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DECLARATION
I, Arpan Bhowmick, a PGDM student at IMIS, Bhubaneswar bearing roll no. 13DM068,
hereby declare that this report on Summer Internship Project titled Credit Appraisal at
Bank of India is solely my work and is prepared by me only.
I also declare that I have not revealed any sort of critical information of the bank as
per the secrecy bond I have signed with BOI before undertaking this project in their esteemed
organization.
I also declare that all the information collected from various secondary sources has
been duly acknowledged in this project report.
Place:
Date: (Arpan Bhowmick)
ACKNOWLEDGEMENT
I would like to extend my heartfelt gratitude towards the Management of Bank of
India for providing me an opportunity to undergo my Summer Internship Project in their
esteemed organization. I am extremely grateful to my external guide Mr. xxxxxxxxx
(Manager-Credit), CIC Branch, Bhubaneswar for his guidance and cooperative nature that
helped me in completing this project report. I have learned many new things about the bank
credit system while working at BOI.
I would also like to thank Mr. xxxxxxxxxxx, Senior Manager who permitted me to
work on my project in his branch and for his timely support and advice that helped me in
preparation of this report.
I express my sincere gratitude towards my internal guide xxxxxxxxxxxxx at IMIS,
Bhubaneswar for his time to time guidance and encouragement to take up this interesting
topic.
Last but not the least I would like to thank the Training & Placement Cell at IMIS
for placing me at a prestigious organization like Bank of India for my Summer Internship
Project.
(Arpan Bhowmick)
ABSTRACT
The project is on credit appraisal process of Bank of India. Credit appraisal is an
important activity carried out by the credit department of the bank to determine whether to
accept or reject the proposal for finance. In the beginning the report talks about Bank of
India’s history, its overall financial status and its decision making process.
After that this report talks about bank lending. It starts with principles of lending then
through role of RBI and then types of lending i.e. Fund based lending and Non-fund based
lending along with brief explanations and examples as well.
In the following chapter Credit appraisal is briefly overviewed before talking about
the credit appraisal process in general and then the process undertaken by BOI. It also covers
the various types of appraisals done such as commercial appraisal, technical appraisal and
financial appraisal.
Credit report and credit rating is discussed thereafter. The need of corporate credit
rating is explained in detail followed by the rating scales used by BOI.
The last but one chapter gives a screenshot of a few cases that I could fully cover
during my tenure at the CIC Branch of BOI at Rasulgarh. This includes the appraisal
procedure the bank took for a personal loan case, an automobile loan case, an education loan
and an SME loan.
In the end, I speak about my findings, conclusion and recommendations.
TABLE OF CONTENTS
SL.
NO. PARTICULARS
PAGE.
NO.
1 CHAPTER ONE 6
Objectives 6
Research Methodology 6
Limitations of the study 7
2 CHAPTER TWO 8
An introduction to Bank of India 8
Performance of the bank 9
Decision making process of Credit Department 10
An overview of bank lending 11
Role of RBI 13
Types of lending 15
Overview of credit appraisal 20
Credit appraisal process 21
Credit appraisal at BOI 23
Credit report and credit rating 30
5 CHAPTER THREE 30
Case-I: Personal loan 30
Case-II: Automobile loan 33
Case-III: Education loan 37
Case-IV: SME Loan 39
6 CHAPTER FOUR 41
Findings 41
Conclusions 41
Recommendations 42
Bibliography 43
CHAPTER ONE
OBJECTIVES:
- To study the credit appraisal methods.
- To understand the internal steps taken by the bank for scrutinizing the customer’s
details and credentials.
- To understand the commercial, financial & technical viability of the proposal
proposed and it’s finding pattern.
RESEARCH METHODOLOGY:
Introduction:
Credit appraisal means investigation/assessment done by the bank before providing
any loans and advances/project finance and also checks the commercial, financial
&industrial viability of the project proposed its funding pattern and further checks the
primary & collateral security cover available for recovery of such funds.
Problem statement:
To study the credit appraisal system in Bank of India
Data collection:
i. Primary data:
Informal interview with manager at Bank of India
ii. Secondary data:
- Books
- Websites
- Customer files at BOI
- Circulars of BOI
Beneficiaries:
- Researchers: This report will help researchers improving knowledge about the
credit appraisal system and to have practical exposure of the credit appraisal
system at Bank of India.
- Management students: The project will help the management student to know
the patterns of credit appraisal in Bank of India.
LIMITATIONS OF THE STUDY:
- As the credit appraisal is one of the most crucial areas for any bank, some of the
technicalities are not revealed.
- Credit appraisal system includes various types of detail studies for different areas
of analysis, but due to time constraint, our analysis was of limited areas only.
- The study was only on desk jobs related to credit. I was not exposed to the field
survey and valuation part.
- As per the bank’s terms and conditions related to internship, approaching
customers was not allowed.
- Actual balance sheets, ratios, financial statements of the customers were not
shared with me for my records and thus my study lacks certain details.
CHAPTER TWO
AN INTRODUCTION TO BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from
Mumbai. The Bank was under private ownership and control till July 1969 when it was
nationalized along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50
employees, the Bank has made a rapid growth over the years and blossomed into a mighty
institution with a strong national presence and sizable international operations. In business
volume, the Bank occupies a premier position among the nationalized banks.
The Bank has 4545 branches in India spread over all states/ union territories including
specialized branches. These branches are controlled through 50 Zonal Offices. There are 54
branches/ offices and 5 Subsidiaries and 1 joint venture abroad.
The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions
Placement in February 2008.
While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront
of introducing various innovative services and systems. Business has been conducted with the
successful blend of traditional values and ethics and the most modern infrastructure. The
Bank has been the first among the nationalized banks to establish a fully computerized branch
and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a
Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System
in 1982, for evaluating/ rating its credit portfolio.
Presently Bank has overseas presence in 20 foreign countries spread over 5 continents – with
53 offices including 4 Subsidiaries, 4 Representative Offices and 1 Joint Venture, at key
banking and financial centres viz., Tokyo, Singapore, Hong Kong, London, Jersey, Paris and
New York.
Contribution of foreign branches in the global business of the Bank as at 31.03.2014 is as
under:
Deposits 22.98%
Advances 30.36%
Business Mix 26.19%
Performance as on 31.03.2014 (Rs. In Crores, Except %):
Deposits 476974 Operating Profit 8423
Growth 24.91% Net Profit 2729
Advances 376228 Gross NPA Ratio 3.15%
Growth 28.42% Net NPA Ratio 2.00%
Business Mix 853202 Provision Coverage 58.68%
Growth 26.44% Earnings Per Share (Rs.) 44.74
Growth Return on Equity 11.73% Book value per Share (Rs) 387.53
Capital Adequacy Ratio
(Basel-II)
10.76% Capital Adequacy Ratio
(Basel-III)
9.97%
Decision making process of Credit Department at BOI
The proposals for all types of loans are handled by the credit department at BOI. A credit
appraisal goes through different level of sanctioning to enforce internal controls and other
practices to ensure that exceptions to policies, procedures and limits a re reported in a timely
manner to the appropriate level of management for action.
Proposal reaches the branch which is scrutinized by the credit department
Then it reaches the Zonal Office for further checking
It is further sent to the Head Office (AGM/DGM)
Subsequently the proposal is sent to G.M
From G.M. it goes to E.D
Next it reaches C.M.D
The proposal is finally sent to MC/BOD for further clearance if needed
AN OVERVIEW OF BANK LENDINGS
A developed country like U.S.A. sees its’ major lending activities done by Capital & Money
market, where banks provide services for merger & acquisition and other merchant banking
activities. In India lending is predominantly done by Banks. Capital Market & Money Market
are not as strong and dependable entities as yet as banks in a developing country as India and
Indian Economy. Banks have different ways of extending credit to different types of
borrowers for a wide variety of purposes.
Principles of Lending and Loan Policy:
Principles of Lending
Banks lend from the funds mobilized as deposits from public. A bank acts in the
capacity of a custodian of these funds and is responsible for its safety, security but
at the same time is also required to deliver justified and assured returns over these
borrowings. A bank looks into following aspects before lending:
Safety: the first rule of lending is to ascertain the safety of the advances made.
This means assessment of the repaying capacity of the borrower and purpose of
borrowing. It also includes assessment of contingencies and a fallback plan for the
same. This is ensured by taking adequate security (readily marketable and free of
encumbrances) by way of guarantee, collateral, charges on property, etc.
Liquidity: The second rule of lending is to ascertain how and when the repayment
of the advances made would happen and that the repayment is timely. This is to
ascertain availability of funds in future and make sure that the funds are not
locked up for a long period. This helps in maintaining balance between deposits
and advances and to meet depositor‘s obligation.
Profitability: The third rule of lending is to lend at higher rate of interest than
borrowing rate. This is called as interest spread / margin. One has to strike a
balance between profitability and safety of funds. Interest rates must be charged
competitively but at the same time spread should be adequate.
Risk diversion: An old saying says ― “never put all your eggs in one basket”. A
lender must lend to a diversified customer base. Diversification must be made in
terms of geographical locations, borrowers, industry, sector etc. It is done so as to
mitigate adverse financial effects of a business cycle, catastrophe, chain effect etc.
Loan Policy: Banks are basically a lending institution. Its major chunk of revenue
is earned from interest on advances. Each bank has its own credit policy, based on
the principles of lending, which outlines lending guidelines and establishes
operating procedures in all aspects of credit management. The po licy is drafted by
the Credit Policy Committee and is approved by the bank‘s board of directors.
The credit policy sets standards for presentation of credit proposals, financial
covenants, rating standards and benchmarks, delegation of credit approving
powers, prudential limits on large credit exposures, asset concentrations, portfolio
management, loan review mechanism, risk monitoring and evaluation, pricing of
loans, provisioning for bad debts, regulatory/ legal compliance etc. The lending
guidelines reflect the specific bank's lending strategy (both at the macro level and
individual borrower level) and have to be in conformity with RBI guidelines. The
loan policy typically lays down lending guidelines in the following areas:
Credit-deposit ratio: Banks are under an obligation to maintain certain statutory
reserves like cash reserve ratio (CRR – to be kept as cash or cash equivalents),
statutory liquidity ratio (SLR – to be kept in cash or cash equivalents and
prescribed securities), etc. These reserves are maintained for asset – liability
management (ALM) and are calculated on the basis of demand and time liabilities
(DTL). Banks may further invest in non – prescribed securities for the matter of
risk diversion. Funds left after providing for these reserves are available for
lending. The CPC decides upon the quantum of credit that can be granted by the
bank as a percentage of deposits.
Targeted portfolio mix: CPC has to strike balance between risk and return. It sets
the guiding principles in choosing preferred areas of lending and sectors to avoid.
It also takes into account government policies of lending to preferred / avoidable
sectors. The bank assesses sectors for future growth and profitability and
accordingly decides its exposure limits.
Loan pricing: Risk-return trade-off is a fundamental aspect of risk management.
Borrowers with weak financial position and, hence, placed in higher risk category
are provided credit facilities at a higher price (that is, at higher interest). The
higher the credit risk of a borrower the higher would be his cost of borrowing. To
price credit risks, bank devises appropriate systems, which usually allow
flexibility for revising the price (risk premium) due to changes in rating. In other
words, if the risk rating of a borrower deteriorates, his cost of borrowing should
rise and vice versa.
At the macro level, loan pricing for a bank is dependent upon a number of its cost
factors such as cost of raising resources, cost of administration and overheads,
cost of reserve assets like CRR and SLR, cost of maintaining capital, percentage
of bad debt, etc. Loan pricing is also dependent upon competition
Collateral security: As part of a prudent lending policy, bank usually advances
loans against some security. The loan policy provides guidelines for this. In the
case of term loans and working capital assets, bank takes as 'primary security' the
property or goods against which loans are granted. In addition to this, banks often
ask for additional security or 'collateral security' in the form of both physical and
financial assets to further bind the borrower. This reduces the risk for the bank.
Sometimes, loans are extended as 'clean loans' for which only personal guarantee
of the borrower is taken
Role of RBI:
The credit policy of a bank should be conformant with RBI guidelines; some of the important
guidelines of the RBI relating to bank credit are discussed below.
- Directed credit stipulations: The RBI lays down guidelines regarding minimum
advances to be made for priority sector advances, export credit finance, etc. These
guidelines need to be kept in mind while formulating credit policies for the Bank.
- Capital adequacy: If a bank creates assets- loans or investment-they are required
to be backed up by bank capital; the amount of capital they have to be backed up
by depends on the risk of individual assets that the bank acquires. The riskier the
asset, the larger would be the capital it has to be backed up by. This is so, because
bank capital provides a cushion against unexpected losses of banks and riskier
assets would require larger amounts of capital to act as cushion.
- Credit Exposure Limits: As a prudential measure aimed at better risk
management and avoidance of concentration of credit risks, the Reserve Ba nk has
fixed limits on bank exposure to the capital market as well as to individual and
group borrowers with reference to a bank's capital. Limits on inter-bank exposures
have also been placed. Banks are further encouraged to place internal caps on their
sector exposures, their exposure to commercial real estate and to unsecured
exposures.
Table 1: Exposure norms for Commercial
Banks in India Exposure to
Limit
1. Single Borrower
15% of capital fund (Additional 5% on
infrastructure exposure)
2. Group Borrower
40% of capital fund (Additional 10% on
infrastructure exposure)
3. NBFC
10% of capital fund
4. NBFC – AFC
15% of capital fund
5. Indian Joint Venture/ Wholly owned
subsidiaries abroad/ Overseas step down
subsidiaries of Indian corporate
20% of capital fund
6. Capital Market Exposure
(a) Bank’s holding of shares in any company
(b) Bank’s aggregate exposure to capital market
(solo basis)
(c) Bank’s aggregate exposure to capital market
(group basis)
(d) Bank’s direct exposure to capital market
(solo basis)
(e) Bank’s direct exposure to capital market
(group basis)
The lesser of 30% of paid-up share capital
of the company or 30% of the paid-up
capital of the banks
40% of its net worth
40% of its consolidated net worth
20% of its net worth
20% of its consolidated net worth
7. Gross holding of capital among banks/ FIs 10% of capital fund
TYPES OF LENDING
Lending can be for long term tenure or short term tenure. Lending is broadly classified into
two broad categories: fund based lending and non-fund based lending.
Fund Based Lending:
This is a direct form of lending in which a loan with an actual cash outflow is given to the
borrower by the Bank. In most cases, such a loan is backed by primary and/or collateral
security. The loan can be to provide for financing capital goods and/or working capital
requirements.
Loan: -In this case, the entire amount of assistance is disbursed at one time only,
either in cash or by transfer to the company’s account. It is a single advance. The
loan may be repaid in installments, the interests will be charged on outstanding
balance.
Overdraft: - In this case, the company is allowed to withdraw in excess of the
balance standing in its Bank account. However, a fixed limit is stipulated by the
Bank beyond which the company will not be able to overdraw the account. Legally,
overdraft is a demand assistance given by the bank i.e. bank can ask for the
repayment at any point of time. However in practice, it is in the form of continuous
types of assistance due to annual renewal of the limit. Interest is payable on the
actual amount drawn and is calculated on daily product basis.
Cash Credit: - In practice, the operations in cash credit facility are similar to those
of overdraft facility except the fact that the company need not have a formal current
account. Here also a fixed limit is stipulated beyond which the company is not able
to withdraw the amount. Legally, cash credit is a demand facility, but in practice, it is
Lending Tenure
Short TermWorking Capital
Fund Based
Cash Credit
Overdraft
Non-Fund Based
Letter of Credit
Bank Guarantee
Long Term Term Loan
on continuous basis. The interests is payable on actual amount drawn and is
calculated on daily product basis. Concept of margin also plays a vital role unlike
overdraft.
Working Capital Term Loans : - To meet the working capital needs of the
company, banks may grant the working capital term loans for a period of 3 to 7
years, payable in yearly or half yearly installments.
Packing Credit: - This type of assistance may be considered by the bank to take care
of specific needs of the company when it receives some export order. Packing credit
is a facility given by the bank to enable the company to buy the goods to be exported.
If the company holds a confirmed export order placed by the overseas buyer or a
letter of credit in its favor, it can approach the bank for packing credit facility.
Non-fund Based Lending:
In this type of facility, the Bank makes no funds outlay. However, such arrangements may be
converted to fund-based advances if the client fails to fulfill the terms of his contract with the
counterparty. Such facilities are known as contingent liabilities of the bank. Facilities such as
'letters of credit' and 'guarantees' fall under the category of non-fund based credit.
The non-fund based lending in the form of letter of credit is very regularly found in the
international trade. In case the exporter and the importer are unknown to each other. Under
these circumstances, exporter is worried about getting the payment from the importer and
importer is worried as to whether he will get the goods or not. In this case, the importer
applies to his bank in his country to open a letter of credit in favor of the exporter whereby
the importer’s bank undertakes to pay the exporter or accept the bills or drafts drawn by the
exporter on the exporter fulfilling the terms and conditions specified in the letter of credit.
Letter of Credit: Letter of credit (LC) is a method of settlement of payment of a trade
transaction and is widely used to finance purchase of raw material, machinery etc. It
contains a written undertaking by the bank on behalf of the purchaser to the selle r to
make payment of a stated amount on presentation of stipulated documents and
fulfillment of all the terms and conditions incorporated therein. Letters of credit thus
offers both parties to a trade transaction a degree of security. The seller can look
forward to the issuing bank for payment instead of relying on the ability and
willingness of the buyer to pay.
Parties to a Letter of Credit:
1. Applicant/Opener: It is generally the buyer of the goods who gets the letter of credit
issued by his banker in favor of the seller. The person on whose behalf and under
whose instructions the letter of credit is issued is known as applicant/ opener of the
credit.
2. Opening bank/issuing bank: The bank issuing the letter of credit.
3. Beneficiary: The seller of goods in whose favor the letter of credit is issued.
4. Advising Bank: Notification regarding issuing of letter of credit may be directly
sent to the beneficiary by the opening bank. It is, however, customary to advise the
letter of credit through sane other bank operating at the place/country of seller. The
bank which advises the letter of credit to the beneficiary is known as advising bank.
5. Confirming Bank: A letter of credit substitutes the credit worthiness of the buyer
with that of the issuing bank. It may sometimes happen especially in import trade that
the issuing bank itself is not widely known in the exporter's country and exporter is
not prepared to rely on the L/C opened by that bank. In such cases the opening bank
may request other bank usually in the country of exporter to add its confirmation
which amounts to an additional undertaking being given by that bank to the
beneficiary. The bank adding its confirmation is known as confirming bank. The
confirming bank has the same liabilities towards the beneficiary as that of opening
bank.
6. Negotiating Bank: The bank that negotiates the documents drawn under letter of
credit and makes payment to beneficiary. The function of advising bank, confirming
bank and negotiating bank may be undertaken by a single bank only.
Letter of Credit Mechanism
Any business/industrial venture will involve purchase transactions relating to
machine/other capital goods and raw material etc., and also sale transactions relating
to its products. The customer may be an applicant for a letter of credit for his
purchases while be the beneficiary under other letter of credit for his sale transaction.
The complete mechanism of a letter of credit may be divided in three parts as under:
1. Issuing of Credit: Letter of credit is always issued by the buyer's bank (issuing
bank) at the request and on behalf and in accordance with the instructions of the
applicant. The letter of credit may either be advised directly or through some other
bank. The advising bank is responsible for transmission of credit and verifying the
authenticity of signature of issuing bank and is under no commitment to pay the
seller. The advising bank may also be required to add confirmation and in that case
will assume all the liabilities of issuing bank in relation to the beneficiary as stated
already.
2. Negotiation of Documents by beneficiary: On receipt of letter of credit, the
beneficiary shall arrange to supply the goods as per the terms of L/C and draw
necessary documents as required under L/C. The documents will then be presented to
the negotiating bank for payment/acceptance as the case may be. The negotiating
bank will make the payment to the beneficiary and obtain reimbursement from the
opening bank in terms of credit.
3. Settlement of Bills Drawn under Letter of Credit by the opener: The last step
involved in letter of credit mechanism is retirement of documents received under L/C
by the opener. On receipt of documents drawn under L/C, the opening bank is
required to closely examine the documents to ensure compliance of the terms and
conditions of credit and present the same to the opener for his scrutiny. The opener
should then make payment to the opening bank and take delivery of documents so that
delivery of goods can be obtained by him.
Types of Letter of Credit
Letter of credit may be divided in two broad categories as under:
(i) Revocable letter of credit: This may be amended or cancelled without prior
warning or notification to the beneficiary. Such letter of credit will not offer
any protection and should not be accepted as beneficiary of credit.
(ii) Irrevocable letter of credit: This cannot be amended or cancelled without the
agreement of all parties thereto. This type of letter of credit is mainly in use
and offers complete protection to the seller against subsequent development
against his interest.
Bank Guarantee: A contract of guarantee can be defined as a contract to perform the
promise, or discharge the liability of a third person in case of his default. The contract
of guarantee has three principal parties as under:
- Principal debtor: The person who has to perform or discharge the liability and for
whose default the guarantee is given.
- Principal creditor: The person to whom the guarantee for due fulfillment of contract
by principal debtor. Principal creditor is also sometimes referred to as beneficiary.
- Guarantor or Surety: The person who gives the guarantee.
Bank provides guarantee facilities to its customers who may require these facilities for
various purposes. The guarantees may broadly be divided in two categories as under:
- Financial guarantees: Guarantees to discharge financial obligations to the customers.
- Performance guarantees: Guarantees for due performance of a contract by
customers.
Let us explain with an example how guarantees work. A company takes a term loan
from Bank A and obtains a guarantee from Bank B for its loan from Bank A, for
which he pays a fee. By issuing a bank guarantee, the guarantor bank (Bank B)
undertakes to repay Bank A, if the company fails to meet its primary responsibility of
repaying Bank A.
Banks carry out a detailed analysis of borrowers' working capital requirements. Credit
limits are established in accordance with the process approved by the board of
directors. The limits on working capital facilities are primarily secured by inventories
and receivables (chargeable current assets).
OVERVIEW OF CREDIT APPRAISAL
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
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
this measures the financial condition and the ability of the customer to repay back the Loan in
future. Generally the credits 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 is missing in the equation then the lending officer must question the
viability of credit. There is no guarantee to ensure a Loan does not run into problems;
however if proper credit evaluation techniques and monitoring are implemented then
naturally the Loan loss probability / problems will be minimized, which should be the
objective of every lending Officer.
CREDIT APPRAISAL PROCESS
Receipt of application from applicant
Title clearance reports of the properties to be obtained from empanelled
Advocates
Assessment of proposal
Proposal preparation
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA etc.
Pre-sanction visit by bank officers
Preparation of financial data
Valuation reports of the properties to be obtained from empanelled valuer/engineers
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list
etc
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 AT BOI
Credit Appraisal – Initial due diligence & financial analysis
The process of credit appraisal would begin with the selection of the borrower. The process
would broadly cover:
(i) Appraising the borrower/business
(ii) Appraising/assessing the credit requirement and structuring the credit delivery,
security, covenants etc. Appraisal of the borrower would include background
check and assessment of managerial, commercial, technical and financial
capability/strength, project execution/management ability, success in joint venture
for technology/ market, retention of professional talent at various levels,
management control, promoters’ shareholding etc.
Both the above aspects need to be appraised/ examined at the time of the initial entry of a
customer to the Bank as also at the time of subsequent periodic reviews. Naturally, the
appraisal would be different in respect of:
- Retail segment like personal loans for consumer durables, house etc
- Small business like loans to business enterprises
- Farming sector/agriculturists
- MSME sector
- Corporates in manufacturing, infrastructure, services, wholesale trade and other
sectors.
Background of the borrower/management
Background of the borrower needs to be done through scrutiny of antecedents, experience in
the line of business, managerial, marketing, technical competence, organizational strength,
integrity etc. Track record with us, status report from the other banks, reports in the sector
from our borrowers in similar business, RBI/CIBIL reports on defaulters/willful
defaulters/SAL of ECGC, Corporate action taken by SEBI/NSE/BSE, reports from their
vendors/dealers who may be our customers, reasonability of CMA projections, actual
performance vs estimates, frequent overdrawing, history of restructuring/OTS etc.
In case of adverse report in any of the above areas, there could be justifications/mitigations
which should be looked into. If need be the appraising officer may personally visit the other
bank for personal discussions. The gist of such oral discussion may be recorded in the file of
the borrower and brought out in the proposal. KYC guidelines as framed by RBI and adopted
by Bank are to be followed by the branches.
Commercial appraisal
The nature of the product, demand for the same, the existing and perceived competition in the
segment, ability of the proponents to withstand the same, government policies governing the
industry, etc. need to be taken into consideration. The trade practices in respect of the product
should be thoroughly understood. Branches should use the reports from ICRA/CRISIL &
Capitaline available on Stardesk.
Technical appraisal
Technical appraisal of the project needs to be carried out for industrial activity1 proposals
beyond the cut-off limits prescribed from time to time. Such appraisal may be carried out in-
house by Technical Officers working in Technical Appraisal Department/ Technical
Appraisal Cells or officers having technical expertise for the same or by an outside agency as
determined by the appropriate authority. Where technical appraisal is carried out by All India
Financial Institutions, PSU Banks/other leading banks having expertise in the area, their
report may be accepted for appraisal purposes.
Financial appraisal
Analysis of financial parameters/ratios should be done. Aspects like
i. Balance sheet strength
ii. Growth in TNW, sales, PAT etc
iii. Borrower’s ability to service the principal and interest, meet the cash flow
requirement in respect of payments under LC opened, absorb additional burden
due to escalation of raw material cost etc
iv. Position of receivables/inventory etc should be looked into.
The following parameters ratios should be computed:
i. TNW with reconciliation of change in TNW
ii. Current Ratio
iii. Total outside liabilities/equity (DER)
iv. Profit before interest, depreciation, taxes, appropriation (PBIDTA/EBIDTA)
v. Profit After Tax/Net sales
vi. Inventory + receivables/Sales ratio
vii. DSCR if the borrower enjoys any term loan with any bank/FI even if no TL is
being considered by our bank.
viii. Capital Employed
ix. PAT/Capital employed
x. Investments
xi. Segmental Revenue if applicable
CHECK POINTS FOR DUE DILIGENCE/ASSESSMENT IN CREDIT PROPOSAL
1. Articles of Incorporation - A corporate registration is the cornerstone and basis for
legitimacy, as it requires the business to rely upon its corporate name, image and
reputation.
2. Status Reports - This is useful to show that the company continues to exist and
operate as a legal entity, and has not been dissolved and/or reincorporated under
another name. Most companies that actively engage in business with serious clients
will have one that is relatively recent. Whenever new proposals are put up for
approval, status reports of the company / group needs to be obtained from their
existing bankers. Obtaining status reports is an essential step in due diligence process,
in all advance accounts.
3. Market enquiries - This serves as an important tool. Verification of the antecedents
of the borrower through discrete market enquiries could amply reveal inherent
deficiencies. Cross verification with our existing customers in the line and other
players in the line, would serve as first hand information.
4. Licenses / Certifications - Ask for a copy of licenses, permits, registrations or
certifications if they are directly related to and required for the specific work the
company must perform. If copies are not available, request the number and issuing
authority of each document.
5. Web Site Addresses - All Companies have their websites. Companies that say they
do not have a website or do not need one have to be treated with caution. Good
companies always make efforts to allow clients or partners to keep in touch with
them, receive notice of changes of office address, e-mail addresses or phone numbers,
reminders of services offered or updates on new services.
6. Resume of Managers or Key Employees - Ask for resume (also called "professional
bio") of managers / key employees of the company. This will give you some
additional leads and information to verify the company's ability to perform the work
promised and general capabilities.
