PROJECT APPRAISAL / CREDIT APPRAISAL

Project / Credit appraisal is a skill which has to be acquired by study and

supplemented by practice. Intuitive guess work has little place in appraising the
credit rating or credit needs of a corporate unit. The credit managers of banks and
Non Banking Finance Companies (NBFCs) are duty bound to accept or reject a
proposal on the basis of its viability or non - viability.

TECHNIQUES USED IN CREDIT APPRAISAL

A. BY THE BANKS OR FINANCIAL INSTITUTIONS.
B. BY THE COMPANY (BORROWER).
Project / Credit appraisal is done by banks or financial institutions by obtaining credit
information of the borrowing company.

Credit information of the borrowing company can be obtained by the

following sources:
1. BANKS AND FINANCIAL INSTITUTIONS:
The source of primary information can be from the banks and financial institutions
themselves which are the most original, the most detailed and by far the most
trustworthy source, and as much relevant information as possible may be sought
from the prospective banks.
2. BANK REFERENCES:
Information about the general financial health of the companies would come from the
bankers with whom the company has its account, but also the bankers who might
have lent to the company. Getting a reference through the company’s bankers makes
it easy to get correct information and the lending banker may remain disguised.
3. TRADE REFERENCE:
They are references from the company’s customers, suppliers, etc. Supplier’s
information would be particularly useful because, that would give an idea of the usual
payment policies of the company.
4. CREDIT RATING AGENCIES:
Credit rating agencies like CRISIL – Credit Rating Information Services of India
Limited, An RBI credit rating agency is CARE – Credit Analysis and Research Limited &
other agencies are ICRA – Investment Information and Credit Rating Agency of India,
& DCR INDIA – Duff and Phelps Credit Rating India Private Limited, & ONICRA Credit
Rating Agency of India Limited are the main credit rating agencies in India.
These agencies provide ready and detailed information required by banks and
financial institutions for financing the capital requirements of the companies which
are credit rated by these agencies.
5. PUBLISHED BOOKS:
Preliminary and basic information about a company may be taken from printed
sources like the Stock Exchange Year book, Corporate Path finder’s data base, etc.
6. COMPANY FINANCIAL REPORTS:
One of the most convenient and commonly used tools of credit evaluation by the
banks is the company’s annual accounts which are statutorily prepared annually and
laid before the shareholders. Apart from the annual accounts, a listed company has
to publish half yearly un audited results in the newspapers twice a year.

7. PRESS REPORTS
The financial press comes out regularly with reports about companies. All the three
leading financial papers in India – The Economic Times, The Financial Express and
Business Standard publish some sort of periodic guides which give some key ratios
and figures about well known companies.
Key indicators and periodic guides given in the above financial papers and magazines
help bank to assess Companies financial standing and can take a positive decision
regarding financing the capital requirements of the company.
8. STOCK MARKET OPINION:
Investor’s perception is best judged by the market opinion about the company. This
market opinion also has an indirect impact on the company’s health. Hence, a bank
or a financial institution may also refer to shareholders or share dealers to know the
market sentiments about the prospective company.
9. CHARGES REGISTERED:
Charges created on the assets of a company have to be registered with the Registrar
of Companies. This information which would indicate to what extent the company’s
assets – present and future are charged.
OTHER TECHNIQUES USED IN CREDIT APPRAISAL:
1. Personal discussion
2. Factory visit
3. Study of financial statements
1. PERSONAL DISCUSSION:
This is the most significant source of primary information which is original, detailed
and most trustworthy.
Type of borrower:
History of the company, background of the promoters, nature of the
company’s business, that is whether first generation entrepreneur (newly
started) or established (in the field).
a. Character:
If the customer is honest and is prompt in paying the dues that he has
undertaken to pay.
b. Market, product (share of market, competition, price, sales volume).
c. Investor’s perception (dividend policy).
2. FACTORY VISIT:
Under factory visit information collected are:
a. operating capacity
b. infrastructure and other utilities
c. labour relations
d. internal control system for raw material (imported, indigenous)
e. ISO certificate
3. STUDY OF FINANCIAL STATEMENTS:
Financial statements contain a wealth of information. If properly analyzed and
interpreted, they can provide valuable insights into a firm’s performance and
position.
Financial analysis determines the significant operating and financial characteristics of
a firm form accounting data and financial statements. The goal of such analysis is to
determine the efficiency and performance of the firm’s management as reflected in
the financial records and reports.
Analysis can be done through:
A. Ratio Analysis
B. Trend analysis
C. Reading of notes to accounts and other information

