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GENESIS OF THE PROJECT

The project is on Credit Appraisal Process of TJSB Bank. Credit Appraisal is an important activity carried out by the Special Credit Cell department of the bank which determines whether to accept or reject the proposal for finance. It means an investigation or assessment done by the bank before providing any Loans and Advances or Project finance and also checks the commercial, financial and technical viability of the project proposed, its funding patterns and further check the primary and collateral security cover available of recovery of such funds.

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.

Proper assessment of credit risk is important as it helps in establishing credit limits. In assessing credit risks the 5 Cs of credit are crucial & relevant to all borrowers/ lending, which must be kept in mind, at all times. Character: The willingness of the customer to honor his obligations. It reflects integrity, a moral attribute that is considered very important by credit managers. Capacity: The ability of the customers to meet credit obligations from the operating cash flows. Capital: The financial reserves of the customers. If the customer has problems in meeting credit obligations from operating cash flow, the focus shifts to its capital. Collateral: The security offered by the customer in the form of pledged assets. Conditions: The general economic conditions that affect the customers. To get information on the five Cs a Firm may rely on the Financial Statements, Bank References, Experience of the firm and Prices and yields on Securities.

Numerical Credit Scoring: In traditional credit analysis, customers are assigned to


various risky classes on the basis of the five Cs of credit. Credit Analysts may, however, want to use a more systematic numerical credit scoring system. Such a system may involve the following steps: 1. Identify factors relevant for credit evaluation. 2. Assign weights to these factors that reflect their relative importance. 3. Rate the customer on various factors, using suitable rating scale. 4. For each factor, multiply the factor rating with the factor weight to get the factor score. 5. Add all the factor scores to get the overall customer rating index. 6. Based on the rating index, classify the customer.

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

BACKGROUND OF THE BANKING SECTOR

DEFINITION OF A BANK
The word bank has originated from English word Banco, Bancus or Banque. Its meaning is bench or table. In Europe in the middle age, the money transactions were undertaken sitting on a bench. As per Indian Banking Act, A service to accept deposits from people with the intention to invest or lend with the condition of returning it immediately whenever demanded at any predetermined time. An institute this service is Bank Banking is a service helpful to the business, its function is to borrow money from people and further lend the same. While analyzing definition of bank as per Indian Banking Act, below mentioned matters are clarified:

(1) Bank accepts monetary deposits from people. (2) The intention behind accepting these deposits is to invest or lend the respective fund. (3) The function of accepting deposit or lending money is made under the condition that on demand or as predetermined otherwise the same amount has to be refunded immediately. (4) The institution doing this type of business is called bank. 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 cooperative banks and 16 scheduled state co-operative banks.

State Bank of India is still the largest bank in India with the market share of 20% ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India. 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. 3

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%.

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.

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 cooperative 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

Bank

IFCI

IDBI

ICICI NABARD NHB

IRBI

EXIM Bank

SIDBI

Commercial

Regional Rural Banks

Land Development Banks

Cooperative Banks Banks

Public Sector Banks

Private Sector Banks

SBI Groups

Nationalized Banks

Indian Banks

Foreign Bank

About Co-operative Bank


A Co-operative bank is financial entities which belongs to its members, who are at the same time the owners and customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with wide range of financial and banking services. (loans, deposits, banking accounts etc).

Co-operative bank differ from stockholder banks by their organization, their goals, their values and their governance. In most countries, they are supervised and controlled by banking authorities and have to respect prudential banking regulations, which put them at a level playing field with stockholder banks. Depending on countries, this control and supervision can be implemented directly by state entities or delegated to a co-operative federation or central body. Co-operative banking is retail and commercial banking organized on a co-operative basis.

Co-operative banking institutions take deposits and lend money in most part of the world. Co-operative banking institutions take deposits and lend money in most parts of the world. It includes retail banking, as carried out by credit unions, mutual savings and loan associations, building societies and co-operatives, as well as commercial banking services provided by mutual organizations to co-operative businesses. The structure of commercial banking is of branch banking type , while the cooperative banking structure is a 3 tier federal one . A state Co-operative bank works at the apex level ( i.e. .works at state level ) The central Co-operative bank works at the intermediate level. (i.e.District Cooperative banks ltd. works at district level )

INTRODUCTION OF TJSB BANK


Since 1972 TJSB is in co-operative field, the dynamism infused by the Board of Directors, unflinching loyalties of clientele and devotion of staff has propelled the sound foundation of The TJSB Sahakari Bank Ltd (TJSB) and has emerged as one of the leading multi state scheduled co-operative Bank in the country . Presently TJSB is catering the needs of the society through close network of 63 branches and 1 Extension counters spread all over the city of Thane, Nashik, NaviMumbai, Pune, Aurangabad, Satara, Nagpur, Kolhapur, Goa, Latur& Karnataka. All these branches has shown remarkable progress. TJSB focusing on business strategy solely, has created a Visionary Growth Plan for Stakeholders.

