Section B: Research Design

B.1. Research Objectives

1. To study the credit appraisal policy and the credit appraisal process of ING
Vysya bank with the help of a case study.
2. To carry out a comparative analysis of the credit appraisal process and credit
policy of IVBL, HDFC and Punjab National banks with respect to the SME
sector.
B.2. Methodology of Data Collection
This study makes use of quantitative as well as qualitative data gathered from both
primary and secondary sources. The sources of information have been mentioned
below.
Primary sources of Information- Meetings and discussion with Regional Sales
Manager and Relationship Manager Business Banking.
Secondary sources of Information-
Book of instructions- provided by IVBL
Loan Policy and Internal Circulars of the bank
Annual audited reports of IVBL
Research papers, power point presentations and PDF files prepared by the
bank and its related official documents
B.3. Techniques used for Data Analysis
The various techniques and processes used in the Credit Appraisal System have been
studied and analyzed which are then applied on one proposal received in the bank.
B.4. Business Banking at ING Vysya
Business banking is also known as commercial banking and occurs when a bank, or
division of a bank, only deals with businesses. Business banking at IVBL aims to help
small and medium enterprises to grow their business. Under business banking they
provide various loan schemes for SMEs, The Business Banking division has four
major subparts:
Sales and marketing Sales and marketing plays a very important role in
marketing the facilities available at the bank and convince clients to take them.
It also plays the role of offering the facilities to the clients according to their
requirements.
Credit Appraisal Once the overall information about the client is gathered,
a proposal is made based on the requirement of the client and purpose for
which he needs debt. Depending on the requirement of the client, various
parameters are analyzed to know the credit worthiness of the client. Apart
from this credit rating is also done by the bank to know the risk associated
with the client.
Monitoring After the disbursal of loan has been done, monthly monitoring
of account is done to know that the facility given to the client is properly
utilized. Monitoring involves checking the account, keeping a track of cheque
returns etc. This helps to see whether the account bearer is doing business in
accordance with the reports given by it.
Collection Sometimes the clients is unable to repay the loan amount to the
bank due to various reasons. In this case, reason for default has to be checked
and then legal proceedings are made accordingly to get the loan amount from
the client.
B.4.1 Business Banking Products for SMEs
M Power Rent
Product that offers immediate liquidity against commercial property owned.
Here, loan can be availed at competitive rates, against rent receivables.
M Power SSI
Product to provide credit facilities to Small Scale Industry units engaged in
activities like manufacturing, processing or SSSBEs, including Information
Technology and / or Software industry.
M Power BLT
Product formulated specifically to provide credit facilities to Small and
Medium Enterprise engaged in Trading, Small Businesses and Service
activities. The scheme offers Secured Overdraft Limits (SOD) (Fund and Non-
fund) Term Loans and Composite Loans covering both Working Capital as
well as Term loan with a maximum exposure of Rs.200 lakhs per customer.
The product was launched in November 2003 to provide to provide necessary
working capital and term loans/composite loans to the Small and Medium
Enterprises engaged in trading, small businesses and service activities with
simplified procedures/ processes / appraisal and at concessional pricing.
B.5. Financial Ratio Analysis
Investopedia defines ratio analysis as Quantitative analysis of information
contained in a companys financial statements. Ratio analysis is used to evaluate
various aspects of a companys operating and financial performance such as its
efficiency, liquidity, profitability and solvency.

Chart 2: Ratio Analysis
Liquidity Ratios
1. Current ratio = Current Assets / Current Liabilities
It measures the short-term liquidity of the company and its ability to meet its
short-term obligations. It must be at least 1.33:1 but at the same time higher
ratio affects the profitability of the company.
2. Quick ratio = (Current Assets Closing Stock) / Current Liabilities
It must be equal to 1. It measures the companys ability to pay off its short-
term obligations without selling its inventories.

Leverage Ratios
1. Leverage = Total Outstanding Liabilities / Total Net Worth
This ratio reflects the relationship between the capital contributed by creditors
relative to the capital contributed by owners. From a lender's perspective a
Ratio Analysis

Liquidity Ratios
Measure firm's
ability to meet
current
obligations
Activity Ratios
Show the firm's
efficiency in
utilizing the
assets
Profitablity Ratios
Measure overall
performnce and
effectiveness of
firm
Levearge Ratios
Show the
proportioin
of debt and
equity in
financing the
assets
Coverage Ratios
Analyse a
company's ability
to service of its
debt
lower TL/TNW is better as it demonstrates a larger owner commitment and an
equity "buffer" to insulate the creditor from potential problems.

