Ankit Report

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CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT BANGALORE- 560029
SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN FINANCE
CREDIT APPRAISAL AND RISK RATING IN PUNJAB NATIONAL BANK SUBMITTED BY:
Ankit Koolwal MBA(2011-2013) Roll No. : 1121506
INDUSTRY GUIDE
Mr. Dinesh Kumar Singhal SENIOR MANAGER
FACULTY GUIDE
Mr. Aravind Asst. Professor (CUIM)
Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE
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CERTIFICATE OF ORIGIN
This is to certify that Mr. Ankit Koolwal , a student of Post Graduate Degree in MBA(Finance) , Christ University Institute Of Management, Bangalore has worked in the Credit Department of Punjab National Bank, Circle Office New Delhi and has submitted this project report entitled Credit Appraisal and Risk Rating at PUNJAB NATIONAL BANK, under the able guidance and supervision of Mr. Dinesh Kumar Singhal, SENIOR MANAGER, PUNJAB NATIONAL BANK. The period for which he was on training was for 7 weeks, starting from 9th April to 26th May. This Summer Internship report has the requisite standard for the partial fulfillment of the Post Graduate Degree in Finance. To the best of our knowledge no part of this report has been reproduced from any other report and the contents are based on original work.
Mr. Aravind S. Asst. Professor CUIM
Ankit Koolwal Student MBA in Finance CUIM
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ACKNOWLEDGEMENT
First of all, I would like to thank the Lord Almighty to have showered his blessings upon me and to ensure that I could complete the project successfully through his blessings. I would like to thank my parents and other family members to support me in all the endeavours which made me capable to come up to the level of being given this project. Special thanks should go to Prof Aravind S; without whose support and co-operation, this project would not have been completed successfully. Your co-operation and support really matter to me sir, for this project and in all the other future endeavours as well. Thank You Sir. Thanks should also go to Punjab National Bank for accepting me as a Summer Intern at their North Delhi circle office and for giving me all the possible help and facilities. I would also like to thank Mr. Dinesh Kumar Singhal, my mentor without whose support, knowledge sharing, concern and co-operation, the project wouldnt have been successful and complete. I would also like to extend special thanks to Mr R.L. Arya, Senior manager credit Rating department, PNB for all their co-operation, support and every small possible help during the project.
I would also like to thank the management of CHRIST UNIVERSITY, BANGALORE for giving me this opportunity and platform to complete the project. Once again, I would like to thank Prof Aravind S, Faculty Guide from CHRIST UNIVERSITY, BANGALORE, for all his help during the entire Summer Internship Project.
JUNE 1,2012
Ankit Koolwal 1121506 CHRIST UNIVERSITY
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TABLE OF CONTENTS
Title 1. Certificate Of Origin 2. Acknowledgement 3. Executive Summary 4. Project Process Summary 5. Industry Profile 6. Company Profile a. Introduction b. Products and services c. Awards and achievements 7. Introduction to Credit Appraisal a. Corporate Loan b. Methods of lending c. Credit Appraisal d. Credit appraisal process in PNB 8. Credit Risk a. Factors determining credit risk b. Credit risk policy c. Risk mitigation techniques 9. Risk Rating a. Introduction b. Tool PNB TRAC c. Factors affecting rating d. Areas of rating e. Ratios considered in rating f. Credit rating models 10. Problem statement 11. Objective of study 12. Project design and methodology 13. Case study
Page No. 2 3 6 7 8 10 10 13 14 16 16 18 19 21 23 23 24 27 28 28 29 30 31 36 41 42 43 44 45
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14. Data analysis and findings 15. Learnings 16. Suggestions 17. References
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EXECUTIVE SUMMARY
The objective of the project is to study and analyze the various aspects of financing corporate borrowers which are beyond the powers of the branches and within the ambit of the Circle Office of Punjab National Bank (PNB).This study covers the process Punjab National Bank follows to assess the credit worthiness of its clients and grant the finance for the setting up or expansion of their projects. Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department. Primarily, credit is required for following purposes: a. Working capital finance
b. Term loan for mega projects c. Non Fund Based Limits
A brief study of the procedure to calculate the credit risk rating for the various proposal available has also been covered. Before granting finance, the bank calculates the credit risk score of the client by using software called PNB Trac, generated by feeding in both the quantitative and qualitative data of the client, which is used by the bank to evaluate the credit risk of the bank and accordingly charge the rate of interest to the clients. In ordinary loan transaction there is no credit risk associated with the borrower but, this is a very important part in case of project finance. In a proposal what is important is the identification, analysis, allocation and management of every risk associated. Attempts have been made to understand the models used by the banks as a whole, their feasibility and the degree to which the models are able to mitigate the risk. The viability study tries to find out the industries where the projects can be financed and the parameters that are taken into account. After all the related analysis is done, decision about sanctioning of loan is made based on the credit worthiness of the client, policy of RBI and the bank. My learning from this project is about how risks are faced by the bank and how they are being mitigated. Bank uses various tools in which risk can be diversified thereby helping bank in making efficient decisions. A proper credit appraisal process is being applied by PNB for providing financial aid to corporate.
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PROJECT PROCESS SUMMARY
The project consists of understanding the basic concepts related to the topics concerned, detailed understanding of the credit appraisal process, risk rating and a brief overview about the techno-economic viability of the projects and finally the case study of rathi steel and power limited. Initially my mentor gave me the PNBOA's manual to read and understand all the policies and rules provided by RBI and banks internal policies in making lending decisions. During the project, Mr. Dinesh Kumar Singhal , also explained the various parameters bank looks into while assigning ratings to various corporate and non-corporate. He explained the entire process of risk rating and the financial analysis that is done by banks. Then I was sent to the rating department to understand working of the PNB TRAC software. After an analysis of current ratio, debt-equity ratio and the various profitability ratios and other parameters ratings are assigned by the software according to the preset benchmarks. Secondary research on the meaning of risk, its scope, various types of risk etc. has been done to get in tune with the purpose of the project. I was given some proposals to have a brief understanding and then my mentor gave me 2-3 proposals to prepare. In the techno-economic viability study, debt-service coverage ratio, the technical and the economic viability of the project is analyzed. The demand-supply gap, the commercial viability is also analyzed. A projected profit and loss account is prepared and sensitivity analysis is done to figure out the techno-economic feasibility study of the projects. I worked out on the case of rathi steel and power limited from preparation of proposal, board note, risk rating, clarifications of the issues and finally recommendations being sent to Head office for further actions.
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INTRODUCTION TO BANKING INDUSTRY
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access
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to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.
The banking industry in India seems to be unaffected from the global financial crises which started from U.S in the last quarter of 2008. Despite the fallout and nationalization of banks across developed economies, banks in India seems to be on the strong fundamental base and seems to be well insulated from the financial turbulence emerging from the western economies. During the recessionary phase in October 2008March 2009 period, the RBI was swift to reduce the policy rates, both repo and reverse repo and provide liquidity to the economy by reducing the reserve ratios and offering adequate support to the banking system. Couple of fiscal stimulus packages by the Government, relaxation of norms for certain sectors like real estate and allowing the banks to restructure its advances too contributed to the sailing of Indian banks through the rough phase with minimal impact. The Indian banking industry is well placed as compare to their banking industries western counterparts which are depending upon government bailout and stimulus packages. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil.
Although there will be no impact on the Indian banking system similar to that in west but the banks in India will adopt for more of defensive approach in credit disbursal in coming period. In order to safe guard their interest, banks will follow stringent norms for credit disbursal. There will be more focus on analyzing borrower financial health rather than capability.
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COMPANY PROFILE PUNJAB NATIONAL BANK
Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being the first Indian bank to have been started solely with Indian capital. The bank was nationalized in July 1969 along with 13 other banks. Today, PNB is a professionally managed bank with a successful track record of over 110 years. The bank has the 2nd largest branch network in India, with 4525 branches including 432 extension counters spread throughout the country. PNB was ranked as 248th biggest bank in the world by Bankers Almanac, London. Punjab National Bank is not only the first bank to specialize in credit rating models in India but also the first one to launch image based cheque transaction system for collection of intra bank intercity cheques thereby providing credits merely in 48 hrs in 13 cities. MISSION: Banking for the unbanked. 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.
With over 60 million satisfied customers and more than 5100 offices including 5 overseas branches, PNB has continued to retain its leadership position amongst the nationalized banks. The bank enjoys strong fundamentals, 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; bullion business; life and non-life insurance; Gold coins & asset management business, etc. PNB has earned many awards and accolades during the year in appreciation of excellence in services, Corporate Social Responsibility (CSR) practices, transparent governance structure, best use of technology and good human resource management.
Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, PNB has achieved significant growth in business which at the end of March 2011 amounted to Rs 5,55,005 crore. PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network, business and many other
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parameters. During the FY 2010-11, with 39.16% share of CASA to domestic deposits, the Bank achieved a net profit of Rs 4433 crore. Bank has a strong capital base with capital adequacy ratio of 12.42% as on Mar11 as per Basel II with Tier I and Tier II capital ratio at 8.44% and 3.98% respectively. As on March11, the Bank has the Gross and Net NPA ratio of 1.79% and 0.85% respectively. During the FY 2010-11, its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.67% & Agriculture Credit to Adjusted Net Bank Credit at 19.30% was also higher than the stipulated requirement of 40% & 18% respectively. The Bank has been able to maintain its stakeholders interest by posting an improved NIM of 3.96% in Mar11 (3.57% Mar10). The Earning per Share improved to Rs 140.60 (Rs 123.86 Mar10) while the Book value per share improved to Rs 661.20 (Rs 514.77 Mar10). 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 2010-11. The impressive operational and financial performance has been brought about by Banks 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 OperatingProfit NetProfit Deposit Advance TotalBusiness
Mar'09 5690 3091 209760 154703 364463
Mar'10 7326 3905 249330 186601 435931
Mar'11 9056 4433 312899 242107 555005
CAGR(%) 26.16 19.76 22.14 25.10 23.40
Bank 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
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Banking Solution (CBS) since Dec08, thus covering 100% of its business and providing Anytime Anywhere banking facility to all customers including customers of more than 3200 rural & semi urban branches. The Bank has also been offering Internet banking services to its customers which also enables on line booking of rail tickets, payment of utilities bills, purchase of airline tickets, etc. Towards developing a cost effective alternative channels of delivery, the Bank with 5050 ATMs has the largest ATM network amongst Nationalized Banks.
Backed by strong domestic performance, the Bank is planning to realize its global aspirations. Bank has opened one branch each at Kabul and Dubai, two branches at Hong Kong and an Off Shore Banking Unit at Mumbai. In addition to the above, Bank has Representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK with 7 branches and a subsidiary each in Kazakhstan & Bhutan, and joint venture with Everest Bank Ltd. Nepal. During the year, Bank acquired majority equity stake of 63.64% in Dana Bank of Kazakhstan.
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I.)
PRODUCTS AND SERVICES : 1. Saving Funds a. PNB Mitra SF Account b. PNB Prudent Sweep c. PNB Rakshak d. PNB Shikshak Overdraft Scheme e. PNB Shikshak Sweep Scheme f. PNB Vidyarthi SF Account g. Scheme for providing Overdraft Facility to Pensioners h. Total Freedom Salary Account
2. Fixed Deposit Scheme a. Auto Renewal b. FD Scheme for Road Accident Victims c. Loan Against TD d. PNB 1111 Days e. PNB 555 & 1000 Days f. PNB 777 Days g. PNB Anupam Term Deposit Scheme h. PNB Bal Vikas i. PNB Combo Deposit Scheme j. PNB Dugna-Fixed Deposit Scheme k. PNB Lakhpati Deposit Scheme l. PNB Multi Benefit Term Deposit Scheme m. PNB Ordinary Term Deposit Scheme n. PNB Special Term Deposit Scheme o. PNB Sugam Term Deposit Scheme p. Flexi-RD q. PNB Tax Saver Fixed Deposit Scheme r. PNB VAY Deposit Scheme s. Prospective Senior Citizen Scheme t. Recurring Deposits Scheme
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3. Credit Scheme a. Advance Against Gold and Jewellery b. Car Finance c. Education Loan Scheme d. Housing Loan e. Loan Against Mortgage of Property f. Other Credit Scheme g. Personal Loan h. Professional Loan i. Personal Loan Scheme for Pensioners j. Reverse Mortgage Scheme k. Two Wheeler Finance
4. Current Account a. PNB Current Account b. PNB Smart Banking Current Account 5. Cards a. ATM / Debit Card b. PNB Global Credit Card c. PNB World Travel Card
6. Insurance 7. PNB Gold Coins 8. Mututal Funds a. Principal PNB AMC b. UTI Mutual Fund4
II.)
AWARDS AND ACHIEVEMENTS
1. PNB Bagged Golden Peacock National Training Award 2011. 2. PNB Awarded Overall Best Corporate Social Responsibility Awards 2012. 3. PNB Awarded SKOCH Award on Financial Inclusion 2012. 4. PNB bags Most Socially Responsive Bank Award 2011. Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE
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5. PNB receives Best Bank Award-2011. 6. PNB Awarded Golden Peacock HR Excellence Award-2011. 7. PNB Awarded Best Technology Bank 2010 8. Asia Best Employer Brand Award" for Excellence in Training 9. Global HR Excellance Award 2010 for the outstanding Contribution to the cause of Education.
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INTRODUCTION TO CREDIT APPRAISAL
What is loan? An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, along with interest, at a future time. There is a predetermined time for repaying a loan, and generally the lender has to bear the risk if the borrower is not able to repay the loan.
Corporate Loan Corporate loans are loans made to businesses for a specific business purpose. It is a loan given to a business so that it can buy buildings, equipments, may install a new plant or carry out an expansion or modernization process etc. There are many types of corporate loans, and lenders change interest rates for these loans based on risk and market conditions, just like individual loans. Without these loans, most companies would not have enough funding for basic business activities. While there are many varieties, the most widely used and important ones are(1) Working capital loan (2) Term loan
1. Working Capital The term working capital is used in financial parlance to describe that capital which is required by an enterprise to carry out its day to day operations. It mainly consists of investments in raw material, work in progress, finished goods and receivables. Banks provide the working capital finance in the form of cash credits, overdraft, demand loans (for working capital purpose), bills purchased / discounted limits and pre- shipment and post- shipment credits etc.
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Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exist between them. 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. The service units need the working capital for meeting the expenditure, for making advance payments to its staff and providing credit to its customers. So all type of units whether in manufacturing or trading or service sector need the working capital.
Working Capital Finance is categorized as: 1) Fund Based. These are the facilities for which the bank provides funding and assistance to actually purchase business assets or to meet business expenses. Inventory finance and Bill Finance (Post Sales Finance) Cash credit
2) Non Fund Based. These are the facilities for which the bank can issue letters of credit or can give a guarantee on behalf of the customer to the suppliers, Government Departments for the procurement of goods and services on credit.
Letter of Credit (LC) Bank Guarantee.
2. Term Loan When a loan is granted for a fixed period exceeding one year & is repayable in installments according to a schedule of repayment extending beyond three years it is commonly known as
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term loan . This loan is granted for purchase of fixed assets & is usually allowed against hypothecation mortgage of movables/immovable assets. 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 installments from a business's cash flow. 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. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow. Term loan is normally extended to finance the acquisition of fixed assets. It is generally sanctioned for the following purposes : For setting up of new industrial units For expansion of an existing unit Modernization of existing unit, Diversification into different product lines Restructuring of existing units For backward integration i.e. for manufacturing certain products which are being used as raw material by existing units. For forward integration i.e. for manufacturing certain products of existing unit as raw material.
Methods Of Lending :a) Working Capital i) Simplified method linked with turnover:- simplified method based on turnover for assessing working capital finance upto 2 crore shall continue ii) MPBF System:- existing MPBF system with flexible approach shall be followed for units requiring working capital finance exceeding the above mentioned amount
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iii)
Cash Budget System:- Cash budget system shall be followed in sugar, tea, service sector, construction activity etc.
iv)
Loan System for Delivery of Bank Credit :- borrowers will have freedom to decide the proportion of cash credit and loan component of working capital limits, period of such loans and renewal of loan component
b) Term Loan:- The system of annual renewal/review of working capital limits is in vogue. In order to ensure effective monitoring specially in case of project financing having longer gestation period, a system of annual review of term loans has been introduced recently. Accordingly, all term loans, other than retail loans, with sanctioned limit of 1 crore & above needs to be reviewed annually. The term loans with remaining maturity period of above 5 years shall not exceed 50% of the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per the past trend.
Credit Appraisal Credit appraisal means an investigation/ assessment done by the bank prior to providing any loans & advances & 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. In the credit appraisal process, the decision maker makes an attempt to find answers to two questions. First, whether the entrepreneur requires funds, and also what are his credentials. If the answer to first question is positive, the second question is all about the extent of his requirement and the ways and means to fund the requirements. Assessment of credit requirements for enterprises working at a small scale is often difficult because of lack of data relating to operations of the unit. Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. Credit risk is a risk related to non repayment of the credit
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obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed which measures the financial condition and the ability of the customer to repay back the loan in future. Generally the credit facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose. However the 3 C of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at all times. Character Capacity Collateral
If any one of these are missing in the equation then the lending officer must question the viability of credit.
Credit Approval Process