7. Corporate Brochure or Company Overview - Every company should have a
professional and well-developed presentation of their business concept or services.
This evidences the level of preparation of the company, and demonstrates whether
they have sufficiently developed their capabilities. Project Reports / Information
Memoranda, are not to be taken for face value. They need to be critically examined
vis-à-vis other sources like similar businesses.
8. It should be ensured that too much dependence on consultant driven business, is
avoided by the Company. Even when consultants refer business, discussions should
be held with the promoters/CFOs.
9. ROC search – ROC search, as applicable, at the time of considering fresh advances,
needs to be done, to assess existing charge/s on company’s assets.
10. Each proposal should bear reference related to RBI/CIBIL/ECGC/ List of Defaulters /
willful Defaulter List, etc. As per existing guidelines, Branch / Zonal Office must
bring out this aspect in the proposal.
11. Pre-Sanction Inspection – Branches should note to conduct pre-sanction inspections
before submitting new proposals. Inspection reports should be prepared strictly as per
the format. Findings of the inspection should be brought out in the proposal. It should
invariably include the place of work of the entity in addition to visiting the corporate
office, meeting promoters & employees etc.
12. Critical information as envisaged in Credit policies / Circulars, are to be obtained and
scrutinized.
13. Scrutiny of statements of accounts with previous / existing bankers, to be done, to
ascertain their conduct. This is more so necessary while takeover of the facilities is
involved.
14. Risk Mitigation - Proper coverage of risk and mitigation in the proposal reflects good
understanding of the business. As per existing guidelines, Branch / Zonal Office must
bring out these aspects in the proposal.
15. Status of Litigation If the company is involved in any litigation/disputes/ arbitration,
Zone / Branch should give details in the proposal.
16. Assessment of Limits Financial parameters like DER, Current Ratio for W/C &
DSCR, DER, FACR, BEP, IRR, sensitivity analysis for Term Loan are to be properly
captured in the proposals. Proposals should not be considered without these
parameters being adequately brought out.
17. Assessment about promoter/s ability to bring in the funds envisaged, to be properly
done.
18. Risk Rating - Risk Rating Exercise for Credit Rating & Pricing has to be done as per
different Risk Scoring Modules.
19. The security which is obtained by the Bank (either as principal or as collateral) shall
be verified as to its title clearance as well as value by independent Panel Advocates/
Valuers and periodical Encumbrance Certificate shall be obtained. In this regard,
extant guidelines, is enumerated in Branch Circular from time to time are to be
meticulously observed.
Check points for Pre and Post Monitoring Norms:
PRE DISBURSEMENT:
i. Suitable monitoring of various acts by the customer/Branch officials/out-side agencies
should be done at the pre-disbursement stage. Depending upon the terms of sanction in each
case, the following actions/steps, wherever applicable, may be taken prior to disbursement:-
ii. Obtention of satisfactory credit reports from existing lenders and other service providers
such as D&B, CIBIL etc. if stipulated. Branch staff, which is processing the applications for
credit requests of new customers, should personally call on the Bank/FI with whom the
incumbent is presently enjoying facilities and discreetly enquire about the conduct and
general aspects of the account. This is in addition to obtaining status reports. The personal
visit to the operating staff of that Bank/FI may reveal more about the proposed borrower
which may not have been incorporated in the report. Wherever it is not desirable to obtain
Status Report for the fear of putting our competitor on guard, decision may be taken on the
basis of scrutiny of proponent’s statement of account for the last one year with the existing
Banker and the fact that the Sanctioning Authority has satisfied itself about the credit
worthiness of the proponents on the strength of statement of account for the last one year and
that status report is not being obtained for the fear of putting the existing banker on guard
should be recorded in the proposal.
However, in case Branch desires not to obtain ‘Status Report’ from other Bankers/Service
providers prior to disbursement then specific ‘approval’ of the higher authority viz GM
NBG and/or GM Head Office should be obtained
In such cases the Branch should obtain status report subsequently and the staff should visit
the Bank/FI immediately after disbursement to discreetly enquire about the conduct and
general aspects of the account.
iii. Adhering to Head Office guidelines for Credit Rating exercise pertaining to entry level for
new accounts.
iv. Post-sanction inspection of the unit prior to disbursement. Needless to add, pre-sanction
inspection report cannot substitute the need of pre-disbursement inspection
vi. Issuance of sanction letter and acceptance of terms, conditions and stipulations of
sanctions by the borrowers.
vii. Execution of all relevant documents, including creation of collateral security / mortgage
etc. as per terms of sanction
ix. Furnishing of Letters of guarantee by guarantors.
x. Disbursement of amounts by other participating financial agencies / Banks / Financial
Institutions etc.
Clarity in regard to draw down of amounts such as first date of disbursal and last date of
disbursal, the stages in which the monies are required to be drawn, its acceptance and
evaluation at Branch level (If these are already included in the credit proposal, the same must
be adhered to).
xii. Vetting of documents
xiii. Credit Process Audit compliance
xiv. Post Sanction Pre Disbursement approval wherever branch level sanction
xv. Keeping the duly completed/signed check list on record along with other security
documents
DURING DISBURSEMENT:
Credit delivery in loan accounts is distinct from running accounts such as Cash Credit. All
disbursements whether in loan account or in running accounts, will be related to actual /
acceptable performance of the business unit and should never lose sight of basic objective of
safety of Bank's exposure in the credit assets. The disbursements should commensurate with
the progress of the project / business activity, also taking into account the extent of margin
brought in by the promoters up to the given point of time.
The sanction of the limit is not a commitment in isolation to extend funds to the borrower
under all circumstances. It is only a financial contract to make available funds for due
performance of various business objectives and goals set out in his proposal. Bank's
disbursements depend upon due performance /compliance of/with borrower's own
commitments. Therefore, the credit delivery has to be used as an effective monitoring tool to
ensure that there are only normal and acceptable credit risks.
The following aspects wherever applicable, may be considered for monitoring:
(a) LOAN ACCOUNTS :
i. Actual Implementation vis-a-vis Project schedule.
ii. Possibility of time or cost overrun.
iii. Adequacy of arrangements to meet cost overruns.
iv. Impact of time overrun on timely cash generations of the project.
v. Verification of end-use of funds with reference to verifiable records such as invoices,
account books, registers, records, inspection of the unit etc.
vi. Certificate from Company’s Statutory Auditors on the extent of cost incurred on the
project at any given point of time, implementation progress certificate from approved
architect/contractor etc., wherever applicable.
vii. Disbursements to be made, to the extent possible, directly to the suppliers / service
providers and the element of cash withdrawals to be kept minimum.
Status report on the suppliers of machinery as per the guidelines which ensures genuineness
of supplier/transaction must be obtained.
Even while making direct payments, whenever doubt arises about the genuine nature of the
transaction, due care is to be exercised.
