SUMMER PROJECT REPORT

Credit risk management in Punjab national

bank
Prepared for the Mumbai University in the partial fulfillment of the
requirement for the award of the degree in
MASTERS OF MANAGEMENT STUDIES

Submitted By:
Name: Sharvani Rajendra Pawar
Roll No. & Year: 100

Under the guidance of

__________________Kiran Rodrigues________________

SFIMAR

St Francis Institute Of Management And Research, Mt. Poinsur,

S.V.P Road, Borivali (W) Mumbai.
Batch- 2014-2016 :

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Date:
TO WHOMSOEVER IT MAY CONCERN
This is to certify that (Student Name) has successfully completed his/her
Summer project on Project Title for a period of __________ months. i.e. from
______ to ______ 2015.
During this period, we found him/her sincere, honest & hardworking.

We wish him/her all the best for further assignments.

For (Company Name)

Signing Authority
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Executive summary:
The project report titled Credit Risk Management in Punjab National Bank is
related to the study of techniques and procedures followed by Punjab national
Bank to manage credit risk from the pre- sanction period to the post- sanction
period of loans for large corporates.
The study is concerned with the review of the existing instruments of risk
management which are implemented by PNB for credit services. Number of
manuals were studied to understand the credit risk management process of the
bank. RBI monitors the Credit Risk Models for all the banks in India and also
provides guidelines for the bank to maintain their processes and procedures.

Analysis of credit risk management process in Punjab

national bank.

1. About Punjab national bank

Punjab National Bank (PNB) was established in 1894 and is one of the largest
government owned and over all fourth largest bank in India. It has about 5100
branches across 764 cities and serves over 63 million customers. It has presence
throughout the length and breadth of the country and offers a wide variety of
banking services that include corporate and personal banking, industrial finance,
agricultural finance, financing of trade and international banking. Among the
clients of the bank are multinational companies, Indian conglomerates, medium
and small industrial units, exporters and non-resident Indians. The large presence
and vast resource base have helped the bank to build strong links with trade and
industry. The strength of the bank lies in its corporate belief of growth and stability.
Vision of Punjab National Bank To evolve and position the bank as a world class
progressive, cost effective and customer friendly institution providing
comprehensive financial and related services, integrating frontiers of technology
and serving various segments of society especially the weaker sections, committed
to excellence in serving the public and also excelling in corporate values.
Mission of Punjab National Bank To provide excellent professional services and
improve its position as a leader in the field of financial and related services, build
and maintain a team of motivated and committed workforce with high work ethos,
use latest technology aimed at customer satisfaction and act as effective catalyst for
socio-economic development.

Product and Services:

Saving Accounts:
Total Freedom Salary Account
PNB Prudent Sweep
PNB Vidyarthi SF Account
Current Accounts:
PNB Vaibhav
PNB Gaurav
PNB Smart Roamer
Fixed Deposit Schemes:
Spectrum Fixed Deposit Scheme
Anupam Account
Mahabachat Schemes
Multi Benefit Deposit
Scheme Credit SchemesHousing Laons
Car finanace
Personal Loan
Credit Cards
Social Banking:

Mahila Udyam Nidhi Scheme

Krishi Card
PNB Farmers Welfare Trust
Corporate Banking:
Term Loan and Working Capital Financing
Fund Based and Non-fund based financing
Gold card scheme for exporters
EXIM Finance
Business Sectors: PNB Karigar Credit Card, PNB Kushal Udhai, PNB PRagati
Udhami, , NB Vikas Udhami, Cash Management Services
Other Services and Businesses: Locker Facilites, Senior Citizens Scheme, PPF
Schemes and Internet Banking , Mutual Fund Business, Gold Coin Business,
Depository Services, Online Trading Facility, Insurance Business, Merchant
Banking etc.

Financials for March 2015:

Liabilities
Total capital
Net worth (share capital +reserves and

Rs. (in crores)

370.91.00
37,691.97

surplus)
Total debt(deposits and borrowings)
Other liabilities and provisions
Total liabilities

547,049.19
17,204.89
601,946.05

Assets
Cash with RBI
Balances with banks, money at call
Advances
Investments
Net block
Other assets
Total assets

Rs.(in crores)
24,224.94
31,709.23
380,534.40
151,282.36
2,163.93
12,031.19
601,946.05

Punjab National Banks gross NPA and restructured loans are 17.94 per cent as
on March 2015.

Organization Chart:
Board
of
Directo
rs
CMD

ED
GM
(Credit)

GM (NPA
and weak
Accounts

GM
retail
and
Lendin
g

GM
Treasur
y

GM
(IRMD)

DGM

DGM

DGM

AGM

AGM

AGM

FUNCTIONAL HEAD

GM
Deposi
ts

GM
Audit

2. Credit Division (CD) CIRCLE OFFICE:

For the purpose of commercial lending it consist of branches, mid corporate
branches (MCBs), large corporate branches (LCBs) and head office (CD). In
Punjab national bank the credit division looks after processing and
monitoring of any loan proposal. It includes pre and post sanction activities
which help bank to closely monitor all the accounts.
The credit division at circle office looks after sanctioning of loan proposals
which fall above the loaning power of branches but within the powers of
circle head. Mostly loans more than 1 crore and below 35 crore are
sanctioned at the circle office.
Risk rating of such proposals is also carried out at the circle office in order
to sanction/renew/review/ enhance a particular proposal.
The division also carries out on regular basis post sanction monitoring of the
accounts in order to detect various risk or threats arising from such accounts.
Any such irregularity if found then credit division ask the branches to take
certain action against such defaulters.
For all types of corporates the division carries out risk rating and for retail
loans they carry out scoring process. Scoring is not done on frequent basis
unlike rating.
The bank has introduced Grid/Committee system in credit sanction
process wherein every loan proposal falling within the vested powers of
DGM and above is discussed in a credit committee which on the merit of the
case recommends the proposal to the sanctioning authority. Such committee
have been formed both at HO and ZO level, The credit committee at HO
includes GM Credit and CGM/GM-RMD.