Technology Initiatives : TJSB was successful in implementing the Core Banking Solution which has helped Bank to migrate the branches from being the processing centers to marketing customer centric outfits. It also improved Banks multiple deliver channels such as ATM, Internet, Mobile etc.

TJSB is the first co-operative sector to install Cheque Depositary System in all their 63 branches, which are operational 24 x 7.

TJSB has also placed Real Time Gross Settlement System (RTGS) to customers.

Automated Cheque Issuance Machine was first introduced by TJSB which enable customers to take Personalized Cheque Book 24 x 7.

Business Process Re-engineering: With the help of Core Banking Solution TJSB has initiated Business Process Reengineering by establishing: Specialized Credit Cell Specialized Retail Banking Cell Centralized Monitoring Cell Centralized Back office Processing Cell E-lobby Bancassurance: TJSB act as an agent for Max New York Life Insurance Company Ltd for life insurance product and with The Oriental Insurance Company Ltd for general Insurance.

Business Expansion Plan: Recognizing opportunity, TJSB has done its expansion through Merger and Takeover of the other Banks. It has recently acquired two Pune based Co-operative Banks namely The Navjeevan Nagrik Sahakari Bank Ltd and The Sadguru Jungli Maharaj Sahakari Bank Ltd.

Rewards and Recognition : TJSB was awarded as TECHNOLOGY BANK OF THE YEAR in the Co-operative Bank Category for Financial Year 2009. TJSB has got 1st prize for The Best Co-operative Bank in Maharashtra by Maharashtra State Urban Banks Federation Ltd for the Financial year 2004-2005. TJSB has been awarded 1st prize as Padmabhushan Vasandada Patil Utkarsha Nagri Sahakari Bank for the financial year 2003-2004 from Kokan Region for the second time consecutively,

TJSB was recognized amongst top 5 co-operative banks in the country, during centenary celebration of Co-operative movement by Kalupur Commercial Co-operative Bank

Organisation Structure -TJSB


BOARD

CEO

CGM

GM

GM (Credit, Audit, HR) DGM

GM (IT)

Forex AGM

Accounts

PCRO

Recovery

Credit

SCC

Audit & Vigilance

Admin

IT

Managers

Officers

OBJECTIVES AND SCOPE OF THE PROJECT

Objectives and scope: To study the credit appraisal system in banks. To understand the commercial, financial & technical viability of the proposal proposed and its finding pattern. To study the various funded and non-funded credit facilities offered by the bank

Scope of my project is to know the Credit Appraisal in Co-operative Bank. What are the parameters and risk factors are taken into consideration in Credit process. How Specialize Credit Cell (SCC) works.

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RESEARCH METHODOLOGY

1. Descriptive Research: TJSB Bank sanctions the limits after proper appraisal of the genuine working capital requirements of the borrowers keeping in mind their business cycle and short term credit requirement. Relationship between Credit score and Ratios helps us to know whether bank has taken viable decision before granting loans.

2. Sampling: As no Primary data was collected, the whole conclusion was made on the basis of Secondary data. No Sampling is done.

3. Data Analysis: Data Analysis is done by using Correlation analysis. In Correlation it explains the relationship between the Rating and Ratios. Rating is the total score obtained by each customer based on the various financial parameters. It covers financial risk, Business Risk, Management Risk and Industry risk. Different Ratios are taken in consideration such as, Current Ratio, Collateral Coverage, Cash Accruals and TOL-QE/TNW+QE.

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Literature review
Literature review provides available research with respect to the selected topic of the projector research findings by an author which has been done with respect to the research to research topic. This chapter provides the overall view of the available literature with respect to the topic of the project. The review of the related research works are described as under:-

1. A researcher Machiko Nissanke, Ernest Aryeetey in their book: Financial Integration and Development explained about the loan administration and risk reduction by formal lenders(i.e. banks), Credit Analysis Standards, Increase Project equity requirements, Loan screening of banks and assessing creditworthiness during screening. Banks consider return on project as an important indicator for appraising the projects 2. A research was conducted by Mr. V.M.V. Subha Rao, on Monitoring of Advances A New look. The research gave two views on the commencement of monitoring process-(i)Narrow view- the monitoring starts only after the advance is disbursed, (ii)Broad view- at the time of conducting credit investigation of the borrower continue in all other stages of credit cycle. 3. Mritunjay Kumar Pandey conducted a study on Financial Performance Appraisal of TISCO. The Objectives of the study was to check the profitability and efficiency of the firm in the near future, to give brief summery about the ratios which affect the organizations financial structure and to point out the relationship between ratios and reasons behind it.

