Improvements needed in Risk Rating, Credit

Appraisal and Monitoring Methods of the

bank
Submitted By
ASIS KUMAR MANDAL
NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES

Project Done At
PUNJAB NATIONAL BANK, CIRCLE OFFICE
MUMBAI

Asis Kumar Mandal

Preface
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined
as the risk that a firms customer and the parties to which it has lent money will fail to
make promised payments is known as credit risk
The exposure to the credit risks large in case of financial institutions, such
commercial banks when firms borrow money they in turn expose lenders to credit
risk, the risk that the firm will default on its promised payments. As a consequence,
borrowing exposes the firm owners to the risk that firm will be unable to pay its debt
and thus be forced to bankruptcy.
The project helps in understanding the clear meaning of credit Risk Management at
Punjab National Bank. It explains about the credit risk scoring method and
corresponding rating of the borrower and different lending rate. It helps to understand
the fair credit policy of the Bank and Credit Recovery management of the same.

MUMBAI
11th June, 2010

Asis Kumar Mandal

Asis Kumar Mandal

ACKNOWLEDGMENT

It is indeed a matter of great pleasure and privilege to work on the project titled
Improvements needed in Risk Rating, credit appraisal and monitoring Methods of the
bank. I would like to express special thanks to Mr. B.G Pinto and Mr. Rushikesh Dhimar for
providing me an excellent opportunity to complete my summer internship at PUNJAB
NATIONAL BANK, CIRCLE OFFICE-MUMBAI.
I would like to express my Indebtedness to them for their excellent guidance and valuable
suggestions for the successful completion of the project.
I would also like to thank the entire staff of PUNJAB NATIONAL BANK, CIRCLE OFFICEMUMBAI for providing their excellent support.
I am bound to the Honorable Prof. C. D. Sreedharan for his stimulating support and
guidance.
Without the support of everyone mentioned above, this project wouldnt have been possible.

Asis Kumar Mandal

Asis Kumar Mandal

Executive Summary

Efficient management of loans and advances portfolio has assumed greater

significance as it is the largest asset of the bank having direct impact on its
profitability. At Punjab National Bank, Circle Office, Mumbai, I had the opportunity to
know in detail about the various funding options provided to Corporates. Term loans
or Project finance and Working capital finance are the two types of finance provided
to the Corporates.
There are good structured Credit Rating Tool is in place to assess the risk of lending
to any kind of corporate. For different size of company different methodology is
applied to assess the risk. However with this intense rating mechanism its not always
possible to judge the future risk of any business. This project covers in detail the
entire credit Rating procedure at Punjab National Bank. The bank follows a structured
format for Project appraisal in which credit rating is one of the most important part.
Different methods of credit delivery i.e. sole banking, multiple banking, loan
syndication and consortium lending have been discussed. The project for which the
finance is granted needs be appraised properly. Banks need to ascertain if the project
is technically feasible and economically viable or not. It should be able to generate
surplus so as to service the debts within a reasonable period of time.
A sample Credit rating was calculated. Some confidential elements have been
omitted from the report. Its capacity of repayment was ascertained based on analysis
of Managerial Competence, Technical Feasibility, Commercial and Financial Viability.
As recommended action items to improve the risk assessment these items have been
identified-Lot of training is required for the lending officers, extensive data is required
for SMEs and right information should be collected from all stakeholders. However
the current credit rating tool is properly structured and strictly followed in the
organization.

Asis Kumar Mandal

Table of contents
Title

Page No

Preface

Acknowledgements

Executive Summary

Chapter 1 Introduction and Research methodology

1.1 Title

1.2 Objectives

1.3 Methodology

Chapter -2 Banking Industry Overview

2.1 History

2.2 The Indian Banking System

10

2.3 Importance of banking sector in growing economy

10

2.4 Emerging Scenario in Banking Sector

11

2.5 Current Scenario

11

Chapter 3 Profile of Punjab National Bank

13

Chapter 4 Theoretical background of Credit Risk Management

15

4.1 Credit

15

4.2 Risk

15

4.2.1 Market Risk

15

4.2.2 Operational Risk

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4.2.3 Credit Risk

16

4.2.3.1 Key Elements of Credit Risk Management

16

4.2.3.2 Fundamental Approaches to Credit Risk Management

16

Chapter 5 Credit Rating

18

5.1 Definition

18

5.2 Use

18

5.3 Main Features of the Rating Tool

18

5.4 Different Ratios Used in Credit Rating Assessment

18

5.4.1 Current ratio

18

5.4.2. TOL/TNW

19

5.4.3. PBDIT/Interest (times)

19

5.4.4. ROCE or ROA (%)

19

5.4.5. Operating profits/Net sales (%)

20

5.4.6. Inventory / net sales + receivables / gross sales

20

5.5 Rating tool

21

5.5.1 Financial Parameters

21

5.5.2 Business Parameters

22

5.5.3 Management Parameters

22

5.5.4 Conduct Parameters

22

5.6 Difficulty of Measuring Credit Risk

24

5.6.1 A portfolio approach to credit risk management

24

5.6.2 Asset by asset approach

25

Chapter 6 Credit Appraisal

26

6.1 Credit Appraisal

26
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6.1.1 Managerial Competence

26

6.1.2 Technical Feasibility

26

6.1.3 Commercial Viability

26

6.1.4 Financial Viability

26

6.2 Credit investigation report

27

6.3 Credit Files

28

Chapter 7 Credit Rating of a Company

29

7.1 Financial Evaluation

29

7.2 Past Financial-Absolute Comparison

29

7.3 Subjective Assessment

30

7.4 Trend Adjustment

30

7.5 Operating Efficiency Evaluation

30

7.6 Market Position Evaluation

31

7.7 Industry Evaluation

31

7.8 Management Evaluation

32

7.9 Subjective Assessment of Management

32

7.10 Conduct of Account Evaluation

32

7.11 Total Score

33

7.12 PNB Score Card

33

Chapter 8 Recommendations and Suggestions

34

Chapter 9 Conclusion

35

Bibliography

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Chapter-1 Introduction and research Methodology

1.1 Title of the Project Report:
Improvements needed in Risk Rating, credit appraisal and monitoring Methods of the
bank.
1.2 Objectives of Project:
1) To study the RBI guidelines and the banks limits regarding credit rating and
risk analysis.
2) To know the different methods available for credit rating and understanding the
credit rating procedure used in Punjab National Bank.
3) To gain insights into the credit risk management activities of Punjab National
Bank.
4) To get a thorough understanding of the credit rating process by analyzing a
demo proposal.
1.3 Methodology:
Data collection method:Primary data The primary data which was required for basic understanding was
obtained under the direct guidance of the Credit manager. Some internal manual has
been used.
Secondary data Data from the internet and textbooks has also been utilized.