DEPARTMENT STRUCTURE (CREDIT DIVISION- CIRCLE OFFICE

MUMBAI):

CIRCLE HEAD

CHEIF
MANAGERCREDIT

MANAGERS

OFFICERS

Risk Management Department (RMD)

SENIOR
MANAGERCREDIT

CLERKS

In a banks portfolio, losses stem from outright default due to inability or

unwillingness of a borrower or counter party to honor commitments in relation to
lending, settlement and other financial transactions. PNB has an elaborate risk
management structure in place. Credit Risk management structure at PNB involves
Integrated Risk Management Division (IRMD) RMD frames policies related to
credit risk and develops systems and models for identifying, measuring and
managing credit risks. It also monitors and manages industry risks.
Circle Risk Management Departments (CRMDs) Risk Management Departments
at circle level are known as CRMD. Their responsibilities include monitoring and
initiating steps to improve the quality of the credit portfolio of the Circle, tracking
down the health of the borrowable accounts through regular risk rating, besides
assisting the respective Credit Committee in addressing the issues on risk.
Risk Management Committee (RMC) it is a sub-committee of Board with
responsibility of formulating policies/procedures and managing all the risks.
Credit Risk Management Committee (CRMC) it is a top level functional
committee headed by CMD and comprises of EDs, CGMs/GMs of Risk
Management, Credit and Treasury etc. as per the directives of RBI. Credit Audit
Review Division (CARD) it independently conducts Loan Reviews/Audits.
- Credit audit review division (CARD) this division mainly looks after the loan
review mechanism of the bank. It is their job to see to it that the party are
complying with the regulations of bank and if any such defaulters are found they
are reported to the credit division.

Taking a step further during the year, the Bank has developed and placed on
central server score based rating models in respect of retail banking. These
processes have helped the Bank to achieve fast & accurate delivery of credit; bring
uniformity in the system and facilitate storage of data & analysis thereof. The
analysis also involves analyzing the projections for the future years.

Project introduction:
Banks are in the business of financial intermediation. They are therefore subjected
to multiple types of risk. Managing such risk is a major challenge before them.
Banks which take reasonable risk are the most successful banks but this can be
done only after carefully examining various factors, including the expected return
from the projects under consideration before approval. Risk are broadly divided
into three categories- credit risk, market risk and operational risk. Risk are all
interrelated and interdependent on their cause and effect. All other risk considered
are important and are needed to be taken care of but the most important and the
one occupying central place in commercial banks is Credit Risk Management.
According to latest 2015 data provided by RBI the rising bad loans have become
the biggest concern for RBI as well as govt of India. In this financial year NPAs
have increased to 4.6 percent from last September. Therefore proper credit
management mainly influences success or failure of banks and financial
institutions.
Credit risk or default risk is the potential that a bank borrower or counterparty will
fail to meet its obligation in accordance with the agreed terms. It is noted that most

of the NPAs are arising in commercial lendings. This project is a study of Credit
risk management in Punjab national bank for working capital and term loans. It
gives an analysis of how fund based facilities are managed. Most of the
commercial clients make use of fund based facility and due to various reasons
there are defaults in repayment of such loan. This project gives information about
various instruments used by PNB in order to manage their credit risk. The study is
related to the review of credit risk model being implemented at PNB for large
corporates.

Objectives of the study:

1. To study fund based facilities provided to industrial clients where various
variables considered during appraisal of a loan proposal.
2. To understand to need and importance of credit risk models for PNB.
3. To understand the different instruments of risk management by using risk
assessment models as well as credit risk rating procedures used by the bank
for large corporates.
4. To understand the appraisal of term loan and working capital financing of
large corporates through various case studies.
5. To understand various steps taken by bank for the appraisal of large
corporates NPA accounts through case study.

Research methodology:

Research design:
Descriptive research design.
Sampling:
The study is based on convenience sampling. Here samples are nothing but various
loan proposals that were studied. An attempt was made to ensure that this sample is
an accurate representation of a large group. Due to time constraints the research
was narrowed down to large corporates and to 35 samples (loan proposals) could
be analyzed so that an in depth analysis can be carried out.
Data collection:
In order to learn and observe the practical applications of various theories and
concepts, following sources are being used:
1. Primary source of information:
For this various proposals were considered and studied
Discussion with the senior manager-credit and manager- credit for
clarification on certain terms and procedures.
2. Secondary source of information:
Banks credit policy.
Circulars and guidelines issued by bank
Study of proposals and credit risk management manuals.
Website of Punjab national bank and other IT sources.
Books and papers were also used to study risk management in
banks.

Chapters relating to data:

Types of credit facilities that are studied:

Working capital and term loans:

1. Working capital :
Working Capital refers to the current asset holdings of the firm.Net working
capital is the difference between Current Assets and Current Liabilities.
Working capital requirements depend on various business specific internal
factors like operating efficiency, technology employed and the level of
quality control.
Current Assets may further be classified in to two components:
i)
A permanent Core Component
ii)
Fluctuating Component
A manufacturing enterprise has to maintain a minimum level of inventory
at any point of time below which production could get impacted. This
minimum level of current asset is called Core Current Asset level. This
would be constantly tied up in the business with changes in sales and
activity level. Fluctuating component is the portion above this level that is
continuously changing due to changes in demand, seasonality of product
etc. Businesses finance permanent core component through long-term
sources of fund like equity or long term loans. Fluctuating Component is
financed mainly by availing the short term loans and other credit facilities
from the bank. Main focus here is to avoid overfunding or underfunding of
the operations. While over funding will amount to locking up of assets
unproductively as idling cash or inventories, at the same time under funding
would seriously hamper the day-to-day operations and pose a threat to the
survival of the businesses. Hence it is critical to correctly determine the
maximum bank finance that should be provided.
2. Term loans:

Term loans are those loans that are lent for extended period of time, most of
them are taken for purpose of capital expenditure by the firm. They are
different from short term loans which are for taken for meeting the working
capital requirements and short term liquidity.
Term loans are utilized for acquisition of fixed assets and are to be repaid
from cash generated out of the operations of the business. Credit delivery for
term loans are broadly divided into fund based i.e. cash credit and non- fund
based like deferred payment guarantee (DPG) where the liability to make
payment crystallizes after the bill again such guarantees are presented for
payments. Term loans are sanctioned for acquisition of fixed assets like land,
building, plant/machinery, office equipment, furniture-fixture and other
capital expenditure like purchase of transport vehicles and other vehicles,
agricultural equipment etc. The term loan is a loan which is not a demand
loan and is repayable in terms of i.e. in Instalments irrespective of the period
or the security cover. Term loans are normally granted for the periods
varying from three to seven years and under exceptional circumstances
beyond seven years. The term loans with remaining maturity period of above
5 years shall not exceed 50% of the term deposits with remaining maturity
period of above 5 years after taking into account the renewal of term
deposits as per the past trend, as is being done for ALM. Since term loans
are provided for a long tenure ensuring the viability of the project and
sufficient generation of cash over a long tenor of the loan becomes critical.

