PRESENTATION ON CREDIT

APPRAISAL IN BANKING SECTOR

PRESENTED BY
KINJAL KATHROTIYA (45)
SAGAR KAKKAD (43)
MBA II (FINANCE),CPIMR
 WHAT IS CREDIT APPRAISAL?

Credit appraisal means an investigation/assessment done by

the bank prior before providing any loans & advances/project
finance & also checks the commercial, financial & technical
viability of the project proposed.
Proper evaluation of the customer is preferred which measures
the financial condition & ability to repay back the loan in future
Credit appraisal is the process of appraising the credit
worthiness of the loan applicant
 WHAT IS CREDIT APPRAISAL? (CONT’D)
Factors like:-
» Age
» Income
» Number of dependents
» Nature of employment
» Continuity of employment
» Repayment capacity
» Previous loans, etc. are taken into account while
appraising the credit worthiness of a person.
3 ‘C’ of credit are must be kept in mind for lending funds:-
» Character » Capacity » Collateral
If any one of these are missing in the lending officer must
question the viability of credit
 RESEARCH METHODOLOGY
PROBLEM STATEMENT:
To study the Credit Appraisal System in SME sector, at
State Bank of India (SBI), Ahmedabad.

OBJECTIVES:
To study the Credit Appraisal at SBI
To check the commercial, financial & technical viability of the
project proposed & its funding pattern
To check the primary & collateral security cover available for
recovery of such funds
 RESEARCH METHOLOGY (CONT’D)
» RESEARCH DESIGN :
Analytical in nature

» DATA COLLECTION :
Secondary Data:
E-circulars of SBI
Books & Journals
Database at SBI
Library research
Websites
 RESEARCH METHODOLOGY (CONT’D)

LIMITATION OF THE STUDY:

Due to the constraint limited study on the project has been

done
Access to data (Credit Appraisal data in detail is not
available)
As the credit appraisal is one of the crucial areas for any
bank, some of the technicalities are not revealed which may
cause destruction to the information
 BRIEF OVERVIEW OF LOANS
Loans can be of two types fund based & non-fund based:

» FUND BASED includes:

Working Capital
Term Loan

» NON-FUND BASED includes:

 Letter of Credit
 Bank Guarantee
 MEASURES
Debt Equity Debt Service Coverage
Ratio Ratio
Concept
Concept
The amount of cash flow
Proportion of Debt fund of a
available
company in relation to its equity
to meet annual interest
and principal payments

Formula
Formula
Long Term Debt
Net Operating Income
Tangible Net worth
Total Debt Service

Comments
This ratio is an indicator of leverage Comments
of a company DSCR less than 1 means negative
It measures a company’s cash flows
ability to borrow and repay money
 CREDIT RISK ASSESSMENT (CRA)
 The CRA models adopted by the Bank take into account all
possible factors into appraising the risks, associated with a
loan.
 These have been categorized broadly into financial,
business, industrial & management risks are rated
separately.
 These factors duly weighted are aggregated to arrive at a
credit decision whether loan should be given or not
Financial parameters:
The assessment of financial risk involves appraisal of the
financial strength of the borrower based on performance &
financial indicators. which assessed in terms of static ratios,
future prospects & risk mitigation .
 CREDIT APPRAISAL PROCESS

Receipt of application from applicant

|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and
Properties documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list,
etc.
|
Title clearance reports of the properties to be obtained from empanelled advocates
|
Valuation reports of the properties to be obtained from empanelled valuer/engineers
|
CREDIT APPRAISAL PROCESS (CONT’D)

Preparation of financial data

|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of
accounts, renew of accounts, etc
(on regular basis)
 CREDIT APPRAISAL STANDARDS
QUALITATIVE:

The proposition is examined from the angle of viability &

also from the Bank’s prudential levels of exposure to the
borrower, Group & Industry

View is taken about bank’s past experience with the

promoters, if there is a track record to go by

Opinion reports from existing bankers & published data

if available
 CREDIT APPRAISAL STANDARDS
(CONT’D)
Sector/ Mfg. Others
Parameters
QUANTITATIVE:
Current Ratio 1.33 1.20
(min.) (For FBWC limits above Rs. 5cr)
(i)Working capital 1.00
(For FBWC limits upto Rs. 5cr)
(ii)Term Loan TOL/ TNW (max.) 3.00 5.00
Technical Feasibility DSCR
Economic Feasibility Net (min.) 2:1 2:1
Gross (min.) 1.75:1 1.75:1
Financial Feasibility
Managerial Competency
Debt/ Equity 2:1 2:1
Ratio (max.)
Promoters’ 30% 20% of equity
contribution* of
(min.) equity
 RATING SCALES FOR GIVING LOANS
S. No. Borrower Range of Risk level Comfort Level
Rating scores

