Credit Appraisal System of PUNJAB NATIONAL BANK

Credit Appraisal System of“PUNJAB NATIONAL BANK”

Submitted to: Presented by: Dr. Apar Singh Manish Kanwar(Professor) MBA-II(E) 6370

ABOUT THE BANK• Established in 1895 in Anarkali Bazaar at Lahore.• Lala Lajpat Rai was one of the first customers of the bank.• It was the first bank that was started with the Indian capital.• Nationalized in July 1969.• Has over 5670 offices including 432 extension counters in

INDIA.• Corporate office of bank at New Delhi.• UK, Nepal, Bhutan, Kazakhstan, China, Shanghai etc.

CONTINUED…

• It is currently the second largest state-owned commercial bank in India ahead of Bank of Baroda with about 5670 branches across 764 cities.

• Over 6000 ATM’s across India serving more than 7.2 crore customers.

VISION AND MISSIONVISION"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".

Chairman & Managing Director

Mr. K.R.Kamath(2009-till date)

Sardar Dyal Singh Majithia (1895-1898)

ORGANIZATION STRUCTURE

HEAD OFFICE 7- BHAIKAJI CAMA PLACE, NEW DELHI -66

CIRCLE OFFICES (67)

BRANCHES (5675)

OBJECTIVES

RESEARCH METHODOLOGYSources of information:•Primary Sources•Secondary Sources

PRIMARY SOURCES•Meetings and discussion with the Chief Manager and the Senior Manager of Credit Department.SECONDARY SOURCES:•Internal Circulars of the bank•Websites•Database at PNB

CREDIT APPRAISAL SYSTEM IN

PUNJAB NATIONAL BANK

CREDIT• Credit is the trust which allows one party to

provide resources to another party where that second party does not reimburse the first party immediately, but instead arranges either to repay or return those resources at a later date.

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.

LOANS

FUND BASED NON-FUND BASED

RETAIL LOAN

WORKING CAPITAL

CONTINUED……WORKING CAPITALIt is a short-term cash loan to a company. The business that receives the loan can continuously draw from the bank up to a certain specified amount.

TERM LOANSA bank loan to a company carrying fixed interest rates, and monthly or quarterly repayment schedules and include a set maturity date.

CONTINUED……RETAIL LOANSIt is the practice of loaning money to individuals rather than institutions. These loans are the loans for automobile purchases, home purchases, medical care, home repair, vacations, educational loans and other consumer uses.

EXPORT FINANCEThis type of a credit facility is provided to exporters who export their goods to different places.

Pre-Shipment FinancePost-Shipment Finance

CONTINUED……BILL DISCOUNTINGWhile discounting a bill, the Bank buys the bill (i.e. Bill of Exchange) before it is due and credits the value of the bill after a discount charge to the account of the customer. 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.

BANK GUARANTEEA bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.

CONTINUED……

CREDIT ANALYSIS• Market Analysis

• Technical Analysis

• Management & Organization Analysis

• Financial Analysis

CREDIT ANALYSIS(Contd..)MARKET ANALYSIS•Market Demand and Potential for each product item and its variants/substitutes.

•Critical Analysis regarding Size of the Market.

•Influence of Government policies like Government Import Policy and Import duty structure also need to be evaluated.

TECHNICAL ANALYSIS•Location and Size•Raw Material•Plant & Machinery, Plant Capacity and Manufacturing Process.

MANAGEMEMENT & ORGANIZATION ANALYSISStrengths and Weaknesses of the Management by commenting on the background, qualifications, experience, and capability of the Promoter.

CREDIT ANALYSIS(Contd..)

FINANCIAL ANALYSIS•Cost of Project & Means of Financing•Profitability Statement•Break-Even Analysis•Fund-Flow Statement•Balance Sheet Projections•Internal Rate of Return•Sensitivity Analysis•Financial Ratios• Debt-Equity Ratio • Debt-Service Coverage Ratio • Current Ratio • Output Investment Ratio

CREDIT ANALYSIS(Contd..)