4. Eleanor Charles in his paper Appraising the Role of the Appraiser, talked about the centralized function of the appraiser to grant the loan and virtually every loan applicant will have to rely on an appraisal to set a value on the property against which the loan is to be made.

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TJSB BANK CREDIT RATING OF SMEs


About SMEs In India, small and medium enterprise (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset up to Rs10 million is considered as a SSI unit and investment up to Rs. 100 million is considered as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. The SME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. SME sector also has a large number of service industries.

TJSB Bank Services to SMEs


TJSB Bank has special focus for extending credit facilities to Small and Medium Size Enterprises. Bank has customized solutions for Small Business Enterprises, Small Scale Industries and Medium Scale Industries. Credit Facilities are offered in the nature of Term Loans for establishment of new industries, acquisition of machineries, technology up-gradation, or execution of ad-hoc orders or for expansion, modernization or diversification programs. Finance offered will be in the form of Fund base as well as non fund base facilities as per the requirements of the Business. Working Capital Term Loan requests are considered for viable small and medium size enterprises requiring infusion of fresh funds by way of one time core working capital assistance.

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Products: Establishment \ modernization \up-gradation of Fixed Assets: Bank provide property loans to SME for purchase of factory premises &modernization of existing factory building. They also offer hypothecation loans to SMEs for purchase / import of machinery Setting up Office, Renovation of the premises: Bank offer property loans to SME to set-up the business office & branch office for the expansion of business plans. They also offer term loans to renovate existing office premises. Purchase of commercial vehicles: Bank offer hypothecation loan to the transport operators to purchase new commercial vehicles such as Buses, Trucks, Tempo, etc.

Working Capital Limits: Bank offer credit facility in the form of Cash Credit limit, Working capital term loan to the SMEs against the hypothecation of stock & Book Debts. It helps to meet working capital requirement and Short term financial need.

Project Finance: Bank offer project finance loans to technically qualified, trained and experienced Entrepreneurs to execute the prestigious orders in hand.

Export Finance:

Pre-shipment Credit Pre-shipment Credit facility is offered to an exporter by way of packing credit to enable him to purchase/import of raw materials, processing and packing of the goods meant for export order.

Post shipment credit Post-shipment Credit facility is offered to an exporter to finance export bills receivables after the date of shipment of goods till the date of realisation of export proceeds on submission of documents.

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Fund Base:

Working capital Funds required for day to-day working will be to finance production & sales. For production, funds are needed for purchase of raw materials/ stores/ fuel, for employment of labour, for power charges etc. financing the sales by way of sundry debtors/ receivables. Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital. Working capital in this context is the excess of current assets over current liabilities. The excess of current assets over current liabilities is treated as net, for storing finishing goods till they are sold out & for working capital or liquid surplus & represents that portion of the working capital, which has been provided from the long-Term source.

Term Loan A Term Loan is granted for a fixed Term of 3 years to 7 years intended normally for financing fixed assets acquired with a repayment schedule normally not exceeding 8 years. A Term Loan is a Loan granted for the purpose of capital assets, such as purchase of land, construction of, buildings, purchase of machinery, modernization, renovation or rationalization of plant, & repayable from out of the future earning of the enterprise, in installments, as per a prearranged schedule.

Non-fund Base:
Bank Guarantee Limits & Letter of Credit limit: Bank offer to issue various types of guarantees such as performance, financial, bid bond, tenders, customs etc & we have tie-up with Nationalised Banks also to issue BG. They also issue inland letter of credit facility to our customers to purchase raw material, machinery etc. They also have tie-up with Nationalised Banks to issue foreign letter of credit to import machinery, raw material etc.

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Eligibility: Individuals/Partnership Firms/Companies. Experience /qualification in the proposal line of activity. .

Loan Amount: Cash credit limit, Property loan & Hypothecation loan will be assessed according to the project requirement.

Rate of interest: Banks PLR is 13.50 % p.a. & Bank offer attractive rate of interest to SMEs based on their credit ratings. Security: Hypothecation of Asset financed Mortgage of immovable property Personal Guarantee of Director / Partner.

Period:

Period for cash credit account will be of 12 months and limits being renewed yearly. Period for Terms loans will be 36 months to 84 months. Moratorium period will be 6 months. Period for project finance variable from project to project and reviewed on yearly basis.

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TJSB Bank Commercial Loan Processing:

The commercial loans provide an attractive source of income in terms of interest, lenders exercise a lot of care and study in evaluating borrowers to ensure that funds lent out are along with the earnings.

TJSB Bank provides separate loan for different categories of borrowers. The loan application form contains information relating to Background of borrower, personal and professional details, purpose of loan, nature of facility, period of repayment, nature of security offered, and financial status of borrower.

