CREDIT APPRAISAL

PROCESS
OF BANKS
 TABLE OF CONTENT
Sr. no Content Page no

1 Introduction

2 Objectives

3 Limitation

4 Research methodology

5 Introduction to bank of
india

6 Credit appraisal at BOI

7 Finding

8 Recommendation

9 Conclusion

10 Bibliography
 INTRODUCTION
The Credit Appraisal is a complete exercise which starts from the time a
potential borrower walks into the branch and concludes in credit
delivery and monitoring with the objective of certifying and maintaining
the quality of lending and managing credit risk.
Credit appraisal is the assessment of the viability of proposed long term
investments in terms of shareholder wealth and the formal analysis of all
project costs and benefits which is used to justify the project proposal.
The bank has over the years designed and adopted the Best Practices
Code.
This in effect represents the bank's philosophy towards effective
Corporate Governance. A good appraisal justifies spending money on a
project. A proper consideration of each of the key components of project
appraisal is essential.
 OBJECTIVES
 To study the credit appraisal methods.
 To understand the internal steps taken by the bank for scrutinizing
the customer’s details and credentials.
 To understand the commercial, financial & technical viability of
the proposal proposed and it’s finding pattern.

LIMITATIONS OF THE STUDY

 As the credit appraisal is one of the most crucial areas for any
bank, some of the technicalities are not revealed.
 Credit appraisal system includes various types of detail studies for
different areas of analysis, but due to time constraint, our analysis
was of limited areas only.
 The study was only on desk jobs related to credit. I was not
exposed to the field survey and valuation part.
 As per the bank’s terms and conditions related to internship,
approaching customers was not allowed.
 Actual balance sheets, ratios, financial statements of the customers
were not shared with me for my records and thus my study lacks
certain details.
-
 RESEARCH METHODOLOGY
Introduction:

Credit appraisal means investigation/assessment done by the bank

before providing any loans and advances/project finance and also
checks the commercial, financial &industrial viability of the
project proposed its funding pattern and further checks the primary
& collateral security cover available for recovery of such funds.

Problem statement:

To study the credit appraisal system in Bank of India

Data collection:

Primary data:
Informal interview with manager at Bank of India

Secondary data:
Books
Websites
Customer files at BOI
Circulars of BOI
 AN INTRODUCTION TO BANK OF INDIA

Bank of India was founded on 7th September, 1906 by a group of

eminent businessmen from Mumbai. The Bank was under private
ownership and control till July 1969 when it was nationalized along with
13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50

lakh and 50 employees, the Bank has made a rapid growth over the
years. In business volume, the Bank occupies a premier position among
the nationalized banks.

The Bank has 4545 branches in India spread over all states/ union
territories including specialized branches. These branches are controlled
through 50 Zonal Offices. There are 54 branches/ offices and 5
Subsidiaries and 1 joint venture abroad.

While firmly adhering to a policy of prudence and caution, the Bank has
been in the forefront of introducing various innovative services and
systems.. The Bank has been the first among the nationalized banks to
establish a fully computerized branch and ATM facility at the
Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a
Founder Member of SWIFT in India. It pioneered the introduction of the
Health Code System in 1982, for evaluating/ rating its credit portfolio.
Presently Bank has overseas presence in 20 foreign countries spread
over 5 continents – with 53 offices including 4 Subsidiaries, 4
Representative Offices and 1 Joint Venture, at key banking and financial
centres viz., Tokyo, Singapore, Hong Kong, London, Jersey, Paris and
New York.
Contribution of foreign branches in the global business of the Bank
as at 31.03.2014 is as under:

Deposits 22.98%

Advances 30.36%

Business Mix 26.19%

Performance as on 31.03.2014 (Rs. In Crores, Except %):

Deposits 476974 Operating 8423
Profit
Growth 24.91% Net Profit 2729
Advances 376228 Gross NPA 3.15%
Ratio
Growth 28.42% Net NPA 2.00%
Ratio
Business 853202 Provision 58.68%
Mix Coverage
Growth 26.44% Earnings Per 44.74
Share (Rs.)
Growth 11.73% Book value 387.53
Return on per Share
Equity (Rs)
Capital 10.76% Capital 9.97%
Adequacy Adequacy
Ratio Ratio
(Basel-II) (Basel-III)
 CREDIT APPRAISAL PROCESS

Receipt of application from applicant

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no.,
MOA, AOA etc.