Instruments of credit risk management used in PNB:

Credit risk management consist of a lot techniques, which help the bank in
mitigating the adverse impacts of credit risk. Some of them used in PNB are as
follows:
1. Credit approving authority:
At PNB Credit approval committees (CACs) is formed based on the
communication received from department of financial services, ministry of
finance, Govt of India, credit approval committees at HO / CO level have been
formed as under
CAC at Co/ HO level
COCAC

Headed by
Circle head

Credit proposal
Beyond loaning powers
of the incumbent of the
branch but within vested
loaning powers of the
circle head (AGM/ DGM

FGMCAC

FGM

as the case maybe).

Beyond loaning power of
circle head but not
exceeding Rs. 35 crore

HOCAC LEVEL-I

Senior most GM (credit)

Above Rs. 35 crore and

up to Rs. 50 crore.

HOCAC LEVEL-II

Senior most ED

Above Rrs. 50 crore and

up to Rs. 100 crore.

HOCAC LEVEL-III

Managing director and

Above Rs. 100 crore and

CEO

up to Rs. 400 crore.

2. Prudential limits:
Exposures include credit exposures (funded and non -funded credit limits) and
investment exposure including underwriting and similar commitments as well as
certain type of investment in companies. In case of term loans sanctioned limits or
outstanding, whichever ae higher are considered. Factors like rating of industry by
external agency, nature of industry and its importance in economy as well as
internal factors like level and trend of assets impairment, exposure level and
quality of exposures in industry are also taken into consideration. However,
undisbursed term loan amounts in any industry shall also be monitored closely.

This model provides scientific assessment and corresponding exposure ceiling

level to an industry. These limits shall be reviewed on the basis of data analysis
regularly. Further, the industry-wise exposures shall also be monitored closely by
Credit Division, HO to especially those industries which have reached trigger level
of 85% of exposure limit so that instances of breach of ceiling could be averted.

Industry/Sector Ceiling in percentage

Sector

S.

Sector

No.
1.
2.
3.
4.

All engineering
Chemicals, dyes and paints
Construction
Food processing

6%
3%
5%
5%

5.
6.
7.
8.
9.

Iron and steel

Other textiles
Paper and paper products
Petroleum
Sugar

10%
5%
3%
3%
5%

The New Basel Accord states that to apply State of the art financial methodologies
for prescription of capital adequacy they have proposed two approaches namely
standardized approach and Internal Rating Based (IRB) Approach for estimating
regulatory capital for credit risk. Banks will be benefited by adopting IRB
approach as capital requirements for credit risk will depend on the asset quality.
Under IRB the banks shall measure the credit risk based on assessments of the risk
characteristics of both the borrower and specific type of transaction or facility
offered such as CC, Term loan and to the extent of type of securities. Based on this
approach PNB has implemented various risk rating models for different category
of borrowers covering all accounts with total exposure of above Rs. 50 lakh for
arriving default risk rating.

3. Credit Rating:
An important tool in monitoring the quality of individual credits as well as the total
portfolio is the use of internal rating system. A well-structured internal rating
system is a good means of differentiating the degree of credit risk in different
credit exposure of a bank. This plays a very important role in the pre-sanction stage
of a loan appraisal. Credit risk rating is very useful to a bank for carrying out
following activities:

 Whether to lend to a borrower or not: through credit rating bank are able
decide the exposure level.
Pricing: The risk premium to be charged to a borrower should be
determined by its credit risk rating. Borrowers with poor credit rating
should be priced high.
Risk Mitigants: The extent of collateral security required and the need to
step up margin requirements are linked to credit risk rating of a borrower.
The higher the risk category of a borrower, the greater should be the value of
collateral and/or the margins.
Level of decision-making: The delegation of loan sanction/approval powers
can be linked to the credit risk rating of a borrower. For low risk borrowers,
higher power of approval can be at the branch level to facilitate faster
sanctioning of loans thereby ensuring better customer service. For higher
risk borrowers, approval from higher levels may be considered.
Frequency of renewal and monitoring: renewal of facility for borrowers
with high rate can be considered at longer intervals while comparing to low
rated borrowers. High risk borrowers should be frequently monitored as
compared to low risk ones. Shortest interval can be for a period of 3 months.

PNB has robust credit risk framework and has already placed credit risk rating
models on central server based system PNB TRAC, which provides a scientific
method for assessing credit risk rating of a client. For large corporates the process
of tracking migration of rating and default instances to estimate the probability of
default is been done at H.O.
The credit risk rating tool has been developed with a view to provide a standard
system for assigning a credit risk rating to the borrowers of the bank according to
their risk profile. This rating tool is applicable to all large corporate borrower

accounts availing total limits (fund based and non-fund based) of more than Rs. 12
crore or having total sales/ income of more than Rs. 100 crore.
Risk of borrower is evaluated on a scale of AAA to D wherein AAA represents
minimum risk and D indicates maximum risk.
Risk could be arise due to internal and specific factors in the company, the industry
in which the company is working or the economic conditions prevailing in the
market and/or willingness of the company.
Risk rating model for corporates considers sources of risk like the financials of the
borrower both quantitative and qualitative, business performance by analyzing the
trends, quality of management- how strong they area and capable to repay the loan
amount, the conduct of accounts in order to closely monitor whether there is any
default in payments with respect to previous loans taken or the one with other
banks lastly it also considers how the industry is working as they have group
exposures so if one company in the same group is not doing well than others can
also be affected.