Asis Kumar Mandal

Chapter -2 Banking Industry Overview

2.1 History:
Banking in India has its origin as carry as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu, the
great Hindu jurist, who has devoted a section of his work to deposits and advances
and laid down rules relating to the interest. During the Moghal period, the indigenous
bankers played a very important role in lending money and financing foreign trade
and commerce. During the days of East India Company, it was to turn of the agency
houses top carry on the banking business. The general bank of India was the first
joint stock bank to be established in the year 1786.The others which followed were
the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to
have continued till 1906, while the other two failed in the meantime. In the first half of
the 19th Century the East India Company established three banks; The Bank of
Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras in
1843.These three banks also known as presidency banks and were independent
units and functioned well. These three banks were amalgamated in 1920 and The
Imperial Bank of India was established on the 27th Jan 1921, with the passing of the
SBI Act in 1955, the undertaking of The Imperial Bank of India was taken over by the
newly constituted SBI. The Reserve Bank which is the Central Bank was created in
1935 by passing of RBI Act 1934, in the wake of Swadeshi Movement; a number of
banks with Indian Management were established in the country namely Punjab
National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank of
Baroda Ltd, The Central Bank of India Ltd .On July 19 th 1969, 14 Major Banks of the
country were nationalized and in 15 th April 1980 six more commercial private sector
banks were also taken over by the government. The Indian Banking industry, which is
governed by the Banking Regulation Act of India 1949, can be broadly classified into
two major categories, non-scheduled banks and scheduled banks. Scheduled Banks
comprise commercial banks and the co-operative banks.
The first phase of financial reforms resulted in the nationalization of 14 major banks in
1969 and that resulted in a shift from class banking to mass banking. This in turn
resulted in the significant growth in the geographical coverage of banks. Every bank
had to earmark a min percentage of their loan portfolio to sectors identified as
priority sectors the manufacturing sector also grew during the 1970s in protected
environments and the banking sector was a critical source. The next wave of reforms
saw the nationalization of 6 more commercial banks in 1980 since then the number of
scheduled commercial banks increased four- fold and the number of bank branches
increased to eight fold. After the second phase of financial sector reforms and
liberalization of the sector in the early nineties, the PSBs found it extremely difficult to
complete with the new private sector banks and the foreign banks. The new private
sector first made their appearance after the guidelines permitting them were issued in
January 1993.

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2.2 The Indian Banking System:

Banking in our country is already witnessing the sea changes as the banking sector
seeks new technology and its applications. The best port is that the benefits are
beginning to reach the masses. Earlier this domain was the preserve of very few
organizations. Foreign banks with heavy investments in technology started giving
some Out of the world customer services. But, such services were available only to
selected few- the very large account holders. Then came the liberalization and with it
a multitude of private banks, a large segment of the urban population now requires
minimal time and space for its banking needs.
Automated teller machines or popularly known as ATM are the three alphabets that
have changed the concept of banking like nothing before. Instead of tellers handling
your own cash, today there are efficient machines that dont talk but just dispense
cash. Under the Reserve Bank of India Act 1934, banks are classified as scheduled
banks and nonscheduled banks. The scheduled banks are those, which are entered
in the Second Schedule of RBI Act, 1934. Such banks are those, which have paid- up
capital and reserves of an aggregate value of not less than Rs.5 lacs and which
satisfy RBI that their affairs are carried out in the interest of their depositors. All
commercial banks Indian and Foreign, regional rural banks and state co-operative
banks are Scheduled banks. Non Scheduled banks are those, which have not been
included in the Second Schedule of the RBI Act, 1934. The organized banking
system in India can be broadly classified into three categories: (i) Commercial Banks
(ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve Bank of India is
the supreme monetary and banking authority in the country and has the responsibility
to control the banking system in the country. It keeps the reserves of all commercial
banks and hence is known as the Reserve Bank.
2.3 Importance of Banking Sector in a Growing Economy:
In the recent times when the service industry is attaining greater importance
compared to manufacturing industry, banking has evolved as a prime sector
providing financial services to growing needs of the economy.
Banking industry has undergone a paradigm shift from providing ordinary banking
services in the past to providing such complicated and crucial services like, merchant
banking, housing finance, bill discounting etc. This sector has become more active
with the entry of new players like private and foreign banks. It has also evolved as a
prime builder of the economy by understanding the needs of the same and
encouraging the development by way of giving loans, providing infrastructure facilities
and financing activities for the promotion of entrepreneurs and other business
establishments. For a fast developing economy like ours, presence of a sound
financial system to mobilize and allocate savings of the public towards productive
activities is necessary.
Commercial banks play a crucial role in this regard. The Banking sector in recent
years has incorporated new products in their businesses, which are helpful for
growth. The banks have started to provide fee-based services like, treasury
operations, managing derivatives, options and futures, acting as bankers to the
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industry during the public offering, providing consultancy services, acting as an

intermediary between two-business entities etc. At the same time, the banks are
reaching out to other end of customer requirements like, insurance premium
payment, tax payment etc. It has changed itself from transaction type of banking into
relationship banking, where you find friendly and quick service suited to your needs.
This is possible with understanding the customer needs their value to the bank, etc.
This is possible with the help of well organized staff, computer based network for
speedy transactions, products like credit card, debit card, health card, ATM etc.
These are the present trend of services. The customers at present ask for
convenience of banking transactions, like 24 hours banking, where they want to
utilize the services whenever there is a need. The relationship banking plays a major
and important role in growth, because the customers now have enough number of
opportunities, and they choose according to their satisfaction of responses and
recognition they get. So the banks have to play cautiously, else they may lose out the
place in the market due to competition, where slightest of opportunities are captured
fast. Another major role played by banks is in transnational business, transactions
and networking. Many leading Indian banks have spread out their network to other
countries, which help in currency transfer and earn exchange over it.
These banks play a major role in commercial import and export business, between
parties of two countries. This foreign presence also helps in bringing in the
international standards of operations and ideas. The liberalization policy of 1991 has
allowed many foreign banks to enter the Indian market and establish their business.
This has helped large amount of foreign capital inflow & increase our Foreign
exchange reserve. Another emerging change happening all over the banking industry
is consolidation through mergers and acquisitions. This helps the banks in
strengthening their empire and expanding their network of business in terms of
volume and effectiveness.
2.4 Emerging Scenario in the Banking Sector:
The Indian banking system has passed through three distinct phases from the time of
inception. The first was being the era of character banking, where you were
recognized as a credible depositor or borrower of the system. This era come to an
end in the sixties. The second phase was the social banking. Nowhere in the
democratic developed world, was banking or the service industry nationalized. But
this was practiced in India. Those were the days when bankers has no clue
whatsoever as to how to determine the scale of finance to industry. The third era of
banking which is in existence today is called the era of Prudential Banking. The main
focus of this phase is on prudential norms accepted internationally.
2.5 Current Scenario:
Currently overall, banking in India is considered as fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for
the private sector and foreign banks. Even in terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent
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balance sheets-as compared to other banks in comparable economies in its region.

The Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage
volatility-without any stated exchange rate-and this has mostly been true. With the
growth in the Indian economy expected to be strong for quite some time especially in
its services sector, the demand for banking services-especially retail banking,
mortgages and investment services are expected to be strong. M&A, takeovers,
asset sales and much more action (as it is unraveling in China) will happen on this
front in India. In March 2006, the Reserve Bank of India allowed Warburg Pincus to
increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the
first time an investor has been allowed to hold more than 5% in a private sector bank
since the RBI announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them. Currently, India has 88 scheduled
commercial banks (SCBs) - 28 public sector banks (that is with the Government of
India holding a stake), 29 private banks (these do not have government stake; they
may be publicly listed and traded on stock exchanges) and 31 foreign banks. They
have a combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent
of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.

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Chapter 3 Profile of Punjab National Bank

With its presence virtually in all the important centres of the country, Punjab National
Bank offers a wide variety of banking services which include corporate and personal
banking, industrial finance, agricultural finance, financing of trade and international
banking. Among the clients of the Bank are Indian conglomerates, medium and small
industrial units, exporters, non-resident Indians and multinational companies. The
large presence and vast resource base have helped the Bank to build strong links
with trade and industry.
Punjab National Bank is serving over 3.5 crore customers through 4525 Offices
including 432 extension counters - largest amongst Nationalized Banks. The Bank
was recently ranked 21st amongst top 500 companies by the leading financial daily,
Economic Times. PNB's attempts at providing best customer service has earned it
9th place among Indias Most Trusted top 50 service brands in Economic Times- A.C
Nielson Survey. PNB is also ranked 248th amongst the top 1000 banks in the world
according to "The Banker" London.
At the same time, the bank has been conscious of its social responsibilities by
financing agriculture and allied activities and small scale industries (SSI). Considering
the importance of small scale industries bank has established 31 specialised
branches to finance exclusively such industries.
Strong correspondent banking relationship which Punjab National Bank maintains
with over 200 leading international banks all over the world enhances its capabilities
to handle transactions world-wide. Besides, bank has Rupee Drawing Arrangements
with 15 exchange companies in the Gulf and one in Singapore. Bank is a member of
the SWIFT and over 150 branches of the bank are connected through its computerbased terminal at Mumbai. With its state-of-art dealing rooms and well-trained
dealers, the bank offers efficient forex dealing operations in India.
The bank has been focussing on expanding its operations outside India and has
identified some of the emerging economies which offer large business potential. Bank
has set up representative offices at Almaty: Kazakhistan, Shanghai: China and in
London. Besides, Bank has opened a full fledged Branch in Kabul, Afghanistan.
Keeping in tune with changing times and to provide its customers more efficient and
speedy service, the Bank has taken major initiative in the field of computerization. All
the Branches of the Bank have been computerized. The Bank has also launched
aggressively the concept of "Any Time, Any Where Banking" through the introduction
of Centralized Banking Solution (CBS) and over 2409 offices have already been
brought under its ambit.
PNB also offers Internet Banking services in the country for Corporates as well as
individuals. Internet Banking services are available through all Branches of the Bank
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networked under CBS. Providing 24 hours, 365 days banking right from the PC of the
user, Internet Banking offers world class banking facilities like anytime, anywhere
access to account, complete details of transactions, and statement of account, online
information of deposits, loans overdraft account etc. PNB has recently introduced
Online Payment Facility for railway reservation through IRCTC Payment Gateway
Project and Online Utility Bill Payment Services which allows Internet Banking
account holders to pay their telephone, mobile, electricity, insurance and other bills
anytime from anywhere from their desktop.
Another step taken by PNB in meeting the changing aspirations of its clientele is the
launch of its Debit card, which is also an ATM card. It enables the card holder to buy
goods and services at over 99270 merchant establishments across the country.
Besides, the card can be used to withdraw cash at more than 25000 ATMs, where
the 'Maestro' logo is displayed, apart from the PNB's over 898 ATMs and tie up
arrangements with other Banks.

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Chapter 4 Theoretical background of Credit Risk

Management
4.1 Credit:
The word credit comes from the Latin word credere, meaning trust. When sellers
transfer his wealth to a buyer who has agreed to pay later, there is a clear implication
of trust that the payment will be made at the agreed date. The credit period and the
amount of credit depend upon the degree of trust.
Credit is an essential marketing tool. It bears a cost, the cost of the seller having to
borrow until the customers payment arrives. Ideally, that cost is the price but, as most
customers pay later than agreed, the extra unplanned cost erodes the planned net
profit.
4.2 Risk:
Risk is defined as uncertain resulting in adverse outcome, adverse in relation to
planned objective or expectation. It is very difficult o find a risk free investment. An
important input to risk management is risk assessment. Many public bodies such as
advisory committees concerned with risk management. There are mainly three types
of risk they are follows
Market risk
Operational risk
Credit Risk
Risk analysis and allocation is central to the design of any project finance, risk
management is of paramount concern. Thus quantifying risk along with profit
projections is usually the first step in gauging the feasibility of the project. Once risk
has been identified they can be allocated to participants and appropriate mechanisms
put in place.
4.2.1 Market Risk:
Market risk is the risk of adverse deviation of the mark to market value of the trading
portfolio, due to market movement, during the period required to liquidate the
transactions.
4.2.2 Operational Risk:
Operational risk is one area of risk that is faced by all organizations. More complex
the organization more exposed it would be operational risk. This risk arises due to
deviation from normal and planned functioning of the system procedures, technology
and human failure of omission and commission. Result of deviation from normal
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functioning is reflected in the revenue of the organization, either by the way of

additional expenses or by way of loss of opportunity.
4.2.3 Credit Risk:
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined
as the risk that a firms customer and the parties to which it has lent money will fail to
make promised payments is known as credit risk