Prior to granting loan/credit to a corporate or a non-corporate, there is 5 step process followed by banks. It is very important process as the NPAs of the banks have increased in the last couple of quarters on account of liberal lending by the banks. This has made the process all the very important. On top of this there are the Know Your Customer Guidelines that every bank has to follow. Before lending, the bank basically looks at the 5 Ps to analyse the credibility of the borrower. These are :
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1. Person: This is the first P of lending. The integrity and the capacity of the person is checked before granting any loan. Capacity also includes the financial capacity and the managerial capacity. 2. Purpose: The 2nd P talks about the purpose of the loan. In this step, the technical, economic and the commercial viability of the project are analyzed. 3. Payment: The 3rd P talks about the time of payment for the loan that will be provided by the banks. For e.g., a Term Loan is granted with a payment period of 8 years. If the payment is not made on time, there is an asset-liability mismatch. 4. Protection: The 4th P analyses the protection that is given by the borrower to avail the facility. The security can of two kinds. Primary and Secondary. For high value loans, tangible assets are kept as collateral with the banks. The role of guarantor also comes into picture. The banks have been authorized the property of the borrower and nobody can use that property without the permission of the banks. 5. Perspective: Even though all the first four Ps are satisfied and the person may be eligible for loan, it depends on the bank, whether credit should be granted. The policy of the banks, policies of the RBI and the nation interest is considered in the perspective context of the credit approval.
Credit Appraisal process followed in PNB
Submission of request letter and corresponding documents
Carrying out due diligence on the client
Preparing feasibility report
Not feasible
stop
A S Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE
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Prepare a proposal,determine the interst rate and submit the proposal to circle office
Re-verify and analyse the proposal
Meeting client in case of queries
Vetting of credit rating report
Sanction of proposal on basis of terms and condition
Approval of request made by the client like Reduction of Interest Rates etc
Acceptance of the terms and conditions by the client
Disbursement of loan from branch
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CREDIT RISK
Credit risk is the risk of default by borrower due to inability / unwillingness to repay his debts in accordance with the agreed terms and conditions .
General Factors determing Credit Risk The credit risk of a banks portfolio depends on both external and internal factors. The external factors can be economy wide as well as company specific. Some of the economy wide factors are: State of the economy Wide swings in commodity prices Fluctuations in foreign exchange rates and interest rates Trade restrictions Economic sanctions Government policies,etc.
Some company specific factors are: Management expertise Company policies Labour relations
The internal factors within the bank which influence credit risk are: Deficiencies in loan policies/ administration Absence of prudential credit concentration limits Inadequately defined lending limits for loan officers. Deficiencies in appraisal of borrowers financial position. Excessive dependence on collateral without ascertaining its quality/reliability Lack of risk pricing mechanisms Absence of loan review mechanism
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Ineffective system of monitoring of accounts
While the bank can influence and control the internal factors to improve quality of its credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems will help in improving the quality of credit decisions thereby reducing loan losses.
Need for credit Risk Assessment
If terms and conditions of sanctions are stipulated without proper assessment of credit risk, bank might charge: High ROI from a good quality customer, which may drive them away to other bank OR low ROI from a poor quality customer thereby not compensating for higher losses due to higher probability of default. How to minimize Credit risks By controlling the internal factors to improve the quality of credit portfolio By proper diversification of credit portfolio across industries
Goal of credit risk management To improve credit decisions To improve quality of credit portfolio To reduce loan losses
Credit risk policy Risk identification Risk management Risk grading techniques Risk reporting Risk control system & risk mitigation technique
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Risk identification There are several types risks. So it is necessary to firstly identify type of risks associated. The various types of risks are: Industry risk Financial risk Business risk Management risk Project risk
Industry risk:- Government regulations and policies, availability of infrastructure facilities, industry rating, industry scenario and outlook, technology up gradation, availability of inputs etc. Financial risk:- In the guidance notes issued on credit risk management, RBI has identified certain areas for critical examination in order to assess the degree of financial risk involved in a credit proposal Analysis of past financials Analysis of future cash flows including projected profitability Flexibility to raise required resources Strength of the sponsor group
Business risk:- The business efficiency of a company is a function of its relative positioning within the industry/sector. It is generally determined by the market position and operating efficiency of the company. The lending bank may select suitable parameters relevant to the industry for assessment of this risk. Management risk:- For a lending banker, the management related risks are perhaps the most relevant and important risk elements, especially if the promoter/management of the enterprise is new to the bank. This risk may involve an assessment of management capabilities in terms of Track record of the management
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Quality of the management personal Payment record with banks Market standing Support from group companies
Project risk:- If the credit proposal envisages project funding by the bank by way of term finance, it would also be necessary to evaluate the project specific factors, in addition to the above. Evaluation of project risks would involve analysis and appraisal of the following: Determination of the size of the project in relation to the existing net worth of the enterprise Likelihood and extent of overruns Assessment of project implementation risks Technology / stabilisation risks Risks related to statutory clearances Assessment of funding risks
Risk Grading Techniques Rating Category PNB -AAA PNB AA PNB A PNB BB PNB B PNB C PNB D Minimum Risk Excellent business credit, superior asset quality, excellent debt capacity and coverage Marginal Risk Very good business credit, very good asset quality and liquidity, very good debt capacity and coverage Modest Risk Good business credit, good asset quality and debt capacity and coverage Average Risk Average business credit with satisfactory asset quality and liquidity, good debt capacity and coverage Marginally Acceptable Risk High Risk Caution Acceptable business credit with average risk, acceptable asset quality, modest debt capacity Not creditworthy, generally acceptable asset quality Unacceptable business credit, normal repayment jeopardy, inadequate projected net worth and paying capacity Signification Description
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Credit Risk Mitigation Techniques: Under standardized approach, the following securities are eligible for treatment as credit risk mitigants: 1. Cash or any equivqlent issued by lending banks or deposit with the bank which is incurring the counter party exposure. 2. Value of collateralized jewellery for eg. Gold (both bullion and jewellery) should be benchmarked to 99.99 purity. 3. Securities issued by central and state government. 4. Indira vikas patra and NSCs provided no lock in period is operational and if they can be encashed within the holding period. 5. Life insurance policies with a declared surrender value of an insurance company which is regulated by an insurance sector regulator. 6. Debt securities rated by a recognised credit rating agency where these are either: a. Atleast BBB- when issued by public sector entities; or b. Atleast PR3/P3/F3/A3 for short term debt instruments. 7. Debt securities not rated by a recognised crdit rating agency where these are: a. Issued by a bank b. Listed on a recognised exchange etc. 8. Units of mutual funds regulated by the securities regulator of the jurisdiction of the banks operation mutual funds where a price for the units is publicly quoted i.e. where the daily NAV is available in public domain.
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RISK RATING
Credit risk rating is the rating assigned to borrowers based on an analysis of their ability and willingness to repay the debt taken from the bank. This rating is assigned on a scale, which generally has 6 to 8 levels. Companies falling in the same credit risk category have similar probability of default. Better the rating lower the probability of default. The probability of default increases in an exponential manner as the credit risk rating deteriorates. Uses of Credit Risk Rating It helps to decide in following matters: 1. Whether to lend to s borrower or not. 2. Pricing 3. Risk mitigants 4. Product mix 5. Level of decision making 6. Frequency of renewal and monitoring Assessment of credit risk rating Credit risk rating tool involve analysis of a company on various parameters such as financials, industry characteristics, business performance, management quality etc. different scales can be used and the above parameters can be combined with appropriate weightages to arrive at a final score. The credibility of credit risk rating to a large extent depends on the skills of the person using the rating tool and his integrity in using the model equitably for all concerns. It is essential for the rater to acquire reasonably adequate information about the company and the industry before he conducts the rating. Characteristics of a good rating system Sensitivity of ratings to real changes in credit quality Lead time with respect to recognized changes to quality Stability of ratings when no change has occurred. Objectivity
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Credit risk rating tool PNB TRAC The credit risk rating tool has been developed with a view to provide standard system for assigning a credit risk rating to the borrowers of the bank according to their risk profile. This rating tool is applicable to all large corporate borrowal accounts availing total limits (fund based and non fund based) of more than Rs. 12 crore or having total sales/ income of more than Rs. 100 crore. Inputs to the tool are the financial data of the borrower, industry information and the evaluation of the borrower on various objective and subjective parameters. The tool evaluates the credit risk rating of a borrower on a scale of AAA(minimum risk) to D(maximum risk). The credit risk rating tool incorporates and includes possible factors of risk for determining the credit rating of the borrower. The risk could be internal and specific to a company, the industry in which the company is operating or the entire economy and can influence the repayment capacity and willingness of the company. The credit risk rating tool considers the following broad areas in evaluating the default risk of a borrower: 1. Financials 2. Business performance 3. Industry outlook 4. Quality of management 5. Conduct of account The tool focuses on these areas for assessing the credit risk of the company. These areas are divided into several sub- areas and each sub areas is further divided into a number of parameters. Scores are assigned to each of the parameters in the different sections on a scale of 0 (poor) to 4(excellent) up to two decimal points. Scoring of some of these parameters is subjective while for others it is done on the basis of pre defined objective criteria.
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The scores given to the individual parameters multiply by allocated weights are aggregated and a composite score for the company is arrived at in percentage terms. Weights are assigned to different parameters based on their importance. The overall percentage score obtained is then translated into a rating on a scale from AAA to D according to a pre- defined range as under:
Score Obtained
Above 80.00 Above 77.50 upto 80.00 Above 72.50 upto 77.50 Above 70.00 upto 72.50 Above 67.50 upto 70.00 Above 62.50 upto 67.50 Above 60.00 upto 62.50 Above 57.50 upto 60.00 Above 52.50 upto 57.50 Above 50.00 upto 52.50 Above 47.50 upto 50.00 Above 42.50 upto 47.50 Above 40.00 upto 42.50 Above 30.00 upto 40.00 30.00 and below
Category
PNB - AAA PNB - AA+ PNB - AA PNB - AAPNB - A+ PNB - A PNB - APNB - BB+ PNB - BB PNB - BBPNB - B+ PNB - B PNB - BPNB - C PNB - D
Risk Indicator
Minimum Risk
Marginal risk
Modest risk
Average risk
Marginally acceptable risk
High risk Caution risk
Factors to be considered in rating: 1. Tool consists of several qualitative parameters that are to be evaluated subjectively. It is therefore necessary to be adequately familiar with the company and the industry. Information should be collected about the company from all possible sources to conduct this exercise accurately. 2. The data used to rate company should be annualized and comparable before it is used for rating purposes. While evaluating a company against a industry the following points should be kept in mind: a. The companys value should only be compared with peers.
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b. Size/ capacity/ volume are inductive factors in selecting peers. c. The sample of companies chosen for industry comparison should be identical. d. The number of companies in sample should be reasonable. e. The sample size should be atleast 5 companies which are in operating conditions. f. For companies where industry data is not available, data for other comparable industries can be used. g. In case latest data of peers is not available then the last available data which is no more than 1 year old may be taken. 3. Wherever a particular parameter is not applicable, no score should be given and it should be made NA so that its score gets distributed in other parameters of that section. 4. For multi divisional companies evaluation should be done separately for each business. 5. The CPRMD, head office will provide the industry score to be used for all major industries and till then it may be assigned as 50%.
The rating is divided into 5 areas which consists of sub-areas with several parameters under each sub area. These areas are: 1. Financial strength 2. Business performance 3. Industry outlook 4. Management evaluation 5. Conduct of account
1. Financial strength: It indicates the health of the company and the potential risk involved in lending to the company. The financial strength may be assessed by a. analyzing past performance
b. its trend c. its expected future performance and risk d. subjective assessment of quality of financial performance.
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Within these areas parameters are defined. These parameters are taken from financial statements viz. balance sheet, profit and loss account, cash flow statement etc. of the company. Scores are assigned to the parameters and they are combined to arrive at a score for each of the above areas. These computed scores are then combined according to assigned weights to arrive at the cumulative financial score. The parameters under each category are:
a. Past performance
Growth parameter gross sales growth rate Profitability parameter OPBDIT/ Sales Efficiency parameter short term bank borrowings/ Net Sales Cash flow parameter operating cash flow/ Total Debt net operating cash flow/ Total Debt Solvency parameters debt equity ratio TOL/ TNW Liquidity parameter current ratio Debt coverage parameter interest coverage DSCR Return on capital employed
b. Expected future performance