Questionnaire:

Which branch does it belongs to?

What is the nature of the facility?
What is the turnover of the company for previous year?
What are the profit margin of the borrower?
Who is the sanctioning authority?
What is the current ratio for both defaulters and non-defaulters?
What is the debt-equity ratio for both defaulters and non-defaulters
What is the net worth of the borrowing company for both defaulters as well

as for non- defaulters.

In case of unavailability of the net worth, cost of immoveable property of the
borrowers.
What are various rate of interest applicable to the borrower?
How the loans are reviewed, what is the duration of reviewing or renewing
the loan proposal?
What is the period of loan taken?
What is the limit that is sanctioned for borrowers of working capital loans?
What is the limit sanctioned for borrowers of term loans

The data was analyzed by going through 35 proposals which belonged to large
corporates as the loan amount were beyond 12 crore. Hence the risk rating model
for large corporates was studied.
The model is based on certain parameters which are duly examined and only after
that the come on a particular rating. For corporates they carry out rating and for
retail loans or individual they carry out scoring.
The sectors which are covered under large corporates are manufacturing, service as
well as trading.
Rating is conducted periodically starting from 3 months to annually. It acts as an
important aspect while sanctioning a loan proposal as well as wile renewing the
proposal. So its a pre as well as post sanction initiative which is taken by bank to
closely monitor their risk.
Step I:
The scores assigned to different parameters i.e. financials, industry, conduct of
accounts and management quality ranges from 0 to 4 and have up to two decimal
points. Here 0 is considered to be very poor and 4 is considered to be very
excellent. The rating for some of this parameters tends to be subjective and the
rater only has to feed in the given data and TRAC will decide the score for that
particular parameter.
In case where no such parameter is applicable NA is given so that the weight of
that parameter gets distributed equally among other parameters.

Step II:
The scores given to the individual parameters multiplied by allocated weights are
aggregated and a composite score for the company is arrived at in percentage terms.
Weights have been assigned to different parameters based on their importance.
The following table shows the various parameters and the weights assigned to them:

Weightage of parameters in the model

Factors

weightage

Financial aspect

40

Quality of Management

20

Conduct of Accounts

20

Industry overlook

20
100

Total
Step III:

Once all the parameters are analyzed and the final score obtained is then converted
into percentage from between 0 to 100 and this percentages are then converted into
rating from scale of AAA to D according to the pre-defined range as under:

Rating
category

Risk Profile
(Description)

Score (%) obtained

Grade within
the rating
category

PNB AAA

Minimum Risk

Above 80.00

PNB- AAA

PNB-AA

Marginal Risk

Above 77.50 up to 80.00

PNB- AA +

Above 72.50 up to 77.50

PNB- AA

Above 70.00 up to 72.50

PNB- AA -

PNB-A

PNB-BB

PNB-B

Modest Risk

Average Risk

Marginally
Acceptable
Risk

Above 67.50 up to 70.00

PNB- A +

Above 62.50 up to 67.50

PNB- A

Above 60.00 up to 62.50

PNB- A -

Above 57.50 up to 60.00

PNB- BB +

Above 52.50 up to 57.50

PNB- BB

Above 50.00 up to 52.50

PNB- BB -

Above 47.50 up to 50.00

PNB- B +

Above 42.50 up to 47.50

PNB- B

Above 40.00 up to 42.50

PNB- B -

PNB-C

High Risk

Above 30.00 up to 40.00

PNB- C

PNB-D

Caution Risk

30.00 and below

PNB D

Important factors to be considered in the rating process

The rating tool contains several qualitative parameters that are to be evaluated
subjectively. It is, therefore, necessary to be adequately familiar with the company
and the industry. Visiting the company and interacting with its management
generally helps the rater in understanding the underlying activity behind the
financial data of the company being analysed; the business prospect of the
company and its management. Information should be collected about the company
from all possible sources to conduct this exercise completely, accurately and in an
authenticated manner.
The data used to rate companies should be annualised & comparable before it is
used for rating purposes. Similarly the financials of the company should be made
comparable with peers in case of change in accounting policies, merger, demerger,
acquisition, sell-off etc.
While evaluating a company against the industry the following points
should be kept in mind:
- The companys value should be compared only with peers.

- Size / capacity / volume are indicative factors in selecting peers.

- The sample of companies chosen for the industry comparison should be
identical as far as possible for rating all companies under one particular
industry having similar size / capacity / nature of activity.
- The number of companies in sample should be reasonable i.e. neither too
low nor too high.
- The sample size should be of at least 5 companies. The sample should be
first selected from the activities in which company is operating.
In case of non-availability of data:
For companies where industry data is not available, data for other comparable
industries can be used. For multi-divisional companies, which are involved in more than
one industry, evaluation should be done separately for each business. Thus the
management evaluation, conduct of account and financial evaluation will be done on a
common basis. For the business section, each business should be evaluated and
scored separately, taking into account the different industries involved. A weighted
average of these business scores should be calculated, where the weights are
proportional to the contribution of each business to the companys total sales. This
weighted average should then be combined with the scores in the other sections to
arrive at the overall rating for the company. Risk rating is done as soon as the circle

office receives audited financial statements. In some cases provisional figures can
also be taken.
Rating category of PNB-AAA states that the particular proposal bears minimum
risk and it can be accepted. It has a score of more than 80.00 and it is given grade
AAA.

Whereas rating category of PNB-D states that there is high risk involved and the
loan approval committee must consider various parameters before sanctioning the
loan as it involves higher amount of risk. In PNB normally loans having rating
below B are subjected to approval of various committee before they are considered
as they pose high amount of risk. And currently the economy is not doing well so
in avoid unnecessary risk proposals with good score are accepted hence saving
bank from incurring more NPAs.
Parameters considered in PNB credit risk model
Parameter 1: Financial Strength Of The Clients
The financials of a company are indicative of the health of the company and potential
risks in lending to the company e.g. if the company already has a large amount of debt
on its balance sheet, compared to its cash flow generation capacity, a loan to this
company would be risky.

Parameter 2: Business Performance Of The Clients

The business performance of a company has a direct relationship with the credit risk of
the company as the business performance determines the generation of cash for debt
repayment.
The companys competence in its activities as well as its position relative to its
competitors are key indicators of how a company is expected to perform and its ability
to generate funds to repay its debts.

