Introduction

The fnancial crisis under which the entire global economy has been reeling for the
past six years has become the main cause for recession which started in 2006
from US and spread across the world. The world economy has been majorly
aected from the crisis. The securities in stoc! exchange ha"e fallen drastically
which has become the root cause of ban!ruptcy of many fnancial institutions and
indi"iduals. The root cause of the economic and fnancial crisis is credit default of
big companies and indi"iduals which has badly impacted the world economy. So in
the present scenario analysing one#s credit worthiness has become "ery important
for any fnancial institution before pro"iding any form of credit facility so that such
situation doesn#t arise in near future again.
$nalysis of the credit worthiness of the borrowers is !nown as %redit $ppraisal. &n
order to understand the credit appraisal system followed by the ban!s this project
will be conducted. The project will analyse the credit appraisal procedure with
special reference to 'unjab (ational )an! which will include !nowing about the
dierent credit facilities pro"ided by the ban!s to its customers* how a loan
proposal is prepared* what are the formalities that has to be satisfed and most
importantly !nowing about the "arious credit appraisal techni+ues which are
dierent for dierent types of credit facility.
Reasons for selecting the project
,hene"er an indi"idual or a company uses a credit that means they are borrowing
money that they promise to repay the same within a pre-decided period. &n order
to assess the repaying capability i.e. to e"aluate their credit worthiness ban!s use
"arious techni+ues that dier with the dierent types of credit facilities pro"ided
by the ban!. &n the current scenario where it is seen that big companies and
fnancial institutions ha"e gone ban!rupt just because of credit default. So %redit
$ppraisal has become an important aspect in the ban!ing sector and has gained
prime importance.
&t is the incident of credit defaults that has gi"en rise to the fnancial crisis of
200.-0/. )ut in &ndia the credit default is comparati"ely less compared to
countries such as US. 0ne of the reasons leading to this may be good appraisal
techni+ues used by ban!s and fnancial institutions in &ndia. 1"entually the
importance of this project is mainly to understand the credit appraisal techni+ues
used by the ban!s with special reference to 'unjab (ational )an!.
Scheme of the project
Objective of the project
The o"erall objecti"e of this project is to understand the current credit appraisal
system used in ban!s. The %redit $ppraisal system will be analysed as per the
dierent credit facilities pro"ided by the ban!. The detailed information about the
techni+ues and processes will be del"ed to !now the entire process underta!en to
appraise any credit facility to be oered by the )an!.
Structure or Plan of the project
The project frst of all will ma!e a study about the commercial ban!s- its important
functions. Then it will highlight the concept of )an! %redit 2 its recent trends. The
project will then proceed towards the lending procedure of ban!s and here it will
highlight the credit appraisal being the frst step in building up of a loan proposal.
Then it will discuss the ban!#s credit policy with respect to 'unjab (ational ban!
where the project has been underta!en.
Commercial banks and its objectives
$ commercial ban! is a type of fnancial intermediary that pro"ides chec!ing
accounts* sa"ings accounts* and money mar!et accounts and that accepts time
deposits. Some use the term 3commercial ban!3 to refer to a ban! or a di"ision of
a ban! primarily dealing with deposits and loans from corporations or large
businesses. This is what people normally call a 3ban!3. The term 3commercial3 was
used to distinguish it from an in"estment ban!.
%ommercial ban!s are the oldest* biggest and fastest growing fnancial
intermediaries in &ndia. They are also the most important depositories of public
sa"ings and the most important disbursers of fnance. %ommercial ban!ing in &ndia
is a uni+ue ban!ing system* the li!e of which exists nowhere in the world. The
truth of this statement becomes clear as one studies the philosophy and
approaches that ha"e contributed to the e"olution of ban!ing policy* programmes
and operations in &ndia.
The ban!ing system in &ndia wor!s under constraints that go with social control
and public ownership. The public ownership of ban!s has been achie"ed in three
stages4 5//6* july 5/6/ and $pril* 5/.0. (ot only the public sector ban!s but also
the pri"ate sector and foreign ban!s are re+uired to meet the targets in respect of
sectoral deployment of credit* regional distribution of branches* and regional credit
deposit ratios. The operations of ban!s ha"e been determined by lead ban!
scheme* 7ierential 8ate of interest scheme* %redit authori9ation scheme*
in"entory norms and lending systems prescribed by the authorities* the
formulation of credit plans* and ser"ice area approach.
