Table of Contents

CHAPTER 1

INTRODUCTION TO BANKING
SECTOR
1
1.1

History of
Banking...................
...1
1.2
Classification of
Banks...................................3
1.3
PNB Profile...
.........6
CHAPTER 2

INTRODUCTION TO CREDIT
APPRAISAL..14
2.1 Reasons for selecting the
project ....14
2.2 Objective of the project
..15
2.3 Overview of credit
..15
2.4 Basic overview of Loans
....17
2.5 Working Capital
...21
2.6 Review of Literature
.24
2.7 Credit Appraisal ..
..29

CHAPTER 3

CHAPTER 4

CHAPTER 5

RESEARCH
METHODOLOGY
..31
TEV
STUDY
32
MARKET/INDUSTRY/PRODUCT
ANALYSIS..35

CHAPTER 6

CHAPTER 7

CHAPTER 8

CHAPTER 9
CHAPTER 10

CHAPTER 11
CHAPTER 12
CHAPTER 13

BIBIL/EQUIFAX/HIGHMARK
..38
CREDIT RISK
RATING
..40
FINANCIAL
ANALYSIS
..45
SECURITY OFFERED BY THE
COMPANY..48
RATIO ANALYSIS
.
..49
VARIOUS AUDIT REPORTS .
.56
POST SANCTION FOLLOW UP BY
LOAN.58
CONCLUSION
..60

CHAPTER 14

CHAPTER 15

CASE
STUDY
.62
BIBLIOGRAPHY
70

EXECUTIVE SUMMARY
This study shows that how PNB bank gives the loans to its customers.
Credit appraisal is done to evaluate the credit worthiness of a buyer.
This project has analyzed the credit appraisal procedure with special
reference to PNB which includes knowing about the different credit
facilities provided by the banks to its customers, how loan proposal is
being paid, what are the formalities that is to be satisfied and most
importantly knowing about the various credit appraisal techniques
which are different for each type of credit facilities. The credit appraisal
for any organization basically follow these steps: Assessment of credit
need, financial statement analysis, and financial ratios of the company,
credit rating, working capital requirement, term loan analysis,
submission of documents, NPA classifications and recovery.

The main aim of research is to find out the truth

which is hidden and which has not been discovered
as yet. Though each research study has its own
specific purpose, we may think of the following
broad categories:

To gain familiarity with the phenomenon or to

achieve new insights into it.
To portray accurately the characteristics of a
particular individual, situation or a group.
To determine the frequency with which something
occurs or with which it is associated with
something else.

It is a way to systematically solve the research

problem. It may be understood as a science of
studying how research is done scientifically. In it we
study the various steps that are generally adopted
by a researcher in studying his research problem
along with the logic behind them.

CHAPTER 1
INTRODUCTION TO
BANKING SECTOR
In India, the definition of business banking has
been given in the banking regulation act, (BR
Act), 1949. According to section 5(c) of the BR
Act, a banking company is a company which
transacts the business of banking in India.
Further, Section 5(b) of the BR Act defines
banking as, accepting, for the purpose of
lending and investment, of deposits of money
from the public, repayable on demand or
otherwise and withdrawal by cheque, draft and
order or otherwise. This definition points to the
three primary activities of a commercial banks
which distinguish it from the other financial
institutions. These are:
1) Maintaining deposit accounts including
current accounts,
2) Issue and pay cheques, and
3) Collect cheques from the banks customers.

1.1)History of banking
Banking in India has its origin a searly 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 rates of interest.
During the Mogul period, the indigenous bankers played a
very important role in lending money and financing foreign
trade and commerce. During the days of the East India
Company, it was the turn of the agency houses to 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 them ean
th
time.In the first half of the 19 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
were in depending intuit sand functioned well. These three
banks were am alga mated in1920 and anew bank, the
th
Imperial Bank of India was established on 27 January 1921.
With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken over by
the newly constituted State Bank of India. The Reserve Bank
which is the Central Bank was created in 1935 by passing
Reserve Bank of India Act 1934 .In the wake of the Swedishi
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, 1969, 14 major banks of the country were nationalized
th
and in 15 April 1980 six more commercial private sector
banks were also taken over by the government. Since then,
the industry has witnessed substantial growth and radical
changes. As of March 2002, the Indian banking industry
consisted of 97 Commercial Banks, 196 Regional Rural
Banks, 52 Scheduled Urban Co-operative Banks, and 16
Scheduled State Co-operative Banks. The growth of the
banking industry in India may be studied in terms of two
broad phases: Pre Independence (1786-1947), and Post
Independence (1947 till date). The post independence phase

may be further divided into three sub-phases:

Pre-Nationalization Period (1947-1969)
Post-Nationalization Period (1969-1991)
Post-Liberalization Period (1991- till date)
The two watershed events in the post independence phase are
the nationalization of banks (1969) and the initiation of the
economic reforms (1991). This section focuses on the
evolution of the banking industry in India post-liberalization.
Banking Sector Reforms-Post-Liberalization
In 1991, the Government of India (GoI) set up a committee
under the chairmanship of Mr. Narasimaham to make an
assessment of the banking sector. The report of this
committee contained recommendations that formed the basis
of there forms initiated in 1991.
The banking sector reforms had the following objectives:
1. Improving the macroeconomic policy framework within
which banks operate;
2. Introducing prudential norms;
3. Improving the financial health and competitive position of
banks;
4. Building the financial in restructure relating to
supervision, audit technology and legal framework; and
5. Improving the level of managerial competence and quality
of human resources.

1.2)

Classification of Banks

The Indian banking can be broadly categorized into

nationalized (government owned), private banks and
specialized banking institutions. The Reserve Bank of
India acts a centralized body monitoring any
discrepancies and shortcoming in the system.

RESERVE BANK OF INDIA

SCEDULED BANKS

Commercial Bank

Foreign
bank(40)

Regional
rural
bank(196)

Public sector banks(27)

Corporates

Urban
State
Corporates
corporates
(52)

Private sector banks(30)

Old (22)
New(8)

State bank of India and

other associate banks(8)

Other nationalised
banks(19)

Commercial bank
It is also known as exchange bank of India that provides services
such as accepting deposits, making business loans, and offering
basic investment products. Commercial bank can also refer to a
bank or a division of a bank that mostly deals with deposits and
loans from corporations or large businesses, as opposed to

individual members of the public .The term commercial was

used to distinguish it from a investment bank.
Commercial banks are the oldest, biggest and fastest growing
financial intermediaries in India. They are the most important
depositories of public saving and the most important disbursers
of finance. It is a unique banking system which works under
constraints that go with social control and public ownership. The
public ownership of banks has been achieved in three stages:
1995, July 1969 and April 1980. Not only the public sector banks
but also the private sector and foreign banks are required to meet
the targets in respect of sectoral development of credit, regional
distribution of branches and regional credit deposit ratios.
Commercial banks have a special role in India. Liabilities of
bank are money and therefore they are the important part of the
payment mechanism of any company. For a financial system to
mobilise and allocate savings of the country successfully,
productively and to facilitate day to day transactions there must
be class of financial institutions that the public views are safe and
convenient outlet for its savings.

Structure of commercial banks

Commercial
banks

Scheduled
banks

Private
Banks

SBI and its

subsidiaries

Non- Scheduled
banks

Public
Banks

Foreign
Banks

Other
Nationalized
Banks

Major objectives of commercial banks

The main objective of a commercial bank is to generate

profitability for its ownership by providing quality based
products and services to the residents of the communities
and regions that they represent.
Bank credit
The borrowing capacity provided to an individual by the
banking system in the form of credit or a loan is known
as bank credit. The total bank credit the individual has the
sum of the borrowing capacity each lender bank provides
to the individual.
The operating paradigms of the banking industry in
general and credits dispensation in particular have gone
through a major upheaval.
(a) Lending rates have fallen sharply.
(b) Traditional growth and earning such as
corporate credits has been either slow or not
profitable as before.
(c) Banks moving into retail finance, interest rate
on the once attractive retail loans also started
coming down.
(d) Credit risk has went up and new type risk are
surfaced.
Types of loans offered by the commercial banks
Secured loan
A secured loan is a loan in which the borrower pledges
some asset (e.g., a car or property) as collateral for the
loan, which then becomes a secured debt owed to the
creditor who gives the loan. The debt is thus secured
against the collateral in the event that the borrower
defaults, the creditor takes possession of the asset used as
collateral and may sell it to regain some or all of the
amount originally lent to the borrower.
Unsecured loan
Unsecured loans are monetary loans that are not secured
against the borrower's assets. There are small business
unsecured loans such as credit cards and credit lines to
large corporate credit lines. These may be available from
financial institutions under many different guises or
marketing packages such as:

1. Bank overdrafts
2. Corporate bonds
3. Credit card debt
4. Credit facilities or lines of credit
5. Personal loans

1.3)PNB Profile
Punjab National Bank was registered on 19 May 1894 under the
Indian Companies Act with its office in Anarkali Bazaar Lahore.
The founding board was drawn from different parts of India
professing different faiths and a varied back-ground with,
however, the common objective of providing country with a truly
national bank which would further the economic interest of the
country. PNB has the distinction of being the first Indian bank to
have been started solely with Indian capital that has survived to
the present. (The first entirely Indian bank, the Oudh
Commercial Bank, was established in 1881 in Faizabad, but
failed in 1958.)
PNB has had the privilege of maintaining accounts of national
leaders such as Mahatma Gandhi, Shri Jawaharlal Nehru,
Shri LalBahadurShastri, Shrimati Indira Gandhi, as well as the
account of the famous JalianwalaBagh Committee.
The Bank made steady progress right from its inception. It has
shown resilience to tide over many a crisis. It withstood the crisis
in banking industry of 1913 and the severe depression of the
thirties.
With the passage of time the Bank grew in strength spreading its
wings from one corner of the country to another.
It has about 5100 branches across 764 cities and serves over 63
million customers. It has presence throughout the length and
breadth of the country and offers a wide variety of banking
services that include corporate and personal banking, industrial
finance, agricultural finance, financing of trade and international
banking. Among the clients of the bank are multinational
companies, Indian conglomerates, medium and small industrial
units, exporters and non-resident Indians. The large presence and
vast resource base have helped the bank to build strong links with
trade and industry. The strength of the bank lies in its corporate
belief of growth and stability.

2.1 Organizational Structure:

The bank has a three tier structure comprising of head office,

circle office and branch office. There are 65 circle offices and
4267 branch offices. There is decentralized power up to the
branch level which has improved speed of decision making.

Organizational Structure of PNB

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Circle Office Functional structure

Security
HRD

Inspection
Credit
Circle Office

GAD

Marketing

IT

PRD

Vision
To develop an institute of reckoning to serve as an infrastructure
model with high-tech environment and state of the art systems,
demonstrating use of IT in the management of administrative and
training activities and development of IT maturity in banking,
insurance and other financial sectors through research,
development, consultancy and educational endeavours.

Mission

Banking for the Unbanked

Tag line of PNB

The name you can Bank upon.

Diversification of PNB:
Diversification initiatives of the bank have shown promising
results. PNB has undertaken business, bullion business, merchant
banking, Insurance business, mutual fund business, PNB Debit
card and has also undertaken foreign exchange business.
Consistent profit performance, improved fundamentals and
strong technology base have provided PNB distinct advantages
to meet the forces of composition effectively.
Punjab National Bank has taken a number of initiatives for the
benefit of its invaluable customers and has virtually become one
stop shop for various financial products & services. The bank has
made Banc assurance Tie-up with oriental Insurance Co. Ltd.

(OICL), a public sector undertaking, which offers variety of

products e.g. Fire Insurance, Motor Vehicle Insurance, Marine
Insurance & Misc. Insurance Policies like Shop-keepers policy;
theft/burglary Policy; Fidelity Guarantee Policy; Personal
Accident Policy, Health Insurance Policy; Overseas Travel
Insurance Policy, House Hold Goods etc. at a competitive price
with assured post sale services.

CORPORATE PROFILE
With more than 120 years of strong existence and 6081 total
branches including 5 foreign branches, 6940 ATMs as on
March14, PNB is serving more than 8.9 crore esteemed
customers. PNB, being one of the largest Nationalized banks, has
continued to provide prudent and trustworthy banking services to
its customers. The bank enjoy strong fundamentals, large
franchise value and good brand image. To meet the growing
aspirations of the people and compete in these tough conditions,
the bank of us wide range of products and services.
FINANCIAL PARAMETERS OF PNB
PNB continues to maintain its frontline position in the Indian
banking Industry.
PNB continued its strong performance for the year 2010-11.Total
business of the bank amounts Rs.8.00 lakh crore.Net Interest
Income (NII) increased by 3.4% while Net Interest Margin (NIM)
declined to 3.15%. Net Profit decresed by 29.48% to reach
Rs.3343 crore. Operating Profit is Rs.11384 crore, 6.7% up from
last year. PNB continues to be among leading banks amongst
nationalized banks in net profit, operating margins, total business,
deposits, advances, CASA deposits and customer base. Summary
of the financials for this year is as below:

Parameters
Operating
Profit
Net profit
Deposit
Advance
Total
business

Mar09
5690

Mar10
7326

Mar11
9056

Mar12
10614

Mar13
10907

Mar14
11384

3091
209760
154703
364463

3905
249330
186601
435931

4433
312899
242107
55505

4884
379588
293775
673366

4748
391560
308796
700356

3343
451397
349269
800666

2.2) Technology Adopted:

PNB has always looked at technology as a key facilitator to
provide better customer service and ensured that its IT strategy
follows the Business strategy so as to arrive at Best Fit. The
Bank has made rapid strides in this direction. All branches of the
Bank are under Core Banking Solution (CBS) since Dec08, thus
covering 100% of its business and providing Anytime
Anywhere banking facility to all customers including customers
of more than 3000 rural & semi urban branches. The Bank has
also been offering Internet banking services to its customers
which also enables on line booking of rail tickets, payment of
utilities bills, purchase of airline tickets, etc. Towards developing
a cost effective alternative channels of delivery, with 6009
ATMs.
With the help of advanced technology, the Bank has been a
frontrunner in the industry so far as the initiatives for Financial
Inclusion is concerned. With its policy of inclusive growth, the
Banks mission is Banking for Unbanked. The Bank has
launched a drive for biometric smart card based technology
enabled Financial Inclusion with the help of Business
Correspondents/Business Facilitators (BC/BF) so as to reach out
to the last mile customer. The Bank has started several innovative
initiatives for marginal groups like rickshaw pullers, vegetable
vendors, dairy farmers, construction workers, etc. Under
Branchless Banking model, the Bank is implementing 40 projects
in 16 States.

Global Footprint:
Bank has established overseas footprints in 10 countries via 4
overseas branches and an offshore banking unit in Mumbai,
wholly owned subsidiary in UK with 7 branches & a subsidiary
each in Kazakhstan & Bhutan; 5 Representative offices in
Australia, Norway, Dubai, China and Kazakhstan; and one joint
venture with Everest Bank Ltd., Nepal.
Backed by strong domestic performance, the Bank is planning to
realize its global aspirations. Bank continues its selective foray in
international markets with presence in 10 countries, with 2
branches at Hongkong, 1 each at Kabul and Dubai;
representative offices at Almaty, Dubai, Shanghai and Oslo; a
wholly owned subsidiary in UK; a joint venture with Everest
Bank Ltd. Nepal and a JV banking subsidiary DRUK PNB
Bank Ltd. in Bhutan. Bank is pursuing up gradation of its
representative offices in China & Norway and is in the process of
setting up a representative office in Sydney, Australia and taking
controlling stake in JSC Dana Bank in Kazakhstan.
Punjab National Bank also maintains strong correspondent
banking relationship with 200 leading international banks all
over the world. It enhances its capacities to handle transaction
world-wide. Besides, bank has Rupee Drawing arrangement,
with exchange companies in the Gulf. Bank is a member of the
SWIFT and 85 branches of the bank are connected through its
computer-based terminal at Bombay. With its state-of-art dealing
rooms and well-trained dealers, the bank offers efficient FOREX
dealing operations in India. The bank has been focusing on
expanding its operations outside India and has identified some of
the emerging economies which offer large economies and large
business potential. Bank has set up a representative office at
Almaty, Kazakhstan w.e.f. 23rd October 1998.

Credit Division (CD) at PNB:

Commercial lending organization structure in PNB consists of
Branches, Mid Corporate Branches (MCBs), Large Corporate
Branches (LCBs) and Head Office (CD).Credit Division (CD)
looks after the loan proposals which fall into the purview of
GMs-HO/ED/CMD/MC/Board. Medium corporate branches are
headed by AGMs and LCB as DGM. Based on the guidelines
received from Department of Financial Services, Ministry of
Finance, Govt. of India, it has been decided to form Credit
Approval Committees at HO/CO level as under:

CAC at HO level

Headed by

Credit proposals

HOCAC Level-I

Senior most GM(Credit)

HOCAC Level-II
HOCAC Level-III

Senior most ED
CMD

Above Rs.35 crore but

crore
Above Rs.50 crore&upto R
Above Rs.100 crore&u
crore

Similarly, at Circle Office level, two Credit Approval

Committees shall be set up as under:
CAC at CO level

Headed by

Credit proposals

COCAC Level-I

Circle Head

COCAC Level-II

FGM

Beyond loaning powers of Incumb

branch but within vested loaning pow
Head (AGM/DGM as the case may be
Beyond loaning powers of Circle H
exceeding Rs.35 crore

CAD looks after all proposals for all types of loans which fall
within the purview of GMs-HO/ED/CMD/MC/Board. A credit
appraisal goes through different level of sanctioning to enforce
internal controls and other practices to ensure that exceptions to
policies, procedures and limits are reported in a timely manner to
the appropriate level of management for action.

The bank has introduced Grid/Committee system in credit

sanction process wherein every loan proposal falling within the
vested powers of DGM and above is discussed in a credit
committee which on the merit of the case recommends the
proposal to the sanctioning authority. Such committees have been
formed both at HO and ZO level; the credit committee at HO
includes GM Credit and CGM/GM-RMD. For credit proposals
falling within the vested power of CGM/GM, the credit
committee at HO includes DGM/AGM/Chief Manager-CD and
DGM/AGM/Chief Manager RMD. CD looks after all proposals
for all types of loans which fall within the purview of GMsHO/ED/CMD/MC/Board. A credit appraisal goes through
different level of sanctioning to enforce internal controls and
other practices to ensure that exceptions to policies, procedures
and limits are reported in a timely manner to the appropriate
level of management for action.
The credit administration division is to be assisted by Risk
Management Division (RMD) and Industry desk for risk vetting
and techno-economic feasibility of credit proposal.

Risk Management Department (RMD):

Credit risk is the possibility of loss associated with changes in

the credit quality of the borrowers or counter parties. In a banks
portfolio, losses stem from outright default due to inability or
unwillingness of a borrower or counter party to honor
commitments in relation to lending, settlement and other financial
transactions.
PNB has an elaborate risk management structure in place. Credit
Risk management structure at PNB involves
- Integrated Risk Management Division (IRMD)
IRMD frames policies related to credit risk and develops
systems and models for identifying, measuring and
managing credit risks. It also monitors and manages
industry risks.

Circle Risk Management Departments (CRMDs)

Risk Management Departments at circle level are known
as CRMD.
Their responsibilities include monitoring and initiating
steps to improve the quality of the credit portfolio of the
Circle, tracking down the health of the borrower accounts
through regular risk rating, besides assisting the respective
Credit Committee in addressing the issues on risk.
Risk Management Committee (RMC)
It is a sub-committee of Board with responsibility of
formulating policies/procedures and managing all the
risks.
Credit Risk Management Committee (CRMC)
It is a top level functional committee headed by CMD and
comprises of EDs, CGMs/GMs of Risk Management,
Credit, and Treasury etc. as per the directions of RBI.
Credit Audit Review Division (CARD)
It independently conducts Loan Reviews/Audits.

The risk management philosophy & policy of the bank focuses on

reducing exposure to high risk areas, emphasizing more on the
promising industries, optimizing the return by striking a balance
between risk and return on assets and striving towards improving
market share to maximize shareholders value.
The credit risk rating tool has been developed with a view to
provide a standard system for assigning a credit risk rating of the
borrower of the bank according to their risk profile. This rating
tool is applicable to all large corporate borrower accounts
availing total limits (fund based and non-fund based) of more
than Rs. 12 crore or having total sales/ income of more than Rs.
100 crore. The Bank has robust credit risk framework and has
already placed credit risk rating models on central server based
system PNB TRAC, which provides a scientific method for
assessing credit risk rating of a client. Taking a step further
during the year, the Bank has developed and placed on central
server score based rating models in respect of retail banking.
These processes have helped the Bank to achieve fast & accurate
delivery of credit; bring uniformity in the system and facilitate

storage of data & analysis thereof. The analysis also involves

analyzing the projections for the future years.

CHAPTER 2
INTRODUCTION TO CREDIT
APPRAISAL
Credit Appraisal means an investigation/assessment done by the
banks before providing any loans and advances/project finance
and also checks the commercial, financial and technical
viability of the project proposed, its funding pattern and further
checks the primary and collateral security cover available for
recovery of such funds.
Credit appraisal is a process to ascertain the risks associated with
the extension of the credit facility. It is generally carried by the
financial institutions, which are involved in providing financial
funding to its customers. Credit risk is a risk related to nonrepayment of the credit obtained by the customer of a bank. Thus
it is necessary to appraise the credibility of the customer in order
to mitigate the credit risk. Proper evaluation of the customer is
performed this measures the financial condition and the ability
of the customer to repay bank the Loan in future. Generally the
credits facilities are extended against the security known as
collateral. But even though the loans are backed by the
collateral, banks are normally interested in the actual loan
amount to be repayed along with the interest. Thus, the
customers cash flows are ascertained to ensure the timely
payment of principle and the interest. It is the process of
appraising the credit worthiness of a Loan applicant.

2.2) Reasons for selecting the project

Whenever an individual or a company uses a credit that means
they are borrowing money that they promise to within a predecided period. In order to assess the repay capability i.e to

evaluate the credit worthiness banks use various techniques that

differ with the different type of credit facilities provided by the
bank. In the current scenario where it is seen that big countries
and financial institutions have been bankrupted just because of
bank default so credit appraisal has been become an important
aspect of banking sector and is gaining prime importance.
It is the incident of credit defaults that has been given to the
financial crises of 2008-2009. But in India the credit defaults are
comparatively less than the other countries like U.S. One of the
reasons leading to this may be good appraisal techniques used by
banks and financial institutions in India. Eventually the
importance of the project is mainly to understand the credit
appraisal techniques used by the banks with special reference to
Punjab National Bank.

2.3) Objective of the project

The overall objective of the project is to understand the current
appraisal techniques used in the banks. The credit appraisal
system has been analyzed as per the different credit facilities
bank. The detailed explanation about the techniques and process
has been discussed in detailed in further chapters. provided by
the bank. The detailed explanation about the techniques and
process has been discussed in detailed in further chapters.

2.4) Overview of credit

Credit is the money you borrow from lender. It has to pay it back
at an agreed time. Lenders include banks, credit unions, building
societies and finance companies. You use credit to pay for things
you have not saved for. Having credit means there is money you
owe. You need to repay your debt to the lender. You use different
type of credit depending upon what you borrow money for.

Different types of credit

There are different types of credit. Some type of credit costs
more money than others. Some credit is for a short time and
some foer a long time like several years.

A) High cost credit

a) Payday loans(short term loans):- A payday loan is a
short term loan. It is usually for a small amount, like a
few hundred dollars. These loans cost a lot of money.
The lender charges a high interest rates and must be paid
back by a certain date. To pay back your loan you
arrange to have money taken from your account when
you get paid. This money is given to the lender. You may
also be charged a fee to access the loans. The amount of
the fee differs depending on how long you loan is for.
Some paid a loans will charge your client an upfront fee
instead of interest. However, just because your client is
not paying interest it does not mean this loan is cheap.
Because the term of loan is for a short time- usually only
30 days- the upfront fee can be just as much as a very
high interest rate.
b) Interest-free deals:- Interest-free does not mean cost
free- you still have to pay fees and charges. Most large
stores offers interest free dealsfor things like computers,
electrical appliances, lounge suites and other household
goods
There are usually two ways you can pay for interest free
deals:
(1) By instalments- You make regular payments each
month, to pay off your purchase by the end of the
interest free period. The instalment periods may not
be enough to pay off the full price before the interest
free period ends. When this happen the lender will
charge you high interest.
(2) By now, pay later- You do not make any payment
until the end of interest free period. Then you pay the
full amount, plus fees and charges. The lender does
not need to tell you when this period ends. It is upto

you to keep a track of this date. If you do not pay

everything you owe by the end of the interest period
the lender will charge you interest.

c)

Credit cards:- You use a credit card to buy things. You

can only spend upto a certain amount of money on a
card, which is called the credit limit. You get accredit
card from a lender who will ask you to repay the amount
you have spend on the card in monthly amounts. There
may be interest, fees and charges for spending in the
card. With most credit cards ypu pay a fee every yaer to
be able to use a card. With credit cards you get a bill that
tell you how much you owe that month. If you do not
pay this amount you are charged interests and sometimes
other fees. Fees add a lot to the cost of using a credit
card. You can pay fees for:

Annual accounts

Rewards programs
Late payments
Exceeding your credit limits

With a credit card you can often get a secondary card.

This allows your partner or other family member, for
example, to buy goods or services using your credit. You
have to pay any debts caused when someone else using
your card.

d) Store cards:- Some large retail stores issues their own

store cards, but you can normally only use them in their
stores or stores they are connected with. You use store
cards just like regular credit cards but you usually pay
higher interest for doing so. Some big stores in Australia
offers these cards.

e)

Consumer leases:- Consumer lease lets you rent an

item(for example, a home computer or television) over a
period of time. You make regular rental
payments(usually monthly) until the leases over. The
total amount you pay however, will be more than if you

paid for the item with cash. You may also have to pay
fees and charges.

f)

Rent to buy:- A purchasing arrangement where you buy

an item by renting it for a amount of time. You make
regular rental payments, for example, every month over
3 years.

B) Low cost credit

a) Car loan:- A car loan is for buying a new car or used
car- not for any other item. With a car loan, you
borrow an amount of money to pay for your car. You
have to repay it in an amount of time. You have to
sign a credit contract that tells you how much you
have borrowed and how much you have to pay back
every month. Not all car loans are for the same
amount of time. They are usually between 12 months
and 5 years. Car loans are nearly always fixed rate
loans. This means you pay the same interest rate
throughout the loan. You also have to pay fees and
charges. These are included in the total cost of your
loan.

b) Personal loans:- A personal loan is normally for

something you need or something you want to do like
fixing things in your home or taking a holiday. Your
repayments are made within an amount of time. This
is usually between 12months and 5years. Personal
loans can be secured or unsecured. You have to pay
interest, fees and charges on the amount you borrow.

c)

Home loans:- Home loan is for buying a home- not

for any other item. There are many different types of
home loans. The interest rates, terms and fees are not
all the same. So you need to look at different loans to
see which one is best for you.

C)Consolidation Loans: Consolidation loan is

when you put all your loans into one loan. An advantage
of consolidation loan is that you only make one
repayment each month and you can get a lower interest
rate. You might not have to pay as many fees and

charges. With a consolidation loan, you are repaying all

your debts in the one loan, over a longer period of time.

2.5) Basic overview of loans

A loan is a amount of money that you can borrow, from a
bank, with a contractual obligation to pay it back with
interest, which represents payment for the service of
providing loan.

Classifications of loans
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Fund Based:- It is credit facility to a borrower would result in

depletion of actual liquidity of a banker immediately.

Functions of a bank are those in which banks make deployment

of their funds either by granting advances or by making
investments for meeting gaps in funds requirement of their
customers and borrowers.
Fund based functions of a bank can be classifies into two parts:1) Granting of loans and advances
2) Making investment in shares/debentures/bonds.
Non-Fund Based:- In this the credit facilities to a borrower may
or may not affect the bankers liquidity. It is perceived that non
fund based business is very remunerative to bank, besides getting
hadsome commission or fees and some other service charges also
get the low cost deposits in the shape of margin and ancillary
business.
The funds of the borrower are not blocked in advances to be
given to the supplier or beneficiaries and this keeps his liquidity
position comfortable, production smooth and cost low.
Non- fund based working capital financing comprises:
1.

Letter of Credit (L/C s)

2.

Bank Guarantees (B/G s)

The basic difference between fund-based and non-fund based
credit assistance lies mainly in the cash outflow. While the
former involves all immediate cash outflow, the latter may or
may not involve cash outflow from a banker. In other words, a
fund based credit facility to a borrower would result in depletion
of actual liquidity of a banker.

1.Retail loan:-

A lender who lends money to individual rather

than institution. Banks, credit unions, savings and loans
institutions, and mortgage bankers are all examples of retail
lenders. Retail lenders are used generally for lending money for
mortgages, auto loans and consumer-finance loans.

The typical products offered in the Indian retail banking segment

are:1) Housing loans

2) Consumer loan for purchase of durables

3) Auto loans
4) Educational loans
5) Credit cost
6) Loans Retail

2.Cash Credit:-

A cash credit is a short-term cash

loan to a company. A bank provides this type of funding,
but only after the required security is given to secure the
loan. Once the security for repayment has been given, the
business that receives the loan can continuously draw
from the bank up to a certain specified amount. It runs
like a current account except that the money that can be
withdrawn from this account is not restricted to the
amount deposited in the account. Instead, the account
holder is permitted to withdraw a certain sum called
limit or credit facility in excess of the amount
deposited in the account.

3.Export finance:- There are two types of export finance:(i) Pre-shipping finance:- Funds advanced by a lending
institutions(such as an export-import bank or trade
development bank) against confirmed orders from the
qualified foreign buyers to enable the exporter to make
and supply ordered goods. Usually, the exporter arranges
a commitment from the buyer to make the payment
directly to the lender. Upon receipt of payment the
lender deduct the loan amount plus interest and another
charge and forward the balance to the exporter.
(ii) Post-shipping finance:-Post shipment credit means any
loan or advance granted or any other credit provided by
a bank to an exporter of goods or (and) services from
india from the date of extending credit after shipment of
goods or (and) rendering of services to date of
realization prescribed by FED, and includes any loan
and advance granted to an exporter, in consideration of,
or on security of any duty drawback allowed by the
Government from time to time. Banks serves with low
interest rates to exporters under post shipment credit
based on the guidelines of reserve bank.

4.Bill discounting:- Bill discounting is a major

activity with some of the smaller banks. Under this type
of lending, banks take the bill drawn by the borrower on
his (borrowers) customer and pay him immediately
deducting some amount as discount/commission. The
bank then presents the bill to the borrowers customer on
the due date of the bill and collects the total amount. If
the bill is delayed, the borrower or his customer pays the
bank a predetermined interest depending upon the terms
of transaction.

5.Term Loan:- Term Loans are the countered parts of

fixed deposits in the bank. Banks lend money in this
mode when the repayment is sought to be made in fixed,
predetermined instalments. This type of loan is normally
given to the borrowers for acquiring long term assets i.e.
assets which will benefit the borrower over a long
period(exceeding atleast one year). Purchases of plant
and machinery, constructing building for factory, setting
up new projects fall in this category. Financing for
purchase of automobiles, consumer durables, real estate
and creation of infrastructure also fall in this category.

Non-Fund Loans:
1.Bank Guarantee:- A guarantee from a lending
institution ensuring that the liabilities of the debtor will
be met. In other words, if the debtor fails to settle a debt,
the bank will cover it.
For example:- Bank guarantee might be used when a
buyer obtain goods from the seller then runs into a cash
flow difficulties and cannot pay the seller. The bank
guarantee would pay an agreed upon sum to the seller.
Similarly if the supplier was unable to provide the goods,
the bank would then pay the purchaser the agreed upon
sum. Essentially the bank guarantee act as a safety
measure for the opposing party in the transaction.

2.Letter of Credit:- A letter of credit is a document

from a bank guaranteeing that a seller will receive
payment in full as long as a certain delivery conditions
have been met. In the event that the buyer is unable to
make payment on the purchase, the bank will cover the
outstanding amount. They are often used in international

transactions to ensure that the payment will be received

where the buyer and the seller may not know each other
and are operating in different countries. In this case the
seller is exposed to number of risks such as credit risk,
and legal risk caused by the distance, differing laws and
difficulty in knowing each party personally. A letter of
credit provides the seller with the guarantee that they will
get paid as long as certain delivery conditions have been
met. For this reason the use of letters of credit has
become a very important aspect of international trade.
The bank that writes the letter of credit will act on the
behalf of the buyer and make sure that all delivery
conditions have been met before making the payment to
the seller. Letters of credit are typically used by importing
and exporting companies particularly for large purchases
and will often negate the need by the buyer to pay a
deposit before delivery is made.
The basic difference between the two is Letter of Credit
ensures that the transaction proceeds as planned, while
the bank guarantee reduce the loss if the transaction
doesnt go as planned.

2.6) Working capital:Capital: - the amount required starting a business. It is

divided into fixed capital and working capital.
Working capital: - It refers to short term funds are needed
to meet operating expenses. It refers to fund, which a
company must possess to finance its day to day
operations. It is concerned with the management of
current assets and current liabilities. Broadly there are
two concepts of working capital:

Gross working capital

Net working capital

Gross working capital:- According to this, the total

current assets are known as gross working capital. It is
also known as quantitative or circulating capital. Total
current assets include cash, marketable securities,
accounts receivables, inventory, prepaid expense,
advance payment of tax, etc.

Gross working capital concept focuses attention on two

aspects of current assests management, they are:
a) Optimum investment in current asset and
b) Financing of current assets
Optimum investment in current assets:
investment in working capital must be just
adequate to the needs of the firm. In other words,
current assets investment should not be inadequate
or excessive. Inadequate working capital can
disturb production and can also threaten the
solvency of the firm, if it fails to meet its current
obligation. So excessive investment in current
assets should be avoided since it impairs firms
profitability.
Financing of current assets: Sometimes surplus
funds may arise, which should be invested in short
term securities. There should not be kept as idle
cash.
Net working capital: Excess of current assets
over current liabilities. It can be positive or
negative.
It mainly focus on the two aspects of current asset
management, they are:
(a) Maintaining Liquidity Position:- Net working
capital decide the extent of long term capital
in financing current assets.
(b) To decide upon the extent of long term
capital in financing current assets: Here NWC
concept helps in indicating the extent of long
term funds required to finance current assets.

Kinds of Working Capital

Categorisation of working capital can be made either based on its
concepts or the need to maintain current assets either

permanently and/or temporarily. It may be classified into gross

working capital and net working capital.

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Permanent Working Capital:It is the minimum investment kept in the form of inventory of
raw materials, work-in-process, finished goods, stores and
spares, and book debts to facilitate uninterrupted operation of a
firm.

Temporary Working Capital:A firm is required to maintain an additional current asset

temporarily over and above the permanent working capital to
satisfy cyclical demands. Any additional working capital apart
from permanent working required to support the changing
production and sales activities is referred to as temporary or
variable working capital.

Components of Working Capital

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Effective management of working capital involves effective
control over the current assets and current liabilities, which are
the main components of working capital.

1) Components of current assets:- Current assets are those

assets which can be turned into cash within an accounting
period. It consists of cash, marketable securities,
inventories, sundry debtors, one year fixed deposits with
banks, prepaid expenses.
2)

Components of current Liabilities:- Current liabilities

are those liabilities intended to be paid in the ordinary
course of business out of the current assets. It consists of
sundry creditors, loans and advances, bank overdraft,
short-term borrowings, taxes and proposed dividend.

Role of Banker:
The unit should have sufficient amount of working capital. A
portion of it is to be finance from long term sources called the
liquid surplus or net working capital (NWC). The remaining is
normally financed by the bank in the form of working capital
limits. Excess maintenance of working capital may result in idle
resources and high interest cost whereas less amount of working
capital may mean disruption in the working. So both the
situations are to be avoided. That is why the technique of
calculation of right amount of working capital assumes
significance. For financing of working capital, a banker should
be able to calculate right amount of working capital needed by
the unit being financed. It shall mean right amount of financing
which will result in higher profitability for the unit and safety of
funds of the bank.

2.7) Review of literature

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

A research work on the topic On the appraisal on

consumer credit banking products with the asset quality
frame: A multiple criteria application, done by
Panagiotis, Xidonas, Alexandros flamos, Sortirios
Koussouris, Dimitrious Askouins and loannis Psarras
from National Technical University of Athens in 2007
says that asset quality refersto the likelihood that the
banks earning assets will continue to perform and
requires both qualitative and quantitative assessment.
Decision problems like the internal appraisal of banking
products, are problems with strong multiple-criteria
character and it seems that the methodological framework
of Multiple Criteria Decision Making could provide a
reliable solution. In this paper, the Asset Quality banking
indicators are the, so called, criteria, the value of these,
indicators are the, so called, scores in each criterion and
the P.R.O.M.E.T.H.E.E. [Preference Ranking

Organization Method of Enrichment Evaluations, Brans

&Vincke (1985)] Multiple Criteria method is applied,
towards modelling banking products appraisal problems.
A Multiple Criteria process, strictly mathematically
defined, integrates the behaviour of each indicatorcritedron and utilizes each score in order to rank the so
called alternatives, i.e. categories of banking products.
II.

The research paper on Evaluation of decision support

systems for credit management decisions by S.
Kanungo, S.Sharma, P.K. Jain from Department of
studies, IIT Delhi have conducted a study to evaluate the
efficiency of decision support system (DSS) for credit
management. This study formed a larger initiative to
access the effectiveness of the I.T based credit
management process at SBI. Such a study was
necessitated since credit appraisal has become an integral
sub-function of the Indian banks in view of growing
incidence of non-performing assets. The DSS they have
assessed was a credit appraisal system developed by
Quuattro pro at SBI. This system helps in analysis of
balance sheets, Calculation of financial ratios, cash flow
analysis future projections, sensitivity analysis and risk
evaluation as per SBI norms. They have also used a
strong Quassi experimental design called Solomons four
group design for the assessment. In the experiment the
managers of SBI who attended the training programme
were the subjects the experiment consisted of the
measurements that were taken as pre and post tests. An
experimental intervention or stimulus con sisted of DSS
training and use. There were four groups in the
experiment. The stimulus remained constant as they took
care to ensure that the course content as well as the
instructors remained the same during the course of the
experiment. Two were experimental groups and two were
control groups. All four groups underwent training in
credit management between the pre and the post tests.
Results from research shows that while the DSS is
effective, improvement needs to be done in the
methodology to assess such improvements. Moreover
such assessment frameworks while being adequate from a
DSS-centric view point do not respond to the assessment
of DSS in an organizational setting. In the concluding
section they have discussed how this evaluative
framework can be strengthened to initiate an activity that

will allow the long term and possibly the only meaningful
evaluation framework for such a system.
III.

The research paper on the topic Towards an appraisal

of the FMHA farm credit program: A case study of the
efficiency of borrower by S. Mehdian, Wm. McD.
Herr, Phil Eberle, and Richard Grabowski have
studied that the production frontier methodologyis used to
measure the overall efficiency of a sample of farmers
home administration (FMHA) compared to non
participants. The study did not find evidence that the
efficiency FMHA farms improved between a time period.
Results indicated that overall efficiency of FMHA
borrowers is associated with selected financial
characteristics of the farms. A review of the literature
shows that agriculture finance specialists have not been
successful in evaluating whether FMHA pro-grams
improve the efficiency and income of probability of
success. Inadequate evaluation of the FMHA program
occurs partially because of the difficulty of adequately
determining the impacts of changes in the econ-borrowers
in a more normal period of the loan. This study addressed
these difficulties by utilising a non parametric production
frontier technique to measure overall efficiency and a
matched pair statistical procedure to measure how
efficiency of farms receiving FMHA credit change related
to a Non-FMHA farmers.

IV.

The book named Financial Analysis for Bank Lending

in Liberalised Economy by Sampat.P.Singh and
Dr.S.Singh have discussed the subject financial analysis
for bank lending has assumed considerable importance,
particularly since early 1990s when, like most of the
countries, india opted for the policy of liberalisation and
globalisation after 1991. The present value is meant to be
a standard reference as well as text book on the varied
facets of financial analysis with reference to credit
management by banks and financial institutions. The
book consist of three parts. Part 1 discusses the concepts
and tools of financial analysis; Part 2 explains various
concepts of working capital in its historical contexts;
while Part 3 demonstrates the application of these tools in
the changing context of liberalised economy by focussing
on new concepts like Credit Worthiness, Risk Analysis,
Credit Rating, Products-Differentiation, PricingDifferentiation, Asset-Liability Management, etc. The

book contains-Bank Lending and Industrial Finance in

India, Basic Economics for Bankers and Business
Managers, Introduction to Fundamentals Accounting
Principle, Profit and Loss Account(Operating Statement),
Analysis of Profit and Loss Account(Operating
Statement), Structure and Analysis of Balance Sheet,
Ratios as Tools of Financial Statements Analysis,
Accounting Flows: Income, Cash and Funds, Break-evenAnalysis and Margin of Safety, Appraisal of Capital
Projects, New Conceptual Framework for Analysis,
Liberalised Era and New Focus of Bank Lending,
Financing Working Capital: Conceptual and Historical Ex
position, Credit worthiness and Credit Rating: At Centre
Stage Nucleus of Credit Appraisal, Working Capital
Managedment-1: MPBF System of Appraisal and
Bifurcation of Fund-Based Limit into Two Components
Working Capital Management-2: Alternative methods of
Appraisal, Working Capital Management- 3: Follow-up
and Supervision, Appraisal of a New Project Involving
Term Loan, Management of Problem Accounts,
Management of Non-Performing Assets(NPA s),
Rehabilitation of Sick Industrial Units, Working Capital
Management: Concepts and Techniques, 1st committee on
Financial Sector Reform and the 2nd Committee on
Banking System reform(Known as Narasimham
Committee Report, 1998).
V.

The research paper on the topic Competitive analysis in

banking: Appraisal of themethodoligies by Nicola
Cetorelli has discussed about the U.S. banking industry
has experienced significant structural changesas the result
of an intense process of consolidation. From 1975 to
1997, the number of commercial banks decreased by
about 35 percent, from 14318 to 9215. Since the early
1980s there have been an average of more than 400
mergers per year. The relaxation of intrastate branching
restrictions, effective to differing degrees in all states by
1992, and the passage in 1994 of the Reigle Neal
Interstate Banking and Branching Efficiency Act, which
allows bank holding companies to acquire banks in any
state and , since June1 1, 1997, to open interstate
branches, is certainly accelerating the process of
consolidation. These significant changes raise important
policy concerns. On the one hand, one could argue that
banks are merging to fully exploit potential economies of
scale and/or scope. The possible improvements in

efficiency may translate into Welfare gains for the

economy, to the extent that customers pay lower prices
for banks services or are able to obtain higher quality
services or services that could not have been offered
before. On the other hand, from the point of view of
public policy it is equally important to focus on the effect
of this restructuring process on the competitive conditions
of the banking industry. Do banks gain market power
from merging? If so, they will be able to charge higher
than competitive prices for their products, thus inflicting
welfare costs that could more than offset any presumed
benefit associated with mergers. In this article, analysis of
competition in the banking industry is done highlighting a
very fundamental issue: How market power is measured
and how do regulators rely on accurate and effective
procedures to evaluate the competitive effects of a
merger.

2.8) Credit Appraisal:It is a process by which the lender assesses the

credit worthiness of the borrower. It revolves
around character, collateral capability and capacity.
It takes into account various factors like income of
the applicants, number of dependents, monthly
expenditure, repayment capacity, employment
history, number of years of service and other
factors which affect credit rating of the borrower. It
is an important part of determining the eligibility for a home
loan, and the quantum of the loan. A prospective borrower has to
go through the various stages of the credit appraisal process of
the bank. Each bank has its own criteria to satisfy itself on the
credit worthiness of the borrower.
The eligibility for the loan that a person can get depends on his
credit worthiness, determined in terms of the norms and
standards of the bank. Being a crucial step in the loan process, a
borrower needs to be careful in planning his financing modes.
The credit worthiness, basically, assures the repayment capacity
of the borrower - whether the borrower is capable of repaying the
loan and dues on time.
The credit requirement must be assessed by all Indian
Financial Institutions or specialized institutions set up for this
purpose.

Wherever financing of infrastructure projects is taken up

syndication arrangement- banks exposures shall not
exceed 25%.
Bank may also take up financing infrastructure projects
independently/exclusively in respect of promoters of
repute with excellence past record in implementation.
In such cases due diligence on the ability of the projects
are well defined and accessed. State government
guarantee may not be taken as a substitute of satisfactory
credit appraisal.

Credit Appraisal Process

Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no.,
MOA, AOA, and Properties
documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data,
ECGC caution list, etc.
|
Title clearance reports of the properties to be obtained from
empanelled advocates
|
Valuation reports of the properties to be obtained from
empanelled valuer/engineers
|
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning
authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements,
review of accounts, renew of
accounts, etc
(On regular basis)

CHAPTER 3
RESEARCH METHODOLOGY
The objective of research methodology is to study
the Credit Appraisal of PNB Bank and to check the
commercial, financial and technical viability of the
project proposed and its funding pattern.
The methodology being used involves two basic
sources of information primary sources and
secondary sources.
Primary sources of Information

Meetings and discussion with the Chief

Manager and the Senior Manager of both
Credit and Credit Risk Management
Department

Meetings with the clients

Secondary sources of Information

Loan Policy and Internal Circulars of the Bank

Referring to information provided by CIBIL,

Income Tax files, Registrar of Companies
(Ministry of Corporate Affairs), and Auditor
reports.

Research papers, power point presentations

and PDF files prepared by the bank and its
related officials

Chapter-4
TECHNICAL
ECONOMIC
VIABILITY STUDY
TEV Study (Technical Economic Viability)
Techno Economic Viability Study and Feasibility
reports provides appraisal of technological
parameters of a project and its impact on the
financial viability of project. TEV study is a risk
mitigation task undertaken in respect of any
industrial activity prior to decision taken by
bank, whether Bank should lend for such project
or not.
The feasibility study/TEV consultancy starts with
developing the project concept to the point of
evaluating its economic, financial and technical
viability. The Company with our support leads a
turn-key team to produce a Detailed Project
Report with full financial analysis for submissions
with the Government/investors. Once submitted
our team also supports their fund raising
program.
Purpose of TEV Study
The purpose of TEV Study is to provide utility to
the sanctioning authority to conclude at an
informed judgment as regards acceptance of the
project for lending (or investment) purpose.
TEV study takes into account market, regulatory,
and standards- related product and also
financials. Viability study, as simple meaning is
the study to arrive at the two criteria to judge
feasibility of the proposal which considers the
cost consumption and desired value to be
attained. This involves keeping in consideration,
historical background of the business or project,
description of the product or service, accounting

statements, details of the operations and

management, marketing research and policies,
financial data, legal requirements and tax
obligations. Generally, feasibility studies precede
technical
development
and
project
implementation.
Feasibility study
Feasibility study is carried out with the aim to
determine the strengths and weaknesses of the
existing business or proposed venture. The
objective of conducting feasibility study is to
assess
the
threats
presented
by
the
environment; the resources required and the
prospects for success. Ratio of expected
outcomes
and
costs
required
for
implementation,
feasibility
of
technology
deployment within the circumstances of
prevailing local and national regulations and
availability of resources to keep the project
operational are some of the major criteria to
determine
the
viability
of
a
proposed
venture/existing business.
A well-designed feasibility study should provide
a historical background of the business or
project, a description of the product or service,
accounting statements, details of the operations
and management, marketing research and
policies, financial data, legal requirements and
tax obligations. Generally, feasibility studies
precede technical development and project
implementation.
A feasibility study evaluates the projects
potential for success; therefore, perceived
objectivity is an important factor in the
credibility of the study for potential investors
and lending institutions.

Carrying out technical viability broadly

requires analysis of following parameters:

Technical Feasibility
Economical Feasibility
Financial Feasibility
Operational Feasibility

Technical Feasibility:- The technical feasibility

assessment
is
focused
on
gaining
an
understanding
of
the
present
technical
resources of the organization and their
applicability to the expected needs of the
proposed system. It is an evaluation of the
hardware and software and how it meets the
need of the proposed system.
Economical Feasibility:- The purpose of the
economic feasibility assessment is to determine
the positive
economic
benefits
to
the
organization that the proposed system will
provide.
It
includes
quantification
and
identification of all the benefits expected. This
assessment typically involves a cost/benefits
analysis.
Financial Feasibility:- in case a new project,
financial viability can be judged on the following
parameters:

Total Estimated Cost Of The Project

Financing Of The Project In Terms Of Its
Capital Structure, Debt Equity Ratio And
Promoters Share Of Total Cost
Existing Investment by The Promoter In
Any Other Business
Projected Cash Flow And Profitability

The financial viability of a project should provide

the following information:

Full Details of the Assets to be financed

and how liquid those assets are.
Rate Of Conversion To Cash-Liquidity (i.e.
How Easily Can The Various Assets Be
Converted To Cash?).
Projects Funding Potential And Repayment
Terms.

Sensitivity in the repayments capability to the

following factors:

Time Delays.
Mild Slowing Of sales.
Acute Reduction/Slowing Of sales.
Small Increase In Cost.
Large Increase In Cost.
Adverse Economic Conditions.

Operational
Feasibility:Operational
feasibility is a measure of how well a proposed
system solves the problems, and takes
advantage of the opportunities identified during
scope definition and how it satisfies the
requirements identified in the requirements
analysis phase of system development.
The operational feasibility assessment focuses
on the degree to which the proposed
development projects fits in with the existing
business environment and objectives with
regard to development schedule, delivery date,
corporate culture, and existing business
processes.
To ensure success, desired operational outcomes
must
be
imparted
during
design
and
development. These include such designdependent parameters such as reliability,
maintainability,
supportability,
usability,
producibility,
disposability,
sustainability,
affordability and others. These parameters are
required to be considered at the early stages of

design if desired operational behaviours are to

be realized. A system design and development
requires appropriate and timey application of
engineering and management efforts to meet
the previously mentioned parameters. A system
may serve its intended purpose most effectively
when its technical and operating characteristics
are engineered into the design. Therefore
operational feasibility is a critical aspect of
systems engineering that needs to be an
integral part of the early design phases.

CHAPTER - 5
MARKET/INDUSTRY/PRODUCT
ANALYSIS
Market analysis helps in determining whether the
loan should be given to the borrower or not. A
company does not operate in isolation there are
various market forces that acts in either favourable
or unfavourable manner towards its performance.
Thus the rating would not give true picture if does
take market or demand situation/market potential
plays an important role in determining the growth
level of the company like
1. Level of competition: Monopoly, Favourable,
Unfavourable.
2. Seasonality in demand: affected by short
term seasonality, long-term seasonality or
may not be affected by seasonality in
demand.
3. Raw material availability.
4. Location issues like proximity to market,
inputs, infrastructure, favourable, neutral,
unfavourable.
5. Technology i.e. proven technology not to be
changed in immediate future, technology
undergoes outdated technology.
6. Capacity utilization.
All businesses starting out are different and they
may be creating business plans and strategies for
different reasons or audiences. If your business is
quite small and you know your customers inside
and out, this may not be the best use of your time.
If this is an internal plan, and there isnt a need for
industry data to corroborate your forecast, a market
analysis may not be necessary.
If you do need banks to lend you money or
investors to jump on board, a market analysis

section is required, as savvy lenders or investors

will need to know that the business youre pitching
has viable market appeal. Either way, a solid
business plan complete with market analysis will be
invaluable. Youll need to identify your potential
customers and attract investors, and it will help you
to be clear about what you want to do with your
business, both now and in the future.
The things which should be mention in the
market analysis are:Market analysis should include an overview of your
industry, a look at your target market, an analysis
of your competition, your own projections for your
business, and any regulations youll need to comply
with.
Industry description and outlook
Here the current state of your industry overall and
where its headed should be mentioned. Relevant
industry metrics like size, trends, life cycle, and
projected growth should all be included here. This
will let banks or investors see that you know what
youre doing.
Target market
In the previous section of your market analysis, you
were able to look at the general scope. In this
section, youve got to be specific. Its important to
establish a clear idea of your target market early
on. A lot of new entrepreneurs make the rookie
mistake of thinking that everyone is their potential
market. The target market section of your business
plan should include the following:

User Persona and Characteristics: Youll

want to include demographics such as age,
income, and location here. Youll also need to
dial into your customers psychographics as

well. You should know what their interests and

buying habits are, as well as be able to
explain why youre in the best position to
meet their needs.
Market size: This is where you want to get
real, both with the potential readers of your
business plan and with yourself. Do you
research and find out who and where your
competitors are, and how much your
customers spend annually on your product or
service. How big is the potential market for
your business?

Competitive analysis:- This is the section in

which you get to dissect your competitors, which is
important for a couple of reasons. The competitive
analysis should contain the following components:

Market: How big is the market for goods and

services similar to what you plan on offering?
Whats the growth rate? Include the general
outlook and trends for this market. Who are
your main competitors? Are there any
secondary competitors who could impact your
business?
Competitor strengths and weaknesses:
What is your competition good at? Where do
they fall behind? Get imaginative to spot
opportunities to excel where others are falling
short.
Barriers to entry: What are the potential
pitfalls of entering your particular market?
Whats the cost of entryis it prohibitively
high, or can anyone enter your market? This
is where you examine your weaknesses. Be
honest, with investors and yourself. Being
unrealistic is not going to make you look
good.

Projections

Market share: When you know how much

money your future customers spend, youll
know how much of the market you have a
chance to grab. Be practical, but dont sell
yourself short. Make sure you are able to
explain how you came up with your numbers.
Pricing and gross margin: This is where
youll lay out your pricing structure and
discuss any discounts you plan to offer. Your
gross margin is the difference between your
cost and the sales price. Again, be realistic
yet optimistic. Optimistic projections not only
serve as a guide, they can be a motivator.

Chapter-6
CIBIL/EQUIFIX/HIFGMA
RK
Three more credit information companies are into business after
the RBI approval. But the existing local credit bureau CIBIL
(Credit Information Bureau India Ltd.) is only approved by the
banking regulators to maintain credit histories of insurance and
telecom customers.
CIBIL collects and maintains records of an individuals payments
pertaining to loans and credit cards. These records are submitted
to CIBIL by member banks and credit institutions, on a monthly
basis. This information is then used to create Credit Information
Reports (CIR) and credit scored which are provided to credit
institutions in order to help evaluate and approve loan
applications. CIBIL was created to play a critical role in Indias
financial system, helping loan providers manage their business
and helping consumers secure credit quicker and on better terms.

Objectives of CIBIL

For credit grantors to gain a complete picture of the payment

history of a credit applicant, they must be able to gain access
to the applicants complete credit record that may be spread
over different institutions.

CIBIL collects commercial and consumer credit-related data

and collates such data to create and distribute credit reports to
its members which are credit institutions and banks in India.

CIBILs over 900 strong member base including all leading

public & private sector banks, financial institutions, non
banking financial companies and housing finance companies.

CIBILs products, especially the Credit Information Report

(CIR) and CIBIL Trans Union Score are very important in the
loan approval process. Once the loan provider has decided
which set of loan applicants to evaluate, it analyzes the

CIR/Score in order to determine the applicants eligibility.

Eligibility basically means the applicants ability to take
additional debt and repay additional outflows given their
current commitments. Post completion of these first 2 first
steps the loan provider will request for the applicants income
proof and other relevant documents in order to finally
sanction the loan.

The CIR and Credit Score not only help loan providers
identify consumers who are likely to be able to pay back their
loans, but also help them to do this more quickly and
economically. This translates into faster loan approvals for
consumers. An individual with a credit score above 750 has
better bargaining power with the lenders, since he is
perceived as a responsible borrower. Since consumers can
now access their Credit Scores and CIRs directly from CIBIL
at the cost of INR 470, they can see for themselves how they
are perceived by the lenders before applying for a loan.
Hence, CIBIL empowers both loan providers and individuals
to see their financial and credit history more clearly and
hence, take better and more informed decisions.

Equifax Credit Information Services, Experian Credit Information

Company, and Highmark Credit Information Services are the
three new entrants. These entities were short-listed from 13
applicants including CIBIL. Business for credit bureau is
expected to grow given rising defaults in consumer credit and
growing risk consciousness among lenders.
Credit information companies in form banks whether a
prospective borrower is creditworthy or not based on his past
payment track record.
Among the new entrants Equifax, is US based and Experian an
Irish company in the credit information business. Both have a
long-established transnational presence. Highmark is a start-up
promoted by individuals Anil Pandya and Anuj Desai.
CIBIL has close to 164 members from the financial sector that
use its database. CIBIL was originally promoted by SBI (40%),
HDFC(40%), Dun & Bradstreet Information Services India
(10%)) and Trans Union International (10%). Subsequently, the

company inducted more investors including ICICI Bank , HSBC,

Stan Chart, Citicorp, Bank of Baroda, IOB, Sundaram finance.
Bank of India, GE, UBI and PNB. ICICI Bank,SBI, D &B and
Trans Union hold 10% stake each in CIBIL. Others own 2.5%5% each.

CHAPTER 7
CREDIT RISK RATING
A credit rating is an evaluation of the credit worthiness of
a debtor, especially a business (company) or a government, but
not individual consumers. The evaluation is made by a credit
rating agency of the debtor's ability to pay back the debt and the
likelihood

of default. Evaluations

of

individuals'

credit

worthiness are known as credit reporting and done by credit

bureaus,

or

consumer

credit

reporting

agencies,

which

issue credit scores.

Credit ratings are determined by credit ratings agencies. The
credit rating represents the credit rating agency's evaluation of
qualitative and quantitative information for a company or
government; including non-public information obtained by the
credit rating agencies' analysts.
Reserve Bank of India has laid down guidelines on, Risk
Management Systems in Banks for implementation by the banks.
In terms of these guidelines, banks should have a comprehensive
risk scoring / rating system that serve as a single point indicator
of diverse risk factors of a counter party and for taking credit
decisions in a consistent manner. The risk rating system should
be designed to reveal the overall risk of lending, for setting
pricing and non-pricing terms of loans.
The various steps taken by the bank to comply with the RBI
guidelines, interlay, include development of various Credit Risk
Rating Models for different categories of borrowers to measure
the risks inherent in individual loans in its credit portfolio. All
borrowers having (FB+NFB) limits of above Rs.2 Lacs

excluding borrowers covered under PNB Score/ Scoring models

(i.e excluding all retail loans, Trading & SME loans up to Rs.50
Lacs and all Direct Agriculture loans) should invariably be rated
on these models.
We have devised and implemented Eight Default Rating models,
two Transaction Rating Model, one Half Yearly Rating model &
one NPA Marking Model as detailed below:-

S.No

Credit Risk Rating Model

Total Limits

Sales

1.

Large Corporate

Above Rs. 15 Crore

(OR)

Above
Crore, e
Trading

Above Rs.5 Cr and up to

Rs.15 Cr. (OR)

Above
and up

2.

Mid Corporate

All trading concerns falling

in the Large Corporate
category shall also be rated
under this model
3.

New Projects Rating Model

Above Rs. 5 Cr. (OR)

Cost of
above R

4.

Small Loans

Above Rs.50 lakh & up to

Rs.5 Cr (AND)

Up to R

5.

Small Loans II

Above Rs.2 lakh & up to

Rs.50 lakhs

Up to R

6.

NBFC

All Non Banking Financial

Companies irrespective of
Limit

7.

Entrepreneur New Business

Borrower setting up new

Cost of

Model

business and requiring

finance above Rs 20 lac
upto Rs. 5 Cr (AND

8.

Credit Risk Rating models

for Banks/ FI

All banks and Financial

Institutions.

S.No.

Transaction Rating Model

Applicability

1.

Facility (Expected Loss)

Assigning rating to facility

sanctioned to the borrower base
default rating and securities
available.

Rating Framework

2.

Future Lease Rental Model

Rs.15 C

Advances to property owners

against future lease rentals.

S.No.

Half Yearly Rating

Model

Applicability

1.

Half Yearly Rating Model

i) All listed companies rated

large /mid corporate rating mode
ii) Other borrowal accounts rated
large / mid corporate rating mode
availing limits (FB+NFB) abo
Rs.50.00 crores from our bank.

S.No.

NPA Model

Applicability

1.

NPA Model

For marking NPA accounts in o

line PNB Trac Credit Risk Rati
System

2. Credit Risk rating Grades

The credit risk rating model provides for evaluating the
borrower on a 7 point scale from AAA to D. With a view
to have better and wider differentiation among the borrowers
within a rating category, the rating grades have been further
split i.e. suffixed (+)/(-) sign within 4 of the 7 existing rating
categories, as detailed below.
Rating category

Description

Score obtained

Grade
the
catego

PNB AAA

Minimum Risk

Above 80.00

PNB-

PNB-AA

Marginal Risk

Above 77.50 up to
80.00

PNBPNB-

Above 72.50 up to
77.50

PNB-

Above 70.00 up to
72.50

PNB-A

Modest Risk

Above 67.50 up to
70.00

PNBPNB-

Above 62.50 up to
67.50

PNB-

Above 60.00 up to
62.50
PNB-BB

Average Risk

Above 57.50 up to
60.00

PNB-

Above 52.50 up to
57.50

PNBPNB-

Above 50.00 up to
52.50
PNB-B

Marginally
Acceptable Risk

Above 47.50 up to
50.00

PNBPNB-

Above 42.50 up to
47.50

PNB-

Above 40.00 up to
42.50
PNB-C

High Risk

Above 30.00 up to
40.00

PNB-

PNB-D

Caution Risk

30.00 and below

PNB

3. Credit Risk Rating Authority and

Vetting/Confirming Authority
The Credit Risk Rating Authority and Vetting/Confirming
Authority in respect of loans sanctioned by different
Authorities will be as under:
Loan Sanctioning
Authority

Credit
Risk
Authority

Rating

Vetting/Confirm
Authority

HO

i) CRMD at CO in
consultation with branches ii)
Large Corporate Branches and
identified branches in respect
of proposals falling under HO
powers

CGM/GM (RMD

GM ( Field )/ Circle
Office

i) ELBs/VLBs/branches ii)
LCBs and identified branches

DGM/AGM/CM
CO

in respect of proposals falling

under FGM powers The
assistance
of
CRMD/
Functional Manager (Credit)
of Circle Office may be taken
in case of need.
Branch

Officer/Manager,
Section

Credit

An official desig
Incumbent not c
processing/ recomm
concerned loan prop

It is further clarified that in case of takeover of accounts,

rating and its approval should be done by the competent
authority in the office of loan sanctioning authority. After the
approval of the rating, case should be referred to next higher
authority along with rating of the borrower for getting
permission to take over of the account as per extant
guidelines.

4. Portfolio

Analysis

of

rated

accounts
For the purpose of analysis of the rated portfolio, the Large
Corporate, Mid Corporate and Small Loans, are redefined as
under:
Category

Exposure Ceiling

Large corporate

Aggregate exposure above Rs. 15

Mid Corporate

Aggregate exposure above Rs. 5

up to Rs. 15 crore

Small loans

Aggregate exposure above Rs. 20

up to Rs. 5 crore