4.2.3.1 Key Elements of Credit Risk Management:

Establishing appropriate credit risk environment
Operating under sound credit granting process
Maintaining an appropriate credit administration, measurement & Monitoring
Ensuring adequate control over credit risk
Banks should have a credit risk strategy which in our case is communicated
throughout the organization through credit policy.
4.2.3.2 Fundamental Approaches to Credit Risk Management:
The internally oriented approach centers on estimating both the expected cost
and volatility of future credit losses based on the firms best assessment.
Future credit losses on a given loan are the product of the probability that the
borrower will default and the portion of the amount lent which will be lost in the
event of default. The portion which will be lost in the event of default is
dependent not just on the borrower but on the type of loan (eg. some bonds
have greater rights of seniority than others in the event of default and will
receive payment before the more junior bonds).
To the extent that losses are predictable, expected losses should be factored
into product prices and covered as a normal and recurring cost of doing
business. i.e., they should be direct charges to the loan valuation. Volatility of
loss rates around expected levels must be covered through risk-adjusted
returns.
So total charge for credit losses on a single loan can be represented by
([expected probability of default] * [expected percentage loss in event of
default]) + risk adjustment * the volatility of ([probability of default * percentage
loss in the event of default]). Financial institutions are just beginning to realize
the benefits of credit risk management models. These models are designed to
help the risk manager to project risk, ensure profitability, and reveal new
business opportunities. The model surveys the current state of the art in credit
risk management. It provides the tools to understand and evaluate alternative
approaches to modeling. This also describes what a credit risk management
model should do, and it analyses some of the popular models.

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The success of credit risk management models depends on sound design,

intelligent implementation, and responsible application of the model. While
there has been significant progress in credit risk management models, the
industry must continue to advance the state of the art. So far the most
successful models have been custom designed to solve the specific problems
of particular institutions.
A credit risk management model tells the credit risk manager how to allocate
scarce credit risk capital to various businesses so as to optimize the risk and
return characteristics of the firm. It is important or understand that optimize
does not mean minimize risk otherwise every firm would simply invest its
capital in risk less assets. A credit risk management model works by
comparing the risk and return characteristics between individual assets or
businesses. One function is to quantify the diversification of risks. Welldiversified means that the firm has no concentration of risk to say, one
geographical location or one counter party.

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Chapter 5 Credit Rating

5.1 Definition:
Credit rating is the process of assigning a letter rating to borrower indicating that
creditworthiness of the borrower. Rating is assigned based on the ability of the
borrower (company) to repay the debt and his willingness to do so. The higher is
rating of company the lower is the probability of its default.
5.2 Use:
Credit rating helps the bank in making many key decisions regarding credit including
1. Whether to lend to a particular borrower or not; what price to charge?
2. What are the products to be offered to the borrower and for what tenure?
3. At what level should sanctioning be done, it should however be noted that credit
rating is one of inputs used in credit decisions.
5.3 Main Features of the Rating Tool:
1.
2.
3.
4.
5.
6.
7.

Comprehensive coverage of parameters

Extensive data requirement
Mix of subjective and objective parameters
includes trend analysis
13 parameters are benchmarked against other players in the segment
Captions of industry outlook
8 grade ratings broadly mapped with external rating agencies prevailing data.

5.4 Different Ratios Used in Credit Rating Assessment:

Under the CRA system, financial risks in a proposal are sought to be captured
through some relevant ratios. Different ratios are used for assessing risks for
extending working capital finance and term loans under CRA system. Also, the ratios
used for assessing risk for financing NBFCs are different.
5.4.1 Current ratio:
It is calculated by dividing current assets by current liabilities. It helps to measure
liquidity and financial strength. Care should be taken in interpreting this ratio as:
i.

1. It is applied at a single point in time, implying a liquidation approach, rather

than a judgment on the
going concern, for it does not explicitly take into
account the revolving nature of current assets and current liabilities.

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ii.

2. The seasonal character of the business resulting in fluctuating current ratio

is a disturbing factor.

iii.

3. Liquidity could be severely affected if current liabilities exceed current

assets.

iv.

4. The higher the ratio the better the liquidity position.

5.4.2. TOL/TNW:
Total outside liabilities divided by total net worth. The characteristics are as follows:
i.
ii.
iii.

It indicates size of stake, stability and degree of solvency.

Indicates how high the stake of the creditors is.
Indicates what proportion of the companys finance is represented by the
tangible net worth
The lower the ratio the greater the solvency.
The ratio is usually higher in case of SMES. Still anything over 3 or 4 should
be viewed with concern.
The ratio should be studied at the peak level of operations.

iv.
v.
vi.

5.4.3. PBDIT/Interest (times):

This is called interest coverage ratio. In the current context, the servicing capability
of loan is very crucial. This ratio, which indicates the number of times the gross
earnings cover the interest payable is an indicator of the measure of comfort that
profitability provides.
i. Higher ratio indicates comfortable debt servicing capability from the cash
accrual of the company.
ii.

A ratio of more than 3 is considered comfortable, where as a ratio of 2 and

below is considered risky.

5.4.4. ROCE or ROA (%):

Profit before depreciation, interest and tax/ total capital employed multiplied by 100.
i.

High ratio indicates that the business is run on profitable lines.

ii.

It is a relationship between the profits made during the year and the finance
employed to make profits i.e. it shows the earning power of the business.

iii.

It is a measure of the managements skill in profitably employing the funds in

the company.
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iv.

It should not only compare favorably with the rate of interest on loanable funds
in the market but also compensable for the risk involved in running the
business.

5.4.5. Operating profits/Net sales (%):

It indicates operating efficiency. It should be comparable with similar industries. Trend

for the company over a period should be encouraging.
5.4.6. Inventory / net sales + receivables / gross sales:
Expressed in days, this ratio captures the turnaround period for major items of the
current asset
i.

Higher the figure, the slower is the turnaround of current asset and in general
higher the risk.

ii.

This ratio will vary across industries.

iii.

For assessment of risk, a shorter working capital cycle can be regarded less
risky.

iv.

Specific industry parameters should also be kept in mind while assessing the
risk under this ratio.

v.

In general, it is expected that the working capital should be turned over at least
twice.

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5.5 Rating tool

Internal credit ratings are the summary indicators of risk for the banks individual
credit exposures. It plays a crucial role in credit risk management architecture of any
bank and forms the cornerstone of approval process.
The rating tool for any borrower assigns the following Weight ages to each one of the
four main categories:
S No Parameters
I.
II.
III.
IV.