1 SB1 94-100 Virtually Zero risk Virtually Absolute safety

2 SB2 90-93 Lowest Risk Highest safety
3 SB3 86-89 Lower Risk Higher safety
4 SB4 81-85 Low Risk High safety
5 SB5 76-80 Moderate Risk with Adequate safety
Adequate Cushion
6 SB6 70-75 Moderate Risk Moderate Safety
7 SB7 64-69
8 SB8 57-63 Average risk Above Safety Threshold
9 SB9 50-56
10 SB10 45-49 Acceptable Risk Safety Threshold
(Risk Tolerance Threshold)
 RATING SCALES FOR GIVING LOANS
11 SB11 40-44 Borderline risk Inadequate safety
12 SB12 35-39 High Risk Low safety
13 SB13 30-34 Higher risk Lower safety
14 SB14 25-29 Substantial risk Lowest safety
15 SB15 <24 Pre-Default Risk Nil
(extremely
Vulnerable to default)
16 SB16 - Default Grade

Banks has introduced New Rating Scales for borrower for giving
loans. Rating is given on the basis of scores out of 100. Bank gives
loans to the borrower as per their rating like SBI gives loans to the
borrower up to SB8 rating as it has average risk till SB8 rating.
From SB9 rating the risk increases. So banks does not give loans
after SB8 rating.
 SBI NORMS FOR CREDIT APPRAISAL

LOAN ADMINISTRATION – PRE SANCTION PROCESS

Preliminary appraisal:
Sound credit appraisal involves analysis of the viability of
operations of a business and the capacity of the promoters to
run it profitably and repay the bank the dues
The company’s Memorandum and Articles of Association should
be scrutinized carefully to ensure that there are no clauses
prejudicial to the Bank’s interests
 SBI NORMS FOR CREDIT APPRAISAL
Towards this end the preliminary appraisal will examine the
following aspects of a proposal. Bank’s lending policy and
other relevant guidelines/RBI guidelines:
• Industry related risk factors
• Credit risk rating
• Profile of the promoters/senior management personnel
of the project
• List of defaulters
• Caution lists
• Government regulations impacting on the industry
• Financial status whether it is acceptable
 SBI NORMS FOR CREDIT APPRAISAL
Whether the project cost acceptable or not
Debt/ Equity ratio whether acceptable
Organizational set up with a list of Board of Directors &
indicating the qualifications & experience in the industry
Demand and supply projections based on the overall market
prospects together with a copy of the market survey report
Estimates of sales, cost of production and profitability
Projected profit and loss account and balance sheet for the
operating year
Audited profit loss account and balance sheet for the past
three years
 SBI NORMS FOR CREDIT APPRAISAL

LOAN ADMINISTRATION – POST SANCTION PROCESS

The post-sanction credit process can be broadly classified into

three stages:
Follow-up
Supervision
Monitoring
which together facilitate efficient and effective credit management
and maintaining high level of standard assets
 CASE STUDY - 1
Company:- Janak Transport Co.
Firm:- Partnership established in 1982 for carrying a
transport business.
Industry:- Transport Activity
Banking with SBI :-16 years as a current A/C holder
Project / Purpose: To purchase 59 new Mahindra Bolero
under tie-up arrangement with ONGC.
The total project cost estimated to be Rs. 363.44 lacs.
Proposed Credit Requirement:Fund Based=Rs.295 lacs
The company is in this business since incorporation &
good contracts and repo with ONGC since last 26 years.
 Deviations in Loan Policy/ Scheme
Parameters Min/Max level as Company's level
per Scheme as on 31/03/2008