Parameter 3: Industry Outlook of the Clients

The credit rating of a company cannot be assessed without considering the outlook of
the industry in which the company is operating. Industry performance very often has a
direct bearing on the performance of a company. Two companies in different industries
would have different credit worthiness depending on the outlook for their industries.

Parameter 4: Management Evaluation Of The Clients

The quality of management and management structure are very important indicators of
a companys credit risk. The performance of a company driven by a strong management
is likely to be better than that of a company having a poor management irrespective of
the industry to which it belongs.
Evaluation of management is important not only due to its impact on the companys
performance, which determines its capability to repay, but also from the point of view of
its integrity. This is because the intentions of the management determine the willingness
of the company to repay its debts.
The management quality thus influences both aspects of default risk, the ability as well
as the willingness of the borrower to repay its debts. Thus the evaluation of
management quality is an essential input for credit risk assessment.

Parameter 5: Conduct Of Account

The conduct of account refers to as to how the borrowers existing accounts with our
Bank as also with other banks are being conducted and whether any problems are
being faced. The conduct of account provides useful indications about the ability and
willingness of the borrower to meet his obligations. The manner in which a borrower has
been conducting his accounts in the past is a good indicator of how the account is likely
to behave in future as well.

The risk management philosophy and policy of the bank mainly focuses on
reducing exposures to areas, because of which it places more emphasize on the
promising industries, optimizing the return by striking a balance between a risk and
the return on the assets and striving towards improving the market share to
maximize shareholders value.
Other post sanction risk management activities involves QMS and PMS.

Analysis of data:
The data collected consist of various variables which are considered by bank at the
time of sanctioning of loans especially for corporates. 35 proposals which were
studied are a mix of both defaulters as well as non- defaulter borrowers. The
proposals had various variables which were analyzed.

Starting first with,

1. Type of facility:
Credit facility are of two types fund based and non-fund based. Data consist of
working capital loans as well as term loans which are further divided into cash
credit and DLG. Most of the proposals belonged to fund based credit facility.
Which consisted of working capital limits and term loans.

5%
21%

35%

6%
11%

TL
WC
CC

22%

BG
OD
Others

2. Mix of borrowers:
There was a mix of borrower that came across during the study, majority of the
borrowers are private limited firms. And second largest borrowers are partnership
firms. There is a mix of various sectors and industry in this borrowers. Attractive
schemes on working capital and term loans has attracted a large number of
corporates.

Mix of borrowers
9% 6%

29%

Proprietorship
Pvt Ltd
Partnership

56%

Public Ltd

3. Turnover of the Companies (in Lacs):

From the data analyzed it is seen that 30% of the companies have turnover of
more than 5000 lakhs per year. Bank gives importance to the financial strength
of companies, before sanctioning any proposal or enhancement bank analyses
the trend of sales for particular company and if any decreasing trend is found
then such proposals are further scanned on various other variables. This is
because in case of term loans the amount generated from the operation of the
bank is routed to the bank in order to repay the loan amount. Analyzing the
financial strength of borrower is one of the important aspect of credit risk
rating.

Turnover of the companies (in lacs)

upto 100
30%

11%

4%
22%

19%

15%

51-100
101-500
501-1000
1001-5000
>5000

4. Profit Margins of Borrowers:

All the companies belonging to this risk model are large corporates. Which include
manufacturing service and trading sector. Hence we can see that the profits earned
by this firm is very less when compared to the sales for the year. It is mainly
because manufacturing sector involves high fixed cost for their operations and also
there sales are diverted to the loans that these corporates take hence at the yearend
they are left with minimal percentages of profits. Still most of these are earning
between 5 to 10 percent profit every year. Which is a good sign that the company is
doing well. There is hardly any difference in between these percentages.

18%
27%
upto 2%
2% to 5%
5% to 10%
more than 10%
30%
24%

5. Current ratio:
Current ratio is also one of the important variable which is considered while
sanctioning loan and in order to avoid credit risk or default risk it is very important
to have current more than 1.33:1. In order to conduct more in depth study the
borrowers were classified into defaulters and non-defaulters. Most of the borrowers
have current ratio ranging from 1.00 to 1.5. in case of defaulters CR maximum is
till 2. Very less percentage of borrowers from non-defaulters are having up to 1
percent and still they are able repay the loan amount from time to time.

Current Ratio for Non-Defaulters

10% 5% 14%

upto 1
1-1.5

24%
48%

1.5-2.5
2.5-5
>5

Current ratio of defaulters

23%
52%
25%

upto 1.5
1.5-2
>2

6. Debt equity ratio:

Each industry or sector have different benchmarks for debt-equity ratio. In case
of debt-equity ratio of 0.5 it states that the firms has half as many liabilities as
there are assets. It is more of a solvency parameter that is considered. Higher
the ratio lower is the margin of safety. Also excessive debts may cause
insolvency of business during the downturns in the business cycle.
If we see in case of non-defaulters the debt-equity ratio of most of the
borrowers is up to 0.25 which is good sign that the borrowers are at low risk.
In case of defaulter the debt-equity ratio is more than 0.5 to 1.5 which shows
that the borrowers are having more liability as compared to their assets hence
resulting into NPA accounts.
Debt-Equity Ratio for Non-Defaulters

5%

11%
42%

16%

upto 0.25
0.25-0.5
0.5-1

5%

1-2.5

21%

2.5-5
>5

Debt-Equity Ratio for Defaulters

8%
15%

31%
upto 0.5
0.5-1.5
46%

1.5-2.5
>2.5

7. Net worth/ Cost of IP:

This is another important variable of a business is Net worth of the business it

tells us how much an entity is worth. Cost of immoveable property (IP) is a
very common security that is kept by business in case of default such properties
are sold at the best possible price and the money is recovered. Net worth helps
bank to decide whether it is feasible to give loan to a particular business. Higher

the net worth more are the chances of recovering money in case default by
borrower. Normally for cash credit Value of Security (VS) is needed to be high
then the Drawing Power of the borrower (DP).
Net Worth/ cost of IP for Non-Defaulters (in lacs)

11%
42%

32%

upto 500
500-1000
1000-5000

16%

>5000

Net Worth/cost of IP for Defaulters

23%

46%

31%

upto 1000
1000-5000
>5000

8. Review schedule:
Each and every type of facility is subjected to review. It depends on what
kind of facility is taken, for retail loans like housing they are not renewed.
But in case of working capital loans or cash credits the loans ae subjected to
review or for renewal- if the borrower is a good borrower and not making
any defaults then there limits can be increased but exposure is kept balanced
with the group exposure. So as to avoid risk arising out of the industry or
sector related to that particular firm.
Loans which are bad or are default borrowers are reviewed after every 3
months so as to take steps as early as possible in order to avoid bad debts.