Impact of contingent liability Foreign transaction risk Impact of merger/demerger/ expansion on key financials Cash flow adequacy Impact of diversion on future financials
c. Subjective assessment
Transparency in accounting Realisability of inventory Realisability of debtors Quality of investments and loans & advances
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d. Trends
Net sales PBDT Non recurring income and expenditure/ Net sales Operating cash flow/ total debt Total current assets/ short term bank borrowings
2. Business Performance: It measures the operational efficiency and core competence of a company vis-a-vis its competitors. These factors determines the ability of the company to generate funds to repay its debts. It is assessed by two sub areas: a. operating efficiency b. market position Within these areas parameters are defined separately for services and manufacturing sector. Scores are assigned to the parameters and they are combined to arrive at a score for each of the above areas. These computed scores are then combined according to assigned weights to arrive at the cumulative score for the company on business performance. The parameter under each category are:
a. Operating efficiency
Operating leverage Inventory turnover Net sales/ current assets Net sales/ operating assets Raw material/ cost of production wages/ cost of production power cost/ cost of production administrative and selling expenses/ net sales cost of goods sold/ net sales credit period allowed credit period availed
b. Market position
Competitive position
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Input related risk Production related risk Product related risk Price competitiveness Marketing Others
3. Industry Outlook: Rating cannot be assessed without considering with the industry in which the company is operating. Two companies in different industries would have different credit worthiness depending on the outlook for their industries. The industry rating is used to adjust the score on business performance. The CPRMD provides the industry score to be used for all major industries till which it is assigned as 50%. The parameters under this are: Expected industry growth rate Capital market perception Regulatory framework tax concession - tariff protection Industry cyclicality Demand supply mismatch Financial performance of industry return on capital employed - price stability - operating profit margins - earning stability Technology used and its obsolescence Threat from environmental factors Threat from globalization Structural attractiveness supplier power - buyer power - threat of product substitution - threat of new entrant - competition within the industry
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4. Management evaluation: The quality of management and management structure are important indicators of a companys credit risk. Evaluation of management is important not only due to its impact on companys performance which determines its capability to repay but also from the point of view of its integrity. This is because the intentions of management determine the willingness of the company to repay its debt. The two sub areas considered for this purpose are: a. Achievement of past targets b. Subjective assessment of management quality Within these areas parameters are defined separately for services and manufacturing sector. Scores are assigned to the parameters and they are combined to arrive at a score for each of the above areas. These computed scores are then combined according to assigned weights to arrive at the cumulative score for the company on business performance. The parameter under each category are:
a. Achievement of targets
Achievement of sales target Achievement of PBT
b. Subjective assessment of management

