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CREDIT SECTION, CIRCLE OFFICE: DELHI, 4th FLOOR, RAJENDRA BHAWAN, RAJENDRA PLACE, NEW DELHI
TELE; 25744450 Fax: 25731252
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TO WHOM IT MAY CONCERN
This is to certify that KRITIKA ARORA, a student of Amity
International
Business School, Noida, undertook a project on “CREDIT
APPRAISAL
AND RISK MANAGEMENT” at PUNJAB NATIONAL BANK from 1st
May to 30th June.
Ms.KRITIKA ARORA has successfully completed the project under
the
guidance of Mr.ARUN KUMAR NIJHAWAN. She is a sincere and
hardworking
student with pleasant manners.
We wish all success in her future endeavors.
Mr. ARUN KUMAR NIJHAWAN
Amity International Business School,Noida 2
Credit Appraisal and Risk Rating at PNB
Senior Manager
Circle Office Delhi
Punjab National Bank
CERTIFICATE OF ORIGIN
This is to certify that Ms. KRITIKA ARORA, a student of Post Graduate Degree in MBA
in
INTERNATIONAL BUSINESS, Amity International Business School, Noida has worked
in the
Credit Department of Punjab National Bank, Circle Office Delhi and has submitted
this
project report entitled “Credit Appraisal and Risk Rating” at PUNJAB NATIONAL
BANK,
under the able guidance and supervision of Mr. ARUN KUMAR NIJHAWAN, SENIOR
MANAGER, PUNJAB NATIONAL BANK. The period for which she was on training was
for 8
weeks, starting from 1st MAY to 30th June.
This Summer Internship report has the requisite standard for the partial fulfillment the
Post
Graduate Degree in International Business. To the best of our knowledge no part of this
report has
been reproduced from any other report and the contents are based on original research.
Amity International Business School,Noida 3
Credit Appraisal and Risk Rating at PNB
Dr. Ajit Mittal
Professor
AIBS
Kritika Arora
Student
MBA in International Business
Amity International Business School
ACKNOWLEDGEMENT
Every work involves efforts and inputs of various kinds and people. I am thankful to all
those
people who have been helpful enough to me to the extent of their being instrumental in
the
completion and accomplishment of the project entitled “Credit Appraisal and Risk
Rating at
Punjab National Bank”.
I sincerely acknowledge with deep sense of gratitude to my project guide Mr. A K
Nijhawan
Senior Manager, Credit, PNB Circle Office, for enhancing my understanding of the
subject and
enabling me to appreciate finer nuances of the subject.
I would also like to express my deepest gratitude to Mr. Rohit Grover (Chief Manager,
Credit),
Ms. Trilochan Kaur Anand (Manager, Credit), Mr. Sarkar (Senior Manager, Credit
Risk
Management Department) and the entire Credit Department for their help and
guidance, without
which the completion of this project would have been extremely difficult.
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Credit Appraisal and Risk Rating at PNB
Lastly, I would like to thank Mr. Nehal Ahad (Chief Manager, HR) as he found me
credible
enough to work for PNB and selected me for challenging project.
Kritika Arora
A1802009075
MBA in International Business
Amity International Business School
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Credit Appraisal and Risk Rating at PNB
CHAPTER PLAN
Table of Content
PART - 1
CHAPTER 1 EXECUTIVE SUMMARY……………………………. 8
CHAPTER 2 INTRODUCTION TO CREDIT APPRAISAL………………… 10
CHAPTER 3 OBJECTIVES…………………………………………... 12
CHAPTER 4 RESEARCH METHODOLOGY……………………………. 13
CHAPTER 5 INDUSTRY PROFILE……………………………………. 14
CHAPTER 6 COMPANY PROFILE……………………………………. 17
CHAPTER 7 REVIEW OF LITERATURE………………………………. 19
7.1 Working Capital Assessment…………………………. 19
7.2 Assessment of Term Loans…………………………… 30
7.3 Basel Accord & Risk Management…………………….. 31
CHAPTER 8 CREDIT APPRAISAL…………………………………… 33
8.1 Introduction………………………………………. 33
8.2 Market Analysis…………………………………… 34
8.3 Technical Analysis…………………………………. 36
8.4 Financial Analysis………………………………….. 38
8.5 Management & Organizational Analysis………………… 45
8.6 Credit Appraisal Checklist…………………………… 46
CHAPTER 9 CREDIT RISK MANAGEMENT…………………………… 49
9.1 Credit Risk………………………………………... 49
9.2 Credit Risk Management System in PNB………………... 49
CHAPTER 10 POST SANCTION FOLLOW UP OF LOANS………………….. 55
CHAPTER 11 ANALYSIS & INTERPRETATION………………………….. 57
11.1 PNB’s Loan Policy…………………………………. 57
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Credit Appraisal and Risk Rating at PNB
