A Project Report On Credit Appraisal

CREDIT APPRAISAL
TABLE OF CONTENTS
Chapters
1. INTRODUCTION
• Reason for selecting the project
• Scheme of the project
• Research Methodology
• Limitation of the study
2. CREDIT POLICY OF COMMERCIAL BANK

• Commercial banks and its objectives
• Recent policy developments regarding bank credit
• Changing phase of bank credit
• Trends of bank credit in India
• Procedure for providing bank credit
• Credit Appraisal
3. THE PROFILE OF THE ORGANIZATION OF PNB

• Indian banking sector & its major challenges
• Punjab National Bank at a glance
• Mission and Vision
• Organizational structure of PNB
Page 1
CREDIT APPRAISAL
4. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO PNB

• Credit philosophy
• Credit policy
• Introduction to loans
• Classification of loans
• Building up of a proposal
• Requirements as per constitution of borrower
• Financial Appraisal
5. ANALYSIS AND INTERPRETATION OF DATA

• Credit Appraisal techniques
• Process of credit appraisal for providing cash credit
• Appraisal techniques for retail loans
6. CONCLUSION
• Conclusion
 BIBLIOGRAPHY
Page 2
CREDIT APPRAISAL
Page 3
CREDIT APPRAISAL
Introduction
The last year financial crises have become the main cause for recession which was started in
2006 from US and was spread across the world. The world economy has been majorly
affected from the crisis. The securities in stock exchange have fallen down drastically which
has become the root cause of bankruptcy of many financial institutions and individuals. The
root cause of the economic and financial crisis is credit default of big companies and
individuals which has badly impacted the world economy. So in the present scenario
analysing one’s credit worthiness has become very important for any financial institution
before providing any form of credit facility so that such situation doesn’t arise in near future
again.
Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to
understand the credit appraisal system followed by the banks this project has been
conducted. The project has analysed the credit appraisal procedure with special reference to
Punjab National Bank which includes knowing about the different credit facilities provided
by the banks to its customers, how a loan proposal is being made, what are the formalities
that is to be satisfied and most importantly knowing about the various credit appraisal
techniques which are different for each type of credit facility.
Before going further it is necessary to understand the need and basic framework of the
project. Therefore this chapter provides an introduction to the topic, objective of the project,
reasons for selecting the project and the basic structure and framework how the project
proceeds. In order to understand the importance of the topic selected an introduction to the
Page 4
CREDIT APPRAISAL
overview of the commercial bank , its functions, and present trends and growth in bank credit
are required and it is covered in this chapter.
Reasons for selecting the project
Whenever an individual or a company uses a credit that means they are borrowing money
that they promise to repay with in a pre-decided period. In order to assess the repaying
capability i.e. to evaluate their credit worthiness banks use various techniques that differ with
the different types of credit facilities provided by the bank. In the current scenario where it is
seen that big companies and financial institutions have been bankrupted just because of
credit default so Credit Appraisal has become an important aspect in the banking sector and
is gaining prime importance.
It is the incident of credit defaults that has given rise to the financial crisis of 2008-09. But in
India the credit default is comparatively less that other countries such as US. One of the
reasons leading to this may be good appraisal techniques used by banks and financial
institutions in India. Eventually the importance of this project is mainly to understand the
credit appraisal techniques used by the banks with special reference to Punjab National
Bank.
Scheme of the project
It covers the objective and structure of the project which is discussed as follows:-
Objective of the project
The overall objective of this project is to under stand the current credit appraisal system used
in banks. The Credit Appraisal system has been analysed as per the different credit facilities
provided by the bank. The detailed explanation about the techniques and process has been
discussed in detail in the further chapters.
Page 5
CREDIT APPRAISAL
Page 6
CREDIT APPRAISAL
Structure or Plan of the project
The project first of all makes a study about the commercial banks- its important functions.
Then it highlights on the concept of Bank Credit & its recent trends. The project then
proceeds towards the lending procedure of banks and here it highlights about credit appraisal
being the first step in building up of a loan proposal. Then it discusses the bank credit policy
with respect to Punjab National bank where the project was undertaken.
The project then proceeds with the review of literature i.e. review of some past work
regarding credit appraisal by various researchers. The project then moves towards research
methodology where it covers the information regarding the type of data collected and the
theoretical concepts used in the project are discussed in detail. Then the project proceeds
with the next chapter consisting of the analysis part which covers the analysis of various
techniques used by the banks for the purpose of credit appraisal. Then the project moves to
its next chapter i.e. findings where some results found out are interpreted and then moving on
to the last and the final chapter i.e. the suggestions and conclusions where some steps are
suggested to be implemented to increase the work efficiency and to reduce to work pressure
Page 7
CREDIT APPRAISAL
Page 8
CREDIT APPRAISAL
Commercial banks and its objectives
A commercial bank is a type of financial intermediary that provides checking accounts,

savings accounts, and money market accounts and that accepts time deposits. Some use the
term "commercial bank" to refer to a bank or a division of a bank primarily dealing with
deposits and loans from corporations or large businesses. This is what people normally call a
"bank". The term "commercial" was used to distinguish it from an investment bank.
Commercial banks are the oldest, biggest and fastest growing financial intermediaries in
India. They are also the most important depositories of public savings and the most important
disbursers of finance. Commercial banking in India is a unique banking system, the like of
which exists nowhere in the world. The truth of this statement becomes clear as one studies
the philosophy and approaches that have contributed to the evolution of banking policy,
programmes and operations in India.
The banking system in India works under constraints that go with social control and public
ownership. The public ownership of banks has been achieved in three stages: 1995, july 1969
and April, 1980. Not only the public sector banks but also the private sector and foreign
banks are required to meet the targets in respect of sectoral deployment of credit, regional
distribution of branches, and regional credit deposit ratios. The operations of banks have
been determined by lead bank scheme, Differential Rate of interest scheme, Credit
authorization scheme, inventory norms and lending systems prescribed by the authorities, the
formulation of credit plans, and service area approach.
Commercial Banks in India have a special role in India. The privileged role of the banks is
the result of their unique features. The liabilities of Bank are money and therefore they are
important part of the payment mechanism of any country. For a financial system to mobilise
and allocate savings of the country successfully and productively and to facilitate day-to-day
transactions there must be a class of financial institutions that the public views are as safe
and convenient outlets for its savings. The structure and working of the banking system are
integral to a country’s financial stability and economic growth. It has been rightly claimed
Page 9
CREDIT APPRAISAL
that the diversification and development of Indian Economy are in no small measure due to
the active role banks have played financing economic activities of different sectors.
Page 10
CREDIT APPRAISAL
Major objectives of commercial banks
Bank Credit
The borrowing capacity provided to an individual by the banking system, in the form of
credit or a loan is known as a bank credit. The total bank credit the individual has is the sum
of the borrowing capacity each lender bank provides to the individual.
The operating paradigms of the banking industry in general and credit dispensation in
particular have gone through a major upheaval.
 Lending rates have fallen sharply.

 Traditional growth and earning such as corporate credit has been either slow or not
profitable as before.
 Banks moving into retail finance, interest rate on the once attractive retail loans also
started coming down.
 Credit risks has went up and new types risks are surfaced
Page 11
CREDIT APPRAISAL
Types of credit-
Bank in India provide mainly short term credit for financing working capital needs although,
as will be seen subsequently, their term loans have increased over the years. The various
types of advances provide by them are: (a) Term Loans, (b) cash credit, (c) overdrafts, (d)
demand Loans , (e) purchase and discounting of commercial bills, and, (f) instalment or hire
purchase credit.
Volume of Credit-
Commercial banks are a major source of finance to industry and commerce. Outstanding
bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19,124 crore in 1978, to
Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90 , Rs 2,82,702 crore in 1997 and to Rs
6,09,053 crore in 2002. Banks have introduced many innovative schemes for the
disbursement of credit. Among such schemes are village adoption, agriculture development
branches and equity fund for small units. Recently, most of the banks have introduced
attractive education loan schemes for pursuing studies at home or abroad. They have
introduced attractive educational loan schemes for pursuing studies at home or abroad. They
have moved in the direction of bridging certain defects or gaps in their policies, such as
giving too much credit to large scale industrial units and commerce and giving too little
credit to agriculture, small industries and so on.
The Public Sector Banks are still the leading lenders though growth has declined compared
to previous quarter. The credit growth rate has dipped sharply in foreign and private banks
compared to previous quarter. In all, the credit growth has slipped in this quarter.
Credit (YOY Growth)
March 28 2008 March 27

2009
Public Sector Banks 22.5 20.4
Page 12
CREDIT APPRAISAL
Page 13
CREDIT APPRAISAL
The rates have gone down compared to previous quarter when it was seen that there was no
changes in loan rates in private and foreign banks. But then compared to rate cuts done by
RBI, they still need to go lower.
Table 16: Reduction in Deposit and Lending Rates

(October 2008 – April 2009*)
(Basis points)
Lending Rates
Bank Group Deposit Rates (BPLR)
Public Sector Banks 125-250 125-225
Private Sector Banks 75-200 100-125
Five Major Foreign Banks 100-200 0-100
Change (from
BPLR Oct – 08 Mar – 09 Apr – 09
Oct to Apr)
13.75-
Public Sector Banks 11.50-14.00 11.50-13.50 125-225
14.75
13.75-
Private Sector Banks 12.75-16.75 12.50-16.75 100-125
17.75
Five Major Foreign14.25-
14.25-15.75 14.25-15.75 0-100
Banks 16.75
Sector-wise credit points credit has increased to agriculture, industry and real estate whereas
has declined to NBFCs and Housing. A bank group wise sectoral allocation is also given
which suggests private banks have increases exposure to agriculture and real estate but has
declined to industry. Public sector banks have increased allocation to industry and real estate.
There is a more detailed analysis in the macroeconomic report released before the monetary
policy.
Page 14
CREDIT APPRAISAL
As on As on
Sector February 15, February
2008 27, 2009
% share Variations % share Variations
in total (per cent) in total (per cent)
Agriculture 9.2 16.4 13 21.5
Industry 45.2 25.9 52.5 25.8
Real Estate 3.1 26.7 8.5 61.4
Housing 7.3 12 4.7 7.5
NBFCs 5.7 48.6 6.6 41.7
Overall Credit 100 22 100 19.5
To sum up, the credit conditions seems to have worsened after January 2009. The rates have
declined but lending has not really picked up. However, the question still remains – whether
credit decline is because banks are not lending (supply) or because people/corporates are not
borrowing (lack of demand). It is usually seen that all financial variables as lead indicators
say if credit growth (along with other fin indicators) is picking, actual growth will also rise.
However, it is actually seen the relation is far from clear. In fact, the financial
indicators hardly help predict any change in business cycle. Most rise in good times and fall
in bad times. Most financial indicators failed to predict this global financial crisis and kept
rising making everyone all the more complacent.
Recent policy developments Regarding Bank Credit
Bank lending was done for a long time by assessing the working capital needs based on the
concept of MPBF (maximum permissible bank finance). This practice has been withdrawn
with the effect from April 15th 1997 in the sense that the date, banks have been left free to
choose their own method ( from the method such as turnover , cash budget, present MPBF ,
or any other theory) of assessing working Capital requirement of the borrowers.
Page 15
CREDIT APPRAISAL
The cash credit system has been the bane, yet it has exhibited a remarkable strength of
survival all these years. In spite of many efforts which were direct in nature, only a slow
progress has been made to reduce its importance and increase bill financing. Therefore a
concrete and direct policy step was taken on April 21, 1995 which made it mandatory for
banks, consortia, syndicates to restrict cash credit components to the prescribed limit , the
balance being given in the form of a short term loan, which would be a demand loan for a
maximum period of one year, or in case of seasonal industries , for six months. The interest
rates on the cash credit and loan components are to be fixed in accordance with the prime
lending rates fixed by the banks. This “loan system” was first made applicable to the
borrowers with an MPBF of Rs 20 crore and above; and in their case , the ratio of cash credit
(loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April 1995 ,
to 60 (40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80) percent in
April 1997. With the withdrawal of instructions about the MPBF in April 1997 , the
prescribed cash credit and loan components came to be related to the working capital limit
arrived in banks as per the method of their choice.
With effect from September 3, 1997, the RBI has permitted banks to raise their existing
exposure limit to a business group from 50% to 60%; the additional 10% limit being
exclusively meant for investment in infrastructure projects.
The term lending by banks also has subject to the limits fixed by RBI. In 1993, this limit was
raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank,
and from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit
was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for
power projects. From September3, 1997 these caps on term lending by banks were removed
subject to their compliance with the prudential exposure norms.
The banks can invest in and underwrite shares and debentures of corporate bodies. At
present, they can invest five percent of their incremental deposits in equities of companies
including other banks. Their investment in shares/ Bonds of DFHI, Securities trading
Corporation of India (STCI), all Indian financial institutions and bonds (debentures) and
Page 16
CREDIT APPRAISAL
preference shares of the companies are excluded from this ceiling of five per cent with affect
from April 1997 . From the same date banks could extend loans within this ceiling to the
corporate against shares held by them. They could also offer overdraft facilities to stock
brokers registered with help of SEBI against shares and debentures held by them for nine
months without change of ownership.
CHANGING PHASE OF BANK CREDIT-

A study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank,
was constituted by the RBI in July 1974 with eminent personalities drawn from leading
banks, financial institutions and a wide cross-section of the industry with a view to study the
entire gamut of Bank's finance for working capital and suggest ways for optimum utilization
of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank
credit. Most banks in India even today continue to look at the needs of the corporate in the
light of methodology recommended by the Group. The report of this group is widely known
as Tandon Committee report.
The weaknesses in the Cash Credit system have persisted with the non-implementation of
one of the crucial recommendations of the Committee. In the background of credit expansion
seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study
and suggest-
i) Modifications in the Cash Credit system to make it amenable to better management of

funds by the Bankers and
ii) Alternate type of credit facilities to ensure better credit discipline and co relation between
credit and production. The Group was headed by Sh. K.B. Chore of RBI and was named
Chore Committee.
Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted the job of
looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of
Tandon & Chore Committee recommendations. His report is applicable to units with credit
requirements of less than Rs.50 lacs.
Page 17
CREDIT APPRAISAL
The recommendations made by Tandon Committee and reinforced by Chore Committee

were implemented in all Banks and Bank Credit became much more organized. However, the
recommendations were perceived as too strict by the industry and there has been a
continuous clamor from the Industry for movement from mandatory control to a voluntary
market related restraint. With recent liberalization of economy and reforms in the financial
sector, RBI has given the freedom to the Banks to work out their own norms for inventory
and the earlier norms are now to be taken as guidelines and not a mandate. In fact, beginning
with the slack season credit policy of 1997-98, RBI has also given full freedom to all the
Banks to devise their own method of assessing the short term credit requirements of their
clients and grant lines of credit accordingly. Most banks, however, continue to be guided by
the principles enunciated in Tandon Committee report.
Trends of Bank Credit in India
The face of Indian banking has changed radically in the last decade. A perusal of the Basic
Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996
and 2005, personal loans have been the fastest growing asset, increasing from 9.3 per cent of
the total bank credit in 1996 to 22.2 per cent in 2005. Of course, this is partly due to the huge
rise in housing loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the
period, but ‘other personal loans’ — comprising loans against fixed deposits, gold loans and
unsecured personal loans — also rose from 6.1 per cent to 10.7 per cent. Other categories
whose share increased were loans to professionals and loans to finance companies. In
contrast, there has been a sharp decline in the share of lendings to industry. Credit to small
scale industries fell from 10.1 per cent of the total in 1996 to 4.1 per cent in 2005.
Reasons for declining trend of bank credit
 A major share of the economic growth has been led by the expansion of the service
sector
 Capital intensity and investment intensity required for growth in the current economic
context may not be as high as it used to be in the past.
Page 18
CREDIT APPRAISAL
 In manufacturing sector more efficient utilization of existing capacities contributed to

the sectoral growth rather rather than any large addition of fresh capacities. The
consequential increase in the demand for credit was also subdued.
 Greater and cheaper avenues for credit resulted in a bigger share of disintermediation
being resorted to by large borrowers.
The other trend has been the substantial drop in the share of rural credit, while the share of
metropolitan centres has increased. While bankers say that up gradation of rural centres into
semi-urban could be one reason (the share of semi-urban centres has gone up), it is also true
that the reforms have been urban-centric and have tended to benefit the metros more. The
number of rural bank offices fell from 32,981 in March 1996 to 31,967 by March 2005.
The states have been the main beneficiaries of bank credit are the northern region as it has
increased its share from 18.7 per cent of the total credit in 1996 to 22.2 per cent in 2005. As
it was seen that Delhi’s share went up from 9.5 per cent to 12.1 per cent over the period. This
is not due to food credit, the account of which is maintained in Delhi. Clearly, the national
capital has gained a lot from liberalisation.
Trends for the year 2008-09

The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a
somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within aggregate deposits demand
deposits have shown an absolute fall (-Rs 4,179 crore) in contrast to the sizeable increase (Rs
94,579 crore or by 22%) in 2007-08,. On the other hand, time deposits have shown an
accelerated increase of 22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the
previous year.
In the investment portfolio of banks, the expansion during 2008- 09 at Rs 194,031crore has
been much lower than the expansion of Rs 340,250 crore as increase in net bank credit to
government under monetary data for the same period. This has happened because the latter has a
sizeable amount of RBI credit to government following the increased open market operations.
Finally, there has occurred considerable slowdown in bank credit expansion. Because of
relatively higher procurement of foodgrains, food credit has expanded by Rs 1,812 crore during
Page 19
CREDIT APPRAISAL
2008-09 as against an absolute fall of Rs 2,121 crore in 2007-08. Non-food credit growth at Rs
406,287 (17.5%) has been slower than in the previous year at Rs 432,846 (23.0%).
Page 20
CREDIT APPRAISAL
Procedure for providing Bank Credit-

Banks offers different types of credit facilities to the eligible borrowers. For this, there are
several procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring
and Asset Recovery Management comprise the entire gamut of activities in the lending
process of a bank which are clearly shown as below:
Source- Self constructed
From the above chart we can see that Credit Appraisal is the core and the basic function of a
bank before providing loan to any person/company, etc. It is the most important aspect of the
lending procedure and therefore it is discussed in detail as below.
Credit Appraisal
Meaning - The process by which a lender appraises the creditworthiness of the prospective
borrower is known as Credit Appraisal. This normally involves appraising the borrower’s
payment history and establishing the quality and sustainability of his income. The lender
satisfies himself of the good intentions of the borrower, usually through an interview.
• The credit requirement must be assessed by all Indian Financial Institutions or

specialised institution set up for this purpose.
• Wherever financing of infrastructure project is taken up under a consortium /
syndication arrangement – bank’s exposure shall not exceed 25%
• Bank may also take up financing infrastructure project independently / exclusively in
respect of borrowers /promoters of repute with excellent past record in project
implementation.
Page 21
CREDIT APPRAISAL
• In such cases due diligence on the inability of the projects are well defined and
assessed. State government guarantee may not be taken as a substitute for satisfactory
credit appraisal.
The important thing to remember is not to be overwhelmed by marketing or profit centre

reasons to book a loan but to take a balanced view when booking a loan, taking into account
the risk reward aspects. Generally everyone becomes optimistic during the upswing of the
business cycle, but tend to forget to see how the borrower will be during the downturn,
which is a short-sighted approach. Furthermore greater emphasis is given on financials,
which are usually outdated; this is further exacerbated by the fact that a descriptive approach
is usually taken, rather than an analytical approach, to the credit. Thus a forward looking
approach should also be adopted, since the loan will be repaid primarily from future cash
flows, not historic performance; however both can be used as good repayment indicators.
Page 22
CREDIT APPRAISAL
Page 23
CREDIT APPRAISAL
Indian Banking Sector & Its Major Challenges

It is well recognised by the world that India is one of the fastest growing economies in the
world. Evidence from across the world suggests that a sound and evolved banking system is
required for sustained economic development. The last decade has seen many positive
developments in the Indian banking sector. The policy makers, which comprise the Reserve
Bank of India (RBI), Ministry of Finance and related government and financial sector
regulatory entities, have made several notable efforts to improve regulation in the sector. The
sector now compares favourably with banking sectors in the region on metrics like growth,
profitability and non-performing assets (NPAs). A few banks have established an
outstanding track record of innovation, growth and value creation. This is reflected in their
market valuation. However, improved regulations, innovation, growth and value creation in
the sector remain limited to a small part of it. The cost of banking intermediation in India is
higher and bank penetration is far lower than in other markets. India’s banking industry must
strengthen itself significantly if it has to support the modern and vibrant economy which
India aspires to be. While the onus for this change lies mainly with bank managements, an
enabling policy and regulatory framework will also be critical to their success.
The failure to respond to changing market realities has stunted the development of
the financial sector in many developing countries. A weak banking structure has been unable
to fuel continued growth, which has harmed the long-term health of their economies. In this
“white paper”, we emphasise the need to act both decisively and quickly to build an
enabling, rather than a limiting, banking sector in India.
Indian banks have compared favourably on growth, asset quality and profitability
with other regional banks over the last few years. The banking index has grown at a
compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent
growth in the market index for the same period. Policy makers have made some notable
changes in policy and regulation to help strengthen the sector. These changes include
strengthening prudential norms, enhancing the payments system and integrating regulations
between commercial and co-operative banks. However, the cost of intermediation remains
high and bank penetration is limited to only a few customer segments and geographies.
While bank lending has been a significant driver of GDP growth and employment, periodic
Page 24
CREDIT APPRAISAL
instances of the “failure” of some weak banks have often threatened the stability of the
system. Structural weaknesses such as a fragmented industry structure, restrictions on capital
availability and deployment, lack of institutional support infrastructure, restrictive labour
laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial
Banks (SCBs), unless addressed, could seriously weaken the health of the sector. Further, the
inability of bank managements (with some notable exceptions) to improve capital allocation,
increase the productivity of their service platforms and improve the performance ethic in
their organisations could seriously affect future performance. India has a better banking
system in place Vis a Vis other developing countries, but there are several issues that need to
be ironed out. Major challenges of Indian banking sector are mentioned below.
Interest rate risk
Interest rate risk can be defined as exposure of bank's net interest income to adverse
movements in interest rates. A bank's balance sheet consists mainly of rupee assets and
liabilities. Any movement in domestic interest rate is the main source of interest rate risk.
Over the last few years the treasury departments of banks have been responsible for a
substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates
fell, the yield on 10-year government bonds (a barometer for domestic interest rates) fell,
from 13 per cent to 4.9 per cent. With yields falling the banks made huge profits on their
bond portfolios. Now as yields go up (with the rise in inflation, bond yields go up and bond
prices fall as the debt market starts factoring a possible interest rate hike), the banks will
have to set aside funds to mark to market their investment. This will make it difficult to show
huge profits from treasury operations. This concern becomes much stronger because a
substantial percentage of bank deposits remain invested in government bonds. Banking in the
recent years had been reduced to a trading operation in government securities. Recent
months have shown a rise in the bond yields has led to the profit from treasury operations
falling. The latest quarterly reports of banks clearly show several banks making losses on
their treasury operations. If the rise in yields continues the banks might end up posting huge
losses on their trading books. Given these facts, banks will have to look at alternative sources
of investment.
Interest rates and non-performing assets
Page 25
CREDIT APPRAISAL
The best indicator of the health of the banking industry in a country is its level of NPAs.
Given this fact, Indian banks seem to be better placed than they were in the past. A few
banks have even managed to reduce their net NPAs to less than one percent (before the
merger of Global Trust Bank into Oriental Bank of Commerce OBC was a zero NPA bank).
But as the bond yields start to rise the chances are the net NPAs will also start to go up. This
will happen because the banks have been making huge provisions against the money they
made on their bond portfolios in a scenario where bond yields were falling.
Reduced NPAs generally gives the impression that banks have strengthened their credit
appraisal processes over the years. This does not seem to be the case. With increasing bond
yields, treasury income will come down and if the banks wish to make large provisions, the
money will have to come from their interest income, and this in turn, shall bring down the
profitability of banks.
Competition in retail banking
The entry of new generation private sector banks has changed the entire scenario. Earlier the
household savings went into banks and the banks then lent out money to corporate. Now they
need to sell banking. The retail segment, which was earlier ignored, is now the most
important of the lot, with the banks jumping over one another to give out loans. The
consumer has never been so lucky with so many banks offering so many products to choose
from. With supply far exceeding demand it has been a race to the bottom, with the banks
undercutting one another. A lot of foreign banks have already burnt their fingers in the retail
game and have now decided to get out of a few retail segments completely.The nimble
footed new generation private sector banks have taken a lead on this front and the public
sector banks are trying to play catch up. The PSBs have been losing business to the private
sector banks in this segment. PSBs need to figure out the means to generate profitable
business from this segment in the days to come.
The urge to merge
In the recent past there has been a lot of talk about Indian Banks lacking in scale and size.
The State Bank of India is the only bank from India to make it to the list of Top 100 banks,
globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be
Page 26
CREDIT APPRAISAL
picked up by a larger bank. The central government also seems to be game about the issue
and is seen to be encouraging PSBs to merge or acquire other banks. Global evidence seems
to suggest that even though there is great enthusiasm when companies merge or get acquired,
majority of the mergers/acquisitions do not really work. So in the zeal to merge with or
acquire another bank the PSBs should not let their common sense take a back seat. Before a
merger is carried out cultural issues should be looked into. A bank based primarily out of
North India might want to acquire a bank based primarily out of South India to increase its
geographical presence but their cultures might be very different. So the integration process
might become very difficult. Technological compatibility is another issue that needs to be
looked into in details before any merger or acquisition is carried out.
Impact of BASEL-II norms
Banking is a commodity business. The margins on the products that banks offer to its
customers are extremely thin vis a vis other businesses. As a result, for banks to earn an
adequate return of equity and compete for capital along with other industries, they need to be
highly leveraged. The primary function of the bank's capital is to absorb any losses a bank
suffers (which can be written off against bank's capital).Norms set in the Swiss town of Basel
determine the ground rules for the way banks around the world account for loans they give
out. These rules were formulated by the Bank for International Settlements in 1988.
Essentially, these rules tell the banks how much capital the banks should have to cover up for
the risk that their loans might go bad. The rules set in 1988 led the banks to differentiate
among the customers it lent out money to. Different weightage was given to various forms of
assets, with zero percentage weightings being given to cash, deposits with the central
bank/govt. etc, and 100 per cent weighting to claims on private sector, fixed assets, real
estate etc. The summation of these assets gave us the risk-weighted assets. Against these risk
weighted assets the banks had to maintain a (Tier I + Tier II) capital of 9 per cent i.e. every
Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital. To put it simply the
banks had to maintain a capital adequacy ratio of 9 percent. The problem with these rules is
that they do not distinguish within a category i.e. all lending to private sector is assigned a
100 per cent risk weighting, be it a company with the best credit rating or company which is
in the doldrums and has a very low credit rating. This is not an efficient use of capital. The
Page 27
CREDIT APPRAISAL
company with the best credit rating is more likely to repay the loan vis a vis the company
with a low credit rating. So the bank should be setting aside a far lesser amount of capital
against the risk of a company with the best credit rating defaulting vis a vis the company
with a low credit rating. With the BASEL-II norms the bank can decide on the amount of
capital to set aside depending on the credit rating of the company. Credit risk is not the only
type of risk that banks face. These days the operational risks that banks face are huge. The
various risks that come under operational risk are competition risk, technology risk, casualty
risk, crime risk etc. The original BASEL rules did not take into account the operational risks.
As per the BASEL-II norms, banks will have to set aside 15 per cent of net income to protect
themselves against operational risks.
Over the last few years, the falling interest rates, gave banks very little incentive to lend to
projects, as the return did not compensate them for the risk involved. This led to the banks
getting into the retail segment big time. It also led to a lot of banks playing it safe and putting
in most of the deposits they collected into government bonds. Now with the bond party over
and the bond yields starting to go up, the banks will have to concentrate on their core
function of lending. The banking sector in India needs to tackle these challenges successfully
to keep growing and strengthen the Indian financial system.
Furthermore, the interference of the central government with the functioning

of PSBs should stop. A fresh autonomy package for public sector banks is in offing. The
package seeks to provide a high degree of freedom to PSBs on operational matters. This
seems to be the right way to go for PSBs. The growth of the banking sector will be one of the
most important inputs that shall go into making sure that India progresses and becomes a
global economic super power.
Page 28
CREDIT APPRAISAL
Punjab National Bank at a Glance
Punjab National Bank (PNB) was established in 1895 in anarkali bazaar at Lahore,
undivided India, Punjab National Bank (PNB) has the distinction of being the first Indian
bank to have been started solely with Indian capital. The bank was nationalised in July 1969
along with 13 other banks. From its modest beginning, the bank has grown in size and stature
to become a front-line banking institution in India at present. Today, the Bank is the second
largest government-owned commercial bank in India with about 5000 branches across 764
cities. It serves over 37 million customers. The bank has been ranked 248th biggest bank in
the world by the Bankers Almanac, London. The bank's total assets for financial year 2007
were about US$60 billion. It has Strong correspondent banking relationships with more than
217 international banks of the world. More than 50 renowned international banks maintain
their Rupee Accounts with PNB. PNB has a banking subsidiary in the UK, as well as
branches in Hong Kong, Dubai and Kabul, and representative offices in
Almaty, Dubai, Oslo, and Shanghai. PNB's founders included several leaders of
the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal Lala
Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi
Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management
of the Bank in its early years.
HISTORY
 1895: PNB commenced its operations in Lahore.
 1904: PNB established branches in Karachi and Peshawar.
 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.
 1947: Partition of India and Pakistan at Independence. PNB lost its premises in
Lahore, but continued to operate in Pakistan.
 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank
became Bharat Nidhi Ltd.
 1961: PNB acquired Universal Bank of India.
 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).
Page 29
CREDIT APPRAISAL
 1965: After the Indo-Pak war the government of Pakistan seized all the offices in
Pakistan of Indian banks, including PNB's head office, which may have moved to
Karachi. PNB also had one or more branches in East Pakistan Bangladesh.
 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.
 1969: The Government of India (GOI) nationalized PNB and 13 other major
commercial banks, on July 19, 1969.
 1976 or 1978: PNB opened a branch in London.
 1986 The Reserve Bank of India required PNB to transfer its London branch to State
Bank of India after the branch was involved in a fraud scandal.
 1988: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The
acquisition added Hindustan's 142 branches to PNB's network.
 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.
 1998: PNB set up a representative office in Almaty, Kazakhstan.
 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At
the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the
result that its shareholders received no payment for their shares.
 PNB also opened a representative office in London
 2004: PNB established a branch in Kabul, Afghanistan.
PNB also opened a representative office in Shanghai.
PNB established an alliance with Everest Bank in Nepal that permits migrants to
transfer funds easily between India and Everest Bank's 12 branches in Nepal.
 2005: PNB opened a representative office in Dubai.
 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK,
with two offices, one in London, and one in South Hall. Since then it has opened a
third branch in Leicester, and is planning a fourth in Birmingham.
 2008: PNB opened a branch in Hong Kong.
 2009: PNB opened a representative office in Oslo, Norway, and a second branch in
Hong Kong, this in Kowloon.
 2010: PNB received permission to upgrade its representative office in the Dubai
International Financial Centre to a branch.
Page 30
CREDIT APPRAISAL
Bank with over 56 million satisfied customers and 5002 offices, PNB continue
to retain its leadership position among nationalised banks. The bank enjoys strong
fundamental, large franchise value and good brand image. Besides being ranked as
one of India's top service brands, PNB has remained fully committed to its
guiding principles of sound and prudent banking. Apart from offering banking products, the
bank has also entered the credit card & debit card business; bullion business; life and non-life
insurance business; Gold coins & asset management business, etc.
PNB has achieved significant growth in business which at the end of March 2010
amounted to Rs 435931 crore. Today, with assets of more than Rs 2,96,633 crore, PNB is
ranked as the 3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd
largest network of branches (5002 offices including 5 overseas branches ).During the FY
2009-10, with 40.85% share of CASA deposits, the bank achieved a net profit of Rs 3905
crore. Bank has a strong capital base with capital adequacy ratio of 14.16% as on Mar’10 as
per Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As on
March’10, the Bank has the Gross and Net NPA ratio of 1.71% and 0.53% respectively.
During the FY 2009-10, its’ ratio of Priority Sector Credit to Adjusted Net Bank Credit at
40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher than the
stipulated requirement of 40% & 18%. The Bank has maintained its stake holder’s interest by
posting an improved NIM of 3.57% in Mar’10 (3.52% Mar’09) and a Return on Assets of
1.44% (1.39% Mar’09). The Earning per Share improved to Rs 123.98 (Rs 98.03 Mar’09)
while the Book value per share improved to Rs 514.77 (Rs 416.74 Mar’09)
Punjab National Bank continues to maintain its frontline position in the Indian banking
industry. In particular, the bank has retained its NUMBER ONE position among the
nationalized banks in terms of number of branches, Deposit, Advances, total Business,
Assets, Operating and Net profit in the year 2009-10. The impressive operational and
financial performance has been brought about by Bank’s focus on customer based business
with thrust on CASA deposits, Retail, SME & Agri Advances and with more inclusive
approach to banking; better asset liability management; improved margin management,
thrust on recovery and increased efficiency in core operations of the Bank. The performance
highlights of the bank in terms of business and profit are shown below: Rs in Crore
Page 31
CREDIT APPRAISAL
Parameters Mar'08 Mar'09 Mar'10 CAGR (%)