Types of Borrowers

Type of Borrower Category P-1 P-2 Individuals for activities allied to agriculture. Small Scale Industrial units and

equipment/systems for Development of new and renewable sources of energy. P-3 P-4 P-5 P-6 P-7 Road and water transport operators. Retail Traders Small Business Enterprises Professional and Self-Employed persons. State sponsored organisations for Scheduled Castes/Scheduled Tribes P-8 P-9 P-10 P-11 P-12 P-13 Educational Loans Housing Loans Consumption Loans Software Food & Agro Processing Sector Investment by banks in venture capital

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CREDIT APPRAISAL PROCESS


Receipt of Applications from Applicant

Communicate with client documents required for the said proposal

Follow-up Sheet

Pre-sanction visit by bank officers

Check for RBI defaulters list, CIBIL data, ECGC, Caution list 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 Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentation, agreement, mortgages, pre-disbursement requirements

Disbursement of loans

Post sanction activities 18

Required Documents for Process of Loans


1. Audited / Provisional P& L A/c, Balance Sheet for Current Year i.e. upto31.03.2012. 2. IT Return Copy of the Firm for A.Y 2012-2013 or latest filed. 3. Reason for increase or decrease (as applicable) in sales / net worth / profits in comparison with earlier years figures. 4. Month wise Sales & Purchase for Current year April 2012. 5. Latest Debtors / Creditors / Stock statements. (Debtors statement should be age-wise) 6. Projected sales turnover of the Firm for, 2012-2013. 7. I.T Returns copy along with individual Balance sheet of all partners / Directors / Proprietors for A.Y 2012-2013 (F.Y 2011-2013) or else latest filed. 8. Approximate amount of Bad Debts as on last month. 9. Undertaking for No change in constitution. 10. Current status of payments of statutory dues (E.g. PF/Excise/Sales Tax etc) Salary/LIC deductions etc. 11. Copy of Sales Tax annual returns for F.Y 2011-2012 and copy of latest return filed in 2012-2013, if applicable. 12. Statement of payment of statutory dues as on 31.03.2012 duly certified by CA. 13. Dully filled CC Renewal form signed by Borrowers / Guarantors. 14. Board Resolution for Renewal Credit limits. (Incase of PVT Ltd and Ltd Company). 15. Guarantors ITd Return Copies along with Balance sheet, Profit & loss A/c for F.Y. 2011-2012. 16. Xerox copy of registration certificate under shop and establishment Act, 1948.

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Credit Rating of TJSB Bank


Credit Rating is done before sanctioning any finance to customer. Under this method marks are assigned to each of the parameters. The following are the parameters have been considered for determining the rating of borrowers in the SME category: Financial Risk Business Risk Industry Risk Management Risk

Within each of these broad areas, various parameters have been used for obtaining an overall rating of the borrower. The total marks a borrower can be awarded on being analyzed using these parameters shall be 100.

Marks Obtained By Borrower Weighted Marks in % = Total Marks assigned to various Parameters

As per Banks guideline, concession in Rate of Interest is provided which is subject to credit rating of the borrower.

The Credit Rating Scale to be used to rate the applicant is as follows:

Marks of the Applicant 75 & Above Between 60 to75 Between 50 to 60 Between 35 to 50 Between 0 to 35

Rating of the Applicant A+ A B

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1) PRIMARY REQUIREMENTS :

A business loan requires detailed documents stating entire business profile that states the general background of the business and its operations. Borrower is required to primarily submit personal financial statements listing all the assets and liabilities, income tax details along with audited profit & loss account and balance sheet of previous 2 to 3 years along with current year. Bank may also demand borrower to submit estimated future projections and statements, expansion plans and details of guarantors.

Security

Another fundamental requirement for loan application is details of Prime and collateral security offered by the borrower. Collateral Security for loan may include assets such as real estate, stocks or bonds, hard goods such as machinery & equipment and various other personal assets.

To ensure the safety of funds lent, the first and most important factor considered by a bank is the capacity of borrowers to repay the amount of loan but bank can hardly afford to take any risk in this regard. The bank therefore relies primarily on the nature of security offered by the borrower. In case borrower fails to repay the amount banks recover money by attaching the assets. Bank can sell the assets offered as security and realise the amount.

For security purpose banks create charge on assets offered by borrower in following ways:

a. Hypothecation:

It is the most common and popular mode of charge whose important features are as under It is not defined under any law. Extended idea of pledge. It relates to goods/commodities, movable machinery, vehicles, book-debts. 21

Ownership remains with the borrower. Possession is also with the borrower. Symbolic/constructive possession with creditor (Bank). It creates an equitable charge. Hypothecation Agreement gives Banker a right to take possession of hypothecated goods, machines.

b. Pledge: Under section 172 of Indian Contract Act pledge means Bailment of Goods as a security for repayment of a debt or performance of a promise. A common example of pledge is gold ornaments, which are pledged with the bank as a security against which Gold Loan is given. Important features of Pledge are Actual delivery of security is given to the Bank. Ownership remains with bailers (Borrower). Liable to return after fulfillment of promise or repayment of loan amount. Disposal possible only after default and giving due notice to the Borrower.

c. Mortgage: Transfer of Property Act 1882 defines Mortgage as: -Transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to pecuniary liability.