%ommercial )an!s in &ndia ha"e a special role in &ndia. The pri"ileged role of the
ban!s is the result of their uni+ue features. The liabilities of )an! are money and
therefore they are important part of the payment mechanism of any country. :or a
fnancial system to mobilise and allocate sa"ings of the country successfully and
producti"ely and to facilitate day-to-day transactions there must be a class of
fnancial institutions that the public "iews are as safe and con"enient outlets for its
sa"ings. The structure and wor!ing of the ban!ing system are integral to a
country#s fnancial stability and economic growth. &t has been rightly claimed that
the di"ersifcation and de"elopment of &ndian 1conomy are in no small measure
due to the acti"e role ban!s ha"e played fnancing economic acti"ities of dierent
sectors.
Credit Appraisal
;eaning - The process by which a lender appraises the creditworthiness of the
prospecti"e borrower is !nown as %redit $ppraisal. This normally in"ol"es
appraising the borrower#s payment history and establishing the +uality and
sustainability of his income. The lender satisfes himself of the good intentions of
the borrower* usually through an inter"iew.
The credit re+uirement must be assessed by all &ndian :inancial &nstitutions or
specialised institution set up for this purpose. ,here"er fnancing of infrastructure
project is ta!en up under a consortium < syndication arrangement = ban!#s
exposure shall not exceed 26> )an! may also ta!e up fnancing infrastructure
project independently < exclusi"ely in respect of borrowers <promoters of repute
with excellent past record in project implementation.
&n such cases due diligence on the inability of the projects are well defned and
assessed. State go"ernment guarantee may not be ta!en as a substitute for
satisfactory credit appraisal.
The important thing to remember is not to be o"erwhelmed by mar!eting or proft
centre reasons to boo! a loan but to ta!e a balanced "iew when boo!ing a loan*
ta!ing into account the ris! reward aspects. ?enerally e"eryone becomes
optimistic during the upswing of the business cycle* but tend to forget to see how
the borrower will be during the downturn* which is a short-sighted approach.
:urthermore greater emphasis is gi"en on fnancials* which are usually outdated@
this is further exacerbated by the fact that a descripti"e approach is usually ta!en*
rather than an analytical approach* to the credit. Thus a forward loo!ing approach
should also be adopted* since the loan will be repaid primarily from future cash
Aows* not historic performance@ howe"er both can be used as good repayment
indicators.
Indian Banking Sector & Its ajor Challenges
&t is well recognised by the world that &ndia is one of the fastest growing large
economies in the world. 1"idence from across the world suggests that a sound and
e"ol"ed ban!ing system is re+uired for sustained economic de"elopment. The last
decade has seen many positi"e de"elopments in the &ndian ban!ing sector. The
policy ma!ers* which comprise the 8eser"e )an! of &ndia B8)&C* ;inistry of :inance
and related go"ernment and fnancial sector regulatory entities* ha"e made
se"eral notable eorts to impro"e regulation in the sector. The sector now
compares fa"ourably with ban!ing sectors in the region on metrics li!e growth*
proftability and non-performing assets B('$sC. $ few ban!s ha"e established an
outstanding trac! record of inno"ation* growth and "alue creation. This is reAected
in their mar!et "aluation. Dowe"er* impro"ed regulations* inno"ation* growth and
"alue creation in the sector remain limited to a small part of it. The cost of ban!ing
intermediation in &ndia is higher and ban! penetration is far lower than in other
mar!ets. &ndia#s ban!ing industry must strengthen itself signifcantly if it has to
support the modern and "ibrant economy which &ndia aspires to be. ,hile the onus
for this change lies mainly with ban! managements* an enabling policy and
regulatory framewor! will also be critical to their success.
The failure to respond to changing mar!et realities has stunted the de"elopment of
the fnancial sector in many de"eloping countries. $ wea! ban!ing structure has
been unable to fuel continued growth* which has harmed the long-term health of
their economies. &n this Ewhite paperF* we emphasise the need to act both
decisi"ely and +uic!ly to build an enabling* rather than a limiting* ban!ing sector
in &ndia.
&ndian ban!s ha"e compared fa"ourably on growth* asset +uality and proftability
with other regional ban!s o"er the last few years. The ban!ing index has grown at
a compounded annual rate of o"er 65 per cent since $pril 2005 as compared to a
2G per cent growth in the mar!et index for the same period. 'olicy ma!ers ha"e
made some notable changes in policy and regulation to help strengthen the sector.
These changes include strengthening prudential norms* enhancing the payments
system and integrating regulations between commercial and co-operati"e ban!s.
Dowe"er* the cost of intermediation remains high and ban! penetration is limited
to only a few customer segments and geographies. ,hile ban! lending has been a
signifcant dri"er of ?7' growth and employment* periodic instances of the
EfailureF of some wea! ban!s ha"e often threatened the stability of the system.