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data,
ECGC, Caution list etc

Title clearance reports of the properties to be obtained from

empanelled advocates
Advocates
Valuation reports of the properties to be obtained from
empanelled valuer/engineers

Preparation of financial data

Proposal preparation

Assessment of proposal
Sanction/approval of proposal by appropriate sanctioning
authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements,

review of accounts, renew of accounts, etc
(On regular basis)
 CREDIT APPRAISAL AT BOI

Credit Appraisal – Initial due diligence & financial analysis

The process of credit appraisal would begin with the selection of the
borrower. The process would broadly cover:
1. Appraising the borrower/business
2. Appraising/assessing the credit requirement and structuring the
credit delivery, security, covenants etc. Appraisal of the borrower
would include background check and assessment of managerial,
commercial, technical and financial capability/strength, project
execution/management ability, success in joint venture for
technology/ market, retention of professional talent at various
levels, management control, promoters’ shareholding etc.
Both the above aspects need to be appraised/ examined at the time of the
initial entry of a customer to the Bank as also at the time of subsequent
periodic reviews. Naturally, the appraisal would be different in respect
of:

 Retail segment like personal loans for consumer durables, house

etc
 Small business like loans to business enterprises
 Farming sector/agriculturists
 MSME sector
 Corporates in manufacturing, infrastructure, services, wholesale
trade and other sectors.
Background of the borrower/management
Background of the borrower needs to be done through scrutiny of
antecedents, experience in the line of business, managerial, marketing,
technical competence, organizational strength, integrity etc. Track
record with us, status report from the other banks, reports in the sector
from our borrowers in similar business, RBI/CIBIL reports on
defaulters/willful defaulters/SAL of ECGC, Corporate action taken by
SEBI/NSE/BSE, reports from their vendors/dealers who may be our
customers, reasonability of CMA projections, actual performance vs
estimates, frequent overdrawing, history of restructuring/OTS etc.
In case of adverse report in any of the above areas, there could be
justifications/mitigations which should be looked into. If need be the
appraising officer may personally visit the other bank for personal
discussions. The gist of such oral discussion may be recorded in the file
of the borrower and brought out in the proposal. KYC guidelines as
framed by RBI and adopted by Bank are to be followed by the branches.
Commercial appraisal
The nature of the product, demand for the same, the existing and
perceived competition in the segment, ability of the proponents to
withstand the same, government policies governing the industry, etc.
need to be taken into consideration. The trade practices in respect of the
product should be thoroughly understood. Branches should use the
reports from ICRA/CRISIL & Capitaline available on Stardesk.
Technical appraisal
Technical appraisal of the project needs to be carried out for industrial
activity1 proposals beyond the cut-off limits prescribed from time to
time. Such appraisal may be carried out in-house by Technical Officers
working in Technical Appraisal Department/ Technical Appraisal Cells
or officers having technical expertise for the same or by an outside
agency as determined by the appropriate authority. Where technical
appraisal is carried out by All India Financial Institutions, PSU
Banks/other leading banks having expertise in the area, their report may
be accepted for appraisal purposes.
Financial appraisal
Analysis of financial parameters/ratios should be done. Aspects like
1. Balance sheet strength
2. Growth in TNW, sales, PAT etc
3. Borrower’s ability to service the principal and interest, meet the
cash flow requirement in respect of payments under LC opened,
absorb additional burden due to escalation of raw material cost etc
4. Position of receivables/inventory etc should be looked into.
The following parameters ratios should be computed:
1. TNW with reconciliation of change in TNW
2. Current Ratio
3. Total outside liabilities/equity (DER)
4. Profit before interest, depreciation, taxes, appropriation
(PBIDTA/EBIDTA)
5. Profit After Tax/Net sales
6. Inventory + receivables/Sales ratio
7. DSCR if the borrower enjoys any term loan with any bank/FI even
if no TL is being considered by our bank.
8. Capital Employed
9. PAT/Capital employed
10. Investments
11. Segmental Revenue if applicable