Mortgagor must be the owner or a person having interest in immovable property. Mortgagor must have a contractual capacity. Property must be a specific immovable property. Purpose is to secure the loan repayment.

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2) PROCESSING APPLICATION :

After receiving all the required documents from the borrower a loan officer will then review the application and documentary attachments. Loan officer will then analyse and review various credit reports, documentation as well as income details provided by the borrower.

There are three principals of bank lending:

Safety:

As Bank lends funds entrusted to it by the depositors, the first and foremost

principal of lending is to ensure safety of the funds lent. Safety mean by capacity and willingness of borrower to repay.

Liquidity: Liquidity mean by granting loan against security of assets which are easily marketable without much loss.

Profitability:

The sound principle of lending is not to sacrifice safety or liquidity for

the sake of higher profitability. Bank should not grant advances to unsound parties even if they are ready to pay high interest. Bank therefore has to consider creditworthiness of borrower, borrowers background, soundness of his project or business activity. Banker has to ensure that the business of the borrower is permissible for lending as per the guidelines & policy of the bank. For assessing credit worthiness of borrower, banker has to collect information through number of sources.

This is important stage in loan process as it involves preparation of Process Note, and analysis of loan application. Important steps carried out by loan officer are as follows.

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Analysis of financial statements:

Banks approach towards analysis of financial statement is to find and study the solvency or repaying capacity of the borrower. Bank is concerned with the estimation of the risks if any, involved in lending to the borrower.

Processing officer carefully analyses all the financial statements and records of the borrower. Financial Statement analysis assists the loan officer in assessing the financial and administrative efficiency of the borrower. Various financial ratios are calculated and trend analysis is carried out to check the consistency and growth of business. Various recommendations and observations are drawn based on the ratios. Ratios computed are as follows:

Tangible Net Worth Debt-Equity Ratio Unsecured Loans Asset Turnover Ratio Liquidity Ratio Sales Profitability & DSCR

Visit Report

Loan processing officer conduct visit to the commercial or factory site of the borrower and also to its registered office for inspection. Objective behind visit is to verify the operational setup and soundness of the borrower in respect of loan. After the visit detailed visit report is prepared containing observations of visit and recommendations.

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Working Capital Assessment:

Working capital facilities are required by industries .trading concerns and also units engaged in extending services. Need of working capital in majority of cases remain more or less constant throughout the year.

Methods of Assessment of working capital

a. Maximum Permissible Bank Finance (MPBF) Method:

Audited financial statements of last two years have to be studied. The data in Profit & Loss Statement & in the Balance Sheet in whatever format is first reconstructed in the prescribed format.

The total build-up of current assets & current liabilities is to be studied. The inventory, Debtors & Creditors which have been expressed in the monetary terms in balance sheet should be converted into holding into months or days.

Current assets & current liabilities are assessed based on projected sales. Finding the Working Capital Gap & deciding the contribution of Borrower & Banks contribution for bridging the Gap

b. Turnover Method:

Under this method, working capital is assessed on the basis of 20% of the projected / actual sales of the borrower.

c. Operating Cycle Method:

Under this method, working capital requirement is assessed on the basis of the average time intervening between the acquisition of material or services entering the process and the final cash realization.

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Calculation of Drawing Power/ Limit

Drawing power is calculated based on the value of security provide i.e. Stock and debts or property. Drawing power is calculated after considering margin which is fixed to certain extent e.g. For the traders is 30% whereas to a manufacture it is fixed at 40 %.

Margin: Margin is provided by way of liquid surplus i.e. from long term liabilities. Current assets shall partly finance by capital and long term liabilities for any going concern. Financial accommodation up to 100 % of the value of goods will not be granted by banks, banks fix certain margin on the value of goods which must be financed by borrower and remaining will be financed by bank. The percentage of margin fixed on any security depends on its nature and type of borrower.

Thus Process note comprise of entire analysis of the loan application and borrower including drawing power of the borrower, his working capital requirements, security details, valuation reports, details of guarantors, financial statement analysis, visit report and other terms and conditions of sanctioning of loan. Once process note is completed it is forwarded to sanctioning authority for final review and assessment

3) APPLICATION REVIEW AND SANCTIONING OF LOAN

After the loan application is processed and all the findings are satisfactory, the loan application is then submitted to sanctioning authority. Sanctioning authority then assesses and eventually decides whether the loan will be approved.

