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CREDIT

APPRAISAL &
NPA
MANAGEMENT
ARKADIP GUPTA
PGDMB14-101

CONTENTS:
INTRODUCTION
IOB

a general introduction
CREDIT APPRAISAL methods used
NPA MANAGEMENT provisioning of
assets
CASE STUDY ANALYSIS
i. ABC TRADERS
ii. ABC GRAPHICS
CONCLUSION

INTRODUCTION

Experience
Case

at IOB

study details

Lessons

learnt

INDIAN OVERSEAS BANK

Recent Achievements
IOB adjudged Best Public Sector Bank in
Priority Sector Lending by Dun & Bradstreet.
IOB has bagged Best bank Award from Govt
of Tamil Nadu for its support to Self Help
Group (SHGs) in the State.
IOB received Banking Excellence Award
from Finance Ministry, GOI
IOB awarded Customer Focus Award for
constantly delivering industry leading
service standards.
Commendable IT Achievements (CBS, CTS,
Mobile Banking, Payment gateway, etc)

SWOT ANALYSIS

Recent performances (financial)in Crore

Trend Analysis
of IOB

Important ratios
in NPA analysis and values

NAME OF RATIO

VALUE FOR IOB (in crore)

Gross NPA ratio.

4.98%

Net NPA ratio

3.19%

CREDIT APPRAISAL

6 Cs of CREDIT
APPRAISAL

WORKING CAPITAL

A measure of both a company's efficiency and


its short-term financial health. The working
capital is calculated as:

CA

CL

WC

Methods:
I.
Turnover Method
II.
Max. Permissible Banking Finance
III.
Cash Budget Method

Types of Loan
Fund
I.
II.
III.

Based

WC loan
Term loans
Composite loans

Non-Fund
I.
II.

Based

Bank Guarantee
Letter of Credit

The workflow of
CREDIT APPRAISAL

Proposal
approval

STAR
T

Receipt of
documents
from
applicants

Proposal
Assessme
nt

Documen
t
verificati
on

Pre sanction visit


by official

Proposal
preparatio
n

Preparation
of financial
data

Documentati
on
mortgaging
and
agreements
Disburseme
nt of loans
Documen
t
verificati
on
Post
sanction
process
STOP

NPA MANAGEMENT

Importance of NPA management


Reasons:
I.
II.

Internal factors
External factors

Impacts:
I.
II.
III.
IV.

Restriction of cash flows


Drain of profits
Bad effect on equity value
Bad effect on goodwill

Asset Categorization

SubStanard
Asset

Doubtful
Asset

Loss
Asset

Regular servicing of interest and the principal owed to the bank


Their arrears normally dont exceed the timeframe of 90 days

Irregular servicing of interest with period varying from 91days to 1 year


The level of provisioning varies according to the category

Being in the substandard category for over a year reduces the


asset to this category.
They require heavy provisioning and have very low salvage value

They have very little salvage value to account off.


Once inspected by auditors they are normally written off
They require 100% provisioning

Standard
Asset

NPA provisioning

SARFAESI ACT,2002
Allows the banks to recover their nonperforming assets without the legal
intervention. The Act provides three
alternate measures:
I.
Securitization
II. Asset Reconstruction
III. Enforcement of security without legal
powers

Other preventive
measures
DRT
LOAN

RESTRUCTURING

COMPROMISE

/ SETTLEMENT

SCHEMES
BIFR
SALE

OF NPAs TO OTHER BANKS

CASE STUDY ANALYSIS


1.
2.

ABC TRADERS (extension of WC loan)


ABC GRAPHICS ( extension of WC loan,
failure of interest payment and
subsequent sub standard account)

ABC TRADERS
WORKING CAPITAL RENEWAL LOAN
The company primarily was distributor of
imported papers and boards
The method followed for renewal of the WC
loan was Nayak Committee Method
Owing to their foreign transactions, they
were also given a LG of 1 CR.
The interest rate was 4.50% over BPLR.
The collateral was worth of 2.26Cr.
It was private limited company with
presence in Tamil Nadu and parts of
Karnataka

ABC TRADERS
BALANCE SHEET

Calculation:
1.

NAYAK Committee method

2.

TANDON Committee method (II


method)

ABC GRAPHICS
WORKING CAPITAL LOAN
The

proprietorial company dealt mainly


with printing of cards and minor
animation projects
The method followed for renewal of the
WC loan was Tandon Committee
Method
The interest rate was the standard BPLR.
The collateral was worth of 10L.
Its interest servicing was poor and it was
reduced to sub-standard account.

ABC GRAPHICS
BALANCE SHEET

1.

TANDON Committee method (II


method)

Notional Dues Calculation

COMPARATIVE STUDY
between the 2 cases

ABC TRADERS

Private limited
company
The proprietors were
highly experienced in
the paper industries
Its sales prediction
were much accurate
than the former
They had excellent
history of borrowings
with IOB

ABC GRAPHICS

Proprietary company
They were new in the
area of business
The projected sales
on the basis of which
loan was approved
was too ambitious
Their risk assessment
was poor

LESSONS LEARNT

Lessons learnt
Proper

evaluation of risk while providing


of loans
The recovery workflows used by IOB in
case of an account turning NPA
The general banking operations
especially the instrument clearing cycle.