11.1.1 Objective …………………………………..... 57
11.1.2 Basic Tenets of the Policy………………………... 57
11.1.3 Methods of Lending……………………………. 58
11.2 Credit Appraisal Process at PNB……………………… 60
11.2.1 Flowchart…………………………………... 60
11.2.2 Brief on the Process……………………………. 60
11.2.3 Risk Rating of the Borrower………………………. 62
11.2.4 Determination of the Applicable Rate of Interest …………. 65
11.2.5 Post Sanction Follow Up………………………… 66
CHAPTER 12 CASE STUDY- ABC PARTS PVT LTD 68
12.1 Borrowers Profile…………………………….... 68
……………... 71
12.2 Credit Appraisal of ABC PARTS Pvt. Ltd
I. Management Evaluation……………………
II. Business Evaluation………………………
III. Technical Evaluation……………………...
IV. Legal Evaluation………………………...
V. Financial Evaluation……………………...
71
73
75
77
78
12.3 Present Proposal ………………………………. 84
12.4 Security …………………………………… 89
12.5 Credit Risk Rating…………………………….. 90
12.6 Recommendations…………………………….. 94
CHAPTER 13 CONCLUSION & RECOMMENDATIONS……...………… 95
Conclusion……………………………………….. 95
Findings…………………………………………. 97
Recommendations………………………………...... 98
Limitations………………………………………... 99
REFERENCES……………………………………………………….........
10
0
PART –2
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Credit Appraisal and Risk Rating at PNB
CHAPTER 14 CUSTOMER SATISFACTION……………………………. 10
2
14.1 Customer Satisfaction…………………………….... 102
14.2 Statement of the Problem……………….................... 10
3
14.3 Need for the Study…………………………………………. 103
14.4 Scope of the Study……………………………………………….. 104
14.5 Objective of the Study……………………………………… 104
14.6 Sample Method……………………………………………... 105
14.7 Method of Data Collection………………………………….. 106
CHAPTER 15 ANALYSIS & INTERPRETATION………………………………. 107
15.1 Share of Different Types of Accounts………………………. 107
15.2 Ratios of the Services Offered by PNB……………………… 109
15.3 Reason for Selecting PNB…………………………………… 111
15.4 Consumers Willingness To Recommend PNB To Others….... 113
15.5 Satisfaction of Respondents With Services Offered by PNB… 115
Branch
CHAPTER 16 BANKING OPERATIONS IN BRANCH OFFICES ………………. 117
16.1 Opening of Saving Account by Individual…………………… 117
16.2 Cash Deposit………………………………………………… 127
16.3 Cash Payment……………………………………………….. 131
16.4 ATM Management & Maintenance Operation……………… 133
16.5 Customer Facilities & Conveniences………………………… 136
CHAPTER 17 CONCLUSION & RECOMMENDATION………………………… 137
17.1 Suggestion & Recommendation…………………………….. 137
17.2 Limitation of the Study………………………………..…….. 139
17.3 Conclusion………………………………………………….. 140
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Credit Appraisal and Risk Rating at PNB
Chapter 1 EXECUTIVE SUMMARY
This project was undertaken at the Punjab National Bank Circle Office Delhi, at
the Credit
Department. Financial requirements for Project Finance and Working Capital
purposes are taken
care of at the Credit Department. Companies that intend to seek credit facilities
approach the
bank. Primarily, credit is required for following purposes:
a. Working capital finance
b. Term loan for mega projects
c. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc.
Project Financing discipline includes understanding the rationale for project
financing, how to
prepare the financial plan, assess the risks, design the financing mix, and raise the
funds. In
addition, one must understand some project financing plans have succeeded while
others have
failed. A knowledge-base is required regarding the design of contractual
arrangements to support
project financing; issues for the host government legislative provisions,
public/private
infrastructure partnerships, public/private financing structures; credit requirements
of lenders, and
how to determine the project's borrowing capacity; how to analyze cash flow
projections and use
them to measure expected rates of return; tax and accounting considerations; and
analytical
techniques to validate the project's feasibility
Project finance is different from traditional forms of finance because the credit risk
associated
with the borrower is not as important as in an ordinary loan transaction; what is
most important is
the identification, analysis, allocation and management of every risk associated
with the project.
The purpose of this project is to explain, in a brief and general way, the manner in
which risks are
approached by financiers in a project finance transaction. Such risk minimization
lies at the heart
of project finance. Efficient management of credit portfolio is of utmost
importance as it has a
tremendous impact on the Banks’ assets quality & profitability. The ongoing
financial reforms
have no doubt provided unparallel opportunities to banks for growth, but have
simultaneously
exposed them to various risks, which need to be effectively managed.
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The concept of Credit Management is undergoing radical changes. Credit Risk in
all exposures
calls for precise measuring and monitoring for taking considered credit decisions
with suitable
risk mitigants, risk premium, etc. Credit portfolio should be well diversified in
various promising
sectors with a cautious approach to be adopted in risky segments.
Also, lending continues to be a primary function in banking. In the liberalized
Indian economy,
clientele have a wide choice. External Commercial Borrowings and the domestic
capital markets
compete with banks. In another dimension, retail lending- both personal advances
and SME
advances- competes with corporate lending for funds and for human resources. But
lending by
nature cannot be an aggressive selling activity, disregarding the risks involved.
Bank has to be
competitive without compromising on the basic integrity of lending. The quality of
the Bank’s
credit portfolio has a direct and deep impact on the Bank’s profitability.
The study has been conducted with the purpose of getting in-depth knowledge
about the credit
appraisal and credit risk management procedure in the organization for the above
said first two
purposes.
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Chapter 3 OBJECTIVES
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:
i. Management Evaluation
ii. Business / Industry Evaluation
iii. Technical Evaluation
iv. Legal Evaluation
v. Financial Evaluation
vi. Credit Risk Rating
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8.1 INTRODUCTION
Effectiveness of Credit Management in the bank is highlighted by the quality of its loan
portfolio.
Every Bank is striving hard to ensure that its credit portfolio is healthy and that Non
Performing
Assets are kept at lowest possible level, as both of these factors have direct impact on
its
profitability. In the present scenario efficient project appraisal has assumed a great
importance as
it can check and prevent induction of weak accounts to our loan portfolio. All possible
steps need
to be taken to strengthen pre sanction appraisal as always “Prevention is better than
Cure”. With
the opening up of the economy rapid changes are taking place in the technology and
financial
sector exposing banks to greater risks, which can be broadly classified as under:
Industry Risks
Government regulations and policies, availability of infrastructure facilities,
Industry Rating, Industry Scenario & Outlook, Technology Up gradation,
availability of inputs, product obsolescence, etc.
Business Risks
Operating efficiency, competition faced from the units engaged in similar
products, demand and supply position, cost of labor, cost of raw material
and other inputs, pricing of product, surplus available, marketing, etc.
Management Risks
Background, integrity and market standing/ reputation of promoters,
organizational set up and management hierarchy, expertise/competence of
persons holding key position in the organization, delegation and
decentralization of authority, achievement of targets, track record in
execution of project, debt repayment, industry relations etc.
Financial Risks
Financial strength/standing of the promoters, reliability and reasonableness
of projections, past financial performance, reliability of operational data and
financial ratios, adequacy of provisioning for bad debts, qualifying remarks
of auditors/inspectors etc.
In light of the foregoing risks, the banks appraisal methodology should keep pace with
ever
changing economic environment. The appraisal system aims to determine the credit
needs/requirements of the borrower taking into account the financial resources of the
client. The
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Credit Appraisal and Risk Rating at PNB
end objective of the appraisal system is to ensure that there is no under - financing or
over -
financing. Following are the aspects, which need to be scrutinized and analyzed while
appraising:
8.2 MARKET ANALYSIS
(Demand & Potential)
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The market demand and potential is to be examined for each product item and its
variants/substitutes by taking into account the selling price of the products to be
marketed vis-avis
prices of the competing products/substitutes, discount structure, arrangement made for
after
sale service, competitors' status and their level of operation with regard to production
and products
and distribution channels being used etc. Critical analysis is required regarding size of
the market
for the product(s) both local and export, based on the present and expected future
demand in
relation to supply position of similar products and availability of the other substitutes as
also
consumer preferences, practices, attitudes, requirements etc. Further, the buy-back
arrangements
under the foreign collaboration, if any, and influence of Government policies also needs
to be
considered for projecting the demand. Competition from imported goods, Government
Import
Policy and Import duty structure also need to be evaluated.
