct of accounts of associate with the existing bankers has been

satisfactory.

The short and medium term outlook for the industry is stable

Availability of collateral security reflected in collateral coverage of

50.566%.

Gross average DSCR of 2.54.

Average security margin of 48%.

The company has adequate management skills and production/marketing

infrastructure in place to achieve the projected trajectory. There is steady

demand for the product.

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CASE STUDY- 2

Details of case study

Company:- Janak Transport Co.

Firm:- Partnership

* Shri Harisinghbhai Lavjibhai Chaudhari;

* Shri Jesangbhai Lavjibhai Chaudhari;

* Shri Vinodkumar Lavjibhai Chaudhari;

* Shri Pratapbhai Lavjibhai Chaudhari;&

* Shri Janakkumar Jesangbhai Chaudhari

Industry:- Transport Activity

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CREDIT APPRAISAL

Segment:- C& I

Date of Incorporation:- 03.09.82

Banking with SBI since:- 16 years as a current A/C holder

Banking arrangement:- Multiple Banking Arrangement

Regd. & Admin. Office:- Opp. Simandhar Flat,

Nr. Pashabhai Petrol Pump,

Highway, Mehsana.

Janak Transport Co. is a partnership firm established in 1982 for carrying a

transport business.

As the company is in this business since incorporation & the unit has good

contracts with ONGC since last 26 years so it has a good repo with ONGC.

As the company has a good repo with ONGC, the ONGC outlook of the

business is considered positive.

The firm has approached for term loan of Rs. 295 lacs to finance the purchase of

Mahindra-Bolero. The total project cost is estimated to be Rs. 363.44 lacs.

Brief of Contract:

(1). Fixed hire charges/ taxi/ month: Rs. 29150

(with fixed 3000 Km run/ month & 12 hours duty/ day)

(2). Additional/ km charges beyond 3000 km. Rs. 3.57

(3). Duration of contract = 3 Years

Proposed Credit Requirement:

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Fund Based = Rs. 295 lacs

Performance Details

a) PERFORMANCE AND FINANCIAL INDICATORS:

(Rs. in lacs)

  Aud. Aud. Esti. Proj. Proj. Proj. Proj.

31st March 2007 2008 2009 2010 2011 2012 2013

Net Sales 501.78 546.65

713.8

2

898.6

5

898.6

5

898.6

5

898.6

5

Operating Profit (after

interest) 149.64 182.92

234.2

4

326.6

9

374.3

2

404.0

8

425.0

6

PBT

1.20 2.90 22.48 92.62 125.4

7

143.5

1

151.9

6

PBT/Sales (%) 0.24 0.53 3.15 10.31 13.96 15.97 16.91

PAT1.20 2.90 22.48 92.62 125.4

7

143.5

1

151.9

6

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CREDIT APPRAISAL

Cash Accruals

39.05 40.51 129.2

5

233.7

4

224.2

5

212.6

6

200.3

6

PBDIT

54.44 52.41 150.0

1

266.9

9

247.2

1

226.2

0

203.7

2

Paid up Capital

21.04 22.56 91.00 113.4

8

181.1

0

256.5

7

340.0

8

TNW

21.04 22.56 113.4

8

181.1

0

256.5

7

340.0

8

427.0

4

Adjusted TNW 21.04 22.56

113.4

8

181.1

0

256.5

7

340.0

8

427.0

4

TOL/TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27

TOL/Adjusted TNW 12.22 12.80 5.04 2.15 1.01 0.47 0.27

Current Ratio 1.57 1.42 2.22 2.53 2.71 3.80 6.47

Current Ratio (Excl.

TL instalments)

2.34 1.97 3.93 4.49 5.66 5.83 6.47

NWC 100.20 103.87

386.1

4

349.1

8

323.8

0

361.2

9

438.2

5

b) Synopsis of Balance Sheet :

Sources of funds 31.03.2007 31.03.2008

Share Capital 21.04 22.56

Reserves and Surplus

Secured Loans : short term 2.57 14.66

: long term 102.87 100.10

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CREDIT APPRAISAL

Unsecured Loans 39.92 36.21

Deferred Tax Liability

Total 166.40 173.53

Application of Funds

Fixed Assets (Gross Block)

Less Depreciation

Net Block

Capital Work in Progress

Investments 52.48 39.3

Inventories (Movable Assets) 110.59 134.66

Sundry debtors 92.61 78.70

Cash & bank balances 11.93 48.15

Loans & advances to

subsidiaries and group companies

Loans & advances to others 10.58 10.49

( Less : Current liabilities ) 109.22 136.74

(Less : Provisions ) 2.57 1.03

Net Current Assets 113.92 134.23

Misc. Expenditure

(To the extent not written off or

adjusted )

Total 166.40 173.53

c) Movement in TNW (Rs. in lacs)

