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credit apprasial management
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CREDIT APPRAISAL & NPA MANAGEMENT
ARKADIP GUPTAPGDMB14-101
CONTENTS: INTRODUCTION IOB – a general introduction CREDIT APPRAISAL – methods used NPA MANAGEMENT – provisioning of
assets CASE STUDY ANALYSIS –
i. ABC TRADERSii. ABC GRAPHICS
CONCLUSION
INTRODUCTION
Experience at IOB
Case 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 CroreSOURCES OF FUNDS :
Capital 1,235.35 924.1 797 618.75 544.8
Reserves Total 14,934.82 12,533.26 11,130.65 8,706.18 6,979.78
Deposits 227,976.09 202,135.35 178,434.18 145,228.75 110,794.71
Borrowings 24,456.04 23,322.86 23,613.85 19,355.40 8,982.20
Other Liabilities &
Provisions6,302.55 5,740.47 5,661.45 4,875.19 3,790.14
TOTAL LI ABI LI TI ES 274,904.85 244,656.04 219,637.13 178,784.27 131,091.63
APPLI CATI ON OF
FUNDS :
Cash & Balances with RBI 11,735.10 9,837.82 10,198.91 10,010.89 7,666.45
Balances with Banks &
money at Call7,273.68 5,420.60 6,062.19 2,007.76 2,158.19
I nvestments 70,236.80 61,417.35 55,565.88 48,610.45 37,650.56
Advances 175,887.77 160,364.12 140,724.45 111,832.98 78,999.16
Fixed Assets 2,567.10 1,847.04 1,744.05 1,681.11 1,699.57
Other Assets 7,167.12 5,769.11 5,341.65 4,641.08 2,917.70
Miscellaneous Exp not
written off0 0 0 0 0
TOTAL ASSETS 274,904.85 244,656.04 219,637.13 178,784.27 131,091.63
Contingent Liability 84,280.17 71,001.21 59,192.54 45,075.89 39,340.52
Bills f or collection 14,345.76 12,645.16 8,336.52 4,253.20 3,205.15
Trend Analysis of IOB
NAME OF RATIO VALUE FOR IOB (in crore)
Gross NPA ratio. 4.98%
Net NPA ratio 3.19%
Important ratios in NPA analysis and values
CREDIT APPRAISAL
6 C’s 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:
Methods:I. Turnover MethodII. Max. Permissible Banking FinanceIII. Cash Budget Method
CA WCCL
Types of Loan Fund Based
I. WC loanII. Term loansIII. Composite loans
Non-Fund BasedI. Bank GuaranteeII. Letter of Credit
The workflow of CREDIT APPRAISAL
START
Receipt of documents
from applicants
Document
verification
Pre sanction visit by official
Preparation of financial
data
Proposal Assessme
nt
Proposal preparatio
n
Proposal approval
Documentation
mortgaging and
agreements
Disbursement of loans
Document
verification
Post sanction process
STOP
NPA MANAGEMENT
Importance of NPA management Reasons:
I. Internal factorsII. External factors
Impacts:I. Restriction of cash flowsII. Drain of profitsIII. Bad effect on equity valueIV. Bad effect on goodwill
Asset CategorizationStandard
Asset
• Regular servicing of interest and the principal owed to the bank• Their arrears normally don’t exceed the timeframe of 90 days
Sub-
Stanard
Asset
• Irregular servicing of interest with period varying from 91days to 1 year• The level of provisioning varies according to the category
Doubtfu
l Asset
• 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
LossAsset
• They have very little salvage value to account off.• Once inspected by auditors they are normally written off• They require 100% provisioning
NPA provisioning
