CHAPTER 1

Introduction to credit appraisal

Credit appraisal means an investigation/assessment done by the bank prior before providing any
loans & advances/project finance & also checks the commercial, financial & technical viability
of the project proposed its funding pattern & further checks the primary & collateral security
cover available for recovery of such funds.

The project on ‘Credit Proposal Appraisal’, takes a broad overview of the credit facilities offered
by the bank. The advances given by the bank are discussed. There two types of advances given
by the bank. The first is the fund based advances and other is non fund based advances. Fund
based advances include tem loan, overdraft and cash credit. Whereas the non fund based
advances include letter of credit, guarantees and export packing credit.

Term loans are given to corporate to fund either a new project which may be a completely new
unit/ plant or expansion or an expansion of the existing unit/plant. Overdraft facility is given to
satisfy the need of the working capital requirement of the corporate. The borrower has to keep
his all transactions through the bank. All sales should come to bank. The Bank keeps a close eye
on the expenditure done by the borrower to avoid the misuse of the fund.

Letter of credit facility is given for the trade between unknown parties. Parties may be situated in
the same geographic area or different geographic area. By the time goods reach to the buyer, the
bank which is opening the LC pays the discounted bill to the seller. Seller gets his money while
the goods are in the transaction.

Guarantees are given to the applicant for making any agreement or any purchase where on the
failure of the applicant to perform as per the conditions in the agreement with the third party the
bank has to pay to the third party the guaranteed amount.

While undertaking any new project finance, while sanctioning any new credit, increasing the
limit of the existing credit facilities or renewing the existing credit facility the bank under goes a
very careful study of the borrower’s profile.

When the case being studying is of the project finance bank ask a detail project report by a
reputed consultant. The project report consists of the detail study of the proposed project by
expertise with their comment on the project. The project covers techno economic viability study
of the project. In this study the technical economic viability of the project is checked. Also the
relevant back ground of the promoter need to be known. A details about technicalities; in a
language so that the bank officer would be capable of taking decision is given. For economic
viability the expected cost of the project is calculated and the projections for next five years for
sale are done. These projections of next five years are done on the basis of the market research,
carried out by the consultant, and the macro economic data available. Depending on this
projection financial ratio are calculated. The main ratios are interest coverage ratio and debt
service coverage ratio. Without satisfied ratio’s figure bank do not go ahead with the project.
After deciding the credit rating and pricing bank ask for securitization. The bank needs primary
securities as well as collateral securities. In primary securities bank takes mortgage of land,
building and plant. In collateral bank asks for guarantees of promoter and inventory hold. This is
where the profile of the borrower and his net worth needs to be known.

After doing all this study the credit proposal in given format is prepared with detail comments of
the bank officer where ever necessary with concern authorities signature and been submitted to
the zone office for sanction. This whole process takes around one month. Zone office or Head
Office comments on the proposal and sends it back with taken decision.

The bank has to give the information of the group of companies of the borrower. Also the
exposure of the bank branch to the sector of the borrower is needs to be mentioned. The figure of
NPAs related to the sector is mentioned.

In all this procedure the most important things are the financial position of the borrower and his
relations with the bank.

The conditions regarding the credit are given separately. Schedule of installments is given in the
proposal itself. The proposal formulator has to give his specific remarks on the risk involved in
the project or the business of borrower. Risk mitigation techniques related to the risks discussed
are also given. Any measures which need to be taken are discussed with key person of the entity
and remarks of the same are put in the proposal. After sanctioning of the project with authorized
signatures on it, it is documented with proper care for future reference.

INTRODUCTION TO BANKING SECTOR AND SBI

Reforms in the banking sector:

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and
resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant
growth in the geographical coverage of banks. Every bank has to earmark a minimum percentage
of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector also
grew during the The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end-March

2002, there were 296 Commercial banks operating in India. This included 27 Public Sector
Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67
scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16
scheduled state co-operative banks.

Scheduled commercial banks touched on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the
earlier year.

Higher provisioning norms, tighter asset classification norms, dispensing with the concept of
‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and
group exposure etc., are among the measures in order to improve the banking sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of
banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed
to hike the CAR to 12% by 2004 based on the Basle Committee recommendations.

Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly
two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is
expected to grow at 30-40% in the coming years.

Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words
that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information on borrowers /

potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India)
Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting,
processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are
the promoters of the CIBIL.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for
Agricultural and Rural Development to the private players. Also, the Government has sought to
lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise capital
from the market.

Banks are free to acquire shares, convertible debentures of corporate and units of equity-oriented
mutual funds, subject to a ceiling of 5% of the total outstanding advances (including commercial
paper) as on March 31 of the previous year.

The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would pave
way for smoother functioning of the credit market in the country. The government will hold 49%
stake and private players will hold the rest 51%- the majority being held by ICICI Bank (24.5%).

1970s in protected environs and the banking sector was a critical source. The next wave of
reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number
scheduled commercial banks increased four-fold and the number of banks branches increased
eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new
private sector banks and the foreign banks. The new private sector banks first made their
appearance after the guidelines permitting them were issued in January 1993. Eight new private
sector banks are presently in operation. This banks due to their late start have access to state-of-
the-art technology, which in turn helps them to save on manpower costs and provide better
services.

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25%
share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of
the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering
42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and
12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the
year 2000.

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

Banking System in India

 Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI

Commercial Regional Rural Land Development Co-operative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Bank

Bank of Maharashtra is the premier bank of Maharashtra, operating in the country. Registered
on 16th Sept 1935 with an authorized capital of Rs 10.00 lakh and commenced business on 8th
Feb 1936.

Known as a common man's bank since inception, its initial help to small units has given birth to
many of today's industrial houses. After nationalization in 1969, the bank expanded rapidly. It
now has 1375 branches (as of 31 March 2008) all over India. The Bank has the largest network
of branches by any Public sector bank in the state of Maharashtra. The Bank was founded by a
group of visionaries led by the Late V. G. Kale and the Late D. K. Sathe and registered as a
Banking Company on 16 September, 1935 at Pune. Today, Bank of Maharashtra has over 12
million customers across the length and breadth of the country served through 1577 branches in
23 states and 2 union territories

As on 30.09.2011 Bank has 1564 Branches in all over India.

Objectives:

 To study the Credit Appraisal Methods.

 To understand the commercial, financial & technical viability of the project proposed &
it’s funding pattern.
 To understand the pattern for primary & collateral security cover available for recovery
of such funds.
Limitations of the study:

 As the credit rating is one of the crucial areas for any bank, some of the technicalities are
not revealed which may have cause destruction to the information and our exploration of
the problem.
 As some of the information is not revealed, whatever suggestions generated, are based on
certain assumptions.
 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.
Research Methodology

Primary Data:

 Informal interviews with Branch Manager and other staff members at BOM.
 E-circulars of BOM

Secondary Data:

 Books and magazines

 Database at BOM
 Internal reports of the banks
 Library research
 Websites
CHAPTER 2
 INDUSTRY PROFILE

Competitive forces model in the banking industry

(PORTER’S FIVE-FORCE MODEL)
Prof. Michael Porter’s competitive forces Model applies to each and every company as well as
industry. This model with regards to the Banking Industry is presented below.

(2)Potential Entrants is high as

development financial
institutions as well as private
and foreign banks have entered
in a big way.

(5) (1)Rivalry among existing (4)

firms has increased with
Organizing power of the Bargaining power of buyers
liberalization. New products
supplier is high. With the and improved customer is high as corporate can raise
new financial instruments funds easily due to high
services is the focus.
they are asking higher (3) competition.
return on the investments.
Threat from substitute is high
due to competition from
NBFCs and insurance
companies as they offer a high
rate of interest than banks.
 1. Rivalry among existing firms

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

2. Potential Entrants

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

3. Threats from Substitutes

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

4. Bargaining Power of Buyers

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

5. Bargaining Power of Suppliers

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

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

The banking sector is also taken as a proxy for the economy as a whole. The performance of
bank should therefore, reflect “Trends in the Indian Economy”. Due to the reforms in the
financial sector, banking industry has changed drastically with the opportunities to the work
with, new accounting standards new entrants and information technology. The deregulation of
the interest rate, participation of banks in project financing has changed in the environment of
banks.