Weightages (%)

Financial performance
Operating performance
Quality of management
Industry outlook

XXXX
XXXX
XXXX
XXXX

In the above parameters first three parameters used to know the borrower
characteristics. In fourth encapsulates the risk emanating from the environment in
which the borrower operates and depends on the past performance of the industry its
future outlook and macro economic factors.

5.5.1 Financial Parameters

S.NO Indicator/ratio

Score

F1
(a) Audited net sales in last year
(b) Audited net sales in year before last
(c) Audited net sales in 2 year before last
(d) Audited net sales in 3 year before last
(e) Estimated or projected net sales in next year
F2 NET SALES GROWTH RATE (%)
F3 PBDIT growth rate (%)
F4 Net sales (%)
F5 ROCE (%)
F6 TOL/TNW
F7 Current ratio
F8 DSCR
F9 Interest coverage ratio
F10 Foreign exchange risk
F11 Reliability of debtors
F12 Operating cash flow
F13 Trend in cash accruals

Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xx
Xx
Xx
Xxx
Xxx
Xxx
Xx
Xx
Xx
Xx
Xx

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Asis Kumar Mandal

5.5.2 Business Parameters

S.NO Indicator/Ratio
B1 Credit period allowed (days)
B2 Credit period availed (days)
B3 Working capital cycle (times)
B4 Production related risks
B5 Product related risks
B6 Price related risks
B7 Fixed assets turnover
B8 No. of years in business
B9 Nature of clientele base

Score
Xx
Xx
Xx
Xx
X
X
X
X
X

5.5.3 Management Parameters

Sr. No Indicator/Ratio
M1 HR policy
M2 Track record in payment of statutory and other dues
M3 Market reports of management reputation
M4 Too optimistic projections of sales and other financials
M5 Capability to raise resources
M6 Technical and managerial expertise
M7 Repayment track record
5.5.4 Conduct Parameters
Sr. No Indicator/Ratio
A1 Creation of charges on primary security
A2 Creation of charges on collateral and
execution of personal or corporate guarantee
A3 Proper execution of document
X
A4 Availability of search report
A5 Other terms and conditions not complied with
A6 Receipt of periodical data
A7 Receipt of balance sheet
B1 Negative deviation in half yearly net sales vis--vis
proportionate estimates
B2 Negative deviation in annual net sales vis--vis
Estimates
B3 Negative deviation in half yearly net profit vis--vis
proportionate estimates
B4 Adverse deviation in inventory level in months
vis--vis estimate level
B5 Adverse deviation in receivables level in months
vis--vis estimated level
B6 Quality of receivable assess from profile of debtors
B7 Adverse deviation in creditors level in months
vis--vis estimated level
22

Score
X
X
X
X
X
X
X

Score
X
X
X
X
X
X
X
X
X
X
X
X
X

Asis Kumar Mandal

B8 Compliance of financial covenants

B9 Negative deviation in annual net profit
vis--vis estimates
C1Unit inspection report observations
C2 Audit report internal/statutory/concurrent/RBI
C3 Conduct of account with other banks/lenders
and information on consortium
D1 Routing of proportionate turnover/business
D2 Utilization of facilities (not applicable for term loan)
D3 Overdue discounted bills during the period under
review within the sanctioned terms then not applicable
D4 Devolved bill under L/c outstanding
during the period under review
D5 Invoked BGs issued outstanding during the
period under review
D6 Intergroup transfers not backed by trade
transactions during the period under review
D7 Frequency of return of cheques per quarter
deposited by borrower
D8 Frequency of issuing cheques per quarter
without sufficient balance and returned
D9 Payment of interest or installments
D10 Frequency of request for AD HOC
INCREASE OF LIMIS during the last one year
D11 Frequency of over drawings CC account

X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

E1 Status of deterioration in value of

primary security or stock Depletion
X
E2 Status of deterioration in value of collateral security
X
E3 Status of deterioration in personal net worth and TNW
X
E4 Adequacy of insurance for the primary /collateral security X
F1 Labor situation/industrial relations
F2 Delay or default in payments of salaries
and statutory dues
F3 Non co-operation by the borrower
F4 Intended end-use of financing
F5 Any other adverse features/non financial including
Corporate governance issues such as adverse publicity,
strictures from regulators, political risk and adverse trade
environment not covered

23

X
X
X
X

Asis Kumar Mandal

5.6 Difficulty of Measuring Credit Risk:

Measuring credit risk on a portfolio basis is difficult. Banks and financial institutions
traditionally measure credit exposures by obligor and industry. They have only
recently attempted to define risk quantitatively in a portfolio context e.g., a value-atrisk (VaR) framework. Although banks and financial institutions have begun to
develop internally, or purchase, systems that measure VaR for credit, bank
managements do not yet have confidence in the risk measures the systems produce.
In particular, measured risk levels depend heavily on underlying assumptions and risk
managers often do not have great confidence in those parameters. Since credit
derivatives exist principally to allow for the effective transfer of credit risk, the difficulty
in measuring credit risk and the absence of confidence in the result of risk
measurement have appropriately made banks cautious about the use of banks and
financial institutions internal credit risk models for regulatory capital purposes.
Measurement difficulties explain why banks and financial institutions have not, until
very recently, tried to implement measures to calculate Value-at-Risk (VaR) for credit.
The VaR concept, used extensively for market risk, has become so well accepted
that banks and financial institutions supervisors allow such measures to determine
capital requirements for trading portfolios. The models created to measure credit risk
are new, and have yet to face the test of an economic downturn. Results of different
credit risk models, using the same data, can widely. Until banks have greater
confidence in parameter inputs used to measure the credit risk in their portfolios.
They will, and should, exercise caution in using credit derivatives to manage risk on a
portfolio basis. Such models can only complement, but not replace, the sound
judgment of seasoned credit risk managers.
5.6.1 A portfolio approach to credit risk management
Since the 1980s, Banks and financial institutions have successfully applied modern
portfolio theory (MPT) to market risk. Many banks and financial institutions are now
using earnings at risk (EaR) and Value at Risk (VaR) models to manage their interest
rate and market RISK EXPOSURES. Unfortunately, however, even through credit
risk remains the largest risk facing most banks and financial institutions, the
application of MPT to credit risk has lagged. The slow development toward a portfolio
approach for credit risk results for the following factors:
The traditional view of loans as hold-to-maturity assets.
The absence of tools enabling the efficient transfer of credit risk to investors while
continuing to maintain bank customer relationships.
The lack of effective methodologies to measure portfolio credit risk.
Data problems
Banks and financial institutions recognize how credit concentrations can adversely
impact financial performance. As a result, a number of sophisticated institutions are
actively pursuing quantitative approaches to credit risk measurement. While date
problems remain an obstacle, these industry practitioners are making significant
progress toward developing tools that measure credit risk in a portfolio context. They
24