Management set up and corporate governance Commitment and sincerity Track record in execution of projects Track record in debt repayment Track record in industrial relations Financial strength/ flexibility/ group support Capital market perception
5. Conduct of account : It refers to how the borrowers existing accounts with our bank as also with other banks are being conducted and whether any problem are being faced. It provides an useful indication about the ability and willingness of the borrower to meet his obligations.
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The evaluation of conduct of account is done on basis of its PMS rank or PMS index score. The PMS rank is used as an input in credit rating model. It is converted into a scale of 0 to 4 according to the table for computation. PMS rank 8-10 6-7 4-5 3 1-2 SCORE 0 1 2 3 4
For companies which have not been banking with PNB earlier, the PMS score is not available. For such companies the aspect of conduct of account be ignored and the remaining score should be scaled upto 100 and the rating assigned accordingly.
RATIOS CONSIDERED IN CREDIT RISK RATING MODEL ARE:
1. Growth Ratios Percentage increase in gross sales = Sales in current year sales in three years ago ^1/3 -1 * 100
2. Profitability Ratio
a) Operating profit ratio =
OPBDIT Net Sales
OPBDIT = Profit before depreciation, intt. and tax extra ordinary income + extra ordinary expenses other income
b) ROCE (Return on capital employed) =
PBIT Average Capital Employed
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PBIT = Profit before interest and tax + extra ordinary expenses extra ordinary income interest on short term loan. Capital employed = Tangible net worth + preference capital + total borrowings short term bank borrowings commercial paper Average capital employed = Average of previous and current year
c) Cash profit ratio =
PBDT Net Sales
PBDT (Profit before depreciation and tax) = Profit before depreciation and tax + extra ordinary expenses extra ordinary income
3. Current Ratio =
Current assets Current liabilities
Current assets = cash and bank balances + investments in government securities + sundry debtors + bills receivable + inventories + loans and advances + advance payment of tax + pre-paid expenses + other current assets Current liabilities = short term bank borrowings + commercial paper + loan from corporate bodies + bills discounted + sundry creditors + int. Accrued + unmatured financial charges + advance against work in progress + inter office adjustment + provision for tax/dividend + other current liabilities
4. Solvency ratio
a) Debt equity ratio =
Debt Equity
Debt = Total borrowings + preference capital short term bank borrowings commercial paper loans from corporate bodies
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Equity = Tangible net worth b) Total outside liability to tangible net worth = TOL TNW TOL = Total Borrowings + Preference Capital + Current Liabilities & Provisions + Bills Discounting TNW = Equity capital + reserves & surplus Revaluation reserve Accumulated losses misc. Expenses not written off intangible assets accumulated depreciation not provided for. 5. Cash Flow Adequacy ratio
a) Operating cash flow to total debt = Operating cash flow Total debt
b) Net Operating cash flow in total debt = Operating cash flow interest dividend tax Total Debt
6. Debt Coverage Ratio a) Interest coverage ratio = EBITDA Total interest EBITDA (Earnings before interest , tax, depreciation and amortisation) = Profit before depreciation, interest tax and amortisation + extra ordinary expenses extra ordinary income Total interest = gross interest + interest capitalised b) DSCR (Debt Service Coverage Ratio) = PBDIA Intt. + TL instalments PBDIA (Profit before depreciation, interest and amortisation) = Profit after tax + depreciation + amortisation + interest on term debt + extra ordinary expenses extra ordinary income Intt. TL instalment = Gross int. On term debt + interest capitalised + lease rent +instalment due for one year
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c) Total current assets to short term bank borrowings = Total current assets Short term bank borrowings
7. Efficiency Ratio
a) Current assets turnover ratio =
Net sales Current sales
b) Operating assets turn over ratio Net sales Operating assets Operating assets = total assets (revaluation reserve + capital work in progress + investments + intangible assets + share applicable money + Misc. Expenses not written off + accumulated expenses + loans & advances group/associates/other companies) + depreciation c) Inventory turnover ratio = Cost of goods sold Average inventory d) Collection period = Average debtors Average daily sales Debtors include bills receivable & bills discounting but net of provisions Sales are gross sales net of internal transfers e) Creditors holding ratio = Average Creditors Average daily cost of sales Creditors for purchase of goods / services and expenses. It also includes bills payable / acceptances
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8. Operating Ratio a) Short term bank borrowings to net sales = Short term bank borrowings Net Sales b) Raw material to cost of production = Total raw material expenses Cost of production Raw material expenses = Consumable of raw material, stores & spares & packing expenses, freight inward, handling expenses, purchase tax and procurement expenses be also considered as part of raw material expenses. c) Wages to cost of production = Wages Cost of production Wages include salary & wages, payment of bonus, contribution to EPF, staff welfare expenses, commission to employees and remuneration to directors d) Power to cost of production = Power Cost of production Power includes power and fuel expenses
e) Admin. & selling expenses to net sales =
Admin. & sales expenses Net sales
f) Cost of goods sold to net sales =
Cost of goods sold Net sales
9. Leverage Ratio: Operating leverage = Total Contribution Contribution Fixed cost Total Contribution = Sales Variable cost
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Variable cost = Total raw material consumption + power & fuel + indirect taxes + wages(70%) + repair plant + other operating expenses + advertisement + marketing & selling expenses + distribution expenses Contribution fixed cost = PBIT +extra ordinary expenses extra ordinary income
Credit risk rating models The bank has several rating model according to the requirement of loans and the wrth of the clients. These models are:
S.No. 1 2 3 4 5 6 7 Credit Risk Rating Model Applicability Total Limits Sales large corporate Above Rs. 15 crore Above Rs. 100 Crore Mid corporates Above Rs. 5 Cr and upto Rs 15 Cr Above Rs 25 Cr and upto Rs 100 Cr All trading concerns falling in the large corporate category shall also bbe rated Small loans Above Rs 50 lakh & upto Rs 5 Cr Upto Rs 25 Cr Small loans II Above Rs 2 lakh & upto Rs 50 lakh NBFC All Non Banking Financial Companies irrespective of limit New Project Rating Model Above Rs. 5 cr cost of project above rs 15 Cr Entrepreneur New Business Model Borrower setting up new cost of project above rs 15 Cr business and requiring finance above Rs 20 lac upto Rs 5 Cr Half Yearly Review of Rating i) all listed companies rated on large / mid corporate rating models ii)other borrowel accounts rated on large / mid corporate rating models availing limits (FB+NFB) above Rs 50 Cr from bank Facility Rating Framework Assigning rating to facility sanctioned to the borrower based on default rating and securities available Credit Risk Rating Models For Banks all banks and financial institutions
9 10
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PROBLEM STATEMENT
Earlier, there was a noticeable risk that was associated with the loans provided by the banks. But due high competition and high profitability motive, banks keep on providing loans to the customers without any deep study of the background of the customer (corporate). This in return, sometimes, created problems of financial losses, downfall in market value and even affected the regular working of bank because of large amounts of NPAs. These actions lead to the downfall of banking and financial sector, so a need of proper management of risk aroused. This need gave rise to the concept of credit appraisal and risk analysis. This process helps the bankers to provide loans to the corporate with the minimum risk of failure.
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OBJECTIVE OF STUDY
To understand, measure and manage the credit risk to ensure sustained growth of healthy loan portfolio while dispensing the credit. To know the process of credit appraisal applied by the bank to provide loan to the corporate. To understand various types of risks involved in providing loan To find out ways to mitigate these risks. To analyze the credit worthiness of the clients To understand and carry out ratings provided by bank to rate any corporate from minimum risk to high risk corporate and understand their significance.
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PROJECT DESIGN AND METHODOLOGY
The goal of the study is to understand the concept of credit appraisal process and risk analysis in banks. This study generally includes collection of data from two basic sources of information: 1. Primary source 2. Secondary source
1. Primary source:
Discussions with senior manager (mentor) Credit of PNB credit department. Discussions with senior manager CRMD of PNB rating department. Meeting with the clients.
2. Secondary source: Punjab national bank officers association manual for banks and RBIs guidelines on lending of loan. Internal circulars and documents of the bank. Auditors report of the related company. Annual reports of the company.
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CASE STUDY ABC STEEL AND POWER LTD.
1. Name of the Borrower: M/s ABC STEEL AND POWER LIMITED. 2. BO & Controlling Office: Tropical Building 3. CO: North Delhi Circle
GIST OF THE PROPOSAL A. Sanction of Working Capital Limits: Rs. in Crores Existing Proposed Fund Based Working Capital Non Fund Based 0.00 Working 0.00 30.00 20.00
Capital(LC/BG) 0.00 B. For Term Loan : Purpose Cost of Project Total Debt Promoters contribution Proposed TL (our share) DER Repayment Period Door to door tenor To Part Finance the Proposed 128.70 93.50 35.20 45.00 2.66:1 8 years 10 years 6 months 50.00
C. Approval of ROI/ Service charges as under: AS PER THE BANKING POLICY.
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Facility Existing Proposed
Applicable rate
Rate of interest
CC PC TL
NA
BR+3.25%
BR+4.50
NA
BR+2.25%+TP BR+4.50+0.50 As per Banks As per Banks clause Nil NA clause Nil NA
Processing Fee Upfront Fee Lead Bank Fee Commission LC/BG on NFB Other charges, if any NA
In
line
with *
Lead Bank** NA NA
D. Approval of other Issues, if any : 1. To allow release of increase in working limits for Ghaziabad unit after obtaining individual documents subject to full tie of working capital pending execution of joint documents and creation of charge within 3 months from the date of our sanction failing which penal interest @ 1% shall be charged after expiry of -6- months. 2. To allow Bills Receivable/Debtors period up to 75 days for all in case of Ghaziabad Unit for calculation of Drawing power. 3. To allow to charge commission on LC/BG as per lead bank. 4. To allow transportation of goods under LC through unapproved transporters. 5. To consider to waive fire insurance for Steel Billets/Ingots/TMT Bars/Wire Rods for both Ghaziabad and Orissa Unit.
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6. To allow full interchangeability for LC and BG Limit. 7. To allow per customer limit at Rs.3.00 Crores for TMT bars and Rs.5.00 Crores for value added products.
CASE: Part - I
1. Borrowers Profile : a. b. Group Name P C Rathi Group
Address of Regd./Corporate Office 1. Regd. Office: 24/1A,Mohan Cooperative Industrial Estate, Mathura Road, New Delhi-110 044. 2.Corporate Office: A 3, South of G T Road, Ghaziabad, U P
c.
Works/Factory
1. A 3, South of G T Road, Ghaziabad, U P 2. Village Potapali- Sikirdi, Thana Burla, Distt. Sambalpur Orissa.
d.
Constitution and constitution code Widely held Public Ltd. Company as per ladder
e.
Date of incorporation/ Establishment
26th December 1971
f. g. h.
Dealing with PNB since Industry/Sector Business Activity (Product)/Installed Capacity.
New Account Steel Sector To carry on the business of manufacturing, trading, selling in all type and kinds of Steel and Steel Products.The Company is having two manufacturing units with installed capacities as under: 1.Ghaziabad, U P having manufacturing Capacity of Steel Bar/TMT/Wire Rod and Steel Billets of 175000
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TPA & 40000 TPA respectively. 2. Sambalpur, Orissa having manufacturing capacity of Sponge Iron and Steel Billets of 150000 TPA & 150000 TPA respectively. Company has also installed 20 MW Captive Power Plant at Orissa to take care of power requirement of the plant.
2. Directors : Sl. No. Name & Designation Address/Mobile No. of Directors Whether Promoter/ Professional/ Nominee 01. Sh. Pradeep Rathi 26A,Sadhna Enclave, New Delhi-110017 Promoter
02.
Sh. Prem Narayan Varshney
D-89,GangaVihar,Gakulpuri (Shahdara),Delhi-110094 T-21/12,DLF PhaseIII,Gurgaon-122002
Whole-Time Professional Director IndependentNon Promoter Director Independent Non Promoter Director Independent Non Promoter Director
03.
Sh. Shree Kumar Daga
04.
Sh. Dwarka Das Lakhotia
53A,Old Arya Nagar, Ghaziabad,UP-201001
05.
Sh. Ranjeet Khattar
R-785,New Rajinder Nagar,New Delhi-110060
3. Share Holding Pattern as on 31.03.2012 :

