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7/29/2019 creditappraisalinbankingsbi-120203222702-phpapp01

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CREDIT APPRAISAL IN BANKING

SECTOR


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WHAT IS CREDIT APPRAISAL?

Credit appraisal means an investigation/assessment doneby 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 is the process of appraising the creditworthiness of the loan applicant


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WHAT IS CREDIT APPRAISAL? (CONTD)

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.

3 C of credit are must be kept in mind for lending

funds:- Character Capacity Collateral

If any one of these are missing in the lending officer

must question the viability of credit


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BRIEF OVERVIEW OF LOANS

Loans can be of two types fund based & non-fund based:

FUND BASED includes:

Working Capital

Term Loan

NON-FUND BASED includes:

Letter of Credit

Bank Guarantee


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Debt Equity

Ratio

Debt Service

Coverage

RatioConceptProportion of Debt fund of a

company in relation to its equity

Formula

Long Term Debt

Tangible Net worth

Comments

This ratio is an indicator of leverage

of a company

It measures a companys

ability to borrow and repay money

Concept

The amount of cash flow

available

to meet annual interest

and principal payments

Formula

Net Operating Income

Total Debt Service

Comments

DSCR less than 1 means negative

cash flows

MEASURES


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CREDIT RISK ASSESSMENT (CRA)

The CRA models adopted by the Bank take into

account all possible factors into appraising the risks,associated with a loan.

These have been categorized broadly into financial,business, industrial & management risks are rated

separately.

These factors duly weighted are aggregated to arriveat a credit decision whether loan should be given ornot

Financial parameters:

The assessment of financial risk involves appraisal of

the financial strength of the borrower based on

performance & financial indicators. which assessed in


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CREDIT APPRAISAL PROCESS

Receipt of application from applicant

|Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, andProperties documents)

|

Pre-sanction visit by bank officers

|

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

|

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

|

Valuation reports of the properties to be obtained from empanelledvaluer/engineers

|


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CREDIT APPRAISAL

PROCESS (CONTD)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 ofaccounts, renew of accounts, etc

(on regular basis)


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CREDIT APPRAISAL STANDARDS

QUALITATIVE:

The proposition is examined from the angle of

viability & also from the Banks prudential levels

of exposure to the borrower, Group & Industry

View is taken about banks past experience with

the promoters, if there is a track record to go by

Opinion reports from existing bankers &

published data if available


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CREDIT APPRAISAL STANDARDS

(CONTD)

QUANTITATIVE:

(i)Working capital

(ii)Term Loan

Technical Feasibility

Economic Feasibility

Financial Feasibility

Managerial Competency

Sector/Parameters

Mfg. Others

Current Ratio

(min.)

1.33 1.20

(For FBWC limits above Rs.

5cr)1.00

(For FBWC limits upto Rs.

5cr)

TOL/ TNW

(max.)

3.00 5.00

DSCR

Net (min.)

Gross (min.)

2:1

1.75:1

2:1

1.75:1


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RATING SCALES FOR GIVING LOANS

S. No. BorrowerRating Range ofscores Risk level Comfort Level

1 SB1 94-100 Virtually Zero risk Virtually Absolute safety2 SB2 90-93 Lowest Risk Highest safety3 SB3 86-89 Lower Risk Higher safety4 SB4 81-85 Low Risk High safety5 SB5 76-80 Moderate Risk with

Adequate Cushion Adequate safety6 SB6 70-75 Moderate Risk Moderate Safety7 SB7 64-698 SB8 57-63 Average risk Above Safety Threshold9 SB9 50-5610 SB10 45-49 Acceptable Risk

(Risk Tolerance Threshold)Safety Threshold


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RATING SCALES FOR GIVING LOANS

Banks has introduced New Rating Scales for borrower for

giving loans. Rating is given on the basis of scores out of

100. Bank gives loans to the borrower as per their rating like

SBI gives loans to the borrower up to SB8 rating as it has

average risk till SB8 rating. From SB9 rating the risk

increases. So banks does not give loans after SB8 rating.

11 SB11 40-44 Borderline risk Inadequate safety12 SB12 35-39 High Risk Low safety13 SB13 30-34 Higher risk Lower safety14 SB14 25-29 Substantial risk Lowest safety15 SB15


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SBI NORMS FOR CREDIT APPRAISAL

Towards this end the preliminary appraisal will examine

the following aspects of a proposal. Banks lending policyand other relevant guidelines/RBI guidelines:

Industry related risk factors

Credit risk ratingProfile of the promoters/senior management

personnel of the project

List of defaultersCaution lists

Government regulations impacting on the industry

Financial status whether it is acceptable


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Whether the project cost acceptable or not

Debt/ Equity ratio whether acceptable

Organizational set up with a list of Board of Directors &

indicating the qualifications & experience in the industry

Demand and supply projections based on the overallmarket prospects together with a copy of the market survey

report

Estimates of sales, cost of production and profitability

Projected profit and loss account and balance sheet for

the operating year

Audited profit loss account and balance sheet for the past

three years


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LOAN ADMINISTRATIONPOST SANCTIONPROCESS

The post-sanction credit process can be broadly classifiedinto three stages:

Follow-up

Supervision

Monitoring

which together facilitate efficient and effective credit

management and maintaining high level of standard assets


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CASE STUDY - 1

Company:- Janak Transport Co.