SARFAESI ACT,2002Allows the banks to recover their non-performing assets without the legal intervention. The Act provides three alternate measures:I. SecuritizationII. Asset ReconstructionIII. 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. ABC TRADERS (extension of WC loan)2. 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
Particulars AUDI TED AUDI TED AUDI TED ESTI MATED
31.03.2011 31.03.2012 31.03.2013 31.03.2014
1. NET SALES
i. Receipts 1463.8748 1612.72553 965.46 1062
ii. Export Receipts 0 0 0 0
TOTAL 1463.8748 1612.72553 965.46 1062
2. COST OF SALES
i. Opening Stock 0 0 223.38 241.36
ii. ADD : Payments 1368.52558 1509.0158 927.76 1025.54
Trading Expenses 0 0 4.57 5.02
iii. LESS Closing Stock 0 0 241.36 265.5
SUB TOTAL 1368.52558 1509.0158 914.35 1006.42
3. Gross Profit (+) / Loss (- ) {1 - 2} 95.34922 103.70973 51.11 55.58
4. Selling & Administrative Expenses 57.65416 60.08418 19.88 21.86
5. I nterest & Financial Charges 26.12761 29.35476 24.5 24.5
6. Depreciation on Other Assets 5.92431 5.01462 1.12 0.96
SUB TOTAL 89.70608 94.45356 45.5 47.32
7. Operating Profit / Loss (3- 4+5+6) 5.64314 9.25617 5.61 8.26
8. Other I ncome / Expenses
i. Other I ncome 2.12239 4.75393
ii. LESS Other Expenses 1.47576 0
SUB TOTAL 0.64663 4.75393 0 0
9. PROFI T / LOSS BEFORE TAX 6.28977 14.0101 5.61 8.26
10. I ncome Tax Paid 0 47.01781 1.12 1.65
11. Net Profit / Loss after Tax 6.28977 - 33.00771 4.49 6.61
12. Dividend
13. Retained Profit 6.28977 - 33.00771 4.49 6.61
14. Cash Accrual 12.21408 - 27.99309 5.61 7.57
Calculation:1. NAYAK Committee method
AUDI TED AUDI TED AUDI TED ESTI MATED
AS PER NAYAK COMMI TTEE 31.03.2011 31.03.2012 31.03.2013 31.03.2014
Net Sales 1463.8748 1612.72553 965.46 1062
Reqd Working Capital 25% of sales (A) 365.9687 403.181383 241.365 265.5
Promoter's Contribution : 5 % ( B ) 73.19374 80.6362765 48.273 53.1
Available N.W.C. ( C ) 21.57332 -24.15776 76.75 83.73
Minimum Permissible Bank Finance
( A ) - ( B ) 292.77496 322.545106 193.092 212.4
( A ) - ( C ) 344.39538 427.339143 164.615 181.77
WHI CHEVER I S LESS 292.77496 322.545106 164.615 181.77
2. TANDON Committee method (II method)
AS PER TANDON COMMI TTEE AUDI TED AUDI TED AUDI TED ESTI MATED
31.03.2011 31.03.2012 31.03.2013 31.03.2014
Net Sales 1463.8748 1612.72553 965.46 1062
Current Assets:
i. Stock in Trade 0 0 241.36 265.5
ii. Sundry Debtors 288.79913 202.39395 185.05 199.13
iii. Other Current Assets 1.09836 1.06036 62.75 55.08
TOTAL CURRENT ASSETS (A) 289.89749 203.45431 489.16 519.71
Current Liabilities other than Bank Borrowings
i. Creditors for Purchases 80.94977 25.92937 231.94 256.38
ii. Other Current Liabilities 0 0 5.47 4.6
TOTAL CURRENT LI ABI LI TI ES (B) 80.94977 25.92937 237.41 260.98
WORKI NG CAPI TAL GAP ( C ) 208.94772 177.52494 251.75 258.73
UNDER SECOND METHOD
N W C Required (25 % of TCA) ( D ) 72.4743725 50.8635775 122.29 129.9275
Net Working Capital Available ( E ) 21.57332 -24.15776 76.75 83.73
Maximum Permissible Bank Finance
( C ) - ( D ) 136.473348 126.661363 129.46 128.8025
( C ) - ( E ) 187.3744 201.6827 175 175
WHI CHEVER I S LESS 136.473348 126.661363 129.46 128.8025
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.
