CHAPTER-1

INTRODUCTION

1
INTRODUCTION

PURPOSE
The project report is aimed at studying the credit appraisal policies of Punjab National
Bank. PNB is the India’s number one nationalized bank having the largest network of
branches all over India. It is the third largest bank in India. PNB offers a wide variety of
products and services. PNB also has a large asset base and diversified credit portfolio.
Despite of the large number of advances the net NPA of PNB stand at 1.77 %, are lowest
as compared to other banks. The reason behind the lowest NPAs is the stringent credit
policy of PNB. According to the guidelines of RBI the banks have to follow the BASEL
II norms from March 31 2009 and the pillar one of the BASEL II says that the banks have
to maintain a minimum capital amount decided on the basis of bank’s risk profile. The
bank’s risk profile covers 3 kinds of risks, credit risk, market risk and operational risk.
Among these 3 kinds of risks credit risk is the main as it has a direct bearing on the
bank’s profitability and long term sustenance of the bank. To keep the credit risk
minimum, the banks all over India are required to design a credit risk management
policy.

PNB also has designed its credit risk management policy in order to minimize its credit
risk. Under the credit risk management policy, the bank’s are required to design the
measures to minimize its credit risk. Credit risk is the possibility of loss associated with
changes in the credit quality of the borrowers or counter parties. The counter parties may
include an individual, small and medium enterprises, corporate, banks, financial
institution. In a bank’s portfolio, losses stem from outright default due to inability or
unwillingness of a borrower or counter party to honor commitments in relation to
lending, settlement and other financial transactions. Thus to minimize the credit risk the
banks are required to maintain a healthy portfolio of their borrowers, and for that the
banks must ensure that they are lending to the people who have the willingness and the

2
ability to repay the loan along with the loan interest. In short, the banks are required to
check the creditworthiness of the borrower before any credit is given to them.

To check the creditworthiness of the borrower the banks are required to conduct an
appraisal of the borrower. This is known as credit appraisal of the borrowers. The credit
appraisal of the borrowal accounts aim at ensuring that the borrower is financially sound
and he is having the right intension to pay back his loan amount with the interest amount.
The credit appraisal process involves a number of process and techniques to asses the
borrower’s financial condition and his intensions. The credit appraisal of the borrower
can be done pre sanction and post sanction. The pre sanction appraisal helps in deciding
whether to approve the loan while the post sanction appraisal helps to ensure that the loan
amount is being used for the right purpose. In PNB the credit appraisal is done thru a
manual as well as computerized process. The manual process of credit appraisal involves
preparing of proposals in case of business loans and the use due diligence of the loan
officer to assess the borrower’s capacity. The computerized process of credit appraisal is
done by centralized server based credit appraisal software. For pre sanction appraisal of
loans PNB is having its in build credit appraisal software called the PNB TRAC for
business loans and PNB SCORE a scoring model for retail loans. The PMS software is
used for post sanction appraisal of the loans. The bank also uses the CIBIL score and RBI
defaulters list in order to assess its borrowers.

3
OBJECTIVE OF THE STUDY
The objectives of the project work are:
- To provide a clear understanding of the credit, the credit process & credit appraisal
- To understand the role of credit appraisal in mitigating the credit risk
- To thoroughly study and understand the credit appraisal process in PNB

4
RESEARCH METHODOLOGY:

RESEARCH DESIGN:
The study is about gaining an understanding about the credit appraisal procedure adopted
by the PUNJAB NATIONAL BANK. This study is being conducted as the credit
appraisal processes learned during the summer training process will help us to understand
more about the credit system in the banks and particularly in PNB. This project report
contains the study of the Indian Banking industry and the Punjab national bank, thus
providing useful information regarding the industry and the bank.

DATA COLLECTION:
The study being conducted is about a subject for which the theories and principles have
been already established by the RBI, the banks in India and the Punjab National Bank.
Since this research study is mainly descriptive in nature and thus, there are no variables to
be established or found out during the research. The research is mainly explaining what is
happening in the credit appraisal front in the banks particularly in Punjab National Bank.

Thus the data used in the study is mainly the Secondary data.

The secondary data used during the study involves:

- Banking industry reports
- PNB performance reports
- PNB policies in regard of credit appraisal

In the project report the primary data is also used but only to some extent. The primary
data used in the study involves:
- The observations made during the summer training.
- Information obtained by personal interactions with the people in loan department.

5
LIMITATIONS OF THE STUDY:
This project report is subjected to certain limitations. The limitations of the project report
are:
- The lack of time which restricted the thorough understand of the credit appraisal
process.
- The lack of case studies on the subject.

6
CHAPTER-2
COMPANY PROFILE

7
INDUSTRY PROFILE

INTRODUCTION
Could you imagine a world without banks? At first, this might sound like a great thought!
But banks (and financial institutions) have become cornerstones of our economies for
several reasons. They transfer risk, provide liquidity, facilitate both major and minor
transactions and provide financial information for both individuals and businesses. Infact
this is one industry that has the stigma of being old and boring.

Before going further let us first understand what a bank is?

A bank is a business. But unlike other businesses banks don’t manufacture products.
Banks sell services- financial services like loans, checking accounts etc.

According to INDIAN BANKING REGULATION ACT 1949

"Banking" means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdraw able by cheque,
draft, order or otherwise.And, "Banking Company" means any company which transacts
the business of banking;Any company which is engaged in the manufacture of goods or
carries on any trade and which accepts deposits of money from the public merely for the
purpose of financing its business as such manufacturer or trader shall not be deemed to
transact the business of banking within the meaning of this clause;

ROLE OF BANKS
The commercial role of banks is not limited to banking, and includes:
 Issue of banknotes (promissory notes issued by a banker & payable to bearer on
demand)
 Processing of payments by way of telegraphic transfer, internet banking or other
means
 Issuing bank drafts and bank cheques

8
 Accepting money on term deposit
 Lending money by way of overdraft, installment loan or otherwise
 Providing documentary and standby letters of credit (trade finance), guarantees,
securities underwriting commitments and other forms of off-balance sheet exposures
 Currency exchange.

BANKING INDUSTRY IN INDIA

Banking Industry is an essential part of any economy. In fact, banks are the single most
important supplier of credit. The banking industry has the capital and commitment to
support the financial needs of individuals, businesses and all levels of government Banks
make loans to consumers to finance purchases of homes, education, cars and major
appliances. India has 79 scheduled commercial banks with 28 public sector banks, 23
private banks and 28 foreign banks. They have a combined network of over 67,000
branches and 914,241 employees, according to a release by Reserve Bank of India
published on Sep 24, 2008. According to a report by ICRA Limited, a rating agency, the
public sector banks hold around 75.3 per cent of total assets of the banking industry and
the private and foreign banks hold of 18.2 per cent and 6.5 per cent respectively. Banking
Industry is the most dominant sector of the financial system in India, and with good
valuations and increasing profits, the sector has been among the top performers in the
markets.

PRODUCTS & SERVICES

Banking Industry has evolved a lot over past few decades. Today banking is not limited
to traditional banking which just offers deposits and loans. Internet banking, mobile
banking, ATMs and technology advancement has help banks to lower there cost and at
the same time offer new and sophisticated products and services to there customers.
 DEPOSITS
 LOANS
 RETAIL BANKING
 ATMs
 PLASTIC MONEY

9
 FINANCIAL SERVICES

 WEALTH MANAGEMENT
 INSURANCE
 DEMAT SERVICES

INTERNATIONAL CREDIT CRUNCH AND OTHER THREATS TO

INDIAN BANKING INDUSTRY

Currently world wide the banking industry is facing a tough time due to the failure of
financial system in the biggest economy i.e. United State of America. The problem arises
due to default in sub prime mortgage lending clubbed with rising national debt, current
account deficit, and fiscal policies of US. This has led to the failure of some big
investment banking firm leading to file bankruptcy. Financial Institutions are the one to
face challenge because of liquidity crunch.

Indian Industries have been witnessing today is an indirect, knock-on effect of the global
financial situation and is a reflection of the uncertainty and anxiety in the global financial
markets. While no country in today’s globalizing world can remain completely insulated
from the global financial crisis, Indian banking industry is better placed to cope with the
adverse consequences of the financial turmoil. India is relatively better placed due to its
robust policy framework, stricter prudential regulations with respect to capital and
liquidity and strong growth performance (a growth of ~9 per cent) in recent years.

An added obstacle to the sustained improvement of the banking system is the fact that
banks are mandated to provide funding to government-defined priority sectors dominated
by small-scale business and agriculture. Loans to these sectors are at high risk of
becoming non-performing. Private-sector banks must ensure that 25 percent of their loans
are directed towards these priority sectors; for state-owned banks, the figure is 40

10
percent. These thresholds restrict the level of credit available to more efficient companies

in non-priority sectors.

The level of bad loans has been falling in recent years as a result of the creation of asset
reconstruction companies and a rapid expansion in lending. Non-performing assets
(NPA) fell to 1.0 per cent for the fiscal year 2007-08, according to the latest data from the
Reserve Bank of India. In the near future, for a stint, we expect to see an increase in Non-
performing Assets

FUTURE PROSPECTS FOR INDIAN BANKING INDUSTRY

11
 SHORT TERM PROSPECTS OR THINGS TO LOOK OUT IN THE
YEAR 2009:
- Remittances: The global recession coupled with declining oil prices could result in a
deceleration in remittance flows which have played an integral role in the Balance
of Payment (BoP). To counter this, besides raising rates on NRI deposits,
introducing another ‘diaspora’ bond and further reducing remittance costs would be
steps in the right direction.

- Rising NPLs :Higher rates, ForEx assumptions going wrong, slowing industrial
output and corporate profits are likely to result in a rise in NPLs and weakness in
asset quality. Though far from peak levels, the macro implication is cautious
lending, with aggressive policy easing not being matched by banks lowering rates
or increasing advances. This would escalate the negative feedback loop currently in
play.

LONG TERM PROSPECTS OR GROWTH PROSPECTS:

- Advantage India – FDI
The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural
India and take over weak banks with an investment of up to 74 per cent, and further
relaxations are on the anvil by 2010, with the second phase of opening expected to
commence in April 2009.

- Market Opportunities
The Indian consumer holds the biggest opportunity for the Indian banking system and
retail banking has immense opportunities in India. Though there are 334 million bank
accounts in India, only 60 million Indian households are actively involved with regular
banking activities.

12
COMPANY PROFILE

 INTRODUCTION- PUNJAB NATIONAL BANK

With over 38 million satisfied customers and 4668 offices, PNB has continued to retain
its leadership position among the nationalized banks. The bank enjoys strong
fundamentals, large franchise value and good brand image. Besides being ranked as one
of India's top service brands, PNB has remained fully committed to its guiding principles
of sound and prudent banking. Apart from offering banking products, the bank has also
entered the credit card & debit card business; bullion business; life and non-life insurance
business; Gold coins & asset management business, etc.

PNB has always looked at technology as a key facilitator to provide better customer
service and ensured that its ‘IT strategy’ follows the ‘Business strategy’ so as to arrive at
“Best Fit”. Along with the achievement of 100% branch computerization, one of the
major achievements of the Bank is covering all the branches of the Bank under Core
Banking Solution (CBS), thus covering 100% of it’s business and providing ‘Anytime
Anywhere’ banking facility to all customers including customers of more than 2000 rural
branches. The bank has also been offering Internet banking services to the customers of
CBS branches like booking of tickets, payment of bills of utilities, purchase of airline
tickets etc. With the help of advanced technology, the Bank has been a frontrunner in the
industry so far as the initiatives for Financial Inclusion is concerned.