A. RATIO ANALYSIS:
Ratio analysis is the science of deriving certain conclusions by a study of such ratios.
Some uses of ratios are:
• To compare different companies in the same industry.
• To compare different industries.
• To compare performance in different time periods.
The ratios to be looked into are:
 Liquidity ratio
  Profitability ratio
 Efficiency ratio
 Leverage ratio
B.TREND ANALYSIS:
Trend analysis can be through:
a. Intra firm comparison that is review of the trend of the ratios over the years
within the firm and
b. Inter firm comparison.
The trend analysis may even be related to absolute figures, such as growth
in rates, net worth etc.
C.NOTES TO ACCOUNTS
Financial statements are dressed - up accounts to give the best possible
performance outlook of a company. Careful reading and analysis of the notes on
accounts, one can gauge the policies of the management, performance of the
company, and its future planning.
These can be obtained from:
These would include:
• The notes to accounts
• Directors report
• Auditor’s report
• Other data published in the annual report.

A. BY THE COMPANY (BORROWER):

The company should make sure that the following information required for processing
credit requests are collected by the company for submitting it to the bank or financial
institution in order to obtain the required credit facility:
1. Basic background information on the company:
This includes:
• Name, domicile and ownership of the company
• Names of shareholders and directors
• Nominal and paid up capital
• Legal status
• Line of business (full description of the business activities)
 • Brief history of the company highlighting major developments in the
methods of trade, product mix and other factors central to the performance
of the company.
2. Required facility:
This should include the following:
• Amount
• Type of credit facility
• Purpose of facility (details of the end –use of the facility requested)
• Tenor of facility
• Schedule of draw downs.
3. Key industry dynamics:
The company should highlight key industry players as well as provide comparison of
its performance and standing in the industry compared with its competitors.
Information should also be provided on the following:
The company’s competitive advantages vis-à-vis the other players giving details of
the critical success factors:
• list of major competitors and their market share
• market share of the company
• list of major buyers with details of the selling terms
• list of major suppliers with details of the terms of purchase
• key industry risks as well as how the company mitigates them
• description of the trade cycle of the business
• Seasonality of the operation giving details of peak and slack seasons.
4. Management:
The company is required to provide:
• A detailed organization chart
• Information on the key personnel (of the rank of departmental heads and
above) which should include, the name ,age, educational background,
years of experience, line of operations and ports held present position
and description of duties and responsibilities.
5. Management information system:
Details of the planning, controlling and monitoring systems which have been put in
place have to given.
6. Financials:
The following should be provided:
  Projected financial statements like Profit & Loss account, Balance sheet
along with explanation needs to be given for any material negative or
positive variances in the financial statements.

 Projected Cash flow projections as well as underlying assumptions

 Analysis of trade debtors and creditors
7. Security:
List of properties to be pledged;
• Value of each property (as supported by a professional valuation) ;
• Whether the property is being used to secure loans from another lender ; if so
details of commitments are needed ;
• Location of the property proposed as security.
8. Present banking relationship:
The bank requires full details of the present credit facilities being enjoyed at the
moment. In particular:
• Types of facilities
• Amount approved
• Date approved
• Outstanding balance
• Repayment terms
• Due date
• Securities provided
• Ability of the company to meet its current borrowing obligations.