Report On Credit Appraisal in PNB

Credit Appraisal in Punjab National Bank Pre-Sanction And Post-Sanction Follow-up
Submitted in partial fulfillment of PGDM program 2011-2013
Submitted by
Name Kanika Rai Roll No- FB11078
Faculty Mentor
Ms Dilpreet Kaur
JAGAN INSTITUTE OF MANAGEMENT STUDIES ROHINI DELHI
Credit appraisal in PNB
Chapter 1
EXECUTIVE SUMMARY
This project was undertaken at the Punjab National Bank Circle Office Delhi, at the Credit Department. Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily, credit is required for following purposes: a. Working capital finance b. Term loan for mega projects c. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to analyze cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility Project finance is different from traditional forms of finance because the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project. The purpose of this project is to explain, in a brief and general way, the manner in which risks are approached by financiers in a project finance transaction. Such risk minimization lies at the heart of project finance. Efficient management of credit portfolio is of utmost importance as it has a tremendous impact on the Banks assets quality & profitability. The ongoing financial reforms
Jagan Institute of Management Studies,Delhi 2
have no doubt provided unparallel opportunities to banks for growth, but have simultaneously exposed them to various risks, which need to be effectively managed. The concept of Credit Management is undergoing radical changes. Credit Risk in all exposures calls for precise measuring and monitoring for taking considered credit decisions with suitable risk mitigants, risk premium, etc. Credit portfolio should be well diversified in various promising sectors with a cautious approach to be adopted in risky segments. Also, lending continues to be a primary function in banking. In the liberalized Indian economy, clientele have a wide choice. External Commercial Borrowings and the domestic capital markets compete with banks. In another dimension, retail lending- both personal advances and SME advances- competes with corporate lending for funds and for human resources. But lending by nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be competitive without compromising on the basic integrity of lending. The quality of the Banks credit portfolio has a direct and deep impact on the Banks profitafitability.
The study has been conducted with the purpose of getting in-depth knowledge about the credit appraisal and credit risk management procedure in the organization for the above said first two purposes.
Chapter
CREDIT APPRAISAL AN INTRODUCTION
OBJECTIVES
To study broad contours of management of credit, the loan policy, credit appraisal for business units i.e. for working capital loan or Term Loan.
To understand the basis of credit risk rating and its significance . To utilize the above learning and appraise the creditworthiness organizations those approach PUNJAB NATIONAL BANK for credit. This would entail undertaking of the following procedures: i. ii. iii. iv. v. vi. Management Evaluation Business / Industry Evaluation Technical Evaluation Legal Evaluation Financial Evaluation Credit Risk Rating
Project / Credit appraisal is a skill which has to be acquired by study and supplemented by practice. Intuitive guess work has little place in appraising the credit rating or credit needs of a corporate unit. The credit managers of banks and Non Banking Finance Companies (NBFCs) are duty bound to accept or reject a proposal on the basis of its viability or non - viability.
Project / Credit appraisal is done by banks or financial institutions by obtaining credit information of the borrowing company. Credit information of the borrowing company can be obtained by the following sources: 1. Banks and Financial Institution 2. Bank References 3. Trade References Credit Rating Agencies
4. Published Books: Basic information about a company may be taken from printed
sources like the Stock Exchange Year book, Corporate Path finders data base, etc. 5. Company Financial Reports 6. Press Reports 7. Stock Market Opinion
8. Charges Registered: Charges created on the assets of a company have to be registered
with the Registrar of Companies. 9. Personal discussion 10. Factory Visit 11. Credit Rating Agencies
with the Registrar of Companies. 17. Personal discussion 18. Factory Visit
Credit appraisal in PNB 19. Study of Financial Statements: Financial analysis determines the significant operating
and financial characteristics of a firm form accounting data and financial statements. Analysis can be done through: a. Ratio Analysis
b. Trend analysis: Trend analysis can be through:
i. Intra firm comparison that is review of the trend of the ratios over the years within the firm and ii. Inter firm comparison.
c. Reading of notes to accounts and other information: Careful reading and
analysis of the notes on accounts, one can gauge the policies of the management, performance of the company, and its future planning. 20. Credit Rating Agencies
with the Registrar of Companies. 26. Personal discussion 27. Factory Visit Information required to be submitted by the Company (Borrower) to the Bank The company should make sure that the following information required for processing credit requests are collected by the company for submitting it to the bank or financial institution in order to obtain the required credit facility:
1. Basic background information on the company:
2. Required facility
Credit appraisal in PNB 3. Key industry dynamics: 4. Management: 5. Management information system: Details of the planning, controlling and monitoring
systems which have been put in place have to given. 6. Financials

7. Details of the Security to be pledged: 8. Present banking relationship: The bank requires full details of the present credit
facilities being enjoyed at the moment.
Chapter
COMPANY PROFILE
Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being the first Indian bank to have been started solely with Indian capital. The bank was nationalized in July 1969 along with 13 other banks. Today, PNB is a professionally managed bank with a successful track record of over 110 years. The bank has the 2nd largest branch network in India, with 4525 branches including 432 extension counters spread throughout the country. PNB was ranked as 248th biggest bank in the world by Bankers Almanac, London. Punjab National Bank is not only the first bank to specialize in credit rating models in India but also the first one to launch image based cheque transaction system for collection of intra bank intercity cheques thereby providing credits merely in 48 hrs in 13 cities.
To be a Leading Global Bank with Pan India footprints and become CORPORATE VISION MISSION a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof Banking for the unbanked
With over 56 million satisfied customers and 5002 offices, PNB has continued to retain its leadership position amongst the nationalized banks. From its modest beginning; the bank has grown in size and stature to become a front-line banking institution in India at present. Based on its sound and prudent banking experience and consistent profit performance, PNB looks confidently to the futurethe name you can bank upon PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 4,35,931 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 Mar10 as per Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As on March10, 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%. Products and Services of PNB : (1) PNB UPHAAR PREPAID CARD This card is used mainly in festival season basically to gift as well it targets students and for segment who is not having Bank Accounts. (2) WORLD TRAVEL CARD Frequent Travellers who are going Abroad can use this card and make their travelling easy and comfortable. Students, Businessman can easily take the facility of this card and enjoy their trip. (3) PNB BAL VIKAS DEPOSIT SCHEME PNB BAL VIKAS DEPOSIT SCHEME provides a deposit product with feature of monthly recurring deposit for first five years and thereafter the maturity value of RD would be placed in FIXED DEPOSIT scheme under income option for the next 5 Years. The objective of the scheme is to provide regular income for the future studies for the child.
ORGANIZATIONAL STRUCTURE
Hierarchy
Chapter
REVIEW OF LITERATURE
7.1 WORKING CAPITAL AND ITS ASSESSMENT