13
Financial Performance:

The performance highlights of the bank in terms of business and profit are shown below:
  (Rs.Crores)

Parameters Mar'07 Mar'08 Mar'09 CRAR

Operating Profit* 3617 4006 5744 26.02
Net Profit* 1540 2049 3091 41.67
Deposit 139860 166457 209760 22.47
Advance 96597 119502 154703 26.55
Total Business 236456 285959 364463 24.15

 PRODUCTS AND SERVICES

 Retail Banking
- Deposits
- Housing Finance
- Personal Loans
- Education Loans
- Debit Cards
- Depository Services
- Third Party Mutual Fund/ Insurance products
 Corporate Banking
- Working Capital Facilities
- Trade Finance Products:
 Letters of Credit
 Guarantees
- Transactional Services

14
 Cash Management
- Finance to SME Sector
- Project Finance
 Treasury Operations
- Forex
- Gilts / Bonds & Money Markets
- Derivatives
- Equity
- Precious Metals
 Rural Banking
- Agriculture Lending
- Non Farm Lending (Allied activities)
- Production, Investment Financing
- Kisan Credit Cards

 DETAILED BUSINESS OVERVIEW

 BUSINESS:
Domestic Business of the Bank increased to Rs 3,64,463 crore as on 31 March 2009
registering an absolute accretion of Rs 78,460 crore and a growth of 27.51 per cent.
Including the business of foreign branches at Kabul, Hong Kong and Norway, the Bank's
global business amounted to Rs 3,64,463 crore in the year 2009.

 RESOURCE MOBILISATION
Total deposits of the Bank amounted to Rs 2,09,760 crore as on March 31, 2008, showing
an absolute accretion of Rs 43,303 crore and a growth of 26.0 % over previous year. The
share of low cost deposits (current & savings) in total deposits stood at 39 %.

15
Keeping in view the varying customer requirements, the Bank modified its existing
deposit schemes. To ensure reasonableness of Bank charges, the Bank has also
restructured the service charges of its key services.

 CREDIT DEPLOYMENT
The Bank remains committed to meet the genuine credit requirements of the productive
sectors of the economy in a transparent and equitable manner. Bank's Advances at the
end of March 2009 stood at Rs 1,54,703 crore, as compared to Rs 1,19,502 crore at the
end of March 2008, showing an accretion of Rs 35,201 crore and a growth of 29.5 %.
To further improve the quality of loan portfolio, the Bank continued its emphasis on
effective monitoring, intensive on the job training and making the credit proposal format
more objective. To expedite the decision making process for faster credit delivery, the
Bank introduced a single point Credit Appraisal System for credit proposals.

For better monitoring, supervision, tracking and reporting of credit proposals in the Bank,
a web-based Online Monitoring & Tracking of Credit Proposal System has also been
developed. The system has the feature where next level in the hierarchy can monitor and
track the status of the credit proposals.

The Bank has set up a Project Appraisal and Debt Syndication Cell to develop
syndication business and to tap fee based income.

- NPA Management
The year 2008-09 started with concerns emerging on asset quality, as reflected in the
slippages during the previous year. The Bank not only stepped up its follow up &
recovery efforts but also contained slippages by gearing up its machinery. By the end of
March 2009, the Bank was able to bring the position under control.

As a result of the concerted efforts made, the ratio of Gross NPAs to Gross Advances
declined to 1.77 % from 2.74 % last year. The ratio of net NPAs to net Advances also
declined to 0.17 percent from 0.64 percent last year.

16
A) PNB's Subsidiaries

i) PNB Housing Finance Limited

On the business front, the Company has achieved a balanced growth in housing and non-
housing segment as well as between individuals and real estate developers. During the
year the Company's fresh business (disbursements) amounted to Rs. 676 crore. The
Company has also tied up with real estate developers by approving their projects for
individual financing, which will ensure good business growth in the years to come.

ii) PNB Gilts Limited

PNB Gilts Limited, a leading Primary Dealer in Government securities posted excellent
results during the year 2007-08. The Company's profit before tax grew by 309 percent to
Rs. 67.01 crore, while the profit after tax increased by 183 percent to Rs. 45.15 crore. The
net worth of the company as on March 31, 2008 was Rs. 525.41 crore. The company
continued to fulfill all its obligations as a primary dealer in primary as well as secondary
market.

(iii) Punjab National Bank (International) Limited (PNBIL)

The PNBIL was authorized by the Financial Services Authority (FSA) to conduct
banking business in UK, on 13th April 2007. In addition Bank has a subsidiary (PNBIL)
in UK with 4 branches, one each at Southall, Gresham Street London, Leicester and
Birmingham. The subsidiary earned profit during first year of its operation.

17
CHAPTER-3
CREDIT APPRAISAL

18
CREDIT APPRAISAL OF LOANS BY BANKS

Introduction
Banking, by its very nature, is an attempt to manage multiple and seemingly opposing
needs, and that makes banks ‘special’. Banks stand ready to provide liquidity on demand
to depositors through chequeing accounts and extend credit as well as liquidity to their
borrowers through lines of credit. In the process, banks face several risks for which they
need to take protective measures to ensure that they remain solvent and liquid. Thus,
robust risk management and strong capital position are critical in ensuring that individual
banking organizations operate in a safe and sound manner, which, in turn is crucial for
maintaining the stability of the financial system and fostering economic growth.

Risk is inherent in banking business. Banks that run on the principle of avoiding risks
cannot meet the legitimate credit requirements of the economy. On the other hand, a bank
that takes excessive risks is likely to run into difficulty.

Credit risk is the most common risk in banking and possibly the most important in terms
of potential losses. The default of a small number of key customers could generate very
large losses and in an extreme case could lead to a bank becoming insolvent. This risk
relates to the possibility that loans will not be paid or that investments will deteriorate in
quality or go into default with consequent loss to the bank. Credit risk is not confined to
the risk that borrowers are unable to pay; it also includes the risk of payments of the bills
being delayed beyond the maturity time, which can also cause problems for the bank.

CREDIT APPRAISAL

Extending credit would have been impractical today, if not impossible, without the events
that have been brought on by deregulation, technology and disintermediation in the
financial services industry, all of which have actually changed the psychology of
extending business and corporate credit.

19
Credit has evolved from the assessment of borrower’s creditworthiness into a risk
evaluation and measurement methodology that lenders and suppliers of credit use to
analyze measure and manage called credit appraisal of borrowers or credit appraisal of
loans.

IMPORTANCE OF CREDIT APPRAISAL:

1. Credit appraisal helps to mitigate credit risk.

2. It helps to improve the loan profile of the bank.
3. Credit appraisal helps the banks to decide how much loan to lend to a borrower.
4. Credit appraisal helps to decide the best price of the loans.
5. Management of credit risk is a must for all the banks, for that RBI has issued
some guidelines and credit appraisal is one of the important tool for mitigation of
credit risk as suggested by RBI.
6. Ensures the security of the principal and interest.
7. Helps in reducing the NPAs and NPLs.

THE CHANGING LANDSCAPE FOR CREDIT APPRAISAL

Over the past decade, the servicing of the debt instruments has been reconfigured to
create a more efficient credit process and loan market through the application of new
technologies, new financial products and new market participants. Unlike the traditional
commercial lending, which at one time was predicated on long- term relationships;
today’s emphasis is on short-term value-added customer relationships. This concept of
value added has also brought new meanings to commercial lending as customer
relationships are defined as profitable or non- profitable. If they are profitable, this must
be evidenced by returns that are commensurate with the overall portfolio objectives and
for the financial institution’s return on capital.

20
PRINCIPLES OF GOOD LENDING:

There are certain principles of good lending which the banks try to accomplish through
the adoption of the appraisal techniques. These principles are:

1. Safety:

Bank uses its depositor’s money to lend credit to its borrowers. Thus safety of its
lending’s the major concern of a Banker as bank is investing someone’s money for the
loan. Safety here means that the borrower will repay the principle amount lent to him
along with the interest. Thus the banker has to critically assess the borrower’s credit
quality, his ability to repay the loan in order to ensure greater safety of loan amount.
Safety of loan amounts is also important due to stringent NPA norms established by RBI.

2. Liquidity:

Liquidity means the degree to which an asset or security can be bought or sold in the
market without affecting the asset's price. Liquidity is characterized by a high level of
trading activity. Assets that can by easily bought or sold, are known as liquid assets.

In banking, liquidity is the ability to meet obligations when they come due without
incurring unacceptable losses. Managing liquidity is a daily process requiring bankers to
monitor and project cash flows to ensure adequate liquidity is maintained.

For an individual bank, clients' deposits are its primary liabilities (in the sense that the
bank is meant to give back all client deposits on demand), whereas reserves and loans are
its primary assets (in the sense that these loans are owed to the bank, not by the bank).
The investment portfolio represents a smaller portion of assets, and serves as the primary
source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals
and increased loan demand. Banks have several additional options for generating

21
liquidity, such as selling loans, borrowing from other banks, borrowing from a central
bank and raising additional capital. In a worst case scenario, depositors may demand their
funds when the bank is unable to generate adequate cash without incurring substantial
financial losses. In severe cases, this may result in a bank run.

Thus banks need to main adequate liquidity and should not lock up funds in long term
loans so that its deposits can be paid on demand or at short notice.

Most banks are subject to legally-mandated reserve requirements intended to help banks
avoid a liquidity crisis.

3. Profitability:

Profitability is the key word for every business organization and bank is no exception to
it. The profit is the result of sound business decision and is related to cost of funds and
other related risks. Profits provide the bank a cushion against the expected and
unexpected losses.

Bank earns profits from the interest rates collecting from various types of loans. i.e.,
Bank offers less rate of interest on deposits and makes high rate of interest on loans and
through this bank earn profit.
4. Spread:

You should not keep all the eggs in one basket. Bank should strike a balance between
short term, medium term and long term loans. So that bank could main liquidity and
profitability both. Investing in short and medium term loans provides banks with
adequate liquidity and investment in medium and long term loans provides banks with
great profitability as more the period of investment more is the interest on it.

22
Also banks should not concentrate to advances to one industry or one field so that if any
of the industry goes into recession the banks don’t face more losses. It should keep on
getting returns from rest of the sectors.

5. Purpose:

When a borrower goes to a bank for a loan, he has a purpose. It is the responsibility of the
loan officer to identify his purpose, check his creditability and then approve his loan. He
should also make sure that the lending is being made for an approved purpose, i.e. the
purpose of the loan should not be illegal or unethical.

The banks can lend for productive purpose i.e. to business units and for consumption
purposes to the consumers like home loan, car loan, etc. The prospective borrower who
will approach the bank for loan may have his or her own reason to ask for loan but the
bank’s loan policy should take care of all the reasons and all the purposes so that each
loan can be treated properly.

6. End Use:

Once the loan has been disbursed the money is in the hands of the borrower and now he
has to put it to the use. Now it is the responsibility of the banker to make sure that the
loan money is being used for the purpose for which loan was availed. For that the banker
should obtain all the supporting papers in respect of it. This step is necessary so as to
ensure that the money is not being put into use to any illegal or unethical purpose or any
other purpose other than the purpose for which the loan was availed and also so that the
bank can get its principle and interest money on the maturity date.

7. Need Based Finance:

The borrower when he approaches the bank he has some specified need for money. He
needs money for his purpose which he wants to fulfill by that money. The banker after

23
approving his purpose should identify his need for money and should make sure that he is
lending according to the need of the borrower. He should neither over finance nor under
finance.

Generally a banker should not finance the need completely. He should ask the borrower
to finance some part of his need from his own sources. This is to make sure that the
borrower is financially sound and he is having some own stake in the purpose of loan,
this makes the loan more secure.

8. Viability Oriented instead of security oriented lending:

While considering a loan application the banker should mainly focus on the violability or
the future prospects of the business or the other purpose for which the loan is being taken.
He should not approve or reject the loan on the basis of the security being offered against
the loan. While appraising the loan application the banker should look at the character,
capacity, capital, collateral and condition.

The future prospects of the loan should be taken as the main component while appraising
the loan and the security should only be considered as the insurance or the cushion to fall
back. Security mainly acts as psychological support to the banker that the loan will be
repaid and a pressure on the borrower that he has to get back his security back.

9. Own Stake:

The banker should not approve the entire loan amount. He should ask the borrower to
have a financial stake in the business or the loan purpose. If the borrower is not having a
stake in the business then there are much chances of default. Therefore the banker while
appraising the loan should consider the debt-equity ratio, interest coverage ratio,
sensitivity analysis, break even analysis, etc.

24
10. National Priorities:

Banks also have some social responsibility towards the society. For this the banks are
required to reserve some portion of its advances for the priority sector. The priority
sectors include the agriculture finances, MSM enterprises, etc. The Indian banks are
required to lend 40% of their advances to the priority sector and 25% of which should be
lent to the weaker sector.

PROCESS OF APPRAISAL:

1. Checking the 5 C’s of the borrower:

The very basic approach to credit analysis calls for assessing a prospective customer in
terms of the ‘5 Cs of credit’.