Operating Profit 4006 5744 7326 22.29
Net Profit 2049 3091 3905 23.98
Deposit 166457 209760 249330 14.42
Advance 119502 154703 186601 16.01
Total Business 285959 364463 435931 15.09
Page 32
CREDIT APPRAISAL
PNB has always looked at technology as a key facilitator to provide better customer service
and ensured that its ‘IT strategy’ follows the ‘Business strategy’ so as to arrive at “Best Fit”.
The bank has made rapid strides in this direction. All branches of the Bank are under Core
Banking Solution (CBS) since Dec’08, thus covering 100% of its business and providing
‘Anytime Anywhere’ banking facility to all customers including customers of more than
3000 rural & semi urban branches. The bank has also been offering Internet banking services
to the customers of CBS branches like booking of tickets, payment of bills of utilities,
purchase of airline tickets etc. Towards developing a cost effective alternative channels of
delivery, the bank with more than 3500 ATMs has the largest ATM network amongst
Nationalized Banks.
With the help of advanced technology, the Bank has been a frontrunner in the
industry so far as the initiatives for Financial Inclusion is concerned. With its policy of
inclusive growth in the Indo-Genetics belt, the Bank’s mission is “Banking for Unbanked”.
The Bank has launched a drive for biometric smart card based technology enabled Financial
Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to
reach out to the last mile customer. The Bank has started several innovative initiatives for
marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction
workers, etc. Under Branchless Banking model, the Bank is implementing 40 projects in 16
States. The Bank launched an ambitious ‘Project Namaskar’ under which 1 lakh touch points
will be established in unbanked villages by 2013 to extend the Bank’s outreach. Under this,
30 Kiosks have been opened covering 119 Villages reaching 1.32 Lakh beneficiaries.
Backed by strong domestic performance, the bank is planning to realize its global
aspirations. Bank continues its selective foray in international markets with presence in 9
countries, with branches at Kabul and Dubai, Hong Kong & representative offices at Almaty,
Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK, a joint venture with Everest
Bank Ltd. Nepal and a JV banking subsidiary “DRUK PNB Bank Ltd.” in Bhutan. Bank is
pursuing up gradation of its representative offices in China & Norway and is in the process
of setting up a representative office in Sydney, Australia and taking controlling stake in JSC
Dana Bank in Kazakhstan.
Page 33
CREDIT APPRAISAL
Mission and Vision

VISION
"To be a Leading Global Bank with Pan India footprints and become a household
brand in the Indo-Gangetic Plains providing entire range of financial products and
services under one roof"
MISSION
"Banking for the unbanked"
“TO provide excellent professional services and improve its position as a leader in
financial and related services; build and maintain a team of motivated and committed
workforce with high work ethos; use latest technology aimed at the customer
satisfaction and act as effective catalyst for socio- economic development”
Products and Services

➢ Corporate banking
➢ Personal banking
➢ Industrial finance
➢ Agriculture finance
➢ Financing of trade
➢ International banking
➢ Home loan
➢ Auto loan
➢ ATM/Debit card
➢ Deposit interest rate
➢ Credit interest rate
➢ Other services: lockers facility, internet banking, EFT & Clearing services etc
Award & Achievements

Best IT Team of the year Award
SKOTCH Challenger Award for Change Management for the year 2005-06
Best IT User in Banking & Financial by NASSCOM in partnership with Economic
Services Industry - 2004 Times
Page 34
CREDIT APPRAISAL
for Excellence in Corporate Governance - 2005

Golden Peacock Award
by Institute of Directors
FICCI's Rural Development Award for Excellence in Rural Development – 2005
Skotch Challenger Award for
for becoming a pioneer in Public Banks - 2005
Exemplary use of Technology
Golden Peacock National Training -
by Institute of Directors
2004 & 2005
National Award for Excellence in Ranked 2nd for 4 consecutive years - 2002,
SSI Lending 2003, 2004 & 2005
Banking Technology Awards 2004
Runner up in 'Best IT Team of the Jointly Adjudged by IBA, Finacle & TFCI
Year Award 2005'
Money Outlook Award - 2004
Runner up in 'Best Bank (public
Sector) of the year Award' -2005
for excellence in export perforamnce for 3
consecutive years 2001, 2002 & 2003
Niryat Bandhu Gold Trophy
by Federation of Indian Exporters Organization
(FIEO)
by the leading Financial Daily The Economic

21st Amongst Top 500 Companies
Times, June 2005
9th amongst India's Top 50 Most A.C Nielson Survey, The Economic Times Dec
Trusted Service Brands 2004
3rd Rank amongst Banking Sector
in India The Bankers' Almanac, January 2006
323rd Rank in the World
368 amongst Top 1000 Global
The Banker, London July 2005
Banks
Winner for becoming a pioneer in public banks
Skoch Challenger Award for
by Skoch consultancy services pvt ltd, Gurgaon
Exemplary Use of Technology
2005
FICCI's Rural Development Award Award for excellence in rural development 2005
Amity Business School, Noida has conferred the
Award to PNB, after an in-depth research to
analyse the strengths and core competencies of
Amity Global Corporate Excellence
the Global 500 companies and banks which have
Award
already made an indelible most admired
impression on the Indian economy. 2008
& 2007 & 2005
IBA, Finacle & TFCI jointly adjudged PNB as
Banking Technology Awards runner up in "Best IT Team of the year Award"
2005
Best IT Implementation 2007
PC Quest Users’ Choice Award
& 2005
Page 35
CREDIT APPRAISAL
Symantec Visionary Award Information Security Impact 2005

Money Outlok adjudged PNB as runner up in
Money Outlook Award "Best Bank (Public Sector) of the year Award"
2005
IBA, Finacle & TFCI runner up Award for
Banking Technology Awards Outstanding Achiever of the Year (Individual).
2005
Golden Peacock Innovative
2010 (for BCP implementation)
Product/Service Award
Golden Peacock Award for Winner in the ‘Large Joint Entry’.2009 &
Excellence in Corporate Governance 2007 & 2005
Skoch Challenger Award for For upliftment of Weaker sections of society
Change Management 2006
IDRBT Banking Technology
Best IT Team of the Year Award 2006
Awards
National Award For Excellence in First Prize by By Ministry of Small Scale
lending to Tiny sector Industries.2006
Skoch Challenger Award for
Skoch Consultancy Services Pvt Ltd 2007
capacity building for FTC initiative
Computer Associates Excellence
Excellence in EMS Roll Out. 2007
Award
For Best IT Implementation by IDG Media Pvt.
CIO 100 Award
Ltd.2007, 2008 & 2009
National Award for Excellence in
For Lending to Micro enterprises 2007
Lending to Micro Enterprises
Award for the use of Technology for Institute for Development and Research in
Financial Inclusion. Banking Technology (IDRBT), Hyderabad. 2008
Dun & Bradstreet Award for
“Priority Sector Lending including Dun & Bradstreet 2009
Financial Inclusion”.
Khadi & Village Industry Commission, Ministry
National Award for Excellence in
of Micro, Small & Medium Enterprises, Govt. of
Lending for Institutional Finance in
India
Propagating KVI Programmes in
(Interest Subsidy Eligibility Certificate Scheme)
NORTH ZONE
2009
Khadi & Village IndustryCommission, Ministry
National Award for Excellence in of Micro, Small & Medium Enterprises, Govt. of
Lending for Institutional Finance in India
CENTRAL ZONE
2009
National Award for Excellence in Khadi & Village IndustryCommission, Ministry
Lending for Institutional Finance in of Micro, Small & Medium Enterprises, Govt. of
Propagating KVI Programmes in India
Page 36
CREDIT APPRAISAL

NATIONAL LEVEL
2009
Lending for Institutional Finance for India
(Prime Minister Employment Generation
NORTH ZONE
Programme) 2009
Lending for Institutional Finance for India
(Prime Minister Employment Generation
CENTRAL ZONE
Programme) 2009
India Pride Award by dainik
Excellence in PSU 2009
Bhaskar and Daily News analysis
Indira Gandhi Rajbhasha Shield Promoting Hindi 2009
Emerson Uptime Champion Awards 2009
“Best InfoSphere Warehouse 2009 (for implementation of Enterprise Wide
Solution” Award by IBM Data Warehouse)
Organizational structure of Punjab National Bank
Hierarchy
Page 37
CREDIT APPRAISAL
Board of Directors
• Sh.K.R. Kamath:- He has been appointed as a chairman and managing director of
Punjab National Bank by Govt. Of India.
• Sh. M.V.Tanksale:- Executive Director
• Sh. Nagesh Pydah:- Executive Director
• Smt. Ravneet Kaur:- Govt. of India Nominee Director
• Shri L.M.Fonseca:- Reserve Bank of India Nominee Director
• Shri Mushtaq A Antulay:- Part-time non-official Director
• Shri Gautam P. Khandelwal:- Part-time non-official Director
• Shri Vinod Kumar Mishra:- Part-time non-official Director
• Shri Tribhuwan Nath Chaturvedi :- Share Holder Director
• Shri G R Sundaravadivel:- Share Holder Director
• Shri Devinder Kumar Singla: Share Holder Director
• Sh. M P Singh:- Workmen Employees Director
• Sh. Pradeep Kumar:- Officer Director
Page 38
CREDIT APPRAISAL
Review of Literature
Literature review provides available research with respect to the selected topic of the project
or the research findings by an author which has been done with respect to the research topic.
This chapter provides the overall view of the available literature with respect to the topic of
the project. The review of the related research works are described as under:-
1. A research work on the topic “ On the appraisal on consumer credit banking products
with the asset quality frame: A multiple criteria application.” done by Panagiotis Xidonas,
Alexandros Flamos, Sortirios Koussouris, Dimitrious Askouins & Ioannis Psarras from
National Technical University of Athens in 2007 says that Asset quality refers to the
likelihood that the bank's earning assets will continue to perform and requires both a
qualitative and quantitative assessment. Decision problems like the "internal appraisal of
banking products", are problems with strong multiple-criteria character and it seems that the
methodological framework of Multiple Criteria Decision Making could provide a reliable
solution. In this paper, the Asset Quality banking indicators are the, so called, "criteria", the
value of these indicators are the, so called, "scores" in each criterion and the
P.R.O.METH.E.E. [Preference Ranking Organization Method of Enrichment Evaluations,
Brans & Vincke (1985)] Multiple Criteria method is applied, towards modelling banking
products appraisal problems. A Multiple Criteria process, strictly mathematically defined,
integrates the behaviour of each indicator-criterion and utilizes each score in order to rank
the so called "alternatives", i.e. categories of banking products.
2. The research Paper on “Evaluation of decision support systems for credit management
decisions” by S. Kanungo, S.Sharma, P.K. Jain from Department of studies, IIT Delhi have
conducted a study to evaluate the efficiency of decision support system (DSS) for credit
management. This study formed a larger initiative to access the effectiveness of the I.T based
credit management process at SBI. Such a study was necessitated since credit appraisal has
Page 39
CREDIT APPRAISAL
become an integral sub-function of the Indian banks in view of growing incidence of non-
performing assets. The DSS they have assessed was a credit appraisal system developed by
Quuattro pro at SBI. This system helps in analysis of balance sheets, Calculation of financial
ratios, cash flow analysis, future projections, sensitivity analysis and risk evaluation as per
SBI norms. They have also used a strong Quassi experimental design called Solomon’s four
group design for the assessment. In the experiment the managers of SBI who attended the
training programme were the subjects the experiment consisted of the measurements that
were taken as pre and post tests. An experimental intervention was applied between the pre-
tests and the pro-tests. The intervention or stimulus consisted of DSS training and use. There
were four groups in the experiment. The stimulus remained constant as the they took care to
ensure that the course content as well as the instructors remained the same during the course
of the experiment. Two were experimental groups and two were control groups. All four
groups underwent training in credit management between the pre and the post tests. Results
from research shows that while the DSS is effective, improvement needs to be done in the
methodology to assess such improvements. Moreover such assessment frameworks while
being adequate from a DSS-centric viewpoint do not respond to the assessment of DSS in an
organizational setting . In the concluding section they have discussed how this evaluative
framework can be strengthened to initiate an activity that will allow the long term and
possibly the only meaningful evaluation framework for such a system.
3. The research paper on the topic “Towards an appraisal of the FMHA farm credit
program: A case study of the efficiency of borrower by S. Mehdian, Wm. McD. Herr, Phil
Eberle, and Richard Grabowski” have studied that the a production frontier methodology is
used to measure the overall efficiency of a sample of farmers home administration(FMHA)
compared to non participants. The study did not find evidence that the efficiency FMHA
farms improved between a time period Results indicated that overall efficiency of FMHA
borrowers is associated with selected financial characteristics of the farms. A review of the
literature shows that agricultural finance specialists have not been successful in evaluating
whether FMHA pro- grams improve the efficiency and income of probability of success.
Liberal loan policies
Page 40
CREDIT APPRAISAL
Eligible borrowers. Inadequate evaluation of the FMHA program occurs partly because of
because the difficulty of adequately deter-mining the impacts of changes in the econ-
borrowers in a more normal period of the loan. This study addressed these difficulties by
utilizing a nonparametric production frontier technique to measure overall efficiency and a
matched pair statistical procedure to measure how efficiency of farms receiving FMHA
credit changed relative to a Non-FMHA farmers.
4. The book named “Financial Analysis for Bank Lending in Liberalised Economy” by
Sampat.P.Singh and Dr.S.Singh have discussed the subject financial analysis for bank
lending has assumed considerable importance, particularly since early 1990's when, like
most of the countries, India opted for the policy of liberalisation and globalisation after 1991.
The present volume is meant to be a standard reference as well as text book on the varied
facets of financial analysis with reference to credit management by Banks and Financial
Institutions. The book consists of three parts. Part I discusses the concepts and tools of
Financial Analysis; Part II explains various concepts of working capital in its historical
context; while Part III demonstrates the application of these tools in the changing context of
liberalised economy by focusing on new concepts like 'Credit Worthiness', Risk-Analysis,
Credit Rating, Products-Differentiation, Pricing-Differentiation, Asset-Liability
Management, etc. The book contains- Bank Lending and Industrial Finance in India ,Basic
Economics for Bankers and Business Managers ,Introduction to Fundamentals Accounting
Principles ,Profit and Loss Account (Operating Statement) ,Analysis of Profit and Loss
Account (Operating Statement) ,Structure and Analysis of Balance Sheet ,Ratios as Tools of
Financial Statements Analysis ,Accounting Flows : Income, Cash and Funds ,Break-even
Analysis and Margin of Safety ,Appraisal of Capital Projects ,New Conceptual Framework
for Analysis, Liberalised Era and New Focus of Bank Lending ,Managing Working Capital
by Strategic Choice , Financing Working Capital : Conceptual and Historical
Exposition,Creditworthiness and Credit Rating : At Centre stage Nucleus of Credit Appraisal
, Working Capital Management-I : MPBF System of Appraisal and Bifurcation of Fund-
Based Limit in Two Components Working Capital Management-II : Alternative Methods of
Appraisal ,Working Capital Management-III : Follow-up and Supervision , Appraisal of a
New Project Involving Term Loan , Management of Problem Accounts , Management of
Page 41
CREDIT APPRAISAL
Non-Performing Assets (NPAs), Rehabilitation of Sick Industrial Units, Working Capital

Management : Concepts and Techniques , 1st Committee on Financial Sector Reform and
the 2nd Committee on Banking System Reform (Known as Narasimham Committee Report,
1998).
5. The research paper on the topic “Competitive analysis in banking: Appraisal of the
methodologies” by Nicola Cetorelli has discussed about the U.S. banking industry has
experienced significant structural changes as the result of an intense process of consolidation.
From 1975 to 1997, the number of commercial banks decreased by about 35 percent, from
14,318 to 9,215. Since the early 1980s, there have been an average of more than
400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998). The
relaxation of intrastate branching restrictions, effective to differing degrees in all states by
1992, and the passage in 1994 of the Riegle.Neal Interstate Banking and Branching
Efficiency Act, which allows bank holding companies to acquire banks in any state and,
since June 1, 1997, to open interstate branches, is certainly accelerating the process of
consolidation. These significant changes raise important policy concerns. On the one hand,
one could argue that banks are merging to fully exploit potential economies of scale and/or
scope. The possible improvements in efficiency may translate into welfare gains for the
economy, to the extent that customers pay lower prices for banks. services or are able to
obtain higher quality services or services that could not have been offered before.1 On the
other hand, from the point of view of public policy it is equally important to focus on the
effect of this restructuring process on the competitive conditions of the banking industry. Do
banks gain market power from merging? If so, they will be able to charge higher than
competitive prices for their products, thus inflicting welfare costs that could more than offset
any presumed benefit associated with mergers. In this article, analysis of competition in the
banking industry is done highlighting a very fundamental issue: How market power is
measured and how do regulators rely on accurate and effective procedures to evaluate the
competitive effects of a merger.
Page 42
CREDIT APPRAISAL
Page 43
CREDIT APPRAISAL
Credit Philosophy & Policy with regards to Punjab National

Bank
An ideal advance is the one given to a reliable customer for an approval purpose with
adequate experience, safe in knowledge that the money will be used to advantage and
repayment will be made within a reasonable period from trade receipts or known maturities
due on or about given dates.
Credit philosophy – “To achieve credit expansion required for sustaining the
profitability of the bank and emphasis on quality assets, profitable relationships and
prudent growth.”
CREDIT POLICY
Bank follows following broad policy imperatives:-
• Reduction in dependence upon short term corporate loans, especially unsecured

exposures.
• Aiming to achieve more sanctions at levels closer to the customer.
• Changing the mix of the portfolio in favour of better diffused and higher yielding
credit.
• Building competencies in credit management through training & promotion of self
directed learning.
Objectives of credit policy
1. A balanced growth of credit portfolio, which does not compromise safety.
Page 44
CREDIT APPRAISAL
2. Adoption of a forward looking and market responsive approach for moving into
profitable new areas on lending which emerge, within the pre determined exposure
ceilings.
3. Sound risk management practices to identify measure, monitor and control risks.
4. Maximize interest yields from credit portfolio through a judicious management of
varying spreads of loan assets based upon their size, credit rating and tenure.
5. Leverage on strong relationships with existing long-standing clients to source a bulk
of new business by addressing their requirements comprehensively.
6. Ensure due compliance of various regulatory norms including CAR, income
recognition and asset classification
7. Accomplish balanced development of credit to various sectors and geographical
regions.
8. Achieve growth of credit to priority sectors / subsectors and continue to surpass the
targets stipulated by reserve bank of India.
9. Using of pricing as a tool of competitive advantage ensuring however that earnings
are protected.
10. Develop and maintain enhanced competencies in credit management at all levels
through a combination of training initiatives, promotion of self directed learning and
dissemination of best practices.
Objectives in Credit
To maintain healthy balance between-
• Credit volumes
• Earnings
• Asset quality
within the framework of regulatory prescriptions, corporate goals and bank’s social
responsibilities.
Page 45
CREDIT APPRAISAL
Page 46
CREDIT APPRAISAL
Introduction to loans
Loans are advances for fixed amounts repayable on demand or in instalment. They are
normally made in lump sums and interest is paid on the entire amount. The borrower cannot
draw funds beyond the amount sanctioned.
A key function of the Bank is deploying funds for income-yielding assets.