Structural wea!nesses such as a fragmented industry structure* restrictions on
capital a"ailability and deployment* lac! of institutional support infrastructure*
restricti"e labour laws* wea! corporate go"ernance and ineecti"e regulations
beyond Scheduled %ommercial )an!s BS%)sC* unless addressed* could seriously
wea!en the health of the sector. :urther* the inability of ban! managements Bwith
some notable exceptionsC to impro"e capital allocation* increase the producti"ity
of their ser"ice platforms and impro"e the performance ethic in their organisations
could seriously aect future performance. &ndia has a better ban!ing system in
place His a His other de"eloping countries* but there are se"eral issues that need
to be ironed out. ;ajor challenges of &ndian ban!ing sector are mentioned below.
Interest rate risk
&nterest rate ris! can be defned as exposure of ban!Is net interest income to
ad"erse mo"ements in interest rates. $ ban!Is balance sheet consists mainly of
rupee assets and liabilities. $ny mo"ement in domestic interest rate is the main
source of interest rate ris!.
0"er the last few years the treasury departments of ban!s ha"e been responsible
for a substantial part of profts made by ban!s. )etween July 5//G and 0ct 200K*
as interest rates fell* the yield on 50-year go"ernment bonds Ba barometer for
domestic interest ratesC fell* from 5K per cent to L./ per cent. ,ith yields falling
the ban! Interest rates and non!performing assets
The best indicator of the health of the ban!ing industry in a country is its le"el of
('$s. ?i"en this fact* &ndian ban!s seem to be better placed than they were in the
past. $ few ban!s ha"e e"en managed to reduce their net ('$s to less than one
percent Bbefore the merger of ?lobal Trust )an! into 0riental )an! of %ommerce
0)% was a 9ero ('$ ban!C. )ut as the bond yields start to rise the chances are the
net ('$s will also start to go up. This will happen because the ban!s ha"e been
ma!ing huge pro"isions against the money they made on their bond portfolios in a
scenario where bond yields were falling.
8educed ('$s generally gi"es the impression that ban!s ha"e strengthened their
credit appraisal processes o"er the years. This does not seem to be the case. ,ith
increasing bond yields* treasury income will come down and if the ban!s wish to
ma!e large pro"isions* the money will ha"e to come from their interest income*
and this in turn* shall bring down the proftability of ban!s.
Competition in retail banking
The entry of new generation pri"ate sector ban!s has changed the entire scenario.
1arlier the household sa"ings went into ban!s and the ban!s then lent out money
to corporate. (ow they need to sell ban!ing. The retail segment* which was earlier
ignored* is now the most important of the lot* with the ban!s jumping o"er one
another to gi"e out loans. The consumer has ne"er been so luc!y with so many
ban!s oering so many products to choose from. ,ith supply far exceeding
demand it has been a race to the bottom* with the ban!s undercutting one
another. $ lot of foreign ban!s ha"e already burnt their fngers in the retail game
and ha"e now decided to get out of a few retail segments completely. The nimble
footed new generation pri"ate sector ban!s ha"e ta!en a lead on this front and the
public sector ban!s are trying to play catch up. The 'S)s ha"e been losing
business to the pri"ate sector ban!s in this segment. 'S)s need to fgure out the
means to generate proftable business from this segment in the days to come.
"he urge to merge
&n the recent past there has been a lot of tal! about &ndian )an!s lac!ing in scale
and si9e. The State )an! of &ndia is the only ban! from &ndia to ma!e it to the list
of Top 500 ban!s* globally. ;ost of the 'S)s are either loo!ing to pic! up a smaller
ban! or waiting to be pic!ed up by a larger ban!. The central go"ernment also
seems to be game about the issue and is seen to be encouraging 'S)s to merge or
ac+uire other ban!s. ?lobal e"idence seems to suggest that e"en though there is
great enthusiasm when companies merge or get ac+uired* majority of the
mergers<ac+uisitions do not really wor!. So in the 9eal to merge with or ac+uire
another ban! the 'S)s should not let their common sense ta!e a bac! seat. )efore
a merger is carried out cultural issues should be loo!ed into. $ ban! based
primarily out of (orth &ndia might want to ac+uire a ban! based primarily out of
South &ndia to increase its geographical presence but their cultures might be "ery
dierent. So the integration process might become "ery diMcult. Technological
compatibility is another issue that needs to be loo!ed into in details before any
merger or ac+uisition is carried out.