3%
2%

6%

3%
30%

Renewal
Fresh
Annual Review
Enhance
Reviewed 3 Months
Reviewed 6 Months

56%

9. Rate of interest:
The rate of interest varies from proposal to proposal. Loan pricing is
administered under BR (base rate) regime as per the RBI guidelines. Under
this system banks specify a base rate above which all the loans are priced.
Base rate is revised from time to time as per RBI review of interest rates that
depends on the macroeconomic situations. It depends on the type of score
that the borrower gets under credit risk rating. Normally higher the score
higher are the rates. In the data that was collected majority of the borrowers
fell under 10 to 15 percent.

18%

15%
less than 10%
10% to 15%
67%

more than 15%

10.Limit sanctioned for working capital loans:

The proposals which were studied had limit sanctioned of more than 15
crore.

limit sanctioned for WC

5%

1200-1700

26%

1700-2500

44%

2500-5000
>5000

25%

limit sanctioned for TL

20%

4%

51-100

20%

101-500
501-1000
22%

33%

1001-5000
>5000

11.Period of loan:
A term loan is a monetary loan that is repaid in regular payments over a set
period of time. Term loans usually last between one and ten years, but it may
last as long as 30 years in some cases. In this case majority of the loans are
taken for a very short period that is of 12 months. However loans which are
good and are paid regularly without any defaults are not ended very soon the

banks on the date of review enhances their limits. However in case of defaulters
only aim is to recover the money as soon as possible and to avoid the loan
turning into bad debt. Working capital loans are normally for short duration as
they are taken to meet daily requirements.

period of loan
3%
3%

6%

10%
3 months
12 months
48 months
60 months
84 months

77%

Case study of a NPA account: working capital loan

NPA (Non-performing Assets) - All those assets which don't generate regular
income are known as NPA.
Types of assets
Standard assets: - An assets which is generating regular income to the bank
Sub-standard assets: - An asset which is overdue for a period of more than 90
days but less than 12 months
Doubtful assets: - An asset which is overdue for a period of more than 12 months.
Loss assets: - Assets which are doubtful and considered as nonrecoverable by bank, internal or external auditor or central bank inspectors
Sub-standard assets, Doubtful assets and Loss assets are NPA.
SARFAESI Act and Rules
SARFAESI Act (The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002) was enacted to regulate securitization
and reconstruction of financial assets and enforcement of security interest created
in respect of Financial Assets to enable realization of such assets.
The SARFAESI Act provides for the manner for enforcement of security interests
by a secured creditor without the intervention of a court or tribunal. If any
borrower fails to discharge his liability in repayment of any secured debt within 60
days of notice from the date of notice by the secured creditor, the secured creditor
is conferred with powers under the SARFAESI Act to
a) take possession of the secured assets of the borrower, including transfer by way
of lease,assignment or sale, for realizing the secured assets
b) takeover of the management of the business of the borrower including the right
to transferby way of lease, assignment or sale for realizing the secured assets,
c) appoint any person to manage the secured assets possession of which is taken by
thesecured creditor, and

d) require any person, who has acquired any of the secured assets from the
borrower andfrom whom money is due to the borrower, to pay the secured creditor
so much of themoney as if sufficient to pay the secured debt.

INTRODUCTION:

M/s ABC Industries is an SSI unit established in November 20XX . Mr. R K is the
proprietor of the firm. The firm manufactures copper/aluminum extrusion, wire
drawing, sections/strips/patta/bush bars/bounded winding wire, coated aluminum
wire, copper tube etc.
THE LOAN PROPOSAL:
Name of the Borrower: M/ABC Industries
Name of BO/Controlling Office/FGMO: XYZ
Subject: To consider
A. Review of Working Capital Limits
Existing
FB
NFB
Total

Proposed

4.30
(4.30)
4.30

4.30
(4.30)
4.30

B. Approval of ROI/ Service charges as under:Facility

Existing

Proposed

Applicable
rate

Income Earned
Last year

CC
TL
Rate of
interest

Processing
fee
Upfront Fee
Lead Bank
fee

Current year
upto__________
Intt. Non-intt
Intt.
Non-intt
BR+3.50% BR+3.50%
0.05
0.15
i.e. 13.75% i.e. 13.75% at NA
NA
at present as present as
per L &A
per L &A
circular no. circular no.
48/2014
48/2014
dated
dated
23.4.2014
23.4.2014
Rs. 225 per Rs. 225 per 0.01
0.01
Lacs
Lacs
NA
NA
0.00
0.00
NA

NA

NA

NA

Comm. on
NFB
Other
charges, if
any

0.01

0.00

0.00

0.00

D. Approval of other Issues, if any : NA

Whether
fresh /
renewal /
enhancemen
t
Asset
Classification
as on
31.06.2014
and last PMS
score
Credit Risk
Rating by
Bank
Facility
Rating

Review for a period of three months.