Asis Kumar Mandal

are also using credit derivatives to transfer risk efficiently while preserving customer
relationships. The combination of these two developments has precipitated vastly
accelerated progress in managing credit risk in a portfolio context over the past
several years.
5.6.2 Asset by asset approach:
Traditionally, banks have taken an asset by asset approach to credit risk
management. While each banks method varies, in general this approach involves
periodically evaluating the credit quality of loans and other credit exposures. Applying
a accredit risk rating and aggregating the results of this analysis to identify a
portfolios expected losses. The foundation of thee asset-by-asst approach is a sound
loan review and internal credit risk rating system. A loan review and credit risk rating
system enables management to identify changes in individual credits, or portfolio
trends, in a timely manner. Based on the results of its problem loan identification,
loan review and credit risk rating system management can make necessary
modifications to portfolio strategies or increase the supervision of credits in a timely
manner. Banks and financial institutions must determine the appropriate level of the
allowances for loan and losses (ALLL) on a quarterly basis. On large problem credits,
they assess ranges of expected losses based on their evaluation of a number of
factors, such as economic conditions and collateral. On smaller problem credits and
on pass credits, banks commonly assess the default probability from historical
migration analysis. Combining the results of the evaluation of individual large problem
credits and historical. Two important assumptions of portfolio credit risk models are:
1. The holding period of planning horizon over which losses are predicted
2. How credit losses will be reported by the model.
Models generally report either a default or market value distribution. The objective of
credit risk modeling is to identify exposures that create an unacceptable risk/reward
profile. Such as might arise from credit concentration. Credit risk management seeks
to reduce the unsystematic risk of a portfolio by diversifying risks. As banks and
financial institutions gain greater confidence in their portfolio modeling capabilities. It
is likely that credit derivatives will become a more significant vehicle in to manage
portfolio credit risk. While some banks currently use credit derivatives to hedge
undesired exposures much of that actively involves a desire to reduce capital
requirements.

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Asis Kumar Mandal

Chapter 6 Credit Appraisal

6.1 Credit Appraisal:
Appraisal of the firms position on basis of following parameters:
1. Managerial Competence
2. Technical Feasibility
3. Commercial viability
4. Financial Viability
6.1.1 Managerial Competence:
Back ground of promoters
Experience
Technical skills, Integrity & Honesty
Level of interest / commitment in project
Associate concerns
6.1.2 Technical Feasibility:
Location
Size of the Project
Factory building
Plant & Machinery
Process & Technology
Inputs / utilities
. 6.1.3 Commercial Viability:
Demand forecasting / Analysis
Market survey
Pricing policies
Competition
Export policies
6.1.4 Financial Viability:
Whether adequate funds are available at affordable cost to implement the project
Whether sufficient profits will be available
Whether BEP or margin of safety are satisfactory
What will be the overall financial position of the borrower in coming years?

26

Asis Kumar Mandal

6.2 Credit investigation report:

Branch prepares Credit investigation report in order to avoid consequence in later
stage Credit investigation report should be a part of credit proposal. Bank has to
submit the duly completed credit investigation reports after conducting a detailed
credit investigation as per guidelines.
Some of the guidelines in this regards as follow:
Wherever a proposal is to be considered based only on merits of flagships
concerns of the group, then such support should also be compiled in respect of
subject flagship in concern besides the applicant company.
In regard of proposals falling beyond the power of rating officer, the branch should
ensure participation of rating officer in compilation of this report.
The credit investigation report should accompany all the proposals with the fund
based limit of above 25 Lakhs and or non fund based of above Rs. 50 Lakhs.
The party may be suitably kept informed that the compilation of this report is one
of the requirements in the connection with the processing for consideration of the
proposal.
The branch should obtain a copy of latest sanction letter by existing banker or the
financial institution to the party and terms and conditions of the sanction should be
studied in detail.
Comments should be made wherever necessary, after making the
observations/lapses in the following terms of sanction.
Some of the important factors like funding of interest, re schedule of loans etc
terms and conditions should be highlighted.
Copy of statement of accounts for the latest 6 months period should be obtained
by the bank to get the present condition of the party.
Remarks should be made by the bank on adverse features observed. (e.g.,
excess drawings, return of cheques etc).
Personal enquiry should be made by the bank official with responsible official of
partys present / other bankers and enquiries should be made with a elicit
information on conduct of account etc.
Care should be taken in selection of customers or creditors who acts as the
representative. They should be interviewed and compilation of opinion should be
done.
Enquiries should be made regarding the quality of product, payment terms, and
period of overdue which should be mentioned clearly in the report. Enquiry should
be aimed to ascertain the status of trading of the applicant and to know their
capability to meet their commitments in time.
To know the market trend branch should enquire the person or industry that is in
the same line of business activity.
In depth observation may be made of the applicant as to :
I. Whether the unit is working in full swing
II. Number of shifts and number of employees
III. Any obsolete stocks with the unit
IV. Capacity of the unit
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Asis Kumar Mandal

V. Nature and conditions of the machinery installed

VI. Information on power, water and pollution control etc.
VII. Information on industrial relation and marketing strategy
6.3 Credit Files:
Its the file, which provides important source material for loan supervision in regard to
information for internal review and external audit. Branch has to maintain separate
credit file compulsorily in case of Loans exceeding Rs 50 Lakhs which should be
maintained for quick access of the related information.
Contents of the credit file:
Basic information report on the borrower
Milestones of the borrowing unit competitive analysis of the borrower
credit approval memorandum
Financial statement
Copy of sanction communication
Security documentation list
Dossier of the sequence of events in the accounts
Collateral valuation report
Latest ledger page supervision report
Half yearly credit reporting of the borrower
Quarterly risk classification
Press clippings and industrial analysis appearing in newspaper
Minutes of latest consortium meeting
Customer profitability
Summary of inspection of audit observation
Credit files provide all information regarding present status of the loan account on
basis of credit decision in the past. This file helps the credit officer to monitor the
accounts and provides concise information regarding background and the current
status of the account

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Asis Kumar Mandal

Chapter 7 Credit Rating of a Company

1. Name of the Borrower: ABC Construction Company
2. BO/CO/HO: XYZ

3. Business Owner: Partnership

4. Industry: Construction-Civil
5. Exposure (Rs Lakh):

(i) Sanctioned Limit: Fund :400 Term: 2705 N.F.B. 650 Total : 3500 (Ceiling)
(ii) Proposed Limit: Fund: 900 Term: 2705 N.F.B. 1650 Total: 5255 (Ceiling)
7.1 FINANCIAL EVALUATION
Category