(b) CASH CREDIT ACCOUNTS:
i. Compliance of sanction terms / stipulations (any exception requires approval of appropriate
authority)
ii. Verification of completion of the implementation of the project/business activity and
readiness to commence commercial production.
iii. Disbursements to be made, to the extent possible, directly to the suppliers/service
providers and the element of cash withdrawals to be kept minimum.
iv. Even while making direct payments, whenever doubt arises about the genuine nature of
the transaction, due care is to be exercised.
v. Stock inspection data regarding regular movement of goods, actual sales keeping pace with
projections, not having unacceptable quality rejections in sales, not accumulating slow/
obsolete inventory, elongation of debtors beyond acceptable levels, change in credit periods
from suppliers etc.
vi. Meaningful on site/off site verification of Stock/Book Debt statements to ensure adequacy
of Drawing Power/Drawing Limit
POST DISBURSEMENT:
i. Monitoring of the actual performance of the borrowers on monthly basis by
calling for MSOD statements and comparing the same with the projected
performance figures appearing in the customer’s own CMA data submitted to
Bank, sanctioned proposal / QIS returns etc. Any substantial deviation will have to
be probed into, not waiting for submission of audited financials.
ii. Obtention of Stock/Book debts statements as per stipulation and scrutiny thereof
iii. Periodical inspections by our staff (comprehensive guidelines issued vide BC
98/16 dated 19.04.2004 and 102/96 dated 09.08.2008)
iv. Stock Audit by approved C.As as per extant policy. (Comprehensive guidelines
issued vide BC 98/61 dated 05.07.2004)
v. Timely obtention and analysis of Audited statements of Accounts.
vi. Timely review of account
vii. Conducting periodical consortium meet/ JLA meet and sharing the information
with member of consortium /JLA.
viii. Obtaining LIE report periodically and verifying the progress, wherever applicable.
Following it up & complying post disbursement conditions.
ix. Timely identification of accounts showing symptoms of strain and, wherever
considered fit, resort to prompt restructuring of the account, so that the
rehabilitation process is meaningful.
Monitoring of an account is not confined to any single office (Branches including Large
Corporate/Mid Corporate branches/Zonal Office /NBG office/Divisional Office/Head Office)
and concerted efforts will have to be made at all levels with whatever information available at
each level, to prevent any deterioration in asset quality. Under- lending or delay in lending can
be equally painful to the wellbeing/viability of the borrower’s unit and this itself can lead to
asset becoming non-performing.
CREDIT REPORT AND CREDIT RATING
The credit report is an important determinant of an individual's financial credibility. They are
used by lenders to judge a person's creditworthiness. They also help the person concerned to
narrow down on the financial problem areas.
Credit report is a document, which comprises detailed information about the credit payment
history of an applicant. It is mostly used by the lenders to determine the credit worthiness of
an applicant. The business credit reports provide information on the background of a
company. This assists one to take crucial business related decisions. People can also assess
the amount of business risk associated with a company and then decide whether they would
be comfortable in providing them with credit facilities. The degree of interest that would be
shown by investors in their company can also be gauged from the business credit reports as
they can get an idea of the conception of their customers regarding themselves. Since these
records are updated at regular intervals of time they enable people to identify the risk levels
associated with a business as well as its future. These reports also allow businesses to get
detailed information about the financial status of business partners and suppliers.
What Is A Corporate Credit Rating?
Ratings can be assigned to short-term and long-term debt obligations as well as securities,
loans, preferred stock and insurance companies. Long-term credit ratings tend to be more
indicative of a country's investment surroundings and/or a company's ability to honor its debt
responsibilities. . The ratings therefore assess an entity's ability to pay debts.
There are various organizations that perform credit rating for various business organizations.
Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness
of the applicant. The credit rating model of BOI assesses various aspects of the projects and
assigns scores against them thereby determining the risk level involved with the project.
It is divided in five sections:
1. Rating of the borrower
- Financial risk
- Management risk
2. Market condition/ Demand situation
3. Rating of the facility
4. Business consideration
5. Cash flow related parameters
1) Rating of the borrower: This part of credit rating model deals with assessing the financial
and managerial ability of the borrower. The financial ability of the firm is derived by
calculating ratios that determine the short term and long term financial position of the firm
Short term ratios include Current Ratio, determines the liquidity position of the company
over a period of one year. The current ratio is an indication of a firm's market liquidity and
ability to meet creditor's demands. It is excess of current assets over current liability. If
current liabilities exceed current assets (the current ratio is below 1), then the company may
have problems meeting its short-term obligations. If the current ratio is too high, then the
company may not be efficiently using its current assets.
According to the guidelines given to BOI the ideal level is at 1.33:1 however the acceptable
level is at 1.17:1.
However at times current ratio may not be a true indicator, the current ratio for road projects
is very high but this does not indicate that the company is not using its assets well but the
ratio is high because the activity involves more in dealing with current assets. Hence it is
important for the evaluator to understand the nature of the industry.
Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative
proportion of equity and debt used to finance a company's assets. This ratio is also known as
Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the
company already has acquired high amount of funds from market thereby reducing the
investor share over the securities available, increasing the risk.
It is also important for the lender bank to assess the firm’s debt paying capacity over a period.
Such capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum
acceptable level is 1.50.
It is also necessary for the lender to determine the ability of the firm to achieve the projected
growth by evaluating the projected sales with actual. However such parameter remains non
applicable if the business is new.
Financial risk evaluation is only one of the parameter and not the only parameter for
determining the risk level. It is important to evaluate the Management Risk also while
evaluating the risk relating to borrower.
It is the management of the company that acts as guiding force for the firm. The key
managerial personnel should bear the capacity to bail out the company from crisis situation.
In order to remain competitive it is essential to take initiatives. Such skills are developed over
years of experience, thus for better performance it is required to have a team of well qualified
and experienced personnel.
2) Market potential / Demand Situation
A Company does not operate in isolation there are various market forces that acts in either
favorable or unfavorable manner towards its performance. Thus the rating would not give
true picture if does take market or demand situation in consideration.
The demand supply situation / market Potential plays an important role in determining the
growth level of the company like
1. Level of competition: Monopoly, Favorable, Unfavorable
2. Seasonality in demand: affected by short term seasonality, long term seasonality or
may not be affected by seasonality in demand.
3. Raw material availability
4. Location issues like proximity to market, inputs, infrastructure: Favorable, neutral,
unfavorable
5. Technology i.e. proven technology: Not to be changed in immediate future,
technology undergoes change, outdated technology.
6. Capacity utilization
3) Rating of the Facility:
The company can start functioning only after completing statutory obligations laid down by
the governing authority. Such statutory obligation involves obtaining licenses, permits for
ensuring smooth operations. Preparation and Submission of Financial Statements, Stock
statements in the standard format within the given time schedule.
4) Business Consideration:
The length of relationship with the bank enables the lender to assess the previous
performance of the account holder. A good track record acts in the favor of the applicant,
however an under-performance make the lender more vigilant.
The income value to the bank is also given due consideration.
Thus Credit Rating of the Business takes into consideration various aspects that have direct or
indirect effect on the performance of the business.
After evaluating the risk level involved the lender bank decides on lending interest rate.
In BOI they are categorized in 9 segments:
1. Lowest Risk CR-1
2. Low Risk CR-2
3. Medium Risk CR- 3
4. Moderate/ Satisfactory Risk CR- 4
5. Fair Risk CR- 5
6. High Risk CR- 6
7. Higher Risk CR- 7
8. Highest risk CR- 8
9. NPA CR- 9
In BOI, a business receiving Credit Rating above level 6 are not considered good from point
of investment and thus are avoided.
