CHAPTER 1

EXECUTIVE SUMMARY

The project is on credit appraisal process of State bank of India. Credit appraisal is an important activity carried out by the credit department of the bank to determine whether to accept or reject the proposal for finance. Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions like banks which are involved in providing financial funding to its customers.

The project first of all makes a study of the state bank of India - its important functions. Then it highlights on the concept of Bank Credit & its recent trends. The project then proceed towards the lending procedure of banks and here it highlights about credit appraisal being the first step in building up of a loan proposal. Then it discusses the bank credit policy with respect to state bank of India where the project was undertaken.

The project then proceeds with the review of literature i.e. review of some past work regarding credit appraisal by various researchers. The project then moves towards research methodology where it covers the information regarding the type of data collected and the theoretical concepts used in the project are discussed in detail. Then the project proceeds with the next chapter consisting of the analysis part which covers the analysis of various techniques used by the banks for the purpose of credit appraisal and analysis of the customers views towards the credit policy system of the bank. Then the project moves to its next chapter i.e. findings where some results found out are interpreted and then moving on to the last and the final chapter i.e. the suggestions and conclusions where some steps are suggested to be implemented to increase the work efficiency and to reduce to work pressure.

CHAPTER 2 OBJECTIVE OF THE STUDY

1.1OBJECTIVE OF THE STUDY

Objectives of a project tell us why a project has been taken under study. It helps us to know more about the topic that is being undertaken and helps us to explore future prospects of that organization.

To analyse the importance of credit appraisal system in State bank of India To find out the effectiveness of the credit appraisal system in State bank of India.

To study the credit policy adopted by the bank for their lending activities To analyse the credit risk assessment (CRA) system followed in the bank Carryout customer satisfaction survey to find out the perspective of the customer towards the credit appraisal system of the bank

CHAPTER 3 RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

In any research work, the methodology used is of crucial significance. Any research methodology used must be able to meet certain goals. Any research methodology used must help in achievement of the objectives of the study. Secondly, the research methodology must deliver accurate data and, by extension, accurate results.

Methods of Data collection: The analysis tools used is of both types which include 1. Primary data. a) Questionnaire. b) Survey

2. Secondary Data. a) Newspaper & Books b) Internet & Journals.

Sample Area & Size: A Survey was conducted in the area of thane with a Sample Size of 100 Respondents.

CHAPTER 4 LITERATURE REVIEW

Review of Literature

Literature review provides available research with respect to the selected topic of the project or the research findings by an author which has been done with respect to the research topic. This chapter provides the overall view of the available literature with respect to the topic of the project. The review of the related research works are described as under:-

1. A research work on the topic On the appraisal on consumer credit banking products with the asset quality frame: A multiple criteria application. done by Panagiotis Xidonas, Alexandros Flamos, Sortirios Koussouris, Dimitrious Askouins & Ioannis Psarras from National Technical University of Athens in 2007 says that Asset quality refers to the likelihood that the bank's earning assets will continue to perform and requires both a qualitative and quantitative assessment. Decision problems like the "internal appraisal of banking products", are problems with strong multiple-criteria character and it seems that the methodological framework of Multiple Criteria Decision Making could provide a reliable solution. In this paper, the Asset Quality banking indicators are the, so called, "criteria", the value of these indicators are the, so called, "scores" in each criterion and the P.R.O.METH.E.E. [Preference Ranking Organization Method of Enrichment Evaluations, Brans & Vincke (1985)] Multiple Criteria method is applied, towards modeling banking products appraisal problems. A Multiple Criteria process, strictly mathematically defined, integrates the behavior of each indicator-criterion and utilizes each score in order to rank the so called "alternatives", i.e. categories of banking products.

2. The research Paper on Evaluation of decision support systems for credit management decisions by S. Kanungo, S.Sharma, P.K. Jain from Department of studies, IIT Delhi have conducted a study to evaluate the efficiency of decision support system (DSS) for credit management. This study formed a larger initiative to access the effectiveness of the I.T based credit management process at SBI. Such a study was necessitated since credit appraisal has become an integral sub-function of the Indian banks in view of growing incidence of non-performing assets. The DSS they have assessed was a credit appraisal system developed by Quuattro pro at SBI. This system helps in analysis of balance sheets, Calculation of financial ratios, cash flow analysis, future projections, and sensitivity analysis and risk evaluation as per SBI norms. They have also used a strong Quassi experimental design called Solomons four group design for the assessment. In the experiment the managers of SBI who attended the training programme were the subjects the experiment consisted of the measurements that were taken as pre and post tests. An experimental intervention was applied between the pretests and the pro-tests. The intervention or stimulus consisted of DSS training and use. There were four groups in the experiment. The stimulus remained constant as the they took care to ensure that the course content as well as the instructors remained the same during the course of the experiment. Two were experimental groups and two were control groups. All four groups underwent training in credit management between the pre and the post tests. Results from research shows that while the DSS is effective, improvement needs to be done in the methodology to assess such improvements. Moreover such assessment frameworks while being adequate from a DSS-centric viewpoint do not respond to the assessment of DSS in an organizational setting. In the concluding section they have discussed how this evaluative framework can be strengthened to initiate an activity that will allow the long term and possibly the only meaningful evaluation framework for such a system

3. The research paper in Credit appraisal in the US by Elkhoury 2009 says that Credit rating companies play a fundamental role in shaping economic directions of countries. Credit rating agencies (CRAs) play a key role in financial markets by helping to reduce the

informative asymmetry between lenders and investors, on one side, and issuers on the other side, about the creditworthiness of companies or countries. CRAs' role has expanded with financial globalization and has received an additional boost from Basel II which incorporates the ratings of CRAs into the rules for setting weights for credit risk. Ratings tend to be sticky, lagging markets, and overreact when they do change. In the United States, just like in other industrialised countries, credit rating agencies (CRA's) are crucially important manifestations of financial spheres and their role in driving economies cannot be underrated. Credit appraisal in the United States is an industry that continues to face several challenges. Firstly, the industry has the agencies have continued to operate within their own financial and market architectural frameworks, despite massive changes which have continued to present themselves in the financial sector. Of late, credit appraisal agencies in the United States has come under focus due to the prevailing credit crisis facing the country and ,by extension, the global economy as well. Several criticisms have been levelled against the major credit rating agencies. Additionally, it has been noted that the quality of the agencies rating process must be effective and accountable to issuers of debts. In particular, it has been reported that in course of executing their responsibilities, CRAs should not, ideally, encounter financial situations which compromise their integrity. This, it has been shown, would reduce the levels of risks of debt issuers. However, Kerr (2008) reports that the quality of rating process of the agencies has been poor, with cases of conflict of interests being detected. It has recommended expanding the [voluntary] code to try to

ensure the quality of the rating process, avoid conflicts of interest, define agencies responsibilities to issuers of debt and credit investors and clarify agencies communication with market participants. However the author writes that such measures are intended to 'enhancing competition, promoting transparency, reducing conflicts of interest, and reducing ratings-dependent regulation. These approaches are all broadly consistent with the dominant academic theory of rating agencies, the "reputational capital" model, which is taken to imply that under the right circumstances a well-functioning reputation mechanism will deter low-quality ratings. The policy initiatives currently under consideration can be seen as efforts to fix discrete problems with the rating market so that the reputation mechanism can work properly.'

4. The research paper on the topic Competitive analysis in banking: Appraisal of the methodologies by Nicola Cetorelli has discussed about the U.S. banking industry has experienced significant structural changes as the result of an intense process of consolidation. From 1975 to 1997, the number of commercial banks decreased by about 35 percent, from 14,318 to 9,215. Since the early 1980s, there have been an average of more than 400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998). The relaxation of intrastate branching restrictions, effective to differing degrees in all states by 1992, and the passage in 1994 of the Riegle.Neal Interstate Banking and Branching Efficiency Act, which allows bank holding companies to acquire banks in any state and, since June 1, 1997, to open interstate branches, is certainly accelerating the process of consolidation. These significant changes raise important policy concerns. On the one hand, one could argue that banks are merging to fully exploit potential economies of scale and/or scope. The possible improvements in efficiency may translate into welfare gains for the economy, to the extent that customers pay lower prices for

banks. services or are able to obtain higher quality services or services that could not have been offered before.1 On the other hand, from the point of view of public policy it is equally important to focus on the effect of this restructuring process on the competitive conditions of the banking industry. Do banks gain market power from merging? If so, they will be able to charge higher than competitive prices for their products, thus inflicting welfare costs that could more than offset any presumed benefit associated with mergers. In this article, analysis of competition in the banking industry is done highlighting a very fundamental issue: How market power is measured and how do regulators rely on accurate and effective procedures to evaluate the competitive effects of a merger.

CHAPTER 5 INTRODUCTION TO BANKING SECTOR

5.1A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban cooperative banks and 16 scheduled state cooperative banks. Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year. State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs. 1040bn. Higher provisioning norms, tighter asset classification norms, dispensing with the concept of past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the measures in order to improve the banking sector. A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations. Retail Banking is the new mantra in the banking sector. The home Loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming

years. Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers. With a view to provide an institutional mechanism for sharing of information on borrowers / potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital from the market. Banks are free to acquire shares, convertible debentures of corporate and units of equity oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The government will hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).

