Credit Appraisal System of PUNJAB NATIONAL BANK

Submitted to: Dr. Apar Singh (Professor)

Presented by: Manish Kanwar MBA-II(E) 6370

ABOUT THE BANK

Established in 1895 in Anarkali Bazaar at Lahore. Lala Lajpat Rai was one of the first customers of the bank. It was the first bank that was started with the Indian capital. Nationalized in July 1969. Has over 5670 offices including 432 extension counters in INDIA. Corporate office of bank at New Delhi. UK, Nepal, Bhutan, Kazakhstan, China, Shanghai etc.

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It is currently the second largest state-owned commercial bank in India ahead of Bank of Baroda with about 5670 branches across 764 cities. Over 6000 ATMs across India serving more than 7.2 crore customers.

VISION AND MISSION

VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof".

MISSION
"Banking for the unbanked".

Chairman & Managing Director

Sardar Dyal Singh Majithia (1895-1898)

Mr. K.R.Kamath (2009-till date)

ORGANIZATION STRUCTURE
HEAD OFFICE 7- BHAIKAJI CAMA PLACE, NEW DELHI -66

CIRCLE OFFICES (67)

BRANCHES (5675)

OBJECTIVES
To understand the process of credit appraisal applied by the bank to provide loan to the corporate

To understand various types of risks involved in providing loan

To analyze the credit worthiness of the clients

To understand and carry out ratings provided by bank to rate any corporate

RESEARCH METHODOLOGY
Sources of information: Primary Sources Secondary Sources PRIMARY SOURCES Meetings and discussion with the Chief Manager and the Senior Manager of Credit Department. SECONDARY SOURCES: Internal Circulars of the bank Websites Database at PNB

CREDIT APPRAISAL SYSTEM IN PUNJAB NATIONAL BANK

CREDIT
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately, but instead arranges either to repay or return those resources at a later date.

BANK CREDIT The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan is known as a bank credit.

LOANS FUND BASED WORKING CAPITAL RETAIL LOAN TERM LOAN BANK GUARANTEE NON-FUND BASED

BILL DISCOUNTING
EXPORT FINANCE

LETTER OF CREDIT

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WORKING CAPITAL It is a short-term cash loan to a company. The business that receives the loan can continuously draw from the bank up to a certain specified amount.

TERM LOANS A bank loan to a company carrying fixed interest rates, and monthly or quarterly repayment schedules and include a set maturity date.

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RETAIL LOANS It is the practice of loaning money to individuals rather than institutions. These loans are the loans for automobile purchases, home purchases, medical care, home repair, vacations, educational loans and other consumer uses. EXPORT FINANCE This type of a credit facility is provided to exporters who export their goods to different places.
Pre-Shipment Finance Post-Shipment Finance

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BILL DISCOUNTING While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange) before it is due and credits the value of the bill after a discount charge to the account of the customer. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.

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BANK GUARANTEE A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.

CREDIT ANALYSIS
Market Analysis Technical Analysis Management & Organization Analysis Financial Analysis

CREDIT ANALYSIS(Contd..)
MARKET ANALYSIS Market Demand and Potential for each product item and its variants/substitutes. Critical Analysis regarding Size of the Market. Influence of Government policies like Government Import Policy and Import duty structure also need to be evaluated.

CREDIT ANALYSIS(Contd..)
TECHNICAL ANALYSIS Location and Size Raw Material Plant & Machinery, Plant Capacity and Manufacturing Process. MANAGEMEMENT & ORGANIZATION ANALYSIS Strengths and Weaknesses of the Management by commenting on the background, qualifications, experience, and capability of the Promoter.

CREDIT ANALYSIS(Contd..)
FINANCIAL ANALYSIS Cost of Project & Means of Financing Profitability Statement Break-Even Analysis Fund-Flow Statement Balance Sheet Projections Internal Rate of Return Sensitivity Analysis Financial Ratios
Debt-Equity Ratio Debt-Service Coverage Ratio Current Ratio Output Investment Ratio

CREDIT ANALYSIS(Contd..)
Ratios Debt-Equity Ratio Debt-Service Coverage Ratio Current Ratio Formula Debt (Term Liabilities) / Equity
(Net Profit After Taxes + Depreciation + Annual interest on long term debt + extra ordinary income extra ordinary expenses) /(Annual interest on long term debt + Repayment of debt)

Standard 2:1 1.5 to 2

Current Assets / Current Liabilities

1.33:1 NA

Output Investment Sales / Total capital employed Ratio

CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed. Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future.

CREDIT APPRAISAL (Contd.)

Credit appraisal is the process of appraising the credit worthiness of the loan applicant. Factors like: Age Income Number of dependents Nature of employment Continuity of employment Repayment capacity Previous loans, etc. are taken into account while appraising the credit worthiness of a person.

CREDIT APPRAISAL PROCESS

Receipt of application from applicant

Receipt of documents (Balance sheet, KYC papers, MOA, AOA, and Properties documents)
Pre-sanction visit by bank officers Check for RBI defaulters list, willful defaulters list, CIBIL data, etc. Title clearance reports of the properties to be obtained from empanelled advocates Valuation reports of the properties to be obtained from empanelled valuer/ engineers

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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 (Contd.)

CREDIT INFORMATION OF THE BORROWING COMPANY Banks and Financial Institutions Bank References Credit Rating Agencies Published Books Company Financial Reports Press Reports Personal Visit Factory Visit

CREDIT APPRAISAL (Contd.)

CREDIT INFORMATION TO BE SUBMITTED BY THE BORROWING COMPANY Basic background information on the company Copy of certificate of registration of firm Memorandum and Articles of Association Required facility Management Details of the Security to be pledged Key industry dynamics Present Relation with the Bank

CREDIT RISK
Credit risk is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. In a banks portfolio, losses stem due to inability or unwillingness of a borrower to honor commitments in relation to lending, settlement and other financial transactions.

CREDIT RISK RATING

CATEGORY PARAMETERS / INPUTS Capital market perception of the group Management Evaluation Risk bearing capacity Track record in debt repayment Range of services Quality of service offered Business Evaluation Location advantage Ambience of service outlet Effectiveness of distribution channels Quality of infrastructure available Management Setup Integrity, commitment and sincerity Financial flexibility Level of customer satisfaction Advertising / promotional strategies Brand equity Expected market growth Technology adopted in the process

Debt Equity Ratio

Financial Evaluation Project Implementation Risk Evaluation Foreign exchange risk Project complexities Expected cost overrun Funding risk

Internal Rate of Return

Working capital cycle (in months) Expected time overrun Status of obtaining clearances Service period (in years)

PNB SCORE

POST-SANCTION FOLLOW UP
To keep a watch on the project during implementation stage so that there are no time & cost overruns. To ensure that is no diversion of funds. To monitor operations in the account particularly cash credit facilities which indicate health of the account. To obtain market report on the borrower, to gather information like reputation/financial standing etc. To ensure that the unit's management and organizational setup is effective. To detect signals and symptoms of sickness or deterioration taking place in conduct/performance of the account.

Performance Highlights

BALANCE SHEET 2011-12

FINDINGS
Risk is the center most part of the analysis and basis for the decision of the bank. All the analysis is being done to generate a grade, which represents the intensity of risk, that helps in determining the condition of the corporate applying for loan. The whole process of credit appraisal helps in providing a suitable measure to minimize the risk due to non repayment of loan to the bank.

LIMITATIONS OF THE STUDY

Access to data. Limited study on project due to time factor. As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed.