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Credit Appraisal & Renewal


A detailed study done in
Submitted in partial fulfillment of the requirement for the award of
degree of
Master of Management (MMS) under Mumbai University

Submitted by


BATCH: 2009 – 2010

Under the guidance of




Department of
Master of Management Studies
Kharghar, Navi Mumbai
Credit Appraisal & Renewal


The project undertaken is credit appraisal and renewal. The project

emphasis on understanding the procedure and process used by
Abhyudaya Co-operative Bank Ltd. to assess the credit worthiness of the
The credit appraisal process is the scientific way of giving the
credit to corporate client by analyzing the credit worthiness of the
company through different parameters. The first step in credit appraisal
project is to understand the Indian Co-operative banking industry.
The credit appraisal for company starts with Understanding the
need of loan to the borrower i.e. for which purpose the loan is required.
After this next step is to analyse the financial statement of the company to
whom the loan is to be sanctioned. The main things which are taken into
consideration while analyzing the financial statement are type of
statement, nature of activity, accounting policy, qualities of assets and
liabilities , unit wise performance result of the company & director’s
After analyzing the financial statement the second step is to analyse
the key financial ratios of the company such as:
Creditors Ratio, Debtors Ratio, Debt Equity Ratio, Debt-service coverage
ratio, liquidity ratio, turnover ratio, Stock Velocity Ratio etc.
The next step is to understand the methodology used to determine
the credit rating. Since the credit rating methodology differ from bank to
bank in term of the weight age given to the parameters but the parameter
used by the banks to assess credit worthiness are almost same to all
The sensitivity analysis is used to check the company ability to pay
back the loan by changing the independent variables and consequently
monitoring the effect on dependent variables. The last step is to
understand the classifications of Non Performing Assets and the
provision to recovery of NPA. The research report contains the whole
procedure & process which is used by the bank to give credit.
Credit Appraisal & Renewal


A work is never a work of an individual. I owe a sense of gratitude

to the intelligence and co-operation of those people who had been so easy
to let me understand what I needed from time to time for completion of
this exclusive project.
I am also grateful to Dr. J. G. Kori Principal and Prof. Pravin
More, HOD of MMS, Saraswati College of Engineering Dept of MMS,
for permitting me to undertake this study.
I am greatly indebted to my guides Prof. SADHANA OGALE,
faculty guide for Finance (summer internship), Saraswati College of
Engineering and Department of Master of Management Studies & Mr. K.
B. Sawant, Dy. General Manager, Central Zonal Office, Abhyudaya Co-
operative Bank Ltd., Ghatkopar for their constant guidance, advice and
help which enabled me to finish this project report properly in time.
Last but not the least, I would like to forward my gratitude to my
friends & other faculty members who always endured me and stood with
me and without whom I could not have completed the project.

Harshad Rajan Joshi

Credit Appraisal & Renewal


I do hereby declare that this piece of project report entitled “A

Study on Credit Appraisal at Abhyudaya Co-op. Bank” for partial
fulfillment of the requirements for the award of the degree of “MASTER
OF MANAGEMENT STUDIES” is a record of original work done by
me under the supervision and guidance of Prof. SADHANA OGALE,
Sarawati College of Engineering & Dept of MMS .This project work is
my own and has neither been submitted nor published elsewhere.


Credit Appraisal & Renewal


This is to certify that the summer project work of Mr. Harshad Rajan
Joshi titled Credit Appraisal is an original work and this work has
notbeen submitted elsewhere in any form. The indebtness to other
works/publications has been duly acknowledged at the relevant places.
The project work was carried out during 3.05.2010 to 30.06.2009 in

Mr. K. B. Sawant, Dy.Gen.Manager, Date:

Abhyudaya Co-operative Bank,
Central Zonal Office,
Ghatkopar, Mumbai.
Credit Appraisal & Renewal


Sr. No. Contents Page No.

1 Abstract 2
2 Acknowledgement 3
3 Declaration 4
4 Executive Summary
5 Certificate 8
6 Introduction To The Study 9-11
(a) Objective Of The Study
(b) Limitation Of The Study
(c) Research Methodology
7 Introduction - Banking sector an overview 12-17
(a) Indian Banking Structure
8 Evolution of Urban Co-operative Banks 18-43
9 About Abhyudaya Co-operative Bank 44-45
(a) Company Profile & features
(b) Technological Progress and Services Offered
By Abhyudaya Bank
(c) Key Developments
(d) Future Goals of the Bank
(e) Milestones
(f) The Bank’s Mission / Vision Statement
10 Loan process and credit analysis in 46-48
Abhyudaya Co-op. Bank
11 Forms Of Bank Finance 49-50
12 Factors to be taken into consideration while 51-53
determining requirements for working
13 Securities Required in bank finance
14 Documentation Formalities
15 NPA classification and recovery
16 Case Study I: M/s Quality Crafts Store 54-55
17 Case Study I: M/s A.M. Classic 56
18 Glossary 57
Credit Appraisal & Renewal
19 Recommendations & Suggestions
20 Conclusion
21 Bibliography
Credit Appraisal & Renewal


Once a project opportunity is conceived and it is considered after

the preliminary screening, a detailed feasibility study has to be
undertaken covering marketing, technical, and financial aspects of the
project. The study in the form of cases deal with calculations of MPBF
(Maximum Permissible Finance), along with going through the
borrower’s information, general information of the proposal, past record
of borrower and details of security mortgaged. Financial records of the
borrower audited, provisional and projected such as Profit and loss
account statements, Balance Sheet and Cash and Fund Flow Statements
needed to be considered. The ratios such as current Ratio, Debt Service
Coverage Ratio etc are also checked. The ultimate decision whether to
grant the credit to borrower for the application or not and how to go about
it , is undertaken after this study which discloses whether the borrower
has good past record and information provided are true and fair.

My project concerns with the Calculations of MPBF i.e. Credit

Appraisal and Renewal, in which I need to asses if the borrower should
be granted credit, and what should be the recommended loan amount.
This all is done after carefully evaluating the financials and securities
provided by the borrower.

Various financial ratios are calculated for the past and future data
provided by the borrower after checking the veracity of the same. The
various ratios, which are frequently calculated include:

• Current ratio:
[(Receivables + material and finished good inventory)/ (creditors
for goods and expenses)]
• Long term debt-equity ratio
[Long Term Debt/ Net worth]
• Interest coverage ratio
[(Profit Before Interest – Provision for Tax)]/(Interest payments
due for the year]
• Fixed assets coverage ratio
[Fixed Assets/ (Term loan and other long term debt obligations)]
• Debt-service coverage ratio
[{(Profit after tax + Interest on term loan + Depreciation} + Other
Credit Appraisal & Renewal
non-cash charges]/ [Interest on term loan + Principle

• Profit after tax/sales

• Debtors Velocity
[Average Receivables/Credit Sales* No. of days in a year.]
• Creditors Velocity
[Average Payables/Credit Purchase* No. of days in a year.]
• Stock Velocity
[Average Stocks/Cost of goods Sold* No. of days in a year.]

Two other important criterions are IRR and DSCR

Financial institutions calculate the Internal Rate of Return (IRR).

The Internal Rate of Return refers to the rate of return that the project is
expected to generate based on its projected cash flows accruing over its
expected lifespan. Institutions have a threshold IRR that the project needs
to surpass to assess its viability.

DSCR refers to the ability of the project to generate sufficient cash

flows to repay the debt taken to finance the project. This includes the
principal along with the interest component.

The above ratios are taken and matched with the standard, though a
certain amount of flexibility is exercised depending on the perception and
personal judgment of the appraising officer. A rating is assigned to the
project based on the scores of the different ratios. A cut-off rating
determines financing decision (whether the project would financed or
not). Above the rating, the projects maybe categorized into excellent,
good and average. Based on this and the project characteristics, the final
terms and conditions of financial assistance are decided upon like:

• Moratorium
• Repayment period
• Availability period
• Security (like first charge, personal guarantee etc.)
• Interest rate
Credit Appraisal & Renewal
All the expenses like service fee, processing fee, document fee and
other expenses like inspection of site, factory, etc. are charged to the
applicant and are a source of income for the lending institution.


Credit Appraisal:-

Credit appraisal is done to evaluate the credit worthiness of a

borrower. The credit proposal is prepared to indicate the need based
requirement and the rationale for its recommendation. Bank has in place a
well-defined framework for approving credit limits of different segments.
Requests for credit facilities from the prospective borrowers shall be on
the prescribed format and the full-fledged proposal should be prepared for
submission to the appropriate sanctioning authority for approval. These
proposals analyze various risks associated with bank lending i.e. business
risks, financial risks, management risks, etc. and clarify the process by
which such risks will be managed on an on going basis.

Objective of the study:-

The objective of research is to study the Co-operative Banking in

Abhyudaya Co-operative Bank Ltd. The area of study in Abhyudaya Co-
operative Bank Ltd. include:-

1. To make an item wise study of the component of Credit Appraisal

and renewal Process.
2. The study also involves the study of procedural formalities
included in sanctioning the finance to its clients.
3. This study would involve analyzing the balance sheets of their
clients in determining their financial needs.
4. To suggest the step to be taken to increase the efficiency in Credit
Credit Appraisal & Renewal

Place of study:-

The project study is carried out at the Loan Department of

Abhyudaya Co-operative Bank Ltd. Central Zonal office Situated at
Ghatkopar, Mumbai. The study is undertaken as a part of the MMS
curriculum from 03th MAY 2010 to 30th JUNE 2010 in the form of
summer placement.

Study design and methodology:-

Two types of data are collected, one is primary data and second
one is secondary data. The primary data were collected from the Loan
Department of Abhyudaya Co-operative Bank Ltd. The secondary data
were collected from the books, Abhyudaya Co-operative Bank website,


There may be limitations to this study because the study duration

(summer placement) is very short and it’s not possible to observe every
aspect of Credit Appraisal practices.
Credit Appraisal & Renewal


Data Collection:-

Data collected specifically for the study of Credit Appraisal &

Renewal from Abhyudaya Co-operative Bank Ltd.
Since the research carried out for this project is descriptive in
nature, the various documents and official files would require for
understanding the methodology used by the banks. The data collection is
done by personal interview or direct observations. At the same time,
related articles, newspapers, magazines, in-house journals, Credit Policy
of banks, etc were referred. The information on the project under
consideration is obtained by the bank employees and officials. Also I
went through various files and the official correspondence of the bank for
better understanding the topic under the study. The methodology also
include finding out the financial ratio, understanding the credit rating and
assessment of Credit Appraisal and renewal of the companies.

Secondary Data:-

This data is collected from bank’s internal documents which make

on monthly basis & from Web sites. Secondary data is scrutinized on the
basis of suitability, reliability, adequacy and accuracy.


It has been ensured that the data available is suitable for the
purpose of inquiry on hand.


The data is reliable because it is collected from the bank’s internal

Credit Appraisal & Renewal

Banking Sector: An overview

Banking Regulation Act of India, 1949 defines Banking as

“accepting, for the Purpose of lending or investment of deposits of money
from the public, repayable on demand or otherwise and withdraw able by
cheques, drafts, and order or otherwise.”

Most of activities a Bank performs are derived from the above

definition. In addition, Banks are allowed to perform certain activities
which are ancillary to this business of accepting deposits and lending. A
bank’s relationship with the public, therefore, revolves around accepting
deposits and lending money. Another activity which is assuming
increasing importance is transfer of money –both domestic and foreign –
from one place to another. This activity is generally known as “remittance
business” in banking parlance. The so called forex (foreign exchange)
business is largely a part of remittance albeit it involves buying and
selling of foreign currencies.

The law governing Banking Activities in India is called

“Negotiation Instruments Act 1881”. The banking activities can be
classified as:

 Accepting Deposits from public/others (Deposits)

 Lending money to public (Loans)
 Transferring money from one place to anther (Remittances)
 Acting as trustees
 Acting as intermediaries
 Keeping valuables in safe custody
 Collecting Business
 Government business
Credit Appraisal & Renewal

Indian Banking Structure

Credit Appraisal & Renewal

Evaluation of Urban Co-operative Banks

The term Urban Co-operative Bank (UCBs), though not formally defined,
refers to primary co-operative banks located in urban and semi –urban
areas. These banks, till 1996 were allowed to lend money only for non-
agricultural purposes. This distinction does not hold today. These banks
were traditionally centered on communities, localities work place group.
They essentially lent to small borrowers and businesses. Today, their
Scope of operations has widened considerably.

The origin of the urban co-operative banking movement in India can be

traced to the chose of nineteenth century when, inspired by the success of
the experiments related to the co-operative movement in Britain and the
co-operative credit movement in Germany such societies were set up in
India. Co-operative societies are based on the principles of co-operation,-
mutual help, democratic decision making and open membership. Co-
operative represented anew and alternative approach to organization as
against proprietary firm, partnership firm and joint stock companies
which represent the dominant form of commercial organization.

Main features of Co-operative Organization:

The main features of co-operative organization are:

 Voluntary Association
 Democratic Administration
 Self- help and Mutual Aid
 Common Welfare through Common Action
 Participation of Members on the basis of Equality
Credit Appraisal & Renewal

A dedicated group of social workers and labour movement activist,

imbued with the spirit of service to the cause of mill workers, other
industrial workers and economically weaker sections started the
Abhyudaya Co-op. Credit Society Ltd in 1964, with a small share capital
of Rs.5000/-. The area of Parel, Parel village, Kalachowki, Sewri and
their surroundings where at that time predominantly populated with low
income industrial labour and middle class. The promoters realized that
there was the need for providing this hard working, less educated,
economically weaker but honest section of the society with a dependable,
trustworthy and self institutional source for channelizing their savings
and meeting small credit needs. The credit society provided the answer.
The enthusiastic response from the people and the confidence reposed by
them in the credit society encouraged the promoters, in just a few months,
to get it converted in to and Urban Co-op. Bank. Thus, the Abhyudaya
Co-op. Bank Ltd. was bourn in June 1965 with the motto “Prosperity
through Co-operation”.
Credit Appraisal & Renewal
Credit Appraisal & Renewal


Abhyudaya Co-op. Bank Ltd., one of the leading Urban Co-

operative Banks in India, in its outlook and approach, has the objective of
progress and prosperity of all. From a humble beginning in January 1964
as a Co-operative Credit society with a share capital of a merely
Rs.5,000/- held by 83 members, today Abhyudaya Co-op bank has
become one of the large Urban Co-operative Banks with a "Scheduled
Bank" status. The bank has been converted into a “Multi-State Scheduled
Urban Co-op. Bank” w.e.f. 11th January, 2007. The area of operation
which was restricted to the State of Maharashtra has now been extended
to Karnataka & Gujarat State. Currently, the capital base of the bank
stands at Rs. 45.77 crores and Reserves and surpluses at Rs.682.54 crores
as on 31.03.2009. The bank has 1,23,011 members and more than 12
lakh depositors. The Bank has seen a tremendous growth in deposits. The
deposits of the bank are over Rs. 3176.81 crores as on 31.03.2009, which
were Rs. 2625 crores as at the end of the financial year 2007-2008. The
loans and advances stood at Rs. 1856.39 crores as on 31.03.2009. The
bank had posted a as on 31.03.2009. “The growth rate of the bank
compares well with that of others in the sector. The Bank has maintained
a steady growth. The bank has been paying dividend @ 15% to its
members which is maximum permissible as per the MCS Act.

The Bank has launched different loan schemes tailor-made to suit

the needs of various customers. The schemes aim at providing loans for
purchase or construction of residential premises, repair/renovation of
house property, purchase of car, seeking higher education and for
purchase of household consumer durable. One of the loan schemes, viz.
"Udyog Vikas Yojana" is specially designed for the benefit of small
entrepreneurs and businessmen. The procedure for sanctioning of loans
under the schemes has been simplified and relaxed with a view to attract
new customers and facilitating speedy sanction of loans. The Bank has
total 87 branches including a Mobile Bank at Navi Mumbai. Bank is
committed to spread network of branches throughout the State and
provide much needed banking services to the population, which has been
deprived of the banking facilities.

The Bank has total 87 branches including a Mobile Bank at Navi

Mumbai. 11 Hours fully computerized services and 7 days working at 15
Credit Appraisal & Renewal
branches and 24 hours ATM service at 60 branches. Bank is committed to
spread network of branches throughout the State and provide much

needed banking services to the population, which has been deprived of

the banking facilities.

Innovative Banking is another area of operation that Abhyudaya is

currently focusing on for a sustainable long term growth. The Bank has
always endeavored for providing satisfactory customer service the help of
the latest technology. The Bank has provided fully computerized services
to its valued clients. Bank is offering 11 Hours fully computerized
services and 7 days working at 15 branches and 24 hours ATM service at
60 branches.

Our features:

1. Attractive Interest Rates on Deposits.

2. 0.50% additional interest on Deposits for Co-operative Society.
3. 1.00% additional interest on Deposits for Senior Citizens.
4. Various Loan Facilities to fulfill your needs.
5. We have cheque drawing and cheque collection faculty on major
cities all over India.
6. Electricity bills of B.E.S.T., M.S.E.B. etc. accepted.
7. NO TDS to our shareholders.
8. Lockers available at lowest rates.

Technological Progress and Services Offered By Abhyudaya Bank:

The bank has successfully implemented the Core Banking Solution

(CBS). After centralized connectivity the bank is now able to offer
anywhere banking services to customers. Now customers can transact
cash, transfer of fund, clearing, remittances, etc from any branch of the
bank and also use ATM installed at any branch for cash withdrawals,
statement of accounts and balance enquiry. Reserve Bank of India has
also conferred license to open five offsite ATMs and the same will be
installed at A.Nagar, Worli, Wadala, Ghatkoper, Bhandup area shortly.
The bank is providing all types of Foreign Exchange, MoneyGram and X-
press Money services. Bank has also offering telebanking, Mobile
banking services and Internet Banking services.
Credit Appraisal & Renewal
The Bank has also implemented/adopted other RBI schemes such
as RTGS, ECS, NEFT, Speed Clearing, etc. Bank has taken corporate
Agency of LIC of India and now all types of LIC’s Policies are available
at our branches. Out of 87 branches, 16 branches are working in double

shift, rendering 11 hours service to the customers. 62 branches having

ATM facility and our customers are free to operate on more than 6000
ATMs through BANCS network. Now bank has also developed Acquirer
module and customers of other banks in BANCS network can withdraw
the amount from ATM machines installed by our bank. In 3 of our
branches namely Vashi, Dadar and New Panvel ‘Franking’ facility has
been made available for the General Public.

The Bank has launched different loan schemes tailor-made to suit

the needs of various customers. The schemes aim at providing loans for
purchase or construction of residential premises, repair/renovation of
house property, purchase of car, seeking higher education and for
purchase of household consumer durable. One of the loan schemes, viz.
"Udyog Vikas Yojana" is specially designed for the benefit of small
entrepreneurs and businessmen. The procedure for sanctioning of loans
under the schemes has been simplified and relaxed with a view to attract
new customers and facilitating speedy sanction of loans. Bank is
committed to spread network of branches throughout the State and
provide much needed banking services to the population, which has been
deprived of the banking facilities.

Insurance offered by Abhyudaya Bank:

Bank has taken corporate Agency of LIC of India and now all types
of LIC’s Policies are available at Abhyudaya Co-op. Bank branches.

Customer Service:

The Abhyudaya Co-operative Bank has proved to be customer

driven organization and the people in the organization understand that
innovation creates opportunity, quality creates demand and teamwork
makes it happen. The Bank, feeling the pulse of customers need that they
demand more for less, has endeavored to provide them better quality
service, wider choice and above all innovative products. The Bank is
Credit Appraisal & Renewal
always ready to add value to its customers and takes every possible step
to improve quality of customer service. The Abhyudaya Co-op. Bank has
a very efficient complaint redress mechanism. The Bank has a robust
grievance redressal structure and processes to ensure prompt in-house
redressal of all their customer complaints. It handles the customer queries
and complaints on priority. One can find ‘Customer Suggestion Card’, at

all branches of the Bank and also on its website. Customers accessing the
website of the Bank have the option to send their queries through e-mail.

Bank on Information Technology:

The bank has a constant focus on application and augmentation of

the information technology in order to modernize Bank’s operations and
deliver value-added services to the customers. The Bank covers more and
more branches under the computerization programmes. The bank has
extended Anywhere Banking and Tele-Banking facilities to many new
locations/branches, the number of ATMs (both off-site and on-site)
installed by the Bank has increased to 62, and our customers are free to
operate on more than 6000 ATMs through BANCS network. Now bank
has also developed Acquirer module and customers of other banks in
BANCS network can withdraw the amount from ATM machines installed
by our bank. In 3 of our branches namely Vashi, Dadar and New Panvel
‘Franking’ facility has been made available for the General Public.

Branch Expansion:

With a view to increasing its reach to potential markets and

extending banking facilities to un-banked areas coupled with catching on
new business opportunities Bank has been opening new branches
selectively at centers offering highest business potential.
Credit Appraisal & Renewal


1964 Established as Co-operative Credit Society.

1965 Converted into a Bank with one Branch at Abhyudaya Nagar.
1985 Inauguration of Bank's own Building, Staff Training College and
Auditorium at Vashi. RBI Permitted the Bank to open and maintain
NRI Accounts.
1986 Instituted Educational Prizes to the children of Members and
Became 3rd Biggest Urban Co-op. Bank in India.
1988 Became Scheduled Bank.
1990 Inauguration of Bank's own Building at New Panvel.
1995 Decision to set up "Development Reserve Fund" to undertake
special schemes.
1997 All Branches fully computerised.
1999 Eleven Hours & Sunday Banking started in 16 Branches.
2000 ATM installed at 3 Branches.
Bank's website: www.abhyudaya.com launched.
2003 Opened 40th Branch with ATM Facility & 11 hours and sunday
banking at Lokmanya Nagar (Thane). Setup Treasury Dept. at Fort.
2004 Started RTGS and NDS facilities.
2006 * Franking facility at Dadar, Vashi, New Panvel
* Citizens Co-op. Bank Ltd. Pune with 13 Branches merged with
our Bank.
2007 * Bank registered under Multi-State Co-op. Societies Act, 2002
on 11th Jan. 2007.
2008 Merger of Shri Krishna Co Operative Bank, Vadodara
June 19

2008 Merger of Janata Sahakari Bank, Udupi

Aug 20
2008 Merger of Manekchowk Co-op Bank Ltd,Ahmedabad withour bank.
Oct 10
Credit Appraisal & Renewal

Growth and Strength:

The Bank has 1,30,000 members and more then 13.20 lakh
depositors. During first year 2009-10, our bank has achieved substantial
growth in all perspectives reflecting an overall growth of 34% in business
mix which has reached up to mark of Rs.6735 crore. It is the highest
among leading large sized urban co-operative Banks in India. With a rise
of 31.4%, Deposits reached up to Rs.4170.62 crore and rise of 38.20%,
Advances reached up to Rs.2564.73 crore. Our bank has also been able to
maintain ratio of CASA deposits to total Deposits as high as 42.35%. The
strength of the Bank is reflected in fact that its paid up capital and
Reserves amounted to Rs.818.56 V and investment are to the tune of
Rs.2126.74. CRAR maintained by our Bank stood at Rs.29.95 crore.

Key Developments:

With the expanding horizons and continuing developments and

competition he bank propose to become full fledged financial service
provider, fulfilling requirements of customers and other stakeholders by
providing all allied services, as permitted by the regulatory authorities.
The bank has adopted advanced technology for providing faster and
convenient services to clients and within a short span of time we will be
providing additional services like Demat, Issuance of PAN card etc. these
major long term proposals will enable the bank to increase its market
share and better fulfillment of expectations of all the stakeholders.

Future Goals of the Bank:

To build a global brand, the Bank feels a need to do two things –

go global physically and second, more importantly, have a unique
business model, product offering and service standards, all of which are
globally recognized.
Credit Appraisal & Renewal


Mission Statement:

A “Mission” to continuously strive for synergy between

technology, systems and human resource so as to provide products and
services that meet the quality, performance and aspiration of its vast
clientele. For this, we maintain highest standards of ethics and societal
responsibilities constantly innovate products and processes and develop
teams that keep the momentum going to take the Bank to excellence in
the new millennium.

Vision Statement:

A “vision” of relentlessly pursuing our aim and objective of

making the bank emerge as a luminous stand in the tapestry of India’s
Banking System. We will strive to mould the Abhyudaya Bank into
agile and resilient Organisation by adopting the fine-tuned customer
relationship, management strategies, operations based on asset-liability
and risk management systems, upgradation of required technology
capabilities and developing the human resource to meet the challenges of
the paradigm shift. Our vision seeks to serve, as our Chairman has aptly
put it, as a reference point for making strategic decisions, conveying
benefits to stakeholder, articulating competitive advantage and
underscoring the driving principles of Organisation.
Credit Appraisal & Renewal




31.03.2008 31.03.2009
Paid up 40.46 45.77
Reserves 629.65 671.95
Deposits 2625.50 3174.81
Loans & 1616.10 1856.39
Gross 126.07 175.87
Net Profits 40.81 92.36
Working 3434.28 4122.15
Investments 1420.72 1883.20
Membership 1,20,577 1,23,011

The Deposits have grown by Rs. 549.31 crores at the previous year
end and registered growth of 21%. Advanced have growth by 15% and
gone up by Rs. 240.29 crores. As a result bank has achieved a CD ratio
58.47 %. Paid Up Capital of the bank increased form Rs. 40.46 crores to
Rs. 45.77 crores, registering growth of 13 % over the previous year. The
reserves and other funds have increased from Rs. 629.65 crores to Rs.
671.95 crores in the previous year.
Credit Appraisal & Renewal
The Working Capital have grown by Rs. 687.87 crores at the
previous year end and registered a growth of 20 %.
The Net Profit has increased from Rs. 40.81 to Rs. 92.36 crores.
Credit Appraisal & Renewal

Capital to Risk Asset Ratio:

Credit Appraisal & Renewal


Bank Lane, G. D. Ambedkar Marg, Parel Village, Mumbai-400 012
Credit Appraisal & Renewal

Lone Process & Credit Analysis in Abhyudaya Co-op. Bank:

The Lone Process Flow In Abhyudaya Bank Is As Follows:

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Pre-Qualifying Application Processing sanctioning Closing

The popularity of loan and advance facility provided by Abhyudaya bank

is due to its effectively structured loan process and credit policy .The
credit policy is being revised at regular interval. These efforts resulted in
maintaining the NPAs almost at zero level Credit analysis of the lone
proposal is been carried out as per the outline of credit policy.
Credit Appraisal & Renewal


A firm can draw funds from its bank within the maximum credit limit
sanctioned. It can draw fund in the following forms:


Under the overdraft facility, the borrower is allowed to withdraw

funds in excess of the balance in his current account up to a certain
specified limit during a stipulated period. Though overdrawn amount is
repayable on demand, they generally continue for a long period by annual
renewals of the limits. It is a very flexible arrangement from the
borrower’s point of view since he can withdraw and repay funds
whenever h desires within the overall stipulations. Interest is charged on
daily balances- on the amount withdrawn-subject to some minimum
charges. The borrower operates the account through cheques.

Cash Credit:

It is the most popular method of bank finance for working capital

in India. Under this method a borrower is allowed to withdraw funds from
the bank up to the sanctioned credit limit. Borrower is not required to
borrow the entire sanctioned credit once, rather, he can draw periodically
to the extent of his requirements and repay by depositing surplus funds in
his cash credit account. There is no commitment charge; therefore,
interest is payable on the amount actually utilized by the borrower. Cash
credit limits are sanctioned against the security of current assets. Though
funds borrowed are repayable on demand, banks usually do not recall
such advances unless they are compelled by adverse circumstances. Cash
credit is the most flexible arrangement from borrower’s point of view. It
is more often than not is used for working capital.

Purchase of Discounting Bills:

Under the purchase or discounting of bills, a borrower can obtain

credit from bank against its bills. The bank purchases or discounts the
borrower’s bills. The provided under this agreement is covered within the
overall cash credit or overdraft limit. Before purchasing or discounting
Credit Appraisal & Renewal
the bills, the bank satisfies itself as to the creditworthiness of the drawer.
Though the term bills purchased implies that the bank becomes owner of

the bills, in practice, bank holds bills as security for the credit. When a
bill is discounted, the borrower is paid the discounted amount of the bill.

Letter of Credit:

Suppliers, particularly the foreign suppliers, insist that the buyer

should ensure that his bank will make the payment if he fails to honor its
obligation. This is ensured through a letter of credit arrangement. A Bank
opens a Letter of Credit in favor of a customer to facilitate his purchase
goods. If the customer does not pay to the supplier within the credit
period, the bank makes the payment under the L/C arrangements. This
arrangement passes the risk of the supplier to the bank. Bank charges the
customer for opening the L/C. The Bank extends such facility to the
financially sound customers. Unlike cash credit or overdraft facility, the
L/C arrangement is an indirect financing; the bank makes payment to the
suppliers on behalf of the customer only when he fails to meet the
obligation. There are two banks involved in L/C arrangements. The L/C
opener Bank on behalf of the applicant or purchaser and the advisory
bank on behalf of the beneficiary or supplier. The L/C opener Bank issues
L/C after taking required security. The beneficiary or supplier gives the
goods invoice & bill of exchange to the advisory bank. The advisory bank
sends the same to the Opener Bank for acceptance, the opener bank take
an acceptance from the applicant and sends back the same to the advisory
bank. Now the L/C opener Bank makes payment to the beneficiary or
supplier in case of purchaser default. The bank charges the customer for
opening the L/C.

Bank Guarantee:

A Bank Guarantee is a guarantee made by a bank on behalf of a

customer (usually an established corporate customer) should it fail to
deliver the payment, essentially making the bank a co-signer for one of its
customer's purchases. A bank guarantee is more risky for the merchant
and less risky for the bank. A letter from a bank guaranteeing that a
buyer's payment to a seller will be received on time and for the correct
amount. In the event that the buyer is unable to make payment on the
Credit Appraisal & Renewal
purchase, the bank will be required to cover the full or remaining amount
of the purchase. With a bank guarantee, a client can default and the bank
assumes the liability. Thus it can be said that Bank Guarantee is a
commitment made by a bank to a foreign buyer that the bank will pay an
exporter for goods shipped if the buyer defaults.

Housing Loan:

The Bank provides facility of housing loan to consumers for

purchase, construction, renovations or for repairs of the house.
The Bank as against the loan amount asks for security from the borrower,
the conditions for which are as follows:

• Primary: Mortgage of the house Property to be purchased /

• Collateral: Third party Guarantee of two person, or assignment of
LIC Policies, pledge of Govt. securities etc.
• Share Amount:
2.5% of the Loan amount sanctioned.
• Purchase of Flats in Building more than 15 years old:
For purchase of flat in Building which is more than 15 years old,
loan will be considered only if it is certified by the Structural
Engineer that the residual life of the building is more than 20 years
and the building is in good condition.
• Repayment :
Upto 180 installments to Salaried Persons & 120 installments in
case of others / businessmen

In the view of above conditions bank sanctions the loan to the borrower.
The Abhyudaya Co-operative Bank charges a processing fee @0.6% of
loan amount.

Following is the table for rate of interest that bank charges against
housing loan amount. They are subject to change.

Rate of Interest (Subject to change)

Floating Fixed
Credit Appraisal & Renewal
Abhyudaya Special Housing
Loan Scheme
upto 30.09.2011
Up to Rs.20 Above Rs.20 lacs Up to Rs.20 lacs
lacs upto 50 lacs

10.00% 11.00% 9.00%

Education loan:

The Abhyudaya Co-operative Bank also provide assistance to gain

education to the Indian Nationals under” Abhyudaya Gyan Vardhini
Educational Loan Scheme”, who have secured admission to
professional/technical courses through entrance test/selection process or
have secured admission to foreign universities/institutions or have passed
the qualifying examination for admission to the courses or to employed
person intending to improve their educational qualification and/or receive
training in modern technology in India or abroad provided training offers
prospects of better placement.

Vehicle Loan:

The Abhyudaya Co-operative Bank provides car loan facility for

the following purpose:

Purchase of Private / Commercial Vehicles (New or Used)

Maximum amount, Eligibility

For Private Vehicles (New) For Private Vehicles (Used)

(a) Max Rs.10.00 Lakh (a) Max Rs.3.00 Lakh
(b) 30 times net salary (b) 30 times net salary
(c) 3 times of average net profit / (c) 2 times of average Net Profit /
net income p.a. for Businessman Net Income p.a. for Businessman
(d) 80% of cost of vehicle (d) 60% of valuation / agreement
value whichever is lower
For Commercial Vehicles (New) For Commercial Vehicles (Used)
(a) Max Rs.10.00 Lakh (a) Max Rs.3.00 Lakh
(b) 5 times of average Net Profit / (b) 2 times of average Net Profit /
Net Income p.a. Net Income p.a.
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(c) 80% of cost of vehicle (c) 50% of valuation / agreement
value whichever is lower

Repayment: up to 60 installments

Service Charges:
1.2% of the sanctioned amount.

Share Amount:
2.5 % of the sanctioned amount.

Personal Loan:

The Abhyudaya Co-operative Bank grants Personal Loan for for

following purpose:

• Purchase of Consumer Durables / Furniture / Fixtures / Computers

• Repairs / Renovations of Flat / House
• Purchase of 2 wheelers
• Purchase of Gold Ornaments
• Marriage & other religious ceremonies
• Domestic / Foreign Tours & Travels
• Repayment of existing debt
• Takeover of personal loan from other banks
• Medical expenses for self / family members etc.

Maximum Loan Amount: Rs.2.00 Lakh


For Salaried Persons:

(a) Minimum take home pay after EMI amount of loan Rs.4,500/- and net
salary above Rs.7,000 /-p.m.

Repayment: Upto 60 installments

Credit Appraisal & Renewal

Rate of Interest: 14%

[With 50% Collateral securities 13%]

Service Charges: 1.2% of amount sanctioned

Share Amount: 5% of the amount sanctioned

Mortgage Loan:

The main purpose of mortgage loan provided at Abhyudaya Co-

operative Bank is as follows: - The loan amount can be used for any
purpose but shall not be used for purposes prohibited by law. The
property should be in the name of Applicant or Co-applicant of family

Maximum Amount:
(a) Rs.20 lakh to Individuals / Self employed persons / Professionals.
(b) Rs.100.00 lakh to business enterprises and self employed and
Professional for use in business against own Flat / House / Gala / Office /
Factory Premises, etc. kept in mortgage.

Repayment: Up to 84 months.

Eligibility: Amount of loan will depend on repaying capacity / DSCR /

Loan to the extent of 60 % of the present value of the property.

Sureties: One surety of good means acceptable to the bank.

Service Charges: 1.2 % of the sanctioned amount.

Share Amount: 2.5 % of the sanctioned amount.

Working Capital Loan/Term Loan or Mortgage loan for Trade &

Service Sector:

Banks are the main institutional sources of working capital finance

in India. After trade credit, bank credit is the most important source of
Credit Appraisal & Renewal
financing working capital requirements. A bank considers a firm’s sales
and production plans and the desirable levels of current assets in
determining its working capital requirements. The amount approved by
the bank for the firm’s working capital requirements is called credit limit.
Credit limit is the maximum funds which a firm can obtain from the
banking system.

In case of firms with seasonal businesses, banks may fix separate

limits for the peak level credit requirements indicating the periods during
which the separate limits will be utilized by the borrower. In practice,
banks do not lend 100% of the credit limit; they deduct margin money. A
margin requirement is based on the principle of conservatism and is
meant to ensure security. If the margin requirement is 30%, bank will
lend only up to 70% of the value of the asset. This implies that security of
bank’s lending should be maintained even if the asset’s value falls by

A borrower may sometimes require ad hoc or temporary

accommodation in excess of sanctioned credit limit to meet unforeseen

contingencies. Banks provide such accommodation through a demand

loan account or a separate non operable cash credit account. The
borrower is required to pay a higher rate of interest above the normal rate
of interest on such additional credit.

The purpose of such loan is to provide hassle free working capital

finance to the borrower. The nature of this loan can be cash credit,
overdraft or a term loan. The borrower should have a good track record
of 3 years.

The security in this case goes as follows: Primary Hypothecation of

stocks and book-debts Collateral Mortgage of Unencumbered residential
house/flat, commercial or industrial property with a clear marketable title
in the name and possession of the borrower/Proprietor/
Partner/s/Director/s either self occupied or vacant.

The Rate of interest is PLR+1% with monthly rests. The term loan
(against mortgage of immovable property) from a minimum Rs. 0.50 lacs
to maximum Rs. 50 lacs or 30 times net monthly income whichever is
lower. The security is the Mortgage of the unencumbered residential
house/flat, commercial or Industrial property with a clear marketable title
Credit Appraisal & Renewal
in the name and possession of borrower/proprietor or partner/s/Director/s
either self occupied or vacant with a security cover of 1.5 times the
amount of loan. The Rate of Interest is PLR+2.5% with a repayment
period of 60 months.
Credit Appraisal & Renewal

Factors to be taken into consideration while determining

requirements for working capital:

Production Policies:

A sugar factory which belongs to a seasonal industry would

obviously have its working capital need affected by the length of the
crushing season. The production schedule i.e. the plan for production, has
great influence on the level of inventories. In some cases raw material can
be procured only in a particular season and have to be stocked for the
production of the whole year. In many others, the production cycle is
limited to a part of the year and raw materials have to be accumulated
throughout the year. In all such cases the need for working capital will
vary according to the production plans. Similarly, the decision of the
management regarding automation, etc, also affects working capital
requirements. In a labor- intensive process, the requirements of working
capital will be higher. In the case of highly automatic plant, the
requirements of long-term funds would be greater.

Nature of the business:

The shorter the manufacturing process, the lower is the

requirements of working capital. This is because, in such a case,
inventories have to be maintained at a low level. Longer the
manufacturing process, higher will be the requirements of working
capital. This is the reason why highly capital-intensive industries require
large amount of working capital to run their sophisticated and long
production process. Similarly, a trading concern requires lower working
capital than a manufacturing concern.

Credit policy:

The credit policy of the company also determines the requirements

of working capital. A company, which allows liberal credit to its
customers, may have higher sales but consequently will have large
amount of funds tied up in sundry debtors. Similarly a company, which
has very efficient debt collection machinery and offers strict credit
terms, may require lesser amount of working capital than the one where
debt collection system is not so efficient or where the credit terms are
Credit Appraisal & Renewal
liberal. The credibility of a company in the market also has an effect on
the working capital requirements. Reputed and established concerns can

purchase raw material on credit and enjoy many other services also like
door delivery, after sales service etc. This would mean that they could
easily have large current liabilities; therefore the required working capital
may not be very high.

Inventory policy:

The inventory policy of a company also has an impact on the

working capital requirements since a large amount of funds is normally
locked up in inventories. An efficient firm may stock material for a
smaller period and may, therefore, require lesser amount of working

Abnormal factors:

Abnormal factors like strikes and lockouts also require additional

working capital. Recessionary conditions necessitate a higher amount of
stock of finished goods remaining in stock. Similarly, inflationary
conditions necessitate more funds for working capital to maintain same
amount of current assets.

Market conditions:

Working capital requirements are also affected by market

conditions like degree of competition. Large inventory is essential as
delivery has to be off the shelf or credit has to be extended on liberal
terms when market competition is fierce or market is not very strong is a
buyer’s market.

Conditions of supply:

If prompt and adequate supply of raw materials, spares, stores etc.

is available it is possible to manage with small investments in inventory
or work on the just in time (JIT) principle. However if the supply is
erratic, scant seasonal, channel zed through government agencies etc., it
is essential to keep large stocks increasing working capital requirements.
Credit Appraisal & Renewal
Business Cycle:

Business fluctuations lead to cyclical and seasonal changes in

production and sales and affect the working capital requirements.

Growth and expansion:

The growth in volume and growth in working capital go hand in

hand. However, the change may not be proportionate and the increased
need for working capital is felt right from the initial stages of growth.

Level of taxes:

The amount of taxes paid depends on taxation laws. These amount

usually have to be paid in advance. Thus need for working capital varies
with tax rates and advance tax provisions.

Dividend policy:

Payment of dividend utilizes cash while retaining profits acts as a

source of working capital. Thus working capital gets affected by dividend

Price level changes:

Inflationary trends in the economy necessitate more working

capital to maintain the same level of activity.

Operating efficiency:

Efficient and coordinated utilization of capital reduces the amount

required to be invested in working capital
Credit Appraisal & Renewal

Securities Required in bank finance

Banks generally do not provide working capital without adequate

security. The following are the modes of security which a bank may


Under hypothecation, the borrower is provided with working

capital finance by the bank against the security of movable property,
generally inventories. The borrower does not transfer the property to the
bank; he remains in the possession of property made available as security
for the debt. Thus hypothecation is a charge against property for an
amount of debt where neither ownership nor possession is passed to his
creditor. Banks generally grant credit hypothecation only to first class
customers with highest integrity. They do not usually grant hypothecation
facility to new borrowers.


Under this arrangement, the borrower is required to transfer the

physical possession of the property for the payment of debt. In case of
mortgage, the possession of the property may remain with the borrower,
with the lender getting the full legal title. The transferor of interest
(borrower) is called mortgager, the transferee (bank) is called mortgagee,
and the instrument of transfer is called the mortgage deed.
The credit granted against immovable property has some difficulties.
They are not self liquidating. Also, there are difficulties in ascertaining
the title and assessing the value of the property. There is limited
marketability and therefore security may often b difficult to realize. Also,
without the court’s decree the property can not be sold. Usually, for
working capital finance, the mode of security is either hypothecation or
pledge. Mortgages may be taken as additional security.


Lien means right of the lender to retain property belonging to the

borrower until he repays credit. It can be either a particular lien or general
lien. Particular lien is a right to retain property until the claim associated
Credit Appraisal & Renewal
with the property is fully paid. General lien, on the other hand, is
applicable till all dues of the lender are paid. Banks usually enjoy general
Credit Appraisal & Renewal


Once the credit limits are sanctioned main documents are obtained from
the client concerned. The nature of documents varies depending upon the
type of facility sanctioned and terms of sanction. They may include one
or more of the following-

• Loan agreement conveying in terms and conditions of loan.

• CIBIL (Credit Information Bureau (India) Limited) report of the
borrower company.
• Valuation report of the property to be mortgaged if any.
• A comprehensive credit agreement.
• CR’s (Confidential Report) of the borrower from the banks.
• Agreement of hypothecation of book debts.
• Power of attorney to receive the business receivables.
• Pledge letters of agreement in respect of documents of title to
goods covering credit limits.
• Insurance / contingency insurance policy.
• Appropriate standard policy or specific policy.
• Corporate and personal guarantee.
• Documents conveying equitable mortgage on primary security i.e.
fixed assets pertaining to the project and on the additional security
• Personal guarantee of the borrower and guarantor (if any)
• Compliance of registration of charge formalities.
Credit Appraisal & Renewal
• Search report form an Advocate indicating a clear title for the last
fifteen years as per the land records; and Approved building plans
incase of constructed property.

This would involve submission of the relevant documents by enterprise.

The legal department in the financial institution would scrutinize these
documents for their validity and completeness.
Credit Appraisal & Renewal

Non Performing Asset

Non Performing Asset means an asset or account of borrower,

which has been classified by a bank or financial institution as sub-
standard, doubtful or loss asset, in accordance with the directions or
guidelines relating to asset classification issued by RBI.
With a view to moving towards international best practices and to
ensure greater transparency, it has been decided to adopt the '90 days
overdue' norm for identification of NPAs, from the year ending March
31, 2004. Accordingly, with effect form March 31, 2004.

A Non performing asset (NPA) shall be an advance where

i. Interest and /or installment of principal remain overdue for a period
of more than 90 days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90
days, in respect of an Overdraft/ Cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years in the
case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts.

Reserve Bank of India (RBI) has issued guidelines on provisioning

requirement with respect to bank advances. They are classified mainly

Standard Assets: Such an asset is not a non-performing asset. In other

words, it carries not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period

not exceeding 12 months.
Credit Appraisal & Renewal
Doubtful Assets: Asset that has remained NPA for a period exceeding 12
months is a doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal

auditors or by external auditors or by Reserve Bank India (RBI)

It should be noted that the above classification is only for the purpose of
computing the amount of provision that should be made with respect to
bank advances and certainly not for the purpose of presentation of
advances in the banks balance sheet.

After the implementation of Securitization Act, 2002 banks issue notice

to the defaulter to either pay back the dues to the bank or give the
ownership of the secured assets mentioned in the notice. However, there
is a potential threat to recovery if there is substantial attrition in the value
of security given by the borrower or if borrower has committed fraud
with the concerned bank. Under such a situation it will be prudent to
directly classify the advance as a doubtful or loss asset, as appropriate.


The bank can file a suit against the clients in court to recover its
due. It is filed in court so that the dues can be recovered through the Debt
Recovery Tribunal. The DRT came into existence in 1993 for debts with
outstanding of Rs.10 lakhs and more.

The other courts will not have authority to hear cases falling under
this jurisdiction, once the case is referred to DRT. The DRT has the
powers to attach and sell, to arrest and detain in jail.


It is the takeover of unproductive / non core assets by mutual

agreement. Absence of legal problems in taking over is a precondition.
Minimum value of asset should be Rs.5 Crores.


Credit Appraisal & Renewal
One time settlement is one the resource for the bank to recover its
debts. The settlement amount is arrived at by the bank and borrower in
order to settle the loan account. The doubtful or loss account as on
31.03.2000, the settlement amount is minimum 100 % of O/s as on the
date it became NPA. Sub standard as on 31.03.2000, which later became
Doubtful/loss, the settlement amount is minimum 100% O/s on date it
became Doubtful/ Loss + interest at PLR from 01.04.2000 to date of

settlement. Amount is to be paid in lump sum. And if it is payable in

installments, the minimum no of installments are 12. The minimum
amount to be paid immediately is 25%, Interest at PLR from date of
settlement to date of payment.


Corporate debt restructuring is a viable and transparent mechanism

for ailing but viable corporate outside the structure of BIFR/legal
proceedings. It is applicable for only sub standard assets. Only
manufacturing companies are covered under the scheme. In corporate
restructuring scheme only the accounts of Rs. 20 Crores and above are
covered. It is a three tier structure- CDR Forum, CDR Empowered
Group, and CDR cell CDR Forum frames policies and guidelines. CDR
Empowered Group makes sanctions, approvals, commitments, etc. CDR
cell scrutinizes, assesses, and monitors.

Features of the scheme are:

1. Revival plans is to be ready in 90 days
2. Lenders cannot exit from the agreement
3. Creditors with 20% or more exposure can approach the CDR
4. Restoration plan approved by 60% of value of creditors is binding
5. Amount of sacrifice is the amount of interest measured in P V terms,
which is provided fully or written off
Credit Appraisal & Renewal

Case Studies
Assessment of Working Capital /Cash Credit Facility/Term Loan
Credit Appraisal & Renewal
Credit Appraisal & Renewal

M/S Quality Crafts Store

M/S Quality Crafts Store Proprietor Mr. Shah Salim, 256-D 1st floor,
Green Towers, established in the year 2002, is engaged in retail business
of shawls particularly trading of woolen shawls and allied items. The
party has been in connection with and dealing with the Abhyudaya Co-
op. Bank, Ghatkopar branch since year 2006 with satisfactory dealings
and good conduct. The turnover of account is encouraging. The party has
established good trade connections and is involved in related trade. No
negative complaints has been registered or found against the party ever
since the opening of account with the bank branch. The amount is
frequently routed through the account and the performance of account is

Borrower’s Information
Name of Applicant Borrower : Mr. Shah Salim Mateen
Address of the Head/Regd. Office : 256-D 1st floor, Green Towers
Constitution : Individual
Date of Establishment : Year 2002
Period since dealing with branch : Year 2006
Net worth as on 31.10.2009 : Rs. 9.00 lacs

General Information of the Proposal

Existing Banking Arrangements : Sole Banking
Proposed Banking Arrangements : Sole Banking
Sanction Comes Under Powers of : Branch Head
Activity : Trading of woolen shawls etc.
Sector : Trading
Present Facilities by the Applicant : Nil
Facility Requested by the Applicant : Cash Credit
Purpose of Borrowing : For Expansion of Existing
Amount Requested : Rs. 5.00 Lacs.

Securities Proposed for the Facility:

Primary Security
Hypothecation of stocks and Book Debts

Collateral Security
Credit Appraisal & Renewal
Third Party Guarantee of two persons:
1. Mr. Azam Ahmad S/o Mr. Naseeruddin Ahamad
2. Mr Shoeb Tak S/o Mr. Younis Tak

Both the guarantors are dealing with the Abhyudaya Co-op. Bank
Branches. As reported both are availing cash credit facility with their
respective branches and with a satisfactory performance.

Financials of the Firm (Amt. in Rs. Lacs)

Particulars 31/03/2009 31/03/2010

Sales 6.12 19.00
Purchases 4.12 17.53
% of Sales Growth 325.00
Net Profit 1.42 2.23
Share Capital 2.64 3.30
Total Term Liabilities 2.64 3.30
Current Liabilities
Working Capital 0.00 8.00
Sundry Creditors 0.38 1.20
Expenses Payable 0.23 0.65
Borrowings 0.00 0.00
Other liabilities 0.00 0.00
Total Current Liabilities 0.61 9.85
Tolal Liabilities 3.25 13.15
Investments 0.00 0.00
Fixed Assets 0.24 0.72
Total Fixed Assets 0.24 0.72
Current Assets
Stocks 1.24 8.50
Sundry Debtors 0.52 3.16
Cash in hand/Bank Balance 1.25 0.77
Loans/Advances 0.00 0.00
Total Current Assets 3.01 12.43
Total Assets 3.25 13.15
Credit Appraisal & Renewal
Financial Indicators

Particulars 31/03/2009 31/03/2010

Net Working Capital (In Rs. Lacs) 2.40 2.58
Current Ratio 4.93 1.26
Stocking Velocity ( Days) 108 175
Debtors Velocity (Days) 31 60
Creditors Velocity (Days) 33 25

Apart from the above financials of the party, the account statement
reveals the following transactions of the party with the Bank Branch
(Amt. in Rs. Lacs):

Debit Credit
Summation Summation
From 01/04/2008 to 31/03/2009 (1 6.52 6.50
From 01/04/2008 to 31/10/2009 (7 11.62 11.10

Comments and Observations:

Financial Indicators has been calculated as follows:

a) Net Working Capital: Total Current Assets less Total Current

b) Current Ratio: Total Current Assets divided by Total Current
c) Stocking Velocity: Stock for the year divided by Cost of Goods
Sold or Credit Purchase during the year multiplied by 360 days.
d) Debtors Velocity: Average Receivables or Debtors for the year
divided by Credit Sales during the year multiplied by 360 days.
e) Creditors Velocity: Average Payables or Creditors for the year
divided by Credit Purchase during the year multiplied by 360 days.

Other Comments and observations:

f) The party has projected to achieve a sales target of Rs. 19.00 Lacs
over previous year achievement of Rs. 6.12 Lacs. The projected
Credit Appraisal & Renewal
sales target seems to be achievable owing to the fact that up to
31/10/2007 (7 months) the party has a sales turnover of Rs. 11.62
lacs through the account.
g) Stock Velocity reveals the part of sales always invested in stock
during the year or in other words it refers to the period of sales sans
obstacles out of the current stock in case the production halts due to
strike or other reason.
The stocking period of 175 days is on higher side hence its been
accepted at 90 days level.
h) Debtors Velocity reveals the duration within the debtors are
expected to be realized. The projected debtors’ period seems
reasonable hence accepted for assessment as projected.
i) Creditors Velocity reveals the duration within the creditors are
expected to be paid. Lesser the days better is the position of the
firm. The projected creditors velocity is at a lower level, keeping
the kind of stocks in trade into consideration, the velocity has been
accepted at 50 days level.

Assessment of MPBF (Amt. in Rs. Lacs)

Particulars Amount
Accepted Sales 19.00
Accepted Purchase 17.53
Current Assets
Stock (17.53*90÷360) 90 days 4.38
Debtors (19*60÷360 60 days 3.16
Cash in hand 0.54
Loans & advances 0.00
Total Current Assets (a) 8.08
Current Liabilities
Creditors (17.53*50÷360) 50 days 2.50
Other liabilities 0.00
Total Current liabilities (b) 2.50
Working Capital Gap (a-b) 5.58
Margin (as projected by the party) 2.58
MPBF 3.00

Recommendations of Bank Branch

Credit Appraisal & Renewal
In view of above, it is proposed, if agreed, to allow Cash Credit Facility
of Rs. 3 Lacs (Rupees three lacs only) in favor of M/S Quality Crafts
Store Prop. Mr. Shah Alam Mateen for a period of one year subject to
renewal after review against securities as discussed.

Rate of Interest: PLR presently 13 % with monthly rests or any other rate.
This may be prescribed by the Bank from time to time.

Margin: 40% on Stocks 50% on Book-Debts (excluding book debts older

than 6 months).
Credit Appraisal & Renewal


M/S A.M. Classic Proprietor Mr. Saleem Siddique E-115 King Circle
Mumbai, established in the year 1997, is engaged in wholesale and retail
trading of shawls, dress material and artificial jewelries. The party has
been in connection with and dealing with the Abhyudaya Co-op. Bank,
Neharu Nagar branch with satisfactory dealings and good conduct. The
turnover of account is encouraging. The party has established good trade
connections and is involved in related trade. No negative complaints has
been registered or found against the party ever since the opening of
account with the bank branch. The amount is frequently routed through
the account and the performance of account is good. The party was
maintaining current account with Abhyudaya Co-operative Bank Neharu
Nagar Branch and was accommodated by way of cash credit facility of
Rs. 5.50 lacs in December 2007 against collateral security of 3rd party
guarantee of two persons. The said C/C limit was renewed on

Borrower’s Information

Name of Applicant Borrower : Mr. Saleem Siddique

Address of the Head/Regd. Office : E-115 King Circle Mumbai
Constitution : Sole Proprietorship
Date of Establishment : Year 1997

General Information of the Proposal

Existing Banking Arrangements : Sole Banking Arrangements

Proposed Banking Arrangements : Sole Banking Arrangements
Sanction Comes Under Powers of : Zonal Office, Ghatkopar.
Activity : Trading
Sector : Handicrafts
Present Facilities by the Applicant : C/C facility of Rs. 5.50 lacs
Collateral security of 3rd party
Guarantee of two persons.
Facility Requested by the Applicant : Cash Credit under bank’s scheme
of Mortgage loan for Trade & Service Sector
Credit Appraisal & Renewal
Purpose of Borrowing : For Expansion of Existing
Amount Requested : Rs. 35.00 Lacs.

Securities Proposed for the Facility

Primary Security
Hypothecation of stocks and Book Debts

Collateral Security
Third Party Guarantee of two persons:
1 Existing : 3rd Party Guarantee of two persons
2 Offered : Mortgage of flat at F-87, First Floor, King

The security offered as mortgage comprises of residential flat at F-87,

King Circle, Mumbai standing in the name of Mr. Saleem Siddique S/o
Mr. Shahid Siddique (Proprietor of the Firm). As per the valuation report
of P. Kumar, the market value of the said flat is Rs. 54.00 lacs and the
realizable value (Forced Sale Value) is less by 15% of the cost. It is to be
mentioned that the against said flat, the party is presently availing Home
Loan Facility from IDBI Bank and the party will adjust the said loan in
full and final prior to availing the fresh facility from the Branch. The
papers regarding clearance of title deeds in respect of flat to be offered as
mortgage have been forwarded to Bank’s approved lawyer/Legal
Department Zonal Office Mumbai for Legal Opinion.
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Financials of the Firm (Amt. in Rs. Lacs)

31/03/200 31/03/200 31/03/201

Particulars 8 9 0
Sales 64.08 127.00 163.46
Purchases 60.32 115.40 151.48
% of Sales Growth 98.19 28.71
Net Profit 3.55 4.41 5.57
Share Capital 4.20 7.85 12.77
Car Loan- IDBI Bank 0.00 2.42 1.55
Home Loan- IDBI Bank 14.53 12.01 0.00
Unsecured Loans 0.00 6.00 6.00
Total Term Liabilities 18.73 28.28 20.32
Current Liabilities
Working Capital 0.00 0.00 39.51
Sundry Creditors 31.13 10.78 12.39
Expenses Payable 1.08 0.68 0.96
Sales Tax Payable 0.00 0.72 1.25
Other liabilities 0.00 0.00 0.00
Total Current Liabilities 32.21 12.18 54.11
Total Liabilities 50.94 40.46 74.43
Investments 0.00 0.52 0.84
Fixed Assets 16.96 19.31 17.87
Total Fixed Assets 16.96 19.83 18.71
Current Assets
Stocks 5.15 11.43 27.15
Sundry Debtors 22.43 3.46 28.52
Cash in hand/Bank Balance 6.20 5.74 0.05
Loans/Advances 0.00 0.00 0.00
Others 0.20 0.00 0.00
Total Current Assets 33.98 20.63 55.72
Total Assets 50.94 40.46 74.43
Credit Appraisal & Renewal

Financial Indicators

31/03/200 31/03/200 31/03/201

Particulars 8 9 0
Net Working Capital (In Rs. Lacs) 1.77 8.45 1.61
Current Ratio 1.05 1.69 1.03
Stocking Velocity ( Days) 31 36 65
Debtors Velocity (Days) 126 10 63
Creditors Velocity (Days) 186 34 29

Apart from the above financials of the party, the account statement
reveals the following transactions of the party with the Bank Branch
(Amt. in Rs. Lacs):

Months Debit Credit

Summation Summation
April-2008 11.94 20.91
May-2008 7.67 1.50
June-2008 2.62 0.36
July-2008 2.99 0.00
August-2008 6.52 6.53
September-2008 3.49 0.00
October-2008 3.40 4.69
November-2008 6.32 3.55
December-2008 12.58 13.04
January-2009 18.45 18.97
February-2009 14.87 32.41
March-2009 15.27 7.84
Total 106.12 109.80

Comments and Observations:

Financial Indicators has been calculated as follows:

a) Net Working Capital: Total Current Assets less Total Current

b) Current Ratio: Total Current Assets divided by Total Current
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c) Stocking Velocity: Stock for the year divided by Cost of Goods
Sold or Credit Purchase during the year multiplied by 360 days.

d) Debtors Velocity: Average Receivables or Debtors for the year

divided by Credit Sales during the year multiplied by 360 days.
e) Creditors Velocity: Average Payables or Creditors for the year
divided by Credit Purchase during the year multiplied by 360 days.

Other Comments and observations:

f) The party has achieved sales target of Rs. 127.00 lacs during the
financial year 2008-2009, out of which Rs. 109.80 lacs has been
routed through the C/C account thorough the Bank Branch. It is
about 86% of sales that have been routed through the account.
g) The conduct of account has remained satisfactory.
h) The firm is running on profitable lines and capital of the firm is
showing continuous increasing trend.
i) The firm is availing Car Loan Facility from IDBI Bank and is
regularly depositing installments in the said account.
j) The proprietor of the firm is also availing Home Loan facility again
from IDBI Bank and the party intends to adjust the same.

Assessment Of Working Capital : (Under Mortgage Loan Scheme)

Particulars Amount (in lacs)

Sales achieved during the year 2008-2009 127.00
Projected Sales for the year 2009-2010 163.46
Accepted Sales 158.75
(Maximum 125% of the achieved turnover)
Permissible Limit 31.75 A
(20% of the accepted sales)
Market Value of property as per valuation 54.00
Forced Value (85% of market value) 45.90
Permissible Limit 34.43 B
(75% of the forced Sale Value)
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Maximum Permissible Limit 31.75
(Lower of A or B)
Limit Recommended by the branch 32.00

Recommendations of the Bank

In view of above, it is recommended to sanction Cash Credit Facility of

Rs. 32.00 Lacs (Rupees Thirty Two Lacs only) in favor of M/S A.M.
Classic proprietor Mr. Saleem Siddique under Bank’s scheme “Mortgage
Loan for Trade and Service Sector” against before said securities for a
period of one year subject to renewal after review.

Rate of Interest : As per CAD guidelines

Validity : One year

Other Conditions

1. Prior to release of facility, the party shall have to adjust C/C

facility of Rs. 5.50 lacs sanctioned under Normal Cash Credit
Scheme of Bank.
2. Prior to release of facility, party to adjust Home loan facility with
IDBI Bank in full and final
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Credit Appraisal & Renewal


A stern measure of a company's ability to pay its short

Acid test
term debts, in that stock is excluded from asset value.
(liquid assets/current liabilities) Also referred to as the
Quick Ratio.
The direct costs attributable to the production of the
Cost of goods sold
goods sold by a company. The directly attributable costs
of products or services sold (usually materials, labour,
and direct production costs). COGS = net sale -gross
Cash flow The statement showing the movement of cash in and out
statement of a business from day-to-day direct trading and other
non-trading or indirect effects, such as capital
expenditure, tax and dividend payments.
Capital employed The value of all resources available to the company,
typically comprising share capital, retained profits and
reserves, long-term loans and deferred taxation.
The rate that has to be received from an investment in
Cost of debt
order to achieve the required rate of return from the
A group of ratios that measures a firm’s ability to meet
Coverage ratios its recurring fixed charge obligations, such as interest on
long term debt, lease payments, and/or proffered stock
Average collection This represents the no. of days’ worth credit sales that is
period locked in debtors.
Current liabilities Liabilities that is normally payable within a year and are
not for along term.
Current ratio A liquidity measures defined as current assets divided
by current liabilities.
The uncertainty of expected returns from a security
attributable to possible changes in the financial capacity
of the security issuer to make future payments to the
Default risk
security owner. Treasury securities are considered to be
default free. Default risk is also referred to as “financial
risk” in the context of marketable securities
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Inventory turnover The ratio of net sales to inventory.

Letter of credit A letter from a bank mentioning that it has established a

line of credit in favor of a certain party
letters of guarantee are concerned with providing
Letters of
safeguards to buyers that suppliers will meet their
obligations or vice-versa, and are issued by the
supplier's or customer's bank depending on which party
seeks the guarantee.
Net working
Net working capital is the difference between total
current assets total current liabilities.
The operating cycle of a firm begins with the
Operating cycle
acquisition of raw materials and ends with the collection
of receivables.
A technique of risk analysis which studies the
responsiveness of the criterion of merit like net present
Sensitivity analysis
value or internal rate of return to variations in
underlying factors like selling price, quantity sold, etc.
Term loan A loan which is generally repayable in more than one
year and less than ten years.
Turn over ratios, also referred to as activity ratios or
Turn over ratios
asset management ratios, measure how efficiently the
firm employs the assets.
There are two measures of working capital- gross
working capital and net working capital. Gross working
Working capital
capital is the total of current assets. Net working capital
is the difference between the total current assets and the
total current liabilities.
Credit Appraisal & Renewal


After studying the credit appraisal process at Abhyudaya C-operative

Bank and observing the findings, I put forth some of my
recommendations which, I firmly believe, would enhance the overall
credit delivery process of the Bank and experience of corporate clients.
My suggestions are as follows:


Currently, the processing of credit proposal is done on office 2003

The Suggestions:

The processing of credit proposal can be done by using upgraded

software’s like office 2007.


The government and Reserve Bank of India have devised compromise

settlement schemes to help banks recover non-performing assets
especially for genuine borrowers. The scheme provides concessions and
interest waivers so that immediate settlement can take place.

The Suggestions:

There are special software available that enables the bank and the user in
respect of:
• Speedy preparation, evaluation and approval of settlement
• Availability of reliable information and systems to monitor
and control the recovery process.

Thus, such software could be install to prepare and evaluate settlement

schemes. The benefits of such software can be summerised as follows:

 Realistic approach for evaluation of the proposal by

calculating interest using different interest rates and
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 Saves time by enabling speedy preparation of settlement

proposals giving a total picture of the outstanding.

 Gives comprehensive information including details of

Borrowers, Credit Facilities, Present asset position and
scope for recoveries.

 Automates respective task in preparing the proposal, office

notes/memorandum and other correspondence.

 Extensive MIS reports facilitate monitoring and reporting

to Central office/ RBI and other regulatory authorities.
Credit Appraisal & Renewal


The study at Abhyudaya Co-operative Bank 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:

1. Financial statement analysis

2. Working capital and its assessment techniques
3. Credit risk assessment
4. Documentation
5. Loan administration

Abhyudaya Co-operative bank’s 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. It considers
important parameters like profitability, repayment capacity, efficiency of
the unit, historical / industry comparisons etc…

The Credit Policy of the Bank should be reviewed periodically by taking

into account changes in money market, changes in credit policy
announced y Reserve Bank of India and happening of other events to
protect the interest of the bank and to maintain profitability.
Credit Appraisal & Renewal

Proper credit appraisal involving performance of the client, sureties and

industrial visits can help bank to reduce its NPA’s and hence to reduce its
credit risk.
Credit Appraisal & Renewal



Books & Publications:

Macro Economics: D.N. Mithani.

Financial Management: Prasanna Chandra.

Abhyudaya Bank manuals and circulars

Credit Policy of Abhyudaya Bank


Websites: www.abhyudayabank.com