Particulars AUDI TED ESTI MATED AUDI TED
31.03.2011 31.03.2012 31.03.2012
1. NET SALES
i. Receipts 30.14 38.73 23.53
ii. Export Receipts 0 0 0
TOTAL 30.14 38.73 23.53
2. COST OF SALES
i. Opening Stock 0 4.34 4.25
ii. ADD : Payments 26.8 28.77 20.87
Trading Expenses 3.24 3.87 4.73
iii. LESS Closing Stock 4.34 3.64 7.74
SUB TOTAL 25.7 33.34 22.11
3. Gross Profit (+) / Loss (- ) {1 - 2} 4.44 5.39 1.42
4. Selling & Administrative Expenses 1.17 1.87 2.25
5. I nterest & Financial Charges 0.68 0.84 0.84
6. Depreciation on Other Assets 0.64 1.12 0.86
SUB TOTAL 2.49 3.83 3.95
7. Operating Profit / Loss (3- 4+5+6) 1.95 1.56 - 2.53
8. Other I ncome / Expenses
i. Other I ncome 0.22 0.29
ii. LESS Other Expenses 0 0.3 0.48
SUB TOTAL 0.22 - 0.3 - 0.19
9. PROFI T / LOSS BEFORE TAX 2.17 1.26 - 2.72
10. I ncome Tax Paid 0.1 0 0
11. Net Profit / Loss after Tax 2.07 1.26 - 2.72
12. Dividend
13. Retained Profit 2.07 1.26 - 2.72
14. Cash Accrual 2.71 2.38 - 1.86
ABC GRAPHICS BALANCE SHEET
1. TANDON Committee method (II method)
AS PER TANDON COMMI TTEE AUDI TED AUDI TED ESTI MATED
31.03.2011 31.03.2012 31.03.2012
Net Sales 30.14 23.53 38.73
Current Assets:
i. Stock in Trade 12.65 7.74 14.28
ii. Sundry Debtors 1.47 2.84 1.5
iii. Other Current Assets 0.8 0.7 1.2
TOTAL CURRENT ASSETS (A) 14.92 11.28 16.98
Current Liabilities other than Bank Borrowings
i. Creditors for Purchases 0.73 1.85 0.86
ii. Other Current Liabilities 0.07 0.78 0.2
TOTAL CURRENT LI ABI LI TI ES (B) 0.8 2.63 1.06
WORKI NG CAPI TAL GAP ( C ) 14.12 8.65 15.92
UNDER SECOND METHOD
N W C Required (25 % of TCA) ( D ) 3.73 2.82 4.245
Net Working Capital Available ( E ) 7.98 3.36 10.52
Maximum Permissible Bank Finance
( C ) - ( D ) 10.39 5.83 11.675
( C ) - ( E ) 6.14 5.29 5.4
WHI CHEVER I S LESS 6.14 5.29 5.4
Notional Dues Calculationa) Outstanding as on the date upto which interest was last
debited 528980
Date of interest last debited/Date of NPA whichever is earlier
08/06/201
ADD:
b) Simple interest to be added from the date of interest last debited or date of NPA whichever is earlier till date of sub-mission of compromise Proposal at the Bank’s base rate prevailing on the date of submitting the proposal / contract rate / decreed rate of interest which ever is less.
13.25% pa
c) Debits such as Bills returned unpaid, DPGs invocation of Guarantees or any other business debits made after the date mentioned in col.(a) above
d) Interest on the (c ) above at the rate mentioned in col.(b) 70090
e) Other Expenses viz. ECGC/DICGC premium, Godown rent, Insurance premium paid, charges paid to Security agencies/ Personnel etc., subsequent to the date of NPA.
f) Legal and Other Expenses incurred subsequent to date mentioned in col. (a) above
15,009
SUBTOTAL: A 614079
LESS:
a) Recoveries made after the date mentioned in col. (a) and Countervailing Interest : Date Amount CV Interest Total X
b) CV Interest on ECGC / CGTMSE claim received amount. CV Interest Y Sub Total Z=X+Y
NOTIONAL AMOUNT DUE FROM THE PARTY (A - Z )
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
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
COMPARATIVE STUDY between the 2 cases
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.