(i) Character
(ii) Capacity
(iii) Capital
(iv) Collateral
(v) Conditions

2. Sources of information available to assess the borrower:

A firm may rely on the following sources to obtain information on the 5 Cs:

(i) Loan Application

(ii) Financial statements
(iii) Bank References
(iv) Experience of the firm
(v) Personal Interview
(vi) Inspection prior to the sanction

25
3. Financial Appraisal:
In the prior step the banker obtains the required documents from the borrower. Now it’s
the job of the banker to conduct a financial appraisal in the following manner:
(i) Past performances
(ii) Projections with assumptions
(iii) Fund flows analysis
(iv) Ratio Analysis

4. Security Appraisal:
The banker should also appraise the price and yield of the primary and collateral
security offered by the borrower against the loan amount. Security should be
appraised on the following parameters:

(i) Marketability
(ii) Ease to access the title, vale, quantity or quality of the security.
(iii) Stability of the value of security.
(iv) Durability of the security
(v) Absence of contingent liability
(vi) Yield

5. Credit Monitoring:
This means that the banker should keep an eye on the progress of the project. For that he
should clearly mention the terms and conditions regarding the repayment of loan and the
payment of its interest so that there is no problem at the time of maturity of the loan. And
also proper documentation at the time of sanction and disbursement of loan is required in
order to avoid any confusion later on. He should also review the operations in the
account, obtain QRS, stock statement, insurance policy etc, and confirm end use of
advances.

26
CHAPTER-4
CREDIT APPRAISAL IN
PNB LOAN
DEPARTMENT

27
CREDIT APPRAISAL IN LOAN DEPARTMENT – PUNJAB
NATIONAL BANK

The Reserve Bank of India has clearly stated in its guidelines that the banks are required
to keep a check on their capital adequacy ratio and for that RBI has suggested the BASEL
II model to all the Indian banks and in fact it has been now made mandatory for all the
banks to follow this accord. According to BASEL II pillar one any bank has 3 kinds of
risks-
- Credit risk
- Operational risk
- Market risk.

Out of these 3 kinds of risks credit risk is the main risk which can affect the well being of
the bank. As credit risk covers the credit profile or the loan profile of the bank, i.e. it
covers how secure the loans of that particular bank are. If the bank is having high credit
risk it has greater probability of going insolvent. Thus to maintain its creditability,
profitability and to comply with the RBI norms the firms have to keep their credit risk,
minimum. The best way to reduce the credit risk is to keep your lending’s safe. If the
borrowers of the bank are reliable and are financially sound, then there is less risk of
default and there by lower credit risk. And to make sure that the bank’s borrowers won’t
default its necessary to check their creditworthiness before the sanction of the loan, it
means to ascertain in advance that the borrower will be able to repay the loan amount
with the timely interest payments of the loan. And for checking the financial soundness
of the borrower the credit appraisal of the borrower is a must.

In PNB also, they strive hard to keep their credit risk low, and for that PNB adopts a very
stringent credit appraisal policy. Each borrower’s account is checked and rechecked
before the loan is sanctioned to him to be sure of his financial soundness and also the
borrower’s accounts are regularly monitored in order to check that the money is being
used for the right purpose, so that there are less chances of default.

28
 LOANS AND ADVANCES IN PNB
Before going further to understand the various credit appraisal policies at Punjab National
Bank, it will be relevant to find out the various loans and advances offered by the bank.

Loans and Advances in PNB

Business Loan Retail Loan

Fund Based Non Fund Based

Facilities Facilities

I. BUSINESS LOAN
Business loan is the loan granted for the use of business by the bank. Business need loans
for 3 major purposes:
- For financing their working capital
- Term loan financing
- Project financing

1. WORKING CAPITAL FINANCING:

Firms need cash to pay for all their day-to-day activities. They have to pay wages, pay for
raw materials, pay bills and so on. The money available to them to do this is known as the
firm’s working capital. The main sources of working capital are the current assets as
these are the short-term assets that the firm can use to generate cash. However, the firm
also has current liabilities and so these have to be taken account of when working out
how much working capital a firm has at its disposal.
Working capital is therefore:-
WORKING CAPITAL = Current Assets - Current liabilities
||

29
stock + debtors + cash
Thus working capital is the same as net current assets, and is an important part of the top
half of the firm's balance sheet. It is vital to a business to have sufficient working capital
to meet all its requirements. Many businesses have gone under, not because they were
unprofitable, but because they suffered from shortages of working capital.

Working Capital Cycle

The way working capital moves around the business is modeled by the working capital
cycle. This shows the cash coming into the business, what happens to it while the
business has it and then where it goes. A simple working capital cycle may look
something like:-

Between each stage of this working capital cycle there is a time delay. For some
businesses this will be very long where it takes them a long time to make and sell the
product. They will need a substantial amount of working capital to survive. Others
though may receive their cash very quickly after paying out for raw materials etc...
(perhaps even before they've paid their bills?) - They will need less working capital.
For all businesses though they need to plan how much cash they are going to have. The
best way of doing this is a CASH FLOW FORECAST.

Financing of working capital

Bank credit is the primary institutional source of working capital finance in India.
The different forms in which the bank normally provides loans and advances are as
follows:

30
a. Loans
When a bank makes an advance in lump-sum against some security it is called a loan.
PNB generally provide short term loans up to one year for meeting working capital
requirements. The term loans may be either medium-term or long term loans. In case of a
loan, a specified amount is sanctioned by the bank to the customer. The entire loan
amount is paid to the borrower either in cash or credit to his account. The borrower is
required to pay interest on the entire amount of the loan from the date of the sanction. A
loan may be repayable in lump sum or installments. Interest on loans is calculated at
quarterly rests and where repayments are stipulate in installments, the interest is
calculated at quarterly rests on the reduced balances.
b. Cash Credits
A cash credit is an arrangement by which the bank allows his customer to borrow money
up to a certain limit against some tangible securities or guarantees. The interest is charged
on the daily balance and not on the entire amount of the account. Hence it is the most
favorite mode of borrowing by industrial and commercial concerns.
c. Overdrafts
Overdraft means an agreement with a bank by which the current account holder is
allowed to withdraw more than the balance to his credit up to a certain limit. The interest
is charged on daily overdrawn balances. The main difference between cash credit and
overdraft is that overdraft is allowed for a short period and is a temporary
accommodation whereas the cash credit is allowed for a longer period. Overdraft can be
clean overdraft, partly secured or fully secured.
d. Purchasing and discounting of bills:
In this case, the bank lends without any collateral security. The seller draws a bill of
exchange on the buyer of goods on credit. Such a bill may be either a clean bill or a
documentary bill which is accompanied by documents of title to goods such as railway
receipts. The bank purchases the bills payable on demand and credits the customer’s
account with the amount of bill less discount. At the maturity of the bills, bank presents
the bill to its acceptor for payment. In case the bill discounted is dishonoured by non-

31
payment, the bank recovers the full amount of the bill from the customer along with
expenses in that connection.

Computation of working capital

With a view to impart uniformity to the system of appraisal of working capital
requirements of the borrowers, bank has prescribed obtention of information on Credit
Monitoring Arrangement (CMA) Data Base Forms. The information on the CMA data
base forms is to be obtained from the borrowers, including SSI borrowers desiring to
avail working capital limits of the prescribed extent (presently Rs. 100 lakhs and more).
However, all borrowers opting for Maximum Permissible Bank Finance (MPBF) System
have necessarily to submit information on CMA forms, irrespective of the limit.

The committee’s recommendations for computation of working capital

 Tandon Committee Report
Reserve Bank of India setup a committee under the chairmanship of Shri P.L. Tandon in
July 1974. The terms of reference of the Committee were:
1. To suggest guidelines for commercial banks to follow up and supervise credit from the
point of view of ensuring proper end use of funds and keeping a watch on the safety of
advances;
2. To suggest the type of operational data and other information that may be obtained by
banks periodically from the borrowers and by the Reserve Bank of India from the leading
banks;
3. To make suggestions for prescribing inventory norms for the different industries, both
in the private and public sectors and indicate the broad criteria for deviating from these
norms ;
4. To make recommendations regarding resources for financing the minimum working
capital requirements;
5. To suggest criteria regarding satisfactory’ capital structure and sound financial basis in
relation to borrowings;

32
6. To make recommendations as to whether the existing pattern of financing working
capital requirements by cash credit/overdraft system etc., requires to be modified, if so, to
suggest suitable modifications;

The committee was of the opinion that:

i. Bank credit is extended on the amount of security available and not according to the
level of operations of the customer
ii. Bank credit instead of being taken as a supplementary to other sources of finance is
treated as the first source of finance. Although the Committee recommended the
continuation of the existing cash credit system, it suggested certain modifications
so as to control the bank finance.

The banks should get the information regarding the operational plans of customer in
advance so as to carry a realistic appraisal of such plans and the banks should also know
the end use of bank credit so that the finances are used only for purposes for which they
are lent. The recommendations of the committee regarding lending norms have been
suggested under alternatives. According to the first method, the borrower will have to
contribute a minimum of 25% the working capital gap from long-term funds, i.e., owned
funds and term borrowing; this will give minimum current ratio of 1.17 : 1
Under the second method of the borrower will have to provide a minimum. of 25% of
the total current assets from long-term funds; this will give a minimum current ratio of
1.33:1.
In the third method, the borrower’s contribution from long-term funds will be to the
extent of the entire core current assets and a minimum of 25% of the balance current
assets, thus strengthening the current further.

Computation of Maximum Permissible Bank Finance(MPBF):

The Tandon Committee had suggested three methods for determining the maximum
permissible bank finance (MPBF).
They are
Method 1: MPBF=0.75(CA-CL)

33
Method 2: MPBF=0.75(CA)-CL
Method 3: MPBF=0.75(CA-CCA)-CL
Where CCA=Core Current Assets- this represents the permanent component of working
capital.
 Chore Committee Report
The Reserve Bank of India in March, 1979 appointed another committee under the
chairmanship of Shri K.B. Chore to review the working of cash credit system in recent
years with particular reference to the gap between sanctioned limits and the extent of
their utilisation and also to suggest alternative type of credit facilities which should
ensure greater credit discipline.

The important recommendations of the Committee are as follows:

1. The banks should obtain quarterly statements in the prescribed format from all
borrowers having working capital credit limits of Rs. 50 lacs and above.
2. The banks should undertake a periodical review of limits of Rs. 10 lacs and above.
3. The banks should not bifurcate cash credit accounts into demand loan and cash credit
components.
4. If a borrower does not submit the quarterly returns in time the banks may charge penal
interest of one per cent on the total amount outstanding for the period of default
5. Banks should discourage sanction of temporary limits by charging additional one per
cent interest over the normal rate on these limits.
6. The banks should fix separate credit limits for peak level and non-peak level, wherever
possible.
7. Banks should take steps to convert cash credit limits into bill limits for financing sales.

 Credit Authorization Scheme

Under the scheme, all selected commercial banks were advised to obtain the RBI’s prior
authorization before sanctioning any credit limit of Rs.1 crore or more to an single party
or any limit that would take the total limits enjoyed by such party from the entire banking
system (including co-operating sector) as a whole to Rs.1 crore or more. The appraisal on
the part of the banks related to need of funds, security for the advance and suitability of

34
terms and conditions is taken for granted. Normally authorization is given within 3 days
of the receipt of application. Rejections are few and mainly related to the regular activity
of the borrower, intermediate trading activities and double financing.
Since 1965, the Credit Authorisation Scheme (CAS) has been playing a significant role as
an effective instrument of credit regulation. Rationalisation of the Scheme RBI advised
commercial banks in June 1970 to collect and examine data relating to
a. Utilisation of existing credit limits by borrowers
b. Total working capital requirements and bank finance permissible together with the
borrower’s ability to meet the gap between the two.
c. Comparative financial position for the last 3 years
d. Cash flow
e. In respect of term loans, project cost and sources of financing the project.

 CAS Form of Application

The forms prescribed under the Credit Authorization Scheme, particularly relating to the
assessment of working capital requirements, considers the following important aspects of
lending.
a. Examination of its operation cycle and total working capital requirement is necessary,
as finance is required by a company for its total current operations and not merely
inventory or receivables.
b. Assessment of the company’s peak requirement of current assets as balance sheet
changes indicate only the movement in funds between 2 years.
c. Adjustments for other available sources of finance such as sundry creditors, advances
received etc. so as to arrive at
i. networking capital requirements of the borrowing company
ii. the peak level of current assets to maintain a given level of production
d. Security and drawing power (after providing usual margins) to arrive at permissible
bank finance
e. Margin requirement i.e the gap between the total working capital requirement and
credit limits available ( including those proposed as per the application submitted to the
RBI) to be met out of current working capital

35
f. margin requirement and credit limits available (including as per the application
submitted to RBI) to meet the current working capital surplus and/or other long term
sources of finance.
The objective of the Credit Authorization Scheme is in the nature of credit planning and
control than credit appraisal.

Margins
The prescribed margin in cash credit account must be maintained, to provide for:
a) any possible shortage in storage which might not be disclosed by inspection.
b) shrinkage, weevilling, etc.
c) fall in prices, and
d) borrowers' stake in the project.

Security Valuation:
Generally for the working capital loans (cash credit loans), the stocks are kept as
securities, also called as the hypothecation of stocks. Thus it is required to properly assess
the value of the stocks in order to secure the working capital loans. Inventories are valued
at the lower of cost and net realizable value.

Rate Of Interest
The rate of interest should be charged as advised by authorities from time to time.
Generally the ROI is calculated as BPLR + rate as calculated according to the rating of
the borrower.
CREDIT APPRAISAL IN PNB

Credit Appraisal in PNB

Pre sanction appraisal Post-sanction appraisal

36
Credit appraisal function in PNB consists of the pre-sanction and the post-sanction
appraisal of borrower’s accounts. Both of these approaches are being discussed below

i) Pre Sanction Appraisal:

The loan portfolio of the bank shows the effectiveness of its credit management policy.
Today every bank is striving hard to manage its credit department properly, to keep the
NPA’s low and to maintain its profitability. And therefore the pre-sanction appraisal of
the borrowers is considered to be most important so that weak accounts can be kept out.

Detailed Guidelines To be Followed While Considering credit Proposals:

i) All loan facilities be considered after obtaining loan application(s) from the
borrower(s). The borrowers should have the desired background,
experience/expertise to run their business successfully.
ii) Project for which the finance is granted should be technically feasible and
economically/commercially viable i.e. it should be able to generate enough
surpluses so as to service the debts within a reasonable period of time.

iii) Cost of the project and means of financing the same should be properly assessed
and tied up. Both, under-financing and over- financing can have an adverse
impact on the successful implementation of the project.
iv) Borrowers should be financially sound, enjoy good market reputation and must
have their stake in the business i.e. they should possess adequate liquid resources
to contribute to the margin requirements.
v) Loans should be sanctioned by the competent sanctioning authority as per the
delegated loaning powers and should be disbursed only after execution of all the
required documents.
vi) Projects financed must be closely monitored during implementation stage to avoid
time and cost overruns and thereafter till the adjustment of the bank's loan.

37
BUSINESS LOAN APPRAISAL:
With the rapid expansion of the economy, the banks are being exposed to new risks in
every field. These risks can be broadly classified into 4 main categories:
(a) Industry Risk- it includes changes in the industries due to changes in govt.
policies and regulations, infrastructure, industry scenario and outlook, availability
of inputs, etc.
(b) Business Risk- These are the internal risks of the business and include, operating
efficiency, competition, demand and supply position, cost of labour, cost of raw
material and other inputs like water and electricity, pricing of products, surplus
available, marketing, etc.
(c) Management Risk- Management consists of the people who run the business and
management risk include the background, organizational set up and management
hierarchy, expertise or competence of persons holding key position in the
organization, delegation and decentralization of authority, achievement of targets,
track record in debt payments, track record in industrial relations, etc.
(d) Financial Risks- Finance is the lifeblood of the business. No business can survive
without adequate finances. Thus its very important for any business firm to
manage its finances properly. The financial risks involve, financial strength of the
promoters, reliability and reasonableness of projections, past financial
performance, reliability of operational data and financial ratios, adequacy of
provisioning for bad debts, qualifying remarks of auditors, etc.

In the light of the above risks, the banks should keep their appraisal methodology updated
with the changing environment. The appraisal system in PNB aims to determine the
credit needs of the borrowers by taking into account his financial resources. Also the
appraisal system is aimed to ensure that there is no over or under financing.

38
Credit Appraisal Mechanism for the various business loans
studied under the summer training period:
I. Project Appraisal:
Project finance is one of the key areas for any lending institution. As such, before taking
a final decision about financing any project, whether individually or jointly a detailed and
critical appraisal of the project is necessary.
The following aspects are needed to be scrutinized and analyzed while appraising:
1. Market
The market demand and the potential market demand is to be examined for each product
item and its substitutes by taking into account the selling price of the products,
arrangements made for after sale services, competitors status and the level of operations
with regard to production and products and distribution channels being used, etc. Critical
analysis is required regarding size of the market of the products both local and export,
based on the present and expected future demand in relation to supply position of the
similar products and availability of the other substitutes as also consumer preferences,
practices, attitudes, requirements etc.

2. Technical Aspects
In a dynamic market, the product, its variants and the product-mix proposed to be
manufactured in terms of its quality, quantity, value, application and current taste/trend
requires thorough investigation. The technical analysis of the project includes the
appraisal of the location & sites, cost and availability of the raw material, the plant and
machinery used, plant capacity and the manufacturing process.

3. Financial Aspects:
The financial aspects include cost of project, means of financing, cost of production,
break-even analysis, financial statements as also profitability/funds flow projections,
financial ratios, sensitivity analysis which are discussed as under:
(a) Cost of project and means of financing:

39
The various foreseen and unforeseen costs of the project and the various means of finance
should be evaluated. The cost of financing includes, the cost of land & building,
transportation, plant and machinery, know-how expenses, etc. The project can be
financed thru the bank loan, promoters and shareholders.
(b) Profitability Statement:
The profitability statement also known as income and expenditure statement is prepared
after considering the net sales figures and details of the direct costs or expenses relating
to raw material, wages, power, fuel, etc to arrive at gross profit. Projections of profit/loss
are prepared for a period covering the repayment of term loans. There should not be any
optimistic or pessimistic view while working our profitability projections to ensure that
these are realistic and achievable. A unit may be considered as financially viable,
progressive and efficient if it is able to earn enough profits not only to service its debts
timely but also for future development/growth.
(c) Break-Even Analysis:
Analysis of break-even point of a business enterprise would help in knowing the level of
output and sales at which the business enterprise just breaks even i.e. there is neither
profit nor loss. A business earns profit if it operates at a level higher than the break-even
level or break-even point. If, on the other hand, production is below this level, the
business would incur loss. The break-even point in an algebric equation can be put as
under:
Break-even point = Total Fixed Cost
(Volume or Units) (Sales price _ (Variable Cost
per unit) per unit)

Break-even point = Total Fixed Cost x Sales .

(Sales in rupees) (Sales) - (Variable Costs)
(d) Fund-Flow Statement:
A fund-flow statement is often described as a ‘Statement of Movement of Funds’ or
‘where got: where gone statement’. It is derived by comparing the successive balance
sheets on two specified dates and finding out the net changes in the various items
appearing in the balance sheets.

40
A critical analysis of the statement shows the various changes in sources and applications
(uses) of funds to ultimately give the position of net funds available with the business for
repayment of the loans. A projected Fund Flow Statement helps in answering the under
mentioned points.
- How much funds will be generated by internal operations/external sources?
- How the funds during the period are proposed to be deployed?
- Is the business likely to face liquidity problems?
(e) Balance Sheet Projections:
Projected balance sheet gives the position of assets and liabilities of a unit at a particular
future date. In other words, the statement helps to analyze as to what an enterprise owns
and what it owes at a particular point of time. The loan officer appraises the projected
balance sheet data of the unit by considering whether the projections are realistic looking
to various aspects relating to the same industry.
(f) Financial Ratios:
The financial ratios which are considered important are discussed as under:
i) Debt-Equity Ratio = Debt (Term Liabilities) .
Equity (Share capital, free reserves, premium on
shares, development rebate reserves, etc. after
adjusting loss balance)

ii) Debt-Service Coverage Ratio = Net Profit (After Taxes) + Annual interest
on long term debt + Depreciation
. Annual interest on long term debt + Amount
of installments of principal payable
during the year.

iii) Tangible Net Worth = Tangible Net Worth (Paid up Capital + Reserves
Outside Liabilities Ratio and Surplus - Intangible Assets)
Total Outside Liabilities (Total Liability-Net Worth)

41
iv) Profit-Sales Ratio = Operating Profit (Before Taxes and excluding
Income from other Sources)
.
Sales
v) Sales-Tangible Assets Ratio = Sales .
Total Assets - Intangible Assets

vi) Output-Investment Ratio = Sales .

Total capital employed (in fixed & current assets)

vii) Current Ratio = Current Assets.

Current Liabilities
(g) Sensitivity Analysis:
While preparing and appraising projects certain assumptions are made in respect of
certain critical/sensitive variables like selling price/cost price per unit of production,
product-mix, plant capacity utilisation, sales etc. which are assigned a `VALUE' after
estimating the range of variation of such variables. The `VALUE' so assumed and taken
into consideration for arriving at the profitability projections is the `MOST LIKELY
VALUE'. Sensitivity Analysis is a systematic approach to reduce the uncertainties
caused by such assumptions made.The Sensitivity Analysis helps in arriving at
profitability of the project wherein critical or sensitive elements are identified which are
assigned different values and the values assigned are both optimistic and pessimistic such
as increasing or reducing the sale price/sale volume, increasing or reducing the cost of
inputs etc. and then the project viability is ascertained. The critical variables can be
thoroughly examined by generally selecting the pessimistic options so as to make
possible improvements in the project and make it operational on viable lines even in the
adverse circumstances.

4. Management and Organization:

It is seen that some projects may fail not because these are not viable but because of the
ineffectiveness of the management and the organization in controlling various functions

42
like production, marketing, finance, personnel, etc. The appraisal report highlights the
strengths and weaknesses of the management by commenting on the background,
qualifications, experience, and capability of the promoter, key management personnel,
and effectiveness of the internal control systems, relation with labor, working conditions,
wage structure, and the other assigned essential functions.

II. Cash Credit:

Cash credit is a facility given by the bank for financing the working capital needs of the
borrower. Cash Credit is a facility granted against hypothecation and pledge of goods or
produce, book debts, bills, trust receipt etc. Before any proposal for a cash credit facility
is considered, the bank officer collects the necessary data as per the proforma prescribed
by the bank. For assessment of borrower's WC needs, the projections submitted by the
borrower for the following year are relevant. The first step in assessing the quantum of
WC finance is to find out whether the projections given by the borrower are reasonable.
Any optimism or pessimism in accepting projections is neither desirable for the bank nor
for the borrower as it may lead to over-financing or under-financing.

To assess the reasonableness of borrower's projections, the following factors are

considered:
i) The branches use the past data given by the borrower as well as the data available
with it. The comparison is made between the past performance and the future
projections. If the future projections are markedly different from the past trend in
relation to projected rate of growth, the reasons for the same have to be ascertained
before accepting the various projections.
ii) The projections given by the borrower are normally based on certain assumptions
such as market demand, cost of raw materials, price, availability of inputs and other
environmental factors. The bank has to assess how far these assumptions are realistic and
likely to materialize.

43
iii) How limits, already sanctioned by the bank, have been utilized by the borrower in
the past? Has the conduct of the account been as per terms of sanction or these have been
frequently violated.
iv) While accepting the borrower's projections, it has to be ensured that the
projections do not go beyond the level beyond which the operations start giving negative
results, as this will inhibit the further expansion.
v) The most important area to be looked into is Sales. All other aspects are directly
related to the projected level of sales. Therefore, determining the projected level of sales
is the first step in assessing the working capital needs of a borrower. Once the level of
sales has been determined, the other data can be easily determined in relation to Sales.

A higher than normal sales estimate for the following year can be accepted only after the
bank is satisfied on the basis of the above scrutiny that the projected level of sales can be
achieved and the available past data and future plans give positive indications in this
regard. The banker also ensures that the borrower is willing to create the necessary
support to achieve the sales target.
The actual requirement of working capital can be arrived at on the basis of position of
current assets and other current liabilities. The bank is to partly meet the difference
between current assets and other current liabilities. If the available NWC is more than the
minimum stipulated working capital, the available NWC is to be taken into account for
arriving at the permissible level of bank. After all the projections have been taken, the
proposal document and other documents required for cash credit advances are completed
by the banker.