The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land and building, plant and machinery, equipments, vehicles etc and also to run the business i.e. its day to day operations. Working capital is defined, as the funds required for carrying the required levels of current assets to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus working capital required (WCR) is dependent on i. ii. The volume of activity (viz. level of operations i.e. Production and Sales) The activity carried on viz. manufacturing process, product, production programme, and the materials and marketing mix. The purpose of assessing the WC requirement of the industry is to determine how the total requirements of funds will be met. The two sources for meeting these requirements are the units long-term sources (like capital and long term borrowings) and the short-term borrowings from banks. The long-term resources available to the unit are called the liquid surplus or Net Working Capital (NWC). It can be explained by visualizing the process of setting up of industry. The units starts with a certain amount of capital, which will not normally be sufficient, even to meet the cost of fixed assets. The unit, therefore, arranges for a long-term loan from a financial institution or a bank towards a part of the cost of fixed assets. From these two sources after meeting the cost of fixed assets some funds remain to be used for working capital. This amount is the Net Working Capital or Liquid Surplus and will be one of the sources of meeting the working capital requirements. The remaining funds for working capital have to be raised from banks; banks normally provide working capital finance by way of advantage against stocks and sundry debtors. Banks, however, do not finance the full amount of funds required for carrying inventories and receivables: and normally insist on the stake of the enterprise at every stage, by way of margins. Bank finance is normally restricted to the amount of funds locked up less a certain percentage of margins. Margins are imposed with a view to have adequate stake of the promoter in the business both to ensure his adequate interest in the business and to act as a protection against any shocks that the business
may sustain. The margins stipulated will depend on various factors like salability, quality, durability, price fluctuations in the market for the commodity etc. taking into account the total working capital requirements as assessed earlier, the permissible limit, up to which the bank finance cab be granted is arrived. While granting working capital advances to a unit, it will be necessary to ensure that a reasonable proportion of the working capital is met from the long-term sources viz. liquid surplus. Normally, liquid surplus or net working capital be at least 25% of the working capital requirement (corresponding to the benchmark current ratio of 1.33), though this may vary depending on the nature of industry/ trade and business conditions.
Various methods for assessment of Working Capital are discussed in detail: Operating cycle method: Any manufacturing activity is characterized by a cycle of operations consisting of purchase of raw materials for cash, converting them into finished goods and realizing cash by sale of these finished goods. The time that lapses between cash outlay and cash realization by sale of finished goods and realization of sundry debtors is known as length of operating cycle. That is, the operating cycle consists of: Time taken to acquire raw materials and average period for which they are in store. Conversion process time Average period for which finished goods are in store and Average collection period of receivables (sundry debtors). Operating Cycle is also called cash-to-cash and indicates how cash is converted into raw materials, stocks in process, finished goods, bills (receivables) and finally backs to cash. Working capital is the total cash that is circulating in this cycle. Therefore, working capital can be turned over or deployed after completing the cycle. Factors, which influence working capital requirement, are Level of operating expenses and Length of operating cycle.
Any reduction in either of the both will mean reduction in working capital requirement or indicate an efficient working capital management. It can thus be concluded that by improving that by improving the working capital turnover ratio (i.e. by reducing the length of operating cycle) a better management (utilization) of working capital results. It is obvious that any reduction in the length of the operating cycle can be achieved only by better management only by better management of one or more of the individual phases of the operating cycle period for which raw materials are in store, conversion process time, period for which finished goods are in store and collection period of receivables. Looking at whole problem from another angle, we find that we can set up extremely clear guidelines for working capital management viz. examining the length of each of the phases of the operating cycle to assess the scope for reduction in one or more of these phases. The length of the operating cycle is different from industry to industry and from one firm to another within the same industry. For instance, the operating cycle of a pharmaceutical unit would be quite different from one engaged in the manufacture of machine tools. The operating cycle concept enables to assess working capital need of each enterprise keeping in view the peculiarities of the industry it is engaged in and its scale of operations. Operating cycle is an important management tool in decision making.
FUND
RM
SIP
RECEIVABLES
FUND
1.
Traditional method of assessment of working capital requirement
The operating cycle concept serves to identify the areas requiring improvement for the purpose of control and performance review. But, as bankers, we require a more detailed analysis to assess the various components of working capital requirement viz., finance for stocks, bills etc.
Bankers provide working capital finance for holding an acceptable level of current assets viz. raw materials, stock-in-process, finished goods and sundry debtors for achieving a predetermined level of production and sales. Quantification of these funds required to be blocked in each of these items of current assets at any time will, therefore provide a measure of the working capital requirement of an industry. Raw material: Any industrial unit has to necessarily stock a minimum quantum of materials used in its production to ensure uninterrupted production. Factors, which affect or influence the funds requirement for holding raw material, are: i. ii. iii. iv. v. vi. vii. viii. ix. x. Average consumption of raw materials. Their availability locally or form places outside, easy availability / scarcity, number of sources of supply Time taken to procure raw materials (procurement time or lead time) Imported or indigenous. Minimum quantity supplied by the market (Minimum Order Quantity (MOQ)). Cost of holding stocks (e.g. insurance, storage, interest) Criticality of the item. Transport and other charges (Economic Order Quantity (EOQ)). Availability on credit or against advance payment in cash. Seasonality of the materials.
This raw material requirement is generally expressed as so many months requirement (consumption).
Stock in process: Barring a few exceptional types of industries, when the raw material get converted into finished products within few hours, there is normally a time lag or delay or period of processing only after which the raw materials get converted into finished product. During this period of processing, the raw materials get converted into finished goods and expenses are being incurred. The period of processing may vary from a few hours to a number of months and unit will be blocked working funds in the stock-in-process during this period. Such funds blocked in SIP depend on:
i.The processing time ii.Number of products handled at a time in the process iii.Average quantities of each product, processed at each time (batch quantity) iv.The process technology v.Number of shifts. Finished goods: All products manufactured by an industry are not sold immediately. It will be necessary to stock certain amount of goods pending sale. This stock depends on: i. ii. iii. iv. v. vi. vii. viii. ix. Whether the manufacture is against firm order or against anticipated order Supply terms Minimum quantity that can be dispatched Transport availability and transport cost Pre-dispatch inspection Seasonality of goods Variation in demand Peak level/ low level of operations Marketing arrangement- e.g. direct sale to consumers or through dealers/ wholesalers. The requirement of funds against finished goods is expressed so many months cost of production.
Sundry debtors (receivables): Sales may be affected under three different methods: i. ii. iii. Against advance payment Against cash On credit
A unit grants trade credit because it expects this investment to be profitable. It would be in the form of sales expansion and fresh customers or it could be in the form of retention of existing customers. The extent of credit given by the industry normally depends upon: i. ii. Trade practices Market conditions
iii. iv. v.
Whether it is bulky by the buyer Seasonality Price advantage Even in cases where no credit is extended to buyers, the transit time for the goods to reach the buyer may take some time and till the cash is received back, the unit will have to be cut out of funds. The period from the time of sale to receipt of funds will have to be reckoned for the purpose of quantifying the funds blocked in sundry debtors. Even though the amount of sundry debtors according to the units books will be on the basis of Sale Price, the actual amount blocked will be only the cost of production of the materials against which credit has been extended- the difference being the units profit margin- (which the unit does not obviously have to spend). The working capital requirement against Sundry Debtors will therefore be computed on the basis of cost of production (whereas the permissible bank finance will be computed on basis of sale value since profit margin varies from product to product and buyer to buyer and cannot be uniformly segregated from the sale value). The working capital requirement is expressed as so many months cost of production.
Expenses: It is customary in assessing the working capital requirement of industries, to provide for 1 months expenses also. A question might be raised as to why expenses should be taken separately, whereas at every stage the funds required to be blocked had been taken into account. This amount is provided merely as a cushion, to take care of temporary bottlenecks and to enable the unit to meet expenses when they fall due. Normally 1-month total expenses, direct and indirect, salaries etc. are taken into account.
While computing the working capital requirements of a unit, it will be necessary to take into account 2 other factors, i. Is the credit received on purchases- trade credit is a normal practice in trading circles. The period of such credit received varies from place to place, material to material and person to person. The amount of credit received on purchases reduces the working capital funds required by the unit.
ii.
Industries often receive advance against orders placed for their products. The buyers, in certain cases, have to necessarily give advance to producers e.g. custom made machinery. Such funds are used for the working capital of an industry. It can be thus summarized as follows:
Raw materials Stock-in-process Finished Goods Sundry Debtors Expenses Total Current Assets Credit received on Purchases (months Purchase value) Advance payment on order received
Months requirement Months (cost of Production) Months cost of Production required to be stocked Months cost of Production (o/s credits) One month(normally)
Rs. A Rs. B Rs. C Rs. D Rs. E A+B+C+D+E Rs. F Rs. G
WORKING CAPITAL REQUIRED (H) = (A+B+C+D+E)- (F+G)
2.
Projected Annual Turnover Method for SME units (Nayak Committee)
For SME units, which enjoy fund based working capital limits up to Rs.5 crore, the minimum working capital limit should be fixed on the basis of projected annual turnover. 25% of the output or annual turnover value should be computed as the quantum of working capital required by such unit. The unit should be required to bring in 5% of their annual turnover as margin money and the Bank shall provide 20% of the turnover as working capital finance. Nayak committee guidelines correspond to working capital limits as per the operating cycle method where the average production/ processing cycle is taken to be 3 months. Example: Anticipated Annual Output (A) Working Capital Requirement: 25% of A (B) Margin : 5% of A (C) Maximum Permissible Bank Finance (B-C) Important clarifications: i. The assessment of WC limits should be done both as per Projected Turnover Method and Traditional Method; the higher of the two is to be sanctioned as credit limit. If the operating cycle is more than 3 months, there is no restriction on extending finance at more than 20% of the turnover provided that the borrower should bring n proportionally higher stake in relation to his requirements of bank finance. ii. While the approach of extending need based credit will be kept in mind, the financial strengths of the unit is also important, the later aspect assumes greater significance so as to take care of quality of banks assets. The margin requirement, as a general rule, should not be diluted. 120 30 6 24
In Rs lacs
MPBF Method (Tandon and Chore Committee Recommendations) The Tandon Committee was appointed to suggest a method for assessing the working capital requirements and the quantum of bank finance. Since at that time, there was scarcity of banks resources, the Committee was also asked to suggest norms for carrying current assets in different industries so that bank finance was not drawn more than the minimum required level. The Committee was also asked to devise an information system that would provide, periodically, operational data, business forecasts, production plan and resultant credit needs of units. Chore Committee, which was appointed later, further refined the approach to working capital assessment. The MPBF method is the fall out of the recommendations made by Tandon and Chore Committee.Regarding approach to lending: the committee suggested three methods for assessment of working capital requirements. First Method of lending: According to this method, Banks would finance up to a max. of 75% of the working capital gap (WCG= the total current assets - current liabilities other than bank borrowing) and the balance 25 % of the WCG considered as margin is to come out of long term source i.e. owned funds and term borrowings. This will give rise to a minimum current ratio of 1.17:1. The difference of (1.17-1) represents the borrowers margin which is popularly known as Net Working Capital (NWC) of the unit Second Method of lending: As per the 2nd method Bank will finance maximum up to 75% of total current assets (TCA) & Borrowers has to provide a minimum of 25% of total current assets as the margin out of long term sources. This will give a minimum current ratio of 1.33:1 Third Method of lending: Same as 2nd method, but excluding core current assets from total assets and the core current assets is financed out of long term funds. The term core current assets refers to the absolute minimum level of investment in current assets, which is required at all times to carry out minimum level of business activity. The current ratio is further improved i.e. 1.79: 1
Example: Current Liabilities Creditors for purchase Other current liability Bank borrowings Current assets 100 Raw material 50 Stock in process 200 Finished goods Receivables Other current assets Total Current Liabilities 350 Total Current Assets 200 20 90 50 10 370
(In Rs lacs)
Calculating NWC First method of lending Total CA Less: CL Bank Borrowing Second method of lending 370 Total CA 150 Less: 25% of CA Third method of lending 370 Total CA 92 Less: core CA from LT 370 95 275 Working Capital Gap 25% of WCG from long term sources MPBF Current ratio 220 55 165 MPBF 1.17: 1 Current ratio Less: CL - Bank Borrowing 150 Less: 25% from LTS Less: CL Bank Borrowing 128 MPBF 1.33: 1 Current ratio 69 150 56 1.79: 1
The above example shows that the contribution of margin by the borrower increases when financing is shifted from First method to Second method which is known to be stringent from borrower point of view (Third method was not accepted by RBI).
3.
Projected Balance Sheet Method (PBS)
The PBS method of assessment will be applicable to all borrowers who are engaged in manufacturing, services and trading activities who require fund based working capital finance of Rs. 25 lacs and above. In case of SSI borrowers, who require working capital credit limit up to Rs. 5 cr, the limit shall be computed on the basis of Nayak Committee formula as well as that based on production and operating cycle of the unit and the higher of the two may be sanctioned.. The assessment will be based on the borrowers projected balance sheet, the funds flow planned for current/ next year and examination of the profitability, financial parameters etc. unlike the MPBF method, it will not be necessary in this method to fix or compute the working capital finance on the basis of a stipulated minimum level of liquidity (Current Ratio). The working capital requirement worked out is based on the following: i. ii. CMA assessment method is continued with certain modifications. Analysis of the Profit and Loss account, Balance Sheet, Funds flow etc. for the past periods is done to examine the profitability, financial position, and financial management etc of the business. iii. Scrutiny and validation of the projected income and expenses in the business and projected changes in the financial position (sources and uses of funds). This is carried out to examine whether these parameters are acceptable from the angle of liquidity, overall gearing, efficiency of operations etc. In the PBS method, the borrowers total business operations, financial position, management capabilities etc. are analysed in detail to assess the working capital finance required and to evaluate the overall risk. The assessment procedure is as follows: i. ii. iii. iv. v. Collection of financial information from the borrower Classification of current assets / current liabilities Verification of projected levels of inventory/ receivables/ sundry creditors Evaluation of liquidity in the business operation Validation of bank finance sought
7.2 ASSESSMENT OF TERM LOANS

vi. Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of land, building and plant and machinery, required for setting up a new industrial undertaking or expansion/diversification of an existing one and also for acquisition of movable fixed assets. Term Loans are also given for modernization, renovation, etc. to improve the product quality or increase the productivity and profitability. vii. The basic difference between short-term facilities and term loans is that short-term facilities are granted to meet the gap in the working capital and are intended to be liquidated by realization of assets, whereas term loans are given for acquisition of fixed assets and have to be liquidated from the surplus cash generated out of earnings. They are not intended to be paid out of the sale of the fixed assets given as security for the loan. This makes it necessary to adopt a different approach in examining the application of the borrowers for term credits. viii. For the assessment to Term Loan Techno Economic Feasibility Study is done. The success of a feasibility study is based on the careful identification and assessment of all of the important issues for business success. A detailed Project Report is submitted by an entrepreneur, prepared by a approved agency or a consultancy organization. Such report provides in-depth details of the project requesting finance. It includes the technical aspects, Managerial Aspect, the Market Condition and Projected performance of the company. It is necessary for the appraising officer to cross check the information provided in the report for determining the worthiness of the project. ix. The feasibility study is a part of Credit Appraisal process and the same is discussed in the following chapter.
7.3 BASEL ACCORD & RISK MANAGEMENT

The Basel accord/accords refer to the banking supervision accords namely Basel I and Basel II issued by the Basel Committee on Banking Supervision (BCBS). BASEL I ACCORD The 1988 Basel Accord primarily addressed banking in the sense of deposit taking and lending. The main focus was Credit Risk. It described the strength of the Bank as measured by the Capital employed. Accordingly it put a minimum level of capital adequacy (Capital to Credit Risk Weighted Assets ratio) at 8%. Basel I allocated 4 risk weights i.e. 0%, 20, 50% and 100% to different exposure types, based on the risk perceived on the exposure types under the credit portfolio. Basel I provided a set norm for capital allocation which helped many banks to allocate capital to counter the risks faced by them. CRAR = Capital Risk Weighted Assets (Credit Risk+ Market Risk +Operational Risk) Paid Up Equity Capital + Statutory Reserves + Other disclosed free reserves + Capital Reserves representing surplus arising out of sale proceeds of Assets + Innovative Perpetual Debt instruments Revaluation Reserves (at a discount of 55%) + General Provisions and Loss Reserves + Subordinated Debt + Instruments Hybrid Debt Capital
Tier I Capital CAPITAL Tier II Capital
Risk Weighted Assets Basel I introduced the concept of Risk Weighted Assets (RWA). All the assets of a bank (advances, investments, fixed assets etc.) carry certain amount of risk. In proportion to the quantum of this risk, bank must maintain capital. Quantification of risk is done in percentage (0%, 20%, 50% etc.). Exposure when multiplied with these percentages gives risk based value of assets. These assets are also called Risk Weighted Assets (RWA).
BASEL II ACCORD Banking has changed dramatically since the Basel I document of 1988. Advances in risk management and the increasing complexity of financial activities / instruments prompted international supervisors to review the appropriateness of regulatory capital standards under Basel I. To meet this requirement, the Basel I accord was amended and refined which came out as the Basel II document. The Basel II document is structured into three parts. Each part is called as a pillar. Thus these three parts constitute three pillars of Basel II. This pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks This pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. It also casts responsibility on the supervisors to review and validate banks risk measurement models. This pillar is on market discipline is used to leverage the influence that other market players can bring
PILLAR I
PILLAR II
PILLAR III
DIFFERENCE BETWEEN BASEL I 1 2 3 4 Limited role of collateral as risk mitigant Not recognizing Operational Risk Risk weights assignment on transaction basis Not recognizing tenure or remaining time to maturity of exposures in risk assessment Provisions are through Asset Classification. BASEL II Recognizes wide range of Collateral & 1 Guarantees as risk mitigant Recognizes Operational Risk and prescribes 2 explicit capital charge for 3 Risk weight assignment on risk rating basis 4 Recognizes the tenure or remaining time to maturity of exposures in risk assessment Provisions are through Expected Loss Estimation
Chapter
CREDIT APPRAISAL
8.1 INTRODUCTION
Effectiveness of Credit Management in the bank is highlighted by the quality of its loan portfolio. Every Bank is striving hard to ensure that its credit portfolio is healthy and that Non Performing Assets are kept at lowest possible level, as both of these factors have direct impact on its profitability. In the present scenario efficient project appraisal has assumed a great importance as it can check and prevent induction of weak accounts to our loan portfolio. All possible steps need to be taken to strengthen pre sanction appraisal as always Prevention is better than Cure. With the opening up of the economy rapid changes are taking place in the technology and financial sector exposing banks to greater risks, which can be broadly classified as under: Government regulations and policies, availability of infrastructure facilities, Industry Rating, Industry Scenario & Outlook, Technology Up gradation, availability of inputs, product obsolescence, etc. Operating efficiency, competition faced from the units engaged in similar products, demand and supply position, cost of labor, cost of raw material and other inputs, pricing of product, surplus available, marketing, etc.
Industry Risks
Business Risks
Management Risks
Background, integrity and market standing/ reputation of promoters, organizational set up and management hierarchy, expertise/competence of persons holding key position in the organization, delegation and decentralization of authority, achievement of targets, track record in execution of project, debt repayment, industry relations etc. Financial strength/standing of the promoters, reliability and reasonableness of projections, past financial performance, reliability of operational data and financial ratios, adequacy of provisioning for bad debts, qualifying remarks of auditors/inspectors etc.
Financial Risks
In light of the foregoing risks, the banks appraisal methodology should keep pace with ever changing economic environment. The appraisal system aims to determine the credit needs/requirements of the borrower taking into account the financial resources of the client. The
end objective of the appraisal system is to ensure that there is no under - financing or over financing. Following are the aspects, which need to be scrutinized and analyzed while appraising:
8.2 MARKET ANALYSIS

(Demand & Potential)
The market demand and potential is to be examined for each product item and its variants/substitutes by taking into account the selling price of the products to be marketed vis-avis prices of the competing products/substitutes, discount structure, arrangement made for after sale service, competitors' status and their level of operation with regard to production and products and distribution channels being used etc. Critical analysis is required regarding size of the market for the product(s) both local and export, based on the present and expected future demand in relation to supply position of similar products and availability of the other substitutes as also consumer preferences, practices, attitudes, requirements etc. Further, the buy-back arrangements under the foreign collaboration, if any, and influence of Government policies also needs to be considered for projecting the demand. Competition from imported goods, Government Import Policy and Import duty structure also need to be evaluated.
8.3 TECHNICAL ANALYSIS

In a dynamic market, the product, its variants and the product-mix proposed to be manufactured in terms of its quality, quantity, value, application and current taste/trend requires thorough investigation. Location and Site Based on the assessment of factors of production, markets, Govt. policies and other factors, Location (which means the broad area) and Site (which signifies specific plot of land) selected for the Unit with its advantages and disadvantages, if any, should be such that overall cost is minimized. It is to be seen that site selected has adequate availability of infrastructure facilities viz. Power, Water, Transport, Communication, state of information technology etc. and is in
agreement with the Govt. policies. The adequacy of size of land and building for carrying out its present/proposed activity with enough scope for accommodating future expansion needs to be judged. Raw Material The cost of essential/major raw materials and consumables required their past and future price trends, quality/properties, their availability on a regular basis, transportation charges, Govt. policies regarding regulation of supplies and prices require to be examined in detail. Further, cost of indigenous and imported raw material, firm arrangements for procurement of the same etc. need to be assessed. Plant & Machinery, Plant Capacity and Manufacturing Process The selection of Plant and Machinery proposed to be acquired whether indigenous or imported has to be in agreement with required plant capacity, principal inputs, investment outlay and production cost as also with the machinery and equipment already installed in an existing unit, while for the new unit it is to be examined whether these are of proven technology as to its performance. The technology used should be latest and cost effective enabling the unit to compete in the market. Purchase of reconditioned/old machinery is to be dealt in terms of laid down guidelines. Compatibility of plant and machinery, particularly, in respect of imported technology with quality of raw material is to be kept in view. Also plant and machinery and other equipments needed for various utility services, their supply position, specification, price and performance as also suppliers' credentials, and in case of collaboration, collaborators' present and future support requires critical analysis. Plant capacity and the concept of economic size has a major bearing on the present and future plans of the entrepreneur(s) and should be related to the availability of raw material, product demand, product price and technology. The selected process of manufacturing indicating the adequacy, availability and suitability of technology to be used along with plant capacity, manufacturing process needs to studied in detail with capacities at various stages of production being such that it facilitates optimum utilization and ensures future expansion/ debottlenecking, as and when required. It is also to be ensured that
arrangements are made for inspection at intermediate/final stages of production for ensuring quality of goods on successful commencement of production and completion, wherever required.
8.4 FINANCIAL ANALYSIS