Impact of BAS#$!II norms
)an!ing is a commodity business. The margins on the products that ban!s oer to
its customers are extremely thin "is a "is other businesses. $s a result* for ban!s
to earn an ade+uate return of e+uity and compete for capital along with other
industries* they need to be highly le"eraged. The primary function of the ban!Is
capital is to absorb any losses a ban! suers Bwhich can be written o against
ban!Is capitalC.(orms set in the Swiss town of )asel determine the ground rules for
the way ban!s around the world account for loans they gi"e out. These rules were
formulated by the )an! for &nternational Settlements in 5/... 1ssentially* these
rules tell the ban!s how much capital the ban!s should ha"e to co"er up for the
ris! that their loans might go bad. The rules set in 5/.. led the ban!s to
dierentiate among the customers it lent out money to. 7ierent weightage was
gi"en to "arious forms of assets* with 9ero percentage weightings being gi"en to
cash* deposits with the central ban!<go"t. etc* and 500 per cent weighting to
claims on pri"ate sector* fxed assets* real estate etc. The summation of these
assets ga"e us the ris!-weighted assets. $gainst these ris! weighted assets the
ban!s had to maintain a BTier & N Tier &&C capital of / per cent i.e. e"ery 8s500 of
ris! assets had to be bac!ed by 8s / of Tier & N Tier && capital. To put it simply the
ban!s had to maintain a capital ade+uacy ratio of / percent. The problem with
these rules is that they do not distinguish within a category i.e. all lending to
pri"ate sector is assigned a 500 per cent ris! weighting* be it a company with the
best credit rating or company which is in the doldrums and has a "ery low credit
rating. This is not an eMcient use of capital. The company with the best credit
rating is more li!ely to repay the loan "is a "is the company with a low credit
rating. So the ban! should be setting aside a far lesser amount of capital against
the ris! of a company with the best credit rating defaulting "is a "is the company
with a low credit rating. ,ith the )$S1O-&& norms the ban! can decide on the
amount of capital to set aside depending on the credit rating of the company.
%redit ris! is not the only type of ris! that ban!s face. These days the operational
ris!s that ban!s face are huge. The "arious ris!s that come under operational ris!
are competition ris!* technology ris!* casualty ris!* crime ris! etc. The original
)$S1O rules did not ta!e into account the operational ris!s. $s per the )$S1O-&&
norms* ban!s will ha"e to set aside 56 per cent of net income to protect
themsel"es against operational ris!s.
0"er the last few years* the falling interest rates* ga"e ban!s "ery little incenti"e
to lend to projects* as the return did not compensate them for the ris! in"ol"ed.
This led to the ban!s getting into the retail segment big time. &t also led to a lot of
ban!s playing it safe and putting in most of the deposits they collected into
go"ernment bonds. (ow with the bond party o"er and the bond yields starting to
go up* the ban!s will ha"e to concentrate on their core function of lending. The
ban!ing sector in &ndia needs to tac!le these challenges successfully to !eep
growing and strengthen the &ndian fnancial system.
:urthermore* the interference of the central go"ernment with the functioning of
'S)s should stop. $ fresh autonomy pac!age for public sector ban!s is in oMng.
The pac!age see!s to pro"ide a high degree of freedom to 'S)s on operational
matters. This seems to be the right way to go for 'S)s. The growth of the ban!ing
sector will be one of the most important inputs that shall go into ma!ing sure that
&ndia progresses and becomes a global economic super power.
Punjab %ational Bank at a &lance
Punjab %ational Bank BP%B' (as established in 5./6 in anar!ali ba9aar at
Oahore* undi"ided &ndia* 'unjab (ational )an! B'()C has the distinction of being
the frst &ndian ban! to ha"e been started solely with &ndian capital. The ban! was
nationalised in July 5/6/ along with 5K other ban!s. :rom its modest beginning*
the ban! has grown in si9e and stature to become a front-line ban!ing institution in
&ndia at present. Today* the )an! is the second largest go"ernment-
owned commercial ban! in &ndia with about 6000 branches across G6L cities. &t
ser"es o"er KG million customers. The ban! has been ran!ed 2L.th biggest ban! in
the world by the Bankers Almanac* Oondon. The ban!Is total assets for fnancial
year 200G were about USP60 billion. &t has Strong correspondent ban!ing
relationships with more than 25G international ban!s of the world. ;ore than 60
renowned international ban!s maintain their 8upee $ccounts with '(). '() has a
ban!ing subsidiary in the UQ* as well as branches in Dong Qong* 7ubai and Qabul*
and representati"e oMces in $lmaty* 7ubai* 0slo* and Shanghai. '()Is founders
included se"eral leaders of the Swadeshi mo"ement such as 7yal Singh ;ajithia
and Oala DarQishen Oal Oala Oalchand* Shri Qali 'rosanna 8oy* Shri 1.%. Jessawala*
Shri 'rabhu 7ayal* )a!shi Jaishi 8am* and Oala 7holan 7ass. Oala Oajpat 8ai was
acti"ely associated with the management of the )an! in its early years.