Parameter

Co
Value

LQ-(MLQ)/2

LQ

UQ

Growth
Rate (3yr)
Profitability

Gross Sales
Growth rate(%)
OPBDIT/Sales (%)
Short Term Bank
borrowings/Net
Sales (%)
Operating Cash
flow/Total Debt
(%)
Net operating
Cash flow/Total
Debt (%)

56.09

0
-3.74

1
3.47

2
17.89

27.47
15.35

1.16
14.67

25.21
9.78

12.24

9.23

-3.38

-2.29

Cash Flows

Rate

3
101.44

UQ +
(UQM)/2
4
143.22

73.31
0

88.74
0

96.46
0

1.05
0.00

10.58

13.28

35.84

47.12

1.61

-0.9

1.87

30.7

45.12

0.00

2.46

7.2 PAST FINANCIAL-ABSOLUTE COMPARISON

Category

Debt Equity Ratio

Co
Value
4.86

TOL/TNW

6.49

Liquidity

Current Ratio

1.30

Debt Coverage

Interest Coverage

1.89

DSCR

1.60

Return On Capital
Employed (%)

23.82

Solvency

Profitability

Parameter

Bench Mark Values

0-1
1-2
2-3
3.002.502.002.50
2.00
1.50
5.004.503.254.50
3.25
1.75
1.001.151.351.15
1.35
1.75
1.001.251.501.25
1.50
2.50
1.001.151.251.15
1.25
1.75
6-9%
9-12% 1214%

29

Rate
3-4
1.500.50
1.751.00
1.752.00
2.503.50
1.752.50
14-16%

4
<=0.50

0.00

<=1.00,
>0
>=2.00

0.00

>=3.50

2.39

>=2.50

2.70

>=16%

4.00

1.75

Asis Kumar Mandal

Category

Parameter
Impact of contingent liability
Foreign Transaction Risk
Impact of merger/demerger/expansion
on key financials
Cash Flow Adequacy

Future Risk

Comments
Nil as per ABS09
NA
NA

Rate
4.00
NA
NA

Cash Flow after equity is

negative and deficit has to
be met from short
term/long term sources

2.00

7.3 SUBJECTIVE ASSESMENT

Category
SUBJECTIVE
ASSESMENT OF
FINANCIALS

Parameter
Transparency in accounting

Quality of inventory
Realisability of debtors

Quality of
investment/advances made
to group/other companies

Comments
E.A. Patil & Associates audited
books of the company. No
qualifications
Expected variance may be upto
5% of book value
No bifurcation of debtors
available. Expected variance 510% of book value
The co. made investment of Rs.
5cr in & advances Rs.5.91 cr to
Blue Star Buldg. Pvt. Ltd. Which
exceeds TNW

Rate
2.00

3.00
2.00

0.00

7.4 TREND ADJUSTMENT

Category
Adjustment for
financial trend

Parameters
Net Sales (Rs. Crore)
PBDT Less Non recurring
income/expenditure (Rs.
Crore)
Operating cash flow/Total
debt
Tangible net-worth (Rs.
Crore)

Last
29.78
3.85

Last-1
22.57
3.31

Last-2
18.48
1.32

Last-3
7.83
0.59

RATE
4.00
4.00

0.12

0.14

0.18

0.70

0.00

5.90

3.45

2.51

1.70

4.00

7.5 OPERATING EFFICIENCY EVALUATION

Category

Parameter

Co
Value

LQ-(MLQ)/2

LQ

UQ

1
2
3

Operating leverage
Inventory turnover
Net Sales/Op.
Assets
Raw Material
Consumed/Net
Sales
Credit Period
Allowed

1.32
4.89
1.00

0
2.49
11.70
0.10

1
2.27
13.16
0.15

2
1.84
16.09
0.25

0.51

0.09

0.06

52.70

160.19

129.02

30

Rate

3
1.57
16.48
0.66

UQ +
(UQM)/2
4
1.44
16.68
0.87

0.00

0.00

0.00

0.00

66.68

20.96

-1.90

2.31

4.00
0.00
4.00

Asis Kumar Mandal

7.6 MARKET POSITION EVALUATION
S. No.
1

Parameter
Competitive position
Expected sales growth

Comments

Market dominance/Market
share

Input Related Risk

Availability of raw material
and other critical inputs
Management of price
volatility
Production Related Risk
State of technology used
Flexibility in product
manufacturing
Price Competitiveness
Pricing Flexibility

Financing edge over

competitors
Marketing
Geographical diversity of
market

Sales growth of the company is

expected to be positive as the co.
achieved Rs. 33.13 cr upto Dec09
against projected Rs. 45 Cr for 0910
The company is one of the
average players; products are
reasonably accepted in the
market

Raw material and other critical

inputs are easily available

Rate
2.00
2.00

2.00

2.00

2.50
3.00

At par with peers

2.00

At par with peers

2.00
2.00

The Co. being engaged in

contractual work, pricing
flexibility is low/ at par with
peers.

The firm working with different

Govt. authorities and also worked
for MNCs.

NA
2.00
2.00

NA
2.00
2.00

Others
Threats from environmental
factors

NA
NA

Vulnerability to event risks

(Problems in Acquiring Land,
Getting various approvals,
Geological surprises while
executing contracts,
Rehabilitation etc.

NA

7.7 INDUSTRY EVALUATION

Industry Risk Evaluation for-construction- Civil
Score under industry risk evaluation
55.00%

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Asis Kumar Mandal

7.8 MANAGEMENT EVALUATION
OBJECTIVE
S. No Parameter
1
Actual Gross
Sales (Rs.
Crore)
Targeted
Gross Sales
(Rs. Crore)
2
Actual PBT
(Rs. Crore)
Actual PBT
(Rs. Crore)

Achievements
Co value
0
29.78

25.00

RATE

<75%

75%79%

80%89%

90%95%

>95%

4.00

<75%

75%79%

80%89%

90%95%

>95%

4.00

3.05
2.02

7.9 SUBJECTIVE ASSESSMENT OF MANAGEMENT

S. No.
1
2

Parameter
Management Set up and
Corporate Governance
Commitment and
sincerity

Track record in execution

of projects

Track record in debt

repayment
Track record in industrial
relations
Financial
Strength/flexibility/group
support
Capital market perception

5
6

Comments
Regd. Partnership firm. Experienced
partners.
There are apparently no adverse
features or reasons to doubt the
commitment and sincerity of the
promoters
It is reported that the co. have
implemented the project with small
delay. However most of the projects are
running satisfactorily.
All the debts are repaid in time

Rate
2.00

Cordial industrial relations maintained

3.00

The management is capable of

arranging funds but with a time lag

2.00

NA

NA

2.00

2.00

7.10 CONDUCT OF ACCOUNT EVALUATION

Category
1
2
3
4

Parameter
Preventive monitoring
system rating
Status of account
Operations in account
Submission of financial
data/statements

Comments
Not Applicable

Rate
NA

The account is running regular

Operations in the account are
satisfactory.
All Stock statements and financial
statements are submitted in time.

