DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name of the staff member :Sreenivasa Rao B.
Designation :Lecturer in CCP
Branch :Commercial and Computer Practice
Institute :S.U.V.R&s.R GPW, Ethamukkala
Semester :VI
Subject name :banking II
Subject code :CCP 604 (B)
Major topic :Loans and Advances – Short Term
&Long Term
Duration :50 minutes
Sub topic :Procedure for Appraisal of Loan.
Teaching aids :PPT
CCP604(B).12 1
Objectives:

On completion of this period you would be

able to

 Explain the credit worthiness of a borrower.

 Explain credit information .

 Describe Loan / Credit Appraisal – Meaning –

Importance.

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Recap

So far you have learnt

 The principles of lending policy of a bank

 The different styles of credit extended by the
banker
 The merits and demerits of loans & advances
 The long term and short term loans & advances
 The determinants of working capital

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Credit Appraisal

1. What is the meaning of Credit appraisal ?

3. What do you know about procedure in connection

with the appraisal of a loan by a banker?

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Introduction

 Capital is very scarce and a dear resource. It

should be put to optimum use.

 Before sanctioning loans and advances, the

banker is required to assess the credit
worthiness of the borrowers, and the banker has
to collect necessary information about the
borrower.

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 The credit worthiness of a person means that he
deserves a certain amount of credit, which may
safely be granted to him.
 Credit worthiness is judged by the banker on the
basis of customer’s:

1. Character / credit worthiness

2. Capacity,
3. Capital.

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Credit information

In India the RBI has set up a credit information

Bureau.
This Bureau collects information regarding all
advances of Rs. 5 lakhs or more
Unsecured advances of Rs. 1 lakh or more
from all banks. Such information collected
are consolidated and supplied to banks
on request.

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Apart from this there are other sources from which
credit information may be collected they are;

 Information from the borrower himself.

 Exchange of information among banks.
 Market reports / bazaar reports.
 Tax returns.
 Profit and loss account and balance sheet and
 Records of the Registrar of companies.

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Loan appraisal / credit appraisal
Meaning:
Credit appraisal means: The consideration of a
fresh proposal for loan or an enhancement
proposal for additional loan.

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Loan appraisal / credit appraisal

 Previously all credit decisions were taken

purely on the basis of security criterion.
 Now, the security – oriented approach has
been neglected to the background.

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Loan appraisal / credit appraisal

The assessment of credit needs is now based

more on the
-- Purpose.
-- Project and
-- Performance [3Ps].

Banks are now considering need based credit and

the viability of the proposal should justify the
credit request.
CCP604(B).12 11
Appraisal of loan - Importance
ii) To take Correct Credit decisions:

 Credit appraisal enables a banker to arrive at

correct decisions on the basis of the credit risks
involved in each project.
 Bankers take decisions on the basis of the merit
of each case and credit is sanctioned only for
viable projects.
vi) To Decide the quantum of credit:

 Credit appraisal becomes a must to ascertain the

extent of credit required.
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i. To ascertain the ability to repay:

 Credit appraisal helps a banker to determine the

capacity of the borrower to repay out of his future
earnings.

ii. To find out liquidity, profitability and solvency of

the concern.

iii. To judge the viability of the project.

 A banker can establish the viability of a project through
credit appraisal.
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Summary

1. The credit-worthiness of customer is judged by

the banker on the basis of his 1) character 2)
capacity 3) capital.

2. Credit appraisal becomes a must for all credit

proposals.

3. Credit appraisal helps to take a correct credit

decision when loan applications are made either
for a fresh or for an additional loan.

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Quiz

1. Consideration of a fresh proposal for a loan is termed

as:

a) Credit appraisal

b) Liquidity

c) Project

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Quiz

1) The 3 Ps of credit assessment are

performance, purpose and _____.

• Profit
• Perfect
• Project

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Frequently Asked Questions

1. What do you mean by credit appraisal?

3. State the importance of credit appraisal?

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