III. Guarantee:
Proposals for issue of guarantees are thoroughly appraised and assessed with the same
diligence as in case of fund based limits. Further, it is also ensured that the person(s) on
whose behalf guarantees are issued would be in a position to perform the obligations and
also to honor their commitments out of their resources as and when needed.

44
While issuing financial guarantees, it is ensured that the customer would be in a position
to reimburse the bank in case the guarantee is invoked. In the case of performance
guarantees, due caution are exercised to ensure that the customer has the necessary
experience, capacity and means to perform the obligations under the contract and is not
likely to commit any default.

Prior to issuance of a guarantee, terms of contract between the parties are scrutinized.
This is important because the guarantee bond is subordinate to the contract which is of
paramount importance. In case of guarantees extending over a period of 2 years, yearly
review of cases is required. Guarantee is issued for specific amount and for genuine trade
or business transactions. It is for a definite object, enforceable on the happening of a
definite event.

IV. Overdraft and demand loans:

Customers are ordinarily not allowed to overdraw their accounts. However, the loan
officer has discretion to allow temporary clean overdrafts within specified limits and for
short periods. Overdrafts and demand loans are granted to customers against deposits
lying at the credit of the borrowers in the books of the Branch making such advance or
any branch of the Bank. Before an advance is allowed against fixed deposit as security, a
letter of lien signed by the depositor and fixed deposit receipt duly discharged with
revenue stamp of Re.1 by the depositor is obtained. Bank's lien is noted on the fixed
deposit receipts and in the relative account by the loan officer and also an entry is made
in the fixed deposit/recurring deposit due date register.

When the overdraft or demand loan is made by the Bank against its deposit
- A margin of 25% is maintained;
- The rate of interest 2% higher than the rate payable on the deposit is charged; and
- No third party loan or advance is permitted.

45
Advances against fixed deposits can be liquidated on maturity and are allowed to
continue after the date of maturity of the fixed deposit and in no case a fixed deposit
receipt is renewed where the loan advanced against such deposit is outstanding.
The loan officer is authorized to take decision on these loans according to his own
discretion and also since these loans are issued against bank’s own securities this they
don’t require much of appraisal but in order to avoid any chance of any default the bank
officer obtains the CIBIL score of the borrower.

CREDIT RISK RATING MODELS FOR PRE-SANCTION APPRAISAL

To measure risk in individual borrowal accounts, the bank has identified various
segments viz. large corporate, mid corporate, small, NBFC, New projects, Banks, Retail,
etc. Borrowers in the segments reflect similarity of potential credit risk factors. Parameter
under these models captures potential credit risk both internal as well as external, which
may affect the credit quality of a borrower. The credit risk rating awarded to a borrower
is subject to review from time to time.

These credit rating models provide a common language and uniform framework across
bank for accessing the credit risk. The models enable the bank to evaluate and track risk
on individual obligors on a continuous basis. The credit risk rating models contain several
qualitative and quantitative parameters that are to be evaluated subjectively.
One such model used for pre sanction appraisal of business loans is PNB TRAC.

PNB TRAC is an internally developed centralized web based software application for
assessment of credit risk in a borrowal account. It incorporates all rating models on a
single platform and enables online rating of borrower. The data is stored in a centralized
server, which makes the data collection and storage easier. The various rating models
incorporated in PNB TRAC are:
1. Large Corporate Borrowers (Bank exposure more than Rs. 15 crores)
2. Mid Corporate Borrowers (Bank exposure from Rs. 5 crore to less than
Rs. 15 Crores)

46
3. Small Borrowers- I (Bank exposure from Rs. 20 lacs to less than Rs. 5
crores)
4. Small Borrowers – II (Bank exposure from Rs. 2 lacs to less than Rs.
20 lacs)
5. NBFCs Rating Model
6. New Projects Rating Model
7. Bank and financial Institutions Rating Model
8. New Business Rating Model
9. Half Yearly Review of Rating
10. Facility Rating Model
11. Industry Exposure Limit
12. Segment wise Retail Rating
The Trac Rating:
The various step involved in generating the trac report are:
1. Brief Profile:
The first step includes the inputs regarding the borrower’s account, the loan amount,
category of the loan and the rating model to be used.
2. Financial Analysis:
In this step the financial inputs are given. On this page the figures of the balance sheet are
given as inputs.
3. Industry Analysis:
In this step, the industry’s current scenario and the future prospects of the industry of the
borrower’s business unit are given. The input in this section is based on the judgment of
the loan officer.
4. Management Analysis:
In the fourth step, the comments for the firm’s management are given. This section tries
to analyze whether the firm’s management is proficient enough to manage the business
properly. The input for this section is also based on the judgment of the loan officer.
5. Conduct of the Account:
In this step, the comments on the conduct of the account are given by the loan officer. It
contains the information like if the statements have been given on time or not, etc.

47
6. PNB TRAC Report:
On the basis of the inputs given in each step, the Trac calculates the score of the
borrower. In the report of the borrower, the segment wise scores are given and an
aggregate score is given. And on the basis of these scores the borrower is assigned a
grade. The grading matrix of the borrower is given below:
Rating Grade within Description Description of the Rating
category the rating
Category
PNB –AAA PNB- AAA Minimum Excellent Business Credit, Superior
Risk Asset Quality, Excellent debt
repayment capacity and coverage.
PNB-AA PNB- AA + Marginal Very good business credit, very good
PNB- AA
Risk asset quality and liquidity, very good
PNB- AA -
debt capacity and coverage.
PNB-A PNB- A + Modest Risk Good business credit, good asset
PNB- A
quality and debt repayment and
PNB- A -
coverage.
PNB-BB PNB- BB + Average Average business credit with
PNB- BB
Risk satisfactory asset quality and liquidity,

PNB- BB - average debt repayment capacity and

coverage.
PNB-B PNB- B + Marginally Acceptable business credit with
PNB- B
Acceptable average risk, acceptable asset quality,
PNB- B -
Risk modest debt capacity.
PNB-C High Risk Not creditworthy, doubtful debt
PNB- C
capacity.
PNB-D PNB - D Caution Unacceptable business credit, normal
Risk repayment in jeopardy, inadequate
projected net worth and paying
capacity.

The credit risk rating of a borrower becomes due for updation after the expiry of 12
months from the month of previous rating. Thus fresh rating in the accounts is conducted
annually.

48
Credit Scoring Models:

To evaluate risk in retail segment, scoring models for all the retail lending schemes
except PNB Baghban Scheme (Scheme for reverse mortgage) and Loan against Gold and
Jewellery with limits up to Rs. 50.00 lacs are developed based on scientific application
and have been put on central server under the name PNB SCORE. The models for
exempted schemes have not been developed as the security charged is the primary
mitigant and personal character does not play any significant role. All the retail loans
except the exempted categories will now be sanctioned based on the scores obtained by
individual borrower and all retail loan applications coming for sanction are
necessarily to be scored and rejection would be based on the score obtained. The cut off
score for sanction will be fixed by RBD Head Office from time to time based on
performance of the models, market conditions and corporate policies. The applicants
getting lower scores than the cut off score and the where the sanctioning authority is
confident about the fairness of the proposal, the same will be considered by one level
higher authority for sanction, who shall also record the reasons at the time of sanction of
such applications and will ensure to get it recorded in PNB SCORE in the system.
Experience gained through the scoring models will be used to validate the models.
Eight models have been developed to cater to all retail lending schemes except PNB
Bagban and Loan against Gold and jewellary. The models are as under:
1)     Conveyance Loan 6)     Personal Loan
2)     Housing Loan (Others)
3)     Education Loan 7)     Traders’ Loan (New)
4)     Doctors’ Loan 8)     Traders’ loan
5)     Personal Loan (renewal)
(Pensioner)

49
WHAT IS A CREDIT SCORE?
Credit score is the statistical system used by lenders to determine the creditworthiness the
borrower. Information about the borrower and the borrower’s credit experience is collected from
the loan application and the borrower’s credit report. Using a statistical program, lenders
compare this information to the credit performance of the borrowers with similar profiles.
WHAT IS PNB SCORE?
PNB SCORE is a credit scoring system that awards points for each factor that helps predict who
is most likely to repay the debt. A total number of points “a credit score” helps predict how
creditworthy the borrower is i.e. how likely it is that the borrower will repay a loan and make the
payments when due.

The points are distributed in various aspects of the borrower’s profile such as:
- Personal Information: age, educational qualification, number of dependents/children,
spouse’s income.
- Employment Information: Organization, designation, length of service, etc.
- Income Information: Net income, installment of other loans, other liabilities.
- Net worth Information: Owning a house, vehicle, credit cards, telephone, etc.
- Previous relations with the lender: Bank Account, credit card, any other loan, etc from
PNB.
The level of education can give an indication whether it is good risk to extend credit to the
borrower. Higher the education better is the credit score. A person with professional qualification
is given more points than a simple graduate. Similarly, a person with a reputed institute like IIM,
IIT is having highest score in educational category and person from reputed university is having
a medium score and the person from the least reputed institute will score the least score.

Borrowers who are stable are more preferred. So more points are assigned to the borrowers who
have lived in a particular location or have worked for a single employer for many years. The
profession and the employer of the borrower are also rated. Points may also vary on the basis of
the property owned. More points to self owned property, medium to ancestral property and low
to borrowers with no property.The CIBIL score of the borrower also acts as a basis for increasing
or decreasing the points.

The points on the various parameters are aggregated to compute a single score of the borrower.
This score helps in analyzing the creditworthiness of the borrower. The higher the score is the
better is the creditworthiness of the borrower.

POST SANCTION APPRAISAL:

Post sanction supervision and Follow-up of bank credit has assumed considerable significance
particularly after introduction of new norms of assets classification, provisioning and
derecognizing of interest income on NPAs, affecting profitability. System of supervision and
follow up can be defined as the systematic evaluation of the performance of a borrowal account
to ensure that it operates at viable level and, if problems arise, to suggest practical solutions. It
helps in keeping a watch on the conduct and operational/financial performance of the borrowal
accounts. Further, it also helps in detecting signals/symptoms of sickness and deteriorations, if
any, taking place in the conduct of the account for initiating timely corrective actions to check
slippage of accounts to NPA category.

The goals and objectives of post sanction appraisal may be classified into fundamental and
supplementary goals. Fundamental goals help a bank to ensure safety of funds lent to an
enterprise while, supplementary goals are directed towards keeping abreast of problems arising
out of changes in both the internal and the external environment for initiating timely corrective
actions. Some of the important goals of appraisal are listed as under:
i) To keep a watch on the project during implementation stage so that there are no time &
cost overruns.
ii) To ensure that the funds released are utilized for the purpose for which these have been
provided and there is no diversion of such funds.
iii) To evaluate operational and financial results, such as production, sales, profit/loss, flow
of funds, etc. and comparing these with the projections/estimates given by the borrower at the
time of sanction of credit facilities.
iv) To ensure that the terms and conditions as stipulated in the sanction have been complied
with.
v) To monitor operations in the account particularly cash credit facilities which indicate
health of the account.
vi) To obtain market report on the borrower, to gather information like reputation/financial
standing etc.
vii) To detect signals and symptoms of sickness or deterioration taking place in
conduct/performance of the account.
viii) To ensure that the unit's management and organisational set-up is effective.

System of monitoring & appraisal of credit as lay down by the Bank, covers the following:
CONVEYING OF SANCTION
After the loan is sanctioned, the credit department has to communicate the terms and conditions
of sanction to the borrower, containing therein the details of the facilities sanctioned and
respective terms and conditions. The borrower/s will convey his/their acceptance of the terms
and conditions

PROFILE OF BORROWERS
The credit department maintains profile of each borrower separately specifically mentioning
complete name, contact address, telephone No., activity of borrowers, assets of borrowers,
guarantors and other obligants, details of primary and collateral securities,

QUARTERLY REVIEW SHEET

Review Sheet is a Quarterly Statement prepared by the branch and submitted to the sanctioning
authority. Primary responsibility for scrutiny/processing of Quarterly Review Sheets (QRS) rests
with the Sanctioning Authority. It enables the sanctioning authority to form an opinion about
conduct/ position of the account and operational/financial performance of the Unit. The QRS for
the borrowers enjoying credit limits of Rs. 20 lacs & above is to be prepared
PREVENTIVE MONITORING SYSTEM (PMS)
PMS is a monitoring tool consisting of a number of signals/ indicators for evaluating the health
of a borrowal account on a continuous basis. It assigns numerical score to each signal and
captures the conduct of an account based on indicators of past one year in a single numerical
value called PMS Index Score. It is an action oriented post sanction monitoring tool that tracks
and evaluates the health of the borrowal account on a regular basis.
The aim is to minimize the loan losses by focusing on accounts showing “Early Warning”
Signals of deterioration.