Names of large share holders Number of Shares held Face value of share holding (Rs.) Share-holding %age
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Promoters Mutual Fund Financial institutions/banks Bodies Corporate Individuals NRI Clearing Members Total Others Grand Total
16112914 751245 2253543 3199844 8617298 284216 89001 31308061 50 31308111
161129140 7512450 22535430 31998440 86172980 2842160 890010 313080610 500 313081110
51.47 2.40 7.20 10.22 27.53 0.91 0.28 100 0.00 100
4. Background :
The Company is a profit making, dividend paying and listed Company. Company is engaged in the manufacture of rebars and wire rods which form part of the longer segment of the steel industry. Company also manufactures stainless steel products having an installed capacity of 40000 TPA. In the year 2007-08 the Company had completed the project for setting up a backward integration plant at Orissa to manufacture Steel Billets through DRI-captive powerCCM route. Company has also got Coal Linkages from Coal India Limited for regular supply of coal for Orissa unit. Company has also been allotted Coal Block in Chattisgarh Rathi Steel And Power Ltd has chosen the world famous Thermex technology developed and patented by M/s Henigsdorfer Stahl Engineering GmbH, Germany. The company has a very strong and committed network of dealers with 800 retail outlets spread all over Northern India.
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The company is dealing with reputed customers, which starts from small house builders to mega-projects and high profile companies such as DMRC, IOC, Supplies to SEZ, Unitech, Jaiprakash Group, IOC, DLF, CPWD, PWD, Military Engineering Services and all other major construction companies. 5. Facilities Required :
(Rs. in Crore)
Nature Fund Based CC(H) Fund Based Ceiling Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling Term Loan TOTAL COMMITMENT
Existing
Proposed
Secured/Unsecured (as per RBIs guideline)
30.00 Secured 0.00 30.00
15.00 Secured 5.00 Secured 20.00
NA
45.00 95.00
6. Management : The Company is promoted by Late Shri Punam Chand Rathi. Presently managed by Sh Pradeep Rathi having experience of more than 40 years in Steel Melting and Rolling/Re-Rolling. All the family members are actively involved in running of this Company. Presently has five Directors on it. Shri Pradeep Rathi is Managing Director and other directors are Shri Shree Kumar Daga, Shri Prem Narayan Varshney, Shri Dwarka Das Lakotia and Shri Ranjit Khattar. Both the sons Mr. Udit Rathi and Mr. Srivardhan Rathi are actively involved in the business. Mr. Udit Rathi, aged about 29 years is the chief executive officer of the Company. He is a bachelor of Science in Industrial Engineering from Purdue University, USA. He is the man behind successful implementation of Orissa Unit. He is actively involved in
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Companys expansion and growth plans. He is also involved in arranging the Companys financial needs and also in negotiations with banks/FI/FII. Mr. Srivardhan Rathi, aged about 25 is a bachelor in Economics.
7. Security:
For Term Loan: - Primary: First Pari Passu Charge on Fixed Assets of the Company (Charge to be created within 120 days). - Collateral: Second Pari-passu charge on current assets of company. Personal Guarantee of Mr. Pradeep Rathi & Mr.Udit Rathi.
For Working Capital - Primary: First Pari Passu Charge on Current Assets of the Company (Charge to be created within 120 days) - Collateral: Second Pari-passu charge on Fixed assets of company. Personal Guarantee of Mr. Pradeep Rathi & Mr.Udit Rathi.
8. Credit rating by external agency (CRISIL/ ICRA/ CARE/ FITCH INDIA): ICRA LB/ A4 done on June 2011.
LB - All Bonds, NCDs, and other debt instruments (excluding Public Deposits) with original maturity exceeding one year. Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
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A4 - All instruments with original maturity within one year. Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default.
9. Credit rating by PNB: Rating was carried out in the CRMD department for calculating the risk involved and credit worthiness of the client. The ranking obtained is BB with a score of 52.73% the details of which is explained in appendix A.
10. Financial Position of the Company: Rs. in Crores Two years earlier One year earlier Previous year (31.3.2011) Estimates Provisional Projection for the current year ( 31.3.12) Audited Gross Sales Net sales (net of excise duty etc.) Other Income Operating Profit/Loss *(EBIDTA) Profit before tax Profit after tax Depreciation/Amortization of expenses 7.46 11.13 15.87 6.20 4.38 18.15 11.35 14.05 19.74 15.02 11.44 20.32 13.09 12.55 21.13 30.47 23.73 21.29 1.01 53.55 1.27 54.93 1.94 69.77 1.00 83.30 1.45 87.53 1.00 107.21 796.25 771.90 Audited 778.99 755.80 Audited 845.30 824.27 Estimate 905.95 879.26 Provisional 954.68 935.66 for the year ( 31.3.12) s for the current year ( 31.3.13) Projected 1171.53 1139.15
(31.3.09) (31.3.10)
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Cash profit/ (Loss) * Paid up capital Share Application Money Reserves and Surplus excluding revaluation reserves AND Deferred Tax Misc. expenditure not written off Accumulated losses * Deferred Tax Liability a) Tangible Net Worth (TNW) b) Investment in allied concerns and amount of cross holdings c) Adjusted TNW(a b) * Total Borrowings Secured Unsecured Investments Total Assets Out of which net fixed assets
27.00 24.31 1.54
22.53 28.99 1.16
33.79 31.31 -
31.76 31.31 -
33.68 31.31
45.02 31.31 -
119.97
128.88
144.61
156.05
157.16
179.78
0.00
0.00
0.00
0.00
0.00
0.00
0.00 6.71 152.53
0.00 7.47 166.50
0.00 2.53 178.45
0.00 3.03 190.39
0.00 0.39 188.85
0.00 3.53 214.62
Nil
Nil
Nil
Nil
Nil
Nil
152.53 229.50 214.94 14.56 0.95 543.87 323.76
166.50 229.51 211.79 17.72 0.95 572.04 331.22
178.45 249.00 226.26 22.74 1.05 615.47 347.81
190.39 277.79 237.16 40.63 0.95 676.47 379.61
188.85 254.76 218.90 35.85 1.09 660.28 346.65
214.62 346.12 282.99 63.13 0.95 815.10 454.32
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Net Working Capital * Current Ratio(Considering installments due within 1 year as current Liab.) Current Ratio(Excluding installments due within one year as part of current Liab.) Debt Equity Ratio(TOL/TNW) Term liability/ Adjusted TNW TOL/Adjusted TNW Operating Profit/Sales Long Term Sources Long Term Uses Surplus/ Deficit Short Term Sources Short Term Uses Surplus/ Deficit **
45.90
56.59
70.21
83.65
85.96
100.25
1.19
1.22
1.24
1.24
1.24
1.22
1.28
1.32
1.37
1.40
1.40
1.39
2.57
2.44
2.45
2.55
2.49
2.80
1.41
1.27
1.27
1.25
1.16
1.32
2.57 6.94% 382.03 336.13 45.90 161.84 207.74 (45.90)
2.44 7.27% 396.01 339.42 56.59 176.03 232.62 (56.59)
2.45 8.46% 427.45 357.25 70.21 188.01 258.22 (70.21)
2.55 9.47% 468.18 384.53 83.65 208.29 291.94 (83.65)
2.49 9.36% 443.61 357.65 85.96 214.76 300.72 (85.96)
2.80 9.41% 560.74 460.49 100.25 254.37 354.62 (100.25)
* In case of negative growth/loss/erosion in TNW and NWC, the figures should be prefixed with -ve sign. ** To match with NWC
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11. Interpretation drawn in respect of latest financials:
a. Paid up capital : As on 31.03.2012 the authorized/issued/paid up share capital of the Company is as under: Authorised Share Capital 50000000 Equity Shares of Rs.10/- each Issued/Paid up Share Capital 31308111 Equity Shares of Rs.10/-each fully paid 313081110.00 Rupees 500000000.00
b. Reconciliation of TNW : The TNW of the company is Rs178.45 Lac at the end the financial year 2010-11. The Provisional TNW for the financial year 2011-12 is Rs.188.85 Crores. The TNW for the financial year 2012-13 has estimated at Rs.214.62 Crores. The TNW of the company will increase constantly by retaining the entire profits of the business. Keeping in view of the past trend of profitability of Group concerns and financial strength of the promoters of the company, the estimates/projections of TNW can be accepted. (Rs. in Crores) TNW as on close of FY ended 31.3.2011 Add Less TNW as on close of FY ended 31.3.2012(Prov.) 178.45 cr. 10.40 cr. 0.00 188.85 cr.
c. Sales : The promoters of the company have achieved the Net Sales of company for the financial year 2010-11 at Rs.845.30 Cr. For the year 2011-12 the Company has achieved turnover of Rs. 954.68 Crores (Prov.) and surpassed its estimate of Rs.905.95 Cr. For the year 2012-13 the Company has estimated sales of Rs.1171.53 Crores. The promoters of the company are already in the line of business and have well established marketing links. The Indian steel Industry has made a rapid progress on strong fundamentals over the recent few years. Even in the tough times of economic slowdown, the industry succeeded to sustain its
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positive growth momentum on the strong fundamentals of domestic demand from construction, automobile and infrastructure sectors. Keeping in view the past trends of group and past experience of the promoter of the company, the estimate/ projection of turnover is achievable and can be accepted.
d. Profitability : For the year 2011-12 the Company has achieved net profit of Rs. 12.55 Crores (Prov.) as against estimate of Rs.11.44 Crores. The company has estimated the before tax net profit for the financial year 2012-13 & 2013-14 at Rs. 23.73 Cr. & Rs.32.10 Cr. The profit of the company will increase constantly with the increase in the turnover of the company. The promoters estimated the profits of the company on the basis of the past experience of the industry of more than 40 years. Hence keeping in view the industry scenario and vide experience of the promoters, the projections/estimates of the profitability of the company can be accepted.
e. Investments : As on 31.03.2012 Company has invested in the shares of Bank of Baroda and State Bank of Bikaner and Jaipur. Total investment as on 31.03.2012 is Rs.1.05 Crores.
f. Current ratio : The Current ratio of the Company (without considering the installments of TL due within one year as part of Current Liab.) was 1.32 as at 31.3.2010 and 1.37 as on 31.3.2011 and 1.40 as at 31.03.2012 which is above the benchmark level of 1.33.The Company has estimated the current ratio for the year 2012-13 at 1.39. However as per lead banks note current ratio (considering the installments of TL due within one year as part of Current Liab.) was 1.22 as at 31.03.2010 and 1.24 as on 31.03.2011 and at 1.24 as at 31.03.2012 which is below the benchmark level of 1.33. Current ratio for the financial year 2012-13 & 2013-14 has been estimated at 1.22:1 & 1.25:1. However considering the fact that the promoter of the company are already in the line of business from last 40 years and well known from the industry scenario and the company have adopted internationally proven technologies to manufacture its products and have large number of infrastructure
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and retail outlets and Lead Bank i.e. Bank of Baroda has accepted the same. We recommend for approval of the same in line with Lead Bank.
g. Long Term Debt Equity Ratio : The DER of the Company for the financial year is 1.16. The promoters of the company have estimated the DER for the financial year 2012-13 at 1.32:1. The promoters of the company approached the bank for term loan to add one furnace and to increase the SS melting capacity from existing 40000 TPA to 84000 TPA and to modernize the existing wire rod mill to international standards. The DER of the company will further improve year to year with the repayment of term loan and by retention of profits of the company into business. The estimated DER for financial year 2013-14 is 1.32:1. The debt equity ratio of the company in all the years under consideration is below the acceptable bench mark of the bank i.e. 2:1 and proves the long term solvency of the company. Hence keeping in view the industry scenario and financial strength and experience of the promoters of company into consideration estimates/ projections of Debt Equity ratio of the company can be accepted. 12. Conduct of account : Not applicable as it is a new account.
Part II
1. Justification for working capital sanction:
The Company has explained the change in product mix. The Company has revised its estimates for turnover for the year 2011-12 at Rs.672.63 crores and requested for fund based working capital requirement of Rs.90.00 Crores. Also for the year 2012-13 Company has projected a turnover of Rs.897.42 crores and requested for fund based working capital of Rs.125.00 crores. There has been a surge in the demand of Stainless steel products. The future demand for stainless steel is also likely to be determined favourably from all these sectors. Company has been able to improvise the product mix from 10% in the year 2008-09 to 26% in the year 2010-11. Companys aim is to achieve 40-45% share of value added products in the
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overall product mix which will help the company to maintain the desired operating margins in spite of tough market conditions.
Assessment of Fund Based Limits (Ghaziabad Unit) The MPBF for the year 2011-12 & 2012-13 for Ghaziabad, as per appraisal note of leader bank i.e. BOB, is estimated/projected as under: Rs. In Crores Particulars 31.03.10 Audited 31.03.11 31.03.12 31.03.13
Audited Estimated Projected
1. Total Current Assets 2. Less Current Liabilities(other than Bank borrowing and installments due within 1 year)