)ISIO%
*"o be a $eading &lobal Bank (ith Pan India footprints and become a
household brand in the Indo!&angetic Plains providing entire range of
+nancial products and services under one roof*

ISSIO%
*Banking for the unbanked*
,"O provide e-cellent professional services and improve its position as a
leader in +nancial and related services. build and maintain a team of
motivated and committed (orkforce (ith high (ork ethos. use latest
technolog/ aimed at the customer satisfaction and act as e0ective
catal/st for socio! economic development1
Products and Services
Corporate banking
Personal banking
Industrial +nance
Agriculture +nance
2inancing of trade
International banking
3ome loan
Auto loan
A"45ebit card
5eposit interest rate
Credit interest rate
Other services6 lockers facilit/7 internet banking7 #2" & Clearing services
etc
Organizational structure of Punjab National Bank
Hierarchy
%redit 'hilosophy 2 'olicy with regards to 'unjab (ational )an!
$n ideal ad"ance is the one gi"en to a reliable customer for an appro"al purpose
with ade+uate experience* safe in !nowledge that the money will be used to
ad"antage and repayment will be made within a reasonable period from trade
receipts or !nown maturities due on or about gi"en dates.
Credit philosophy = ETo achiee credit e!pansion re"uired for sustaining the
pro#tability of the bank and emphasis on "uality assets$ pro#table relationships
and prudent gro%th.F
C&'()T PO*)C+
)an! follows following broad policy imperati"es4-
8eduction in dependence upon short term corporate loans* especially unsecured
exposures.
$iming to achie"e more sanctions at le"els closer to the customer.
%hanging the mix of the portfolio in fa"our of better diused and higher yielding
credit.
)uilding competencies in credit management through training 2 promotion of self
directed learning.
Objecties of credit policy
$ balanced growth of credit portfolio* which does not compromise safety.
$doption of a forward loo!ing and mar!et responsi"e approach for mo"ing into
proftable new areas on lending which emerge* within the pre determined exposure
ceilings.
Sound ris! management practices to identify measure* monitor and control ris!s.
;aximi9e interest yields from credit portfolio through a judicious management of
"arying spreads of loan assets based upon their si9e* credit rating and
)ntroduction to loans
Ooans are ad"ances for fxed amounts repayable on demand or in instalment. They
are normally made in lump sums and interest is paid on the entire amount. The
borrower cannot draw funds beyond the amount sanctioned.
$ !ey function of the )an! is deploying funds for income-yielding
assets. $ major part of )an!#s assets are the loans and ad"ances portfolio and
in"estments in appro"ed securities. Ooans 2 $d"ances refer to long-term and
short-term credit facilities to "arious types of borrowers and non-fund facilities li!e
)an! ?uarantees* Oetters of %redit* Oetters of Sol"ency etc. )ill facilities represent
structured commitments which are negotiable claims ha"ing a mar!et by way of
negotiable instruments. Thus* )an!s extend credit facilities by way of fund-based
long-term and short-term loans and ad"ances as also by way of non-fund facilities.
%lassifcation of Ooans
Ooans<$d"ances
Loans/Advances
:und )ased (on-:und
)ased
8etail Ooan
%ash
%redit
Term Ooan )ill
7iscounting
1xport
:inance
)an!
?uarantee
Oetter of
%redit
'ost shipment
:inance
're-shipment
:inance
)an! pro"ides credit in "arious forms. These are broadly classifed into two
categories- :und based and (on =:und )ased. :und based refers to the type of
credit where cash is directly in"ol"ed i.e. where ban! pro"ides money to the see!er
in anticipation of getting it bac!. ,here as in a (on-fund )ased* )an! doesn#t pay
cash directly but gi"es assurance or ta!es guarantee on behalf of its customer to
pay if they fail to do so. &n case on :und )ased there are dierent categories of
loans which are discussed as follows
81T$&O O0$(S-
8etail ban!ing in &ndia is not a new phenomenon. &t has always been pre"alent in
&ndia in "arious forms. :or the last few years it has become synonymous with
mainstream ban!ing for many ban!s.
The typical products oered in the &ndian retail ban!ing segment are4-
Dousing loans
%onsumer loans for purchase of durables
$uto loans
1ducational loans
%redit %ost.
'ersonal loans
8etail loan is the practice of loaning money to indi"iduals rather than institutions.
8etail lending is done by ban!s* credit unions* and sa"ings and loan associations.