A major part of Bank’s assets are the loans and advances portfolio and investments in
approved securities. Loans & Advances refer to long-term and short-term credit facilities to
various types of borrowers and non-fund facilities like Bank Guarantees, Letters of Credit,
Letters of Solvency etc. Bill facilities represent structured commitments which are
negotiable claims having a market by way of negotiable instruments. Thus, Banks extend
credit facilities by way of fund-based long-term and short-term loans and advances as also by
way of non-fund facilities.
Classification of Loans
Loans/Advances
Loans/Advances
Fund Based Non-Fund

Based
Retail Loan
Bank Guarantee
Cash Credit Post shipment

Finance
Export Finance
Letter of Credit
Bill Discounting Page 47

Pre-shipment
Finance
Term Loan
CREDIT APPRAISAL
Page 48
CREDIT APPRAISAL
Bank provides credit in various forms. These are broadly classified into two categories-
Fund based and Non –Fund Based. Fund based refers to the type of credit where cash is
directly involved i.e. where bank provides money to the seeker in anticipation of getting it
back. Where as in a Non-fund Based, Bank doesn’t pay cash directly but gives assurance or
takes guarantee on behalf of its customer to pay if they fail to do so. In case on Fund Based
there are different categories of loans which are discussed as follows
I. RETAIL LOANS-
Retail banking in India is not a new phenomenon. It has always been prevalent in India in
various forms. For the last few years it has become synonymous with mainstream banking
for many banks.
The typical products offered in the Indian retail banking segment are:-
• Housing loans
• Consumer loans for purchase of durables
• Auto loans
• Educational loans
• Credit Cost.
• Personal loans
Retail loan is the practice of loaning money to individuals rather than institutions. Retail
lending is done by banks, credit unions, and savings and loan associations. These institutions
make loans for automobile purchases, home purchases, medical care, home repair, vacations,
and other consumer uses. Retail lending has taken a prominent role in the lending activities
of banks, as the availability of credit and the number of products offered for retail lending
have grown. The amounts loaned through retail lending are usually smaller than those loaned
to businesses. Retail lending may take the form of instalment loans, which must be paid off
little by little over the course of years, or non-instalment loans, which are paid off in one
lump sum.
Page 49
CREDIT APPRAISAL
These loans are marketed under attractive brand names to differentiate the products offered
by different banks. As the Report on Trend and Progress of India, 2007-08 has shown that
the loan values of these retail lending typically range between Rs.20, 000 to Rs.100 lakh. The
loans are generally for duration of five to seven years with housing loans granted for a longer
duration of 15 years. Credit card is another rapidly growing sub-segment of this product
group. In recent past retail lending has turned out to be a key profit driver for banks with
retail portfolio. The overall impairment of the retail loan portfolio worked out much less then
the Gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans
had the least gross asset impairment. In fact, retailing make ample business sense in the
banking sector.
Basic reasons that have contributed to the retail growth in India are-
• First, economic prosperity and the consequent increase in purchasing power has
given a fillip to a consumer boom. Note that during the 10 years after 1992, India's
economy grew at an average rate of 6.8 percent and continues to grow at the almost
the same rate – not many countries in the world match this performance.
• Second, changing consumer demographics indicate vast potential for growth in
consumption both qualitatively and quantitatively. India is one of the countries
having highest proportion (70%) of the population below 35 years of age (young
population). The BRIC report of the Goldman-Sachs, which predicted a bright future
for Brazil, Russia, India and China, mentioned Indian demographic advantage as an
important positive factor for India.
• Third, technological factors played a major role. Convenience banking in the form of
debit cards, internet and phone-banking, anywhere and anytime banking has attracted
many new customers into the banking field. Technological innovations relating to
increasing use of credit / debit cards, ATMs, direct debits and phone banking has
contributed to the growth of retail banking in India.
• Fourth, the Treasury income of the banks, which had strengthened the bottom lines of
banks for the past few years, has been on the decline during the last two years. In
such a scenario, retail business provides a good vehicle of profit maximisation.
Considering the fact that retail’s share in impaired assets is far lower than the overall
Page 50
CREDIT APPRAISAL
bank loans and advances, retail loans have put comparatively less provisioning
burden on banks apart from diversifying their income streams.
• Fifth, decline in interest rates have also contributed to the growth of retail credit by
generating the demand for such credit.
According to K V Kamath, the changing demographic profile and a downward trend of the
interest rates will propel retail credit in India."There is a huge retail credit opportunity that is
surfacing. Banks have low penetration in this segment currently. But it is the one area that is
providing the momentum in the banking business now,” India has among the lowest
penetration of retail loans in Asia. Though the sector has been growing at around 15 per cent,
there is still a huge opportunity to tap into.
Middle and -high-income homes in India has increased to 2.57 crore (25.7 million). Interest
rates on retail loans have been dropping rapidly too. For instance residential mortgages
slumped by 7 per cent over the last four years."The entry of a number of banks in India in the
last few years has helped provide increased coverage and a number of new products in the
market," says Kamath.
I. WORKING CAPITAL / CASH CREDIT

Cash credit is a short-term cash loan to a company. A bank provides this type of funding, but
only after the required security is given to secure the loan. Once a security for repayment has
been given, the business that receives the loan can continuously draw from the bank up to a
certain specified amount. The bank provides certain amount to the company for its day to
day working keeping certain margin in hand.
II. TERM LOANS

A bank loan to a company, with a fixed maturity and often featuring amortization of
principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after
the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon
after they become available. Bank term loans are very a common kind of lending.
Page 51
CREDIT APPRAISAL
Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates,
and monthly or quarterly repayment schedules and include a set maturity date. Bankers tend
to classify term loans into two categories:
• Intermediate-term loans: Usually running less than three years, these loans are generally
repaid in monthly instalments (sometimes with balloon payments) from a business's cash
flow. According to the American Bankers Association, repayment is often tied directly to
the useful life of the asset being financed.
• Long-term loans: These loans are commonly set for more than three years. Most are
between three and 10 years, and some run for as long as 20 years. Long-term loans are
collateralized by a business's assets and typically require quarterly or monthly payments
derived from profits or cash flow. These loans usually carry wording that limits the
amount of additional financial commitments the business may take on (including other
debts but also dividends or principals' salaries), and they sometimes require that a certain
amount of profit be set-aside to repay the loan.
Appropriate For: Established small businesses that can leverage sound financial statements
and substantial down payments to minimize monthly payments and total loan costs.
Repayment is typically linked in some way to the item financed. Term loans require
collateral and a relatively rigorous approval process but can help reduce risk by minimizing
costs. Before deciding to finance equipment, borrowers should be sure they can they make
full use of ownership-related benefits, such as depreciation, and should compare the cost
with that leasing.
Supply: Abundant but highly differentiated. The degree of financial strength required to
receive loan approval can vary tremendously from bank to bank, depending on the level of
risk the bank is willing to take on.
I. BILL DISCOUNTING
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the bill after a discount charge to the customer's
account. The transaction is practically an advance against the security of the bill and the
Page 52
CREDIT APPRAISAL
discount represents the interest on the advance from the date of purchase of the bill until it is
due for payment.
Bills of exchange- A bill of exchange or "draft" is a written order by the drawer to the
drawee to pay money to the payee. A common type of bill of exchange is the cheque (check
in American English), defined as a bill of exchange drawn on a banker and payable on
demand. Bills of exchange are used primarily in international trade, and are written orders by
one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent
of paper currency, bills of exchange were a common means of exchange. They are not used
as often today.
A bill of exchange is an unconditional order in writing addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at fixed or determinable future time a sum certain in money to order or to bearer.
It is essentially an order made by one person to another to pay money to a third person.
A bill of exchange requires in its inception three parties--the drawer, the drawee, and the
payee.
The person who draws the bill is called the drawer. He gives the order to pay money to third
party. The party upon whom the bill is drawn id called the drawee. He is the person to whom
the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates
his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is
called the payee.
Promissory Note- A promissory note is a written promise by the maker to pay money to the
payee. Bank note is frequently transferred as a promissory note, a promissory note made by a
bank and payable to bearer on demand. A maker of a promissory note promises to
unconditionally pay the payee (beneficiary) a specific amount on a specified date.
A promissory note is an unconditional promise to pay a specific amount to bearer or to the

order of a named person, on demand or on a specified date.
A negotiable promissory note is unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand, or at fixed or determinable future
time, sum certain in money to order or to bearer
Page 53
CREDIT APPRAISAL
II. EXPORT FINANCE-

This type of a credit facility is provided to exporters who export their goods to different
places. It is divided into two parts- pre-shipment finance and post-shipment finance.
• Pre Shipment Finance is issued by a financial institution when the seller want the
payment of the goods before shipment.
• Post Shipment Finance is a kind of loan provided by a financial institution to an

exporter or seller against a shipment that has already been made. This type of export
finance is granted from the date of extending the credit after shipment of the goods to
the realization date of the exporter proceeds. Exporters don’t wait for the importer to
deposit the funds.
Non Fund Based loans generate income for the bank without committing the funds of
the bank. Bank generates substantial income under this head. There are two types of credit
under this category which are discussed as follows:-
I. BANK GUARANTEE-
A bank guarantee is a written contract given by a bank on the behalf of a customer. By
issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if
it is not paid by the customer on whose behalf the guarantee has been issued. In return, a
bank gets some commission for issuing the guarantee.
Any one can apply for a bank guarantee, if his or her company has obligations towards a
third party for which funds need to be blocked in order to guarantee that his or her company
fulfils its obligations (for example carrying out certain works, payment of a debt, etc.).
In case of any changes or cancellation during the transaction process, a bank guarantee
remains valid until the customer dully releases the bank from its liability.
In the situations, where a customer fails to pay the money, the bank must pay the amount
within three working days. This payment can also be refused by the bank, if the claim is
found to be unlawful.
Page 54
CREDIT APPRAISAL
II. LETTER OF CREDIT-

A standard, commercial letter of credit is a document issued mostly by a financil institution,
used primarily in trade finance, which usually provides an irrevocable payment undertaking.
The LC can also be the source of payment for traction, meaning that redeeming the letter of
credit will pay an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer
in another. They are also used in the land development process to ensure that approved
public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a
letter of credit are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is a client.
Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior
agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing
a transaction, letters of credit incorporate functions common to giros and Traveler's cheques.
Typically, the documents a beneficiary has to present in order to receive payment include a
commercial invoice, bill of lading, and documents proving the shipment were insured against
loss or damage in transit. However, the list and form of documents is open to imagination
and negotiation and might contain requirements to present documents issued by a neutral
third party evidencing the quality of the goods shipped, or their place of origin.
Page 55
CREDIT APPRAISAL
Building Up of a Proposal
1.GATHERING CREDIT INFORMATION:-
An appraisal of a proposal begins with the gathering of adequate background knowledge

about borrower’s character and credit worthiness. In the concept of appraisal, much reliance
is placed on the credentials of the borrower. Therefore, there is a necessity for evaluation of
the borrower in regard to his standing in the business, means and respectability. The result of
the elaborate scrutiny concerning all these aspects is required to be put into a precise credit
report which helps in taking decision on a credit proposal. Each individual case has to be
examined in the light of its own circumstances and judgment exercised on issues enumerated
above and a final decision has to be arrived at on the basis of scrutiny of all the issues.
Information by definition is that data which is relevant and meaningful for making decisions.
An information system is an aid to the decision making, carrying out and altering decisions.
All information required by the banker in the pre-sanction period should become part of a
system. It should flow into the information system from various sources, such as the
borrower, bank’s own record, environment etc. A significant basis of banker-borrower
relationship is governed by the information which flows between the two parties. After
ascertaining the credit needs of the borrower, the banker looks towards information about his
borrower’s credit worthiness. He seeks out the credit information etc. from his co-bankers,
other borrowers and market information.
2. VARIOUS SOURCES OF CREDIT INFORMATION 
Information regarding character, honesty, and financial position has to be discreetly gathered
from following sources:
a. The borrower: the bank should develop as much credit information as possible during
the initial interview with the borrower/partners of firm/ directors of company/
proposed guarantor /co-obligator and principal officials of firms/company, nature of its
Page 56
CREDIT APPRAISAL
business, past and expected profitability, the degree of competition that the
firm/company faces and whether or not it has had or anticipated any difficulty etc.
Information regarding its principal officers should be collected during such interview.
b. Borrower’s financial statements: for lending decisions, financial information is a

significant part of the total information system. It is derived basically from borrowers:
• Trading and profit and loss statement
• Balance sheet
• Cash and fund flow statements
c. Banks own records: If he is an existing borrower, bank’s own records are a rich
source of additional information. Operations in the borrower’s account and other
dealings at the bank level in regard to collections, discounting/retirement of bills etc.
often useful clues to borrower’s operating and financial transactions. A review of the
previous year’s operations in the account and assessments of borrowers’ financial
statements relating to that period will provide a rich source of information about the
borrower.
d. Opinions: Bank should compile opinions on their borrowers. They should contain
full and reliable records of the character, estimated means and business activities of all
firms and individuals who are under any form of liability to the bank, whether as direct
borrowers or as co-obligators. Full particulars of parties immovable properties where
they are situated, whether they are free from encumbrance and in the case of land,
acreage should be recorded together with fair estimates of their value. As far as
possible written statements of their properties should be taken in evaluating properties
owned by parties jointly with others and as a rule such properties should be
disregarded in arriving at the net means.
e. From other banks: in respect of fresh proposals, enquiries with local banks should be
made before entertaining the proposal to avoid multiple financing without our full
Page 57
CREDIT APPRAISAL
knowledge. In case of new customer having dealings with other banks, confidential
opinion of his banker has to be obtained.
f. Income tax assessment order- Income tax assessment orders agricultural income tax
assessment orders give an insight into the borrower’s account and the extent to which
it is profitable. Comments thereon by the income tax office shall indicate the
shortcomings (lacunae) in the business. In the case of estate owners agricultural tax
assessment orders to be obtained to arrive at parties credit worthiness.
g. Sales tax assessment orders: Sales tax assessment orders will reveal the turnover in
business and when read with trading/ manufacturing and profit & loss account, it may
be possible to have a fair assessment of tendencies in trade i.e., whether over-trading
or carefully trading within recourses at command or trading entirely on the borrowed
funds.
h. Wealth tax assessment orders: wealth tax assessment order will indicate the net
worth of individuals and reveals the liquid source available to bring the required
margin money for the venture.
i. Market sources: Constant touch with the market will help to have first hand
information about the gains or losses in particular business transactions of the
borrowers.
j. Property statements: The property statement of borrower will give an idea of his
worth, liabilities and his income from real estate’s (immovable properties).
k. Municipal property registers: reference to municipal property registers will give an

idea of building owned within the municipality, Rental Values and house tax payable.
It may be noted that the said registers are open for reference to all persons.
Page 58
CREDIT APPRAISAL
l. Other external sources: other external sources, if any, like stock exchange directory,
business periodicals/magazines/journals etc.
REQUIREMENTS AS PER CONSTITUTION OF BOROWER:
Following Requirements as per constitution of borrower should be collected for proposals

emanating from-
1. Partnership:
• Copy of partnership deed
• Copy of certificate of registration of firm (if registered)
1. Company :
• Memorandum and articles of association
• Certificate of incorporation
• Certificate of commencement of business
• Search report indicating subsisting charges on the assets of the company.
• Board resolution for borrowings, creation on the assets of the company and
execution of the documents.
1. Cooperative societies
• Bylaws
• Permission from registrar for the borrowings, creation of charge on the assets
of the society and execution of documents.
1. Trusts
• Trust deed
• Resolution for the borrowings and execution of documents.
1. Industrial units :
Page 59
CREDIT APPRAISAL
• Project report with cash flow, fund flow statements etc.