8.3 TECHNICAL ANALYSIS
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Credit Appraisal and Risk Rating at PNB
In a dynamic market, the product, its variants and the product-mix proposed to be
manufactured in
terms of its quality, quantity, value, application and current taste/trend requires thorough
investigation.
Location and Site
Based on the assessment of factors of production, markets, Govt. policies and other
factors,
Location (which means the broad area) and Site (which signifies specific plot of land)
selected for
the Unit with its advantages and disadvantages, if any, should be such that overall cost
is
minimized. It is to be seen that site selected has adequate availability of infrastructure
facilities
viz. Power, Water, Transport, Communication, state of information technology etc. and
is in
agreement with the Govt. policies. The adequacy of size of land and building for
carrying out its
present/proposed activity with enough scope for accommodating future expansion
needs to be
judged.
Raw Material
The cost of essential/major raw materials and consumables required their past and
future price
trends, quality/properties, their availability on a regular basis, transportation charges,
Govt.
policies regarding regulation of supplies and prices require to be examined in detail.
Further, cost
of indigenous and imported raw material, firm arrangements for procurement of the
same etc.
need to be assessed.
Plant & Machinery, Plant Capacity and Manufacturing Process
The selection of Plant and Machinery proposed to be acquired whether indigenous or
imported
has to be in agreement with required plant capacity, principal inputs, investment outlay
and
production cost as also with the machinery and equipment already installed in an
existing unit,
while for the new unit it is to be examined whether these are of proven technology as to
its
performance. The technology used should be latest and cost effective enabling the unit
to compete
in the market. Purchase of reconditioned/old machinery is to be dealt in terms of laid
down
guidelines. Compatibility of plant and machinery, particularly, in respect of imported
technology
with quality of raw material is to be kept in view. Also plant and machinery and other
equipments
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Credit Appraisal and Risk Rating at PNB
needed for various utility services, their supply position, specification, price and
performance as
also suppliers' credentials, and in case of collaboration, collaborators' present and
future support
requires critical analysis. Plant capacity and the concept of economic size has a major
bearing on
the present and future plans of the entrepreneur(s) and should be related to the
availability of raw
material, product demand, product price and technology.
The selected process of manufacturing indicating the adequacy, availability and
suitability of
technology to be used along with plant capacity, manufacturing process needs to
studied in detail
with capacities at various stages of production being such that it facilitates optimum
utilization
and ensures future expansion/ debottlenecking, as and when required. It is also to be
ensured that
arrangements are made for inspection at intermediate/final stages of production for
ensuring
quality of goods on successful commencement of production and completion, wherever
required.
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Credit Appraisal and Risk Rating at PNB
Chapter 13
CONCLUSION&
RECOMMENDATIONS
CONCLUSION
The study at PNB gave a vast learning experience to me and has helped to enhance my
knowledge. During the study I learnt how the theoretical financial analysis aspects are
used in
practice during the working capital finance and term loan 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 business loans has been devised in a systematic way. It is a
process of
appraising the credit worthiness of loan applicants. Thus it extremely important for the
lender
bank to assess the risk associated with credit; thereby ensure the security for the funds
deposited
by the depositors. 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 6 phases:
1. Financial statement analysis
2. Working capital and its assessment techniques
3. Techno Economic Feasibility Analysis
4. Credit risk assessment
5. Documentation
6. Loan administration
Punjab National Bank’s adoptions of the Projected Balance Sheet method (CMA) 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. The PBS
method
have been rationalized and simplified to facilitate complete flexibility in decision-making.
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Credit Appraisal and Risk Rating at PNB
To ensure asset quality, proper risk assessment right at the beginning, is extremely
important. That
is why Credit Risk Management system is an essential ingredient of the Credit Appraisal
exercise.
PNB has formulated a Credit Risk Rating model, PNB Trac. It considers important
parameters
like profitability, repayment capacity, efficiency of the unit, historical / industry
comparisons
etc… depending on the industry. PNB Trac is one of the best rating models present till
date.
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FINDINGS
After completing the entire project at Punjab National Bank the following key findings as
mentioned below
were observed.
1. At Punjab National Bank, Circle Office the priority to appraise a proposal was given to
new or fresh clients over the existing clients presenting proposals for renewal
2. Ratings, as being performed at PNB, are done once a year. Therefore, the ratings do
not
take into account short term drastic changes like price level changes (which are an
issue
with any method based on accounting statements, since annual reports are based on
historical cost basis of accounting and other changes like sudden mishap/ of the
counterparty are not readily accounted for by the rating system due to long lag between
repeat ratings on the same account.