These institutions ma!e loans for automobile purchases* home purchases* medical
care* home repair* "acations* and other consumer uses. 8etail lending has ta!en a
prominent role in the lending acti"ities of ban!s* as the a"ailability of credit and
the number of products oered for retail lending ha"e grown. The amounts loaned
through retail lending are usually smaller than those loaned to businesses. 8etail
lending may ta!e the form of instalment loans* which must be paid o little by
little o"er the course of years* or non-instalment loans* which are paid o in one
lump sum.
These loans are mar!eted under attracti"e brand names to dierentiate the
products oered by dierent ban!s. $s the &eport on Trend and Progress of )ndia$
,--./-0 has shown that the loan "alues of these retail lending typically range
between 8s.20* 000 to 8s.500 la!h.
Building 1p of a Proposal
23 ?$TD18&(? %817&T &(:08;$T&0(4-
$n appraisal of a proposal begins with the gathering of ade+uate bac!ground
!nowledge about borrower#s character and credit worthiness. &n the concept of
appraisal* much reliance is placed on the credentials of the borrower. Therefore*
there is a necessity for e"aluation of the borrower in regard to his standing in the
business* means and respectability. The result of the elaborate scrutiny concerning
all these aspects is re+uired to be put into a precise credit report which helps in
ta!ing decision on a credit proposal. 1ach indi"idual case has to be examined in
the light of its own circumstances and judgment exercised on issues enumerated
abo"e and a fnal decision has to be arri"ed at on the basis of scrutiny of all the
issues.
&nformation by defnition is that data which is rele"ant and meaningful for ma!ing
decisions. $n information system is an aid to the decision ma!ing* carrying out and
altering decisions. $ll information re+uired by the ban!er in the pre-sanction period
should become part of a system. &t should Aow into the information system from
"arious sources* such as the borrower* ban!#s own record* en"ironment etc. $
signifcant basis of ban!er-borrower relationship is go"erned by the information
which Aows between the two parties. $fter ascertaining the credit needs of the
borrower* the ban!er loo!s towards information about his borrower#s credit
worthiness. De see!s out the credit information etc. from his co-ban!ers* other
borrowers and mar!et information.
2. H$8&0US S0U8%1S 0: %817&T &(:08;$T&0(
&nformation regarding character* honesty* and fnancial position has to be
discreetly gathered from following sources4
The borrower4 the ban! should de"elop as much credit information as possible
during the initial inter"iew with the borrower<partners of frm< directors of
company< proposed guarantor <co-obligator and principal oMcials of
frms<company* nature of its business* past and expected proftability* the degree
of competition that the frm<company faces and whether or not it has had or
anticipated any diMculty etc.
&nformation regarding its principal oMcers should be collected during such
inter"iew.
)orrower#s fnancial statements4 for lending decisions* fnancial information is a
signifcant part of the total information system. &t is deri"ed basically from
borrowers4
Trading and proft and loss statement
)alance sheet
%ash and fund Aow statements
)an!s own records4 &f he is an existing borrower* ban!#s own records are a rich
source of additional information. 0perations in the borrower#s account and other
dealings at the ban! le"el in regard to collections* discounting<retirement of bills
etc. often useful clues to borrower#s operating and fnancial transactions. $ re"iew
of the pre"ious year#s operations in the account and assessments of borrowers#
fnancial statements relating to that period will pro"ide a rich source of information
about the borrower.
0pinions4 )an! should compile opinions on their borrowers. They should contain
full and reliable records of the character* estimated means and business acti"ities
of all frms and indi"iduals who are under any form of liability to the ban!* whether
as direct borrowers or as co-obligators. :ull particulars of parties immo"able
properties where they are situated* whether they are free from encumbrance and
in the case of land* acreage should be recorded together with fair estimates of
their "alue. $s far as possible written statements of their properties should be
ta!en in e"aluating properties owned by parties jointly with others and as a rule
such properties should be disregarded in arri"ing at the net means.
:rom other ban!s4 in respect of fresh proposals* en+uiries with local ban!s should
be made before entertaining the proposal to a"oid multiple fnancing without our
full !nowledge. &n case of new customer ha"ing dealings with other ban!s*
confdential opinion of his ban!er has to be obtained.
&ncome tax assessment order- &ncome tax assessment orders agricultural income
tax assessment orders gi"e an insight into the borrower#s account and the extent
to which it is proftable. %omments thereon by the income tax oMce shall indicate
the shortcomings BlacunaeC in the business. &n the case of estate owners
agricultural tax assessment orders to be obtained to arri"e at parties credit
worthiness.
Sales tax assessment orders4 Sales tax assessment orders will re"eal the turno"er
in business and when read with trading< manufacturing and proft 2 loss account* it
may be possible to ha"e a fair assessment of tendencies in trade i.e.* whether
o"er-trading or carefully trading within recourses at command or trading entirely
on the borrowed funds.