The aspects which need to be analyzed under this head should include cost of project, means of financing, cost of production, break-even analysis, financial statements as also profitability/funds flow projections, financial ratios, sensitivity analysis which are discussed as under: Cost of Project & Means of Financing a. The major cost components of any project are land and building including transfer, registration and development charges as also plant and machinery, equipment for auxiliary services, including transportation, insurance, duty, clearing, loading and unloading charges etc. It also involves consultancy and know-how expenses which are payable to foreign collaborators or consultants who are imparting the technical know-how. Recurring annual royalty payment is not reflected under this head but is accounted for under the profitability statements. Further, preliminary expenses, such as, cost of incorporation of the Company, its registration, preparation of feasibility report, market surveys, pre-operative expenses like salary, travelling, start up expenses, mortgage expenses incurred before commencement of commercial production also form part of cost of project. Also included in it are capital issue expenses which can be in the form of brokerage, commission, advertisement, printing, stationery etc. Finally, provisions for contingencies to meet any unforeseen expenses, such as, price escalation or any other expense which have been inadvertently omitted like margin for working capital requirements required to complete the production cycle, interest during construction period, etc. are also part of capital cost of project. It is to be ensured while appraising the project that cost and various estimates given are realistic and there is no under/over estimation. Further, these cost components should be supported by proper quotations, specifications and justifications of land, machinery and know-how expenses etc. ii. Besides Banks loan, the project cost is normally financed by bringing capital by the promoters and shareholders in the form of equity, debentures, unsecured long term loans and
deposits raised from friends and relatives which are not repayable till repayment of Bank's loan. Resources are raised for financing project by raising term loans from Institutions/Banks which are repayable over a period of time, deferred term credits secured from suppliers of machinery which are repayable in installments over a period of time. The above is an illustrative list, as the promoters have now started raising funds through Euro-issues, Foreign Currency loans, premium on capital issues, etc. which are sometimes comparatively cheap means of finance. Subsidies and development loans provided by the Central/State Government in notified backward districts to attract entrepreneurs are also means of financing a project. It is to be ascertained that requirement of finance has been properly tied-up for unhindered implementation of a project. The financing structure accepted must be in consonance with generally accepted levels along with adequate Promoters' stake. investigated. In case of project finance, the promoter/borrower may bring in upfront his contribution (other than funds to be provided through internal generation) and the branches should commence its disbursement after the stipulated funds are brought in by the promoter/borrower. A condition to this effect should be stipulated by the sanctioning authority in case of project finance, on case to case basis depending upon the resourcefulness and capacity of the promoter to contribute the same. It should be ensured that at any point of time, the promoters contribution should not be less than the proportionate share. The resourcefulness, willingness and capacity of promoter to contribute the same have also to be
Profitability Statement The profitability statement which is also known as Ìncome and Expenditure Statement' is prepared after considering the net sales figure and details of direct costs/expenses relating to raw material, wages, power, fuel, consumable stores/spares and other manufacturing expenses to
arrive at a figure of gross profit. Thereafter, all other expenses like salaries, office expenses, packing, selling/distribution, interest, depreciation and any other overhead expenses and taxes are taken into account to arrive at the figure of net profit. The projections of profit/loss are prepared for a period covering the repayment of term loans. The economic appraisal includes scrutinizing all the items of cost, and examining the assumptions, if any, to ensure that these are realistic and achievable. There should not be any optimism or pessimism in working out profitability projections since even a little change in the product-mix from non-remunerative to remunerative or vice-versa can distort the picture. While preparing profitability projections, the past trends of performance in an industry and other environmental factors influencing the cost and revenue items should also be considered objectively. Generally speaking, a unit may be considered as financially viable, progressive and efficient if it is able to earn enough profits not only to service its debts timely but also for future development/growth.
Break-Even Analysis Analysis of break-even point of a business enterprise would help in knowing the level of output and sales at which the business enterprise just breaks even i.e. there is neither profit nor loss. A business earns profit if it operates at a level higher than the break-even level or break-even point. If, on the other hand, production is below this level, the business would incur loss. The breakeven point in an algebraic equation can be put as under:
Break-even point
(Volume or Units)
Total Fixed Cost / (Sales price per unit - Variable Cost per unit) (Total Fixed Cost x Sales) / (Sales - Variable Costs)
Break-even point
(Sales in rupees)
The fixed costs include all those costs which tend to remain the same up to a certain level of production while variable costs are those costs which tend to change in proportion with the volume of production. As regards unit sales price, it is generally the same for all levels of output. 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. Fund-Flow Statement A fund-flow statement is often described as a Statement of Movement of Funds or where got: where gone statement. It is derived by comparing the successive balance sheets on two specified dates and finding out the net changes in the various items appearing in the balance sheets. A critical analysis of the statement shows the various changes in sources and applications (uses) of funds to ultimately give the position of net funds available with the business for repayment of the loans. A projected Fund Flow Statement helps in answering the under mentioned points. How much funds will be generated by internal operations/external sources? How the funds during the period are proposed to be deployed? Is the business likely to face liquidity problems?
Balance Sheet Projections The financial appraisal also includes study of projected balance sheet which gives the position of assets and liabilities of a unit at a particular future date. In other words, the statement helps to analyze as to what an enterprise owns and what it owes at a particular point of time.
An appraisal of the projected balance sheet data of the unit would be concerned with whether the projections are realistic looking to various aspects relating to the same industry.
Financial Ratios While analyzing the financial aspects of project, it would be advisable to analyze the important financial ratios over a period of time as it may tell us a lot about a unit's liquidity position, managements' stake in the business, capacity to service the debts etc. The financial ratios which are considered important are discussed as under: Ratio Formula Remarks There cannot be a rigid rule to a satisfactory debtequity ratio, lower the ratio higher is the degree of protection enjoyed by the creditors. These days the debt equity ratio of 1.5:1 is considered reasonable. It, however, is higher in respect of capital intensive 1 Debt-Equity Ratio Debt (Term Liabilities) Equity
(Where, Equity = Share capital, free reserves, premium on shares, , etc. after adjusting loss balance)
projects. But it is always desirable that owners have a substantial stake in the project. Other features like quality of management should be kept in view while agreeing to a less favorable ratio. In financing highly capital intensive projects like infrastructure, cement, etc. the ratio could be considered at a higher level. This ratio of 1.5 to 2 is considered reasonable. A very high ratio may indicate the need for lower schedule. This ratio provides a measure of the ability of an enterprise to service its debts i.e. Annual interest on long term debt + Repayment ìnterest' and `principal repayment' besides indicating the margin of safety. The ratio may vary
DebtService Coverage Ratio
Debt + Depreciation + Net Profit (After Taxes) term debt
+ Annual interest on long moratorium period/repayment of loan in a shorter
from industry to industry but has to be viewed with of debt Tangible Net Worth (Paid up Capital + Reserves and Surplus 3 TOL / TNW Ratio Total outside Liabilities (Total Liability - Net Worth) Operating Profit (Before 4 Profit-Sales Ratio Taxes excluding Income from other Sources) Sales This ratio gives the margin available after meeting cost of manufacturing. It provides a yardstick to measure the efficiency of production and margin on sales price i.e. the pricing structure This ratio is of a primary importance to see how best the assets are used. A rising trend of the ratio Sales5 Tangible Assets Ratio reveals that borrower has been making efficient Sales Total Assets - Intangible Assets utilization of his assets. However, caution needs to be exercised when fixed assets are old and depreciated, as in such cases the ratio tends to be high because the value of the denominator of the ratio is very low. Higher the ratio greater the short term liquidity. This ratio is indicative of short term financial position of a business enterprise. It provides margin 6 Current Ratio Current Assets Current Liabilities as well as it is measure of the business enterprise to pay-off the current liabilities as they mature and its capacity to withstand sudden reverses by the strength of its liquid position. Ratio analysis gives indications; to be made with reference to overall tendencies and parameters in relation to the project. This ratio is indicative of the efficiency with which Intangible Assets) This ratio gives a view of borrower's capital structure. If the ratio shows a decreasing trend, it indicates that the borrower is relying more on his own funds and less on outside funds and vice versa circumspection when it is less than 1.5.
Output
Sales
Investment Ratio
Total capital employed (in fixed & current assets)
the total capital is turned over as compared to other units in similar lines.
Internal Rate of Return The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Higher a project's IRR the more desirable it is to undertake the project. IRR should be higher than the Cost of the project (interest rate in case of project financing)
Sensitivity Analysis While preparing and appraising projects certain assumptions are made in respect of certain critical/sensitive variables like selling price/cost price per unit of production, product-mix, plant capacity utilization, sales etc. which are assigned a `VALUE' after estimating the range of variation of such variables. The `VALUE' so assumed and taken into consideration for arriving at the profitability projections is the `MOST LIKELY VALUE'. Sensitivity Analysis is a systematic approach to reduce the uncertainties caused by such assumptions made. 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.
8.5 MANAGEMENT & ORGANIZATION ANALYSIS
Appraisal of project would not be complete till it throws enough light on the person(s) behind the project i.e. management and organization of the unit. It is seen that some projects may fail not because these are not viable but because of the ineffectiveness of the management and the organization in controlling various functions like production, marketing, finance, personnel, etc. The appraisal report should highlight the strengths and weaknesses of the management by commenting on the background, qualifications, experience, and capability of the promoter, key management personnel, and effectiveness of the internal control systems, relation with labor working conditions, wage structure, and the other assigned essential functions. report should also comment on their performance in such concerns. A business is more vulnerable if decision making in all the functional areas rests with a particular person, in other words, òne man show'. Further, the management and the organization should be conducive to the size and type of business. In case it is not so, it should be ensured that professional managers are inducted to strengthen the organization. In case the promoter(s) have interest, in other concerns as Proprietor or Partner or Director, the appraisal
8.6 APPRAISAL OF PROJECT - A CHECK LIST

An indicative list of issues which need to be looked into while appraising a project is given below:
1. Reasonable demand projections keeping in view the size of the market, consumption level, supply position, export potential, import substitute, etc. 2. Competitors' status and their level of operation with regard to production and sales. 3. Technology advancement/Foreign Collaborator's Status/Buy-back arrangements etc. MARKETING 4. Marketing policies in practice, for promotion of product(s) and distribution channels being used. Expenses on marketing are done so as to popularize the product. 5. Local/foreign consumer preferences, practices adopted, attitudes, requirements etc. 6. Influence of Govt. policies, imports and exports in terms of quantity and value. 7. Marketing professionals employed their competence, knowledge and experience.
TECHNICAL 1. Product and its life cycle, product-mix and their application. 2. Location, its advantages/disadvantages, availability of infrastructural facilities, Govt. concessions, if any, available there. 3. Plant and machinery with suppliers' credentials and capacity attainable under normal working condition. 4. Process of manufacturing indicating the choice of technology,
position with regard to its commercialization and availability. 5. Plant and machinery - its availability, specification, price, performance. 6. Govt. clearance/ license, if any, required. 7. Labor/ Manpower, type of skills required and its availability position in the area.
1. Total project cost and how it is being funded/financed. 2. Contingencies and inflation duly factored in project cost. 3. Profitability projections based on realistic capacity utilization and sales forecast with proper justification. Unrealistic/ambitious sales projections without reference to past performance and FINANCIAL justification to be avoided. 4. Break-even analysis, fund flow and cash flow projections. 5. Balance sheet projections should be realistic and based on latest available data. The components of financial ratios should be subjected to close scrutiny. 6. Aspect of support of parent company, wherever applicable, may be taken into account. MANAGERIAL 1. management. 2. 3. etc. 4. Internal control systems, delegation of adequate powers and entrusting responsibility at various levels.
Financial standing and resourcefulness of the Qualifications and experience of the promoters Understanding of the project in all of its aspects -
and key management personnel. financing pattern, technical knowledge and marketing programme
5.
Other enterprises, if any, wherein the promoters
have the interest and how these are functioning.
1. Impact on increase in level of savings and income distribution in society and standard of living. 2. Project contribution towards creation and rate of increase of ECONOMIC employment opportunity, achieving self sufficiency etc. 3. Project contribution to the development of the region, its impact on environment and pollution control
To judge whether the project is viable, i.e. it can generate adequate surplus for servicing its debts within a reasonable period of time and still left with some funds for future development. This involves taking an over-all view to analyse the strengths and weaknesses of the project. It should also be analysed to see whether the management and organisation can prove effective for successful implementation of the project.
Chapter
RESEARCH METHODOLOGY
Primary sources of Information Meetings and discussion with the Chief Manager and the Senior Manager of both Meetings with the clients
Credit and Credit Risk Management Department
Secondary sources of Information Loan Policy and Internal Circulars of the bank Research papers, power point presentations and PDF files prepared by the bank and Referring to information provided by CIBIL, Income Tax files, Registrar of
its related officials Companies (Ministry of Corporate Affairs), and Auditor reports.
Chapter
CREDIT RISK MANAGEMENT
9.1 CREDIT RISK

Credit risk means the possibility of loss associated with diminution in the credit quality of borrowers. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet, commitments in relation to lending, trading, settlement and other financial transactions.
9.2 CREDIT RISK MANAGEMENT SYSTEM IN PNB

A comprehensive credit risk management system, which is in place in the bank, encompasses the following processes: Identification of Credit Risk Measurement of Credit Risk Grading of Credit Risk Reporting and analysis of rating related data Control of Credit Risk
CREDIT RISK IDENTIFICATION In order to take informed credit decisions, it is necessary to identify the areas of credit risk in each borrower as well as each industry. Risk Management Division HO, in coordination with other HO divisions involved in disbursal of credit and also the risk management departments of various
zonal offices identifies these risks areas and develops necessary tools and processes to measure and monitor the risk. CREDIT RISK MEASUREMENT In order to measure the credit risk in banks portfolio, the bank has developed the following models: Credit Risk Rating Model Small 2 Loans Small Loans Mid Corporate Large Corporate Non Banking Financial Corporation Model New Business Model New Project Model Total limits Applicable from the Bank Above Rs. 20 lacs and up to Rs. 50lacs Above Rs. 50 lacs and up to Rs. 5crores Above Rs.5 crores and up to Rs. 15crores Above Rs. 15 crores
(irrespective of any limit)
Below Rs. 5 crores Above Rs. 5 crores
The credit risk rating models have been developed with a view to provide a standard system for assigning a credit risk rating to all the borrowers on the basis of the overall credit risk involved in them. Inputs to the models are the financial, management, business and conduct of account, industry information. The evaluation of a borrower is done by assessment on various objective/subjective parameters. The model evaluates the credit risk rating of a borrower on a scale of AAA to D with AAA indicating minimum risk and D indicating maximum risk. The credit risk-rating models incorporate therein all possible risk factors, which are important for determining the credit quality/ rating of a borrower. These risks could be: Internal and specific to the company, Associated with the industry in which the company is operating or Associated with the entire economy and can influence the repayment capacity and/
or willingness of the company.

Evaluation methodology under rating models The scores are assigned to each of the parameters on a scale of 0 to 4 with 0 being very
poor and 4 being excellent. The scoring of some of these parameters is subjective while for some others it is done on the basis of pre-defined objective criteria. The scores given to the individual parameters multiplied by allocated weights are then
aggregated and a composite score for the company is arrived at, in percentage terms. Higher the score obtained by a company, the better is its credit rating. Weights have been assigned to different parameters based on their importance. Weights assigned to different parameters have been loaded in the software. After allocating/evaluating scores to all the parameters, the aggregate score is calculated and displayed by the software. The overall percentage score obtained is then translated into a rating on a scale from AAA
to D according to a pre-defined range of scores. Wherever a particular parameter is not applicable, no score should be given and the
parameter should be made Not Applicable. For multi-divisional companies, which are involved in more than one industrial activity,
evaluation should be done separately for each business. However, the management evaluation, conduct of account and financial evaluation will be done on a common basis. In such cases, for the business section, each business should be evaluated and scored separately, taking into account the different industrial activity involved.
GRADING OF BORROWERS UNDER THE RATING SYSTEM
In order to provide a standard definition and benchmarks under the credit risk rating system, following matrix has been adopted in all the risk rating models.
Rating category PNB AAA
Description Minimum Risk Marginal Risk
Score (%) obtained Above 80.00 Above 77.50 up to 80.00 Above 72.50 up to 77.50 Above 70.00 up to 72.50
Grade within the rating Category PNB- AAA PNB- AA + PNB- AA PNB- AA PNB- A + PNB- A PNB- A PNB- BB + PNB- BB PNB- BB PNB- B + PNB- B PNB- B PNB- C PNB D
PNB-AA
Modest Risk PNB-A
Above 67.50 up to 70.00 Above 62.50 up to 67.50 Above 60.00 up to 62.50
Average Risk PNB-BB
Marginally Acceptable Risk PNB-B
PNB-C PNB-D
High Risk Caution Risk
Above 30.00 up to 40.00 30.00 and below
SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING The process of rating and vetting is as under: Loan Sanctioning Authority i. Head Office ii. i. Zonal / Circle Office ii. Credit Risk Rating Authority Zonal CRMD in consultation with branches Large Corporate Branches In case of Large Corporate Model, ELB/VLB Zonal CRMD In case of other Models, branches to rate the accounts An official designated by the Incumbent not connected Branch Office Officer/Manager, Credit Section with Processing/ recommending/rating of the concerned loan proposal GM (RMD), HO Vetting/Confirming Authority
In order to adopt internal rating based approaches (IRB) for credit risk, Basel II has placed certain minimum requirements which inter-alia require, validation of rating system, process and estimation of all relevant risk components. Banks must regularly compare realized default rates with estimated probability of default (PD) of each grade and able to demonstrate to its supervisor (RBI), that the internal validation process enable it to assess the performance of internal rating and risk estimation system consistently and meaningfully. In view of above fact, not only rating but consistent practices in evaluation of credit risk rating as well as evolving and updating robust data on various risk components is must for adopting IRB approaches.
CONTROLS
The Credit Risk Management process in the bank encompasses the following management Control techniques which help in mitigating the adverse impacts of credit risk in its credit portfolio. i. Credit Approving Authority a. b. Credit Committee Linkage of loaning powers with risk rating categories
ii.Prudential Exposure limits iii.Risk Based Pricing iv.Portfolio Management v.Loan Review Mechanism vi.Legal documentation vii.Preventive Monitoring System viii.Others a. b. Use of CIBIL data and RBI defaulters list Diversification of Risks
Chapter
10
POST SANCTION FOLLOW UP OF LOANS
Supervision and Follow-up of bank credit has assumed considerable significance particularly after introduction of new norms of assets classification, provisioning and derecognition of interest income on NPAs, affecting profitability. System of supervision and follow up can be defined as the systematic evaluation of the performance of a borrowal account to ensure that it operates at viable level and, if problems arise, to suggest practical solutions. It helps in keeping a watch on the conduct and operational/financial performance of the borrowal accounts. Further, it also helps in detecting signals/symptoms of sickness and deteriorations, if any, taking place in the conduct of the account for initiating timely corrective actions to check slippage of accounts to NPA category. The goals and objectives of monitoring may be classified into fundamental and supplementary goals. Fundamental goals help a bank to ensure safety of funds lent to an enterprise while, supplementary goals are directed towards keeping abreast of problems arising out of changes in both the internal and the external environment for initiating timely corrective actions. Some of the important goals of monitoring are listed as under: i. To keep a watch on the project during implementation stage so that there are no time & cost overruns. ii. To ensure that the funds released are utilized for the purpose for which these have been provided and there is no diversion of such funds. To evaluate operational and financial results, such as production, sales, profit/loss, flow of funds, etc. and comparing these with the projections/estimate changes in both the internal and the external environment for initiating timely corrective actions. Some of the important goals of monitoring are listed as under: iii. To keep a watch on the project during implementation stage so that there are no time & cost overruns. iv. To ensure that the funds released are utilized for the purpose for which these have been provided and there is no diversion of such funds.
v.
To evaluate operational and financial results, such as production, sales, profit/loss, flow of funds, etc. and comparing these with the projections/estimates given by the borrower at the time of sanction of credit facilities.
vi.
To ensure that the terms and conditions as stipulated in the sanction have been complied with.
vii.
To monitor operations in the account particularly cash credit facilities which indicate health of the account.
viii.
To obtain market report on the borrower, to gather information like reputation/financial standing etc.
ix.
To detect signals and symptoms of sickness or deterioration taking place in conduct/performance of the account.
x. xi.
To ensure that the unit's management and organizational set-up is effective. To keep a check on aspects like accumulation of statutory liabilities, creditors, debtors, raw-material, stocks-in-process, finished goods, etc.
xii.
To ensure charging of applicable rate of interest/penal interest/ commitment charges as per bank's guidelines.
System of supervision & monitoring of credit as laid down by the Bank needs to be meticulously followed by the branches/controlling offices which, inter alia, covers the following: i. ii. iii. iv. v. Conveying the sanction Maintenance of Loan Document File Quarterly Review Sheet Preventive Monitoring System Quarterly Monitoring System
vi.
Inspection and Physical Verification of stocks Stock Audit
Chapter
11
ANALYSIS & INTERPRETATION
11.1 PNBs LOAN POLICY