CHECK POINTS FOR DUE DILIGENCE/ASSESSMENT IN

CREDIT PROPOSAL
Articles of Incorporation - A corporate registration is the cornerstone
and basis for legitimacy, as it requires the business to rely upon its
corporate name, image and reputation.
Status Reports - This is useful to show that the company continues to
exist and operate as a legal entity, and has not been dissolved and/or
reincorporated under another name. Most companies that actively
engage in business with serious clients will have one that is relatively
recent. Whenever new proposals are put up for approval, status reports
of the company / group needs to be obtained from their existing bankers.
Obtaining status reports is an essential step in due diligence process, in
all advance accounts.
Market enquiries - This serves as an important tool. Verification of the
antecedents of the borrower through discrete market enquiries could
amply reveal inherent deficiencies. Cross verification with our existing
customers in the line and other players in the line, would serve as first
hand information.
Licenses / Certifications - Ask for a copy of licenses, permits,
registrations or certifications if they are directly related to and required
for the specific work the company must perform. If copies are not
available, request the number and issuing authority of each document.
Web Site Addresses - All Companies have their websites. Companies
that say they do not have a website or do not need one have to be treated
with caution. Good companies always make efforts to allow clients or
partners to keep in touch with them, receive notice of changes of office
address, e-mail addresses or phone numbers, reminders of services
offered or updates on new services.
Resume of Managers or Key Employees - Ask for resume (also called
"professional bio") of managers / key employees of the company. This
will give you some additional leads and information to verify the
company's ability to perform the work promised and general capabilities.
Corporate Brochure or Company Overview - Every company should
have a professional and well-developed presentation of their business
concept or services. This evidences the level of preparation of the
company, and demonstrates whether they have sufficiently developed
their capabilities. Project Reports / Information Memoranda, are not to
be taken for face value. They need to be critically examined vis-à-vis
other sources like similar businesses.
It should be ensured that too much dependence on consultant driven
business, is avoided by the Company. Even when consultants refer
business, discussions should be held with the promoters/CFOs.
ROC search – ROC search, as applicable, at the time of considering
fresh advances, needs to be done, to assess existing charge/s on
company’s assets.
Each proposal should bear reference related to RBI/CIBIL/ECGC/ List
of Defaulters / willful Defaulter List, etc. As per existing guidelines,
Branch / Zonal Office must bring out this aspect in the proposal.
Pre-Sanction Inspection – Branches should note to conduct pre-
sanction inspections before submitting new proposals. Inspection reports
should be prepared strictly as per the format. Findings of the inspection
should be brought out in the proposal. It should invariably include the
place of work of the entity in addition to visiting the corporate office,
meeting promoters & employees etc.
Critical information as envisaged in Credit policies / Circulars, are to be
obtained and scrutinized.
Scrutiny of statements of accounts with previous / existing bankers, to
be done, to ascertain their conduct. This is more so necessary while
takeover of the facilities is involved.
Risk Mitigation - Proper coverage of risk and mitigation in the proposal
reflects good understanding of the business. As per existing guidelines,
Branch / Zonal Office must bring out these aspects in the proposal.
Status of Litigation If the company is involved in any
litigation/disputes/ arbitration, Zone / Branch should give details in the
proposal.
Assessment of Limits Financial parameters like DER, Current Ratio for
W/C & DSCR, DER, FACR, BEP, IRR, sensitivity analysis for Term
Loan are to be properly captured in the proposals. Proposals should not
be considered without these parameters being adequately brought out.
Assessment about promoter/s ability to bring in the funds envisaged, to
be properly done.
Risk Rating - Risk Rating Exercise for Credit Rating & Pricing has to
be done as per different Risk Scoring Modules.
The security which is obtained by the Bank (either as principal or as
collateral) shall be verified as to its title clearance as well as value by
independent Panel Advocates/ Valuers and periodical Encumbrance
Certificate shall be obtained. In this regard, extant guidelines, is
enumerated in Branch Circular from time to time are to be meticulously
observed.
Check points for Pre and Post Monitoring Norms:

PRE DISBURSEMENT:
i. Suitable monitoring of various acts by the customer/Branch
officials/out-side agencies should be done at the pre-disbursement stage.
Depending upon the terms of sanction in each case, the following
actions/steps, wherever applicable, may be taken prior to disbursement:-
ii. Obtention of satisfactory credit reports from existing lenders and
other service providers such as D&B, CIBIL etc. if stipulated. Branch
staff, which is processing the applications for credit requests of new
customers, should personally call on the Bank/FI with whom the
incumbent is presently enjoying facilities and discreetly enquire about
the conduct and general aspects of the account. This is in addition to
obtaining status reports. The personal visit to the operating staff of that
Bank/FI may reveal more about the proposed borrower which may not
have been incorporated in the report. Wherever it is not desirable to
obtain Status Report for the fear of putting our competitor on guard,
decision may be taken on the basis of scrutiny of proponent’s statement
of account for the last one year with the existing Banker and the fact that
the Sanctioning Authority has satisfied itself about the credit worthiness
of the proponents on the strength of statement of account for the last one
year and that status report is not being obtained for the fear of putting
the existing banker on guard should be recorded in the proposal.
However, in case Branch desires not to obtain ‘Status Report’ from
other Bankers/Service providers prior to disbursement then specific
‘approval’ of the higher authority viz GM NBG and/or GM Head
Office should be obtained
In such cases the Branch should obtain status report subsequently and
the staff should visit the Bank/FI immediately after disbursement to
discreetly enquire about the conduct and general aspects of the account.
iii. Adhering to Head Office guidelines for Credit Rating exercise
pertaining to entry level for new accounts.
iv. Post-sanction inspection of the unit prior to disbursement. Needless
to add, pre-sanction inspection report cannot substitute the need of pre-
disbursement inspection
vi. Issuance of sanction letter and acceptance of terms, conditions and
stipulations of sanctions by the borrowers.
vii. Execution of all relevant documents, including creation of collateral
security / mortgage etc. as per terms of sanction
ix. Furnishing of Letters of guarantee by guarantors.
x. Disbursement of amounts by other participating financial agencies /
Banks / Financial Institutions etc.
Clarity in regard to draw down of amounts such as first date of disbursal
and last date of disbursal, the stages in which the monies are required to
be drawn, its acceptance and evaluation at Branch level (If these are
already included in the credit proposal, the same must be adhered to).
xii. Vetting of documents
xiii. Credit Process Audit compliance
xiv. Post Sanction Pre Disbursement approval wherever branch level
sanction
xv. Keeping the duly completed/signed check list on record along with
other security documents
DURING DISBURSEMENT:
Credit delivery in loan accounts is distinct from running accounts such
as Cash Credit. All disbursements whether in loan account or in running
accounts, will be related to actual / acceptable performance of the
business unit and should never lose sight of basic objective of safety of
Bank's exposure in the credit assets. The disbursements should
commensurate with the progress of the project / business activity, also
taking into account the extent of margin brought in by the promoters up
to the given point of time.
The sanction of the limit is not a commitment in isolation to extend
funds to the borrower under all circumstances. It is only a financial
contract to make available funds for due performance of various
business objectives and goals set out in his proposal. Bank's
disbursements depend upon due performance /compliance of/with
borrower's own commitments. Therefore, the credit delivery has to be
used as an effective monitoring tool to ensure that there are only normal
and acceptable credit risks.
The following aspects wherever applicable, may be considered for
monitoring:
(a) LOAN ACCOUNTS :
i. Actual Implementation vis-a-vis Project schedule.
ii. Possibility of time or cost overrun.
iii. Adequacy of arrangements to meet cost overruns.
iv. Impact of time overrun on timely cash generations of the project.
v. Verification of end-use of funds with reference to verifiable records
such as invoices, account books, registers, records, inspection of the unit
etc.
vi. Certificate from Company’s Statutory Auditors on the extent of cost
incurred on the project at any given point of time, implementation
progress certificate from approved architect/contractor etc., wherever
applicable.
vii. Disbursements to be made, to the extent possible, directly to the
suppliers / service providers and the element of cash withdrawals to be
kept minimum.
Status report on the suppliers of machinery as per the guidelines which
ensures genuineness of supplier/transaction must be obtained.
Even while making direct payments, whenever doubt arises about the
genuine nature of the transaction, due care is to be exercised.
(b) CASH CREDIT ACCOUNTS:
i. Compliance of sanction terms / stipulations (any exception requires
approval of appropriate authority)
ii. Verification of completion of the implementation of the
project/business activity and readiness to commence commercial
production.
iii. Disbursements to be made, to the extent possible, directly to the
suppliers/service providers and the element of cash withdrawals to be
kept minimum.