,ealth tax assessment orders4 wealth tax assessment order will indicate the net
worth of indi"iduals and re"eals the li+uid source a"ailable to bring the re+uired
margin money for the "enture.
;ar!et sources4 %onstant touch with the mar!et will help to ha"e frst hand
information about the gains or losses in particular business transactions of the
borrowers.
'roperty statements4 The property statement of borrower will gi"e an idea of his
worth* liabilities and his income from real estate#s Bimmo"able propertiesC.
;unicipal property registers4 reference to municipal property registers will gi"e an
idea of building owned within the municipality* 8ental Halues and house tax
payable. &t may be noted that the said registers are open for reference to all
persons.
0ther external sources4 other external sources* if any* li!e stoc! exchange
directory* business periodicals<maga9ines<journals etc.
&'41)&'5'NT6 A6 P'& CON6T)T1T)ON O7 BO&O8'&9
:ollowing 8e+uirements as per constitution of borrower should be collected for
proposals emanating from-
'artnership4
%opy of partnership deed
%opy of certifcate of registration of frm Bif registeredC
%ompany 4
;emorandum and articles of association
%ertifcate of incorporation
%ertifcate of commencement of business
Search report indicating subsisting charges on the assets of the company.
)oard resolution for borrowings* creation on the assets of the company and
execution of the documents.
%ooperati"e societies
)ylaws
'ermission from registrar for the borrowings* creation of charge on the assets of
the society and execution of documents.
Trusts
Trust deed
8esolution for the borrowings and execution of documents.
1. Industrial units :
Project report with cash flow, fund flow statements etc.
Industrial licenses/SSI registration certificate.
License from local authority, compliance of legal requirements or conditions as applicale and
clearance from regulatory odies.
FINANCIAL APPRAISAL
!n receipt of a loan application the an"er egins the process of financial appraisal. #he first thing
done is to analy$e the financial statements. #herefore, an understanding of these financial statements is
important for the appraiser.
!nce alance sheet is ta"en for analysis the following items are chec"ed up%
&. Fixed assets% #o find out any revaluation of fi'ed assets done y the company to improve their net
worth.
#he schedules of the fi'ed assets should e chec"ed up.
Study notes on accounts and comments of auditors should e chec"ed.
Schedule for reserve should e studied
Any change in the accounting procedure of depreciation should e chec"ed

(. Current assets% to find out whether the assets stated are really liquid or
not.
#he schedules under current liailities and current assets to ascertain any osolete or slow
moving raw material or finished good and old detors or receivales should e chec"ed
#he auditor)s report should e read and understood properly.
#he claims lodged against receivales must e studied
#he receivales due from sister/associate concerns must e studied.
*. Other Current Assets% #heir reasonaleness and their need to maintain them for the usiness.
+arious components of other current assets and if the same is more than ,- .&/-, ascertain
the nature and need for maintaining such amount 0 any assets which is not used in the into day
usiness activity shall e removed and proper treatment is to e made accordingly.
1an" guarantee or letter of credit margin shall e shown as non. current assets.
2. Contingent liabilities% #o find out any unrecogni$ed liailities or losses if any.
#he 344/414 other ills discounted liaility, if any ,is reported in the auditor)s report , then
increase the an" orrowing to the e'tent liaility was not ta"en in the alance sheet and also
increases the deits/receivales to that e'tent.
,. Term liabilities% #o find out whether the liailities are long term or short term, and its needs and
regularity
#his shall e decreasing year after year0 if it has increased, then the reason for the same is to
e loo"ed into 5may e irregular or new term loan availed for e'pansion etc.6
#he term liailities with repayment of the same and the amount payale during the year shall
e deducted from the term liailities as current liailities for finding out liquidity position of
the company should e chec"ed.
6. Stocks:
#he stoc" statements and 7IS forms to find the authenticity of the figures reported under
stoc"/receivales.
3hange in the valuation of the stoc"/finished goods, if any, is to e verified to find out its
effect on the profitaility of the company.
8. Intangible assets %
Any anormal increase in this figure shall e studied to find out the reasons for the same0 this
may e due to ta"e over y others also.
9. Accounting Norms%
$ny change in the ositie! that is su""icient "or acce#ting as satis"actor$0 ut as per the
credit rating chart ma'imum mar"s are assigned if the orrower achieves 9- as percentage of
net profit/net sales.
:eturn on investment or :eturn on equity may also e used to find out the return on capital
invested.
1. %ong term Strength o" a com#an$ is calculated ased on the level of the net worth of the company
/promoters sta"e/loans from close relatives.