The performance of banking industry is done through SWOT Analysis. It mainly helps to know
the strengths and Weakness of the industry and to improve will be known through converting the
opportunities into strengths. It also helps for the competitive environment among the banks.
 a) STRENGTHS

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

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

3. Large Customer Base

This is mainly attributed to the large network of the banking sector. Depositers in rural areas
prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital

Corporate prefers borrowing money from banks because of low cost of capital. Middle income
people who want money for personal financing can look to banks as they offer at very low rates
of interests. Consumer credit forms the major source of financing bybanks.
 b) WEAKNESS

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

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

3. Priority Sector Lending

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

4. High Non-Performing Assets

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

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

2. Differential Interest Rates

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

3. High Household Savings

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

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

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

1. NBFCs, Capital Markets and Mutual funds

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

2. Change in the Government Policy

The change in the government policy has proved to be a threat to the banking sector.

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

4. Recession
Due to the recession in the business cycle the economy functions poorly and this has proved to
be a threat to the banking sector. The market oriented economy and globalization has resulted
into competition for market share. The spread in the banking sector is very narrow. To meet the
competition the banks has to grow at a faster rates and reduce the overheads. They can introduce
the new products and develop the existing services.
CHAPTER 3
 Company Profile

STATE BANK OF INDIA

and majesty of the State Bank Of India founded nearly two centuries ago with primarily intent of
imparting stability to the money market, the bank from its Not only many financial institution in
the world today can claim the antiquity inception mobilized funds for supporting both the public
credit of the companies governments in the three presidencies of British India and the private
credit of the European and India merchants from about 1860s when the Indian economy book a
significant leap forward under the impulse of quickened world communications and ingenious
method of industrial and agricultural production the Bank became intimately in valued in the
financing of practically and mining activity of the Sub- Continent Although large European and
Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small
man never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad
ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out
numerous Central – Banking functions.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the
post depression exe. For instance – when business opportunities become extremely restricted,
rules laid down in the book of instructions were relined to ensure that good business did not go
post. Yet seldom did the bank contravenes its value as depart from sound banking principles to
retain as expand its business. An innovative array of office, unknown to the world then, was
devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and
out students to exploit the opportunities of an expanding economy. New business strategy was
also evaded way back in 1937 to render the best banking service through prompt and courteous
attention to customers.

A highly efficient and experienced management functioning in a well defined organizational

structure did not take long to place the bank an executed pedestal in the areas of business,
profitability, internal discipline and above all credibility A impeccable financial status consistent
maintenance of the lofty traditions if banking an observation of a high standard of integrity in its
operations helped the bank gain a pre- eminent status. No wonders the administration for the
bank was universal as key functionaries of India successive finance minister of independent
India Resource Bank of governors and representatives of chamber of commercial showered
economics on it.

Modern day management techniques were also very much evident in the good old days years
before corporate governance had become a puzzled the banks bound functioned with a high
degree of responsibility and concerns for the shareholders. An unbroken records of profits and a
fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction,
prudential management and asset liability management not only protected the interests of the
Bank but also ensured that the obligations to customers were not met.

The traditions of the past continued to be upheld even to this day as the State Bank years itself to
meet the emerging challenges of the millennium.
MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service Group, with world class
standards and significant global committed to excellence in customer, shareholder and employee
satisfaction and to play a leading role in expanding and diversifying financial service sectors
while containing emphasis on its development banking rule.

VISION STATEMENT:

Premier Indian Financial Service Group with prospective world-class Standards of

efficiency and professionalism and institutional values
Retain its position in the country as pioneers in Development banking.
Maximize the shareholders value through high-sustained earnings per Share.
An institution with cultural mutual care and commitment, satisfying and
Good work environment and continues learning opportunities.

VALUES

Excellence in customer service

Profit orientation
Belonging commitment to Bank
Fairness in all dealings and relations
Risk taking and innovative
Team playing
Learning and renewal
Integrity
Transparency and Discipline in policies and systems.
Organization Structure:

MANAGING DIRECTOR

CHIEF GENERAL MANAGER

G. M G.M G. M G.M G.M

(C&B) (F&S) (I) & CVO (P&D)

Zonal off Functional Heads

Regional officers
Chapter 4
 The conceptual background

OVERVIEW OF CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior before providing any
loans & advances/project finance & also checks the commercial, financial & technical viability
of the project proposed its funding pattern & further checks the primary & collateral security
cover available for recovery of such funds.