3. Some of the parameters in Business and industry evaluation are based on the
information
provided by company, which in some cases may not be sufficient. No specific guidelines
are followed in such cases. Also, some of the parameters here may be rendered
redundant
in some cases and may push up/ push down the rating needlessly in these cases.
4. The present risk rating model does not have any mechanism to prioritize certain
sectors of
the economy. There are certain sector in the economy where risk spread is low and
certain
sectors where spread of risk is high like real estate. Also, there are certain
infrastructural
projects which need to be prioritized. The risk rating model is not flexible to incorporate
all these issues.
5. The BPLR system will soon be replaced by Base Rate system. Banks may choose
any
benchmark to arrive at the Base Rate for a specific tenor that may be disclosed
transparently.
6. With the deregulation of the financial sector, the ability of the banks to service the
credit
requirements of the SME sector depends on the underlying transaction costs, efficient
recovery processes and available security. There is an immediate need for the banking
sector to focus on credit and finance requirements of SMEs.
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RECOMMENDATIONS
The Credit Department at PNB Circle Office Delhi, works at its full potential and the staff
is
highly experienced and has a very strong intuitive sense. So, there is no such
recommendation on
the entire process. However to make the process more flexible and efficient, an
electronic
database should be designed carrying all the available and important information
related to the
proposals accepted, and it should be easily accessible to the Credit Department. This
will help
reduce paperwork and loss of information.
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LIMITATIONS
Like any other study this study too is not free from limitations. The major limitations of
the study
are listed below:
1. The major limitation of this study shall be data availability as the data is proprietary
and
not readily shared for dissemination.
2. Also the geographical scope of the project was limited to PNB Circle Office and the
loans
studied were of solely of businesses established majorly in NCR
3. The credit appraisal decision are more of intuition and experience and since the time
period was limited, hence best efforts were made to grasp the process as much as
possible
4. Due to ever changing environment, many risks are unexpected and the remedial
measures
available are based on general experience from the past. Therefore risks can only be
minimized cannot be erased completely. Hence, out of the various ways in which risks
can
be managed, none of the methods is perfect and may be very diverse even for the work
in a
similar situation in the future
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REFERNCES
Mckinsey & Company. “India Banking 2010 - Towards a High-performing Sector”
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
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
• Project Finance
• Industry Rating
• Loaning Powers and Guidelines for exercising such powers
RBI Circulars and Guidelines
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Guidelines on Credit Appraisal
Basel II Accord
Base Rate
PART -2
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14.6SAMPLE METHOD
Convenience sampling method is used for the survey of this project. It is a non-
probability
sample. This is the least reliable design but normally the cheapest and easiest to
conduct .In this
method Researcher have the freedom to choose whomever they find, thus the name
convenience.
SAMPLE SIZE
Sample size denotes the number of elements selected for the study. For the present
study, 100
respondents were selected at random. All the 100 respondents were the customers of
different
branches of PNB.
SAMPLING METHOD
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A sample is a representative part of the population. In sampling technique, information
is
collected only from a representative part of the universe and the conclusions are drawn
on that
basis for the entire universe.
A convenience sampling technique was used to collect data from the respondents.
14.7METHOD OF DATA COLLECTION
To know the response, the questionnaire method is used. It has been designed as a
primary
research instrument.
Questionnaires were distributed to respondents and they were asked to answer the
questions given
in the questionnaire. The questionnaires were used as an instrumentation technique,
because it is
an important method of data collection.
PRIMARY DATA
A well-structured questionnaire was personally administrated to the selected sample to
collect the
primary data.
SECONDARY DATA
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Two types of secondary data were collected for the preparation of the project work:
Internal Data was generated from company’s brochures, manuals and annual reports.
External Data, on the other hand, was generated from magazines, research books,
intranet and
internet (websites).
17.3CONCLUSION:
Since the opening up of the banking sector, private banks are in the fray each one trying
to cover
more market share than the other.
Yet, PNB is far behind SBI. PNB must also be alert what with Private Banks (ICICI,
HDFC)
breathing down its neck.
I am sure the bank will find my findings relevant and I sincerely hope it uses my
suggestions
enlisted, which I hope will take them miles ahead of competition.
In short, I would like to say that the very act of the concerned management at PNB in
giving me
the job of critically examining consumer satisfaction towards financial products and
services of
the company is a step in their continual mission of making all round improvements as a
means of
progress.
I am sure the bank has a very bright future to look forward to and will be a trailblazer in
its own
right