If the net worth has increased due to infusion of fresh capital or plough ac" of profit, it can
e termed as satisfactory0 even increase of loan from friends ; relatives is a good sign.
If the net worth is decreasing, reason may due to net loss or diversion0 true reason needs to e
ascertained.
If the &'( ratio is less than (%& the same is good0 further if the #!L/#<= is less than ,%&
then the unit)s solvency is noted to e satisfactory. #he ratio indicates that orrower has not
orrowed much and the outside dets within a reasonale limit.
). %i*uidit$ #osition o" the #art$+Current ratio
If the current ratio is increasing and nearer to &., and aove then we can note the position is
satisfactory.
>'pected 3urrent ratio is &.((%& and aove0 if the ratio is less than &.((%& then the promoter)s
margin 5<et wor"ing capital6 towards =or"ing 3apital may not e sufficient to cover the
wor"ing capital limit0 care shall e ta"en to ensure that sufficient <et wor"ing capital for the
wor"ing capital enjoyed is availale.
=hen the 3urrent ratio is poor and the <et wor"ing capital is not sufficient to cover the
e'isting limit, no further term loan shall e sanctioned and the party is to e advised not to
ta"e up any fresh investment in fi'ed assets.
,. -ualit$ o" current assets %
#he current assets holding period must e less than * months for traders and the , months for
the industries depending upon the type of industry 0holding level more than the aove needs
proper justification.
It should e ensured that the current assets turnover is at least more than four times in a year.
.. Contingent liabilit$%
#he effect of this liaility on the net worth of the company0 if it)s effect is less than ,.&/
- of the net worth of the company ,the same may e noted0 ut if it threatens the e'istence of
the company then the position needs serious analysis.
/. &iersion "rom the business needs to be ie0ed care"ull$.
:eduction in <et wor"ing capital position5 elow the required level6 when the unit has earned
cash profit and clearing of term loan installments when the unit is ma"ing cash loss needs to
e viewed seriously.
:eduction in the net worth of the firm 5when they have shown net profit needs further
proing.
MOVEMENT OF CREDIT PROPOSALS
=ith reference to Punja <ational 1an" the movements of credit proposals are studied carefully and the
detailed process is discussed as follows%
#he movement of credit proposals follows a pre.defined path which has een structured in "eeping with the
ris" management principle that the credit granting process should involve multiple credit approvers who
should suject the proposals to credit approvals at various stages accordingly.
Conclusion
3redit appraisal is a process of appraising the credit worthiness of loan applicants. #he fund of depositors
i.e. general pulic are moilised y means of such advances / investments. #hus it is e'tremely important for
lender an" to assess the ris" associated with credit, therey ensure the security for fund deposited y
depositors. #herefore my analyses regarding credit appraisal procedure of Punja <ational 1an" are as
follows%.
In case of retail lending an" strictly follow it)s circular and fulfils all requirement of necessary
documents required for different types of loan so that an" do not suffer any types of loss.
1an" is very much particular aout 3I1IL report of orrowers in case of each type of lending.
1an" lending process in case of retail loan is very much fast after compiling with all the criteria of
an".
In case of project financing an" follow lengthy norms to chec" the feasiility of the project such
as%.
I. ?irstly personal appraisal of promoter is done y the an" to ensure that promoters are
e'perienced in the line of usiness and capale to implement and run the project
efficiently.
II. Secondly detail study aout the technical aspect is done to find the technical soundness
of project such as proper scrutiny of financial report is done, valuation of property y
government approved valuer is done and view regarding each and every area of project
is done under technical analysis.
III. A detail study relating financial viaility of project is done y detail study of cash flow,
fund flow statements and y calculating import ratio which is very much necessary for
project appraisal such as 4S3:, 4>: etc. the main purpose of financial appraisal is
insure that project will ensure sufficient surplus to repay the instalment and interest.
I+. :is" analysis is done y an" to determine the ris" associated with the project. #his is
mainly done y sensitivity analysis and y P<1 credit rating or scoring. =ith sensitive
analysis feasiility of project is determined under worsened condition. 3redit rating or
P<1 scoring is done of various parameters such as personal, management, financial etc ,
therey determine credit worthiness of customer.
+. It is on asis of credit ris" level, a collateral security to e given y orrower is
determined.
#his shows that 1un2ab National 3ank has sound credit appraisal system.
$imitations
The Study has been confned to the details a"ailable online on the )an!#s website and details
a"ailable o"er the internet. ;ost of the schemes ha"e been tried to be assimilated with their
latest features but due to non access to the latest circulars of the )an!s which are prohibited
for public access the details may ha"e some error which are within acceptable range.