iv. Even while making direct payments, whenever doubt arises about the
genuine nature of the transaction, due care is to be exercised.
v. Stock inspection data regarding regular movement of goods, actual
sales keeping pace with projections, not having unacceptable quality
rejections in sales, not accumulating slow/ obsolete inventory,
elongation of debtors beyond acceptable levels, change in credit periods
from suppliers etc.
vi. Meaningful on site/off site verification of Stock/Book Debt
statements to ensure adequacy of Drawing Power/Drawing Limit
POST DISBURSEMENT:
Monitoring of the actual performance of the borrowers on monthly basis
by calling for MSOD statements and comparing the same with the
projected performance figures appearing in the customer’s own CMA
data submitted to Bank, sanctioned proposal / QIS returns etc. Any
substantial deviation will have to be probed into, not waiting for
submission of audited financials.
Obtention of Stock/Book debts statements as per stipulation and scrutiny
thereof
Periodical inspections by our staff (comprehensive guidelines issued
vide BC 98/16 dated 19.04.2004 and 102/96 dated 09.08.2008)
Stock Audit by approved C.As as per extant policy. (Comprehensive
guidelines issued vide BC 98/61 dated 05.07.2004)
Timely obtention and analysis of Audited statements of Accounts.
Timely review of account
Conducting periodical consortium meet/ JLA meet and sharing the
information with member of consortium /JLA.
Obtaining LIE report periodically and verifying the progress, wherever
applicable. Following it up & complying post disbursement conditions.
Timely identification of accounts showing symptoms of strain and,
wherever considered fit, resort to prompt restructuring of the account, so
that the rehabilitation process is meaningful.
Monitoring of an account is not confined to any single office (Branches
including Large Corporate/Mid Corporate branches/Zonal Office /NBG
office/Divisional Office/Head Office) and concerted efforts will have to
be made at all levels with whatever information available at each level,
to prevent any deterioration in asset quality. Under-lending or delay in
lending can be equally painful to the wellbeing/viability of the
borrower’s unit and this itself can lead to asset becoming non-
performing.
 FINDINGS
 Credit appraisal is done to check the commercial, financial &
technical viability of the project proposed and its funding pattern &
further checks the primary or collateral security cover available for
the recovery of such funds.
 Credit is core activity of the banks and important source of their
earnings which go to pay interest to depositors, salaries to
employees and dividend to shareholders.
 Credit and risk go hand in hand.
 In the business world risk arises out of:-
 Deficiencies /lapses on the part of the management
 Uncertainties in the business environment
 Uncertainties in the industrial environment
 Weakness in the financial position
 The loan policy of BOI contains various norms for sanction of
different types of loans.
 For each type of loan, there are different norms as per the
guidelines of RBI.
 The assessment of financial risk involves appraisal of the financial
strength of the borrower based on performance & financial
indicators
 After studying a few cases, I found that in some cases, loan is
sanctioned due to strong financial parameters
 RECOMMENDATIONS
 Closely monitoring and inspecting the activities and stocks of the
borrowers from time to time can avoid the misuse of advances.
 The bank must further secure itself by holding a second charge on
all the fixed assets of the borrower.
 The time period taken by the banks to sanction the limits should be
significantly reduced to allow the borrowers to make use of the
credit when the need is most felt.
 There should be a standard rating process to remove the
subjectivity and different perceptions of the rater (person who does
credit rating process for a borrower company). It will remove the
human biasness in the process.
 Personal guarantee does not give any physical asset to the bank. It
is for the moral binding on the part of the borrower. Hence, bank
should prefer to use this type of guarantee as this will reduce the
default rate on the part of borrower.
 Faster dispersion of credit is of paramount importance. A proposal
has to pass through different channels which lead to delay in the
dispersal of credit. There is a need of drastic reduction in these
channels for faster decision making. This will curtail avoidable
delays, improved efficiency besides reducing appraisal time as
well as cost.
 CONCLUSIONS
 The requirement of credit is ever increasing.
 In most of the cases, hypothecation and/or mortgage are used to
create securities for the banks.
 Every bank has its own internal credit rating procedure to rate the
clients (Borrowers).
 After doing the assessment of the financial indicators it is up to the
judgment of the top management of the bank to sanction such loan.
The very decision could be against the assessment result.
 If the company is with bank from inception stage then they are
given preference, as credible and loyal party over their financial
indicators.
 BIBLIOGRAPHY

Websites:
 www.rbi.org.in
 www.wikipedia.com
 www.investopedia.com
 www.bankofindia.co.in
 www.indianbankassociation.com

Books referred:
 I.M. Pandey - Financial Management - Vikas Publishing House
Pvt. Ltd.
 M.Y. Khan and P.K. Jain - Financial Management - Vikas
Publishing house ltd.
 Credit and Banking - K. C. Nanda (e-Book

Bank of India journals:

 BOI Credit Policy-2014 (Revised) e-book
 BOI individual loan policy documents
 Customer loan files from bank’s records