Reforms in the Banking sector

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank has to earmark a minimum percentage of their Loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eight-fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. This banks due to their late start have access to stateof-the-art technology, which in turn helps them to save on manpower costs and provide better services. During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000

Classification of Banks:

The Indian banking industry, which is governed by the Banking Regulation Act of India 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In Terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old / new domestic and foreign). These banks have over 67,000 branches spread across the country. The Indian banking industry is a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt into old banks and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions

Banks

IFCI IDBI

ICICI NABARD

NHB IRBI

EXIM Bank

SIDBI

Commercial Banks

Regional Rural Banks

Land Development Banks

Cooperative Banks

Public Sector Banks

Private Sector Banks

SBI Groups

Nationalized Banks

Indian Banks

Foreign Banks

Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. Some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Commercial banks are the oldest, biggest and fastest growing financial intermediaries in India. They are also the most important depositories of public savings and the most important disbursers of finance. Commercial banking in India is a unique banking system, the like of which exists nowhere in the world. The truth of this statement becomes clear as one studies the philosophy and approaches that have contributed to the evolution of banking policy, programmes and operations in India. The banking system in India works under constraints that go with social control and public ownership. The public ownership of banks has been achieved in three stages: 1995, July 1969 and April, 1980. Not only the public sector banks but also the private sector and foreign banks are required to meet the targets in respect of sectoral deployment of credit, regional distribution of branches, and regional credit deposit ratios. The operations of banks have been determined by lead bank scheme, Differential Rate of interest scheme, Credit authorization scheme, inventory norms and lending systems prescribed by the authorities, the formulation of credit plans, and service area approach.

Commercial Banks in India have a special role in India. The privileged role of the banks is the result of their unique features. The liabilities of Bank are money and therefore they are important part of the payment mechanism of any country. For a financial system to mobilize and allocate savings of the country successfully and productively and to facilitate day-to-day transactions there must be a class of financial institutions that the public views are as safe and convenient outlets for its savings. The structure and working of the banking system are integral to a countrys financial stability and economic growth. It has been rightly claimed that the diversification and development of Indian Economy are in no small measure due to the active role banks have played financing economic activities of different sectors.

Major objectives of commercial banks

Balancing profitability with liquidity management

As any other business concern, Banks also aim to make profit but besides that they also need to maintain liquidity beacuse of the nature of their liabilities.

Management of Reserves
Banks are expected to hold a part of their deposits in form of ready cash which is known as CASH RESERVES. Central bank decides the reserve ratio known as the CRR.

Creation of Credit
Banks are said to create deposits or credit or money or it can be said that every loan given by bank creates a deposit. This has given rise to the important concept of money multiplier.

5.2 LOCAL SCENARIO OF BANKING SECTOR

Indian Banking System: The Current State & Road Ahead

Introduction Recent time has witnessed the world economy develop serious difficulties in terms of lapse of banking & financial institutions and plunging demand. Prospects became very uncertain causing recession in major economies. However, amidst all this chaos Indias banking sector has been amongst the few to maintain resilience. A progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of nonperforming assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken by the Committee on Financial Sector Assessment (CFSA) also shows that the commercial banks are robust and versatile. The single-factor stress tests undertaken by the CFSA divulge that the banking system can endure considerable shocks arising from large possible changes in credit quality, interest rate and liquidity conditions. These stress tests for credit, market and liquidity risk show that Indian banks are by and large resilient.

Thus, it has become far more imperative to contemplate the role of the Banking Industry in fostering the long term growth of the economy. With the purview of economic stability and growth, greater attention is required on both political and regulatory commitment to long term development programme. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures that are required to further the pace of growth. The results of our survey are given in the following sections.

General Banking Scenario The pace of development for the Indian banking industry has been tremendous over the past decade. As the world reels from the global financial meltdown, Indias banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities, a feat unlikely to be matched by other developed markets around the world. FICCI conducted a survey on the Indian Banking Industry to assess the competitive advantage offered by the banking sector, as well as the policies and structures required to further stimulate the pace of growth. The predicament of the banks in the developed countries owing to excessive leverage and lax regulatory system has time and again been compared with somewhat unscathed Indian Banking Sector. An attempt has been made to understand the general sentiment with regards to the performance, the challenges and the opportunities ahead for the Indian Banking Sector. A majority of the respondents, almost 69% of them, felt that the Indian banking Industry was in a very good to excellent shape, with a further 25% feeling it was in good shape and only 6% of the respondents feeling that the performance of the industry was just average. In fact, an overwhelming majority (93.33%) of the respondents felt that the banking industry compared with the best of the sectors of the economy, including pharmaceuticals, infrastructure, etc. Most of the respondents were positive with regard to the growth rate attainable by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the view that growth would be between 15-20% for the year 2009-10 and greater than 20% for 2014-15.

Banking Activities Over the last three decades, there has been a remarkable increase in the size, spread and scope of activities of banks in India. The business profile of banks has transformed dramatically to include non-traditional activities like merchant banking, mutual funds,new financial services and products and the human resource development. Their survey finds that within retail operations, banks rate product development and differentiation; innovation and customization; cost reduction; cross selling and technological up gradation as equally important to the growth of their retail operations. Additionally a few respondents also find pro-active financial inclusion, credit discipline and income growth of individuals and customer orientation to be significant factors for their retail growth. There is, at the same time, an urgent need for Indian banks to move beyond retail banking, and further grow and expand their fee- based operations, which has globally remained one of the key drivers of growth and profitability. In fact, over 80% of banks in their survey have only up to 15% of their total incomes constituted by fee- based income; and barely 13% have 20-30% of their total income constituted by fee-based income. Out of avenues for non-interest income, we see that Banc assurance (85.71%) and FOREX Management (71.43%) remain most profitable for banks. Derivatives, understandably, remains the least profitable business opportunity for banks as the market for derivatives is still in its nascent stage in India. There is nevertheless a visibly increased focus on fee based sources of income. 71% of banks in their survey saw an increase in their fee based income as a percentage of their total income for the FY 2008-09 as compared to FY 200708. Indian banks are fast realizing that fee-based sources of income have to be

actively looked at as a basis for future growth, if the industry is to become a global force to reckon with.

5.3Bank Credit
The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan is known as a bank credit. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.

The operating paradigms of the banking industry in general and credit dispensation in particular have gone through a major upheaval.

Lending rates have fallen sharply. Traditional growth and earning such as corporate credit has been either slow or not profitable as before. Banks moving into retail finance, interest rate on the once attractive retail loans also started coming down. Credit risks has went up and new types risks are surfaced

Types of credit
Bank in India provide mainly short term credit for financing working capital needs although, as will be seen subsequently, their term loans have increased over the years. The various types of advances provide by them are: (a) Term Loans, (b) cash credit, (c) overdrafts, (d) demand Loans , (e) purchase and discounting of commercial bills, and, (f) installment or hire purchase credit.

Volume of CreditCommercial banks are a major source of finance to industry and commerce. Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 198990 , Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. Banks have introduced many innovative schemes for the disbursement of credit. Among such schemes are village adoption, agriculture development branches and equity fund for small units. Recently, most of the banks have introduced attractive education loan schemes for pursuing studies at home or abroad. They have introduced attractive educational loan schemes for pursuing studies at home or abroad. They have moved in the direction of bridging certain defects or gaps in their policies, such as giving too much credit to large scale industrial units and commerce and giving too little credit to agriculture, small industries and so on. The Public Sector Banks are still the leading lenders though growth has declined compared to previous quarter. The credit growth rate has dipped sharply in foreign and private banks compared to previous quarter. In all, the credit growth has slipped in this quarter.

Credit (YOY Growth) March 28 2008 2009 Public Sector Banks 22.5 20.4 March 27

The rates have gone down compared to previous quarter when it was seen that there was no changes in loan rates in private and foreign banks. But then compared to rate cuts done by RBI, they still need to go lower. Table 16: Reduction in Deposit and Lending Rates (October 2008 April 2009*) (Basis points) Deposit Bank Group Public Sector Banks Private Sector Banks Five Major Foreign Banks Rates 125-250 75-200 100-200 Lending (BPLR) 125-225 100-125 0-100 Change BPLR Oct 08 Mar 09 Apr 09 (from Oct to Apr) Public Banks Private Banks Five Sector13.7514.75 Sector13.7517.75 Major14.2516.75 11.5014.00 12.7516.75 14.2515.75 11.5013.50 12.5016.75 14.2515.75 125-225 Rates

100-125

Foreign Banks

0-100

Sector-wise credit points credit has increased to agriculture, industry and real estate whereas has declined to NBFCs and Housing. A bank group wise sectoral allocation is also given which suggests private banks have increases exposure to agriculture and real estate but has declined to industry. Public sector banks have increased allocation to industry and real estate. There is a more detailed analysis in the macroeconomic report released before the monetary policy As Sector on As on

February 15, 2008

February 27, 2009

% share Variations % share Variations in total Agriculture Industry Real Estate Housing NBFCs Overall Credit 9.2 45.2 3.1 7.3 5.7 100 (per cent) in total (per cent) 16.4 25.9 26.7 12 48.6 22 13 52.5 8.5 4.7 6.6 100 21.5 25.8 61.4 7.5 41.7 19.5

To sum up, the credit conditions seems to have worsened after January 2009. The rates have declined but lending has not really picked up. However, the question still remains whether credit decline is because banks are not lending (supply) or because people/corporates are not borrowing (lack of demand). It is usually seen that all financial variables as lead indicators say if credit growth (along with other fin indicators) is picking, actual growth will also rise. However, it is actually seen the relation is far from clear. In fact, the financial indicators hardly help predict any change in business cycle. Most rise in good times and fall in bad times. Most financial indicators failed to predict this

global financial crisis and kept rising making everyone all the more complacent.

Recent policy developments Regarding Bank Credit

Bank lending was done for a long time by assessing the working capital needs based on the concept of MPBF (maximum permissible bank finance). This practice has been withdrawn with the effect from April 15 th 1997 in the sense that the date, banks have been left free to choose their own method ( from the method such as turnover , cash budget, present MPBF , or any other theory) of assessing working Capital requirement of the borrowers.

