Credit Appraisal System of “PUNJAB NA NATIONAL TIONAL BANK”
Submitted to:
Presented by:
Dr. Dr. Apar Singh
Manish Kanwar
(Professor)
MBA-II(E) 6370
ABOUT THE BANK •
Established in 1895 in Anarkali Bazaar at Lahore.
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Lala Lajpat Rai was one of the first customers of the bank.
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It was the first bank that was started with the Indian capital.
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Nationalized in July 1969. Has over 5670 offices including 432 extension counters in INDIA.
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Corporate office office of bank at New Delhi.
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UK, Nepal, Bhutan, Kazakhstan, China, Shanghai etc.
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It is currently the second largest largest state-owned commercial bank in India ahead of Bank of Baroda with about 5670 branches across 764 cities. Over 6000 ATM’s 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 Ma naging 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 i n providing loan
To analyze the credit worthiness of the clients
To understand and carry out ratings provided by bank to rate any corporate
RESEARCH METHODOLOG METHODOLOGY Y Sources of information: Primary Sources Secondary Sources •
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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 •
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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, immediately, but instead arranges either to repay or return those tho se resources at a later date.
BANK CREDIT The borrowing capacity provided to an individual by the banking system, system, in the form of credit or a loan is known as a bank credit. •
LOANS
FUND BASED
NON-FUND BASED
WORKING CAPIT CAPITAL AL RETAIL LOAN
BANK GUARANTEE
TERM LOAN BILL DISCOUNTING EXPORT FINANCE
LETTER OF CREDIT
CONTINUED…… WORKING CAPITAL CAPITAL It is a short-term cash loan to a company. company. The business that receives the loan can continuously draw from from the bank up to a certain specified amount.
TERM LOANS A bank loan to a company carrying fixed interest rates, rates, and monthly or quarterly repayment schedules and include a set maturity date.
CONTINUED…… RETAIL 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 educational loans and other consumer uses.
EXPORT FINANCE This type of o f a credit facility is provided to exporters who export their goods to different different places. Pre-Shipment Pre-Shipment
Finance
Post-Shipment Post-Shipment Finance
CONTINUED…… BILL DISCOUNTING While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange) before 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.
CONTINUED…… BANK GUARANTEE A bank guarantee is a written contract contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility responsibility for payment of a sum of money mo ney 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. guarantee.
CREDIT CRED IT ANA ANALLYSIS •
Market Analysis
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Technical echnical Analysis
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Management & Organization Analysis
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Financial Analysis
CREDIT ANALYSIS(Contd..) MARKET ANALYSIS •
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Market Demand and Potential for each product item and its variants/substitutes. Critical Analysis regarding 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
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Raw Material
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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 • • • • • • • •
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Debt-Equity Ratio Debt-Service Coverage Ratio Current Ratio Output Investment Ratio
CREDIT ANALYSIS(Contd..) Ratios
Debt-Equity Ratio
Formula
Standard
Debt (Term (Term Liabilities) Liabilitie s) / Equity
2:1
Debt-Service Coverage Ratio
(Net Profit After Taxes Taxes + Depreciation + Annual interest on long term debt + extra ordinary income – extra ordinary expenses) /(Annual interest on long term debt + Repayment of debt)
Current Ratio
Current Assets / Current Liabilities
Output Investment Sales / Total capital employed Ratio
1.5 to 2
1.33:1
NA
CREDIT APPRAISAL •
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Credit appraisal means an investigation/assessmen investigation/assessmentt done by the bank prior pr ior before providing providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed. Proper evaluation of the customer is preferred preferred which measures the financial condition & ability to repay back the loan in future.
CREDIT APPRAISAL (Contd.) •
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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 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
CONTINUED… 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 INFORMATION TO BE SUBMITTED BY THE BORROWING COMPANY
Basic background information on the company
Copy of certificate cer tificate of registration 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 bank’s 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 RA RATING TING CATEGORY CA TEGORY
PARAMETERS / INPUTS Capital market perception of the group
Management Evaluation
Risk bearing capacity
Integrity, Integrity, commitment and sincerity
Track record in debt repayment
Financial flexibility
Range of services
Level of customer satisfaction
Quality of service offered
Business Evaluation Evaluation
Management Setup
Advertising / promotional strategies
Location advantage
Brand equity
Ambience of service outlet
Expected market growth
Effectiveness Effectiveness of distribution channels
Technology adopted in the process
Quality of infrastructure available
Financial Evaluation Evaluation Project Implementation Risk Evaluation
Debt – Equity Ratio
Internal Rate of Return
Foreign exchange risk
Working capital cycle (in months)
Project complexities
Expected time overrun
Expected cost overrun
Status of obtaining clearances
Funding risk
Service period (in years)
PNB SCORE
POST-SANCTION FOLLOW UP •
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To keep a watch on the project during implementation stage so that there are no time t ime & cost overruns. To ensure that is no diversion of funds. To monitor operations in the account particularly cash credit facilities which indicat indicate e 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 •
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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 generate a grade, which represents the intensity of risk, that helps in determining the condition of the corporate 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.
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Limited study on project due to time factor. factor.
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As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed.