3.00
2.00

32

3.00

Asis Kumar Mandal

7.11 TOTAL SCORE

PARAMETER
Financial Evaluation
Business& Industry
Evaluation
Management Evaluation
Conduct Evaluation
AGGREGATE SCORE

% score Obtained
38.87%
55.01%

Weight
40%
25%

Weighted Score
15.55%
13.75%

69.32%
66.67%

25%
10%

17.33%
6.67%
53.30%

7.12 PNB SCORE CARD

Score Obtained
Above 80.00
Above 77.50 up to 80.00
Above 72.50 up to 77.50
Above 70.00 up to 72.50
Above 67.50 up to 70.00
Above 62.50 up to 67.50
Above 60.00 up to 62.00
Above 57.50 up to 60.00
Above 52.50 up to 57.50
Above 50.00 up to 52.50
Above 47.50 up to 50.00
Above 42.50 up to 47.50
Above 40.00 up to 42.50
Above 30.00 up to 40.00
30.00 and below

Final Rating of the Company:

Rating
PNB-AAA
PNB-AA+
PNB-AA
PNB-AAPNB-A+
PNB-A
PNB-APNB-BB+
PNB-BB
PNB-BBPNB-B+
PNB-B
PNB-BPNB-C
PNB-D

Description
Minimum Risk
Marginal Risk

Modest Risk

Average Risk

Marginally Acceptable Risk

High Risk
Caution

PNB-BB

Details of any major event, if any, the effect of which are not yet cleared (major damage to
plant/stocks, court judgment on environmental threats, involvement of promoters/company
in excise/FERA/tax-evasion, recovery suit/winding-up petition filed by creditors/FIs/banks,
any civil/criminal proceedings against the promoters/company, change of management etc.)
NA

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Asis Kumar Mandal

Chapter 8 Recommendations and Suggestions

The problems faced by the bank and the suggestions given are with regards to
increase credit flow not only with respect to working capital finance but also
project finance and asset finance. Problems faced by the Bank for any lending
and suggestions to overcome some of these problems:
There is a critical need to devote substantial resources to improving the skills and
capabilities of banks' lending officers, especially with regard to the analysis of the
borrowers' financial statements. Understanding the nature of the borrower's
business and the cash-flow required is paramount to preventing the creation of
NPAs.
Banks are now better equipped to handle the varied needs of the SME sector due
to better technology and risk management. As recommended by the Ganguly
Committee, the Government has asked banks to adopt a full-service approach to
cater to the diverse needs of the corporates. This, it recommends, may be
achieved by extending banking services to recognize borrowers by adopting the
4-C approach: Customer focus, cost control, cross-selling and containing risk.
To enable the banks take more objective decisions, the Government plans to
introduce a rating mechanism for designated industrial clusters; this may be
designed jointly by Crisil, IBA, Sidbi and SSI Associations. This would enable
institutional funding to be channeled through homogenous recognized clusters.
This will reduce the interest rate difference in case of syndicate loans.
Another way of extending loans to the corporates is the relationship-lending rule,
where the lending partly bases its decision on proprietary information about the
firm and its owner through a variety of contacts over time. The information may be
gathered from such stakeholders as suppliers and customers, who may give
specific information about the owner of the firm or general information about the
business environment in which it operates.
Insufficient data on the SMEs, the lack of credible published information about
their financial health, the high vulnerability of small players in a liberalizing market
and the inadequacy of risk management systems in banks are factors leading to
higher NPAs and lower profitability than potential in SME lending. This can be
overcome by collection of authentic data on the SME segment, educating the
enterprises on the need for reliable financial data, evolving suitable risk models
and close monitoring of accounts by the bank.
There is need to innovate their delivery platforms by using Internet banking,
mobile banking and card-based platforms for delivery of transaction-banking as
well as credit products, and enhance the service element. Companies look for
convenience and simplicity in their banking requirements and banks should
deliver these through an effective use of technology.
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Asis Kumar Mandal

Chapter 9 Conclusion

The study at PNB gave a vast learning experience to me and has helped to
enhance my knowledge. During the study I learnt how the theoretical financial
analysis aspects are used in practice during the working capital finance
assessment. I have realized during my project that a credit analyst must own
multi-disciplinary talents like financial, technical as well as legal know-how.
The credit appraisal for working capital finance system has been devised in a
systematic way. There are clear guidelines on how the credit analyst or lending
officer has to analyze a loan proposal. It includes phase-wise analysis which
consists of 5 phases:
Financial statement analysis
Working capital and its assessment techniques
Credit risk assessment
Documentation
Loan administration
Punjab National Bank of Indias adoptions of the Projected Balance Sheet method
of assessment procedures are based on sound principles of lending. This method
of assessment has certain flexibility required to avoid any rigid approach to fixing
quantum of finance. It is superior and more rational compared to the Turnover
Method; Cash Budget Method of assessment .It also facilitates the Bank to carry
on follow up procedures. The PBS method have been rationalized and simplified
to facilitate complete flexibility in decision-making.
To ensure asset quality, proper risk assessment right at the beginning, is
extremely important. That is why Credit Risk Assessment system is an essential
ingredient of the Credit Appraisal exercise. The PNB was the second to formulate
a Credit Risk Assessment model. It considers important parameters like
profitability, repayment capacity, efficiency of the unit, historical / industry
comparisons etc which were not factored in other models. It is equally efficient
as the SIDBIs CART (Credit Assessment and Rating Tool) model.

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Asis Kumar Mandal

Bibliography

Books:
1. Mukherjee D. D.; 2010; Credit Appraisal, Risk Analysis and Decision
Making- 5th edition; Snow White Publications Pvt. Ltd., Mumbai
2. Dr. Chandra Prasanna ; Financial Management Theory and Practice

Websites:
1. http://www.pnbindia.in/
2. http://www.rbi.org.in/home.aspx
Punjab National Bank circulars, manuals and proposals

36