Sanctioning authority & Delegation of Authority

To regulate the deployment of the credit as well as for speedy sanction and disposal of the credit, the Board of Directors of the bank determines the lending and discretionary powers of various authorities at different level.

As per the level of the official from Manager to CEO powers are assigned for sanctions. 26

Authority includes per party Exposure, Group exposure, Funded and Non -funded limits, Waiver in processing fee, concessions in Interest rate etc. Board is the apex level of authority and all the proposals beyond the powers of CEO will be looked into by the Directors. Board of Directors also formulates overall policy of the bank with regard to credit.

Insurance Details of the assets and securities offered by the borrower against the loan are also mandatory to ensure credit recovery. Hence the details of amount of insurance along with the insuring company and their due dates are mentioned in process notes.

After the approval from the sanctioning authority the processing officer then forwards the sanction letter to the borrower. Sanction letter includes amount of financing, terms & conditions of payment, details of Prime and collateral security, and other conditions regarding loan sanction.

4) Loan Disbursement

Once borrower is agreed on all the conditions mentioned in sanction letter, Borrower is required to sign final set of loan documents. With all the requirements met and all closing documents in order, loan officer generates Disbursement Order (DO) and loan is finally disbursed.

Documentation

Banks generally lend for productive purpose. Documentation is done to create legally valid and effective charge over assets which bind the borrower and guarantors personally. Documents contains specifically and precisely the terms and conditions to the contract between the borrower and bank. Which is examined by the court of law incase of legal recourse. It is therefore necessary that right type of documents properly filled up, adequately stamped and executed are obtained on record.

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Purpose and importance of documentation

Documents are prepared and executed to record the fact that borrower has taken a loan from the Bank and thereby evidence is created. The second purpose of documents is to incorporate the terms and conditions on which the loan has been given. This is very necessary to avoid confusion and ambiguities in future. The third important purpose is to create a charge in favour of the Bank on the assets offered as a security.

By and large the loans are repaid by the Borrowers as per agreed terms and conditions. But when the Borrower fails to repay or does not adhere to the agreed terms and conditions, the Bank has to take action. It may be by way of realizing the asset given as security or enforce the agreed terms and conditions or to take legal action to recover the bank dues. At that time the loan documents prepared and executed are required to produce. Documents, which are not properly executed, cannot be enforced against the borrower and their purpose itself is defeated.

REGISTRATION OF CHARGES OF COMPANIES WITH ROC

The charge on the assets of the company created in favour of the Bank as security for loan is required to be registered with Registrar of Companies. Failure to do so renders such charge void as against liquidator or other registered creditors. Thus in order to protect the interest of the Bank every charge created in favour of the bank needs to be registered.

The registration of charge is a notice to the general public of Banks charge on the assets of the company. Charges such as hypothecation, mortgage requires registration. The charge is required to be registered within a period of 30 days from the date of creation. The delay, however, can be condoned by the Registrar of Companies.

For creation of charge Form No 8 together with the original instrument creating a charge or certified copy is to be filed with the Registrar. Requisite fee prescribed is also to be paid. Registrar after due verification of the charge form and registering the charge on companys records with him issues a certificate of Registration of Charge. 28

Where a modification of charge is to be done e.g. when limit is enhanced, additional security is charged etc Form No 13 is also to be filed along with Form No 8. Procedure for filing modification of charge is similar to filing original charge.

Post Sanction Monitoring Of Advances

The most important stage in the loan begins after the full disbursal of the loan. All the care taken in appraising the project will be nullified due to faulty monitoring. Thus a good asset/loan account can turn bad for the bank if danger signals or negative indicators are not looked into or analysed properly.

When input cost goes up small industries can come under strain. Depending on their ability they may either pass on the cost to the customer or absorb the cost or they may have to sacrifice the profits. In such case accounts will turn bad.

The bank should have a strong monitoring mechanism in place at various levels, which will help capture the account before it moves into an NPA. Bank should carefully monitor the end use of funds and see that the funds are used for the purpose intended for. An advance given for working capital used for trading in stock market increases the risk of default.

A monitoring mechanism should look out for early warning signs in the following areas. Unusual increase in debtor level. Substantial decline in sales levels. Status of borrowers with other banks. Information of group companies. High projection of sales/ Profits should be analysed.

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Correlation Analysis
Keeping in mind, the above process of credit appraisal of TJSB, it would be interesting to understand how the financial ratios form a very important part of determining credit scores of the borrowers. In order to establish the above relationship, simple correlation analysis is done between the ratios and the scores. It also helps in knowing whether bank has taken viable decision before granting loans.