11.1.1 OBJECTIVE The Credit Management & Risk Policy of the bank at the macro level is an embodiment of the Banks approach to understand, measure and manage the credit risk and aims at ensuring sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. This would entail reducing exposures in high risk areas, emphasizing more on the promising industries / productive sectors/ segments of the economy, optimizing the return by striking balance between the risk and the return on assets and striving towards maintaining/improving market share.
11.1.2 BASIC TENETS OF THE POLICY All loan facilities considered only after obtaining loan application from the borrower and compilation of Confidential Report on them and the guarantor. The borrowers should have the desired background, experience/expertise to run their business successfully
Project for which the finance is granted should be technically feasible and economically/commercially viable i.e. it should be able to generate enough surplus so as to service the debts within a reasonable period of time.
Cost of the project and means of financing the same should be properly assessed and tied up. Both, under-financing and over- financing can have an adverse impact on the successful implementation of the project.
Borrowers should be financially sound, enjoy good market reputation and must have their stake in the business i.e. they should possess adequate liquid resources to contribute to the margin requirements.
Loans should be sanctioned by the competent sanctioning authority as per the delegated loaning powers and should be disbursed only after execution of all the required documents.
Projects financed must be closely monitored during implementation stage to avoid time and cost overruns and thereafter till the adjustment of the bank's loan.
The policy sets out minimum or benchmark lending rate, BPLR = 11 % The policy lays down norms for takeover of advances from other banks/ financial institutions
As a matter of policy the bank does not take over any Non-performing Asset (NPA) from other banks
11.1.3 METHODS OF LENDING 1. For Working Capital i. Simplified method linked with turnover Simplified method based on turnover for assessing working capital finance up to Rs.2 crore (upto Rs. 5 crore in case of SSI units)
ii. MPBF System Existing MPBF system with flexible approach shall be followed for units requiring working capital finance exceeding the above-mentioned amount iii. Cash Budget System Cash Budget System shall be followed in Sugar, Tea, Service Sector and Film Production accounts. It will be our endeavor to introduce the same selectively in other areas also Submission of Project Report along with the Request Letter 2. Term Loan In case of infrastructure/mega projects, proper appraisal will be made by utilizing the Feasible Determining of Interest Rate and Preparing Credit Report / Feasibility services of specialized / Technical officers. Preparation of Proposal Report and Risk Rating The term loans with remaining maturity period of above 5 years shall not exceed 50% of Not feasible the term deposits with remaining maturity period of above 5 years after taking into account the renewal of term deposits as per Submission of Proposal to designated the past trend Submission of Proposal to designated Authority (Circle office) Authority Carrying out Due Diligence on the Client
11.2 CREDIT APPRAISAL PROCESS AT PNB

Re-verification and analysis of the Proposal No Queries Vetting of Credit Risk Rating Report 11.2.1 FLOWCHART: Approval of request made by the client like Reduction of Interest Rates etc Queries Meeting with the client to clarify the queries
Acknowledgement of Sanction Terms & Condition by the client
Sanction of Proposal on various Terms & Conditions
Jagan Institute of Management Studies,Delhi
Application to comply with Sanction T&C. Execution of Loan Documents
Disbursement of Sanctioned Amount 51 from the branch office
Procedures at Branch Office Level
Procedures at Circle Office Level
11.2.2 BRIEF ON THE PROCESS At Punjab National Bank, proposal for financing working capital limits and term loans can relate to any of the following: 1. New proposal
2. Renewal of existing limits 3. Enhancement of existing limits Once a proposal is received, financial statements, project report and other important documents are used to evaluate: 1. Maximum permissible bank finance (in case of WC limit) 2. Techno Economic Feasibility Analysis of the project (includes all the 5 evaluation) 3. Various risks associated, if any 4. Various approvals of issues the borrower seeks (reduction of ROI, processing fee etc) 5. Risk rating of the borrower 6. Reasonableness of estimates/projection in regard to sales, chargeable current assets, current liabilities (other than bank borrowings) and net working capital 7. Classification of current assets and current liabilities in conformity with the guidelines issued by the Reserve Bank/HO. 8. Maintenance of minimum current ratio of 1.33:1 (Except where a relaxation is permitted as in the case of sick/weak units, diamond exporters, etc.). 9. An undertaking by the borrower to submit his annual accounts promptly. Further annual review is carried out regularly by the bank even where enhancement in credit limits is not involved 10. Provisions of Foreign Exchange Management Act, 2000 (FEMA), wherever applicable are complied with 11. In respect of industries where norms relating to inventory and receivables have been laid down by Reserve Bank/HO, credit limits should be determined in accordance with such norms and in other cases in tune with past trends.
12. In cases where deviations from norms/past trends are warranted, it should be ensured that these are justified and specific comments in this behalf are incorporated in the notes placed before the competent authority for sanction. 13. Specific guidelines issued by RBI/HO for sanctioning credit limits for financing certain specific activities such as diamond exports, leasing and hire-purchase, tea, sugar and computer software industries will continue to be in force.
11.2.3 RISK RATING OF THE BORROWER Punjab National Bank uses a system of internal ratings for the assessment of the credit quality and risk profile of its borrowers. An internal rating refers to a summary indicator of the risk inherent in an individual credit quality in an individual credit. Ratings typically embody an assessment of the risk of loss due to failure by a given borrower to pay as promised, based on consideration of relevant counterparty and facility characteristics. A rating system includes the conceptual methodology, management process, and systems that play a role in the assignment of a rating.
Credit risk rating tools at Punjab national bank With respect to Punjab National Bank, credit risk rating has been developed with a view to provide a standard system for assigning a credit rating to the borrowers of the bank according to their risk profile. The management of credit risk at PNB includes a continuing review of credit limits, policies and procedures; the approval of specific exposures and workout situations; the constant re-evaluation of the loan portfolio and the sufficiency of provisions thereof. PNB was also one of the first banks to develop their own credit models to ease up their way to risk management, PNB Trac -- for its entire category of lending. The loans with exposure of above Rs 20 lacs have been rated individually, while loans with exposure under Rs 20 lakh have been rated segment-wise on portfolio basis as per the terms of Basel II accord. This means that the bank would be able to do credit ratings on its own for its lendings.
Inputs (parameters) to PNB Trac The rating tool is designed to cater all the industry. The difference between ratings of two borrowers lie in the limits he/she is seeking from the bank and the industry of the same. There are broad categories defined in every model that require different parameters or inputs (both quantitative and subjective) depending on the industry the borrower serves. To explain the above statement an example of the inputs is described below.
Rating Model
New Project Model
Industry Limits
ABC Sector Rs. 1200 lacs
Facilities Required Term Loan
Inputs to the Model for the above mentioned loan will be: CATEGORY Management Evaluation PARAMETERS / INPUTS Capital market perception of the group Risk bearing capacity Track record in debt repayment Management Setup Integrity, commitment and sincerity Financial flexibility
Range of services Quality of service offered Business Evaluation Economies of operation Ambience of service outlet Effectiveness of distribution channels Quality of infrastructure available
Level of customer satisfaction Advertising / promotional strategies Brand equity Expected market growth Locational advantage Technology adopted in the process
Debt Equity Ratio Financial Evaluation Repayment Period (in yrs) Foreign exchange risk
Internal Rate of Return TOL / TNW Working capital cycle (in months)
Project Implementation Risk Evaluation
Project complexities Expected cost overrun Funding risk
Expected time overrun Status of obtaining clearances Service period (in yrs)
How the Rating is done 1. The scores are assigned to each of the parameters of each of the broad category in the different sections on a scale of 0 to 4 up to two decimal points with 0 being very poor and 4 being excellent. The scoring of some of these parameters is subjective while for some others it is done on the basis of pre-defined objective criteria. 2. The scores given to the individual parameters multiply by allocated weights are aggregated and a composite score for the company is arrived at in percentage terms. Higher the score obtained by a company, better is its credit rating. Weights have been assigned to different parameters based on their importance. Example: Factor Financial Evaluation Business & Industry Evaluation Management Evaluation Conduct of Account AGGREGATE SCORE The Aggregate Score of 61.75 refers to PNB- ATHIS MEANS THE RATING OF THE BORROWER IS PNB A11.2.4 DETERMINATION OF THE APPLICABLE RATE OF INTEREST
% score obtained 55.00 50.00 80.00 75.00
Weight 40.00% 25.00% 20.00% 15.00%
Weighted Score 22.00 12.50 16.00 11.25 61.75
Benchmark Prime Lending Rate (BPLR) Bank has determined Benchmark PLR (BPLR) after taking into account actual cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning / capital charge and profit margin. At present, BPLR has been fixed at 11%. BPLR is the reference rate for determination of rate of interest for the borrowers accounts.
Sub-BPLR Lending In order to remain competitive in the market, sub-BPLR lending is also permitted. The sub-BPLR lending lies in the vested powers of CMD/ED/GMs (Head Office)/Circle Heads. These powers are defined in the Internal Circular of the bank, which eventually depends on the rank of the officer and the credit risk rating of the borrower. For instance:
i. ii.
Sub-BPLR Lending permitted by CMD: Sub-BPLR Lending permitted by ED:
up to 5.50% below BPLR up to 3.00% below BPLR
iii. Sub-BPLR Lending permitted by Circle Heads: up to 1.00% below BPLR
Applicable Rate of Interest (ROI) The BPLR attracts further a term premia of 0.50% for term loans having a repayment reschedule over 3 years. Also the applicable ROI depends upon the credit risk rating and the Industry of the borrower. RBI also grants certain rebates or lower ROI for lending to few sectors, like Agriculture, SME etc. to boost the sector and encouraging more participation. Example: for Advances to NBFCs above Rs. 20 lacs
CREDIT RISK RATING AAA A BB 11.2.5 POST SANCTION FOLLOW UP

