A

PROJECT REPORT
ON

TO STUDY THE PROCESS OF CREDIT APPRAISAL,

RISK RATING & CREDIT MONITORING SYSTEM IN PUNJAB
NATIONAL BANK

By:Sayan Sarkar
Enrolment No: 14BSPHH010638
UNDERTAKEN AT
PUNJAB NATIONAL BANK (Circle Office), KOLKATA

1|Page

A REPORT ON

TO STUDY THE PROCESS OF CREDIT APPRAISAL,

RISK RATING & CREDIT MONITORING SYSTEM IN PUNJAB NATIONAL
BANK
By:-

Sayan Sarkar
Enrolment No: 14BSPHH010638

A report submitted in partial fulfillment of the requirement of MBA program,

IBS Hyderabad

Submitted to:
Mrs. Sharmistha Dasgupta, Senior Manager, PNB, CO, Kolkata
Mrs. Swatee Das, Senior Manager, PNB, CO, Kolkata
Prof. Dipanjan Kumar Dey
Faculty Guide

2|Page

AUTHORIZATION
11th May 2015
(To whomsoever it May Concern)

This is to certify that, Sayan Sarkar, Enrol No: 14BSPHH010638 student of IBS-Hyderabad, has
undertaken his Summer Internship Program (SIP) from our bank at Circle Office at A.G. Towers (3rd
Floor) 125/1,Park Street,Kolkata-700017 from 23/02/2014 -11/05/2014 for the project titled To study
the process of Credit Appraisal, Risk Rating and Credit Monitoring System in Punjab National
Bank under our supervision.

The bank has no objection if Sayan Sarkar:

1. Participates for IBS Alumni Federation Award (IBSAF) for Excellence in SIP-2015,being
conducted by IBS and share findings of the project for academic purposes and
2. Uses the bank name for the abstract of the above project in public domain, if selected for the
award.
We wish him well for all his future endeavors.

Sharmistha Dasgupta
Senior Manager, Credit
Punjab National Bank
Circle Office
Kolkata

Swatee Das
Senior Manager, Credit Risk Management
Punjab National Bank
Circle Office
Kolkata

3|Page

ACKNOWLEDGEMENT

I would take this opportunity to express my sincere gratitude to all the people who for their
valuable assistance and continuous support during my Summer Internship Program.
Firstly, I would like to thank B.S. Mann, Circle Head, Punjab National Bank, and Mr.
Sagnik Chatterjee, Deputy General Manager (FGM office) Kolkata for their confidence in
me and giving me opportunity to work in the organization.
I am highly grateful and obliged to my bank guides, Mrs. Sharmistha Dasgupta, Senior
Manager - Credit and Mrs. Swatee Das, Senior Manager Credit Risk Management,
Punjab National Bank, Kolkata for their guidance and support at each and every stage
during development of the project. Their guidance, inputs and suggestions have played a
crucial role at every stage in the development of the project and I had gained a lot of
knowledge from them.
I would also like to thank Mr. Suvro Dasgupta, Manager, PNB (Barabazar Branch), for his
insights and guidance in learning Preventive monitoring system which is a part of post
sanction follow up. His inputs also helped in the development of the project.
A heartfelt gratitude to Prof. Dipanjan Kumar Dey, Faculty IBS Hyderabad, my faculty
guide, with his continuous guidance throughout the program helped me to complete this
project in a timely and systematic manner.

4|Page

DECLARATION
This is to certify that the thesis titled TO STUDY THE PROCESS OF CREDIT
APPRAISAL, RISK RATING & CREDIT MONITORING SYSTEM IN PUNJAB
NATIONAL BANK is a bonafide work done by Sayan Sarkar, Enrolment Number:
14BSPHH010638 in partial fulfillment of the requirements of MBA Program and
submitted to IBS Hyderabad.
I also declare that this project is a result of my own efforts and that it has not been copied
from anyone and I have taken only citations from the literary resources which are
mentioned in the Bibliography section.

Place: Kolkata
Date: 11th May, 2015

5|Page

TABLE OF CONTENT
Sr. No.
i.
ii.
iii.
iv.
1.
1.1
1.1.1
1.1.2
1.2
1.3
2.
2.1
2.1.1
2.2
3.
3.1
3.1.1
3.1.2
3.2
3.3
3.4
3.4.1
3.4.2
3.4.3
3.4.4
3.4.5
3.4.6
3.4.7
3.4.8
3.4.9
3.4.10

Particulars
Authorization
Acknowledgement
Declaration
Executive Summary
Credit Appraisal
Facilities sanctioned by banks
Fund Based
Non fund based
Process followed for Credit Appraisal
Checklist for Pre Sanction Appraisal
Credit Risk Rating
Credit Rating Model
Evaluation in Risk Rating
Credit Risk Rating Grades and Pricing
Credit Monitoring
Preventive Monitoring System
Objective of PMS
Modules of PMS and Score
Audit
Inspection
Bank Checklist for Post-Sanction Follow Up
Cash Credit
Packing Credit
Cheques/ Bills Purchased
Term Loan
Overdraft
Demand Loan
Duty Drawback
Letter of Credit
Letter of Guarantee
Consortium Lending
Glossary
Citations and Bibliographies
Feedback

Page
Number
3
4
5
8-9
10
10
10-11
11
12
13
14
14-15
16-18
18
19
19-20
20
20-21
21
22
22
22
22-23
23
23
23
23
24
24
24
24
25-26
27
28