• Industrial licenses/SSI registration certificate.
• License from local authority, compliance of legal requirements or conditions as
applicable and clearance from regulatory bodies.
FINANCIAL APPRAISAL
On receipt of a loan application the banker begins the process of financial appraisal. The first
thing done is to analyze the financial statements. Therefore, an understanding of these
financial statements is important for the appraiser.
Once balance sheet is taken for analysis the following items are checked up:
1. Fixed assets: To find out any revaluation of fixed assets done by the company to
improve their net worth.
• The schedules of the fixed assets should be checked up.
• Study notes on accounts and comments of auditors should be checked.
• Schedule for reserve should be studied
• Any change in the accounting procedure of depreciation should be checked
2. Current assets: to find out whether the assets stated are really liquid or
not.
• The schedules under current liabilities and current assets to ascertain any
obsolete or slow moving raw material or finished good and old debtors or
receivables should be checked
• The auditor’s report should be read and understood properly.
• The claims lodged against receivables must be studied
• The receivables due from sister/associate concerns must be studied.
3. Other Current Assets: Their reasonableness and their need to maintain them for the
business.
Page 60
CREDIT APPRAISAL
• Various components of other current assets and if the same is more than 5%
-10%, ascertain the nature and need for maintaining such amount ; any assets
which is not used in the into day business activity shall be removed and proper
treatment is to be made accordingly.
• Bank guarantee or letter of credit margin shall be shown as non- current assets.
3. Contingent liabilities: To find out any unrecognized liabilities or losses if any.

• The CDD/DBD other bills discounted liability, if any ,is reported in the
auditor’s report , then increase the bank borrowing to the extent liability was
not taken in the balance sheet and also increases the debits/receivables to that
extent.
3. Term liabilities: To find out whether the liabilities are long term or short term, and
its needs and regularity
• This shall be decreasing year after year; if it has increased, then the reason for
the same is to be looked into (may be irregular or new term loan availed for
expansion etc.)
• The term liabilities with repayment of the same and the amount payable during
the year shall be deducted from the term liabilities as current liabilities for
finding out liquidity position of the company should be checked.
3. Stocks:
• The stock statements and QIS forms to find the authenticity of the figures
reported under stock/receivables.
• Change in the valuation of the stock/finished goods, if any, is to be verified to
find out its effect on the profitability of the company.
3. Intangible assets :
• Any abnormal increase in this figure shall be studied to find out the reasons for
the same; this may be due to take over by others also.
Page 61
CREDIT APPRAISAL
3. Accounting Norms:
• Any change in the accounting norms from the past shall be studied to find out
the reasons for the same; its effect on the net profit, net worth of the company
is to be ascertained.
BALANCE SHEET ANALYSIS
1. Comments on the performance of the unit vis-à-vis last year sales-
• Increased in last year sales are always good; if the net profit also has increased
correspondingly the performance can be noted as satisfactory.
• If the sales has come down or the net profit has also come down then the
reason has to be ascertained. If the unit earned at least cash profit then the
position may be considered as satisfactory.
• If the NP to N/sales is positive, that is sufficient for accepting as
satisfactory; but as per the credit rating chart maximum marks are assigned if
the borrower achieves 8% as percentage of net profit/net sales.
• Return on investment or Return on equity may also be used to find out the
return on capital invested.
1. Long term Strength of a company is calculated based on the level of the net worth
of the company /promoters stake/loans from close relatives-
• If the net worth has increased due to infusion of fresh capital or plough back
of profit, it can be termed as satisfactory; even increase of loan from friends &
relatives is a good sign.
• If the net worth is decreasing, reason may due to net loss or diversion; true
reason needs to be ascertained.
Page 62
CREDIT APPRAISAL
• If the D/E ratio is less than 2:1 the same is good; further if the TOL/TNW is
less than 5:1 then the unit’s solvency is noted to be satisfactory. The ratio
indicates that borrower has not borrowed much and the outside debts within a
reasonable limit.
2. Liquidity position of the party-Current ratio
• If the current ratio is increasing and nearer to 1.5 and above then we can note
the position is satisfactory.
• Expected Current ratio is 1.22:1 and above; if the ratio is less than 1.22:1 then
the promoter’s margin (Net working capital) towards Working Capital may
not be sufficient to cover the working capital limit; care shall be taken to
ensure that sufficient Net working capital for the working capital enjoyed is
available.
• When the Current ratio is poor and the Net working capital is not sufficient to
cover the existing limit, no further term loan shall be sanctioned and the party
is to be advised not to take up any fresh investment in fixed assets.
3. Quality of current assets :

• The current assets holding period must be less than 3 months for traders and
the 5 months for the industries depending upon the type of industry ;holding
level more than the above needs proper justification.
• It should be ensured that the current assets turnover is at least more than four
times in a year.
4. Contingent liability:
• The effect of this liability on the net worth of the company; if it’s effect is
less than 5-10 % of the net worth of the company ,the same may be noted; but
if it threatens the existence of the company then the position needs serious
analysis.
Page 63
CREDIT APPRAISAL
5. Diversion from the business needs to be viewed carefully.

• Reduction in Net working capital position( below the required level) when the
unit has earned cash profit and clearing of term loan installments when the
unit is making cash loss needs to be viewed seriously.
• Reduction in the net worth of the firm (when they have shown net profit needs
further probing.
MOVEMENT OF CREDIT PROPOSALS
With reference to Punjab National Bank the movements of credit proposals are studied
carefully and the detailed process is discussed as follows:
The movement of credit proposals follows a pre-defined path which has been
structured in keeping with the risk management principle that the credit granting
process should involve multiple credit approvers who should subject the proposals to
credit approvals at various stages accordingly.
Page 64
CREDIT APPRAISAL
Credit Appraisal Techniques
Credit appraisal techniques act as tool for the credit portfolio managers to take right
decisions. It is the first and the prime most function performed by the Credit Appraisal Cell
before providing any sort loans or advances. The appraisal technique for each type of loan is
separate from each other. Each type of loan whether secured or unsecured has to be analyzed
Page 65
CREDIT APPRAISAL
in a different way. The different techniques of credit analysis or credit appraisal are
discussed as under:
Process of Credit appraisal for Term Loans
Term loans- Loans which are repayable in not less than 36 months are referred to as term
loans. In the interest of sound risk management practices, banks monitor the percentage of
Term loans in their credit portfolio with a view to keeping the term loan component within a
pre-determined percentage.
Requirements to be obtained with the proposal:
a) Copies of project report
b) Where loan is on participation basis, a copy of the appraisal note of the lead institution /
bank should be obtained.
c) Scrutiny of proposals
➢ The scope of the project:

➢ Background of promoters
➢ Government consents
➢ The technical appraisal
➢ Cost of the project
➢ Sources of finance
➢ The schedule of implementation
➢ The financial projections and profitability
➢ Cash flow statements
➢ Calculation of debt service coverage ratio (DSCR)
➢ Breakeven analysis
d) Disbursement
e) Follow up (post sanction)
Page 66
CREDIT APPRAISAL
Assessment :
For assessment purposes the forms prescribed are used and debt equity ratio, average DSCR,
BEP, pay back period, etc. are taken into consideration. The following minimum financial
parameters are required to be satisfied for a Term loan proposal to merit consideration:
Not more than 2.33:1(1.7:1 may be accepted in

Debt Equity Ratio the case of real estate sector and generally for
different type of industry different level of DER
is acceptable.)
Not less than 1.5to 2 (ratio lower than this is to
Average DSCR be looked into)
Ratios for appraising term loans:
➢ Debt equity ratio: long term debt

Tangible net worth
➢ Average DSCR : Net profit + Depreciation + interest on TL

Term loan installment + interest on TL
➢ Breakeven point : Fixed cost_______

Sales-Variable cost (contribution)
It should be noted that the banks generally consider only term loans repayable
within 5 to 7 yrs. Term loans with maturity beyond 7 yrs are normally not
experienced except infrastructure loans.
Page 67
CREDIT APPRAISAL
Debt Equity Ratio:

A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets.
Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial
statements as well as companies'.
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of
the additional interest expense. If a lot of debt is used to finance
increased operations (high debt to equity), the company could potentially generate
more earnings than it would have without this outside financing. If this were to
increase earnings by a greater amount than the debt cost (interest), then the
shareholders benefit as more earnings are being spread among the same amount
of shareholders. However, the cost of this debt financing may outweigh the return
that the company generates on the debt through investment and business activities
and become too much for the company to handle. This can lead to bankruptcy,
which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company
operates. For example for large projects (with project cost Rs. 100 crore and
above) in Power, acceptable level of DER is 2.33:1, in Iron and Steel Industry
2.25:1 , in Infrastructure and Capital Intensive projects 2:1 and in Real Estate,
level of DER is 1.75:1. The CH, GM, ED and CMD have powers to further relax.
Debt Service Coverag Ratio (DSCR):
The ultimate purpose of project appraisal is to ascertain the viability of a project which has a
direct bearing on the repayment of the instalments under the proposed term loan / deferred
payment guarantee. While the repayment program will depend upon the profitability of a
project, the quantum of annual instalments has to be related to the size of the annual cash
Page 68
CREDIT APPRAISAL
flows. The repayment schedule should, therefore, be fixed after ascertaining the annual
servicing by the debt service coverage ratio.
The debt service coverage ratio is the core test ratio in project financing. This ratio indicates
the degree of viability of a project and influences in fixing the repayment period, and the
quantum of annual instalments. For the purpose of this ratio , “debt” means maturing term
obligations viz. instalments payable during a year under all the term loans/ deferred payment
guarantees and ‘service’ means cash accruals (service) available to cover the maturing
obligation (debt) during each year.
The debt service coverage ratio indicates the ability of the firm to generate cash
accruals for repayment of installment and interest. For example, a DSCR of 3:1 indicates
that for each Re.1/-long term debt including interest to be paid the business generates cash
accrual of Rs.3/- to be utilized for repayment of debt. The difference between the accruals
and debt is known as margin of safety (Rs.2/- in this case).
The ratio of 1.5 to 2 is considered reasonable. Ratio lower than this should
be further looked into. A very high ratio may indicate the need for lower moratorium
period/repayment of loan in a shorter schedule. This ratio provides a measure of the ability
of an enterprise to service its debts i.e. `interest' and `principal repayment' besides indicating
the margin of safety. The ratio may vary from industry to industry but has to be viewed with
circumspection when it is less than 1.5.
BREAK EVEN POINT OR COST VOLUME PROFIT (CVP)

ANALYSIS:
A. The breakeven point is calculated to note the level of production at which the unit neither
earns profit nor incur loss. BEP is the level of operations (in terms of sales or production or
capacity utilization) at which total revenues are equal to total operating costs (fixed and
variable) or, in other words, the operating profit is equal zero. He firm starts earning
Page 69
CREDIT APPRAISAL
operating profits only after the break-even is reached. At BEP, “contribution” exactly equals
the “fixed costs.
B. The formula for calculating the break-even point for each year is as under:
Total fixed cost/Contribution
C. Certain items of the cost that are to be incurred by the unit irrespective of the level of
production are called as fixed cost. The same includes depreciation, repairs and maintenance,
interest, certain portion of salaries, rent, insurance, selling expenses other than variable items
and administrative expenses
D. The variable cost changes with the levels of production. It includes cost of raw materials,
direct wages and other items, which are apportion able to unit of production.
E. The breakeven point is generally expressed in terms of percentage of capacity utilization
Break even analysis is generally expressed in terms of percentage of capacity utilisation.
The CVP analysis provides answers to such questions as: level of

operations needed to avoid loss, level of sales required to achieve targeted profit, effect of
product mix on profits, impact of expansion, most and least profitable products etc. Break-
even analysis is the most widely used form of the CVP analysis.
Break-even analysis is one of the most useful techniques
of profit planning and controlling. The break-even analysis can help in making vital
decisions relating to fixation of selling price make or buy decision, maximizing production
of the item giving higher contribution etc. Further, the break-even analysis can help in
understanding the impact of important cost factors, such as, power, raw material, labor, etc.
and optimizing product-mix to improve project profitability.
It is a useful method for considering also the risk implications of alternative actions. From
one alternative a firm may expect higher profit and also a higher break-even point, while
another alternative may produce comparatively lower profit but at a lower break-even point.
The firm has to weigh the probability (riskiness) of reaching the break-even in the first case
Page 70
CREDIT APPRAISAL
before choosing that alternative. Generally, the preferred alternative would be where the
break-even will be reached earlier.
Caution:
➢ Relationship between revenue, variable costs and volume may not be linear.
➢ It is not always easy to have a clean separation of costs into fixed and variable
components.
➢ Fixed costs may be ‘stepped’ – not fixed over all volumes.
Complexity involved in using BEP analysis in multi-product businesses
Illustration:
Assumed:
Normal year production 75 lakh units (93.75% of installed

capacity)
Fixed Costs Rs. 13.71 lakh
Variable Costs Rs. 13.35 lakh
Sales realization Rs. 41.25 lakh
Contribution Rs. 27.90 lakh
BEP (production) : (Fixed cost / Contribution)* 75 lakh = 36.85 lakh units
BEP (capacity utilization): (Fixed cost / Contribution)* 93.75 = 46.07%
BEP (sales) : (Fixed cost / Contribution)* Rs. 41.25 lakh = Rs. 20.27 lakh
SENSITIVITY ANALYSIS
Projects do not always run to plan. Costs and benefits estimated at an early stage of a
project may indicate a profitable project, but this profit could be eroded by an increase in
costs or a decrease in the value of the benefits (the revenue). Sensitivity Analysis involves
Page 71
CREDIT APPRAISAL
changing input variable estimates from an original set of estimates (called the base case)
and determine their impact on a project’s measured results, such as NPV (or IRR) from
investor’s viewpoint, or DSCR from banker’s point of view.
The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or
sensitive elements are identified which are assigned different values and the values assigned
are both optimistic and pessimistic such as increasing or reducing the sale price/sale
volume, increasing or reducing the cost of inputs etc. and then the project viability is
ascertained.
The critical variables can then be thoroughly examined by generally selecting the
pessimistic options so as to make possible improvements in the project and make it
operational on viable lines even in the adverse circumstances.
In the absence of any defined factors and its values for carrying out the sensitivity analysis, a
common 5% sensitivity factor on sale price/cost price of major raw materials is to be
applied in appraisals of all the projects irrespective of the industry. However, 10% sensitivity
factor may be applied in highly volatile industries by assessing the expected volatility in sale
price/ cost price of major raw materials in future on case to case basis.
Process of Credit Appraisal for providing Cash Credit / Working

Capital Limits
Working capital for any unit means the total amount of circulating funds required for
meeting day to day requirements of the unit. For proper working a manufacturing unit needs
a specific level of current assets such as raw material, stock in process, finished goods,
receivables and other current assets such as cash in hand/ bank and advances etc. So the
working capital means the funds invested in current assets. The trading units need the
working capital for storing the goods and allowing credit to its customers.
Page 72
CREDIT APPRAISAL
Gross Working Capital and Net Working capital
Gross working capital means the total funds required for financing the total current assets.
Net Working capital means the difference the current assets and liabilities. In other words ,
net working capital denotes the portion of gross working capital contributed from long term
sources. As per practice of Indian banks net working capital should normally be 25% of total
current assets which will give a current ratio of 1.33 to the unit. When net working capital is
negative, it implies that the short term funds have been diverted / used for long term uses and
the unit is facing a liquidity crunch. Such situation may also arise due to losses. In such a
situation, the need of the hour is for raising long term sources. A unit needs working capital
because the production, sales and realizations are not simultaneous. The unit needs cash to
purchase the raw material and pay expenses as there may not be perfect matching between
cash inflows and outflows. The stock of raw material is kept to ensure the uninterrupted and
smooth production. It may also be required to cover the situations of shortages etc.
Factors affecting the requirement of working capital:

1. Nature of activity: Manufacturing units need more working capital as compared to
trading and service units.
2. The length of operating cycle: More the length of operating cycle, more the
requirement of working capital. lengthy the process of manufacture, more the need of
working capital due to increase of length of working capital cycle
3. Market trend: The market trend of allowing credit to customers also varies from
industry to industry and city to city. More the credit allowed to customers, more the
need of working capital.
4. Availability of raw materials: When the availability of raw material is assured and
comfortable, lower stock maintenance is required. When there is expectation of
shortage or expectation of rise in prices, more amounts is blocked in raw materials.
5. Location of the unit: When the unit is located near the source of raw material, lower
stock maintenance is required.
Page 73
CREDIT APPRAISAL
6. Type of customers: When there are regular customers, low stock of finished products
is needed. When the sales are to be made to walk- in customers, more level of stock
of finished products is required.
7. Seasonality Factor: When the raw material required is available in a particular season,
the stock for whole of year is to be purchased in the particular season. E.g.
Sugarcane, Cotton, Paddy etc. Similarly the woollen products and products required
in a particular season such as ACs, for keeping the production running, higher level
of finished stocks have to be kept.
Role of Banker:
The unit should have sufficient amount of working capital. A portion of it is to be financed
from long term sources called the liquid surplus or net working capital (NWC). The
remaining is normally financed by the bank in the form of working capital limits. Excess
maintenance of working capital may result in idle resources and high interest cost whereas
less amount of working capital may mean disruption in the working. So both the situations
are to be avoided. That is why the technique of calculation of right amount of working
capital assumes significance. For financing of working capital, a banker should be able to
calculate right amount of working capital needed by the unit being financed. It shall mean
right amount of financing which will result in higher profitability for the unit and safety of
funds of the bank.
Parameters for various stages in computation of working capital:
Stage Time Value

i Raw Material Holding period value of RM consumed
during the period
ii SIP Time taken in RM + Mfg.Exp. during the

converting the period (Cost of
RM into FG production)
iii FG Holding period of R.M + Mfg. Exp. +Adm
Page 74
CREDIT APPRAISAL
FG before being overheads for the

sold period (Cost of sales)
iv Receivables Credit allowed RM+ Mfg. Exp. + Adm.

to buyer Exp.+ Profit for the period
(sales)
The assessment of working capital requirement of business unit has been engaging the
attention of the Govt., RBI and a series of committees were set up to suggest appropriate
modalities of financing working capital as under.
TANDON COMMITTEE RECOMMENDATIONS
Realising the absence of a proper control system in the flow of bank credit for working
capital, RBI constituted a working group “Tandon Committee’ in July 1974 under the
chairmanship of Shri P.L. Tandon. The main task of the group was:
1. To suggest guidelines to commercial banks to follow up and supervise credit from the
view of ensuring proper end use of the funds and keeping a watch on the safety of the
advances.
2. To suggest as to what constitutes the working capital requirements of industry and to
suggest the sources for financing the minimum working capital requirements.
3. To suggest the maximum level of bank finance and the method to compute the same.
4. To make recommendations as to whether the existing pattern of financing working
capital requirements by cash credit or overdraft etc. requires to be modified. If so, to
suggest suitable modifications.
The group submitted its final report during December 1975. The recommendations of this
Committee are summarised below:
(i) Norms for Inventory and Receivables
Page 75
CREDIT APPRAISAL
With a view to curbing speculative and hoarding tendencies, the Committee fixed norms (in
terms of the weeks/month consumption) in respect inventory and receivables which
industrial units may hold. The norms were fixed for 15 major industries and indicate the
maximum permissible limits for inventory holding. Deviations from norms not allowed for
meeting unforeseen situations.
(ii) Approach to Lending.