117.43
144.23
182.52
235.01
39.67 77.76 45.07 84.75 32.68
43.79 100.43 56.87 100.66 43.57 36.06
37.33 145.19 90.00 127.33 55.19 45.63
45.96 189.05 125.00 170.96 64.05 58.75
3. Working Capital Gap 4. Actual / Projected bank borrowings 5. Total current liabilities (2+4) 6. NWC (1-5) 7. Minimum stipulated margin 25% of current assets 8. Item 3- Item 7
29.36 64.38 48.40 99.56 130.30
9. Item 3- item 6 10. MPBF(item 8 or 9, whichever is lower)
45.07 45.07
56.87 56.87
90.00 90.00
125.00 125.00
Accordingly based on Companys representation, on 18.04.2012 Lead bank has reassessed the working capital requirements for the year 2011-12 at Fund based Limit of Rs.90 Crores Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE
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SIP 2012
and non fund based limit at Rs.60 Crores. Lead Bank also assessed the working capital requirement for the year 2012-13 at Fund based Limit of Rs.125.00 Crores and Non Fund Based Limit at Rs.90.00 Crores.
2. Justification for Non Fund based limits
a. Letter of credit The Company has informed that they will be procuring MS/SS Scrap and other Ferro alloys on a regular basis for manufacturing of higher grades of steels and accordingly require higher LC Limits(Inland/Foreign) and requested for RS.75.00 Crores limits for the year 2012-13. b. Bank guarantee Company has informed that one or two regular suppliers (TATA STEEL) who was doing business on cash basis have agreed to extend credit period provided Company will be able to submit Bank Guarantee. Total value of material (Ferro alloys/Billets etc) procured from Tata Steel on monthly basis will be Rs.5.00-10.00 crores. Accordingly value of BG required for will be Rs.10.00 to 12.00 crores valid for at least one year to maintain regular supply of material. Balance Rs.3.00-5.00 crores limit will be required in the normal course of business for giving guarantees to Govt. Departments etc.
c. Justification for term loan In view of good demand scenario Company has now decided to improvise the product mix accordingly to fetch better realization. As a step toward this Company has decided to add 1 no. new furnace and to increase the SS Melting Capacity from existing 40000 TPA to 84000 TPA and to modernize the existing wire rod mill to international standards and also to enhance the existing rolling capacity of wire rod mill from 85,000 TPA to 1,10,000 TPA and
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SIP 2012
also to improvise the product mix by addition/increasing the share of wire rod coils of higher grades of stainless steel and alloy steel and annealing-pickling line. The Company has got the TEV study of the proposed expansion done by ITCOT Consultancy and Services Limited, an approved agency. 1. Summary of cost of project and means of finance The Company has estimated the total capital expenditure for this scheme at Rs. 125.17 crore, which is proposed to be funded by way of long term loan of Rs. 93.50 crores and balance of Rs.31.67 crores by way of internal accruals/promoters contribution. However our Technical Cell,HO has vetted the TEV study and revised the Cost of Project and Means of Finance as under: Rs. in Crores S.No. 1. 2. 3. 4. 5 6. Cost of Project Land Site Development Building & Civil Works Plant & Machinery Misc Fixed Assets Preliminary Expenses 7. 8. 9. Interest during Construction Contingencies Margin Money for Working Capital 128.70 128.70 14.01 4.93 7.50 & Pre-operative Rs. Existing Nil 9.64 86.62 2.25 3.75 Means of Finance Promoters Contribution Term Loan Rs. 35.20 93.50
2. Projected Profitability of the company (Ghaziabad Unit) Appendix B 3. DSCR calculations Appendix C 4. Detailed Sensitivity Analysis Appendix D 5. Proposed repayment schedule: Scheduled date of Completion of Project 30.09.2013
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Commercial Operations Date (COD Implementation period (in months) Moratorium (in months) Repayment period in quarters No. of installment Starting Date(Quarter) End Date (Last installment) Door to door tenor
01.10.2013 18 months 12 months 32 Quarters 32 December quarter 2014 September quarter 2022 10 Year 6 months
Part III
1. Technical Aspects Advantages of location o Located on the main road on national Highway no 24 and all types of infrastructure facilities are available nearby. o Nearness to source of raw-material. Company is also having a backward integration unit in Orissa producing M S Billets. o Availability of skilled and semi skilled labour. o The factory premise is within 1KM from Power Grid and presently power in the unit is supplied from an independent feeder and continuous power supply is available. o The Unit has a dedicated compressed natural gas pipe line from GAIL with a capacity of 27000 Cu. m. o Proximity to market quick delivery in small lots.
Technology o The company has adopted internationally proven technologies to manufacture its products. Company proposes to set up/upgrade latest technology based imported as well indigenous machinery.
Inputs: Raw Materials:
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The performance and productivity of any process primarily depend upon the quality of various raw materials. In addition to the above, it is also imperative that the raw materials should meet the specific quality requirement demanded by the process as well as the equipment selected and technology adopted. The other important criteria for raw materials are the cost of transportation. As already stated that Company has an integrated steel manufacturing unit At Sambalpur wherein M S Billets are manufactured which is a basic raw material for manufacturing of TMT Bars at Ghaziabad unit. Ghaziabad unit is also having Steel Melting Shop with 40000 TPA. Main raw materials for manufacture are Shredded Scrap, Ferro Alloys etc. Ferro Alloys are procured from renowned manufacturers and Company has been dealing with them for the last so many years. Scrap is procured indigenously as well as from out side India. For the proposed expansion for manufacture of higher grades of Stainless Steel Products Company wishes to import the raw materials to manufacture quality products. Company does not foresee any problem in procurement due to long term relationship enjoyed with world renowned Scrap Dealers. With ICD facility at Loni and Dadri, its going to be cost effective to import raw materials directly. In view of existing steel manufacturing facilities at Sambalpur as well as Ghaziabad unit being very near to the market Company do not foresee any problem in getting the raw material for the proposed enhancement in capacity. Water At present Ghaziabad unit is having 3 nos. bore wells which are more than sufficient for the existing operations. Sufficient ground water is also available in and around area and the unit is not likely to face any difficulty in meeting its water requirement. Power The company already has 13.5 MVA load from UPSEB. Total power requirement after the proposed expansion will be 18500 KVA (18.5 MVA). Extra load required for the proposed expansion will also be taken from UPSEB. Manufacturing Process Company has been in this line of activity for the last more than 40 years and has proven manufacturing process for both TMT Bars as well as steel melting shop and has been upgraded as per the latest technology. Manpower Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE
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Companys Ghaziabad unit is Located on the main road on national Highway no 24 and all types of infrastructure facilities are available nearby. Availability of manpower both skilled and non skilled is not a problem. Transportation Unit is located in an industrial area on NH-24 where availability of road as well as rail transport is not a problem. Railway line is within one Km of factory premise.
2. Technical Study Cell at HO have accepted the following revised Implementation Schedule:
Commencement Acquisition of land Site development Building/Civil Work Plant & Machinery (Major) - Placement of order - Delivery at site Erection of equipment INDUCTION AOD SECTION CCM ROLLING MILL-WIRE ROD GARRATT LINE Trial Runs Commercial Production January 2013 March 2013 March 2013 Oct.-Nov. 2012 Oct.-Nov. 2012 Sept 2013 Oct 2013 Already started January 2012 Already with the Company Already Developed September 2011
Completion Already with the Company Already Developed June 2013
Dec 2012 March 2013
March-April 2013 April 2013 April 2013 July-Aug 2013 July-Aug 2013 Sept 2013 Oct 2013
3. Pricing
Company is already dealing with various banks and Bank of Baroda is the Lead bank. Company has informed that existing bankers are charging BR plus 2.75% for Term Loan
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SIP 2012
facilities and BR + 3.25% for WC limits. Company has requested that they may not be able to pay higher rate (BR+4.25% as applicable) as this will lead to existing members also start charging higher rate and this will affect the profitability of the company. The Company therefore requested us to fall in line with existing banks and charge ROI at BR+ 2.75% inclusive of term premium for TL and BR + 3.25% for WC limits which has been accepted as the applicable ROI.
4. SWOT
Strengths 1. Strong Management team with professional background and rich industrial experience of the promoters and its family members and a strong exposure in steel industry. 2. Company proposes to set up/upgrade latest technology based imported as well indigenous machinery. The proposed machines & suppliers are tested & tried by the Company as well as other group companies and the proposed suppliers enjoy good reputation in the market. 3. The existing location on which proposed expansion will be implemented is in an industrial area and by the side of National Highway-24 and all types of Infrastructure facilities are available nearby. 4. The factory premise is within 1KM from Power Grid and presently power in the unit is supplied from an independent feeder and continuous power supply is available. 5. The Unit has a dedicated compressed natural gas pipe line from GAIL with a capacity of 27000 Cu.m. 6. Proximity to market, quick delivery in small lots. 7. The company has adopted internationally proven technologies to manufacture its products.
Weakness: 1. Other big player in the steel industry can give tough competition. 2. Change in the govt. policy for steel industry may affect the profitability unit. 3. Rolling Mill industry is high turnover and low margins industry.
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4. Fluctuating prices of raw materials and finished goods.
Opportunity: 1. The unit is already set in 1971 and has a strong network of dealers. The RATHI brand is an established brand for the last more than 50 years. The unit after expansion will not face any problem in marketing its products. 2. The focus of the Central government on road projects (NHDP, PMGSY and PMBJP) and the emphasis of the government on irrigation and water supply projects are expected to give fillip to the construction industry. 3. Combining the investments in the key sectors (steel, aluminum, paper, cement, petrochemicals, textiles, and oil and gas), the industrial investments are expected to increase by 70% over the next 5 years, as compared with that in the past 5 years. This massive investment is expected to result in construction demand of around Rs.100 billion from industrial projects (assuming civil construction to account for nearly 25% of the total capital cost of the projects)
Threats: 1. Frequent fluctuation in prices of Steel which may affect the profitability of the Projects. 2. Big Players like SAIL and Jindals are ramping up the Capacity of SS Products. 3. The Fortunes of the Steel Industry are closely linked to that of the economy in general and infrastructure in particular. 4. Industry is highly cyclic in nature with high mortality rates. 5. Change in the government policies related to the construction/infrastructure industry will have direct impact on Companys performance. 6. Party will obtained NOC from existing Term lending Banks and FIs for PNBs share pf T/L and for acceding to Pari Pasu charge on fixed assests of Company.
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SIP 2012
Recommendations:
On examining the proposal it has been found out that: The management of the company is well experienced. The company has been in operation for past 40 years and has been earning profits continuously. Though there were several issues in the proposal but those has been sort out by the company. The company has been consistent in its performance and payment of its obligations. The rating obtained for the company is PNB-BB which indicates average risk. Justifications for both the working capital and term loan has been examined and accepted with terms and conditions. All the ratios are near to benchmarks and those with variations are justified with acceptable justifications. The financial position of the company is satisfactory.
Keeping in view these points, we recommend: 1. Sanction of working capital of 50 Cr. at BR(10.50%) + 3.25% rate of interst. 2. Sanction of term loan of 45 Cr. at BR + 2.75% + Term Premium. 3. Release the facilities against execution individual documentation subject to full tie up without waiting for NOC from existing bankers.
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DATA ANALYSIS AND FINDINGS