Firm:- Partnership established in 1982 for carryinga transport business.

Industry:- Transport Activity

Banking with SBI :-16 years as a current A/Cholder

Project / Purpose: To purchase 59 new MahindraBolero under tie-up arrangement with ONGC.

The total project cost estimated to be Rs. 363.44lacs.

Proposed Credit Requirement:Fund Based=Rs.295lacs

The company is in this business since incorporation


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Deviations in Loan Policy/ Scheme

Parameters 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*

DSCR Min. 2.00 2.002

Promoters

contribution (under

tie-up)

Min. 10 % 18.86%

profits in the last two

years

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*FGHFG


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ANALYSIS OF THE CASE

Janak Transport Company is an existing profit making

unit

The main chunk behind giving loan is that Janak

Transport Company is doing contract with ONGC since

incorporationThe promoters are having considerable experience as

transport contractor with ONGC

The unit has got confirm order/ tie-up with ONGC

The promoters contribution to the project is 18.86%

which is above the margin requirement

The current ratio is 1.42 that is satisfactory


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ANALYSIS OF THE CASE (CONTD)

Profits in the last two years:- Min. Rs. 3 lacs with

rising trend

TOL/TNW should be max. 3 which is 12.80 here, as

the co. has done multiple banking it has o/s loans with

other banks also but the co. is regularly making thepayment of principal amount along with the interest so

the loan is given.

The bank checks commercial viability of the company

& found that the DSCR for term loan is 2.02 which issatisfactory

The net sales & PAT of the company is increasing year

after year so overall profitability is good


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CASE STUDY - 2

Company:- Akshat Polymers

Firm:- Partnership Firm (M/S Umiya Polymers)

Industry:- Manufacturing

Activity:- Maufacturing of HDPP woven sacks, which arewidely used as packaging material in cement, fertilizer,

etc. AKSHAT POLYMERS (AP) has been established as a

partnership firm on 19th November, 2007 at Kadi.

The partnership was constituted for manufacturing and

selling of HDPP woven sacks to be manufactured fromHDPP granules.

Proposal for sanction of FBWC limits of Rs.2.25 croresand Fresh Term Loan of Rs.2.00 crores.


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PRISING/ RATE OF INTEREST

Proposal:

Sanction for;

i) FBWC limits of Rs.2.25 crores

ii) Fresh Term Loan of Rs.2.00 croresApproval 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

@13.75and for TL 1.50% above SBAR @14.25%


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Deviations in Loan Policy

Parameters

Indicative

Min/Max levelas per loan policy

Company's

level as on31.03.2009 @

Company's

level as on31.03.2010

Liquidity Min. 1.33 1.34 1.52

TOL/TNWTOL/Adj.

TNW

Max. 3.00 4.112.64

2.501.80

Average

gross

DSCR (TL)

Min. 1.75 2.54 2.54

Debt /

equity

Max. 2:1 2.01:1 1.03:1


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The unit will have installed capacity of 2520 MTThe unit is projected to achieve capacity utilization of

80% during the year 2009-10 and accordingly the sale

for the year is projected at Rs.19.77 crores.

The unit plans to initially market its product in

Gujarat, Maharashtra, Rajasthan and sale to Central

Govt. who purchases the HDPP woven sacks for grains

through open tendersAs per ICRA report, grading and research services

Flexible packaging sector is expected to grow at the

rate of 12.40%.


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The promoters have sufficient experience of 15 years

in the line of activity

The firm has also started marketing activity for their

products & are having very good market contacts forthe sales of the Finished Goods

The orders worth Rs.2.50 crores is expected to be

finalized by end of August, 2008

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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FINDINGS

SBI loan policy contains various norms for sanction of

different types of loans These all norms does not apply to each & every case

SBI norms for providing loans are flexible & it may differfrom case to case

After case study, we found that in some cases, loan issanctioned due to strong financial parameters

From the case study analysis it was also found that in somecases, financial performance of the firm was poor, eventhough loan was sanctioned due to some other strong

parameters such as the unit has got confirm order, the unitwas an existing profit making unit & letter of authority wasreceived for direct payment to the bank from ONGC which is

public sector


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CONCLUSION

Credit is the core activity of the banks & importantsource of their earnings which go to pay interest to

depositors, salaries to employees & dividend to

shareholders

Credit & risk go hand in hand

Banks main function is to lend funds/ provide

finance but it appears that norms are taken as guidelines

not as a decision makingA bankers task is to indentify/assess the risk

factors/parameters & manage/mitigate them on

continuous basis


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Thank You..

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