CHAPTER THREE
CASE STUDIES
(Note: The name and details of the persons in the cases herein are changed to comply with
the bank’s rules and regulations for non-disclosure of internal information.)
CASE – I
The case is about personal loan product from BOI. Ajit Sahoo needed a loan of Rs.75, 000 for
his father’s emergency surgery and thus he approached the BOI’s CIC branch in Rasulgarh.
ABOUT THE PRODUCT:
Product: BOI Star Suvidha (Personal Loan Scheme)
Eligibility: Salaried employees, professionals, individuals with high net worth
Type of advance: Demand/Term loan/Overdraft
Name of the applicant: Mr. Ajit Sahoo
Occupation: Maintenance Engineer
Salary: Rs. 1, 20, 000 per annum
Loan applied: Rs. 75, 000
Purpose: Father’s surgery
Tenure: 24 months
Rate of interest: 15.20%
PRE-SANCTION ACTIVITIES:
1. Meeting the client and discuss his/her requirements
2. Collect application form and KYC documents
3. Meeting the guarantor and collect details about income proof and net value assessment
4. Initial De-dupe check is done to check the credit reporting of the client whether he holds
any over-dues etc. The bank also checks the client in RBI defaulter list.
5. Internal verification is done by the bank which enables it to make sure that the client is
not forging with the financials of the company.
ASSESSMENTS FOR SANCTION:
ASSESSMENT I:
Net monthly income: Rs. 10,000
10 times of Net monthly income: Rs 1, 00, 000
Eligible amount under (I): Rs. 1, 00, 000 [A]
ASSESSMENT II:
Cost of project: Rs. 75, 000
Less margin: Nil
Eligible amount (II): Rs. 75, 000 [B]
ASSESSMENT III:
Gross monthly income: Rs. 10, 000
Statutory deductions: Rs. 1, 200
Net monthly income: Rs. 8, 800
Proposed loan amount: Rs. 75, 000
EMI: 3, 643.63
% of Net take home to GMI: 58.59% (satisfies bank regulations)
Loan amount requested: Rs. 75, 000 [C]
ASSESSMENT IV:
Maximum loan amount permissible under the scheme : Rs. 1, 00, 000 [D]
After all the assessments, the least amount among A, B, C and D is recommended by the
appraisal committee for sanctioning.
In this case Rs. 75, 000 is the least among all the assessments. Thus, Mr. Sahoo’s request for
a loan of Rs. 75, 000 was sanctioned.
POST-SANCTION ACTIVITIES:
1. Bank acquired documentary proof and declaration by the customer to ensure genuine
utilization of the funds.
2. In case of clean advances, documentary proof might not be required but purpose-wise
break-up of the fund utilization must be collected.
3. To ensure timely repayment of the EMI post-dated cheques or ECS mandate should
be acquired from the customer.
DOCUMENTS PROVIDED BY THE APPLICANT:
1. KYC related documents
2. Residential proof documents such as Ration card, telephone bill, electricity bill, rent
receipt, certificate from employer with signature verification
3. Passport size photographs of both applicant and guarantor to be collected and verified
by bank officials
4. Customer identification can be done through PAN card, Driving license, Photo
identity proof issued by employer
5. Identity needs to be verified by visiting the applicants residence and workplace
CASE II
The following case is about BOI’s automobile loan. My guide handed me the file of a fresh
case of the same. Mrs. Kavita Sharma (name changed), who owns a petrol pump in
Bhubaneswar applied for a loan of Rs. 4, 60, 000 for purchasing a new car.
ABOUT THE PRODUCT
Product: Star Vehicle Loan
Eligibility: Salaried employees, Professionals & self employed businessmen, HNI, NRI with
Indian joint borrowers, Senior citizens, Pensioners, Farmers, Companies, Partnership firms
and other corporate bodies
Age: Not to exceed 65 years at the time of availing the loan
Type: Demand loan/Term loan
Quantum of advance: For individuals : Rs. 25 lakhs for Indian make vehicles
Rs. 75 lakhs for imported vehicles
For NRI: Rs. 25 lakhs for any make
For companies/corporate entities: Rs. 100 lakhs
Name of the applicant: Mrs. Kavita Sharma
Occupation: Business
Nature of business: Petrol pump
Gross income: Rs. 14, 00, 000 per annum
Loan applied: Rs. 4, 60, 000
Tenure: 3 years
Rate of interest: 12% per annum
PRE-SANCTION ACTIVITIES:
1. Meeting the client and discuss his/her requirements
2. Collect application form and KYC documents
3. Collect installment letter.
4. Income tax returns/salary particulars/balance sheets to be collected
5. Initial De-dupe check is done to check the credit reporting of the client whether he holds
any over-dues etc. The bank also checks the client in RBI defaulter list.
6. Internal verification is done by the bank which enables it to make sure that the client is
not forging with the financials of the company.
7. Deviation check: The bank after checking the financial soundness of the company goes
for the verification of the deviation check of policy compliance, if any in case of major
deviations the case is presented in front of the zonal credit committee, their decision
stands the final verdict on the approval f the case.
8. The bank undertakes a complete check of financials as mentioned in the requirements,
these audited financials are put in ‘Finacle’ software of the bank and then projections
are made on the basis of financials and then various profitability ratios are analyzed and
the financial soundness of the company is analyzed. The financial viability of the
company is checked on various parameters as mentioned.
9. Hypothecation of assets purchased with bank finance & charge to be registered with the
RTO and registered as personal vehicles.
10. Comprehensive insurance of the vehicle with Bank clause.
ASSESSMENTS FOR SANCTION:
ASSESSMENT I:
Gross average annual income: Rs. 14, 00, 000
2 times of gross average annual income: Rs. 28, 00, 000
Eligible amount under (I): Rs. 28, 00, 000 [A]
ASSESSMENT II:
Cost of the vehicle: Rs. 5, 32, 630
Less margin (10%): Rs. 53, 263
Eligible amount: Rs. 4, 79, 367 [B]
ASSESSMENT III:
Gross monthly income: Rs. 1, 16, 667
Statutory deductions: Rs. 12, 890
Net monthly income: Rs.1, 03, 777
% of Net take home to Gross income : 89.4% (satisfied)
Loan amount requested: Rs. 4, 60, 000 [C]
ASSESSMENT IV:
Maximum loan amount under the scheme : Rs. 25, 00, 000 [D]
Least amount among A, B, C and D is then recommended by the CAC.
In this case, Mrs. Sharma was sanctioned a loan of Rs. 4, 60, 000 after all assessments.
POST-SANCTION ACTIVITIES:
1. Check the actual purchase of the automobile
2. Collection of hypothecation documents from the customer along with insurance
papers
3. In case of clean advances, documentary proof might not be required but purpose-wise
break-up of the fund utilization must be collected.
4. To ensure timely repayment of the EMI post-dated cheques or ECS mandate should
be acquired from the customer.