The three methods of lending as suggested by the committee are:
➢ First Method: 75% of Working Capital Gap (Total Current Assets – Other
Current liabilities)
➢ Second Method: 75% Total Current Assets – Other
Current liabilities
➢ Third Method: 75% [(Total Current Assets – Core Current Assets) – Other
Current liabilities)
Third method of lending was not accepted by RBI and hence rejected.
(iii) Style of Credit.

Tandon Committee suggested that instead of making available entire limit by way of cash
credit it may be bifurcated into demand loan and cash credit component (modified by Chore
Committee).
(iv) Quarterly Follow-up and Supervision

Tandon Committee suggested quarterly forms under the information system made applicable
to borrowers with working capital credit of Rs. 1 crore and over from the banking system.
These forms aim at ensuring proper end-use of credit.
CHORE COMMITTEE RECOMMENDATIONS
In April 1979, a working group under the chairmanship of Sh K.B.Chore was constituted to
review the system of cash credit. The committee submitted the report in Dec 1980. The
Page 76
CREDIT APPRAISAL
lending discipline, as enunciated by Tandon Committee, has been streamlined by certain

recommendations made by Chore Committee. The gist of these recommendations is as
follows:
(a) Annual Review

All working capital credit limits of Rs. 50 lacs and above from the banking system should be
reviewed at least once a year. These reviews are intended to ensure that the limits are need-
based and continue to be viable propositions.
(b) Information System

The scope of the quarterly information system originally envisaged by the study group to
frame guidelines for follow-up of bank credit has been enlarged bringing into its ambit all
borrowers having credit limits of Rs. 50 lacs and over from the banking system.
Presently this limit of Rs. 50 lac has been raised to Rs. 1 Crore.
(c) Withdrawal of bifurcation of cash credit

The recommendation of the Tandon Study Group to bifurcate cash credit accounts into
demand loan and cash credit components has been withdrawn.
(d) Separate limit for peak level and non-peak level

A recommendation that will induce a greater degree of credit planning pertains to the
separate 'Peak-level' and `non-peak level' credit limits, wherever considered feasible. The
period during which these limits will be utilised will now be indicated in the bank's advice
conveying sanction of credit. This recommendation is based on the pronounced seasonal
trends in agriculture-based industries, (such as tea. coffee, sugar, jute, vegetable oils, etc.),
and in the case of some consumer industries such as those manufacturing fans, refrigerators
etc. One of the major determinants of borrower's peak-level and non-peak level credit limits
will be their availment during the corresponding period in the past. Borrower in whose cases
there are no pronounced seasonal trends, may be sanctioned only one limit as peak-level and
non-peak level concepts will not be relevant in such cases.
Page 77
CREDIT APPRAISAL
(e) Determination of Quarterly Operative limits

Before the commencement of each quarter, the borrowers will now be required to indicate
limits sanctioned for their requirements of funds during the ensuing quarter. This will be
termed as the operative limit for the relevant quarter. The operative limit indicated by the
borrower would virtually set the level of drawing in that quarter subject to tolerances of 10%
either way. Hence forth, excess-utilisation or under- utilisation of the operative limit, beyond
the tolerance level referred to above would be considered as an irregularity in the account.
This will be treated as an indication of defective credit planning by the borrower.
Dialogue with the borrower will be initiated to set right the position in regard to defective
credit planning and to ensure that such instances are avoided in future.
(f) Penalty for delayed or non submission of returns

Non-submission of returns, within the prescribed time limit, will henceforth entail penal of
2% per annum on the total outstanding for the period of default in the submission of returns.
Simultaneously, a notice would be issued to the borrower stating that if the default persists it
would be open to the bank to freeze the account without further notice to the borrower. lf the
default persists despite imposition of penal interest and the bank is satisfied that deterrent
action is warranted, the operations in the account may be frozen on the basis of the notice
issued to the borrower.
(g) Adhoc or temporary limits

The working group has conceded that in exceptional cases, ad-hoc or temporary limits could
be sanctioned to borrowers through demand loan or non-operatable cash credit accounts. On
those limits, banks are required to charge additional 1% interest per annum over the normal
rate. However, in certain cases like natural calamities it would be the discretion of the bank
to charge interest of 1% per annum.
(h) Switching over to Second Method of lending
Page 78
CREDIT APPRAISAL
A major recommendation of the working group relates to switching over the borrowers from
the first to the second method of lending. Recognising that in some cases this may not be
possible immediately, Reserve Bank has stipulated that in such cases, the excess borrowings
are to be segregated and treated as WCTL (Working Capital Term Loan), which should be
made repayable in half-yearly instalments within a definite period but not exceeding five
years in any case.
(i) Encouragement of Bills system

To encourage bills systems of financing purchase of raw material inventory, the Working
Group has recommended that banks should extend at least 50% of the cash credit limit
against raw materials to manufacturing units, whether in the public or private sector, by
way of drawee bills only.
Present Status:
The concept of MPBF was the cornerstone of financing which had emerged as a result of
recommendation of Tandon and Chore. However RBI has now abolished the guidelines for
MPBF and advised the banks to draw the guidelines for credit dispensation. Our bank is still
following MPBF system. However the relaxations on case to cases are being allowed.
NAYAK COMMITTEE RECOMMENDATIONS
To give a comprehensive and straight line method for the assessment of working capital
requirement of the borrowers, RBI constituted a working group under the chairmanship of
Sh P.R.Nayak. The study group gave its recommendations in March 1993. In April, 1993,
RBI implemented the recommendations of Nayak Committee for assessing the credit
requirements of village industries, tiny industries and other SSI units . Initially the
recommendations were for SSI units only but now other units have also been covered.
Presently units covered under these guidelines are those having aggregate fund-based
working capital credit limits less than Rs.200 lacs for other than SSI and Rs. 500 lacs for SSI
from the banking system.
Page 79
CREDIT APPRAISAL
It has been advised not to apply the norms for inventory and receivables as also the Methods
of Lending. Instead such units be provided working capital limits computed on the basis of a
minimum of 20% of their Projected Annual Turn-Over (PATO) for new as well as existing
units. Their working capital requirement be assessed at a minimum of 25% of their Projected
Annual Turn-Over (PATO) assessed on realistic basis for new as well as existing units. Out
of this, at least 4/5th(20% of their PATO) be provided by the bank and the borrower should
contribute 1/5th of this estimated working capital requirement (5% of PATO) as margin
money of working capital.
- In case the margin with the party is more than 5% , PBF may be adjusted
accordingly.
- The 20% limit is the minimum. As a temporary relief measure for SME Units, RBI
has allowed banks to finance upto 25% under stimulus package. The same shall be
reviewed after 30.6.09. However if the working capital cycle is longer than 3 months,
higher limit may be fixed. If the working capital cycle is less than 3 months, the limit
may be fixed @ 20 % of turnover but actual withdrawal should be allowed only on
the basis of actual D.P. However lower limit can be sanctioned if requested in writing
by the borrower.
LENDING DISCIPLINE - QUARTERLY MONITORING SYSTEM (QMS)

Consequent to operational freedom granted by RBI in regard to submission of statements
under QIS/Monthly Cash Budget System prescribed under CMA, Bank reviewed the same
and submission of QIS was replaced with Quarterly Monitoring System (QMS)
The QMS discipline is to be enforced on all borrowers enjoying working capital limits of
Rs.1 crore and over from the banking system, irrespective of whether they are exporters or
otherwise
In case the limits have been sanctioned on the basis of Naik Committtee, QMS forms and
CMA data need not be submitted.
Page 80
CREDIT APPRAISAL
The forms for QMS and time period for submission are as under.
Form- 1 To be submitted within 6 weeks from the close of quarter to which it relates
Form-11 To be submitted within 2 months from the close of Half Year to which it
relates.
QMS form I gives us the quarterly data of production and sales and quarterly levels of
current assets and current liabilities.
QMS form II gives us half yearly profitability statement and fund flow statements.
By comparing with the projections as given in CMA, we can see whether the performance is
going on as projected.
QIS I:
QIS I which was earlier discontinued has been reintroduced and is to be submitted in
addition to QMS I and QMS II.
- For all borrowed accounts availing fund based working capital credit limits of Rs.5
crore & above from our bank, Quarterly Information System (QIS) Form-I may be
obtained for fixing up of quarterly operative limits in addition to the QMS Forms.
The QIS Form-I is to be submitted in the week preceding the commencement of the
quarter to which it relates.
- Non adherence to the operative limits will attract penal interest.
COMMITMENT CHARGES
To discourage the borrowers from non-availment of credit already provided to them by

banking institutions and to indirectly help the banks in their Asset Management, RBI has
permitted bank to charge penalty on unavailed portion of sanctioned limit known as a
commitment charge. It is applicable to the working capital limits of Rs.5 crore or above and
charged @ 1% per annum with a tolerance limit of 15% based upon the limit sanctioned.
Page 81
CREDIT APPRAISAL
The unutilized part of the limit is found out by calculating the average utilization during the
quarter. While calculating the average utilization, overdrawn portion or excess portion is not
taken into consideration. If the average utilization is less than 85% than commitment
charges is levied on the entire unavailed position.
Commitment charge is not applicable in case of export unit and sick unit.
PENAL INTEREST
In order to instil a sense of credit discipline among the borrowers, RBI has permitted banks
to levy penal intt. over and above the sanctioned rate of interest in case of non compliance of
various terms and conditions
The broad areas of non compliance where bank charges penal interest are:
 Default in repayment of loans
 Irregularity in cash credit account
 Non submission of stock statements and other financial data
 Default in adhering to borrowing covenants
 Non payment of bills
 Excess borrowings arising out of excess current assets
 Non submission of information under Quarterly Monitoring System
EXEMPTION FROM PENAL INTEREST

○ All advances up to 25000/-
○ Sick unit under rehabilitation
○ Sick unit remained closed
○ Advance against deposits/LIC policy/Govt. securities/Gold & Jewellery
where the drawings are within available value of security
○ Account transferred to Protested category
Page 82
CREDIT APPRAISAL
RATE OF PENAL INTEREST

• 2% above the sanctioned rate where irregularity and default and non-compliance of
terms and conditions as given earlier.
• 2% above the sanctioned rate where adhoc/temporary limit are sanctioned to
borrower.
• 3% above the sanctioned rate in case of non compliance of terms and conditions in
adhoc/temporary limit
AMOUNT ON WHICH PENAL INTEREST TO BE CHARGED

• Amount of default in – instalment /excess drawals or borrowings or amount of
irregularities in account/overdue bill not debited to account.
• Total amount of outstanding – for non-submission of stock statement and other

financial data/default adhering to borrowing covenants/non-submission of
information under QMS.
APPRAISAL TECHNIQUES FOR RETAIL LOANS
I. EDUCATION LOANS
Till some year’s back higher education and quality education was not affordable to some
illustrious students because of the financial constraints. There was no any alternative but to
jump in the job market prematurely. And this led to untimely end of budding talents and their
forceful transformation into to the mediocrity. Scholarships were there, but those were so
less in numbers that only luckier few could avail them. But now the scene has changed
Page 83
CREDIT APPRAISAL
drastically. The boom in the banking sector has led to release of large amount of funds for
education loans
Student loans in India (popularly known as Education loans) have become a popular
method of funding higher education in India with the cost of educational degrees going
higher. The spread of self-financing institutions(which has less to no funding from the
government) for higher education in fields of engineering, medical and management which
has higher fees than their government aided counterparts have encouraged the trend in India.
Most large public sector and private sector banks offer educational loans.
Under section 80(e) of the Indian Income tax act, a person can exempt the amount paid
against the interest of the education loan - either for self or for his/her spouse or children -
for eight years from the year (s)he starts to repay the loan or for the duration the loan is in
effect, whichever is lesser.
Education loan is becoming popular day by day because of the rising fee structure of higher
education. It came into existence in 1995 started first by SBI bank and after that many banks
started offering study loan.
The education loan provided by Punjab National bank is known as Vidyalakshyapurti

scheme. The details regarding its eligibility, processing, documentation etc. are given as
follows:-
Concept VIDYALAKSHYAPURTI Scheme is the main scheme and its

variant PNB Sarvotam Shiksha scheme stands merged with the main
scheme with effect from 20.12.2008
Courses Studies in India
eligible School level including. +2, Graduation, Post graduation, Professional
courses, Computer courses and Evening courses, other courses leading
to diploma /degree approved by UGC, Govt, AICTE, AIBMS, ICMR
etc. and Advance diploma in Banking Tech. It includes professional &
commercial & pilot training courses in India and abroad. For study in
India. Institutes approved by DGCA are included.
Studies Abroad
Graduation, PG and Courses offered by CIMA London , CPA in USA
Eligibility • Indian National
• Secured Admission
Page 84
CREDIT APPRAISAL
Secured pass marks in qualifying exam. Branches need not go into

technicalities of admission process (selection through management
quota etc.) and may consider loan based on admission advice.
( RBD Cir. No. 60/08 dt. 20.12.2008)
More than one In case of more than one loan in a family, the family as a unit is to be
loan in a family taken into account for considering the loan and security taken in
relation to total quantum of loan subject to margin and repaying
capacity of the parents.
Top up Loans Top up loans may be sanctioned to students for pursuing further
studies within overall eligibility limits with appropriate
reschedulement of existing loans and required permission by the CH
Age of student There is no restriction with regard to age of student for being eligible
for the loan.
Income No Income criteria are prescribed for the parents. However amount of
Criteria loan be decided by judging Income of the parents.
Amount of loan Rs. 10.00 lac in India and 20.00 lac for abroad. CH can exercise
higher powers.
Priority Sector Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.
Capital Risk Weight as per BASEL-I 100%
Requirement Risk Weight as per BASEL-II 75%
Margin ➢ NIL Up to Rs. 4.00 lac

➢ 5% Above Rs. 4.00 lac in India
➢ 15% Above Rs. 4.00 lac abroad
(Scholarship/assistance may be included in the margin)
Security NIL Up to Rs. 4.00 lac
3rd party guarantee for loans above 4.00 lac upto Rs. 7.5 lac
(Exemption from taking guarantee for loan up to 7.50 lakh for
students of IIT, IIM, XLRI etc.
EM of IP or other Coll. Security for loans above 7.50 lac (should be
interpreted as loan amount of Rs. 7.51 lac and above in terms
Hypothecation of assets if created out of loan amount.
Co-obligation of students’ parents as well as assignment of future
income of student in loan above Rs. 7.5 lac. For married persons, co-
obligator can be spouse or parents or parents-in-law. Grand parents
can also become co-obligants.
Security for ➢ Lien on Terminal dues
staff members ➢ Extension of EM of IP
➢ Fresh Mortgage if there is no HL
➢ Co-obligation of employee
Penal Interest Up to 25000/- ----NIL , Above 25000/- @ 2% on OVERDUE
AMOUNT
Upfront fee ➢ NIL
Page 85
CREDIT APPRAISAL
➢ 0.50% (Maximum 5000/-) for studies abroad which is eligible for

refund on availment of loan.
Documentation ➢ Upto 4.00 lac - Rs. 270/- plus service tax
Charges ➢ Above 4.00 lac Rs. 450/- plus service tax
Repayment 5 to 7 years with moratorium period equal to Course period + 1 year
or 6 months after getting job whichever is earlier. BM is empowered
to permit extension in moratorium period up to 2 years as against
present provision of max. 1 year in deserving cases under reporting to
circle head.
Calculation of Simple interest is to be charged during moratorium period and kept in
interest a separate account. The accrued interest during repayment holiday will
be added to Principal for fixing of EMI.
Interest 1% interest concession is allowed if it is serviced during holiday
concession period. The concession will be given at start of repayment and EMI
will be fixed accordingly.
Rebate of 0.5% is allowed to students of IITs, IIMs etc.
Page 86
CREDIT APPRAISAL
Constitutes of Tuition fees, Hostel charges, Exam fees, Library/Lab charges, Books,
loan Equipment, Instruments, Uniform, Building fund, Refundable deposit,
Travel expenses & Computers. (Advances for Computers are allowed in
Computer/Management courses only.)
Fees re- Within 6 months. Circle Head can allow beyond a period of 6 months
imbursement also on merits.(RBD Cir. No. 12/10 Dt. 16/02/2010)
Documents Documents will be executed both by student and the parent/guardian.
1. Letter of admission and proof of last qualifying exam.