SALIENT FEATURES OF PMS:

i) Comprehensive- Covers indicators of conduct of account, business performance,etc.
ii) Objective- Health of the account is reflected as a single numerical score.
iii) Diagnostic- Reasons behind deterioration are analyzed for taking remedial steps.
iv) Memory- Unsatisfactory features or irregularities are accounted for one year.
v) Preventive- Timely action/corrective measure can be taken in Early Warning Category
accounts.

Objectives of PMS
The objective of PMS is to track & evaluate the health of borrowal accounts on a continuous
basis and detect:
 Unsatisfactory/adverse signals at an early stage in a comprehensive manner.
 Thorough probe into reasons behind observed signals and analysis thereof.
 Speedy corrective/remedial actions/steps to prevent the account from becoming NPA as well
as to minimize the loan losses.

PMS is applicable for all Large Corporate borrowal accounts i.e. borrowers availing aggregate
limit of above Rs.12 crore. PMS is prepared as on last date of calendar quarter

Composition of PMS
Preventive Monitoring System consists of two parts:
i) PMS Index and Rank
PMS Index is a numerical index consisting of 29 indicators Parameters) grouped into 6 sections.
Penalty rates (weights) in the form of numerical values are assigned to each indicator (parameter)
depending upon their degree of impact on health of an account. The score assigned to any
parameter is stored for last one year at any point of time, which is known as Cumulative score.
The section-wise maximum of cumulative scores is summed up to arrive at PMS Index
Score.Based on PMS Index Scores PMS Ranks are calculated. The scale of 1 to 10 called the
PMS Ranking Scale is used to calculated the Rank. The PMS Rank indicates the state of health
of an account. The lower the PMS Rank, better the health of account and vice-versa.
Category Rank
Healthy 1-2
Early Warning 3-5
Warning 6-8
NPA/Likely NPA 9-10

ii) PMS Report

PMS Report, which has eight parts, describes brief profile of the borrower, position of accounts,
details of signals contributing to PMS Index Score, reasons behind adverse signals and proposes
corrective/ remedial steps with time frame.

QUARTERLY MONITORING SYSTEM (QMS)

Bank has prescribed the QMS system for monitoring performance of big borrowal accounts
enjoying working capital facilities of Rs. one crore & above from the banking system. QMS
includes the submission of data on the prescribed formats depending upon the economic activity
of the borrower.
CASE STUDY:
M/S. CLOTH FOUNDATION
MAIN ROAD, MANGAL BAZAR LAXMI NAGAR
BUSINESS: TRADING SAREE BUSINESS
PURPOSE: RENEWAL OF CASH CREDIT LIMIT

Whether fresh/renewal/enhancement in principle Renewal

Asset classification 001
Credit Risk Rating By the Bank A
Consortium NA
Lead Bank -
PNB Share % 100%
Whether SSI/Priority Sector No
Whether Export Oriented No
Date of last sanction

GIST OF PROPOSAL
Renewal of cc hypothecation limit of Rs. 30 lacs of M/s.
cloth India Pvt Ltd.

1. (a) Name of the Borrower: M/s Cloth India Pvt Ltd.

(b) Address of registered office: 39-F, Laxmi nagar, mangal Bazar
(c) Date of incorporation or establishment: 1988
(d) Dealing with PNB: 1992
(e) Business Activity: Trading in Saree, Suit material, etc.

2. Branch Office: Shakarpur, Delhi

3. (a) Director : Shri K.L.Mongra

(b) If any of them in RBi defaulter’s List: No
(c) If any of them related to director of PNB: No
(d) Management change since last sanction, if any: No
(e) Whether memorandum of association permits
the activity & power of borrowings: No
(f) If the account has shown any adverse effects.
4 PNB’s Commitments and Maximum Possible Exposure: N/A
5. A. Facilities from PNB subsidiaries/Exposure by way of investment in Equity/Debentures
(Rs. In Lakhs)
Name of Facilities Security O/S Purposes Overdues,
the Sanctioned Disbursed amt If any
Institution
(a)

B. Facilities from other Banks/ financial Institutions

(Rs. In Lakhs)
Name of the Existing Share% Proposed Share %
bank FB NFB FB FB NFB NFB FB NFB

6. A Details of Group Companies/Allied/Associate firms and the facilities sanctioned on

them

Name of the company FB NFB Name of the Classification of

dealing bank account

6.B. Comments on conduct of these accounts with our bank/their banks.

6.C. Key financial figures (audited) of Group/Allied/Associate conerns (for the last three years)
31.03 31.03 31.03
Paid up capital
Reserves & Surplus
Tangible Networth
Block Assets
Secured/Unsecured Loans
Sales
Profit Before Tax
Profit After Tax
Comments on the Financial Indicators
7.A (i) Financial Position of the Company
(Rs. In Lakhs)
31.03.06 31.03.07 31.03.08 Projections
for 2009
Gross sales 155.32 113.79 108.45 128.15
Other Income - - .04 -
Operating Profit/Loss 21.90 22.75 22.46 24.60
Profit before tax 0.32 0.27 0.60 4.34
Profit after tax 0.32 0.27 0.60 4.34
Cash profit/loss 6.50 7.63 6.87 10.92
Block Assets 9.87 8.39 7.15 6.09
Depreciation 1.47 1.24 1.06 0.89
Net Assets 8.40 7.15 6.09 5.20
Secured loans 37.59 34.35 32.41 30.00
Unsecured loans 14.84 13.83 12.61 14.84
Paid up capital 20.56 14.46 13.08 19.76
Reserve & surplus excluding
revaluation reserve
Misc expenses not written off
Accumulated losses
Deferred tax liability/asset
Tangible net worth 20.56 14.46 13.08 19.76
Net working capital 64.36 25.16 10.48 29.10
Current Ratio 1.92 1.28 1.11 1.27
Debt-equity ratio 1.09 1.25 1.05 0.75
Operating profit/sales 14.09 19.99 20.71 19.20
7.A.(ii) Comments on Financial Indicators:
The sales of the firm and its profits are showing an increasing trend. The firm is having stable
working capital and current ratio. The debt equity ratio of the firm is also stable.

7.B Details of investment in Shares, Debentures, Units of diversion of funds outside the business,
etc: N/A
7.C Details of liabilities not accounted for/contingent liabilities: NIL

7.D Status/details of adverse comments by auditors of the borrowing unit: N/A

7.E Position of assessment of income tax/sales tax./wealth tax of the borrowing
concern/partners/proprietors: ITR has been filed for 2007-2008

7.F Overall likely impact of (7.B to 7.E) on the financial position of the borrowing unit:
N/A
8.A Primary Security: Hypothecation of stock of clothes
8.B Guarantee/Guarantors
Name of the NMs IPs CR date
Guarantor Previous Present Previous Present Previous Present

Narender nath 78 76 70 69 22.02.07 6.12.08

8.C Total Commitments by Guarantor : 30 Lacs

8.D Collateral Security: EM of IP of house no. 12 laxmi nagar

9. Position of account as on 29-11- 2008

(rs. In lacks)
Nature Limit VS DP Balance Irregularity
CC HYP 30 96.21 72.15 29.82 Nil

10.A Conduct of the account:

Account is running satisfactorily. Account is sometimes overdrawn due to installment.
10.B Review of the account (as per general instructions)
A/c has been reviewed many times
10.C Value of the account (rs. In lakhs)
Period Nature of Limit Amount Interest/commission earned Yeild

10.D Sumamry of serious irregularities pointed out by bank’s inspectors, current auditors, credit
audit & review devision (CA&RD), RBI inspectors, statutory auditors, observations of stock
audit report, comment on preventive monitoring score trends.
-NIL-
11. Brief History:
Clothes India pvt ltd is a trader of ladies clothes material and ready made items. The shop was
established in the year 1988 and the properitor enjoys a good market reputation. The shop was
started as a small cloth material shop but it has a big cloth emporium today.
11.A. General:
The business of trading in cloth material is profitable and stable and the also the shop is located
in a busy market with wide customer base.
11.B. Comment on industry scenario and industry outlook:
Cloth industry is a stable one and the cloth India pvt ltd products are according to the latest
trends
11.C. Comments on management, production and marketing:
The concern is managed by Shri K.L. Mongra who is having enough expertise in the cloth
trading business.
11.D. Borrowers diversification, expansion, modernization programme, if any: No
11.E Risk perception including environmental and social risk alongwith proposed mitigations.
12. Present Proposal
(a) Brief of proposal
This proposal is for renewal of CC hyp limit for Rs. 30 lacs
(b) Justification for working capital sanction
(c) Justification of non fund based facilities

Case 2: ABC Ltd.

The captioned Company incorporated in 1987 as a Private Limited Company was converted into
a Public Limited Company in 1988. The Company is engaged in manufacturing of black G.I.
pipes. Initially the Company was availing credit facilities from a consortium of New Bank of
India and Punjab National Bank, however, on merger of NBI with PNB in 1993, PNB became
the sole banker of the Company.

COMMENTS ON MANAGEMENT, PRODUCTION AND MARKETING:

Promoters of the Company are well qualified and experienced in the line of activity. The
Company has appointed Professionals for day-to-day management / supervision of the
operations/ Marketing /Production etc. Its design and development group has made vital
contributions in producing customized products and value improvements in tube related areas.

THE MAIN CUSTOMERS OF THE COMPANY ARE:-

1. PETROLEUM SECTORS: Hindustan Petroleum Corpn. Ltd., Bharat Petroleum Corpn.

Ltd., Indian Oil Company Ltd., Cochin Refinery Ltd., MRPL

2. GAS SECTORS: Gujarat Gas Co. Ltd., Mahanagar Gas Ltd., Indraprastha Gas Ltd., Gas
Authority of India Ltd.

3. PUBLIC SECTOR UNDERTAKINGS: BHEL, SAIL, NTPC, HZL, BHPV, OIL,

COALFIELD (WCL/SECL etc)

4. INDUSTRIAL GIANTS: Larsen & Toubro Ltd., ThyssenKrupk Inds. (India) Ltd.,
Walchandnagar Inds. Ltd., Escorts, Punjlloyds Ltd., ISGEC, All cement plant of Grasim
Industries, TRF Ltd., Thermax Ltd., Hindustan Construction Co. Ltd., Macmet India Ltd.,
Nagarjuna Construction Co. Ltd., Mecon Ltd., North Delhi Power Ltd.

5. GOVT. SECTORS: PHE Deptts. (Water Supply Sector) of State Govt., State Electricity
Boards., Railways, Defence

GIST OF PROPOSAL
1. Enhancement in FBWC limits from Rs.800 lakh to Rs.1000 lakh.
FACILITIES FROM OUR BANK (Rs. in lakh)
FUND BASED EXISTING PROPOSED
Cash Credit (Stock) 800.00 1000.00
Cash Credit (Book Debt) (500.00) (575.00)
Packing Credit (100.00) (100.00)
Clean DD (within CC Book Debts) (50.00) (50.00)
FOBNLC/FOUBNLC/FOBP/FOUBP (125.00) (125.00)

TOTAL COMMITMENT 800.00 1000.00

6A. KEY FINANCIAL INDICATORS OF THE BORROWING UNIT.

(Rs. in lakh)
Particulars 31.03.03 31.03.04 31.03.05
Audited Audited Audited
Sales – Exports 380.70 181.57 148.31
Sales – Domestic 4755.67 5025.25 8860.26
TOTAL NET SALES 5136.37 5206.82 9008.57
Other Income 59.31 8.71 19.95
Operating Profit (18.68) 51.60 52.40
Profit before tax 40.63 60.31 72.35
Profit after tax 20.13 31.81 39.35
Cash Profit 55.25 67.19 75.15
Paid Up Capital 150.00 150.00 150.00
Reserves & Surplus 794.39 826.12 865.48
Revaluation reserves (138.78) (131.49) (124.20)
Tangible Net Worth 805.61 844.63 891.28
Current Ratio 1.47 1.59 1.64
Debt Equity Ratio 0.17 0.17 0.19

Latest key figure as on 31.12.2005

Sales Rs.6037.00 lakh
PBT Rs. 40.00 lakh
Paid up capital Rs. 150.00 lakh

COMMENTS
- The company has achieved PBT of Rs.72.35 lakh on total sales of Rs.9008.57 lakh during
2004-05 as against PBT of Rs.60.31 lakh on total sales of Rs.5206.82 lakh during 2003-
04. During the current year upto 31.12.2005, sales were Rs.6037 lakh as against the
annual estimates of Rs.7500 lakh. Thus, the sales achievement has been satisfactory.
- TNW was Rs.891.28 lakh as on 31.3.05 as against Rs.844.63 lakh as on 31.3.2004.
- Current Ratio at 1.64 as on 31.3.2005 (1.59 as on 31.3.2004) and DE Ratio at 0.19 as on
31.3.2005 (0.17 as on 31.3.2004) were satisfactory.

Overall financial position of the company is considered satisfactory.

PRIMARY SECURITY
Hypothecation of present & future stocks of Raw Material, Stock in Process, Finished Goods,
Stores & Spares and receivables and other current asset.
8. C COLLATERAL SECURITY (Rs. in lakh}
SN NATURE OF SECURITY RV Valuer’s name &
MV
valuation date

TOTAL 755.04 627.86

Security (MV): Rs 755.04 lakh, (RV): Rs 627.86 lakh

The mortgage of company’s land and building as at 1 above has also been extended to secure the
term loan in favour of group concern for a T/L of Rs.600 lakh, with outstanding of Rs.194.72
lakh as at 14.02.2006 sanctioned by our bank.
To further secure the limits sanctioned to captioned company at the time of last sanction, it was
proposed to extend charge on EM of land & Building presently Mortgaged in the term loan of
the Society. Charge as above stands extended. (WDV of Block Assets of Rs.6.93 crore as on
31.03.2005).
POSITION OF ACCOUNT AS ON 23.03.2006 (Rs. in lakh)
Nature of limit Limit VS DP O/S Irregularity
Fund Based
CC(H & Book Debt)/ FCL 800.00 2069.25 800.00 571.51 Nil
(Incld... Allocated limit of Rs.25 Lakh
at B/o Ambedkar Marg, Ghaziabad
PC (100) Nil
Clean DD (50) Nil
FOBNLC/FOBP/FOUBP/FOUBNLC (125) Nil

Grand Total 1950.00 1568.55 Nil

REVIEW OF ACCOUNT- CASH CREDIT (Rs. in lakh)
PERIOD LIMIT AVAILMENT S U MA T I O N S
MAX. MINI. DEBIT CREDIT
1.4.03-31.3. 04 535.00* 758.96 Credit 9235.58 9010.76
1.4.04-31.3. 05 1100.00 1054.05 Credit 12514.52 12034.19
* Increase to Rs.1100 lakh from Feb.’04 and subsequently reduce to Rs.800 lakh.
INCOME VALUE OF ACCOUNT (Fig. In Lakh)
Period Limits Interest
01.04.04 to 31.3.2005 FBWC 800.00 60.19
30.56
TOTAL 90.75

CONDUCT OF ACCOUNT
a. Status of compliance of terms and All Terms and Condition of last sanction
Conditions of last sanction. Dt. 13.01.2005 have been complied with.
b. Status of availment of limits and Availment in limits had been to the full
overdrawing, if any: extent of sanctioned limit during the
review period.
c. Status of routing of proportionate business The company is dealing exclusively with
in consortium advance & relationship in our bank and sale/export proceeds are
sales and credit summation. routed through our bank.
d. Status of honoring of commitment in N.F.B. ----------------Nil--------------
Limits.
e. Status of submission of stock report, QMS, The company is submitting the
other financial information (including information in time.
audited/provisional balance sheet)
f. Status of checking of stock/ securities. Stock/Securities are being checked as per
terms of sanction.
g. Deviations in general guidelines, if any. ------------- Nil -------------
h. Details of other adverse features observed. ------------- Nil -------------

INDUSTRY SCENERIO & BUSINESS PROFILE.

The consumption of Steel in India is expected to reach around 55-60 Million Tones by the year
2008, nearly double the current level. There has been tremendous increase in the steel throughout
the world. The demand for steel tubes has also increased with the taking up of various
infrastructure projects by various Central/State Governments. The steel tubes infrastructure
witnessed growth during the current year and likely to see boom in the next few years. The
Government is giving continuous thrust on housing and infrastructure sector where Steel Tubes
are used. The existing refineries are expanding their capacities and new refineries are coming
into the scene. In future there seems to be a tremendous scope for industry of steel tubes. With
the cheaper availability of finance and Tax Incentives, it is expected that housing sector will get
a major boost. In view of the same, the long term outlook of Steel Tubes Industry looks positive
and bright.
NOTE ON ASSESSMENT OF PERMISSIBLE BANK’S FINANCE
The Performance of the company during the last two years, estimates for current year and
projections for next year are as under: (Rs.in lakh)
31.03.2004 31.03.2005 31.03.2006 31.03.2007
Estimates Projections
accepted in
last sanction
Projected Sales
Domestic 4400.00 6750.00 7250.00 8900.00
(8400.00)
Export 425.00 250.00 250.00 150.00
(150.00)
TOTAL 4825.00 7000.00 7500.00 9050.00
(8550.00)
Figures in bracket as above denotes now revised sales projections.

31.03.2004 31.03.2005 31.03.2006 31.03.2007

Estimates Projections
accepted in
last sanction
Sales Achievement
Domestic 5025.25 8860.26
Export 181.57 148.31
TOTAL 5206.25 9008.57
% of Achievement 107.90% 129%
Projected NWC 732.82 817.63 923.78 932.78
Actual NWC 748.60 820.92

The sales of the company during 2003-04 & 2004-05 have improved over the previous years.
During 2003-2004 actual sales of Rs.5206.82 lakh are against the estimates of Rs.4825.00 lakh
thereby surpassing the sales estimates by 7.90%. Similarly during 2004-05 actual sales of
Rs.9008.57 lakh are against the estimates accepted Rs.7000 lakh thereby surpassing the sales
estimates by 29%. Major chunk of the Company’s sales comes from Govt. Sector and Industrial
Consumers.
Sales during the nine months period ended 31.12.2005 are Rs.6037 lakh against the full year
projections of Rs.7500 lakh which if annualized comes to 107.32% of full year projections of
Rs.7500 lakh. The company has however; looking at the past trend revised the sales estimates
for the current year (2005-06) to Rs.8550 lakh (including exports of Rs.150 lakh) and is hopeful
of achieving the same.
Sales growth during last year (2004-05) was much more than expected as the company had got
Govt. supply orders worth approx. Rs.30 crore which may vary from year to year. The company
however, wants to be realistic in sales projections and hence has projected sales for the current
year (2005-06) at a lower level than the actual sales during 2004-05.
Similarly the Company has projected sales of Rs.9050 lakh (including exports of Rs.150 lakh)
for the following year (2006-07), which seems to be achievable.

Summary on reasonableness current assets / liabilities. (Rs. in Lakh)

Inv 31.03.04 31.03.05 31.03.2005 31.03.2006 31.03.2007

entry item Audited Revised Actual Estimated Projected
Accepted
Raw Material 552.46 580.00 409.38 570.00 590.00
[1.48M] (1.32M) (0.70M) (1.03M) (1.03M)
Stock in Process 245.52 320.00 376.06 510.00 550.00
(0.62M) (0.70M) (0.63M) (0.92M) (0.95M)
Finished Goods 93.24 110.00 225.38 350.00 400.00
[0.24M] [0.24M] (0.38M) (0.50M) (0.53M)
Receivables – Domestic 775.65 900.00 867.53 950.00 1020.00
[1.62M] [1.60M] (1.17M) (1.36M) (1.36M)
Advance to suppliers 166.66 170.00 43.44 50.00 60.00
Other Current Assets 351.84 227.63 190.00 268.78 306.78
TOTAL C.A. 2018.71 2307.63 2111.79 2698.78 2926.78
CURRENT LIABILITIES
Trade Creditors 48.72 630.00 750.00
Advance from Customer 35.81 40.00 95.00
Statutory Liabilities 33.00 45.00 50.00
Other Current Liabilities 371.63 60.00 99.00
TOTAL C.L. 489.16 775.00 994.00

Comments on Break up of Current Assets

Raw Material
The borrower has revised the projected holding of raw material & packing material to 1.32
months consumption as against 1.50 months for 2004-05 which were accepted by ZO as per
sanction dated 13.01.2005. Actual there against is 0.70M. The company has informed that they
have been keeping the inventory levels at bare minimum level for the best possible utilization of
resources. For the next FY 2005-2006 the RM holding have been projected at 1.03 months and
for 2006-07 also at 1.03 months because Major quantity of raw material are procured from SAIL
& Hindustan Zinc Ltd. in lots. RM holding level estimated/ projected is below the actual holding
level as at 31.03.2004 but the same is little higher than the actual as at 31.03.2005 Looking at the
past three year’s trend of holding levels, the estimated/projected holding level for 2005-2006 &
2006-07 have been considered as reasonable.
Stock in Process
At the time of last sanction SIP level was accepted at 0.70 months (revised) consumption for the
current year 2004-2005. Actual there against is 0.63 months. For the year 2005-2006 the holding
level has been estimated at 0.92 months and for 2006-07 at 0.95 months. Looking at last
accepted level and past trend of holding level, estimated level for 2005-2006 and projected level
for 2006-07 have been considered as reasonable.
Finished Goods
At the time of last sanction, FG level was accepted at 0.24 months consumption for the year
2004-2005. Actual there against is 0.38 months. For the year 2005-2006 the holding level has
been projected at 0.50 months and for 2006-07 at 0.53 months. Actual lower level in the past had
been mainly due to Govt. supply orders for which the company was not required to maintain
high level of inventory. Though the company is expecting Govt. Supply orders, the projections
are on conservative basis without considering the Govt. Supply orders. As such, estimated /
projected levels have been considered as reasonable.
Receivables
At the time of last sanction, level was accepted at 1.60 months for 2004-2005. Actual there
against is 1.17 months. For the year 2005-2006 and 2006-07 the holding level has been projected
at 1.36 months. Looking at past trend, the projected holding level for 2005-2006 and 2006-2007
has been considered as reasonable.
Consumable Stores & Spares
The Company maintains consumables equal to one-month requirements which looking at the
nature of activity and operation level seems to be reasonable.
Other Current assets
Advance to suppliers were accepted at Rs.170 lakh as against actual of Rs.166.66 lakh of 2003-
04. However, actual advance to suppliers is Rs.43.44 lakh as at 31.03.2005. The company has
now projected advance to suppliers at Rs.50 lakh for 2005-06 and at Rs.60 lakh for 2006-07,
which are in, tune with actual of 31.03.2005 and have been considered as reasonable.
The revised level of Other Current Assets (OCA) was accepted at Rs.227.63 lakh for 2004-05.
Actual there against is Rs.190 lakh. The estimated/-projected level for 2005-06 and 2006-07 has
been accepted at Rs. 268.78 lakh and Rs. 306.78 lakh respectively.
Break-up of OCA is as under: (Rs. in lakh)
2005-06 2006-07
Fixed Deposits with Banks 94.00 95.00
Advance payment of taxes 40.00 50.00
Other current assets 134.78 161.78
(Consumable Stores & Spares (105.00) (135.00)
Total 268.78 306.78

Comments on Break up of Current Liabilities

At the time of last sanction, the Creditors level was accepted at Rs.500 lakh for the year 2004-
2005 & Rs.520 lakh for the year 2005.06. Though actual level of Sundry Creditors as at
31.03.2005 was lower at Rs.48.42 lakh, yet the company has projected higher trade creditors at
Rs.630 lakh for 2005-06 and Rs.750 lakh for 2006-07 in anticipation for availing higher credit
from suppliers.

COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE

On the basis of sales turnovers for the financial year 2006-07, ZO has assessed MPBF of
Rs.1000 lakh for 2005-06 and for 2006-07 as under :- (Rs. in lakh)
2005-06 2006-2007
Estimates Projections
1.Current assets 2698.78 2926.88
2.Less: Export Receivables Nil Nil
3.Current Assets net of export receivables 2698.78 2926.88
4. Current Liabilities (Other than Bank Borrowings) 775.00 994.00
5.Working Capital Gap 1923.78 1932.88
6.Minimum Stipulated NWC 25% of 3 674.70 731.72
7.Actual /Projected NWC 923.78 932.88
8.Item 5 minus 6 1249.08 1201.16
9.Item 5 minus 7 1000.00 1000.00
10.Working Capital Limits (FB) 1000.00 1000.00

OTHER ISSUES
Rate of Interest
ED on 30.11.2005 has approved reduction in ROI to 9% (linked to BPLR) as against the
applicable ROI of 12.25% p.a. (BPLR + 1.50%) in the account of the company subject to the
condition that account of the group concern M/s Vasudeva Educational Foundation Society
remaining with us at existing ROI. ZM has recommended for continuance of interest at 9%
(BPLR linked) for the proposed enhanced limits also. We are recommending ROI @ 9.5% p.a.
(linked with BPLR) as against the existing and proposed ROI @ 9.00% p.a.
OTHER CHARGES
Processing fee : 25% concession (as against existing and proposed 50% of applicable
charges).
Commitment charges: 75% (To be considered by ZM at his level)
Credit Risk Rating/ Loan Policy of the Bank
  Financial Evaluation     Industry        
Past Financials – Industry LQ - [M- UQ+[UQ-
  Comparison Co Value Rate LQ]/2 LQ M UQ M]2
Category Parameter     0 1 2 3 4
Growth Rate 3
yrs Gross Sales growth rate 15.71 1.37 8.74 12.76 20.81 29.03 33.14
Profitability OPBDIT/Sales"%" 3.06 1.08 2.43 2.97 4.05 9.42 12.11
Short term bank borrowing / Net
  sales "%" 8.28 2.98 16.16 14.52 11.25 8.22 6.71
Cash Flow Operating cash flow/ Total Debt "%" 30.85 3.35 -8.88 0.67 19.76 29.21 33.94
Net operating cash flow/ Total Debt
  "%" 15.92 2.76 -21.51 -14.09 0.75 20.84 30.89
Past financials – Absolute
  comparison              
Category Parameter              
Solvency Debt equity ratio 0 4 >3 2-3 1.5 - 2 0.5 - 1. < 0.5
  TOL/TNW 1.73 3.51 >5 4-5 2.5 - 4 1 - 2.5 <1
1.25 -
Liquidity Current ratio 1.43 2.72 <1 1 - 1.25 1.5 1.5 - 2 >2
Debt 1.5 - 2.5 -
Coverage Interest coverage 1.86 2.36 <1 1 - 1.5 2.5 3.5 > 3.5
Return on capital employed "ROCE" 8% - 12% - 15% -
Profitability "%" 8.96 1.24 < 8% 12% 15% 25% > 25%
Category Parameter Comments Rate
Aggregate of contingent liabilities were 31%
Future risk Category of TNW 3.00
Operating cash flow was positive during the
Cash flow year 2005-06. The deficit, if any, will be met
  adequacy from long term/short term debt funds 2.00
Reputed auditor audited the account and
Subjective standard accounting principle followed. There
assessment of transparency in are no qualification except for non-provision
financials accounting of gratuity, about Rs 0.14 cr., on accrual basis 2.00
quality of The realizable value is estimated at 9% of the
  inventory book value. 3.00
Net debtor’s o/s for more than 6 months was
Reliability of Rs 0.34 cr. i.e., 3.82% of the total debts.
  debtors Variation is estimated at < 5 of book value. 3.00

  Trend adjustment Rate last last -1 last -2 last -3

Adjustment
for financial
trends Net sales 4.00 78.84 78.63 52.07 51.36
PBDT less non
recurring income/
  expenditure 4.00 1.16 1.14 0.95 0.76
Operating cash flow/
  Total Debt "%" 4.00 0.31 0.40 -0.20 -0.20
  Tangible net worth 3.01 9.40 8.90 8.44 8.05

Business evaluation for steel Co. LQ - [M- UQ+[UQ-

products industry value Rate LQ]/2 LQ M UQ M]/2
Operating efficiency
evaluation              
Operating leverage 1.41 2.44 1.65 1.59 1.46 1.32 1.24
Inventory turnover 7.53 2.46 5.17 5.64 6.59 8.64 9.67
Net sales / op. assets 2.67 2.96 0.65 1.03 1.8 2.71 3.17
Raw material consumed/ Net
sales 0.88 2 0.93 0.91 0.88 0.73 0.66
Credit period allowed 35.45 2.26 55.85 50.12 38.66 26.09 19.81

Market Position
evaluation Comments Rate
Competitive Position   2.00
There was a sales growth of around 8% in
manufacturing activity though overall gross sales
have not increased due to decline in trading sales.
Expected sales growth Company has made similar projection for 2006-07 2.00
The ERW pipe segment is mainly dominated by local
Market Dominance/ players in the country and this company is an average
Markert share player. 2.00
Sales of manufactured product have increased in
terms of quantity and amount, indicating that the
Trends in market share company has maintained its market share. 2.00
Input related risk   2.00
Availability of raw Main raw material required is steel strips/scrap, zinc
material and other critical etc. and are easily available in the domestic market
inputs and acan also be imported. 2.00
The main raw material is procured from SAIL, which
is having its go-downs at various locations. Location
Proximity to raw material of plant is comparable with the peers 2.00
Production related risk   2.00
Capacity utilization has exceeded the installed
Capacity utilization capacity. 2.00
Company is using average technology comparable
State of technology used with peers 2.00
Product related risk   2.50
The company is presently manufacturing steel
tubes/pipes of various sizes and is considered at par
Product range with peers. It is also trading in scrap. 2.00
Company's product is good and well accepted in the
Product quality market 3.00
Price Competitiveness   1.50
Economies of scale Considered at par with peers 2.00
Company is operating on thin margin and is placed
below the median level as regarded profitability and
Pricing flexibility flexibility in pricing its products 1.00
Marketing   2.00
Selling and distribution The company is having average marketing network of
network agents/ dealers at par with the peers 2.00
The plant of the company is located in Charcoal near
Proximity to market Ghaziabad, which is in close proximity to the market 2.00

Industry risk evaluation for steel

products 50%

Management evaluation – Co.

Objective value 0 1 2 3 4 Rate
Actual gross sales "in Rs crores" 90.42 75%- 80%- 90%-
Targeted sales "Rs crores" 75.00 <75% 79% 89% 95% >95% 4
Actual PBT "Rs crores" 0.81 75%- 80%- 90%-
Target PBT "Rs crores" 0.72 <75% 79% 89% 95% >95% 4

Management evaluation - Subjective Comments Rate

Closely held family driven company. The
Management set up and corporate promoters are experienced business
governance people. 2
Commitment and sincerity Satisfactory 2
Track record in debt repayment Accounts of the company are regular 3
The industrial relation are reported to be
Track record in industrial relations cordial 3
Financial strength/ flexibility/ group Management is capable of arranging fund
support with a time lag. 2

Conduct of account evaluation Comments Rate

Status of account Standard account 3
Operation in account are
satisfactory and no devolvement/
Operations in account invocation. 3
Submission of financial data / Timely submission of financial
statements data and statements 3

Total score      
% score Weighted
  obtained Weight score
Finnacial Evaluation 55.37 40% 22.15%
Business industry evaluation 54.29 25% 13.57%
Management evaluation 71.25 25% 17.81%
Conduct of account 75 10% 7.50%
Aggregate score 61.03%
Final Rating of company A    

The account has been risk rated by RMD HO as `A-‘ (Modest Risk) with a score of
61.24% based on ABS as at 31.3.2005.
The proposal conforms to the Loan Policy of the bank.

OTHER RECOMMENDATIONS

In view of the satisfactory past conduct and financial position of the company and that it
is risk rated as `A’, we endorse ZM’s recommendations for:

1. Enhancement in FBWC limits from Rs.800 lakh to Rs.1000 lakh.

2. Approval of other issues viz.
 ROI @ 9.50% p.a (linked to BPLR) as against the existing and proposed at 9%
p.a.;
 Minimum ROI shall be 9.50% p.a. (linked to BPLR) and Bank shall have right to
modify the same at any time.
 Cash Margin on BG limit to be maintained at 10% (existing same). However, ZM
to consider the following matters within his powers, on merits:
 Concession in inter-sol transaction charges for CBS accounts held by the
company at Ghaziabad, and Bombay Branch.
 Allocation of CC limit of Rs.25 lakh at BO: Ambedkar Marg, Delhi.
FINDINGS

The project study on the credit appraisal process in Punjab National Bank reveals the
following findings:

- Credit is the main source of income for all the banks.

- Credit is subjected to credit risk, which is the risk of the lending becoming
NPA’s.
- RBI has suggested the BASEL II norms to the banks in order to maintain their
credit quality and also to mitigate their credit risk.
- In order to comply with the RBI guidelines and also in order to maintain their
credit portfolio PNB has developed its credit risk management policy.
- To mitigate the credit risk, the banks have to appraise their borrowers in order to
ensure that there will be no default and the loans will be repaid.
- Credit appraisal is mainly concerned with checking the creditworthiness of the
borrowers. It includes the financial, market and technical feasibility studies.
- The credit appraisal of the borrowers is also done thru a centralized online
software PNB TRAC.
- The PNB Trac also assesses the credit worthiness of the borrower on certain
parameters in the financial, market, management and conduct of the business
preview and assigns a rank to the borrower.
- The credit appraisal of the retail loans is done according to the PNB SCORE
software, which is again the online centralized credit scoring model developed by
PNB.
- The pre sanction appraisal alone is not enough to mitigate the credit risk, the post
sanction appraisal is also required.
- The post sanction appraisal is done through PMS software, QMS and QRS data.
- The credit appraisal of the borrowal accounts helps the bank to minimize its
NPAs and to mitigate its credit risk.
- The position of PNB in the context of NPA as compared to other banks can be
accredited to its credit appraisal policy.

SUGGESTIONS AND RECOMMENDATIONS:

- The operations in the bank are completely computerized but still there is a lot
of manual work in the department. The employees here are of the perception
that to be on a safer side they need to keep a manual back up of the operations.
This creation of manual back up consumes a lot of time. This mind set of the
employees should be changed and the operations should be made 100%
computerized in order to increase the efficiency of the operations.
- There is no proper training provided by the bank to the employees regarding
the use of these software. Thus steps should be taken to make the employees
well worsed with the softwares.
- The online credit appraisal softwares are not completely biased free. There
always lies a room for intentional or unintentional manipulation of data in
these credit appraisal models. Steps should be taken to make the softwares
bias free.
- There are no proper follow up mechanism in the bank for speedy credit
recovery. The bank can think about bringing the follow up mechanism online.
- There are no strict rules or penalties for the defaulting borrowers, thus
increasing the chances of NPA and losses to the bank. The loan recovery
process should be strengthened.
CONCLUSION

The project has been aimed at studying the credit appraisal process in the PUNJAB
NATIONAL BANK. From the study it can be concluded, that the position of NPA’s
achieved by PNB is due to its stringent credit appraisal policies.

Credit appraisal is an important aspect for any bank as it is directly responsible for
managing the credit risk of the banks. The banks have to keep their credit risk low in
order to comply with the RBI norms and also to maintain a healthy loan portfolio for
themselves.

Appraisal of credit is also a complex task. In PNB the appraisal of the loan applications is
done at the very first level by the loan officers.

This can be concluded from the whole study that the Punjab national bank has become
the third largest bank in India just because of its stringent policies and measures. The
bank has managed to increase its total assets and revenues and reduce its NPA and has
also complied with the various rules and regulations set up by RBI.

The credit portfolio of the bank is really strong and the credit of this goes to the credit
appraisal policies and procedures adopted by the bank. The bank has taken certain
proactive measures like development of centralized credit appraisal mechanism, etc in
order to strengthen its credit portfolio. And that’s why the bank has become one of the
safest banks in India.