2007 2008 2009 2010 2011 2012 2013

Opening TNW 17.63 21.04 22.56

113.48 181.10

256.5

7 340.08

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CREDIT APPRAISAL

Add PAT 1.20 2.90

22.48 92.62 125.47

143.5

1 151.96

Add. Increase in

equity / premium

8.42 10.17 68.44

Add./Subtract

change in intangible

assets

Adjust prior year

expenses

Deduct Dividend

Payment

/Withdrawals

6.21 11.55 25.00 50.00 60.00 65.00

Closing TNW 21.04 22.56

113.48 181.10 256.57

340.0

8 427.04

Appraisal Memorandum for term loan:

Circle: Ahmedabad

Branch: Mehsana

Company: Janak Transport Company(JTC)

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CREDIT APPRAISAL

Term Loan :

a) Proposal: Term Loan of Rs.295.00 lacs under the Transport Plus

Scheme.

b) Project / Purpose: To purchase 59 new Mahindra Bolero under tie-up

arrangement with ONGC.

c) Appraised by: Inhouse examined by the Branch and found to be

economically viable

d) Cost of Project & Means of finance:

Cost Means

MAHINDRA Bolero DI-

2WD

328.6

3

Equity :

68.44

Insurance 15.34

RTO Tax 19.47

WC Margin Debt: 295.00

Total 363.4

4

Total 363.44

e) Remarks on Cost of project & Means of finance (in brief):

Each vehicle shall cost Rs. 6.16 lacs as per details given below:

Basic Price: Rs. 5.57 lacs

RTO : Rs. 0.33 lacs

Insurance : Rs. 0.26 lacs

The cost mentioned above is as per the quotation submitted by Shrijee

Motors, Mehsana.

The firm is required to purchase 59 Mahindra Bolero for this purpose.

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Total cost of vehicle including the insurance and R.T.O. is Rs.363.44

lacs.

The project is proposed to be financed by way of medium term loan

of Rs.295.00 lacs and firm shall raise capital of Rs. 68.44 lacs as a

margin.

Break-even and sensitivity analysis and whether acceptable:

Break even analysis

31/03/0

9

31/03/1

0

31/03/1

1 31/03/12

31/03/1

3

Net Sales (A) 713.82 898.65 898.65 898.65 898.65

Variable costs

Power and Fuel 223.76 253.68 253.68 253.68 253.68

Other operating Exp. 44.89 47.39 48.89 50.89 55.98

Total Variable Cost(B) 268.65 301.07 302.57 304.57 309.66

Fixed Costs

Direct Labour 72.40 85.52 87.52 90.72 94.07

Selling, Admin. &

General Expenses 8.50 9.50 10.50 11.50 12.50

Interest Expenses 20.76 33.25 22.96 13.54 3.36

Depreciation 106.77 141.12 98.78 69.15 48.40

Total Fixed Cost ( C) 208.43 269.39 219.76 184.91 158.33

Contribution (D=A-B) 445.17 597.58 596.08 594.08 588.99

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CREDIT APPRAISAL

Contribution ratio

(E=D/A) 0.62 0.66 0.66 0.66 0.66

BE sales (F=C/E) 336.18 408.17 332.97 280.17 239.89

BE sales as % of Net

Sales 47.10 45.42 37.05 31.18 26.69

Fixed cost with out

depriciation G 101.66 128.27 120.98 115.76 109.93

Contribution (H=A-B) 445.17 597.58 596.08 594.08 588.99

Contribution ratio

(I=D/A) 0.62 0.66 0.66 0.66 0.66

Cash BE sales (J=G/I) 163.97 194.35 183.30

175.39

166.56

CASHBE sales as % of

Net Sales 22.97 21.63 20.40 19.52 18.53

Commercial viability:

Year ending 31st

March

2009 2010 2011 2012 2013 Total

Capacity utilization % 100% 100% 100% 100% 100%

Sales 713.82 898.65 898.65 898.65 898.65

Net Profit 22.48 92.62 125.47 143.51 151.96 536.04

Depreciation 106.77 141.12 98.78 69.15 48.40 464.22

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Cash Accruals 129.25 233.74 224.25 212.66 200.36 1000.26

Interest 20.76 33.25 22.96 13.54 3.36 93.87

TOTAL 150.01 266.99 247.21 226.20 203.72 1094.13

TL / DPG repayments 83.75 132.92 94.58 93.85 43.02 448.12

Interest 20.76 33.25 22.96 13.54 3.36 93.87

TOTAL 104.51 166.17 117.54 107.39 46.38 541.99

Gross DSCR 1.44 1.61 2.10 2.11 4.39

Net DSCR 1.54 1.76 2.37 2.27 4.66

Average Gross DSCR 2.02

Average Net DSCR 2.23

Deviations in Loan Policy/ Scheme:

Parameters Indicative

Min/Max level as

per Scheme

Company's level as on

31/03/2008

Liquidity Min. 1.33 1.42

TOL/TNW Max. 3.00 12.80*

Average gross DSCR (TL) Min. 2.00 2.002

Promoters contribution

(under tie-up)

Min. 10 % 18.86%

profits in the last two Min. Rs.3.00 lacs

with rising trend

Actual profit Rs. 1.20

lacs for year 2006-07 and

Rs.2.90 lacs for year 2007-

08*

Others Nil Nil

Analysis:-

Janak Transport Company is an existing profit making unit

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CREDIT APPRAISAL

The main chunk behind giving loan is that Janak Transport Company is

doing contract with ONGC since incorporation

The promoters are having considerable experience as transport contractor

with ONGC

The unit has got confirm order/ tie-up with ONGC

A letter of authority from ONGC was received, that if Janak Transport

Company will not make the payment than ONGC will directly make the

payment to the bank

The promoters contribution to the project is 18.86% which is above the

margin requirement

The current ratio is 1.42 that is satisfactory

Profits in the last two years:-

Min. Rs. 3 lacs with rising trend

Actual profit Rs. 1.20 lacs for year 2006-07 & Rs. 2.90 lacs for the 2007-

08

If the partners remuneration & interest is included, the profit for the year

ended 31.03.07 & 31.03.08 is Rs. 4.81 lacs & Rs. 6.21 lacs

TOL/TNW should be max. 3 which is 12.80 here, as the co. has done

multiple banking arrangement it has o/s loans with other banks also but

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CREDIT APPRAISAL

the co. is regularly making the payment of loans of principal amount

along with the interest so the loan is given.

Also the contract awarded is backed by guarantee from ONGC regarding

direct payment of monthly bills to SBI. Hence, surety of repayment is

assured.

The bank also checks commercial viability of the company & found that

the DSCR for term loan is 2.02 which is considered satisfactory

Despite that the bank has also done B.E. analysis & found that the B.E.

sales was 47.10% of net sales for this current year

The net sales & PAT of the company is increasing year after year so

overall profitability is good.

The overall projected performance & financial of the unit are considered satisfactory.

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Conclusion

Credit appraisal is a process of appraising the credit worthiness of loan

applicants. The fund of depositors i.e. general public are mobilised by means of

such advances / investments. Thus it is extremely important for lender bank to

assess the risk associated with credit, thereby ensure the security for fund

deposited by depositors. Therefore my analyses regarding credit appraisal

procedure of Punjab National Bank are as follows:-

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CREDIT APPRAISAL

In case of retail lending bank strictly follow it’s circular and fulfils all

requirement of necessary documents required for different types of loan

so that bank do not suffer any types of loss.

Bank is very much particular about CIBIL report of borrowers in case of

each type of lending.

Bank lending process in case of retail loan is very much fast after

compiling with all the criteria of bank.

In case of project financing bank follow lengthy norms to check the

feasibility of the project such as:-

I. Firstly personal appraisal of promoter is done by the bank to

ensure that promoters are experienced in the line of business

and capable to implement and run the project efficiently.

II. Secondly detail study about the technical aspect is done to find

the technical soundness of project such as proper scrutiny of

financial report is done, valuation of property by government

approved valuer is done and view regarding each and every

area of project is done under technical analysis.

III. A detail study relating financial viability of project is done by

detail study of cash flow, fund flow statements and by

calculating import ratio which is very much necessary for

project appraisal such as DSCR, DER etc. the main purpose of

financial appraisal is insure that project will ensure sufficient

surplus to repay the instalment and interest.

IV. Risk analysis is done by bank to determine the risk associated

with the project. This is mainly done by sensitivity analysis and

by PNB credit rating or scoring. With sensitive analysis

feasibility of project is determined under worsened condition.

Credit rating or PNB scoring is done of various parameters

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CREDIT APPRAISAL

such as personal, management, financial etc , thereby

determine credit worthiness of customer.

V. It is on basis of credit risk level, a collateral security to be

given by borrower is determined.

This shows that Punjab National Bank has sound credit appraisal system.

BIBLIOGRAPHY

i. PUNJAB NATIONAL BANK ANNUAL REPORT

ii. PNB JOURNALS

Page 165

CREDIT APPRAISAL

iii. BOOKS

MANAGEMENT OF INDIAN FINANCIAL INSTITUTION,

SRIVASTAVA R.M & NIGAM DIVYA, 10TH EDITION,2010,

HIMALYA PUBLISHING HOUSE, GURGAON MUMBAI

FINANCIA INSTITUTION AND MARKETS, BHOLE L.M, 5TH

EDITION,2009, TATA Mc GRAW- HILLS,7 WEST PATEL

NAGAR, NEW DELHI

iv. WEBSITE

www.pnbindia.com

www.rbi.gov.in

www.google.com

v. NEWSPAPER

Page 166