Ratios Formula Standard

Debt-Equity Ratio Debt (Term Liabilities) / Equity 2:1

Debt-Service Coverage Ratio

(Net Profit After Taxes + Depreciation + Annual interest on long term debt + extra ordinary income – extra ordinary expenses) /(Annual interest on long term debt + Repayment of debt)

1.5 to 2

Current Ratio Current Assets / Current Liabilities 1.33:1

Output Investment Ratio

Sales / Total capital employed NA

CREDIT ANALYSIS(Contd..)

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.

• Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future.

CREDIT APPRAISAL (Contd.)• Credit appraisal is the process of appraising the credit

worthiness of the loan applicant.• Factors like:-

Age Income Number of dependents Nature of employment Continuity of employment Repayment capacity Previous loans, etc. are taken into account while

appraising the credit worthiness of a person.

CREDIT APPRAISAL PROCESS

Receipt of application from applicant

Receipt of documents(Balance sheet, KYC papers, MOA, AOA, and Properties

documents)

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, etc.

Title clearance reports of the properties to be obtained from empanelled advocates

Valuation reports of the properties to be obtained from empanelled valuer/ engineers

CONTINUED…Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc.

(on regular basis)

CREDIT APPRAISAL (Contd.)CREDIT INFORMATION OF THE BORROWING COMPANY

Banks and Financial Institutions Bank References Credit Rating Agencies Published Books Company Financial Reports Press Reports Personal Visit Factory Visit

CREDIT APPRAISAL (Contd.)CREDIT INFORMATION TO BE SUBMITTED BY THE

BORROWING COMPANY Basic background information on the company Copy of certificate of registration of firm Memorandum and Articles of Association Required facility Management Details of the Security to be pledged Key industry dynamics Present Relation with the Bank

CREDIT RISK• “Credit risk” is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties.

• In a bank’s portfolio, losses stem due to inability or unwillingness of a borrower to honor commitments

in relation to lending, settlement and other financial transactions.

CREDIT RISK RATINGCATEGORY PARAMETERS / INPUTS

Management Evaluation

Capital market perception of the group Management Setup

Risk bearing capacity Integrity, commitment and sincerity

Track record in debt repayment Financial flexibility

Business Evaluation

Range of services Level of customer satisfaction

Quality of service offeredAdvertising / promotional strategies

Location advantage Brand equityAmbience of service outlet Expected market growth

Effectiveness of distribution channels Technology adopted in the process

Quality of infrastructure available

Financial EvaluationDebt – Equity Ratio Internal Rate of Return

Foreign exchange risk Working capital cycle (in months)

Project Implementation Risk Evaluation

Project complexities Expected time overrunExpected cost overrun Status of obtaining clearancesFunding risk Service period (in years)

PNB SCORE

POST-SANCTION FOLLOW UP• To keep a watch on the project during implementation stage

so that there are no time & cost overruns.• To ensure that is no diversion of funds.• To monitor operations in the account particularly cash credit

facilities which indicate health of the account.• To obtain market report on the borrower, to gather

information like reputation/financial standing etc. • To ensure that the unit's management and organizational set-

up is effective.• To detect signals and symptoms of sickness or deterioration

taking place in conduct/performance of the account.

Performance Highlights

BALANCE SHEET2011-12

• Risk is the center most part of the analysis and basis for the decision of the bank.

• All the analysis is being done to generate a grade, which represents the intensity of risk, that helps in determining the condition of the corporate applying for loan.

• The whole process of credit appraisal helps in providing a suitable measure to minimize the risk due to non repayment of loan to the bank.

FINDINGS

LIMITATIONS OF THE STUDY

• Access to data.• Limited study on project due to time factor.• As the credit appraisal is one of the crucial areas for

any bank, some of the technicalities are not revealed.