Particulars

Scores Current Ratio 89 77 148 0.96 0.84 2.11 TOL-QE / TNW+QE 3.21 4.87 1.06 Cash Accruals/ Net Sales 9% 3% Collateral Coverage 50% 29% 427%

Ratios Refex Air Ltd Kulkarni Cranes Ltd Moksh Raymond Oman Laboratories Ltd Suraj Lifters Pvt Ltd

128 133

0.8 2.45

1.14 3.03

3% -3%

51% 49%

CORRELATION Particulars (Ratings/Ratios) Current Ratio TOLQE/TNW+QE Cash Accruals/Net Sales Collateral Coverage 0.63527706 -0.7758631 0.70346368 -0.8451471 Score Obtained

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Current Ratio Current ratio shows the relation between Current Assets and Current Liabilities. In Correlation the results shows that every enterprise whose rating shows better short term working capital, which can be easily turned into finished goods within a less debtors turnover days. If the ratings are been negative then it can be said that debtors may be responding late.

TOL-QE/TNW+QE Quasi equity is a debt taken on by a company that has some traits of equity, such as having flexible repayment options or being unsecured. In total outside liability includes both liability of bank as well as outside. Negative correlation shows that there is not much investment made as Quasi Equity.

Cash Accruals Cash Accrual is the profit earned by company including depreciation. As per the ratings, accrual income is showing negative sign which says repayable capacity is not much stronger.

Collateral Coverage Collateral is "an additional form of security which can be used to assure a lender that you have a second source of loan repayment. In this, higher the security higher the ratings. Security is given on behalf of the Term loan and not applicable in Overdraft and Cash Credit. As Correlation shows positive sign, i.e Bank can able to sustain even the loan goes unpaid.

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OUTCOME OF THE STUDY


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 goes 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:o Deficiencies /lapses on the part of the management o Uncertainties in the business environment o Uncertainties in the industrial environment o Weakness in the financial position

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

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

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

To determine the Credit worthiness of a particular customer the above factor mentioned come into play. All the factors were studied in detail while carrying out the project.

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LIMITATION OF THE PROJECT

As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed

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, my analysis is restricted to few sectors.

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LEARNING FROM THE PROJECT


I had a valuable experience doing my summer internship at TJSB Bank in Thane. The duration for my internship was 2 months, starting from 2nd May 2012 to 2nd 2012 in Thane Main branch and, I was working on the CREDIT APPRISAL

My Project Guide was Mr. Pravin Pandurang Pandit, Chief Executive officer for Thane SCC branch, respectively of his department.

This was my First exposure to the corporate world and had an experience of working in banking. I was working on the credit appraisal, which I feel is the basic requirement of any bank. While working I observed the significance of the Credit in a bank, its working.

The project, which was given to me in this period of my summer internship, project was to know the credit appraisal. For that, I have to talk to manager and try to understand concept of credit in the bank.

Thus during this internship-period working on project and simultaneously observing has proved to be a great experience in all as I have got to see and understand various situations of the employees. I would like to conclude by saying that it is been a great learning for me through this internship. I understand some realities of the bank, as I was part of the everyday activities of the organization. I also learned the fact that no department can work on its own each department have to depend on other in one-way or the other.

34

BIBLIOGRAPHY/REFERENCE

BIBLIOGRAPHY

Financial Management, Theory and Practice (Seventh Edition) -Prasanna Chandra

Link www.rbi.org.in www.thanejanata.co.in www.dsir.gov.in www.sidbi.com www.ijmra.us

35

Reference Business Standards Co-operative Banks (Seasonal Article), May 2012

36

ANNEXURE PROCESS NOTE SPECIMEN

Branch: SCC/

Date: 12.06.2012

NOTE TO BE PLACED BEFORE

NAME OF APPLICANT

: (Membership No:)

A.

PRESENT PROPOSAL

B.

BRIEF BACKGROUND

1.

CONSTITUTION

2.

ASSET CLASSIFICATION

3.

ADDRESS

FACTORY: (Owned/Rented/Leased) : OFFICE: (Owned/Rented/Leased) :

4.

DATE OF ESTABLISHMENT

5.

BANKING SINCE

6.

CATEGORY

7.

ACTIVITY:

37

(a) Main Activity (b) Industry (c) List of major clients

: : :

8.

NAME(S) OF DIRECTORS/PARTNERS/PROPRIETOR & THEIR NET WORTH (Amount in RsLacs) NAME AG E ANNUA L INCOM E NETWOR TH

9.

NAME OF THE GUARANTORS OTHER THAN DIRECTORS / PARTNERS /

PROPREITOR & THEIR NET WORTH (Amount in Rs. Lacs) NAME AGE ANNUAL INCOME NETWORTH

(Specific mention if Directors/ Partners / proprietor are not guarantors in their individual capacity)

BRIEF ABOUT THE PARTNERS :

ABOUT THE PRODUCTS:

ABOUT THE PRODUCTION PROCESS:

10.