Brief overview of credit:

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions which are involved in providing
financial funding to its customers. Credit risk is a risk related to non repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the
customer in order to mitigate the credit risk. Proper evaluation of the customer is performed
which measures the financial condition and the ability of the customer to repay back the loan in
future. Generally the credit facilities are extended against the security know as collateral. But
even though the loans are backed by the collateral, banks are normally interested in the actual
loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained
to ensure the timely payment of principal and the interest.

It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income,
number of dependents, nature of employment, continuity of employment, repayment capacity,
previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of
a person. Every bank or lending institution has its own panel of officials for this purpose.
However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending which must be kept
in mind at all times.

Character
Capacity
Collateral

If any one of these are missing in the equation then the lending officer must question the viability
of credit.

There is no guarantee to ensure a loan does not run into problems; however if proper credit
evaluation techniques and monitoring are implemented then naturally the loan loss probability /
problems will be minimized, which should be the objective of every lending officer.

Credit is the provision of resources (such as granting a loan) by one party to another party where
that second party does not reimburse the first party immediately, thereby generating a debt, and
instead arranges either to repay or return those resources (or material(s) of equal value) at a later
date. The first party is called a creditor, also known as a lender, while the second party is called a
debtor, also known as a borrower.

Credit allows you to buy goods or commodities now, and pay for them later. We use credit to
buy things with an agreement to repay the loans over a period of time. The most common way to
avail credit is by the use of credit cards. Other credit plans include personal loans, home loans,
vehicle loans, student loans, small business loans, trade.

A credit is a legal contract where one party receives resource or wealth from another party and
promises to repay him on a future date along with interest. In simple terms, a credit is an
agreement of postponed payments of goods bought or loan. With the issuance of a credit, a debt
is formed.
Basic types of credit

There are four basic types of credit. By understanding how each works, you will be able to get
the most for your money and avoid paying unnecessary charges.

Service credit is monthly payments for utilities such as telephone, gas, electricity, and water.
You often have to pay a deposit, and you may pay a late charge if your payment is not on time.

Loans let you borrow cash. Loans can be for small or large amounts and for a few days or
several years. Money can be repaid in one lump sum or in several regular payments until the
amount you borrowed and the finance charges are paid in full. Loans can be secured or
unsecured.

Installment credit may be described as buying on time, financing through the store or the easy
payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars,
major appliances, and furniture are often purchased this way. You usually sign a contract, make a
down payment, and agree to pay the balance with a specified number of equal payments called
installments. The finance charges are included in the payments. The item you purchase may be
used as security for the loan.

Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can
be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each
month.
Brief overview of loans:

Loans can be of two types fund base & non-fund base:

FUND BASE includes:

Working Capital
Term Loan

NON-FUND BASE includes:

Letter of Credit
Bank Guarantee
Bill Discounting
Chapter 5
 Data analysis & interpretation

Balance Sheet of State Bank of India ------------------- in Rs. Cr. -------------------

Mar 16 Mar 15 Mar 15 Mar 14 Mar 13

12 mths 12 mths 12 mths 12 mths 12 mths

EQUITIES AND LIABILITIES

SHAREHOLDER'S FUNDS

Equity Share Capital 776.28 746.57 746.57 746.57 684.03

Total Share Capital 776.28 746.57 746.57 746.57 684.03

Reserves and Surplus 143,498.16 127,691.65 127,691.65 117,535.68 98,199.65

Total Reserves and Surplus 143,498.16 127,691.65 127,691.65 117,535.68 98,199.65

Total ShareHolders Funds 144,274.44 128,438.22 128,438.22 118,282.25 98,883.69

Deposits 1,730,722.44 1,576,793.24 1,576,793.24 1,394,408.51 1,202,739.57

Borrowings 224,190.59 205,150.29 205,150.29 183,130.88 169,182.71

Other Liabilities and Provisions 159,875.57 137,698.05 137,698.05 96,412.96 95,455.07

Total Capital and Liabilities 2,259,063.03 2,048,079.80 2,048,079.80 1,792,234.60 1,566,261.04

ASSETS

Cash and Balances with Reserve Bank of

129,629.33 115,883.84 115,883.84 84,955.66 65,830.41
India
Balances with Banks Money at Call and
37,838.33 58,977.46 58,977.46 47,593.97 48,989.75
Short Notice