Jagan Institute of Management Studies,Delhi
APPLICABLE ROI BPLR + 1.50 % BPLR + 3.00 % BPLR + 3.50 %
(The Base Rate system will replace the BPLR system with effect from July 1, 2010)
57
If the proposal is considered viable and accepted by the bank then proper account in name of the borrower is created. The account is reviewed from time to time in order to know whether the company has met with all the terms & conditions or not, whether the interest is being paid on time or not, whether there is overdraft in accounts or the funds are not utilized by the company at all, whether the banks interest income is increasing or not. Two of the most used methods for post sanction follow up are:
1. PREVENTIVE MONITORING SYSTEM (PMS) Objectives of PMS The objective of PMS is to track & evaluate the health of borrowers account on a continuous basis and detect: Unsatisfactory/adverse signals/indicators at an early stage in a comprehensive manner. Thorough probe into reasons behind observed signals and analysis thereof. Speedy corrective/remedial actions/steps to prevent the account from becoming NPA as well as to minimize the loan losses. Preventive Monitoring System consists of two parts: i. PMS Index and Rank PMS Index is a numerical index consisting of 29 indicators Parameters grouped into 6 sections. Penalty rates (weights) in the form of numerical values have been assigned to each indicator (parameter) depending upon their degree of impact on health of an account. The score assigned to any parameter is stored for last one year at any point of time, which is known as Cumulative score. The section-wise maximum of cumulative scores is to be summed up to arrive at PMS Index Score. Based on PMS Index Scores a scale of 1 to 10 has been devised, which is known as PMS Ranking Scale. The PMS Rank indicates the state of health of an account. The lower the PMS Rank, better the health of account and vice-versa.
ii.
PMS Report PMS Report, which has eight parts, describes brief profile of the borrower, position of accounts, details of signals contributing to PMS Index Score, reasons behind adverse signals and proposes corrective/ remedial steps with time frame.
2. QUARTERLY MONITORING SYSTEM (QMS) Bank has prescribed the QMS system for monitoring performance of big borrower accounts enjoying working capital facilities of Rs. 1crore & above from the banking system. QMS includes the submission of data on the prescribed formats depending upon the economic activity of the borrower. Under this system financial and operational information/ data is required to be submitted in two different sets of formats i. QMS I This form is required to be submitted within six weeks from the close of the quarter to which it relates. It gives information about the operations of the unit and its performance for the quarter, also giving reasons for non-achievement of sales/production targets. ii. QMS II This form is required to be submitted within two months from the close of the half-year to which it relates. In addition to providing comparative position of the actuals vis-a-vis the projections accepted at the time of sanction relating to the operations of the unit, this form also indicates the `SOURCES' and ÙSES' of the funds generated by the unit, during the half year. Critical analysis of this form can reveal the diversion of short-term funds for long term uses.
Chapter
12
CASE STUDY ABC PARTS PVT. LTD
12.1BORROWERS PROFILE
Group Name Address of Regd./Corporate Office Constitution Date of incorporation Dealing with PNB since Industry/Sector Business Activity (Product) Sunbeam Group of Education Narayanpur, Mirzapur, Uttar Pradesh Private Group 14.09.2011 03.10.2011 Priority Sector School (in association with Sunbeam Group)
BACKGROUND The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The borrower has setup manufacturing units at 4 locations for manufacturing of Automotive Parts. This company is an ISO-9001 2000 Certified Company and working speedily on achieving the TQ 14000. The Management of the company is experienced and working in the line since long and the party is having the regular orders for marketing of products and as well as contracts with corporate manufacturing units of Vehicles/Auto Mobiles. Because of their standing the company is getting repeated orders. The Company is supplying its product to manufacture of Automobile/Vehicles Manufacturer unit as Original Equipment Manufacturers. The company has set up in- house R&D facility in their unit, sophisticated instrumentation laboratory, testing laboratory etc., which reflects the broad vision of the company to withstand the changing environment.
SHAREHOLDING Major Share holders Promoters Holding No. of shares NIL Amt. in Rs. Lacs NIL % Holding NIL
FIs/ Mutual Funds/UTI/Banks/FIIs NRIs/OCBs Public Total
NIL NIL NIL NIL NIL
NIL NIL NIL
NIL NIL NIL NIL
FACILITIES REQUIRED
NATURE TERM LOAN Limit of Credit Exposure on account of all Derivative Products TOTAL COMMITMENT
EXISTING FRESH FRESH
PROPOSED 50.80 (in lakh)
FRESH
50.80
12.2 CREDIT APPRAISAL FOR ABC PARTS PVT. LTD I. MANAGERIAL EVALUATION
1. Market reputation on the promoter / management of the company: 2. Brief Profile of Promoters
Satisfactory
The family has good history of running school at village level. The family has been associated with SHREE RAM PRASAD BALIKA INTER COLLEGE at Sherpur, Narayanpur , Mirzapur and RASHTRIYA INTER COLLEGE,Sherpur, Narayanpur, Mirzapur as a part of management of the school for more than forty years. The school shall be managed under guidance of --
Sri Yogendra Kumar Singh (Aged about 60 years) who has been the part of management of the above mentioned Inter College, besides a successful businessman of Brick Kiln for more than forty years and a leading farmer of Narayanpur. Sri Rakesh Singh(Aged about 50 years) is also associated with the above Inter College as part of management, Partner in Abhinav Tyre at Narayanpur, having turnover of more than one crore, in transport business and leading farmer of the region. Sri Saket Singh (Aged about 44 years) is proprietor of M/s Abhishek Automobiles, associated with BRICK KILN business and leading farmer of the region. Abhishek Singh is MBA in marketing having worked for more than one year with India Mart is young & energetic is looking after the school project under the able guidance of the family. Sri Abhinav Singh has recently completed MBA in finance and is looking after the finance matter of the school. Executive functioning shall be operated through a managing committee concerning of professionals and experienced educational. The Institute shall be named as SUNBEAM NARAYANPUR.
3. Confidential Reports: Satisfactory
Marketing: Narayanpur is situated near Varanasi. As holy city Varanasi is not only popular for religious purpose but also it is one of the biggest centre for education. This historical city has four universities. Varanasi city has been growing very fast and it`s population has increased many fold. This is the main reason that a lot of schools and colleges has been set up in the recent years for e.g. SMS, DPS, SUNBEAM, ARYAN INTERNATIONAL SCHOOL and are running successfully as the present capacity of the educational institute is not sufficient to meet the requirement of the city. To cope with the requirement of growing no of students, the trust has decided to set up a school in the name of SUNBEAM NARAYANPUR at Narayanpur,Mizapur. TRIVENI DEVI EDUCATIONAL TRUST is established by Shri Ygendra Kumar Singh, Shri Rakesh Singh & Shri Saket Singh. at Narayanpur, Mirzapur with the main purpose of providing modern education in association with SUNBEAM GROUP (well known school of
VARANASI) under CBSE .As the there was no such school in this area, demand for a school with modern facilities was overdue. To fill up this gap the school is being set up.
II.
BUSINESS
EVALUATION
The
proposed
project
is
situated
at
NARAYANPUR,MIRZAPUR. The place is easily approachable and conducive for education. Location is very peaceful area from educational point of view with no competitor.
III. BRIEF FEASIBILITY STUDY OF THE PROJECT: Demand for educated person is growing very rapidly considering the demand from various sectors, to fulfill the requirement of the educated person this school will be of great help and will not be a problem to run the school, as a lot of registration have already done for the session 2012-2013 & queries is still going on for admission IV. LEGAL EVALUATION -
Status of various statutory approvals and clearances :