The cash credit system has been the bane, yet it has exhibited a remarkable strength of survival all these years. In spite of many efforts which were direct in nature, only a slow progress has been made to reduce its importance and increase bill financing. Therefore a concrete and direct policy step was taken on April 21, 1995 which made it mandatory for banks, consortia, syndicates to restrict cash credit components to the prescribed limit , the balance being given in the form of a short term loan, which would be a demand loan for a maximum period of one year, or in case of seasonal industries , for six months. The interest rates on the cash credit and loan components are to be fixed in accordance with the prime lending rates fixed by the banks. This loan system was first made applicable to the borrowers with an MPBF of Rs 20 crore and above; and in their case , the ratio of cash credit (loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April 1995 , to 60 (40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80) percent in April 1997. With the withdrawal of instructions about the MPBF in

April 1997 , the prescribed cash credit and loan components came to be related to the working capital limit arrived in banks as per the method of their choice.

With effect from September 3, 1997, the RBI has permitted banks to raise their existing exposure limit to a business group from 50% to 60%; the additional 10% limit being exclusively meant for investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993, this limit was raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank, and from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for power projects. From September3, 1997 these caps on term lending by banks were removed subject to their compliance with the prudential exposure norms.

The banks can invest in and underwrite shares and debentures of corporate bodies. At present, they can invest five percent of their incremental deposits in equities of companies including other banks. Their investment in shares/ Bonds of DFHI, Securities trading Corporation of India (STCI), all Indian financial institutions and bonds (debentures) and preference shares of the companies are excluded from this ceiling of five per cent with affect from April 1997 . From the same date banks could extend loans within this ceiling to the corporate against shares held by them. They could also offer overdraft facilities to stock brokers registered with help of SEBI against shares and debentures held by them for nine months without change of ownership.

CHANGING PHASE OF BANK CREDITA study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide crosssection of the industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilization of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank credit. Most banks in India even today continue to look at the needs of the corporate in the light of methodology recommended by the Group. The report of this group is widely known as Tandon Committee report. The weaknesses in the Cash Credit system have persisted with the nonimplementation of one of the crucial recommendations of the Committee. In the background of credit expansion seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study and suggesti) Modifications in the Cash Credit system to make it amenable to better management of funds by the Bankers and ii) Alternate type of credit facilities to ensure better credit discipline and co relation between credit and production. The Group was headed by Sh. K.B. Chore of RBI and was named Chore Committee. Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted the job of looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of Tandon & Chore Committee recommendations. His report is applicable to units with credit requirements of less than Rs.50 lacs. The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much

more organized. However, the recommendations were perceived as too strict by the industry and there has been a continuous clamor from the Industry for movement from mandatory control to a voluntary market related restraint. With recent liberalization of economy and reforms in the financial sector, RBI has given the freedom to the Banks to work out their own norms for inventory and the earlier norms are now to be taken as guidelines and not a mandate. In fact, beginning with the slack season credit policy of 1997-98, RBI has also given full freedom to all the Banks to devise their own method of assessing the short term credit requirements of their clients and grant lines of credit accordingly. Most banks, however, continue to be guided by the principles enunciated in Tandon Committee report.

Trends Of Bank Credit In India

The face of Indian banking has changed radically in the last decade. A perusal of the Basic Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996 and 2005, personal loans have been the fastest growing asset, increasing from 9.3 per cent of the total bank credit in 1996 to 22.2 per cent in 2005. Of course, this is partly due to the huge rise in housing loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the period, but other personal loans comprising loans against fixed deposits, gold loans and unsecured personal loans also rose from 6.1 per cent to 10.7 per cent. Other categories whose share increased were loans to professionals and loans to finance companies. In contrast, there has been a sharp decline in the share of lendings to industry. Credit to small scale industries fell from 10.1 per cent of the total in 1996 to 4.1 per cent in 2005.

Reasons for declining trend of bank credit A major share of the economic growth has been led by the expansion of the service sector Capital intensity and investment intensity required for growth in the current economic context may not be as high as it used to be in the past. In manufacturing sector more efficient utilization of existing capacities contributed to the sectoral growth rather rather than any large addition of fresh capacities. The consequential increase in the demand for credit was also subdued. Greater and cheaper avenues for credit resulted in a bigger share of disintermediation being resorted to by large borrowers.

The other trend has been the substantial drop in the share of rural credit, while the share of metropolitan centres has increased. While bankers say that up gradation of rural centres into semi-urban could be one reason (the share of semi-urban centres has gone up), it is also true that the reforms have been urban-centric and have tended to benefit the metros more. The number of rural bank offices fell from 32,981 in March 1996 to 31,967 by March 2005. The states have been the main beneficiaries of bank credit are the northern region as it has increased its share from 18.7 per cent of the total credit in 1996 to 22.2 per cent in 2005. As it was seen that Delhis share went up from 9.5 per cent to 12.1 per cent over the period. This is not due to food credit, the account of which is maintained in Delhi. Clearly, the national capital has gained a lot from liberalisation.

Trends for the year 2008-09 The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within aggregate deposits demand deposits have shown an absolute fall (-Rs 4,179 crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 200708,. On the other hand, time deposits have shown an accelerated increase of 22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the previous year. In the investment portfolio of banks, the expansion during 2008- 09 at Rs 194,031crore has been much lower than the expansion of Rs 340,250 crore as increase in net bank credit to government under monetary data for the same period. This has happened because the latter has a sizeable amount of RBI credit to government following the increased open market operations. Finally, there has occurred considerable slowdown in bank credit expansion. Because of relatively higher procurement of foodgrains, food credit has expanded by Rs 1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in 2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than in the previous year at Rs 432,846 (23.0%).

Procedure for providing Bank CreditBanks offers different types of credit facilities to the eligible borrowers. For this, there are several procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring and Asset Recovery Management comprise the entire gamut of activities in the lending process of a bank which are clearly shown as below:

Credit Appraisal Sanctions Monitoring & Asset recovery Management

Source- Self constructed

From the above chart we can see that Credit Appraisal is the core and the basic function of a bank before providing loan to any person/company, etc. It is the most important aspect of the lending procedure and therefore it is discussed in detail as below.

CHAPTER 6 INTRODUCTION TO STATE BANK OF INDIA

6.1ABOUT SBI

THE PLACE TO SHARE THE NEWS ... SHARE THE VIEWS

The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc each one of these initiatives having a huge potential for growth. The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years. It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias growing mid / large Corporate with a complete

array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list. The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 11448 of its own branches and another 6500+ branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. Banking behemoth State Bank of India is planning to set up 15,000 ATMs in the country by March 2010 investing more than Rs 1,000 crore. The Bank is also in the process of providing complete payment solution to its clientele with its ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc. With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programes are attended by bankers from banks in other countries. The bank is also looking at opportunities to grow in size in India as well as internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 8 Subsidiaries in India SBI Capital Markets Ltd, SBI Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI Cards and Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund Management Pvt. Ltd, SBI Canada - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings.

6.2 BACKGROUND
State Bank of India is the largest and one of the oldest commercial bank in India, in existence for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank namely Reserve Bank of India (RBI) is the major share holder of the bank with 59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public holding (other than promoters) at 40.3%. SBI has the largest branch and ATM network spread across every corner of India. The bank has a branch network of over 17000 branches (including subsidiaries). Apart from Indian network it also has a network of 73 overseas offices in 30 countries in all time zones, correspondent relationship with 520 International banks in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as on 31st March, 2008. Of this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% were sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and Ahmadabad Stock Exchange while its GDRs are listed on the London Stock Exchange. SBI group accounts for around 25% of the total business of the banking industry while it accounts for 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued performance in the last few years in scaling up its efficiency levels. Net Interest Income of the bank has witnessed a CAGR of 13.3% during the last five years. During the same period, net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%.

1.

KEY AREAS OF OPERATION

The business operations of SBI can be broadly classified into the key income generating areas such as National Banking, International Banking, Corporate Banking, & Treasury operations. The functioning of some of the key divisions is enumerated below:

a) Corporate Banking The corporate banking segment of the bank has total business of around Rs1,193 bn. SBI has created various Strategic Business Units (SBU) in order to streamline its operations. These SBUs are as follows: i) Corporate Accounts ii) Leasing iii) Project Finance iv) Mid Corporate Group v) Stressed Assets Management

b) National Banking The national banking group has 14 administrative circles encompassing a vast network of 9,177 branches, 4 sub-offices, 12 exchange bureaus, 104 satellite offices and 679 extension counters, to reach out to customers, even in the remotest corners of the country. Out of the total branches, 809 are specialized branches. This group consists of four business group which are enumerated below: i) Personal Banking SBU ii) Small & Medium Enterprises iii) Agricultural Banking iv) Government Banking

c) International Banking SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its international branches also. During FY06, 25 foreign offices were successfully switched over to Finacle software. SBI has installed ATMs at Male, Muscat and Colombo Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company SBI Botswana Ltd. at Gaborone.

d) Treasury The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent years, the treasury operation of the bank has become more active amidst rising interest rate scenario, robust credit growth and liquidity constraints. The bank diversified its operations more actively into alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in order to offset the losses in fixed income portfolio. Reorganization of the treasury processes at domestic and global levels is also being undertaken to leverage on the operational synergy between business units and network. The reorganization seeks to enhance the efficiencies in use of manpower resources and increase maneuverability of banks operations in the markets both domestic as well as international.

e) Associates & Subsidiaries The State Bank Group with a network of 14,061 branches including 4,755 branches of its seven Associate Banks dominates the banking industry in India. In addition to banking, the Group, through its various subsidiaries, provides a whole range of financial services which includes Life Insurance, Merchant Banking, Mutual Funds, Credit Card, and Factoring, Security trading and primary dealership in the Money Market.

i) Associates Banks: SBI has six associate banks namely State Bank of Indore State Bank of Travancore State Bank of Bikaner and Jaipur State Bank of Mysore State Bank of Patiala State Bank of Hyderabad

ii) Non-Banking Subsidiaries/Joint Ventures SBI Capital Markets Ltd, SBI Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI Cards and Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund Management Pvt. Ltd, SBI

CHAPTER 7 INDUSTRY ANALYSIS

7.1 COMPETITIVE FORCES MODEL IN THE BANKING INDUSTRY (PORTERS FIVE-FORCE MODEL) Prof. Michael Porters competitive forces Model applies to each and every company as well as industry. This model with regards to the Banking Industry is presented below.