6|Page

LIST OF ACRONYMS
AOA
BG
BO
CC
CMA
CO
CRMD
CRMD
CRs
DD
DGM
DP
ECGC
FB
FGM
GRs
HO
IPs
KYC
L&A
LCBs
LCs
LIC
MFIs
MOA
MPBF
MTRs
NA
NBFC
NFB
NPA
O/Ds
PC
PMS
RBI
ROC
RRs
TL
TNW
TOL
TRs
UTI
WC

Article of Association
Bank Guarantee
Branch Office
Cash Credit
Credit Monitoring Arrangement
Circle Office
Credit Risk Management Division
Credit Risk Management Division
Confidential Report
Demand Draft
Deputy General Manager
Drawing Power/ Delivery against Payment
Export Credit Guarantee Corporation
Fund Based
Field General Manager
Goods Receipt
Head Office
Immovable Property
Know Your Customer
Loans & Advances
Large Corporate Banks
Letter Of Credit
Life Insurance Corporation
Micro Finance Institutions
Memorandum of Association
Maximum Permissible Bank Finance
Money Transport receipt
Not Applicable
Non Banking Financial Companies
Non Fund Based
Non Performing Asset
Overdrafts
Packing Credit
Preventive Monitoring System
Reserve Bank of India
Registrar of Companies
Railway Receipts
Term Loan
Total Net Worth
Total Liabilities
Transport Receipts
United Trust of India
Working Capital
7|Page

Executive Summary
To Study the Process of Credit Appraisal, Risk Rating and Credit Monitoring System in Punjab National
Bank is the topic of study in the entire internship program. Commercial banks play an important role in
the financial system and the economy. As a key component of the financial system, banks allocate funds
from savers to borrowers in an efficient manner. Thus help in the creation of new money and growth in
the economy.
Finance has been the life blood of any organization whether it is a Manufacturing, Trading or Service
Sector. Organizations require fund either for their day to day operations known as Working Capital or
for the creation of assets through Term Loan. Commercial Banks provide credit to different activities in
an economy like agriculture, industry, transport, retail, small business, NBFC, leasing etc. To provide
credit facilities to cover all sectors, it has proposed different credit appraisal models. Credit Appraisal
involves the collection of different data and information. The data are analysed with the help of different
tools and techniques for credit decision.
Any amount of finance (Loans & advances) of a Bank is an asset in its books. It is a major source of
banks revenue (Income). Since a bank needs to grow and survive, it needs income. So, utmost care is
taken while financing so that the risk becomes minimum and their assets remain performing (revenue
generating).
Basically, both proposed or existing borrower furnishes with the CMA data which includes past 3 years
audited financial statements, estimates for current year, projections for the next year, project report, if any
and other relevant information/data along with loan application. Credit appraisal is an analysis of viability
and calculation of Maximum Permissible Bank Finance (MPBF) based on submitted data and other
relevant information.
There is a prescribed Format of Punjab National Bank called Board Format where relevant information
is placed for fresh as well as for renewal of credit limits. Board Format is designed in such a manner so
that different important aspects of the borrowing unit are analysed like promoters past experience &
capability, past performance, conduct of account, financial capability/health , project viability, security
offered, marketing of product, competition, future prospect based on economic scenario, statutory
compliance and compliance of existing terms and conditions etc to enable the authorities to judge credit
worthiness of a proposal keeping in mind the risk factor and to take judicious and speedy decision.
In Indian banking system, several banks pool together their banking resources and provides fund to a
single borrower, generally for large advance with a common appraisal, common documentation and a
system of joint supervision and follow up. Such an advance is called Consortium lending. The main
objective of Consortium lending is to diversify the risk and to maintain maximum capital exposure norms
as stipulated by RBI. The consortium selects a leader which is called lead bank. Lead bank takes
maximum exposure and carries out certain task like appraising the various aspects of credit proposal,
convenes the consortium meeting etc. Even as a consortium member bank, Punjab National Bank has to
follow the credit appraisal procedures as per its own bank guidelines.
Risk factor is involved in every credit decision. To minimise the risk, bank takes the help of a tool called
Risk Rating. Rating is done in all types of accounts with limit 2 lacs and above. Punjab National Bank
has introduced 13 such rating models covering all categories of loan such as Large Corporates, Mid
Corporates, New Entrepreneur, Small loans, NBFCs etc. It is based on evaluation method. Evaluation is
made in the following four fields viz., Financial Evaluation, Business Evaluation, Management
Evaluation and Conduct of Account Evaluation. These models are automated and designed by experts. It
8|Page

requires specific inputs to get system generated score. The maximum score is 100. The score indicates the
level of lending risk. Accordingly, pricing of the bank i.e., lending rate of interest is fixed linked with is
linked with Risk Rating. Higher rated (lower risk) accounts are charged with lower rate of interest than
lower rated (higher risk) account. Pricing (rate of interest) is fixed for any advance by adding risk
premium with the base rate. Base rate is the minimum lending rate.
Once the loan is sanction and disbursed the bank has to follow up and monitor the conduct of account
which is called Post Sanction Follow Up. The bank needs to prevent the misuse of funds and monitor the
progress of the project/account as per terms of sanction. For monitoring the misuse of funds and slippage
of the account to be an NPA (bad account) the bank uses Preventive Monitoring System (PMS). Like
other tools, PMS is used as an indicator which gives early warning of any kind of danger that the account
is turning out to be bad. It is an automated model which evaluates conducts of accounts, compliance of
terms and conditions of sanction, status of project completion and risk rating for comparison and
generates PMS Score which helps to understand the level of risk in the account/proposal. Here, lower the
score, lower is the risk. However there are other monitoring systems like Audit and Inspection. There
are two parts of Audit viz., Quarterly concurrent audit and statutory audit. During inspection and audit
each loan account is thoroughly checked and observation is made on the deficiencies keeping in mind the
compliance of terms and conditions of sanction and other relevant aspects. The very object of
inspection/audit is to set right the deficiencies observed to safeguard banks interest and to prevent the
account to be an NPA. Provisions need to be made from profit of the bank for NPA accounts and thereby
adversely affect the income of the bank. NPA accounts are sometimes restructured after its viability study
as per RBI guidelines. The objective of such restructure is to upgrade the account. However, monitoring
will continue like any other account.