Investments 477,097.28 495,027.40 495,027.40 398,308.19 350,927.27

Advances 1,463,700.42 1,300,026.39 1,300,026.39 1,209,828.72 1,045,616.55

Fixed Assets 10,389.28 9,329.16 9,329.16 8,002.16 7,005.02

Other Assets 140,408.41 68,835.55 68,835.55 43,545.90 47,892.03

Total Assets 2,259,063.03 2,048,079.80 2,048,079.80 1,792,234.60 1,566,261.04

OTHER ADDITIONAL INFORMATION

Number of Branches 16,784.00 16,524.00 16,333.00 16,059.00 15,002.00

Number of Employees 207,739.00 213,238.00 213,238.00 222,033.00 228,296.00

Capital Adequacy Ratios (%) 13.00 12.00 12.00 13.00 13.00

KEY PERFORMANCE INDICATORS

Tier 1 (%) 10.00 10.00 10.00 10.00 9.00

Tier 2 (%) 3.00 2.00 2.00 3.00 3.00

ASSETS QUALITY

Gross NPA 98,172.80 56,725.00 56,725.00 61,605.00 51,189.39

Gross NPA (%) 7.00 4.00 4.00 5.00 5.00

Net NPA 55,807.02 0.00 0.00 0.00 21,956.48

Net NPA (%) 4.00 2.00 2.00 3.00 2.00

Net NPA To Advances (%) 4.00 2.00 2.00 3.00 2.00

CONTINGENT LIABILITIES, COMMITMENTS

Bills for Collection 199,140.17 92,795.25 190,560.35 74,028.42 66,639.54

Contingent Liabilities 865,027.48 1,000,627.26 902,862.16 1,017,329.95 926,378.91

Interpretation
In the above table shows the vertical balances sheet of 2016,2015,2014 and 2013
in that the balances is more in 2016 and less in 2013. And the contingent liabilities is more in
2014 and less in 2016 it means in the year 2016 there is less contingent liability face by the bank.
CHAPTER 6
 FINDINGS

Credit appraisal is done to check the commercial, financial & technical viability of the
project proposed 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

SBI loan policy contains various norms for sanction of different types of loans

These all norms does not apply to each & every case

SBI norms for providing loans are flexible & it may differ from case to case

Different appraisal scheme has been introduced by the bank to cater different industries
such as:-
Doctor plus scheme for doctors
Transport plus scheme for transport
School, colleges and educational institutions
Trader’s easy loan
Warehouse receipt financing for commodity traders
(agriculture related stock, cotton ginning, etc.)

Bank’s main function is to lend funds/ provide finance but it appears that norms are
taken as guidelines not as a decision making

A banker’s task is to identify/ assess the risk factors/ parameters and manage/ mitigate
them on continuous basis

The CRA models adopted by the bank take into account all possible factors which go into
appraising the risk associated with a loan

These have been categorized broadly into financial, business, industrial, management
risks & are rated separately

The assessment of financial risk involves appraisal of the financial strength of the
borrower based on performance & financial indicators

After case study, we found that in some cases, loan is sanctioned due to strong financial
parameters

From the case study analysis it was also found that in some cases, financial performance
of the firm was poor, even though loan was sanctioned due to some other strong
parameters such as the unit has got confirm order, the unit was an existing profit making
unit and letter of authority was received for direct payment to the bank from ONGC
which is public sector
 RECOMMENDATIONS AND SUGGESTIONS

The problems faced by the bank and the suggestions given are with regards to increase credit
flow the SMEs not only with respect to working capital finance but also project finance and asset
finance.

Problems faced by the Bank for SME lending and suggestions to overcome some of these
problems:

Banks are now better equipped to handle the varied needs of the SME sector due to better
technology and risk management. Thus, it recommends, may be achieved by extending banking
services to recognize SME clusters by adopting the 4-C approach: Customer focus, cost control,
cross-selling and containing risk.

To enable the banks take more objective decisions, the Government plans to introduce a rating
mechanism for designated industrial clusters; this may be designed jointly by CRISIL, IBA,
SIDBI and SSI Associations. This would enable institutional funding to be channeled through
homogenous recognized clusters.

There is a critical need to devote substantial resources to improving the skills and capabilities of
banks' lending officers, especially with regard to the analysis of the SMEs' financial statements.
Understanding the nature of the borrower's business and the cash-flow required is paramount to
preventing the creation of NPAs.