(2) Potential Entrants is high as development financial institutions as well as private and foreign banks have entered in a big way. (5) Organizing power of the supplier is high. With the new financial instruments they are asking higher return on the investments. (1) Rivalry among existing firms has increased with liberalization. New products and improved customer services is the focus. (4) Bargaining power of buyers is high as corporate can raise funds easily due to high competition.

(3) Threat from substitute is high due to competition from NBFCs and insurance companies as they offer a high rate of interest than banks.

1. Rivalry among existing firms

With the process of liberalization, competition among the existing banks has increased. Each bank is coming up with new products to attract the customers and tailor made loans are provided. The quality of services provided by banks has improved drastically.

2. Potential Entrants
Previously the Development Financial Institutions mainly provided project finance and development activities. But they now entered into retail banking which has resulted into stiff competition among the exiting players.

3. Threats from Substitutes

Banks face threats from Non-Banking Financial Companies. NBFCs offer a higher rate of interest.

4. Bargaining Power of Buyers

Corporate can raise their funds through primary market or by issue of GDRs, FCCBs. As a result they have a higher bargaining power. Even in the case of personal finance, the buyers have a high bargaining power. This is mainly because of competition.

5. Bargaining Power of Suppliers

With the advent of new financial instruments providing a higher rate of returns to the investors, the investments in deposits is not growing in a phased manner. The suppliers demand a higher return for the investments.

6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future. Since the availability of funds is more and deployment of funds is less, banks should evolve new products and services to the customers. There should be a rational thinking in sanctioning loans, which will bring down the NPAs. As there is a expected revival in the Indian economy Banks have a major role to play. Funding corporate at a low cost of capital is a special requisite.

7.2 SWOT ANALYSIS

The banking sector is also taken as a proxy for the economy as a whole. The performance of bank should therefore, reflect Trends in the Indian Economy. Due to the reforms in the financial sector, banking industry has changed drastically with the opportunities to the work with, new accounting standards new entrants and information technology. The deregulation of the interest rate, participation of banks in project financing has changed in the environment of banks. The performance of banking industry is done through SWOT Analysis. It mainly helps to know the strengths and Weakness of the industry and to improve will be known through converting the opportunities into strengths. It also helps for the competitive environment among the banks.

a) STRENGTHS

1. Availability of Funds: There are seven lakh crore wroth of deposits available in the banking system. Because of the recession in the economy and volatility in capital markets, consumers prefer to deposit their money in banks. This is mainly because of liquidity for investors.

2. Banking network: After nationalization, banks have expanded their branches in the country, which has helped banks build large networks in the rural and urban areas. Private Banks allowed operating but they mainly concentrate in metropolis.

3. Large Customer Base: This is mainly attributed to the large network of the banking sector. Depositors in rural areas prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital: Corporate prefers borrowing money from banks because of low cost of capital. Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. Consumer credit forms the major source of financing by banks.

b) WEAKNESS

1. Loan Deployment: Because of the recession in the economy the banks have idle resources to the tune of 3.3 lakh crores. Corporate lending has reduced drastically

2. Powerful Unions: Nationalization of banks had a positive outcome in helping the Indian Economy as a whole. But this had also proved detrimental in the form of strong unions, which have a major influence in decision-making. They are against automation.

3. Priority Sector Lending: To uplift the society, priority sector lending was brought in during nationalization. This is good for the economy but banks have failed to manage the asset quality and their intensions were more towards fulfilling government norms. As a result lending was done for non-productive purposes.

4. High Non-Performing Assets: Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. This is because of change in the total outstanding advances, which has to be reduced to meet the international standards.

c) OPPORTUNITIES

1. Universal Banking: Banks have moved along the valve chain to provide their customers more products and services. For example: - SBI is into SBI home finance, SBI Capital Markets, SBI Bonds etc.

2. Differential Interest Rates: As RBI control over bank reduces, they will have greater flexibility to fix their own interest rates which depends on the profitability of the banks.

3. High Household Savings: Household savings has been increasing drastically. Investment in financial assets has also increased. Banks should use this opportunity for raising funds.

4. Overseas Markets: Banks should tape the overseas market, as the cost of capital is very low.

5. Interest Banking: The advance in information technology has made banking easier. Business can effectively carried out through internet banking.

d) THREATS

1. NBFCs, Capital Markets and Mutual funds: There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market Instruments and Mutual Funds are increasing. Normally these instruments offer better return to investors.

2. Change in the Government Policy: The change in the government policy has proved to be a threat to the banking sector.

3. Inflation: The interest rates go down with a fall in inflation. Thus, the investors will shift his investments to the other profitable sectors.

4. Recession: Due to the recession in the business cycle the economy functions poorly and this has proved to be a threat to the banking sector. The market oriented economy and globalization has resulted into competition for market share. The spread in the banking sector is very narrow. To meet the competition the banks has to grow at a faster rates and reduce the overheads. They can introduce the new products and develop the existing services.

CHAPTER 8 OVERVIEW OF CREDIT APPRAISAL

8.1 CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. Brief overview of credit: Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed which measures the financial condition and the ability of the customer to repay back the loan in future? Generally the credit facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of principal and the interest. It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own panel of officials for this purpose.

However the 3 C of credit are crucial & relevant to all borrowers/ lending which must be kept in mind at all times. Character Capacity Collateral If any one of these are missing in the equation then the lending officer must question the viability of credit. There is no guarantee to ensure a loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized, which should be the objective of every lending officer. Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things with an agreement to repay the loans over a period of time. The most common way to avail credit is by the use of credit cards. Other credit plans include personal loans, home loans, vehicle loans, student loans, small business loans, trade. A credit is a legal contract where one party receives resource or wealth from another party and promises to repay him on a future date along with interest. In simple terms, a credit is an agreement of postponed payments of goods bought or loan. With the issuance of a credit, a debt is formed.

Basic types of credit:

There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges. Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time. Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured. Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the loan. Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month.

8.2SBI NORMS FOR CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. 1. Loan policy An Introduction State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its mission of retaining the banks position as a Premier Financial Services Group, with World class standards & significant global business, committed to excellence in customer, shareholder & employee satisfaction & to play a leading role in the expanding & diversifying financial services sector, while continuing emphasis on its Development Banking role. The Loan Policy of the any bank has successfully withstood the test of time and with inbuilt flexibilities, has been able to meet the challenges in the market place. The policy exits & operates at both formal & informal levels. The formal policy is well documented in the form of circular instructions, periodic guidelines & codified instructions, apart from the Book of Instructions, where procedural aspects are highlighted. The policy, at the holistic level, is an embodiment of the Banks approach to sanctioning, managing & monitoring credit risk & aims at making the systems & controls effective. The Loan Policy also aims at striking a balance between underwriting assets of high quality, and customer oriented selling. The objective is to maintain Banks undisputed leadership in the Indian Banking scene.

 The Policy aims at continued growth of assets while endeavoring to ensure that these remain performing & standard. To this end, as a matter of policy the Bank does not take over any Non-Performing Asset (NPA) from other banks. The Central Board of the Bank is the apex authority in formulating all matters of policy in the bank. The Board has permitted setting up of the Credit Policy & Procedures Committee (CPPC) at the Corporate Centre of the Bank of which the Top Management are members, to deal with issues relating to credit policy & procedures on a Bank-wide basis. The CPPC sets broad policies for managing credit risk including industrial rehabilitation, sets parameters for credit portfolio in terms of exposure limits, reviews credit appraisal systems, approves policies for compromises, write offs, etc. & general management of NPAs besides dealing with the issues relating to Delegation of Powers.

Based on the present indications, following exposure levels are prescribed

Individuals as borrowers Maximum aggregate credit facilities of Rs. 20 crores ( Fund based & non-fund based ) Non-corporates (e.g.Partnerships,JHF, Associations ) Maximum aggregate credit facilities of Rs. 80 crores ( Fund based & non-fund based ) Corporates Maximum aggregate credit facilities as per prudential norms of RBI on exposures

Term Loans (loans with residual maturity of over 3 years) should not in the aggregate exceed 35% of the total advances of SBI.

The Bank shall endeavour to restrict fund based exposure to a particular industry to 15% of the Banks total fund based exposure.

The Bank shall restrict the term loan exposure to infrastructure projects to 10% of Banks total advances.

The Bank shall endeavour to restrict exposure to sensitive sectors (i.e. to capital market, real estate, and sensitive commodities listed by RBI) to 10% of Banks total advances.

The Banks aggregate exposure to the capital markets shall not exceed 5% of the total outstanding advances (including commercial paper) as on March 31 of the previous year.

8.3 Credit Appraisal Standards

(A) Qualitative: At the outset, the proposition is examined from the angle of viability & also from the Banks prudential levels of exposure to the borrower, Group & Industry. Thereafter, a view is taken about our past experience with the promoters, if there is a track record to go by. Where it is a new connection for the bank but the entrepreneurs are already in business, opinion reports from existing bankers & published data if available are carefully pursued. In case of a maiden venture, in addition to the drill mentioned heretofore, an element of subjectively has to be perforce introduced as scant historical data weightage to be placed on impressions gained out of the serious dialogues with the promoter & his business contacts.