5. To prevent frauds, disbursement to the funds should be done to the vendor/auto dealer
through NEFT/RTGS to ensure that the account genuinely belongs to the dealer.
6. Annual review of accounts to be done by the bank
DOCUMENTATION:
1. Application-cum-proposal
2. Composite hypothecation agreement for charge on the asset
3. DP note and installment letter
4. Declaration and composite agreement
5. Statement of assets and liabilities of the borrower
6. Bank’s charge to be registered with RTO and a copy of the RC Book with Bank’s
charge noted thereon to be kept with documents
7. Creation of charge on collateral security if proposed/stipulated
8. IT returns/salary particulars/Balance sheets etc
9. Sanction letter – duly acknowledged
CASE-III
The following case is an education loan case of Mr. Subhasis Mohanty S/O Mr. Sukanta
Mohanty who wishes to avail a loan of Rs. 3, 00, 000 from the bank for admission into an
Engineering course.
ABOUT THE PRODUCT:
Product: BOI Star Education Loan Scheme
Eligibility: Graduation courses by recognized universities; PG courses approved by AICTE
or affiliated by UGC; Courses by national institutes like IIT, IIM, NIFT etc.
Parties: Joint borrower should normally be parents/guardian; Husband in case of married
Name of the applicants: Mr. Subhasis Mohanty/Mr. Sukanta Mohanty
Occupation of joint borrower: Auto rickshaw driver
Loan applied: Rs. 3, 00, 000
PRE-SANCTION ACTIVITIES:
1. KYC formalities should be completed
2. Checking of student’s academic documents
3. Verification of RBI defaulter’s list (joint borrower)
4. Verification of PAN
5. Admission letter from the institute
6. Evaluation of future income prospect of the student along with parent’s repayment
capacity.
ASSESSMENT:
1. Total course fee quoted by the institute : Rs. 4, 60, 000
2. Loan applied: Rs. 3, 00, 000
3. Balance amount to be borne by the joint borrower.
4. Joint borrower’s income: Rs. 1, 80, 000 per annum
5. Net worth: Rs. 8, 00, 000 (Jewelry & Land)
6. As the loan applied is below Rs. 4, 00, 000 thus no margin requirement is needed
POST-SANCTION ACTIVITIES:
1. Communication with the institute regarding the applicant’s selection and course fee
structure
2. Communicate with the institute and request for any kind of information related to
cancellation of admission.
3. No application for educational loan should be rejected without concurrence of the
next higher authority.
4. Loan must be disbursed in stages as per the requirement/demand directly to the
institution to the extent possible.
CASE-IV
Mr. Jagdish Chandra Barik is a customer of the bank who holds a current account with the
branch. He owns a cement store nearby and approached the bank for a loan of Rs. 4, 00, 000
as he wanted to expand his business.
PRE-SANCTION ACTIVITIES:
1. KYC formalities
2. Scrutiny of bank accounts
3. Family background, social reputation, duration in the business
4. Checking RBI’s willful defaulters’ list, Special Approval List (SAL) of ECGC,
CIBIL report.
5. The acceptability of the product, its market demand/supply position, market
competition, market arrangement etc. has to be checked
6. Techno-economic appraisal of the unit to be carried out as per the guidelines by
Technical Appraisal Department (TAD) of BOI.
7. Visit to the store and residence of the applicant
8. Checking store rent agreement, residence proof etc.
9. Checking of documents
ASSESSMENTS:
1. Working capital assessment:
As this unit’s WC requirement is below Rs.5 crores, the bank adopts Turnover
method for assessment as per Nayak Committee Recommendations. Under this
method the WC is arrived @ 20% of the projected turnover based on the
assumption of a three month operating cycle.
2. Financial ratios:
- Debt equity ratio: Mr. Barik’s business’ D/E ratio stood at 1.7:1 which was
considered as a very strong one by the bank.
- Current ratio: His current ration was 1.5:1 as he does business on a credit basis
more often and received the money once in a month from the customer.
- Debt Service Coverage Ratio: He had a fair DSCR ratio of 1.65:1 which implied
that he generated enough Net operating income to pay off his debts.
As all factors were satisfactory, Mr. Barik’s application was passed.
POST-SANCTION ACTIVITIES:
1. Monitoring the accounts on a regular basis
2. Visit to the store for checking of stock
3. Acquire monthly stock statement as well as receivables account
4. Balance sheet evaluation
5. Collection of repayment should be maintained
6. Prevent account form being sub-standard
7. Ensure utilization of funds for genuine purpose
CHAPTER FOUR
FINDINGS
- Credit appraisal is done to check the commercial, financial & technical viability of the
project proposed and its funding pattern & further checks the primary or collateral
security cover available for the recovery of such funds.
- Credit is core activity of the banks and important source of their earnings which go to
pay interest to depositors, salaries to employees and dividend to shareholders.
- Credit and risk go hand in hand.
- In the business world risk arises out of:-
Deficiencies /lapses on the part of the management
Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position
- The loan policy of BOI contains various norms for sanction of different types of
loans.
- For each type of loan, there are different norms as per the guidelines of RBI.
- The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators
- After studying a few cases, I found that in some cases, loan is sanctioned due to
strong financial parameters
CONCLUSIONS:
- The requirement of credit is ever increasing.
- In most of the cases, hypothecation and/or mortgage are used to create securities for
the banks.
- Every bank has its own internal credit rating procedure to rate the clients (Borrowers).
- After doing the assessment of the financial indicators it is up to the judgment of the
top management of the bank to sanction such loan. The very decision could be against
the assessment result.
- If the company is with bank from inception stage then they are given preference, as
credible and loyal party over their financial indicators.
RECOMMENDATIONS:
- Closely monitoring and inspecting the activities and stocks of the borrowers from
time to time can avoid the misuse of advances.
- The bank must further secure itself by holding a second charge on all the fixed assets
of the borrower.
- The time period taken by the banks to sanction the limits should be significantly
reduced to allow the borrowers to make use of the credit when the need is most felt.
- There should be a standard rating process to remove the subjectivity and different
perceptions of the rater (person who does credit rating process for a borrower
company). It will remove the human biasness in the process.
- Personal guarantee does not give any physical asset to the bank. It is for the moral
binding on the part of the borrower. Hence, bank should prefer to use this type of
guarantee as this will reduce the default rate on the part of borrower.
- Faster dispersion of credit is of paramount importance. A proposal has to pass through
different channels which lead to delay in the dispersal of credit. There is a need of
drastic reduction in these channels for faster decision making. This will curtail
avoidable delays, improved efficiency besides reducing appraisal time as well as cost.
BIBLIOGRAPHY:
Websites:
www.rbi.org.in
www.wikipedia.com
www.investopedia.com
www.bankofindia.co.in
www.indianbankassociation.com
Books referred:
- I.M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd.
- M.Y. Khan and P.K. Jain - Financial Management - Vikas Publishing house ltd.
- Credit and Banking - K. C. Nanda (e-Book)
Bank of India journals:
- BOI Credit Policy-2014 (Revised) e-book
- BOI individual loan policy documents
- Customer loan files from bank’s records