After going through all the methodology it has been found that 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. This is just a preventive measure not the corrective measure. In the credit appraisal process we use different risk analysis such as financial risk, industry risk, management risk, project risk etc. to get to the final step of generating the ratings which then aids in decision making. Several ratios such as current ratio, debt equity ratio, debt service coverage ratio etc. are calculated and analysed w.r.t. benchmarks in order to understand the credit worthiness of the clients. The bank analyses all the 5 Ps in order to have a 360 degree view of the client.
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LEARNING FROM THE STUDY
This study has helped me to greatly enhance my knowledge. I learnt to implement my theoretical financial knowledge practically during the working capital finance and term loan assessment. I learnt that it is not only the financial aspect that is necessary to analyze the credit worthiness of the client but other aspects such as managerial aspect, technical aspect etc. are equally important. I learnt the importance of financial ratios in assessing the clients. I also learnt the credit appraisal process followed in PNB. I also learnt the application and working of PNB TRAC software for calculating the rating of the clients. PNB TRAC is one of the best rating software present for estimating the rank of clients. I learnt the calculations of maximum permissible bank finance to determine the amount of loan to be passed for a specific client. At PNB priority is given to fresh or new clients over the existing clients proposing for renewals.
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SUGGESTIONS
In the rating model there is constant parameters with constant weightages irrespective of the company and the industry in which it operates. Weightage should be assigned to parameters according to the industry in which the company operates. Rating should be performed when calculating the worthiness of the client since the previous rating does not take into account the short term drastic changes such as price level changes etc. The rating model should have some sort of mechanism to prioritize sectors according to their risk content. Since it is a very tedious task to maintain so much documents and files of the clients, an electronic database can be designed to manage the files in systematic order.
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REFERENCES
Internet www.pnbindia.in/ en.wikipedia.org