(B) Quantitative:

(a) Working capital:

The basis quantitative parameters underpinning the Banks credit appraisal are as follows:Sector/ Parameters
Liquidity Current Ratio (min.) Financial Soundness TOL/TNW (max.) DSCR Net (min.) Gros (min.) Gearing D/E (max.) Promoters contribution (min.) 30% of equity 20% of equity 2:1 1.75:1 2:1 2:1 1.75:1 2:1 3.00

Mfg
1.33

Others
1.20(For FBWC limits above Rs. 5 cr.) 1.00(For FBWC limits upto Rs. 5 cr.) 5.00

(i) Liquidity:

Current Ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However the approach has to be flexible. CR of 1.33 is only indicative & may not be deemed mandatory. In cases where the CR is projected at a lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection for the loan proposal or for the sanction of the loan at a lower level. In such cases, the reason for low CR or slippage should be carefully examined & in deserving cases the CR as projected may be accepted. In cases where projected CR is found acceptable, working capital finance as requested may be sanctioned. In specific cases where warranted, such sanction can be with the condition that the borrower should bring in additional long-term funds to a specific extent by a given future date. Where it is felt that the projected CR is not acceptable but the borrower deserves assistance subject to certain conditions, suitable written commitment should be obtained from the borrower to the effect that he would be bringing in required amounts within a mutually agreed time frame.

(ii) Net Working Capital:

Although this is a corollary of current ratio, the movements in Net Working Capital are watched to ascertain whether there is a mismatch of long term sources vis--vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.

(iii) Financial Soundness:

This will be dependent upon the owners stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire-purchase & leasing concerns. For industrial ventures a Total Outside Liability/ Tangible Net worth ratio of 3.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority.
(iv) Turn-Over:

The trend in turnover is carefully gone into both in terms of quantity & valve as also market share wherever such data are available. What is more important to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations.
(v) Profits:

While net profit is ultimate yardstick, cash accruals, i.e., profit before depreciation & taxation conveys the more comparable picture in view of changes in rate of depreciation & taxation, which have taken place in the intervening years. However, for the sake of proper assessment, the nonoperating income is excluded, as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts closely monitored, and if necessary, exit options explored.

(vi) Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any instrument such as CP / FD this will be taken into account while arriving at the final decision. However as the credit rating involves additional expenditure, we would not normally insist on this and only use this tool if such an agency had already looked into the company finances.

(b) Term Loan

(i) In case of term loan & deferred payment guarantees, the project report is

obtained from the customer,

(ii) Which may be compiled either in-house or by a firm of consultants/

merchant bankers? The technical feasibility & economic viability is vetted by the bank & wherever it is felt necessary, the Credit Officer would seek the benefit of a second opinion either from the Banks Technical Consultancy cell or from the consultants of the Bank/ SBI Capital Markets Ltd.
(iii)Promoters contribution of at least 20% in the total equity is what we

normally expect. But promoters contribution may vary largely in mega projects. Therefore there cannot be a definite benchmark. The sanctioning authority will have the necessary discretion to permit deviations.

(iv) The other basic parameter would be the net debt service coverage ratio

i.e. exclusive of interest payable, which should normally not go below 2. On a gross basis DSCR should not be below 1.75. These ratios are indicative & the sanctioning authority may permit deviations selectively.
(v) As regards margin on security, this will depend on Debt: Equity gearing

for the project, which should preferably be near about 1.5: 1 & should not in any case be above 2:1, i.e., Debt should not be more than 2 times the Equity contribution. The sanctioning authority in exceptional cases may permit deviations from the norm very selectively.
(vi) Other parameters governing working capital facilities would also govern

Term Credit facilities to the extent applicable.

(C) Lending to Non-Banking Financial Companies (NBFCs)

(D) Financing of infrastructure projects

(E) Lease Finance

(F) Letter of Credit, Guarantees & bills discounting

(G) Fair Practices for lenders

8.4 Documentation standards

a. The systems and procedures for documentation have been laid down keeping in view the ultimate objective of documentation which is to serve as primary evidence in any dispute between the Bank and the borrower and for enforcing the Bank's right to recover the loan amount together with interest thereon (through a court of law as a final resort), in the event of all other recourses proving to be of no avail. In order that this objective is achieved, our documentation process attempts to ensure that: The owing of the debt to the Bank by the borrower is clearly established by the documents. The charge created on the borrower's assets as security for the debt is maintained and enforceable The Bank's right to enforce the recovery of the debt through court of law is not allowed to become time-barred under the Law of Limitation.

b. Documentation is not confined to mere obtention of security documents at the outset. It is a continuous and ongoing process covering the entire duration of an advance comprising the following stages: Pre-execution formalities: These cover mainly searches at the Office of Registrar of Companies and search of the Register of Charges (applicable to corporate borrowers), also capacity of borrowers to borrow and the formalities to be completed by the borrowers, searches at the office of the sub-Registrar of Assurances or Land Registry to check the existence or otherwise of prior charge over the

immovable property offered as security, besides taking other precautions before creating equitable / registered mortgage. Execution of Documents This covers obtention of proper documents, appropriate stamping and correct execution thereof as per terms of the sanction of the advance and the internal directives of a corporate borrower such as Memorandum and Articles of Association, etc. Post-execution formalities: This phase covers the completion of formalities in respect of mortgages, if any, registration with the Registrar of Assurances, wherever applicable, and the registration of charges with the Registrar of Companies within the stipulated period, etc. Protection from Limitation / Safeguarding Securities: These measures aim at saving the documents from getting time-barred by limitation and protecting the securities charged to the Bank from being diluted by any charge that might be created by the borrower to secure his other debts, if any. These objectives are sought to be achieved by: (a) Obtention of revival letter within the stipulated period (b) Obtention of Balance Confirmation from the borrower at least at annual intervals (c) Making periodical searches at the Office of the Registrar of Companies. (d) Insurance of Assets charged - (unless specifically waived) to insure the Bank against the risk of fire, other hazards, etc..

c. Keeping the above broad objectives and the documentation process in view, the Bank has devised standard documents in most cases for various types of loans given to the borrowers. Wherever standard specimens have not been evolved, these are suitably drafted on a case-by-case basis with the help of inhouse legal department and, on occasions, with the help of reputed outside solicitors. Furthermore, changes in the documentation procedures and the implications involved are circularized from time to time to all the branches/offices so that those who are responsible for obtaining and safeguarding the documents are made fully conversant with them. This is further strengthened through on-the-job training at the branches as well as at the Bank's training colleges / centers, where the officials are briefed on the documentation procedures so that the Bank's interest is protected in this crucial area. d. In respect of consortium advances, the documents are generally executed in consultation with the other member banks in accordance with the guidelines laid down by RBI /IBA in the matter. Similarly, where advances are extended jointly with the financial institutions, documents are specially drafted in consultation with the solicitors / in-house legal experts to ensure pari passu charge and / or second charge, whichever is applicable, of the movable / immovable assets of the borrower to protect the Bank's interests.

e. While it is the Bank's endeavor to standardize documents for all types of facilities, in cases where documents have to be specially drafted, the Local Head Offices are empowered to vet and approve such documents for facilities which are sanctioned at their level. For facilities requiring sanction of COCC / ECCB, such specially drafted documents are cleared by the Corporate Centre.

8.5 Requirement Of Documents For Process Of Loan Application for requirement of loan Copy of Memorandum & Article of Association Copy of incorporation of business Copy of commencement of business Copy of resolution regarding the requirement of credit facilities Brief history of company, its customers & supplies, previous track records, orders in hand. Also provide some information about the directors of the company Financial statements of last 3 years including the provisional financial statement for the year 2011-12 Copy of PAN/TAN number of company Copy of last Electricity bill of company Copy of GST/CST number Copy of Excise number Photo I.D. of all the directors Address proof of all the directors Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R permission, Allotment letter, Possession Bio-data form of all the directors duly filled & notarized Financial statements of associate concern for the last 3 years

8.6 Delegation of powers

a. A scheme of Delegation exercise by the various functional Powers comprehensively documented in 1985 and amended from time to time is in operation in the Bank in respect of financial and administrative matters for rise. This is based on the premise that an executive is required to exercise only those powers which are related to the responsibilities and duties entrusted to him/her. In exercising the powers, the authorities concerned are required to ensure compliance also with the relevant provisions of the State Bank of India Act and the State Bank of India General Regulations and any rules, regulations, instructions or orders issued from time to time by appropriate controlling authorities.

b. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning all credit facilities.

c. The Scheme of Delegation of Financial powers for advances and allied matters in the Bank has a graded authority structure. The Executive Committee of the Central Board (ECCB) has full powers for sanctioning credit facilities. The sanctioning powers have been delegated down the line to Committees of officials at various administrative offices and individual line functionaries.

d. An appropriate control system is also in operation in tune with the Delegation structure. The powers, exercised by various functionaries, are required to be reported to the next higher authority as laid down in the Scheme of Delegation of Financial Powers.

e. A system of loan review styled 'Credit Audit' which inter alia covers audit of credit sanction decisions at various levels has been implemented. Presently, all accounts with total fund based indebtedness of Rs.5 cr. and above are subjected to credit audit. The audit system serves as an effective control on the system of sanction of loans in the bank through widely delegated powers.