All statutory approvals will be taken from competent authority before release of proposed credit facility.
Implementation schedule/Draw down schedule: The entire TL of Rs:50.80 lacs will be availed by the party in one go. Proposed repayment schedule: Monthly Installment of Rs.84700.00 plus interest. Interest will be serviced by the party as and when levied in the account.
V. FINANCIAL EVALUATION -
Financial Position of the borrower (Rs. in lac)
31.3.13 Gross Receipt Other Income Operating Profit/Loss Profit before tax Profit after tax Cash profit/ (Loss) 78.34 0.00
31.3.14 108.86 0.00
31.3.15 132.48 0.00
31.3.16 144.00 0.00
31.3.17 155.52 0.00
32.42 7.28 7.28 7.28 155.7 5 17.30 138.4 5
56.59 38.14 38.14 38.14 103.6 2 12.11 91.51
72.24 59.16 59.16 59.16 100.86 8.48 92.38
83.91 75.14 75.14 75.14 98.93 5.93 93.00
95.28 90.16 90.16 90.16 97.25 4.15 93.10
Block Assets
Depreciation Net Assets
Secured Loan Unsecured Loan Paid up capital
45.75 0.00 128.1 0 7.28 0.00 0.00 0.00 135.3 8 0.30 0.41
34.75 0.00 128.1 0 38.14 0.00 0.00 0.00 166.2 4 0.18 0.52
23.75 0.00 128.10 59.16 0.00 0.00 0.00 187.26 0.11 0.55
12.25 0.00 128.1 0 75.14 0.00 0.00 0.00 203.2 4 0.05 0.60
0.00 0.00 128.1 0 90.16 0.00 0.00 0.00 218.2 6 0.00 0.63
Reserves and Surplus excluding revaluation reserves Misc. expenditure not written off Accumulated losses Deferred Tax Liability/Asset Tangible Net Worth
Debt Equity Ratio Operating Profit/Sales
Comments on Financial Indicators Gross Receipt: The Projected Gross Receipts of school is Rs 78.34 lacs as on31.03.2013, Rs.108.86 lacs as on
31.03.2014, Rs.132.48 as on 31.03.2015, Rs.144.00 lacs as on 31.03.2016, and Rs.155.52 as on 31.03.2017, Projected Realization of fees: 80% 1013 680*1200*80/100*12/1000000 840*1200*90/100*12/1000000 920*1200*100/100*12/1000000 1000*1200*100/100*12/1000000 1080*1200*100/100*12/1000000 1160*1200*100/100*12/1000000 78.34 108.86 132.48 144.00 155.52 78.34 108.86 132.48 144.00 155.52 167.04 167.04 90% 1014 100% 1015 100% 1016 100% 1017 100% 1018
Average fees Rs: 1200.00 per student per month There is no private school nearby Narayanpur, Mirzapur area. As such management is hopeful get more admission during the present academic year. In view of the above, the projection made by the Trust is justified hence accepted. Net Profit (PAT): The school has projected PAT of Rs.7.28 lacs, Rs. 38.14 Lacs, Rs:59.16 lacs, Rs:75.14 lacs,and Rs:90.16 lacs during the year 2012-13, 2013-14, 2014-15 and 2015-16 and 2016-17 respectively. Keeping in view the gross receipt of the institute during above mentioned periods , the profit of the school is reasonable.
DER: The total cost of project is Rs: 228.10 lacs. Out of which the party has applied for TL of Rs:50.80 lacs only. Remaining Rs: 177.30 lacs will be borne by the party themselves. Thus in present case the DER is 0.22:1, which is well within prescribed range. Unsecured loan: The society has not raised loan from members and others to meet their requirement of capital expenditure.
Details of investment in Shares, Debentures, Units or diversion of funds outside the business etc. -- N.A--
Details of Liabilities not accounted for/Contingent liabilities --N.A-Status/details of adverse comments by Auditors of the borrowing unit
--N.A--
PRESENT PROPOSAL Present proposal is for sanctioning of TL for purchase of school buses, mini van and Tata Magic. Party has applied for TL of Rs: 50.80 lacs only for purchase of said vehicle.
Justification for working capital sanction as per simplified method or traditional method of
lending, as the case may be --N.A
Assessment of Fund Based Limits as per simplified turnover method: NA (A) Assessment of Non Fund Based Limits LETTER OF CREDIT -- N.A BANK GUARANTEE --N.A ( B) Justification for term loan-
Purpose:
Party has requested for sanction of T/L of Rs:50.80 lacs for purchases of 4 Buses , 2-Tata Magic and 2-Mini Van.(Bus-Rs: 1409250.00 each, TATA MAGIC Rs:387000.00 each as per quotations dt: 08.02.2012 and dt:21.02.2012 of M/s Yash Automotive Pvt.Ltd.and Mini Van Rs;362500.00 each as per quotation dt:21.02.2012 of M/s Raj India Auto Pvt.Ltd. The construction of school building will be carried out from their own sources.
Summary of cost of project and means of finance : (Rs. In lacs) COST OF PROJECT AND MEANS OF FINANCE Total Cost of project for transport vehicle 67.85 TL from bank for purchase 4 buses , 2-Tata Magic and 2-Mini 50.80 Van. Cost of 4 buses , 2-Tata Magic and 2-Mini Van.(Bus-Rs: 1409250.00 each, TATA MAGIC Rs:387000.00 each as per quotations dt: 08.02.2012 and dt:21.02.2012 of M/s Yash Automotive Pvt.Ltd.and Mini Van Rs;362500.00 each as per quotation dt:21.02.2012 of M/s Raj India Auto Pvt.Ltd Re 17.05 maining amount will be born by borrower. (Rs in lacs) 2016 2017 75.14 90.16 4.80 4.00 10.16 10.16 90.10 104.32 4.80 4.00 10.16 10.16 14.96 14.16 6.02 7.37
DSCR PAT INTT INSTT INFLOW (A) INTT INSTT OUTFLOW(B) DSCR (A/B)
2013 7.28 7.20 10.16 24.64 7.20 10.16 17.36 1.42
2014 38.14 6.39 10.16 54.69 6.39 10.16 16.55 3.30
2015 59.16 5.60 10.16 74.92 5.60 10.16 15.76 4.75
The minimum DSCR is 1.42 and maximum DSCR is 7.37. The average DSCR is 4.57 which is well within prescribed range.
Present status of project (physical as well as financial):
Out of total vehicle cost of Rs:67.85 lacs ,the party has already made advance of Rs:14.10 lacs in favour of supplier M/s Yash Automotive Pvt.Ltd. on 08.02.2012 and party has applied for TL of Rs:50.80 lacs .
Status of various statutory approvals and clearances: All statutory approvals will be taken from competent authority before release of proposed credit facility. Implementation schedule/Draw down schedule: The entire TL of Rs:50.80 lacs will be availed by the party in one go. Proposed repayment schedule: Monthly Installment of Rs.84700.00 plus interest. Interest will be serviced by the party as and when levied in the account.
12.4 SECURITY PRIMARY : : Hypothecation of 4 school buses, 2-Tata Magic and 2- Mini Van purchased from Bank loan. COLLETRAL: i) Hypothecation/ Mortgage of Block Assets Immovable Properties Rs in lacs Security Description Area in Ownershi Sq M or p Sq Ft 8772 sq.ft. Owned by Sri Yogendra Kumar Singh, Sri Rakesh Singh, Sri Saket Kumar Singh Value Last sancti on N.A Present book value Rs:80.57 lacs Realisable value Rs:68.48 lacs Basis for valuati on Date Whet her existi ng/ fresh Fresh
Land & Building -S.M.old plot No.106 & New Plot No.176, measuring 6 bishwa & 9 dhoor, situated at Vill:Nizamuddinpu r, Pargana:Bhueli, Tehsil-Chunar, District:Mirzapur.
Rs:68.48 lacs
Bank,s 05.03.12 approv ed valuer Sh.S.K .Rai BM 05.03.12 Valuat ion
Fresh .
1. Repayment: Total repayment will be made in 60 monthly installments W.E.F. April, , 2012 as under:(Amt.in Rs.) Financial Year 2012-13 2013-14 2014-15 2015-16 2016-17 Installment Per month 84700x12 84700x12 84700x12 84700x12 84700x12 GRAND TOTAL Total 1016400.00 1016400.00 1016400.00 1016400.00 1014400.00 5080000.00
Personal /Corporate Guarantee :
Rs in lacs
Name of Guarantor
Relationship with borrower
Net Worth
Date of confidential report
Prev. As at . Yogendera Kr.Singh Rakesh Singh Saket Singh President Trustee ---
Present As at 05.03.2012. 102.17 101.57 91.47
Prev.
Present
----
10.03.2012 10.03.2012 10.03.2012
CREDIT RISK RATING ABC PARTS PVT LTD

CRR has been done on the PNB SME score based on projected BS as at 31.03.2013. The party is new & has no existing operation/work. RATING: BB
SCORE: 51.50 b) Rate of Interest applicable as well as proposed: BASE RATE+4.50+0.50(term premia) presently 15.75% as applicable to Credit Risk Rating BB compounded monthly rest subject to change as per banks guidelines after reduction by 1%. c) Risk perception, if any Other Issues: NIL Amount Margin : Rs.50.80 lacs (Rs.Fifty lacns eighty thousand only) : 25%
Chapter
13
CONCLUSION& RECOMMENDATIONS
CONCLUSION
The study at PNB gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the working capital finance and term loan assessment. I have realized during my project that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how. The credit appraisal for business loans has been devised in a systematic way. It is a process of appraising the credit worthiness of loan applicants. Thus it extremely important for the lender bank to assess the risk associated with credit; thereby ensure the security for the funds deposited
by the depositors. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal. It includes phase-wise analysis which consists of 6 phases: 1. Financial statement analysis 2. Working capital and its assessment techniques 3. Techno Economic Feasibility Analysis 4. Credit risk assessment 5. Documentation 6. Loan administration Punjab National Banks adoptions of the Projected Balance Sheet method (CMA) of assessment procedures are based on sound principles of lending. This method of assessment has certain flexibility required to avoid any rigid approach to fixing quantum of finance. The PBS method have been rationalized and simplified to facilitate complete flexibility in decision-making. To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That is why Credit Risk Management system is an essential ingredient of the Credit Appraisal exercise. PNB has formulated a Credit Risk Rating model, PNB Trac. It considers important parameters like profitability, repayment capacity, efficiency of the unit, historical / industry comparisons etc depending on the industry. PNB Trac is one of the best rating models present till date.
FINDINGS
After completing the entire project at Punjab National Bank the following key findings as mentioned below were observed.
1. At Punjab National Bank, Circle Office the priority to appraise a proposal was given to new or fresh clients over the existing clients presenting proposals for renewal 2. Ratings, as being performed at PNB, are done once a year. Therefore, the ratings do not take into account short term drastic changes like price level changes (which are an issue with any method based on accounting statements, since annual reports are based on historical cost basis of accounting and other changes like sudden mishap/ of the counterparty are not readily accounted for by the rating system due to long lag between repeat ratings on the same account. 3. Some of the parameters in Business and industry evaluation are based on the information provided by company, which in some cases may not be sufficient. No specific guidelines are followed in such cases. Also, some of the parameters here may be rendered redundant in some cases and may push up/ push down the rating needlessly in these cases.
4. The present risk rating model does not have any mechanism to prioritize certain sectors of the economy. There are certain sector in the economy where risk spread is low and certain sectors where spread of risk is high like real estate. Also, there are certain infrastructural projects which need to be prioritized. The risk rating model is not flexible to incorporate all these issues. 5. The BPLR system will soon be replaced by Base Rate system. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. 6. With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and finance requirements of SMEs.
RECOMMENDATIONS
The Credit Department at PNB Circle Office Delhi, works at its full potential and the staff is highly experienced and has a very strong intuitive sense. So, there is no such recommendation on the entire process. However to make the process more flexible and efficient, an electronic database should be designed carrying all the available and important information related to the proposals accepted, and it should be easily accessible to the Credit Department. This will help reduce paperwork and loss of information.
LIMITATIONS
Like any other study this study too is not free from limitations. The major limitations of the study are listed below: 1. The major limitation of this study shall be data availability as the data is proprietary and not readily shared for dissemination.
2. Also the geographical scope of the project was limited to PNB Circle Office and the loans studied were of solely of businesses established majorly in NCR
3. The credit appraisal decision are more of intuition and experience and since the time period was limited, hence best efforts were made to grasp the process as much as possible
4. Due to ever changing environment, many risks are unexpected and the remedial measures available are based on general experience from the past. Therefore risks can only be minimized cannot be erased completely. Hence, out of the various ways in which risks can be managed, none of the methods is perfect and may be very diverse even for the work in a similar situation in the future
REFERNCES
Ben McClure. Working Capital Works. Investopedia. From http://www.investopedia.com/articles/fundamental/03/061803.asp Richard Loth. The Working Capital Position. Investopedia. From http://www.investopedia.com/articles/basics/06/workingcapital.asp Naila Iqbal. Paradigms of Working Capital Management. From http://ezinearticles.com/? Paradigms-of-Working-Capital-Management&id=1251489 Jagdish Capoor. Risk Management in Financial Institutions. From
http://www.coolavenues.com/know/fin/jagdish_capoor_a.php3
Principles for the Management of Credit Risk, from http://www.bis.org/publ/bcbsc125.pdf
RBI Circulars and Guidelines Guidelines on Credit Appraisal

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Credit Appraisal in Punjab National Bank Pre-Sanction And Post-Sanction Follow-up

Submitted in partial fulfillment of PGDM program 2011-2013

Name Kanika Rai Roll No- FB11078

JAGAN INSTITUTE OF MANAGEMENT STUDIES ROHINI DELHI

Credit appraisal in PNB

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CREDIT APPRAISAL AN INTRODUCTION

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systems which have been put in place have to given. 6. Financials

facilities being enjoyed at the moment.

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7.1 WORKING CAPITAL AND ITS ASSESSMENT

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Traditional method of assessment of working capital requirement

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Rs. A Rs. B Rs. C Rs. D Rs. E A+B+C+D+E Rs. F Rs. G

WORKING CAPITAL REQUIRED (H) = (A+B+C+D+E)- (F+G)

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Projected Annual Turnover Method for SME units (Nayak Committee)

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Projected Balance Sheet Method (PBS)

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7.2 ASSESSMENT OF TERM LOANS

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7.3 BASEL ACCORD & RISK MANAGEMENT

Tier I Capital CAPITAL Tier II Capital

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8.2 MARKET ANALYSIS

8.3 TECHNICAL ANALYSIS

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