POSITION OF ACCOUNT:

38

10.1

POSITION OF THE ACCOUNT OF FIRM / COMPANY (Amount in Rs. Lacs)

(As on 02.08.201)

FACILIT Y

SAN C. LIM IT

O/ S B A L.

OV ER DU E

INTERE ST RATE

SECU RITY

Cash Credit ADVHYP PRLN TOTAL

DETAILS OF COLLATERAL SECURITY Prime

VALUE

TOTAL SECURITY VALUE


10.2 POSITION OF THE ACCOUNT OF ASSOCIATE FIRM /COMPANY (Not

Applicable) (As on Facility ) L i m i t O/ S Ba l O v e r D u e s R . O . I . Primary Security Type Value

39

Funded [A]

Non Funded [B]

Total [A+B] Security details & its value TOTAL OF PRIMARY + Value: Detail Description of security: Value:

COLLATERAL:

Security Coverage of the Group

NAME A/C

OF

EXPOSURE

TOTAL SECURITIES

TOTAL

VALUATION DETAILS:

Name of Valuer Date of Valuation Valuation of land Valuation of Building / Residential Property Valuation of Machinery Valuation of Vehicles / Cranes Valuation of Dies / Tools and other misc. equipments Rs. Rs. Rs. Rs. Rs.

DEPOSIT RELATIONSHIP Lacs)

(Amount in

40

Sr n o

PARTICUALAR S

TOTAL AMOUN T OF

COLLATERA L SECURITY

FREE DEPOSIT S

DEPOSI T a. TOTAL

12.

CONDUCT OF THE ACCOUNT:

a) General Conduct : A] TURNOVER PARTICULARS Current Year Credit Debit

TOTAL 1) General Conduct : 2) Comments on Turnover: Comments on turnover: (Diff. in turnover / Multiple Banking arrangements / Submission of Bank a/c statements of the Banks etc)

B] DRAWING POWER

Drawing Power (As on 30.06.2011)

Particulars

Debtors to 90 days

up

Upto180 days

Entire Debtors

Stock Add: Debtors Sub total (a) Less Creditors Sub total (b)

41

Margin = @ 30 % of (b) Drawing Power (b-c)

Average Drawing Power Rs.

Whether operations within DP

iv) Date of Last Renewal

13.

TOTAL EARNINGS FROM ACCOUNT: Previous Year i. ii. iii. Interest Commission Other TOTAL Current Year

VISIT DETAILS:

14.1

Visit Details

Date visit

of

18.08.2010
14.2 Observations during Visit in Brief:

15.

INSURANCE DETAILS

Security Description

Amount

(in

Due Date

42

lacs)

Whether existing securities are adequately insured:

16. Compliance of all Terms and Conditions of earlier sanction (If NO Terms which are pending and reasons, No reason for if YES)

(YES/NO)

17.

A] Noting of Charge with ROC (in case of Ltd./ Pvt. Ltd. Co.)

B] Noting of Charge with R.T.O [For Vehicles / Cranes] Report only pending compliances with reasons and plans to comply the same.

18.

Reserve Bank of India/ Statutory Auditors/Concurrent Auditors/Internal Auditors

observations, if any Steps taken by Branch for compliance of the same.

19.

BRIEF FINANCIAL INDICATORS:(Rs. In Lacs) PARTICULARS 2009-10 (AUDITED) Tangible Net Worth Debt /Equity Ratio Current Ratio Net Working Capital Receivables Ratio Creditors Turnover Stock Turnover Net Sales % increase/(decrease) Net Profit % to sales Sales from April 10 to June 10 of 2010-11 (AUDITED) 2011-12 (PROV.)

43

COMMENTS BASED ON PROVISIONAL FINANCIALS OF 2011-2012 :

1) Tangible Net Worth:

2) Debt-Equity Ratio:

3) Current Ratio & Net Working Capital:-

4) Turnover Ratios:-

5) Net Sales and Profitability:-

6) Future projections / D.S.C.R.:-

DELEGATION POWERS:

Parameters

Benchmark Committee II Committee I 1:1 8:1 4:1

Actual

Current Ratio TOL/TNW Debt Ratio DSCR Margin Repayment Periods Collateral Security ROI Equity

1.17:1 6:1 3:1

1.75 25% 7 Years

1.50 20% 10 Years

50%

25%

Not below 13%

Not 12.50%

below

Processing waiver

25%

75%

44

Considering deviation in delegation of power in case of collateral security, the note is put up before Committee I

7) Recommendation
8) TERMS AND CONDITIONS: Pre-disbursement:

Post-disbursement:

OFFICER (SCC)

CHIEF MANAGER (SCC)

ASST.GEN. MANAGER (SCC)

Decision of Credit Committee-II

Additional Terms & Conditions :

CHAIRMAN CREDIT COMMITTEE-II DATE:

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