Liquidity Min. 1.33 1.42

TOL/TNW Max. 3.00 12.80*

DSCR Min. 2.00 2.002

Promoters Min. 10 % 18.86%

contribution (under
tie-up)
profits in the last two Min. Rs.3.00 lacs Actual profit Rs.
years with rising trend 1.20 lacs for year
2006-07 and
Rs.2.90 lacs for
FGHFG year 2007-08*
 ANALYSIS OF THE CASE
Janak Transport Company is an existing profit making unit
The main chunk behind giving loan is that Janak Transport
Company is doing contract with ONGC since
incorporation
The promoters are having considerable experience as
transport contractor with ONGC
The unit has got confirm order/ tie-up with ONGC
The promoters contribution to the project is 18.86%
which is above the margin requirement
The current ratio is 1.42 that is satisfactory
 ANALYSIS OF THE CASE (CONT’D)
Profits in the last two years:- Min. Rs. 3 lacs with rising trend
TOL/TNW should be max. 3 which is 12.80 here, as the co.
has done multiple banking it has o/s loans with other banks
also but the co. is regularly making the payment of
principal amount along with the interest so the loan is given.
The bank checks commercial viability of the company &
found that the DSCR for term loan is 2.02 which is
satisfactory
The net sales & PAT of the company is increasing year
after year so overall profitability is good
The overall projected performance & financial of the unit are
considered satisfactory
 CASE STUDY - 2

 Company:- Akshat Polymers

 Firm:- Partnership Firm (M/S Umiya Polymers)
 Industry:- Manufacturing
 Activity:- Maufacturing of HDPP woven sacks, which are widely
used as packaging material in cement, fertilizer, etc.
 AKSHAT POLYMERS (AP) has been established as a
partnership firm on 19th November, 2007 at Kadi.
 The partnership was constituted for manufacturing and
selling of HDPP woven sacks to be manufactured from
HDPP granules.
 Proposal for sanction of FBWC limits of Rs.2.25 crores and
Fresh Term Loan of Rs.2.00 crores.
 PRISING/ RATE OF INTEREST

Proposal:
Sanction for;
i) FBWC limits of Rs.2.25 crores
ii) Fresh Term Loan of Rs.2.00 crores
Approval for:
i) CRA rating of SB- 6 (71 marks) based on
projected financials as on 31.03.2010.
ii) Pricing for WC facilities @1.00% above SBAR
@13.75and for TL 1.50% above SBAR @14.25%
 Deviations in Loan Policy
Indicative Company's Company's
Parameter Min/Max level level as on level as on
s as per loan policy 31.03.2009 @ 31.03.2010

Liquidity Min. 1.33 1.34 1.52

TOL/TNW Max. 3.00 4.11 2.50

TOL/Adj. 2.64 1.80
TNW

Average Min. 1.75 2.54 2.54

gross
DSCR (TL)

Debt / Max. 2:1 2.01:1 1.03:1

equity
 ANALYSIS OF THE CASE

The unit will have installed capacity of 2520 MT

The unit is projected to achieve capacity utilization of 80%
during the year 2009-10 and accordingly the sale for the
year is projected at Rs.19.77 crores.
The unit plans to initially market its product in Gujarat,
Maharashtra, Rajasthan and sale to Central Govt. who
purchases the HDPP woven sacks for grains through open
tenders
As per ICRA report, grading and research services
Flexible packaging sector is expected to grow at the rate of
12.40%.
 ANALYSIS OF THE CASE

The promoters have sufficient experience of 15 years in

the line of activity
The firm has also started marketing activity for their
products & are having very good market contacts for the
sales of the Finished Goods
The orders worth Rs.2.50 crores is expected to be
finalized by end of August, 2008
Projected financials are in line with the financials of the
some of the unit in similar line of activity and production
level
 FINDINGS
 SBI loan policy contains various norms for sanction of different types
of loans
 These all norms does not apply to each & every case
 SBI norms for providing loans are flexible & it may differ from case to
case
 After case study, we found that in some cases, loan is sanctioned
due to strong financial parameters
 From the case study analysis it was also found that in some cases,
financial performance of the firm was poor, even though loan was
sanctioned due to some other strong parameters such as the unit
has got confirm order, the unit was an existing profit making unit &
letter of authority was received for direct payment to the bank from
ONGC which is public sector
 CONCLUSION

Credit is the core activity of the banks & important source

of their earnings which go to pay interest to depositors,
salaries to employees & dividend to shareholders
Credit & risk go hand in hand
Bank’s main function is to lend funds/ provide finance but it
appears that norms are taken as guidelines not as a
decision making
A banker’s task is to indentify/assess the risk
factors/parameters & manage/mitigate them on continuous
basis
Thank You…..