Asset Classification: Standard

PMS score
: 82.5
PMS rank
: 5

Rating Date of RatingScore

Present

B-

Previous

Whether priority/non
priority sector as per PS&LB
guidelines Sub-sector may
also be mentioned.
Whether Agriculture / Retail /
SME / Others (Please
specify)
a) Whether Sensitive Sector
Real Estate / Capital
Market
b) Applicable Risk weight
Consortium / Multiple Banking
Lead Bank
PNBs Share%

Date of receipt of proposal

- At: CO
Date of clarifications,
if any, received at

30.12.20
13
06.03.13
Priority

SME

No

100%
Sole Banking
Not Applicable
100%

4.9.2014

42.0
7
47.2
8

ABS

31.03.1
3
31.03.1
2

Validity date*
31.12.2014
-

Reasons
for
degradation
NA

CO / HO
Date of placing the proposal
before competent authority
Remarks
Date of last sanction &
authority / In Principle
Consent
Customer ID No.
Activity code (as per ladder)

Renewal of limits by CO CAC on 30.12.2013

151230320
NA

Part II Management Evaluation:

a

Group Name

ABC Industries

Address of Regd. / Corporate

Office
Name & Tel./Mob. No. of the CFO
(with e-mail ID)
Works / Factory / Godown
Constitution and constitution code
as per ladder
Date of incorporation /
Establishment
Dealing with PNB since
Industry / Sector
Business Activity (Product) /
Installed Capacity
Corporate Identity No. (CIN)

Mumbai-

c.
d.
e.
f.
g.
h.
i.
j.

Daman.
Proprietorship
21.2.1996
July 1999
Other Metal & Metal Products
Manufacturing of Copper Wire
Manufacturing of bare copper wire, winding
copper wire and PVC cables.
NA

Financial evaluation:
The party has not submitted any financials for the year as well as for 2014-2015. It
has brought to the branchs notice that the factory of ABC industries at Daman is
shutdown. Hence the party is not able to pay the interest amount and the loan
amount since one and year.
Here is the last financials that the bank has received.
Financial Position of the Company as on close of last three financial years,
estimated for previous year and projected for the next year
1. Financial Information:
(Rs. In Crore)
Profit & loss A/c

31.03.2011
Audited

31.03.2012
Audited

31.03.2013
Audited

- Domestic

7.13

- Export
Gross Sales

0.00
7.13

0.00
9.00

7.13

26.31
9.00

0.01
0.03

0.00
0.05

Profit before tax

0.04

0.55

Profit after tax

0.04

0.05

0.02

0.02

0.06

EBIDTA/PBIDTA

0.06

.07
0.07

Paid up capital

0.54

0.55

0.00

0.00

9.
83
0.00
9.
83
9.22%
9.
83
0.00
0.
10
0.
10
0.
10
0.
03
0.
13
0.
56
0.
66
0.00

0.54
-

0.55
-

0.66
-

0.54

0.55

0.66

4.41
1.30
3.10

4.03
1.59
2.71
5.69

1.16
0.09
1.07
0.01
5.66

% total growth
Net sales (net of excise duty
etc.)
Other Income
Operating Profit/Loss

Depreciation/ Amortization of
Expenses
Cash profit/ (Loss)

Reserves and Surplus

excluding revaluation
reserves
Share Warrants
Misc. expenditure not written
off
Accumulated losses
Deferred Tax Liability/Asset
a) Tangible Net Worth
b) Investment in allied
concerns and
amount of
cross holdings
c) Net owned funds/Adjusted
TNW (a-b)
Share application money
Total Borrowings
Unsecured
Secured
Other Investments
Total Assets

4.95

9.00

Out of which net fixed assets

Current Assets
Non Current Assets
Net Working Capital
Current Ratio
Debt Equity Ratio
Term liability/ Adjusted TNW
TOL/Adjusted TNW
Operating Profit/Sales %
Long Term Sources
Long Term Uses
Surplus/ Deficit
Short Term Sources
Short Term Uses
Surplus/ Deficit

0.65
3.78
0.53

0.71
4.92
0.01

1.02
1.37
3.03
3.05
8.17
0.00
2.19
1.17
1.02
2.76
3.78
(1.02)

1.99
1.68
3.65
3.88
7.50
0.01
2.70
0.71
1.99
2.92
4.91
(1.99)

0.72
4.93
0.
01
0.39
1.09
1.12
1.39
15.15
1.02%
1.12
0.73
0.39
4.54
4.93
(0.39)

Key Financials upto last quarter

Paid up capital/TNW: The paid up capital of the firm has increased from Rs. 0.55
crores in the FY 2011-12 to Rs.0.66 crores for the FY 2012-13. The profit is being
converted to capital of the firm.
The TNW has increased from 0.55 crores as on 31.03.2012 to Rs. 0.66 crores as on
31.03.2013 which is basically on account of paid up capital.
Reconciliation of TNW
(Rs. in Crores)
TNW as on close of FY ended 0.55
31.3.2012
Add: Increase in paid up capital
0.11
TNW as on close of FY ended 0.66
31.3.2013
Sales

The sale of firm has been increasing continuously for the last 3 years. The sales
increased from Rs. 7.13 crores as on 31.03.2011 to Rs. 9.00 crores in FY 2011-12
showing an increase in sales by 26.31%. The sales increased further by 9.22% as
on 31.3.2013 with sales being
9.83 crores. The sales as on 31.03.2013 is 9.83 crores as against existing
projections of Rs. 12.00 crores.
Till Sept, 2013 the borrower could achieve a sales of Rs. 4.24 crores only. The
CMA data has not been provided to us.
Profitability
The PBT has been increasing over the past three year being 0.04 crores, 0.05 crores
and 0.10 crores as on 31.3.2011, 31.03.2012 and 31.03.2013 respectively. The firm
is making operating profit and cash profit.
The unit in terms of % the margins are very thin and the unit is operating on very
thin margin of 1%
Investments
The investment by the firm is minimal being Rs. 30,000/-.
Diversion of fund: No diversion of funds observed.
Net Working Capital/ Current ratio / Debt Equity Ratio
The current ratio of the firm has decreased from 1.68 as on 31.3.2012 to 1.09
as on 31.03.2013. The decrease in current ratio has been on account of payoff
of unsecured loans and increase in current liabilities.
Debt Equity Ratio of the company is has declined from 3.65 as on 31.3.2012
to 1.39 as on 31.3.2013 and is now within the banks guidelines.
TOL/ TNW of the company is high being 8.17 as on 31.3.2011, 7.50 as on
31.3.2012 and 15.15 as on 31.3.2013.

Collateral security:
1.