http://www.icra.in/Content.aspx?cid=VEET9NEN9O4R1FOD9G4HRLJKLJFKJWW4CY7OIC KOFBC2GKL6OW www.org.in/
Books Circulars and manuals from bank. PNBOA manual for Banks and RBIs policies on lending. Credit appraisal, risk analysis and decision making by DD Mukherjee. Annual reports of the company.

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1

CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT BANGALORE- 560029

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Mr. Aravind S. Asst. Professor CUIM

Ankit Koolwal Student MBA in Finance CUIM

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Ankit Koolwal 1121506 CHRIST UNIVERSITY

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

b. Term loan for mega projects c. Non Fund Based Limits

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

PROJECT PROCESS SUMMARY

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

INTRODUCTION TO BANKING INDUSTRY

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

COMPANY PROFILE PUNJAB NATIONAL BANK

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Parameters OperatingProfit NetProfit Deposit Advance TotalBusiness

Mar'09 5690 3091 209760 154703 364463

Mar'10 7326 3905 249330 186601 435931

Mar'11 9056 4433 312899 242107 555005

CAGR(%) 26.16 19.76 22.14 25.10 23.40

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

AWARDS AND ACHIEVEMENTS

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

INTRODUCTION TO CREDIT APPRAISAL

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Letter of Credit (LC) Bank Guarantee.

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Credit Approval Process

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Credit Appraisal process followed in PNB

Submission of request letter and corresponding documents

Carrying out due diligence on the client

Preparing feasibility report

A S Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Re-verify and analyse the proposal

Meeting client in case of queries

Vetting of credit rating report

Sanction of proposal on basis of terms and condition

Acceptance of the terms and conditions by the client

Disbursement of loan from branch

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Ineffective system of monitoring of accounts

Need for credit Risk Assessment

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Marginally acceptable risk

High risk Caution risk

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

Drafted By:Ankit Koolwal, 1121506, CHRIST UNIVERSITY, BANGALORE

b. Expected future performance