A PROJECT PRAPOSAL (MS-100)

ON

CREDIT APPRAISAL AND RISK RATING AT

PUNJAB NATIONAL BANK
SUBMITTED TOWARDS THE PARTIAL FULFILLMENT FOR
THE AWARD OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION(FINANCE)

Project Gudie :

Submitted By:

Ms. NIDHI

SACHIN GOEL

Department of Commerce

Enrollment No. :137728019

ARSD College

Study Centre Code. : 0737

SCHOOL OF MANAGEMENT STUDIES

INDIRA GANDHI NATIONAL OPEN UNIVERSITY
MAIDAN GARHI, NEW DELHI 110 068

TABLE OF CONTENTS
1.

INTRODUCTION TO THE PROJECT

2.

RELAVANCE OF THE STUDY

3.

STATEMENT OF THE PROBLEM

4.

OBJECTIVES OF THE STUDY

5.

RESEARCH METHODOLOGY

6.

LIMITATIONTS OF THE STUDY

7.

BIBLIOGRAPHY

INTRODUCTION
Credit appraisal is a skill which has to be acquired by study and supplemented by practice.
Intuitive guess work has little place in appraising the credit rating or credit needs of a corporate
unit. The credit managers of banks and Non Banking Finance Companies (NBFCs) are duty
bound to accept or reject a proposal on the basis of its viability or non - viability.
Credit appraisal is done by banks or financial institutions by obtaining credit information of the
borrowing company.
Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to
understand the credit appraisal system followed by the banks this project has been conducted.
The project has analysed the credit appraisal procedure with special reference to Punjab National
Bank which includes knowing about the different credit facilities provided by the banks to its
customers, how a loan proposal is being made, 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 facility.
To reduce the lender's credit risk, the lender may perform a credit check on the prospective
borrower, may require the borrower to take out appropriate insurance, such as mortgage
insurance, or seek security over some assets or a guarantee from a third party. The lender can
also take out insurance against the risk or on-sell the debt to another company. In general, the
higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

HISTORY OF INDIAN BANKING

The establishment of the General Bank of India in the year 1786 marked the development of a
structured banking system in India. It was set up as a joint stock company. The East India
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company established three banks. The Bank Of Bengal in the year 1809, The Bank Of Bombay
in 1840 and Bank Of Madras in 1843. The three banks were amalgamated in the year 1920 to
form the New Imperial Bank of India. The Imperial bank was nationalized and was renamed as
State Bank of India with the passing of the State Bank of India Act 1955. The Reserve Bank of
India was constituted as shareholders bank in 1935 and is now the Central Bank of the country.
After independence, the RBI bill was introduced in the Parliament to give public ownership to
the bank. Since January 1, 1949, it has been operating. It exercises the power to control the
Indian Banking Industry.

COMPANY PROFILE

Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being the
first Indian bank to have been started solely with Indian capital. The bank was nationalized in
July 1969 along with 13 other banks. Today, PNB is a professionally managed bank with a
successful track record of over 110 years. The bank has the 2nd largest branch network in India,
with 4525 branches including 432 extension counters spread throughout the country. PNB was
ranked as 248th biggest bank in the world by Bankers Almanac, London. Punjab National Bank
is not only the first bank to specialize in credit rating models in India but also the first one to
launch image based cheque transaction system for collection of intra bank intercity cheque
thereby providing credits merely in 48 hrs in 13 cities

RELEVANCE OF THE STUDY

The project work deals with the study of applicants capability to repay the credit and to appraise
the economic and financial viability of the credit undertaken. The loan proposal is appraised
financially, economically and technically so as to confirm the financial soundness of the
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borrower. It gives a practical insight of the procedures followed by the banks in ascertaining the
credit worthiness of the borrower.
In todays market scenario, one of the most critical areas to focus on is to protect the bank from
bankruptcy. In such conditions Credit and Risk Department plays a key role in growth of banks.
Any delay in realizing the receivables would adversely affect the working capital, which in turn
effects the overall financial management of a firm. No firm can be successful if its over dues are
not collected, monitored and managed carefully in time.

STATEMENT OF THE PROBLEM

PROBLEM STATEMENT: To study the credit appraisal and risk rating system in
PUNJAB NATIONAL BANK.
The assets of the banks which dont perform (that is dont bring any return) are called Non
Performing Assets (NPA) or bad loans. Banks assets are the loans and advances given to
customers. If customers dont pay either interest or part of principal or both, the loan turns into
bad loan.
According to RBI, terms loans on which interest or installment of principal remain overdue for a
period of more than 90 days from the end of a particular quarter is called a Non-performing
Asset.
The business of banking essentially involves intermediation-acceptance of deposits and
channeling these deposits in to lending activities. Since the deposits received from the depositors
have to be repaid to them by the bank, they are known as banks Liabilities and as the loan
given to the borrowers are to be received back from them, they are termed as banks Assets so
assets are banks loans and advances.
In the traditional banking business of lending financed by deposits from customers, Commercial
Banks are faced with the risk of default by the borrower in the payment of either principal or
interest. This risk in banking parlance is termed as Credit Risk and accounts where payment of

interest and /or repayment of principal is not forthcoming are treated as Non-Performing Assets ,
as per the Reserve Bank of generate income for the bank. Existence of Non-Performing Asset is
an integral part of banking and every bank has some Non-Performing Assets in its advance
portfolio. However, the high level of NPA is a cause of worry to any financial institution.

OBJECTIVES OF THE STUDY

To study broad contours of management of credit, the loan policy, credit appraisal for business
units i.e. for working capital loan or Term Loan
To understand the basis of credit risk rating and its significance
To utilize the above learning and appraise the creditworthiness organizations those approach
PUNJAB NATIONAL BANK for credit. This would entail undertaking of the following .
procedures:
1)

Management Evaluation

2)

Business / Industry Evaluation

3)

Technical Evaluation

4)

Legal Evaluation

5)

Financial Evaluation

6)

Credit Risk Rating

RESEARCH METHODOLOGY
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Research comprises of defining & redefining problems, formulating hypothesis or suggested

solutions, collecting, organizing & evaluating data, making deductions & reaching conclusions.
In research design we decide about:

Type of data

How to analyze data

How to make report

RESEARCH DESIGN
To study the credit appraisal procedure at Punjab National Bank.
To analyze the case study of ABC PARTS PVT. LTD.
To study credit risk management system at Punjab National Bank.

TYPE OF RESEARCH
In this project report Exploratory Research has been used which includes:
Search of secondary data.
Survey of knowledgeable persons.
Case study.

DATA TYPE
Data collected was both Primary and Secondary in nature

SOURCES OF DATA COLLECTION

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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 employees

Secondary sources of Information

Loan Policy and Internal Circulars of the bank
Research papers, power point presentations and PDF files
Referring to information provided by CIBIL, Income Tax files, Registrar of Companies
(Ministry of Corporate Affairs), and Auditor reports
E circulars at PNB
Database at PNB
Library research

TOOLS AND TECHNIQUE USED

TECHNIQUE USED FOR PROJECT
CASE STUDY is used as a technique to study and analyze the credit appraisal procedure at
Punjab National Bank.

Many well-known case study researchers such as Robert E. Stake, Helen Simons, and Robert K.
Yin have written about case study research and suggested techniques for organizing and
conducting the research successfully. This introduction to case study research draws upon their
work and proposes six steps that should be used:

Determine and define the research questions

Select the cases and determine data gathering and analysis techniques
Prepare to collect the data
Collect data in the field
Evaluate and analyze the data

Prepare the report

TOOLS USED FOR PROJECT
While making the project file various tools were used. These tools helped in doing the work.
These are: Microsoft Excel
Microsoft Word
Various analysis tools like Tables & Flow Charts.

BENEFICIARIES
Researchers: This report will help researchers improving knowledge about the credit appraisal
system and to have practical exposure of the credit appraisal system at Punjab national Bank.
Management Students: The project will help the management student to know the patterns of
credit appraisal in Punjab national bank.

LIMITATION OF THE STUDY

As the credit appraisal is one of the crucial areas for any bank, some of the
Technicalities are not revealed.
Credit appraisal system includes various types of detail studies for different areas of analysis,
but due to time constraint, our analysis was of limited areas only.

BIBLIOGRAPHY
WEBSITES
Ben McClure. Working Capital Works. Investopedia. From
(http://www.investopedia.com/articles/fundamental/03/061803.asp)
Richard Loth. The Working Capital Position. Investopedia. From
(http://www.investopedia.com/articles/basics/06/workingcapital.asp)
Naila Iqbal. Paradigms of Working Capital Management. From (http://ezinearticles.com/?
Paradigms-of-Working-Capital-Management&id=1251489)
Jagdish Capoor. Risk Management in Financial Institutions. From
(http://www.coolavenues.com/know/fin/jagdish_capoor_a.php3)
Principles for the Management of Credit Risk, from http://www.bis.org/publ/bcbsc125.pdf
BOOKS
M.Y.Khan & P.K.Jain, Financial Management, Seventh Edition
PNB Journals (For internal circulation only)
Credit Management & Risk Policy for the year 2008-09
Book of Instructions on Loans, March 2005
Loans & Advances Circulars on
BPLR
10

Project Finance
Industry Rating
Loaning Powers and Guidelines for exercising such powers

RBI Circulars and Guidelines

Guidelines on Credit Appraisal
Basel II Accord
Base Rate

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