Hypothecation/ Mortgage of Block Assets Immovable Properties:

Security
Descript
ion

Area Owners
in Sq hip
M or
Sq Ft

Value
Last
sancti
on

Prese
nt
Mark
et
value
164.3
8

Basis
Date
Realisabl for
e value valuatio
n

Wheth
er
existin
g/
fresh

147.94

Valuatio 22.01.1
n
2
Report
of
Pawan
Kumar
Ghosh
approv
ed
valuer

Existin
g

Valuatio
n report
of
approv
ed
valuer
Mr.
Pawan
Kumar
Ghosh
Valuatio
n report
of
approv
ed
valuer
Mr.
Pawan
Kumar
Ghosh

09.01.1
2

Existin
g

09.01.1
2

Existin
g

Extensio
n of EM
of
factory
Land,
Building
Daman
(UT)

Land1276
Sq.M
eters
Buildi
ng7000
Sq.Ft

In the
name of
owners
of the
compan
y

149.4
4

Flat No.
11,
Bright
Land
CHS,
Mumbai

Salea
ble
area
1340
sq. ft.

Kanaiyl
al R
Merani
& Rakhi
K
Merani

157.5
0

428.80

Flat No.
C-901,
Kranti
Apts,
Mumbai

Salea
ble
area
925
sq. ft.

Rakhi K
Merani
& Kiran
K
Merani

230.5
0

476.00

2.
Personal /Corporate Guarantee
Name of
Relationshi
Net Worth
Guarantor
p with
borrower

Immovable
property

Date of
confidential
report

Prev.
As at
31.3.1
2
Guarantor
no.1
Guarantor
no.2

Son
Husband

302.7
8
390.1
4

Presen
t
As at
31.3.1
3
391.6
6
178.5
2

Prev.
As at
31.03.1
2
311.97
344.40

Presen
t
As at
31.3.1
3
311.9
7
344.4
0

Prev.
As at
31.03.1
2

Present
As at
31.3.13

24.01.1
3
24.01.1
3

14.12.1
3
14.12.1
3

Position of accounts
Position of Account as on 26.08.2014
For WC Limits is as follows:
Nature
FB-CC
FB- Due Date Default
NFB
Total

Limit
4.30
0.00
(4.30)
4.30

VS
0.47
0.47

DP
0.00
0.00

Balance
0.26
1.95
0.00
2.21

Irregularity
0.26
1.95

Conduct of the Account

including in terms of restructuring done, if any,
along with details of terms & conditions not
complied with. Comments on
following should be given

The limit is over availed due to reduction of DP as per stock statement given by the
party. The account is running irregular. Sale proceed deposited is very less due to
less sales.
CMA Data is not submitted by the party instead of various reminders through letters,
e mails and calls. The party is not submitted by the party.
The account is irregular. We are following up with the party.
Current account maintained with other bank other than Lenders, if any and steps
taken for closing the same.
Specify the details of ECGC claim lodged, if any, during last 5 years.
13. Strengths & Weakness with mitigants,
The account is highly irregular. The party is not cooperating AND NOT SUBMITTING THE cma Data and
other financials. We are following up on daily basis with the party. The Proiposal of release of property to
reduce the irregularity is under consideration at you office. The realease of property is also mortgaged in
other group accounts also.

The account is running in bad position from March 2014. The husband of the
proprietor Mrs. XXX is wife of Mr. PPP and under guidance of his Husband and due to
ill health of his father his business is also going bad. The group is same and
therefore all three accounts is facing the same difficulty and are considered as NPA
account.

The Debtors are not realizing in each of the account in the group. The party now
wishes to sell out one collateral and trying to regularize the account. The proposal
for release of property is already sent to CO for Consideration as the sanction is
under CO Power.
The party is now not ready to co-operate in any manner. However we are regularly
following up the matter.

This was the scenario of the account till September 2014, the account earlier fell in
NPA-standard where it was running irregular. The group consisted of 3 more
companies which are also running irregular. Following are the outstanding amounts of
the group.

Name of the Account in the Group Accounts:

1
2
3
4

Comp1
Comp2
Abc industries
Comp3
Total

Outstandi
ng
In Crs

Irregular
ity
In Crs

7.29
3.51
2.22
0.67

5.69
3.51
2.22
0.00

13.68

11.42

The account in name of ABC industries still did not show any improvement and the
account shifted to sub-standard NPA. Instead of various notices and reminders the
party did not co-operate with the bank. There were no chances that party was in
position to pay off the debt and the interest amount, the PNB rating had also fell
down to B- with a score of 42.79. The PMS ranks were 5 which means that the
account was really in a bad position. Queries which were raised consisted of
Core issues:
1. Account is running irregular from 02.12.2013.
2. Sundry debtors are high at Rs. 161.44 lacs as on 31.12.2013 of which debtors for
more than 90 days are Rs. 105.92 lacs.
3. Credit summation in the account for the period from 01.04.2013 to 31.12.2013 are
Rs.545.27 lacs, whereas sales projected for the period of march 2014 in
provisional balance sheet is Rs. 1461.00 lacs.
4. Sale proceeds are not routed through the account hence causing the account to be
irregular.
5. Stock statements submitted by party do not show stock against LC separately.
6. No sundry creditors are reflected.

So in the CARD (credit audit review department) report for March 2015 it was
mentioned that in order to recover the loan amount of Rs 2.22 crore the bank had
taken strict action of selling out the mortgaged-immoveable property on 1.02.2015.
Under the SARFESAI Act 2002, bank has sold off two properties of the borrowers
and recovered almost of the loan amount. Sum of 70 lakhs is still remaining to be
recovered from the group, Property named Flat No. 11, Bright Land CHS, 14th
Road, Mumbai and Flat No. C-901, Kranti Apts, Mumbai were sold
out in order to reconstruct its financial assets. Still the bank has to
recover money from rest of the companies falling in the same
group. It was found out that the business was not running well for
all the four companies in this group. The factory mentioned in
Daman has also shut down.
Banks next step will be on acquiring rest of the assets and save the
group from turning bad debt. They are in process to sell off the
Daman factory which is listed as one of the collateral security. Also
the list of debtors and creditors is not disclosed by the party in their
balance sheet till date. Therefore the bank is also checking the
genuineness of the Chartered accountants/ firms who had audited
the previous financials for ABC industries.