2. Loan application
3. Agreement on PNB 1116 if student is minor.
4. Agreement on PNB 1117 if student is major.
5. Letter of guarantee if loan is above Rs. 4.00 lac.
6. EM of IP if loan amount is above Rs. 7.5 lac
Post sanction Follow up with the college/university for getting progress report at regular
Follow up intervals.
Life Insurance In terms of guidelines contained in RBD-A cir no. 16/08 dt. 26.3.08,
by Kotak Insurance policy can be obtained to meet the exigencies in case of death
Mahindra of student borrower between age group of 18-33 years. The coverage is
between 20000-15 lac. Single premium will be paid. It will vary
according to age and total insurance Tenor. The scheme is valid for one
year.
Relaxations for It has been decided to permit the following relaxations to the students
students of securing admission in IITs/IIMs/MDI Gurgaon/XLRI Jamshedpur and
IIT,IIM, MDI, ISB Hyderabad:
XLRI, ISB
➢ Exemption from making parent/guardian as co-borrower.
➢ Exemption from taking guarantee for loans up to 7.50 l
Other ➢ CR of the borrower is not required. Brief CR of the guarantor to be
provisions prepared.
➢ “No due Certificate” is not to be insisted upon. Application will be
rejected by next higher authority.
➢ 2nd time loan can be considered by the CH within limits.
➢ Capability Certificated may be issued for studies abroad.
➢ Education loan to the institutions previously under Sarvotam Shiksha
Scheme can be sanctioned by the branch (other than place of
residence of parents) convenient to the borrower depending upon
genuineness, accessibility and aspect of recovery.
➢ On-line applications are being accepted for grant of education loan.
Loan applications are to be disposed of within 15 days under
branch/hub sanction and 21 days under CH and above.
➢ CH has full powers to relax eligibility, margin and security norms.
➢ Parents, grandparents, spouse, parents-in-law can be co-obligants.
➢ Passport and Visa is required for study abroad.
Page 87
CREDIT APPRAISAL
Disposal of It has been decided to curtail the period of disposal of education loan
loan applications to maximum 1 week except cases of CH and above level
applications where the outer limit of disposal will be 2 weeks from the date of receipt
of complete application.
I. VEHICLE LOANS
Today, vehicles can be financed using a number of options such as loans, lease, or hire
purchase agreement. Obtaining a vehicle loan is one of the more straightforward ways of
financing a two or four wheeler. In this manner, the vehicle purchased is actually possessed
by the bank or lending institution. This means the car or motorbike is hypothecated.
Therefore, though the consumer owns the vehicle, the bank or the lending institution is
actually using it as a security against the loan that the consumer has obtained.
Vehicle loan provided by Punjab National Bank are under two categories know as PNB
SARTHI and CAR Loan & details about its processing, eligibility, margin etc are discussed
below:-
PNB SARATHI
Eligibility Individuals with Income proof

➢
Students above 18 years with parents as co-borrowers
➢
Business concerns
➢
Individuals without income proof but residing at the given address
➢
for the last at least 3 years.
➢ Individuals with good repayment track without default.
Purpose & Purchase of Scooter/Motor Cycle/Moped
Extent Maximum Rupees. 100000/-.
Margin ➢ 5% where salary is disbursed through branch or check-off facility
is available.
➢ 25% for students where parents are co-borrowers.
➢ 30% for business or where there is no income proof.
➢ 10% for others.
Income criteria ➢ 10000/- pm. Is the minimum criteria.
➢ Income of parents be considered in case of students.
Page 88
CREDIT APPRAISAL
➢ Income of spouse can be added.

Switch over to On flat fee of 2%
new scheme
Guarantee ➢ Generally it is not required. In cases where there is no Income
proof, Guarantee of some family member or 3 rd. party
➢ In cases where income of spouse is to be added, Guarantee of
spouse can be taken.
Insurance Comprehensive Insurance with bank clause and policy to remain with
the bank.
Security ➢ PNB 551 is required for the Ist time. In case account is regular,
Inspection PNB 551 is not required thereafter.
➢ In case the account is irregular, Qtrly. Inspection is must.
Upfront fee Rs 200/- + Service Tax For students – Nil
Documentation Rs. 270/- plus service tax
Charges
Other ➢ Driving License is required.
Requirements ➢ Statement of account for the last 3 years is required.
➢ Income Tax Proof
➢ Salary certificate
➢ Income of spouse can be considered if he/she is made guarantor.
CAR LOAN
Conveyance Loan (Public) for Car
Eligibility Individual & Business concerns, Professionals & Agriculturists with

6M transaction records.
Purpose & Car, Van & Jeep, Multi New or Old (not older than 3 years – CH
Extent Utility Vehicles/Sports powers)
Utility Vecles
Individuals ➢ 25 times of net monthly salary or Rs. 25
lac whichever is lower for one or more
vehicles.
➢ CH may relax the criteria within
powers keeping in view the repayment
capacity.
➢ Income of spouse can be considered
provided he/she stands as additional
guarantor
Business Corporate and No Ceiling. One or more vehicle can be
non-corporate purchased. Earning and repaying capacity
will be considered.
Agriculturists --do--
Page 89
CREDIT APPRAISAL
Margin General 20% - Cost of Insurance and one-

time road tax can be considered as
margin.
Govt./PSU employees 15% (Repayment in 84 EMIs)
If net income is more than 6 lac Margin can be reduced to 15% by
Sanctioning Authority.
Old Vehicles 30%
CH may reduce up to 10% in deserving cases.
Repayment ➢ Maximum 7 years without any Moratorium period
➢ Old Vehicles – 5 years
➢ Agriculturists – 14 H/years as per crop pattern
➢ CH and above empowered to relax repayment by 12M
➢ Maximum age for EMI 65 years relaxable up to 70 years.
➢ Carry home pay should not be more than 50% of gross salary
➢ Advance cheques equal to no. of installments be obtained.
Rate of Interest The rate is on fixed option with reset clause of 1 year. Rate of interest
is linked with tenure of loan. Presently 0.5% extra interest is charged
if repayment period is 3 years and above.
Upfront fee 1% of loan subject to maximum 6000/- exclusive of service tax.
Documentation Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac + ST
charges Rs. 450/- (Tie up arrangement Rs.1700/- ) Above Rs. 2.00 lac + ST
Security ➢ Hypothecation of the vehicle

➢ RC in joint name of borrower and bank
➢ Bill of the vehicle will also be in the joint name.
Guarantee Spouse if employed or Suitable 3rd party guarantee or Collateral
Security in shape of IP/liquid security equal to 100% of loan amount.
CH and above can waive the guarantee/collateral security.
Insurance Comprehensive Insurance with bank clause and policy to remain with
the bank.
Security ➢ PNB 551 is required for the 1st. time. In case account is regular,
Inspection PNB 551 is not required thereafter.
➢ In case the account is irregular, Qtrly. Inspection is must.
Other ➢ 15% depreciation on St. line method is to be applied in case of Old
Provisions Car
➢ Driving License is not at all required.
➢ Statement of account for the last 6 M. is required.
➢ Car loan finance to business concerns for personal use of
executives shall be outside the purview of corporate banking and
may be sanctioned by officials under vested powers even in case
where existing facilities have been sanctioned by higher
authorities in terms of RBD cir. No. 51 dt. 15/09/09.
Page 90
CREDIT APPRAISAL
I. 5.8.3 HOUSING LOANS

II. Housing loans have emerged as an attractive avenue for credit deployment for
banks in the recent past. Industry level statistics reveal that NPAs in this segment
is relatively low. Housing loans are fully secured as they are backed by mortgages
of residential properties. Small housing loans up to Rs 10 lakhs can be classified
as priority sector credit and hence help in achieving/ maintaining the mandated
priority sector lending targets. Risk weightage for housing loans is only 50 % ,
enabling expansion of the credit portfolio with lesser capital requirement. The
prevailing lower interest rates, which have resulted in greater affordability and the
tax concessions offered by the government have made this one of the fastest
growing financial products. Further since the housing loan portfolio typically
comprises a large pool of small and medium sized loans, risk is distributed over a
large number of accounts, which is ideal from Risk Management point of view.
Hence growth of quality assets under Housing Finance is one of the major areas of
focus for the bank.
PNB-(Punjab National Bank) Home Loan offers the most consumer friendly
home loans and housing finance schemes at attractive rates. PNB Housing Loans, with an
aim to make purchase and construction of homes a comfortable task, provides fixed as well
as floating home loans at different rate of interest for different tenures. PNB Housing
Finance covers 80% of the cost of your home or renovation / repairing of your home loan up
to Rs. 10 Lacs for buying land and up to Rs. 2 Lacs for furnishing can be availed from PNB
Home Loan.
The details of housing loan product of Punjab National Bank regarding its
purpose, eligibility criteria, assessment, processing, documentation, cut back, margin,
pre-sanction follow ups, etc. are as foll
1. HOUSING FINANCE (PUBLIC)
Eligibility Individual & Joint Owners
Purpose & Purchase of Plot Rs.20 lac. However, RM & above may
Extent consider Loan upto 50 lac.
Construction of House Need based
Page 91
CREDIT APPRAISAL
Semi -built House/flat Small/Medium branch Rs. 10 lac

from Pvt Builders Large branch Rs. 20 lac
ELB/VLBs Rs. 40 lac
CH (AGM) Rs. 100 lac
CH (DGM) Rs 100 lac
GM Rs.150 lac
Repair & Renovation Rs. 20 lac
Cost of furnishing Max. 10% of the loan upto maximum of Rs.
2.00 lac
Pari pasu Charge CH powers up to 20 lac to Govt. Employees
Freehold & ➢ The loan can be granted both for freehold and for leasehold
Lease hold property.
➢ In case of Leasehold, loan can be granted on the basis of P/A from
original allottee where DDA/PUDA/HUDA permit conversion of
leasehold into freehold property.
➢ Otherwise advance is not permitted against plots purchased on
Power of Attorney basis.
Capital Loan limit up to 30 lac Risk Weight is 50%
Requirement Loan limit above 30 lac Risk Weight is 75%
LTV Ratio more than 75% Risk Weight is 100%
Margin Land/Plot 40%
Construction/repair/add 25%
ition
Rate of Rate of Interest as per LA Circulars issued from time to time.
Interest ➢ 0.50 % extra will be charged on H/L for 3rd House.
➢ The interest can be fixed or floating
➢ Option can be changed from fixed to floating and vice versa with
flat charges of 2% fee on Balance outstanding
➢ Fixed Interest rate be reviewed/reset after a block of 5 years in
respect of loans disbursed on or after 1.8.2006.
Concessional Bank has decided to extend concessions to

Rate of Defense personnel who are raising Housing
Interest for Loans under bank’s regular Housing Loan
Defense scheme for public as under:
Employees
➢ 25 bps relaxation in interest rates
➢ 50 bps relaxation in processing fee
These relaxations are to be made applicable
in all new cases where defense personnel
avail housing loan either in single name or
along with spouse.
(RBD Cir. No. 11/2010 dt. 16.2.2010)
Page 92
CREDIT APPRAISAL
Repayment ➢ Maximum 25 years including

Moratorium period of 18 months
➢ Installment can be fixed up to maximum
age of 65 years. Hub Incharge of Scale-
IV and above besides Circle Head can
relax the age up to 70 years,
➢ Repayment of loan for
repair/renovation/addition/alteration
restricted to 10 years including
moratorium period of 6M.
➢ All deductions should not exceed 50%
of Gross monthly income. However
where gross monthly salary is above
50000/-, the deduction can be up to 60%
and if gross monthly salary is above
100000/-, the deduction can be up to
70% with the permission of CH. The
income of earning spouse and children
can be taken into account.
➢ The Income of spouse and earning
children can be taken into account
provided they are made co-borrowers.
➢ Father/mother can also be made co-
borrowers in cases where property is in
the single name of his/her son and also
clubbing of their income is permitted
for determining eligibility criteria.
➢ Minimum 24 advance cheques should
be obtained. As and when, 6 cheques
remain, fresh lot be obtained. Out of 24,
23 cheques should be of installments
and 1 cheque should be of the amount
equal to the balance amount.
Graduated PNB offers benefit of graduated EMI. This
EMI means that the customer has the option of
choosing EMI that can increase or decrease
during repayment period rather than being
given a fixed EMI over repayment tenor.
Upfront fee 0.90 % of loan amount + service tax &

education cess (10.30%) on loans above
300 crore.
Processing fees @ 0.50% of loan amount
(max. 20000) +service tax for loans up to
300 crore.
Documentation Rs.1350 + service tax
Page 93
CREDIT APPRAISAL
charges
Security ➢ Equitable/Registered Mortgage of Immovable Property

➢ Tripartite agreement be executed amongst Housing Board/Dev
Authority/Coop Society/Builder, the borrower and the bank where
mortgage cannot be created immediately. In such cases, 3rd party
guarantee is also to be obtained.
➢ EM of other IP or pledge of NSC etc. up to 125% of loan amount if
property is being purchased from 1st P/A holder and where there is
delay in execution of Tripartite agreement or where the mortgage
of property is not possible being an ancestral property (without title
deeds) or Lal Dora Land.
➢ Verification of security is required once in 2 years. In case of
NPAs accounts, security is to be verified on Half yearly basis.
Guarantee In general, no guarantee is to be asked for. But while preparing
RBL score sheet, if score is less than 50%, then 3rd party guarantee
can be obtained to raise score of the applicant.
Insurance In case of building at Re-construction cost.
Priority Sector Repair & Renovation Rs.1.00 lac (Rural & Semi/Urban)
inclusion
Rs.2.00 lac (Urban)
Others Rs. 20.00 lac
Other features ➢ Loan can be sanctioned by the branch/hub near to the present place
of work/posting/residence of the borrower. However, if the
property is situated at other place, services of branch/hub located at
that center may be availed for verification of Security and
NEC/Valuation etc.
➢ Loan can be granted even if property is in the name of wife/parents
provided that the owner is made co-borrower.
➢ Loan can be granted for 2nd house in the same city.
➢ Loan can be granted for purchase of house for rental purpose.
➢ For take over, permission of higher authority is not required
Important Loan cannot be granted
conditions
➢ For construction in Un-authorized colonies
➢ If property is to be used for commercial purpose
➢ Without approved Map
( In Compliance of Delhi High Court Orders)
➢ Pre-payment charges of 2% be recovered on account being

taken over by another bank. In case, the loan is pre-paid out of
Page 94
CREDIT APPRAISAL
own sources or the loan is taken over by another bank with in

30 days from date of circular by which either the interest is
raised or any important term or condition is changed, there will
be no pre-payment charges.
➢ Flat pre-payment charges of 2% be recovered from borrowers
who pre-pay without construction on the plot before 5 years.
➢ Powers of concessions in rate of interest/other charges stand
withdrawn vide RBD cir no. 52/07 dt. 13.11.07.
In case, the construction of house is not completed within 3 years
or in case the plot is sold, penal interest @2% over and above the
applicable rate be charged.
Expression of It is a letter issued by the bank/branch
Interest wherein the lender expresses intention to
make advance to the intended borrower on
the basis of eligibility criteria subject to
the fulfillment of terms and conditions.
Grih Raksha It is Mortgage Reducing Term Assurance
Kavach Policy issued in Tie up arrangement with
TATA-AIG. There is one-time premium
of 2.5% (approx) and that amount can also
be financed. The coverage of the scheme
is 1-20 years. The sum assured is between
Rs.10000 to Rs. 1.00 crore. In case of
death of the borrower, receipt from
insurance company can be utilized towards
adjustment of loan amount as per
amortization table. Prior permission of
TATA-AIG is required if amount is over
Rs. 80.00 lac.
Iffco Tokyo The coverage for accidental death and
general permanent total disability (due to accident)
insurance co. along with mandatory insurance “Fire
Policy – including earthquake” is offered
in tie up arrangement with Iffco Tokyo
General Insurance Co. Ltd. To all existing
as well as new borrowers.
Earnest Money ➢ To meet the requirement of earnest
Deposit money to apply for plot/flat/house
Scheme from State Housing Boards and Urban
Development authorities.
➢ These authorities undertake to refund
or issue allotment letter to the bank
subject to eligibility of the bank for
proposed loan and future requirement
of Housing Loan.
Page 95
CREDIT APPRAISAL
➢ Extent of loan is 90% of EMD or max.