Another way of extending loans to the SMEs is the relationship-lending rule, where the lending
partly bases its decision on proprietary information about the firm and its owner through a
variety of contacts over time. The information may be gathered from such stakeholders as
suppliers and customers, who may give specific information about the owner of the firm or
general information about the business environment in which it operates.
Insufficient data on the SMEs, the lack of credible published information about their financial
health, the high vulnerability of small players in a liberalizing market and the inadequacy of risk
management systems in banks are factors leading to higher NPAs and lower profitability than
potential in SME lending. This can be overcome by collection of authentic data on the SME
segment, educating the enterprises on the need for reliable financial data, evolving suitable risk
models and close monitoring of accounts by the bank.

SMEs are increasingly using products such as derivatives to manage their forex flows. Bank
needs to offer sophisticated products to the SMEs in a simplified manner.

They need to innovate their delivery platforms by using Internet banking, mobile banking and
card-based platforms for delivery of transaction-banking as well as credit products, and enhance
the service element. SMEs look for convenience and simplicity in their banking requirements
and banks should deliver these through an effective use of technology.

The Bank should keep on revising its Credit Policy which will help Bank’s effort to correct the
course of the policies

The Chairman and Managing Director/Executive Director should make modifications to the
procedural guidelines required for implementation of the Credit Policy as they may become
necessary from time to time on account of organizational needs.

Banks has to grant the loans for the establishment of business at a moderate rate of interest.
Because of this, the people can repay the loan amount to bank regularly and promptly.

Bank should not issue entire amount of loan to agriculture sector at a time, it should release the
loan in installments. If the climatic conditions are good then they have to release remaining
amount.

SBI has to reduce the Interest Rate.

SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers
for the Bank.

CONCLUSION

It is boom time for those working in the financial sector. There are opportunities galore in
finance and more will come in the next few years so finance is exciting is exciting both as a
subject and a career option with the greater expansion of the global economy.

Finance management is the backbone of any organizations and hence yields a number of job
options ranging from strategic financial planning to sales.

SBI load policy contains various norms for sanction of different types of loans. There all norms
does not apply to each & every case. SBI norms for providing loans are flexible & it may differ
from case to case.

The CRA models adopted by the bank take into account all possible factors, which go into
appraising the risk associated with a loan, these have been categorized broadly into financial,
business, industrial, and management risks & are rated separately.

Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness.
But, after different types of case studies, our conclusion was such that, in SBI, credit appraisal
system is not only looking for financial wealth. Other strong parameters also play an important
role in analyzing creditworthiness of the firm.

Morover, The study at SBI gave a vast learning experience to us and has helped to enhance our
knowledge. During the study We learnt how the theoretical financial analysis aspects are used in
practice during the working capital finance assessment. We have realized during my project that
a credit analyst must own multi-disciplinary talents like financial, technical as well as legal
know-how.
The credit appraisal for working capital finance system has been devised in a systematic way.
There are clear guidelines on how the credit analyst or lending officer has to analyze a loan
proposal. It includes phase-wise analysis which consists of 5 phases:

1. Financial statement analysis

2. Working capital and its assessment techniques
3. Credit risk assessment
4. Documentation
5. Loan administration

To ensure asset quality, proper risk assessment right at the beginning, is extremely important.
That is why Credit Risk Assessment system is an essential ingredient of the Credit Appraisal
exercise. The SBI was the first to formulate a Credit Risk Assessment model. It considers
important parameters like profitability, repayment capacity, efficiency of the unit, historical /
industry comparisons etc… which were not factored in other models. It is equally efficient as the
SIDBI’s CART (Credit Assessment and Rating Tool) model.

In all, the viability of the project from every aspect is analyzed, as well as type of business,
industry, promoters, past records, experience, projected data and estimates, goals, long term
plans also plays crucial role in increasing chances of getting project approved for loan.
Chapter 7
 BIBLIOGRAPHY

WEBSITES:

www.sbi.co.in
www.indianbankassociation.com
www.bankersindia.com
www.wikipedia.com
www.iibf.co.in

BOOKS:

 Vaidhyanathan, T.S., “Credit Management”

Internal circular of SBI

 “Credit and Banking”

By: K. C. Nanda