SCHEME OF DELEGATION OF FINANCIAL POWER

S L 1

PARTICULARS

LIMITS

CCCC

WBCC

CCC-I

CCC-II

NLCC

AGM

SB-1 SB-2 CORPORATES

&

Over all (TL)

500.00

250.00

100.00

50.00

FBL

7.50

2.00

NA

NA

(35.00)

(15.00)

(TL)

(5.00)

(1.25) (WC1.00)

Others

Over all (TL)

400.00

200.00

70.00

35.00

NFBL

7.50

1.00

NA 60.00

NA 60.00

(20.00) 40.00

(10.00) 20.00

Overall FBL

15.00 5.00

3.00 1.00

2 NONCORPORATES

SB-1 SB-2

&

Over all (TL)

NA

NA

(10.00)

(5.00)

(TL)

(3.00)

(1.00) (WC0.60)

Others

Over all (TL)

50.00

50.00

30.00

15.00

NFBL

5.00

0.60

NA 15.00

NA 15.00

(8.00) 15.00

(4.00) 6.00

Overall FBL

10.00 2.00

1.20 1.00

3 INDIVIDUALS

SB-1 SB-2

&

Over all (TL)

NA

NA

(TL)

(1.00) (WC0.60)

Others

Over all (TL)

10.00

10.00

10.00

5.00

NFBL

2.00

0.60

NA

NA

Overall

4.00

1.20

8.7

Pricing (Factors deciding interest rates and other charges)

a. Pricing in the Bank can be divided into interest pricing and non-interest pricing. Pricing of loans up to Rs.2 lacs will be as prescribed by RBI. In line with RBI guidelines, he Bank announces from time to time its single Benchmark Prime Lending Rate (BPLR), i.e., reference / indicative rates at which the Bank would lend to its best customers. The BPLR would be referred to as State Bank Advance Rate (SBAR) in our Bank. Interest rate without reference to SBAR could be charged in respect of certain categories of loan / credit like discounting of bills, lending to intermediary agencies etc. Interest rates below SBAR could be offered to exporters or other credit worthy borrowers including public enterprises on the lines of a transparent and objective policy approved by the Bank's Board. All other loans are to be priced on the basis of Bank's SBAR with the pricing being linked to grade of the risk in the exposure. The maximum spread over SBAR which could be charged by the Bank will be decided by the Bank from time to time. Within such ceiling, the pricing for various credit facilities, schemes, products, credit related services etc., including sub-SBAR pricing would be determined by ALCO or COCC, as considered appropriate. Bank may also price floating rate products by using market benchmarks (e.g. G-Sec rates, MIBOR etc.) in a transparent manner as per Board approved policies.

b. An internal Credit Risk Rating system covering all advances of Rs.25 lacs and above in C&I, SSI and AGL segments has been put in place to facilitate structured assessment of credit risks. The system enables evaluation of the fundamental strength of the borrower so as to charge a graded rate of interest based on different ratings. However, taking into consideration the trends in movement of interest rates and market competition, the Bank has also adopted an appropriate authority structure to facilitate competitive pricing of loan products linked both to risk rating and overall business considerations.

c. Bank has introduced fixed interest rates in respect of certain categories of loans in personal segment, e.g. housing term loans to individuals. Fixed interest rates are also extended for commercial loans, albeit highly selectively.

d. Market related charges and a discretionary structure that enables branches to effectively face competition are in place. These would be reviewed periodically based on feedback from operating units and the market.

e. Pricing of Bank's funds and services while being basically market driven is also determined by two important considerations, i.e., minimum desired profitability and risk inherent in the transaction. At the corporate level, the applicable price for a particular advance or service is fixed taking into account the marginal cost of Bank's funds and desired rate of return as calculated from indices like profitability levels and return on capital employed. In case of corporate relationship where the value of

connections and overall potential for profitability from a particular account are more important than a particular transaction, the price is fine tuned even to level of no-loss-no-profit in the transaction. For long term exposures, the factors that weigh are the rate charged by the financial institutions, the period of exposure, the pattern of volatility in the interest rates and the expected movement of the rates in the long term perspective.

CHAPTER 9 CREDIT RISK ASSESSMENT

For a bank, what is RISK?

Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments, as per the stipulated terms. Lender task Identify the risk factors, and Mitigate the risk

How does risk arise in credit?

In the business world, Risk arises out of Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor)

To put in another way, success factors behind a business are: -

Managerial ability Favorable business environment Favorable industrial environment Adequate financial strength

As such, these are the broad risk categories or risk factors built into our CRA models. CRA takes into account the above types of risks associated with the

borrowal unit. The eventual CRA rating awarded to a unit (based on a score of 100) is a single-point risk indicator of an individual credit exposure, & is used to indentify, to measure & to monitor the credit risk of an individual proposal. At the corporate level, CRA is also used to track the quality of Banks credit portfolio.

Credit & Risk Go hand in hand. They are like twin brothers. They can be compared to two sides of the same coin. All credit proposals have some inherent risks, excepting the almost negligible volume of lending against liquid collaterals with adequate margin.

Lending despite risks: So, risk should not deter a Banker from lending. A bankers task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. But its always prudent to have some idea about the degree of risk associated with any credit proposal. The banker has to take a calculated risk, based on risk-absorption/ riskhedging capacity & risk-mitigation techniques of the Bank.

CREDIT RISK ASSESSMENT (CRA):

Credit is a core activity of banks & an important source of their earnings, which go to pay interest to depositors, salaries to employees & dividend to shareholders In credit, it is not enough that we have sizable growth in quantity/ volume, it is also necessary to ensure that we have only good quality growth. To ensure asset quality, proper risk assessment right at the beginning, that is, at the time of taking an exposure, is extremely important. Moreover, capital has to be allocated for loan assets depending on the risk perception/ rating of respective assets. It is, therefore, extremely important for every bank to have a clear assessment of risks of the loan assets it creates, to become Basle-II compliant. That is why Credit Risk Assessment (CRA) system is an essential ingredient of the Credit Appraisal exercise.

Indian Scenario: In Indian banks, there was no systematic method of Credit Risk Assessment till late 1980s/ early 1990s. Health Code System (1985) / IRAC norms (1993) are Asset (loan) classification systems, not CRA systems. RBI came out with its guidelines on Risk Management Systems in Banks in 1999 & Guidance Note on Management of Credit in October, 2002.

SBI Scenario: However, like in many other fields, in the field of Credit Risk Assessment too, our Bank played a proactive & pioneering role. We had our Credit Rating System in 1988. Then, the CRA system was introduced in the Bank in 1996. The first CRA model was rolled out in 1996 to take care of exposures to the C & I (Manufacturing) segment. Thereafter, separate models for SSI & AGL segments were introduced in 1998, when the C&I (Mfg) CRA model was developed for Non Banking Finance Companies (NBFCs). As of now, in SBI, CRA is the most important component of the Credit Appraisal exercise for all exposures > 25 lacs & a very important tool in decision-making (a Decision Support System) as well as in pricing. CREDIT RISK ASSESSMENT (CRA) Minimum scores / Hurdle rates

1. The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. These have been categorized broadly into financial, business, industrial & management risks and are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision.

2. Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (collateral security / financial standing).

3. Industry parameters: The following characteristics of an industry which pose varying degrees of risk are built into Banks CRA model: Competition Industry outlook Regulatory risk Contemporary issues like WTO etc.

4. Management parameters: The management of an enterprise / group is rated on the following parameters: Integrity (corporate governance) Track record Managerial competence / commitment Expertise Structure & systems Experience in the industry Credibility: ability to meet sales projections Credibility: ability to meet profit (PAT) projections Payment record Strategic initiatives Length of relationship with the Bank

Bank has introduced New Rating Scales for borrower for giving loans. Rating is given on the basis of scores out of 100. Bank gives loans to the borrower as per their rating like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating. From SB9 rating the risk increases. So banks do not give loans after SB8 rating.

5. The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 (subject to qualitative factors negative parameters). The overall score thus obtained (out of a max. of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8.

CRA model also stipulates a minimum score under financial, business, industry and management risk parameters for a proposal to be considered acceptable in a given form.

The details of such minimum scores are as under: a. Minimum scores General b. Minimum scores under Management Risk : (Integrity/Corporate Governance, Commitment) Track Record and Managerial Competence/

An applicant unit will be required to score minimum 2 marks each (out of 3) in the above three parameters of Management Risk to qualify for Banks assistance. In case of existing accounts if the company scores less than this stipulated minimum marks (02), the Bank would explore all possibilities to exercise exit option. c. Minimum Score under Business Risk:

Compliance of Environment Regulations To qualify for financial assistance, an applicant unit would have to secure full marks (02) under the parameter, Compliance of Environment Regulations. In case, the existing units in the books of the bank do not secure full marks (02), the bank would explore all possibilities for the exercise of exit option.

Hurdle rates: No new connections are to be considered in respect of accounts rated below SB4/ SBTL4, subject to exceptions like availability of Central Govt. guarantees and / or availability of a Corporate guarantee of parent / group company with a CRA rating of SB3 / SBTL3 and above. No enhancements in credit limits are to be considered in existing accounts rated below SB4/SBTL4. (Deviations may be permitted by CCC-I and above, as provided in the Loan Policy.) Risk Management Dept., would issue advisories on the general outlook for the industry from time to time.

Salient features of CRA models: (a) Type of Models S. No. Exposure Level (FB + Non NFB Limits ) Sector (C&I , SSI , AGL) (i) (ii) Over Rs. 5.00 crore Regular Model Trading ( Trading Sector Trade Services) Regular Model Simplified Model &

Rs 0.25 crore to Rs. 5.00 Simplified Model crore

(b) Type of Ratings S. No. (i) Model Regular Model Type of Rating (i) Borrower Rating (ii) Facility Rating (ii) Simplified Model Borrower Rating

(c) Type of Risks Covered: (i) Borrower Rating S. No. Risk Category Regular Model New Existi ng Comp any (i) Financial Risk (FR) 65 25 (65 0.39) (ii) (iii) Qualitative Factors (-ve) (-10) (-10) 30 (20 x 1.5) (-10) 20 (-10) 40 (20 x 2) x 70 35 (70/2) Compan y Existing Company New Compan y Maximum Score Simplified Model

Business & Industry Risk 20 (BR & IR) /Business Risk (for Trading Sector)

(iv)

Management Risk (MR)

15

45 ( 15 x 3)

10

25 ( 10 2.5) x

(v)

Qualitative Parameter (External Rating) Total

(+5)

(+5)

(+5)

(+ 5)

100

100

100

100

(vi)

Borrower Rating based on the above Score

(vii) (viii)

Country Risk (CR) Final Borrower Rating after CR

(ix) (x)

Financial Statement Quality Risk Score/Rating

Excellent/Good/Satisfactory/Poor Comments on Trend in Rating

Transition Matrix

(ii) Facility Rating (Regular Model) S. N o. (a) Risk Drivers for Loss Given Default (LGD) Parameter Maximum Score

(i)

Current Ratio [Working Capital/ Non-Fund Based Facility (except Capex)] Or Project Debt/Equity[Term Loan/Non-Fund Based Facility (for Capex)] 6

(ii)

Nature of Charge

(iii)

Industry /(Trade- for Trading Sector) #

(iv)

Geography #

(v)

Unit Characteristics (a) Leverage/ Enforcement of Collateral-4 (b) Safety, Value & Existence of Assets-4 8

(vi)

Macro-Economic Conditions (a) GDP Growth Rate : Impact of Business Cycle - 2 (b) Insolvency Legislation in the 5

Jurisdiction-1 (c) Impact of Systemic/Legal Factors on Recovery-1 (d) Time Period for Recovery-1 (vii) Total Security (Primary + Collateral)

60

(b)

Risk Drivers for Exposure at Default (EAD)

(i)

Nature of Commitment (Revolving/Non-Revolving) 1

(ii)

Credit Quality of Borrower @

(iii)

Tenor of Facility Total Score Facility Rating based on the above Score

3 100

# No Scoring under these two parameters for AGL & Trade Segments due to non-availability of relevant LGD Data; Score out of 92 to be normalised to 100 for these segments. @ Marks linked to Borrower Rating Score of the Unit.

(d) New Rating Scales - Borrower Rating: 16 Rating Grades S. No. Borrower Rating Range of Scores 1 SB1 94-100 Virtually Zero risk Virtually safety 2 3 4 5 SB2 SB3 SB4 SB5 90-93 86-89 81-85 76-80 Lowest Risk Lower Risk Low Risk Moderate Risk Highest safety Higher safety High safety with Adequate safety Absolute Risk Level Comfort Level

Adequate Cushion 6 7 SB6 SB7 70-75 64-69 Moderate Risk Moderate Safety

8 9 10

SB8 SB9 SB10

57-63 50-56 45-49

Average Risk

Above Threshold

Safety

Acceptable Risk (Risk Threshold) Tolerance

Safety Threshold

11 12 13 14 15

SB11 SB12 SB13 SB14 SB15

40-44 35-39 30-34 25-29 <24

Borderline risk High Risk Higher Risk Substantial risk Pre-Default (extremely to default) Risk vulnerable

Inadequate safety Low safety Lower safety Lowest safety

Nil

16

SB16

Default Grade

(e) New Rating Scales - Facility Rating (Separate for each Fund Based / Non- Fund Based Facility): 16 Rating Grades

S NO

FACILITY RANGE GRADES OF SCORES

LGD LEVEL (Recovery Level)

RISK L E V E L

COMFORT LEVEL

FR1

94-100

Virtually LGD

Zero Virtually Zero Virtually Risk Absolute Safety

FR2

87-93

Lowest LGD (Highest Recovery)

Lowest Risk

Highest Safety

FR3

80-86

Lower LGD (Higher Recovery)

Lower Risk

Higher Safety

FR4

73-79

Very Low LGD (High Recovery)

Low Risk

High Safety

FR5

66-72

Low LGD (Adequate Recovery)

Moderate Risk with Adequate Cushion

Adequate Safety

6 7

FR6 FR7

59-65 52-58

Moderate LGD (Moderate recovery)

Moderate Risk

Moderate Safety

8 9

FR8 FR9

45-51 38-44

Average LGD (Average Recovery) LGD Tolerance

Average Risk

Above Safety Threshold

Acceptable Risk (Risk Tolerance Threshold)

Safety Threshold

10

FR10

31-37

Threshold (Recovery Tolerance Threshold)

11

FR11

24-30

High LGD (Low High Risk recovery)

Low Safety

12

FR12

17-23

Higher LGD (Lower Recovery)

Higher Risk

Lower Safety

13 14 15 16

FR13 FR14 FR15 FR16

11-16 5-10 1-4 0

Substantial LGD (Small recovery) Highest LGD (Minimal/zero recovery

Substantial Risk Highest Risk

Lowest Safety

NIL

(f) Mapping to Existing Borrower Rating Bands S. No. Score 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 94-100 90-93 86-89 81-85 76-80 70-75 64-69 57-63 50-56 45-49 40-44 35-39 30-34 25-29 < 24 New CRA Model Grade SB1 SB2 SB3 SB4 SB5 SB6 SB7 SB8 SB9 SB10 SB11 SB12 SB13 SB14 SB15 SB16 SB8 <25 SB7 >=25 SB5 SB6 >=45 >35 SB3 SB4 >=65 >=50 SB2 >=75 Existing CRA Model Grade SB1 Score >= 90

(g) Qualitative Parameter (External Rating) Solicited Rating by a recognized External Credit Rating Agency (ECRA) translates to additional Score. Following ECRAs recognised by RBI are considered for this purpose:

. S. No. 1

Type

ECRA

Domestic

(a) (b) (c) (d)

Credit Analysis & Research Limited; CRISIL Limited; FITCH India; (d) ICRA Limited.

International

(a) FITCH; (b) (c) Moodys; Standard & Poors

RBI has clarified that Cash Credit Exposures tend to be generally rolled over and also tend to be drawn on an average for a major portion of the sanctioned limits. Hence even though a cash credit exposure may be sanctioned for a period of one year or less, these exposures should be reckoned as Long Term Exposures and accordingly, the Long Term Ratings accorded by the chosen Credit Rating Agencies will be relevant.

CHAPTER 10 DATA ANALYSIS AND DATA INTERPRETATION

Q.1 Have you ever availed the credit facility of any Bank?

Responses Yes No

No of Respondents 79 21

Percentages 79% 21%

Q.1
21% Yes 79% No

The above figure shows that, 79% respondents avail the credit facility of any bank like SBI, ICICI etc. But here 21% of the respondents not availing the credit facility of any bank.

INFERENCES

Here we can understand that majority of the respondents/customers are availing the credit facility of any Bank.

Q.2 Which is your preferred bank for availing the credit facility?

Responses SBI HDFC ICICI AXIS Other

No of Respondents 38 8 15 9 9

Percentages 48% 10% 19% 12% 11%

Q.2
11% 12% 48% SBI HDFC 19% 10% ICICI AXIS Other

The above figure shows the preference to approach credit facility. Here 48% of the respondents indicated as they will approach SBI, 19% of the respondents will prefer ICICI Bank, 12% will prefer Axis Bank, 10% of the respondents will prefer HDFC Bank and 11% preferring other Banks.

Inference: Here we can understand that majority of customers will prefer SBI to avail Credit facility.

3) What are the credit facilities you enjoy with SBI?

Responses Term Loan Credit Card or Overdraft Demand Loan Letter of Credit Other

No of Respondents 12 30 20 10 7

Percentages 15% 38% 25% 13% 9%

Q.3
Term Loan 13% 9% 15% Credit Card or Overdraft Demand Loan 25% 38% Letter of Credit Other

The above figure evident that 38% of the respondents are having Credit Card or Overdraft in SBI, 25% of the respondents having demand loan in SBI, 15% of the respondents having Term Loan, 13% having Letter of Credit and 9% of the respondents having

Inference
It is been inferred that most of the respondents are preferring for credit card or over draft in SBI.

Q4) What are the other facilities you are enjoying with SBI? Responses Saving A/c Current A/c Fixed Deposit Recurring Deposit A/c No of Respondents 35 15 21 10 Percentages 43% 19% 26% 12%

Q.4

12% 43% 26% 19% Saving A/c Current A/c Fixed Deposit Recurring Deposit A/c

From the figure it is evident that 43% of the respondents are having Saving A/C in SBI, 26% of the respondents are having Fixed Deposit in SBI, 19% of the respondents having Current A/C and 12% of the respondents having Recurring Deposit A/C in SBI.

Inference:

It can be inferred that nearly half of the respondents are enjoying Saving A/C facility.

Q. 5) What did you feel about the criteria set for sanctioning credit? Responses Very Stringent No of Respondents and 2 Percentages 3%

Cumbersome Stringent and cumbersome Normal and Appropriate Easy Very Easy 20 22 32 3 25% 28% 40% 4%

Q.5
4% 3% 25% 40% Normal and Appropriate 28% Easy Very Easy Very Stringent and Cumbersome Stringent and cumbersome

From the above figure it evident that 40% of the respondents are saying that the criteria set for sanctioning credit is Easy in SBI, 28% of the respondents are saying that the criteria set for sanctioning credit is Normal and Appropriate in SBI, 25% of the respondents are saying that the criteria set for sanctioning credit is Stringent and cumbersome in SBI, 4% of the respondents are saying that the criteria set for sanctioning credit is Very Easy in SBI and only 3% of

the respondents are saying that the criteria set for sanctioning credit is Very Stringent and Cumbersome in SBI

Inference: It can be inferred that 40% of the respondents are saying that the criteria set for sanctioning credit is Easy in SBI.

Q.6) what did you feel about the documentation Requirement for processing credit facility?