Rs 2.00 lac in the shape of Demand
Loan
➢ ROI is BPLR – 1.75%
➢ Repayment through Refund
order/Housing Loan/Bullet Payment.
➢ Guarantee clause deleted
OD Facility to OD facility can be allowed to existing
existing H/L Housing Loan borrowers there is no IR
borrowers irregularity. Other features of the scheme
are as under:
➢ Minimum 50000/- and Maximum

Rs. 5.00 lac.
➢ Additional limit and present o/s
should not exceed 75% of current
market price of the house so as to
maintain margin of 25%.
➢ Upfront fees is NIL and
documentation charges are Rs.
500/-.
➢ Take home salary should not be
less than 40% of gross salary.
➢ Loaning powers are SB-Nil, MB-
Rs.4.00 lac, LB, ELB & VLB
➢ Rs. 5.00 lac.
➢ ROI is equal to BPLR
➢ After HL is repaid, OD can be
continued/ renewed provided the
sanctioning authority is satisfied
about repaying capacity of the
borrower and Value of security.
➢ OD facility for personal use
should not be sanctioned to the
borrowers, who have availed
loan for plot , construction on
which is yet to be completed in
terms of RBD cir. no. 43
dt.21/08/09
On review, it has been decided to do away
with the condition of minimum 2 year of
repayment track record of the borrower for
considering OD facility up to 5 lac.
However this is subject to compliance of
all other terms and conditions such as
KYC norms, CIBIL database, takeover
Page 96
CREDIT APPRAISAL
guidelines, security norms, maintenance of

margin etc.
This facility is outside the purview of

“Hub and Spoke“ model in the accounts of
existing HL borrowers.
(RBD Cir. No. 64 dt. 19.12.2009)
PNB Flexible This is an attractive variant of Housing
Housing Loan Loan Scheme offered by the PNB for its
Scheme customers. Under this scheme, OD facility
is made available to the HL borrower. He
can deposit his savings and withdraw the
same as per his requirement. The features
of the scheme are as under:
Eligibil ➢ Age of the applicant must be

ity less than 50.
➢ Existing HL borrowers can
also apply provided their
loan account is regular and
no IR irregularity persists.
Purpos All purposes as per original
e scheme except Purchase of
Land / Plot.
Extent Term Loan 80%
Overdraft 20%
➢ After lapse of 3 years,

enhancement in OD will
be allowed equal to
reduction in Term Loan
and thereafter on yearly
basis.
➢ After lapse of 5 years,
20% increase in original
limit is allowed in the
shape of TL/OD for
personal needs.
➢ Market Value of Property
should be sufficient to
cover the margin of 25%
➢ After attaining age of 55
years, OD facility will be
reduced on monthly basis
so that whole limit and
Page 97
CREDIT APPRAISAL
T/L are adjusted by the

end of 65 years.
➢ Maximum OD limit
should not exceed 50%
of Total limit.
➢ HL can be sanctioned by
the branch/hub situated
near the
workplace/posting/reside
nce.
➢ Security verification can
be done by nearby
branch.
➢ Rate of Interest as given
above in the table in
Housing Loan scheme
(general)
For Overdraft portion, R/I is
equal to BPLR
IV. 5.8.4 Personal Loan For Pensioner & Public
Two types of personal loans are being offered by PNB. Personal loan for pensioner is
special category of retail lending scheme being offered by Punjab National Bank to
pensioner. The main intension of this loan is to meet each and every personal needs
including medical expense of senior citizen. Details regarding the same are mentioned
below.
Eligibility Pensioners drawing pension from the branch, Family Pensioners,

DPDO Pensioners, Ex-employees
Purpose & Personal needs
Extent
Up to 75 years of age: 1.50 lac (Minimum Rs. 25000/-)
Above 75 years of age: 0.70 lac (Minimum Rs. 25000/-)
Limit Equivalent to 18 months net pension or Rs. 150000 (for borrowers up
calculation to 75 years’ age) and 12 months net pension or Rs 70000 (for
borrowers above 75 years’ age) whichever is lower. For defense
retirees, the loan equivalent to 20 M net Pension can be granted. Take
home Pension should not be less than 50% of monthly pension
Page 98
CREDIT APPRAISAL
Nature DL or TL or OD on monthly reducing DP

Margin NIL
Guarantee Personal guarantee of spouse eligible for family pension or any
other family member or 3rd party guarantee.
Upfront fee NIL
Documentation Rs. 270/- plus service tax
charges
Repayment 60 EMIs . 24 EMIs in case age is more than 75 years which can be
extended up to 48 months by the sanctioning authority.
Miscellaneous ➢ PPO be kept with the loan documents
➢ Affidavit from the pensioner that present disbursing branch will
not be changed without bank’s consent.
➢ The loan can be availed more than once only after adjustment of
earlier loan
PERSONAL LOANS FOR PUBLIC

Eligibility Only PNB Account holders are eligible. Minimum 6 months’ salary
should be routed in the account or 6 months satisfactory transaction
record for non salary saving accounts.
➢ Permanent Defence, CRPF, BSF & ITBP Personnel (Not to

be granted to those who are due to retirement within next 24
M.
➢ Confirmed permanent employees of Central/state
Govt./PSUs/Reputed Co./Schools/Institutions who fulfill any
of the following 2 conditions:
➢ Route of salary through branch
➢ Check-off facility
➢ Professionally qualified practicing doctors viz. MBBS, BDS
and above having customer relationship with PNB at least for
6 months having annual income of Rs. 4.00 lac and above.
Doctors should be tax payers for 3 years and ITRs be kept on
record.
Check off It means that the employer undertakes to deduct monthly installment
Facility from the salary and remit the same towards adjustment of the loan till
its liquidation and also confirms attachment of terminal dues of the
borrower/employee.
Purpose & Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00 lac or 20
Extent times net salary whichever is lower depending upon the repaying
capacity & Rs. 5.00 lac for those salaried persons who have completed
3 years in the present organization and drawing net monthly salary not
Page 99
CREDIT APPRAISAL
less than Rs. 30000/-.

Nature TL or OD
Sanction and All branches can generate leads for processing at Retail Hubs/CCPCs.
Disbursement However disbursement can be made only by branches having
recovery percentage of not less than 90% under Personal Loan
segment as at end of previous half year.
Minimum net Metro Rs. 15000/- p.m.
monthly Urban Rs. 12500/- p.m.
income SU & Rural areas Rs. 10000/- p.m.
Defence personnel and Rs. 7500/- p.m.
Teachers
Margin NIL
Repayment TL – 60 EMIs
OD- Reducing DP spread over 60 M.
Defence Personnel – 36 M.
Amount of EMI should not be more than 50% of net monthly
income.
60 advance cheques (maximum) signed by the borrower along with
letter of deposit be obtained. Obtention of advance cheques is
applicable where check off facility is not available.
Guarantee Suitable 3rd party guarantee. RM/CM may waive
RBL Sheet PNB Score system will be applicable and the applicant will have to
score at least 50% marks to avail loan.
Upfront fee % of loan amount + service tax
NIL for defense personnel.
Docm. Charges Rs. 270/- up to Rs. 2.00 lac. Rs. 450/- Above Rs. 2.00 lac + ST
NIL for defense personnel.

Other ➢ In case of Army personnel, a copy of authority letter be sent to
Requirements Controller of Defense Account (CDAO) Pune so that salary is
remitted till liquidation of loan
➢ Statement of account for at least 6 m. be obtained.
➢ Affidavit that no other loan from other bank is availed be
obtained.
➢ Copy of IT return for previous 3 years be obtained. Form 16 be
taken if loan is granted to employee.
➢ A Registered letter be sent to the employer informing about
details of loan raised by the employee.
RBD Cir. No. ➢ It is clarified that the branches eligible for
27/09 dt. disbursement/maintaining the accounts shall obtain blanket
26.5.2009 permission from CH for disbursement in the next 25 accounts
submitting performance of the branch under the portfolio.
The genuineness of salary certificates be independently got verified
from HR Deptt. Of the employer of applicant.Hubs should ensure
Page 100
CREDIT APPRAISAL
drawing of CIRs from CIBIL Data base for considering request of

Personal Loans.
V. 5.8.5 PNB Baghban scheme for senior citizen
PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based
product for senior citizen titled "PNB Baghban". The product addresses one of the very
important requirements of the society in the fast changing culture of Indian society. The
main objective of this scheme is to address the financial needs of senior citizens owning self
occupied property (house), for leading a decent life. The salient features of the product are
given hereunder:
Eligibility Senior citizens owning Self-occupied property. If property in single

name, there must be will in favors of spouse and it should be
registered. In case of joint property, one of the spouses must be of 60
years and above. The other spouse should be at least 58 years old. If
there is no spouse, loan will be made in favor of single.
Purpose & ➢ To lead a decent life
Extent ➢ Maximum qualifying amount can be Rs. 1.00 crore which will
depend upon realizable value of property after maintaining
margin of 20%. The monthly payment will be made to the
borrower on the basis of reverse mortgage annuity table.
Margin 20% of realizable value of the property to arrive at the qualifying
amount
Income criteria No
Rate of Interest 10.5% with reset clause of 5 years.
Disbursement In the shape of monthly instalments (to be calculated on reverse
of loan annuity basis) during loan tenor of 15-20 years for age group of
individuals between 60-70 years and 10-15 years for age group of over
70 years or till death of last surviving spouse, whichever is earlier.
For example, if Qualifying amount is Rs. 1.00 lac,
On 10 year tenor of loan, monthly installment will be Rs. 475/-, On

15 year tenor, monthly instalment will be Rs. 230/- and on 20 year
Page 101
CREDIT APPRAISAL
tenor, monthly instalment will be Rs. 125/-
The series of monthly instalments would continue after death of first

spouse during life time of surviving spouse.
Tenor of loan Age group of 60-70 years 15-20 years
Age group above 70 years 10 –15 years
Insurance Against fire, Earthquake and other calamities at the cost of the
borrower
Security EM of IP in favor of the bank. Valuation of property to be got done
from approved valuer. Revaluation be also got done once in a span of
5 years.
Upfront fee Amount equal to half month’s loan subject to maximum of Rs.
15000/- + Service Tax @10.30%
Docm. Charges NIL
Repayment The loan becomes due for payment after 6 months from death of both
the spouses. In case the loan is not repaid by legal heirs within 6
months from the death, the bank is within its right to sell the property
for adjustment of the loan in case the consent of the legal heirs is not
received within 6 months from the death of last survivor.
Others ➢ Residual life of property should be at least 20 years.
➢ Purpose of loan should not be speculation or trading.
➢ It should be ensured that the will executed by the borrower is the
last will.
➢ Life certificate is to be obtained once in a year in November.
Age of Residual life of property should be at least 20 years. A certificate from
Property architect at the time of first valuation be obtained. Revaluation of
property will be done once in 5 years.
Ancestral Now it has been decided to accept ancestral property provided bank is
property as satisfied that there are no other legal heirs or original title deed is not
security available. For this, documentary evidence is required. Circle Head will
deal such proposals.
TERM LOANS A lump sum Term loan can be sanctioned up to Rs. 15.00 lac. The
UNDER PNB cases can be considered on selective basis by HO only for medical
BAGHBAN purpose to senior citizens for treatment of self, spouse and dependents.
SCHEME
Amendments Following two amendments have been carried out in IT Act, 1961.
in PNB 1. Reverse Mortgage does not tantamount to transfer; therefore there is
Baghban no Capital Gain Tax. Income tax is levied only at the time of
Scheme alienation of Mortgaged property by mortgagee for recovery of loan.
2. Stream of payment received by Sr. Citizen would not be treated as
Income. Therefore, bank has to obtain the following at the time of
Page 102
CREDIT APPRAISAL
application of loan:
➢ Cost and year of acquisition of Capital asset.
➢ Cost and year of improvement.
➢ PAN No. of all legal heirs.
➢ Changes, if any made in the Registered Will.
Page 103
CREDIT APPRAISAL
Conclusion
Page 104
CREDIT APPRAISAL
Credit appraisal is a process of appraising the credit worthiness of loan applicants. The fund
of depositors i.e. general public are mobilised by means of such advances / investments.
Thus it is extremely important for lender bank to assess the risk associated with credit,
thereby ensure the security for fund deposited by depositors. Therefore my analyses
regarding credit appraisal procedure of Punjab National Bank are as follows:-
✔ In case of retail lending bank strictly follow it’s circular and fulfils all requirement of
necessary documents required for different types of loan so that bank do not suffer
any types of loss.
✔ Bank is very much particular about CIBIL report of borrowers in case of each type of
lending.
✔ Bank lending process in case of retail loan is very much fast after compiling with all
the criteria of bank.
✔ In case of project financing bank follow lengthy norms to check the feasibility of the
project such as:-
I. Firstly personal appraisal of promoter is done by the bank to ensure that
promoters are experienced in the line of business and capable to
implement and run the project efficiently.
II. Secondly detail study about the technical aspect is done to find the
technical soundness of project such as proper scrutiny of financial report
is done, valuation of property by government approved valuer is done
and view regarding each and every area of project is done under technical
analysis.
III. A detail study relating financial viability of project is done by detail
study of cash flow, fund flow statements and by calculating import ratio
which is very much necessary for project appraisal such as DSCR, DER
etc. the main purpose of financial appraisal is insure that project will
ensure sufficient surplus to repay the instalment and interest.
IV. Risk analysis is done by bank to determine the risk associated with the
project. This is mainly done by sensitivity analysis and by PNB credit
rating or scoring. With sensitive analysis feasibility of project is
Page 105
CREDIT APPRAISAL
determined under worsened condition. Credit rating or PNB scoring is

done of various parameters such as personal, management, financial etc ,
thereby determine credit worthiness of customer.
V. It is on basis of credit risk level, a collateral security to be given by
borrower is determined.
This shows that Punjab National Bank has sound credit appraisal system.
Page 106
CREDIT APPRAISAL
BIBLIOGRAPHY
i. PUNJAB NATIONAL BANK ANNUAL REPORT

ii. PNB JOURNALS
iii.BOOKS
 MANAGEMENT OF INDIAN FINANCIAL INSTITUTION,
SRIVASTAVA R.M & NIGAM DIVYA, 10TH
EDITION,2010, HIMALYA PUBLISHING HOUSE,
GURGAON MUMBAI
 FINANCIA INSTITUTION AND MARKETS, BHOLE L.M,
5TH EDITION,2009, TATA Mc GRAW- HILLS,7 WEST
PATEL NAGAR, NEW DELHI
iv.WEBSITE
 www.pnbindia.com
 www.rbi.gov.in
 www.google.com
v. NEWSPAPER
Page 107

A Project Report On Credit Appraisal

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

A Project Report On Credit Appraisal

Uploaded by

Copyright:

Available Formats

CREDIT APPRAISAL

2. CREDIT POLICY OF COMMERCIAL BANK

3. THE PROFILE OF THE ORGANIZATION OF PNB

4. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO PNB

5. ANALYSIS AND INTERPRETATION OF DATA

Reasons for selecting the project

Scheme of the project

Objective of the project

Structure or Plan of the project

Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checking accounts,

Major objectives of commercial banks

 Lending rates have fallen sharply.

Credit (YOY Growth)

March 28 2008 March 27

Table 16: Reduction in Deposit and Lending Rates

Bank Group Deposit Rates (BPLR)

Public Sector Banks 125-250 125-225

Private Sector Banks 75-200 100-125

Five Major Foreign Banks 100-200 0-100

Recent policy developments Regarding Bank Credit

CHANGING PHASE OF BANK CREDIT-

i) Modifications in the Cash Credit system to make it amenable to better management of

The recommendations made by Tandon Committee and reinforced by Chore Committee

Trends of Bank Credit in India

Reasons for declining trend of bank credit

 In manufacturing sector more efficient utilization of existing capacities contributed to

Trends for the year 2008-09

Procedure for providing Bank Credit-

Source- Self constructed

• The credit requirement must be assessed by all Indian Financial Institutions or

The important thing to remember is not to be overwhelmed by marketing or profit centre

Indian Banking Sector & Its Major Challenges

Interest rates and non-performing assets

Competition in retail banking

The urge to merge

Impact of BASEL-II norms

Furthermore, the interference of the central government with the functioning

Punjab National Bank at a Glance

Parameters Mar'08 Mar'09 Mar'10 CAGR (%)

Mission and Vision

Products and Services

Award & Achievements

for Excellence in Corporate Governance - 2005

by the leading Financial Daily The Economic

Symantec Visionary Award Information Security Impact 2005

(Interest Subsidy Eligibility Certificate Scheme)

Organizational structure of Punjab National Bank

Non-Performing Assets (NPAs), Rehabilitation of Sick Industrial Units, Working Capital

Credit Philosophy & Policy with regards to Punjab National

Bank follows following broad policy imperatives:-

• Reduction in dependence upon short term corporate loans, especially unsecured

Objectives of credit policy

1. A balanced growth of credit portfolio, which does not compromise safety.

To maintain healthy balance between-

A key function of the Bank is deploying funds for income-yielding assets.

Fund Based Non-Fund

Cash Credit Post shipment

Bill Discounting Page 47

I. WORKING CAPITAL / CASH CREDIT

II. TERM LOANS

A bill of exchange is an unconditional order in writing addressed by one person to another,

A promissory note is an unconditional promise to pay a specific amount to bearer or to the