9|Page

1. CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the bank prior providing any loans &
advances/project finance & also checks the commercial, financial & technical viability of the proposed
project, its funding pattern & further checks the primary & collateral security cover available for recovery
of such funds. It is a process carried by bank to ascertain the risks associated with the extension of the
credit facility.

1.1 Facilities Sanctioned by Banks

LOAN

Fund Based

Non-Fund Based

Letter of Credit

Cash Credit/
Packing Credit

Cheques/Bill
Purchase

Term Loan

Overdraft

Letter of Guarantee

Demand Loan Duty Drawback

1.1.1 Fund Based:

In fund based loan, fund is released and withdrawal is made as per requirement of the business. Loan
sanctioned by bank is either short term loan (repayable within a period of 12 months) to create current
assets or long term loan (repayable over a period of 12 months) to create fixed assets. Therefore, the
primary security of the loan is the relevant short term assets (current asset) or the relevant long term asset
(fixed asset) created out of the short term or long term bank finance.
Cash Credit: Cash Credit is working capital finance. Limit is set up based on working capital
gap and business cycle. Withdrawal is allowed upto the limit sanctioned and within the drawing
power of the client whichever is lower.
Packing Credit: A borrowing facility provided by a financial institution to help an exporter to
finance the costs of buying or making a set of products, and then packing and transporting them
before shipment occurs. A packing credit loan will often be extended if a letter of credit has been
issued by a purchaser of the products that is based in another country or a confirmed order for
exporting the goods exists.

Cheques/ Bill Purchase: When the cheque or bill is drawn favoring the borrower, the same is
purchased or discounted (Usance bill) and fund is released instantly. Bank collects the payment of
the cheque/bill in due course.

10 | P a g e

 Term Loan: The loan which is provided for the purchase of Assets and is repaid in regular
payments over a set period of time (generally over 12 months).

Overdraft: It is a temporary facility over and above the limit to meet the demand in exigency.
However, overdraft limit can be sanctioned against security of Bank deposit, LIC policies and
government securities.
Demand Loan: It is a short term loan which is payable on demand. The loan is sanctioned against
banks fixed deposit, shares and government securities mainly for the purpose of consumption.

Duty Drawback: A refund that can be obtained when an import fee has already been paid for a
good, but the good is then subsequently exported. Since refund of import duty takes times, bank
sanction loan against the refundable duty as duty drawback. After receipt of the amount from the
government the loan is adjusted.

1.1.2 Non Fund Based:

In Non Fund Based loan, banks fund is not involved but equivalent amount of bank risk may be involved
in future when letter of credit is invoked or letter of guarantee is devolved. Letter of credit and letter of
guarantee are issued by bank on behalf of the borrower/client for purchase of goods and fulfilment of
promise respectively. Since the liability of the bank in these cases may or may not arise, the liability is
treated as contingent liability.
Letter of Credit: It is a document from a bank guaranteeing that a seller will receive payment in
full as long as 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.
Letter of Guarantee: A guarantee issued by a bank on behalf of a customer for the purpose of
purchase of goods or fulfilment of promise/contractual obligation/financial obligations. Banks
liability arises in the event of default by the borrower.

11 | P a g e

1.2

Process followed for Credit Appraisal

Receipt of application from applicant

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents)

Credit Risk rating of the borrower

Pre-sanction visit by bank officials & obtaining required clarifications/papers.

Checking from RBI defaulters list, wilful defaulters list, CIBIL data, ECGC caution list, etc for borrowers
and guarantors..

Title Deed verification reports of the properties to be obtained from empanelled advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Analysis of financial data and preparation of proposal with calculation of MPBF and recommendation

Verification of pre-sanction checklist of bank

Sanction of proposal by appropriate sanctioning authority

Execution of Loan Documentations

Disbursement of loan
12 | P a g e

1.3 Checklist for Pre Sanction Appraisal

While dealing with pre-sanction Credit Appraisal, it is sometimes felt that the branches at the time of
submitting the loan proposals to the Controlling Offices, many a times, do not include all the critical
meaningful information for speedy and hassle free disposal of the cases, resulting in a unavoidable
correspondence and delay.
To obviate this, Pre-Sanction checklist is followed by bank, which would help in minimising queries from
Sanctioning Authorities, will facilitate prompt disposal of loan proposals. The recommending official
should ensure that the points enumerated in the Checklist are duly addressed/ covered at the time of
submission of Credit Proposal.
Accordingly, Punjab National Bank has made a guideline as prerequisite verification and scrutiny of
different aspects of pre-sanction appraisal for new sanction as well as renewal sanction of existing unit
which are summarized as under. on-Compliance of points of checklist is to incorporated in the proposal.
Sl. No.
Checklist
1.
Assessment Part
That all required documents have been submitted and duly verified by the borrower.
Justification of acceptance of projected sales keeping in view of production plan, actual
sales, market trend and peak and non-peak level market share.
Modification in plant and machinery, if any.
Proper classification of Current Assets & Current Liabilities.
Valuation of stock and its realizability as per laid down guidelines.
Scrutiny of fund flow statement for exact requirement.
Installed/licensed capacity with projections.
Proper classification of current assets.
Borrowers activities, market reputation and collection of CR along with CR of
guarantor.
Vetting of Credit Rating report.
All documents are signed by the borrower.
Report of Allied concerns and facilities with other banks.
2.
Verification of Antecedents of Borrower/Guarantor/Supplier
Whether spot verification of the factory/business premises/IP securities/ collateral
securities has been done before sanction of limits.
Statutory clearance like pollution clearance and other approvals from regulatory
authority.
3.
Additional Safeguards for Existing Accounts.
Any change of management from last sanction, analysis of past track records/conduct.
Irregularities observed by Auditor/Inspector/Stock should be removed.
If there are wide variations between the provisional and the audited accounts, whether
the same are properly analysed / examined.
4.
Documentation/ Creation of Charge
All cuttings in documents have been authenticated by the executants(s). Verification of
document by legal counsel, where necessary.
Proper stamping of document and creation/modification of charge with ROC.
Search and valuation of IPs with proper insurance.
5.
Disbursement
Obtaining approval from authorities for non compliance of any terms of sanction
before disbursement.
Direct payment to the suppliers and no cash disbursement without sanction.
13 | P a g e

2. Credit Risk Rating

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 is designed to reveal the overall
risk of lending, for setting pricing and non-pricing terms of loans and also to present meaningful
information for review and management of loan portfolio.
Credit Risk Rating is the primary activity that is carried out after the approval of Techno Economic
Viability report. The rating evaluates a loan on four aspects namely Financial Aspects, Management
Aspects, Industry Aspects and Conduct of Accounts Aspects. These are the four main pillars on which it
determines the rating. The rating is of utmost importance since it categorises the loan into high, moderate
or low risk. Falling short of achieving the minimum required rating would inevitably stop further
proceedings of loan appraisal.
The various steps taken by the bank to comply with the above RBI guidelines, inter-alia, 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.

2.1 Credit Rating Models: . PNB has devised and implemented Eight Default Rating models, two
Transaction Rating Model, one Half Yearly Rating model & one NPA Marking Model as discussed
below:
Sr. No
1.
2.

3.
4.
5.
6.
7.

Credit Risk Rating Model

Applicability
Total Limit
Sales
Large Corporate
Above Rs. 15 Crore
Above Rs.100 Crore
OR
except Trading Concerns.
Mid Corporate
Above Rs.5 Crore and Above Rs.25Crore and
upto Rs.15 Crore
upto Rs.100Crore
OR
All trading concerns falling in the Large Corporate category shall also be rated under
this model.
New Projects Rating
Above 5Cr OR
Cost of Project above
15Cr
Small Loans
Above Rs.50laks and
upto 5 Cr
Upto Rs.25 Cr
Small Loans II
Above Rs. 2laks and upto
Rs.50laks
NBFC
All Non Banking Financial Companies irrespective
of limits.
Entrepreneur New Business Borrower setting up new Cost of Project upto
Model
business and requiring Rs.15 Cr.
finance above Rs 20 lacs
upto Rs. 5 Cr (AND
However, all new trading business irrespective of
limits shall be rated under this model.
14 | P a g e

New
Non
Banking
Financial
Companies
(NBFCs)/New Micro Finance Institutions (MFIs).
New borrower entities, setting up new business
requiring only working capital/NFB limits of above
Rs.5 crore but not involving setting up of any project
as such.
Projects already completed with own finance, audited
results for first year of operations are not yet
available and proposal is only for sanction of
WC/NFB facilities.
8.

Credit Risk Rating Model for All Banks and Financial Institutions.
Banks/FI

Sr. No
Transaction Rating Model
Applicability
1.
Facility
(Expected
Loss) Assigning rating to facility sanctioned to the borrower
Rating Framework
based on default rating and securities available
2.

Future Lease Rental Model

Advances to property owners against future lease

rentals.

Sr. No
Half Yearly Rating Model
1.
Half Yearly Rating Model

Applicability
i) All listed companies rated on large /mid corporate
rating models. ii) Other borrowal accounts rated on
large / mid corporate rating models availing limits
(FB+NFB) above Rs.50.00 crores from our bank

Sr. No
1.

Applicability
For marking NPA accounts in on-line PNBTrac
Credit Risk Rating System

NPA Model
NPA Model

15 | P a g e

2.1.1 Evaluation in Risk Rating

Credit risk rating models evaluate the default risk of a borrower on four broad aspects viz. Financial
Aspect, Management Aspect, Industry Aspect and Conduct of Account Aspect. These areas are bifurcated
into sub-areas and each sub-area is further split into a number of parameters as per details as under:
A. Financial Evaluation: The evaluation shows the financial stability and soundness of the
business enterprise. With the help of different ratios the same is evaluated as shown as under:

Category
Growth Rate
Profitability
Cash Flows
Solvency Ratio
Liquidity Ratios
Debt Coverage
Ratios
Profitability Ratio

Parameter
Gross Sales growth rate (%)
OPBDIT/Sales (%)
Short term bank borrowings/Net sales (%)
Operating Cash Flows/Total Debt (%)
Net Operating Cash Flow/Total Debt (%)
Debt Equity Ratio
TOL/TNW
Current Ratio
Interest Coverage
DSCR
Return on Capital Employed (%)

B. Management Evaluation: To understand how far the management is efficient in doing the
business is evaluated with different parameters like sales, PBT, debt repayment etc. as per
details as under:

Parameters
Actual Gross Sales
Targeted Sales
Actual PBT
Targeted PBT
Management Set-up and Corporate Governance
Commitment and sincerity
Track record in execution of projects
Track record in debt repayment
Track record in Industrial relations
Financial strength/ flexibility /Group support
Capital market perception

16 | P a g e

C. Business/Industry Evaluation: Every unit is business/industry specific. Thus to understand

its competitive position in present market scenario in different aspects, the evaluation is done
as per details as under:

Parameters
Operating leverage
Inventory turnover
Net sales/Op. Assets
Raw material consumed/Net Sales
Credit period allowed
Competitive Position :
Expected sales growth
Market dominance /Market share
Trend in market share
Input Related Risk :
Availability of raw material and other critical inputs
Proximity to raw material
Status of backward integration
Production Related Risk :
Capacity utilization
State of technology used
Flexibility in product manufacturing
Product Related Risk :
Product range
Product quality
Price Competitiveness :
Economies of scale
Pricing flexibility
Marketing :
Selling and distribution network
Proximity to market

D. Conduct of Account Evaluation: It shows the actual business operation and its efficiency.
Therefore evaluation of conduct of account is of utmost importance in risk rating. Account
evaluation is judged on the following points:

Preventive monitoring system rating

Status of account
Operations in account
Submission of financial data/ statements

17 | P a g e

Total Score and Weights assigned to each parameters of the above evaluation are as under:
Financial Evaluation
Business & Industry
Evaluation
Management Evaluation
Conduct Evaluation

40%
25%
25%
10.00%

2.2 Credit Risk Rating Grades and Pricing

Based on the above parameters, system generates score for each credit rating and assigns rating on the
basis of score obtained as under. However rating of each account must be vetted by appropriate authority
of the bank as per bank guidelines.

Score Obtained
Above 80.00
Above 70.00 upto 80.00
Above 64.00 upto 70.00
Above 58.00 upto 64.00
Above 52.00 upto 58.00
Above 46.00 upto 52.00
Above 40.00 upto 46.00
Above 35.00 upto 40.00
Above 25.00 upto 35.00
25.00 and below

Rating
PNB-A1
PNB-A2
PNB-A3
PNB-A4
PNB-B1
PNB-B2
PNB-B3
PNB-C1
PNB-C2
PNB-C3

Description
Minimum Risk
Marginal Risk
Modest Risk
Lowest Risk
Average Risk
Marginally Acceptable Risk
Cautiously Acceptable Risk
High Risk
Very High Risk
Exceptionally High Risk

Minimum lending rate (except loan against banks own deposit) is the base rate of the bank which is
changed from time to time. Pricing of the bank i.e., rate of interest charged by bank is linked with Risk
Rating. Higher the credit rating score, lower is the credit risk. Risk premium is added with the base rate
according to the rating/credit risk to fix lending rate. Risk premium is different for different types of
accounts and may be changed from time to time.

18 | P a g e

3. Credit Monitoring
A significant aspect of effective management in lending is proper monitoring of credit. The success of
credit monitoring largely depends on two factors viz., a) Co-operation of the borrower clients in
furnishing the required data and statements like monthly stock statements, half yearly and yearly balance
sheet and profit and loss accounts, monthly statement of sales and purchases with outstanding creditors
and debtors, etc. to the bank on time and b) the capacity and knowledge of the credit monitoring
authorities to take timely decisions and corrective steps to keep the borrowal account in good health. Had
there been proper and effective monitoring, it could prevent many accounts from becoming NPA.
Thus Punjab National Bank has devised few credit monitoring techniques which will reduce the
conversion of good accounts turning into bad accounts. Such measures are as under.

Credit Monitoring

Preventive Monitoring System

Stock Audit

Audit

Concurrent Audit

Inspection

Post-Sanction Checklist

Statutory Audit

CARD Audit

3.1 Preventive Monitoring System(PMS)

Post-sanction Credit Monitoring of borrowal accounts is an important ingredient of a sound Credit
Management System and calls for monitoring of the health/conduct of accounts on a continuous basis.
Credit Risk Policy, Credit Appraisal and Credit Monitoring are the three pillars of Credit Management.
The quality of banks credit portfolio can be significantly improved with the help of proper systems,
processes and tools of credit monitoring. The early detection of deterioration in the quality of a borrowal
account and timely action may minimize the possible losses to the bank. Once the account becomes an
NPA, it is difficult for the bank to recover its entire dues.
For the purpose, Bank has in place Preventive monitoring system (PMS) for post sanction monitoring of
borrowers having sanctioned limits (FB plus NFB) above Rs. 1 crore applicable for all corporate
Borrowal Accounts, except for the following:
NPA Accounts.
Advances against Life Insurance Policies.
Advances against Banks own deposit.
Advances against Shares.
Advances against Deposits, Govt. Securities, Units of UTI.
Advances against bullion and jewellery.

19 | P a g e

PMS is a credit monitoring tool which covers a number of signals/ indicators, that are material for
evaluating the conduct or health of a borrowal account and seeks to measure the performance of the
account on the said signals on a continuous basis. It assigns numerical score to each signal and captures
the conduct of an account in a single total numerical value called PMS Index Score on indicators covering
timeframe of past one year. Its focus is on prevention of loan loss by focusing on borrowal accounts
showing early warning signs of deterioration. However success of the system depends on generation of
report at regular interval and taking remedial action in time.
PMS model is based on Behavioural scoring which helps to automatically segment and rate accounts,
customers and portfolios thus allowing efficient management of a particular borrowers credit account as
well as the entire credit portfolio. The system seeks to improve efficiency, efficacy and compliance level
in the borrowal accounts.

3.1.1 Objectives of PMS

PMS is an imperative credit monitoring tool. It seeks to track & evaluate the health of borrowal accounts
on a continuous basis. The objectives of the system are listed below:
A. To detect unsatisfactory/adverse signals/indicators at an early stage in a comprehensive manner
for which compliance of the following points to be looked into.

Compliance with terms & conditions of sanction

Status of Project Implementation
Conduct of account
Adherence of other bank guidelines and statutory requirements

B. To emphasize thorough probe into reasons behind observed signals and analysis thereof. Some of
the causes can be: Incorrect business decisions
Adverse market conditions
Unplanned expansion etc.
Malafide intentions.

C. To propose speedy corrective/remedial actions/steps to prevent the account from becoming NPA
as well as to minimize the loan losses. Some of the actions which can be taken are: Stipulating higher margin on Primary Security.
Asking for more collateral.
Influencing business decision of the borrower.
Infusion of fresh funds.
Inserting more banks into the consortium.
Efforts for recovery of dues.
Exit from the account.

3.1.2 Modules of PMS and Score

The Preventive Monitoring System (PMS) is a post sanction credit-monitoring tool consisting of a
number of signals/parameters for evaluating the health of a borrowal account on a continuous basis. It
consists of three parameters.
20 | P a g e

 Compliance of terms and conditions of sanction- This module evaluate the compliance part i.e.,
adherence of all the terms and conditions of the sanction. The score in this module is assigned on
the basis of selected options out of the available options in PMS.
Project Implementation- This module of PMS seeks to monitor the progress of implementation
of projects financed by the bank and also to capture warning signals, which can tell upon the
health of the account.
Conduct of Account- This is the automated module which calculates score on the basis of data
pertaining to operations in the borrowal account, which is directly derived from transaction system
and ladder. Each and every credit facility of the borrower is analysed to detect any kind of
delinquency or negative signals in the account.
On successful submission of inputs in all the three modules as above, PMS report is generated with score.
Lower score indicates lower risk and vice versa as per details as under. However correctness of score
depends on correct feeding of data. There are Benchmarks and weights which are assigned to the facilities
availed like Term Loan, Cash Credit, Overdraft, Packing Credit, Bills Purchased, Letter of Credit, Letter
of Guarantee and so on. Based on those parameters, benchmark and weights, the system will work out
score, cumulative scores which shall be translated into PMS rank of the corporate in following categories:
PMS Score
0-25%
>25-50%
>50-65%
>65-80%

PMS Rank
1
2
3
4

PMS Indicator
Healthy
Satisfactory
Early Warning
Warning

>80%

NPA

3.2 Audit
It is one of the most important methods of monitoring credit portfolio by Punjab National bank. Audit is
conducted to ensure the validity & reliability of information and the information is free from material
error.PNB conducts the following types of audit:
(a) Quarterly Concurrent Audit: In large and exceptionally large branches, auditors verify the
workings of the branch on day-to-day basis and submit quarterly report. The irregularities pointed
out in the report needs to be rectified by branch and to report to the higher authorities.
(b) Statutory Audit: It is conducted once in a year. The irregularities pointed out in the report needs
to be removed by branch .Removal to be apprised to the higher authorities.

(c) Stock Audit: The auditor reports their observations after physical checking of stock of borrower.
Any adverse observation needs to be rectified immediately after taking up the matter with the
borrower and compliance to be reported to higher authorities.
(d) CARD Audit: CARD audit is conducted by Credit Audit Review division of Head office where
credit limits of a borrower is Rs. 5.oo cr and above. The irregularities pointed out in the Card
report pertaining to the account to be got removed as early as possible and compliance to be
reported to higher authorities.
21 | P a g e

3.3 Inspection
The main object of inspection is checking of documents, records and facilities to verify adequacy of
system control, ensure compliance with established bank guidelines and operational procedures. The
system of annual Inspection in Punjab National Bank is very important as each branch is graded based on
reported outstanding irregularity and its gravity.
On the basis of Inspection/audit report,, the sanctioning authorities monitor the account(s).In case of need,
proper instruction/guidance is provided to branch level to safeguard the interest of the bank. The
outstanding irregularities pointed out in the Audit/Inspection report pertaining to an account needs to
incorporate in the loan proposal of the borrower to bring it to the knowledge of sanctioning authorities to
enable them to monitor the account.

3.4 Bank Checklist for Post-Sanction Follow Up

Lending decisions are based on sound appraisal and assessment of credit worthiness. Past record of
satisfactory performance and integrity are no guarantee for future thought they serve as a useful guide to
project the trend in performance. A loan granted on the basis of sound appraisal may go bad due to the
failure of the borrower to meet its promise of performance. Thus post sanction follow up monitors the end
use of funds and whether the businessmen are continuing to do their business according to their
projections and in terms of sanction. The main objective of post sanction follow up is to prevent the
slippage of an account to NPA. Thus it is very important to monitor the account continuously.
Keeping the point in view, Punjab National Bank has made post sanction follow up checklist separately
for each category of loan which is summarised as under:
3.4.1 Cash Credit(Hypothecation/Pledge)

Submission of stock/ book debt statement should be regular and to be verified/ checked
physically from borrowers record on periodical basis by bank official in terms of sanction
and valuation as per banks guidelines.
Book debt should be out of genuine trade transaction. Power of Attorney to be obtained
incase of advance against book debt.
No DP will be allowed against old and obsolete stock and stocks received under LC and
unpaid for stock. DP should not be over the limit without proper sanction.
Turnover in account should be satisfactory. Frequent overdrawn is not allowed. Overall
ceiling of limit should be maintained.
Stocks to be insured fully in the joint name of bank and borrower and all terms and
conditions are to be adhered.
Necessary documents should be got executed in time including Balance Confirmation
letter.
Pledged stock to be properly stored and to be attended by Godown Keeper/ Chowkidar.

3.4.2 Packing Credit(PC)

Each PC will be allowed against sanctioned LC of approved bank.

Submission of stock statement should be regular and to be verified/ checked physically
from borrowers record on periodical basis by bank official in terms of sanction. Valuation
to be done as per banks guidelines. Stock under PC to be kept segregated.
22 | P a g e

Separate account to be maintained for each PC and to be got adjusted within a period of
180 days, if not got extended.
Stocks to be insured as per bank guidelines and party to deal with the bank exclusively.
No PC will be allowed against expired LC and no shipment will be allowed by an
unapproved clearing agent.

3.4.3 Cheques/Bill Purchased

Cheques must be in favour of the borrower and apparently in order.

Cheques are purchased for good clients only.
Genuine bill to be purchased accompanying RR/TRs. TR must be of approved transport
company.
Bills drawn on allied or associated concerns should not be purchased.
Cite bill is preferable and purchase of bill of longer period (Usance bill) should be
avoided.
Incase of frequent returning of bill, prompt action to be taken to realise the money and
further purchase in such accounts to be avoided.
CR of the drawee should be collected from the banker.
For Usance bill (bill with future due date) drawee wise record with limit to be maintained
and no excess purchase over the limit is to be allowed without proper sanction.

3.4.4 Term Loan

Preferably payments are made directly to the suppliers for procurement of asset which are
to be insured as per bank guidelines in the joint name of the bank and the borrower.
Time of project completion and commencement of production as per schedule to be
adhered.
Instalment payments should be regular and in case of default proper steps to be taken and
the matter to be brought to the notice of the sanctioning authority.

3.3.5 Overdraft

Securities to be endorsed in the favour of the bank incase of post office/UTI certificates
and owner to be got verified.
Third party advance is also allowed with proper sanction and documentation.
Incase of advance without security i.e., clean overdraft, bank should try to adjust the
account as early as possible.
Procedural compliance should be made in all cases.

3.3.6 Demand Loan

Demand loans are sanction against fixed deposit, LIC, shares and government securities
which are to be pledged with the bank.
Incase of shares and government securities, the same to be transferred in the name of the
bank.
Third party demand loan is also granted as per banks stipulation.
Proper documentation must be made as per bank guidelines before release of the loan.

23 | P a g e

3.3.7 Duty Drawback

Documentary evidence to be furnished for import of goods and duty paid for the same by
the clients.
Amount to be released under proper documentation and adhering to the guidelines of RBI.

3.3.8 Letter of Credit

LC to be issued against sanction limits keeping stipulated margin. Issue of LC over the
sanction limit to be got approved.
Party to ensure that LC is retired promptly.
Stock under LC to be insured as per terms of sanction.
Incase of Revolving LC the maximum number and amount per LC to be as per terms of
sanction.
Incase of devolvement (non compliance of terms of LC by borrower) of LC, prompt action
to be taken.
Incase of foreign LC, valid import license to be obtained and FLC is opened strictly in
terms of sanction.

3.3.9 Letter of Guarantee

LG is issued with proper sanction and within the limit keeping stipulated margin.
Expired LGs to be reversed in the books of the bank. Incase of invocation (failure of
borrower to comply terms of LG) of LGs, matter to be dealt appropriately and to be
brought to the notice of the sanctioning authority.
Bank should avoid issue of LGs on behalf of the party where invocation is frequent.

3.3.10 Consortium Lending

In Indian banking system, several banks pool together their banking resources and provides fund to a
single borrower, generally for large advance with a common appraisal, common documentation and a
system of joint supervision and follow up. Such an advance is called Consortium lending. The main
objective of Consortium lending is to diversify the risk and to maintain maximum capital exposure norms
as stipulated by RBI. The consortium selects a leader which is called lead bank. Lead bank takes
maximum exposure and carries out certain task like appraising the various aspects of credit proposal,
convenes the consortium meeting etc.

Punjab National Bank has stipulated to following checklist for Consortium Lending.

Consortium agreements to be got executed by the consortium leader and attested copy
thereof is held.
Consortium meetings are held periodically and letter are exchanged by the participating
bank intimating balances in the account periodically.
Undertaking (as per terms of sanction) to be taken from the borrower agreeing to deposit
sale proceeds, book debts realised, etc. on pro rata basis has been obtained.
Stocks to be periodically checked by participating banks and reports to be exchanged.
All terms and conditions governing the consortium advance as per sanction to be complied
with.
24 | P a g e

Glossary
Bank Guarantee: It is a kind of guarantee from a lending institution which ensures that the
liabilities of a debtor will be met and incase the debtor fails to settle a debt, the bank will cover it.
Base Rate: It is the minimum interest rate at which a bank can lend except for loans to its own
employees, its retired employees and against banks own deposits.
Cash Flows to Debt Ratio (Operating Cash Flow/Total Debt): This coverage ratio compares a
companys operating cash flow to its total debt. Is provides an indication of a companys ability to
cover total debt with its yearly cash flows from operation. The higher the percentage ratio, the
better the companys ability to carry its total debt.
Credit Enhancement: A method whereby a company attempts to improve its debt or credit
worthiness. Through credit enhancement, the lender is provided with reassurance that the
borrower will honor the obligation through additional collateral, insurance, or a third party
guarantee. Credit enhancement reduces credit/default risk of a debt, thereby increasing the overall
credit rating and lowering interest rates.
Debt Service Coverage Ratio (Net Operating Income/ Total Debt Serviced): It is the amount
of cash flow available to meet annual interest and principal payments on debt, including sinking
fund payments. A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1,
say .95, would mean that there is only enough net operating income to cover 95% of annual debt
payments.
Debt to Equity Ratio (Debt/Equity): It is the debt to equity ratio which show the ratio

of both the component in the capital structure.

Door to Door Tenor: It indicates the total period within which the total debt borrowed is to be
paid which includes the period of moratorium, i.e., the period for which payment has been
postponed.
Escrow Account: An escrow account is a temporary pass through account held by a third party
between the processes of transaction between two parties. This is a temporary account as it
operates until the completion of the transaction process, which is implemented after all the
conditions between a buyer and a seller are settled.
Hypothecation: It is a mode of creating an equitable charge on a property to secure the payment of a
debt in which the property itself continues to be in the possession of the debtor. It is a legal transaction
whereby a merge charge is given on the goods for the amount of the debt but the hypothecated goods
remain in the actual possession of the borrower. And neither possession nor ownership passes to the
lender. The instrument which creates a charge is known as Letter of Hypothecation.
Interest Service Coverage Ratio (EBIT/ Interest expense): The interest coverage ratio is used
to determine how easily a company can pay interest expenses on outstanding debt. The lower
the ratio, the more the company is burdened by debt expense. When a company's interest
coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.
Inventory Turnover: A ratio showing how many times a company's inventory is sold and
replaced over a period. The days in the period can then be divided by the inventory turnover
formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."

Lead Bank: A bank that oversees the arrangement of loan syndication and is paid an additional
fee for this service, which involves recruiting the members and negotiating the financing terms.
Lien: The legal right of a creditor to sell the collateral property of a debtor who fails to meet the
obligations of a loan contract.
Liquidity Ratios: A class of financial metrics that is used to determine a company's ability to pay
off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the
margin of safety that the company possesses to cover short-term debts.
Loan Syndication: The process of involving several different lenders in providing various
portions of a loan. Loan syndication most often occurs in situations where a borrower requires a
large sum of capital that may either be too much for a single lender to provide, or may be outside
25 | P a g e

the scope of a lender's risk exposure levels. Thus, multiple lenders will work together to provide
the borrower with the capital needed, at an appropriate rate agreed upon by all the lenders.
Moratorium: It is an agreement between a creditor and a debtor to allow additional time for the
settlement of a debt.
Mortgage: A legal agreement that conveys the conditional right of ownership on an asset or
property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The
lenders security interest is recorded in the register of title documents to make it public
information, and is voided when the loan is repaid in full.
Multiple Banking: Multiple banking is a banking arrangement where a borrowal avails finance
independently from more than one bank. Thus, there is no contractual relationship between
various bankers of such borrower. Also in such arrangement each banker is free to do hid own
credit assessment and old security independent of other bankers.
Operating Leverage (% change in EBIT/ % change in Sales): The Degree of Operating
Leverage (DOL) is the leverage ratio that sums up the effect of an amount of operating leverage
on the companys earnings before interests and taxes (EBIT). Operating Leverage takes into
account the proportion of fixed costs to variable costs in the operations of a business. If the degree
of operating leverage is high, it means that the earnings before interest and taxes would be
unpredictable for the company, even if all the other factors remain the same.
Pari Passu: A Latin phrase meaning "equal footing" that describes situations where two or more
assets, securities, creditors or obligations are equally managed without any display of preference.
An example of pari-passu occurs during bankruptcy proceedings when a verdict is reached, all
creditors can be regarded equally, and will be repaid at the same time and at the same fractional
amount as all other creditors. Treating all parties the same means they are pari-passu.
Pledge: It is delivery of goods by a borrower to a lender as security for the payment of a debt or
the performance of a promise. The ownership remains with the borrower but the possession of the
goods is with the lender until the debt is paid.
Profitability Ratios: A class of financial metrics that are used to assess a business's ability to
generate earnings as compared to its expenses and other relevant costs incurred during a specific
period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the
same ratio from a previous period is indicative that the company is doing well.
Solvency Ratios: The solvency ratio indicates whether a companys cash flow is sufficient to
meet its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the
probability that it will default on its debt obligations.
Working Capital (Current Asset-Current Liabilities): The capital which is required to run its
day to day operation in a business is known as working capital. It is the excess of Current Asset
over its Current Liabilities.

26 | P a g e

Citations & Bibliographies

Study Material

IRMD, Risk Rating Manual. Cir. No: 12/2014, New Delhi, March 14, 2014
IRMD, PMS Manual. New Delhi.
Pre- Sanction and Post- Sanction Credit Appraisal Manual.
Credit Appraisal files and correspondence.

Websites

www.investopedia.com. May 6, 2015

www.businessdictionary.com. May 6, 2015

Books

Toor, NS. Analysis of Balance Sheet. New Delhi: Skylark, 2006.

27 | P a g e

FEEDBACK

28 | P a g e