Responses Very heavy Normal Less Very Less

No of Respondents 32 21 15 11

Percentages 40% 27% 19% 14%

Q.6

14% 40% 19% Very Heavy Normal Less 27% Very Less

From the above figure it evident that 40% of the respondents are saying that providing documents for Credit facility are Heavy in SBI, 27% of the respondents are saying that providing documents for Credit facility are Normal in SBI, 19% of the respondents are saying that providing documents for Credit facility are Less in SBI, 14% of the respondents are saying that providing documents for Credit facility are Very Less in SBI.

Inference:

It can be inferred that 40% of the respondents saying that Documents required for processing the Loan is Heavy.

Q7) what did you feel about the Interest rate & Processing fees charged?

Responses Very heavy Normal Less Very Less

No of Respondents 25 35 12 7

Percentages 32% 44% 15% 9%

Q.7
9% 15% 32% Very heavy Normal Less Very Less 44%

From the above figure it is evident that 32% of the respondents are feeling that interest rate and processing fee charged for Credit Facility are Very Heavy in SBI , 44% of the respondents are feeling that interest rate and processing fee charged for Credit Facility are Normal in SBI , 15% of the respondents are feeling that interest rate and processing fee charged for Credit Facility are Less

in SBI and 9% of the respondents are feeling that interest rate and processing fee charged for Credit Facility are Very Less in SBI. Inference:

It can be inferred that most of the respondents are feeling that the interest rate and processing fees charged for Credit Facility is Normal.

Q.8) what did you feel about the speed of processing the loan application? Responses Very fast Fast Normal Slow Very Slow No of Respondents 3 12 32 24 8 Percentages 4% 15% 41% 30% 10%

Q.8
10% 4% 15% Very fast Fast Normal 41% Slow Very Slow

30%

From the above figure it is evident that 41% of the respondents are feeling that speed of processing the loan application is Normal, 30% of the respondents are feeling that speed of processing the loan application is Slow in SBI, 15% of the respondents are feeling that speed of processing the loan application is Fast in SBI, 10% of the respondents are feeling that speed of processing the loan application is Very Slow in SBI, and only 4% of the respondents are feeling that of processing the loan application is Very Fast in SBI.

Inference:

It can be inferred that most of the respondents are feeling that speed of processing the loan application is Slow in SBI.

Q.9) what did you feel about the time involved credit renewal/Limit Enhancement Procedure?

Responses More Time Consuming Normal Time Consuming Less Time Consuming

No of Respondents 26 40 13

Percentages 33% 51% 16%

Q.9

16% 33% More Time Consuming Normal Time Consuming 51% Less Time Consuming

From the above figure it is evident that 33% of the respondents saying that More time consuming For Renewal the Loan in SBI, 51% of the respondents saying the Normal Time Consuming for Renewal the loan in SBI and 16% of the respondents saying the Less Time Consuming for Renewal the loan in SBI

Inference: It can be inferred that the respondents are accept there is Normal Time Consuming for Renewal the loan.

Q.10) Will you recommend any other person/colleague to avail credit facility of this Bank?

Responses Yes No

No of Respondents 65 14

Percentages 82% 18%

Q.10
18%

Yes No 82%

From the above figure it is evident that 82% of the respondents are saying that they will recommend any other person/colleague to avail credit facility of this Bank and 18% of the respondents are saying that they will not recommend any other person/colleague to avail credit facility of this Bank.

Inference: It can be inferred that the most of the respondents are saying that they will recommend any other person/colleague to avail credit facility of this Bank and

11) How would you rate the overall credit appraisal process of State Bank of India? 1 2 3 4 5 5 being the highest and 1 being the lowest

Responses 1 2 3 4 5

No of Respondents 0 1 29 38 11

Percentages 0% 1% 37% 48% 14%

Q.11
0% 1% 14% 37% 1 2 3 48% 4 5

From the above figure it is evident that 48% of the respondents are rating Rank 4 for overall credit appraisal process of State Bank of India, 37% of the respondents are rating Rank 3 for overall credit appraisal process of State Bank of India and 14% respondents rating Rank 5 for overall credit appraisal process of State Bank of India and only 1% respondent Rank 2 for overall credit appraisal process of State Bank of India.

Inference: It can be inferred that the most of the respondents are rating Rank 4 and Rank 3 for overall credit appraisal process of State Bank of India.

12) Do you look forward to avail the same credit facility of the bank in your Yes [ ] near No [ future? ]

Responses Yes No

No of Respondents 68 11

Percentages 86% 14%

Q.12
14%

Yes No 86%

The above figure shows that, 86% respondents are looking forward to avail the same credit facility of the bank in their future.

INFERENCES

Here we can understand that majority of the respondents/customers are looking forward to avail the same credit facility of the bank in their future.

CHAPTER 11 ANNEXURE QUESTIONNAIRE

Name Age Gender: Male[

: : ]

_________________ __________________ Female[ ]

Employed [ ] Unemployed [ ]

1)

Have

you

ever

availed

the

credit

facility

of

any

Bank?

i) Yes [ ] ii) No [ ]

2) Which is your preferred bank for availing the credit facility? i) SBI [ ] ii) HDFC [ ] iii) ICICI [ ] iv) AXIS [ ] v) Other [ ]

3) What are the credit facilities you enjoy with these banks? i) Term Loan [ ] ii) Credit Card or Overdraft [ ] iii) Demand Loan [ ] iv) Letter of Credit v) Others

4) What are the other facilities you are enjoying with this bank? i) Saving A/c [ ] ii) Current A/c [ ] iii) Fixed Deposit [ ] iv) Recurring Deposit [ ]

5) What did you feel about the criteria set for sanctioning credit? i) Very Stringent and Cumbersome [ ] ii) Stringent and cumbersome [ ] iii) Normal and Appropriate [ ] iv) Easy [ ] v) Very Easy [ ]

6) What did you feel about the documentation Requirement for processing credit facility? i) Very heavy [ ] ii) Normal [ ] iii) Less [ ] iv) Very Less [ ]

7) What did you feel about the Interest rate & Processing fees charged? i) ii) iii) iv) v) Heavy [ ] High [ ] Normal [ ] Low [ ] Very Low [ ]

8) What did you feel about the speed of processing the loan application? i) Very Fast [ ] ii) Fast [ ] iii) Normal [ ] iv) Slow [ ] v)Very Slow [ ]

9) What did you feel about the time involved in credit renewal/Limit Enhancement Procedure? i) More Time Consuming [ ] ii) Normal Time Consuming [ ] iii) Less Time Consuming [ ]

10) Will you recommend any other person/colleague to avail credit facility of SBI? i) Yes [ ] ii) No [ ]

11) How would you rate the overall credit appraisal process of State Bank of India? 1 2 3 4 5 5 being the highest and 1 being the lowest

12) Do you look forward to avail the same credit facility of the bank in your Yes [ ] near No [ future? ]

CHAPTER 12

SUGGESTION AND RECOMMENDATION

 After understanding the credit appraisal system of SBI we can say that to enable the banks take more objective decisions, the Government should plan to introduce a rating mechanism for designated industrial clusters; this may be designed jointly by CRISIL, IBA, SIDBI and SSI Associations. This would enable institutional funding to be channeled through homogenous recognized clusters. There is a critical need to devote substantial resources to improving the skills and capabilities of banks' lending officers. Understanding the nature of the borrower's business and the cash-flow required is paramount to preventing the creation of NPAs. They need to innovate their delivery platforms by using Internet banking, mobile banking and card-based platforms for delivery of transactionbanking as well as credit products, and enhance the service element. From the survey taken it is also known that majority of the respondents avail the credit facilities of SBI and the rates for the same they feel it is normal so SBI should take these things into consideration before framing the policies of SBI. Customers feel that the whole documentation process is very slow in SBI and they look for convenience and simplicity in their banking requirements hence banks should deliver these through an effective use of technology. The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies. The Chairman and Managing Director/Executive Director should make modifications to the procedural guidelines required for implementation of the Credit Policy as they may become necessary from time to time on account of organizational needs.

CHAPTER 13 CONCLUSION

Credit appraisal is a process of appraising the credit worthiness of loan applicants. The fund of depositors i.e. general public are mobilised by means of such advances / investments. Thus it is extremely important for lender bank to assess the risk associated with credit, thereby ensure the security for fund deposited by depositors. Therefore my analyses regarding credit appraisal procedure of SBI are as follows: In case of retail lending bank strictly follow its circular and fulfils all requirement of necessary documents required for different types of loan so that bank do not suffer any types of loss. Bank is very much particular about CIBIL report of borrowers in case of each type of lending. Bank lending process in case of retail loan is very much fast after compiling with all the criteria of bank. In case of project financing bank follow lengthy norms to check the feasibility of the project such as:-

I.

Firstly personal appraisal of promoter is done by the bank to ensure that promoters are experienced in the line of business and capable to implement and run the project efficiently.

II.

Secondly detail study about the technical aspect is done to find the technical soundness of project such as proper scrutiny of financial report is done, valuation of property by government approved value is done and view regarding each and every area of project is done under technical analysis.

III.

A detail study relating financial viability of project is done by detail study of cash flow, fund flow statements and by calculating import ratio which is very much necessary for project appraisal such as DSCR, DER etc. the main purpose of financial appraisal is insure that project will ensure sufficient surplus to repay the instalment and interest.

IV.

Risk analysis is done by bank to determine the risk associated with the project. This is mainly done by sensitivity analysis and by PNB credit rating or scoring. With sensitive analysis feasibility of project is determined under worsened condition. Credit rating of SBI scoring is done of various parameters such as personal, management, financial etc , thereby determine credit worthiness of customer.

V.

It is on basis of credit risk level, a collateral security to be given by borrower is determined.

This shows that SBI has sound credit appraisal system.

CHAPTER 14 BIBLIOGRAPHY