Activity Ratios
1. Accounts Receivable Turnover (Days) = Accounts Receivable/Sales * 365
A lower number of days means that accounts receivable are turning faster.
This measures how quickly and efficiently the company collects on its
accounts receivable. Longer turnover in days may indicate collection problems
or a lack of attention.
1. Creditors Turnover (No. Of days) = Trade Payable/Cost of Sales x 365
It indicates the rate at which vendors are paid. If the company can stretch
accounts payable it has a ready source of potential of future cash flow from
operations.
2. Inventory Turnover (No. Of days) = Inventory / Cost of Sales * 365
Inventory Turnover Ratio (Days) reveals the length of time (in days) the
average item stays in inventory. Quicker turnover can provide greater
liquidity. Slower turnover may reveal obsolete inventory.

Profitability Ratios
1. Operating Profit Margin = EBIT/Sales
It is the ratio of operating profit (EBIT, operating income, income before
interest and taxes) to sales. This is a ratio that indicates how much of each
dollar of sales is left over after operating expenses.
2. Net Profit Margin= PAT/Sales
It is the ratio of net income (net profit) to sales, and indicates how much of
each dollar of sales is left over after all expenses.
B.6. Credit Appraisal Process
It forms an important part of the Business Banking. But before going into the detailed
steps involved in the credit appraisal process first lets see the various scenarios when
this process is carried out:
1. Fresh Proposal: Meant for those clients or companies, which do not have any
prior relationship with the bank and have approached the bank for the first time for a
particular Fund or Non Fund Based credit facility.
2. Enhancement: Meant for existing clients who want an increase in the credit limit
of the facility they are currently availing.
3. Ad hoc: Sometimes clients face increased demand of their products in some
particular seasons or festival seasons, in these cases they can avail the ad hoc facility
provided by the bank, which allows for an increase in the credit limit above the
sanction limit for a fixed period of 90 days. This ad hoc facility can be availed only
twice in any financial year.
4. Review: If the client is new or the performance of the company as per projected
figures is doubtful then a mid review date is decided. Post sanction conditions are put
to test the proposal, for example company has to maintain a turnover of 12 million
and its TOL/TNW should not be more than 6.The facility limit will remain same after
sanction of review proposal only if all the conditions are fulfilled.
5. Renewal: After the tenure of the particular facility gets over and the client wants to
continue with existing facility, with the existing limit then renewal is carried out.
Now moving on to the steps:
1. File Login: The first step is the receiving of duly filled application form from
the client, the form is provided by the marketing department of the bank. The
credit appraisal process involves creation of file for each and every client,
which includes all the necessary documents provided by the client and the
proposal note created by the business-banking department. This step is also
called the file login step as file containing all the relevant documents is
prepared for each client. The various documents that are required by the bank
include the following:
a. Duly filled prescribed application form.
b. Memorandum & Articles of Association/Partnership Deed.
c. Audited Balance Sheets and Profit & Loss Accounts along with
schedules, Auditors Report/Tax Audit report for last 3 years.
d. Duly signed provisional financial statements for immediate previous
year along with schedules etc. If audited is not available. Up-to-date
Figures of sales/purchase.
e. Duly signed projected Balance Sheets and Profit & Loss Accounts for
next year/full tenor in case of loan.
f. Latest IT returns of the borrower/partners/directors etc.
g. Copy of latest sanction letter (for the credit facilities) from the existing
banker/financial institute.
h. Form 311 duly signed by RM/Copy of valuation report for the
properties offered as collateral security.
i. Duly filled & signed latest Net Worth statements of
directors/partners/guarantors in the banks prescribed format (Form No
479/480).
j. Call Memo signed by RM.
k. CIBIL reports of proprietor/partner/directors.
l. Statement of account for last 6 months along with reasons for
lower/excess credit turnover, Banking Summary/Repayment Track of
loans.
m. Copies of various registration certificates i.e. VAT/DIC etc.
2. Pre Sanction Visit: The next step involves a visit by an officer of the bank to
the office of the client to ensure that information provided by the client is
correct and the client is not a bogus client. This also involves checking that the
client is operating according to the activities it has specified in its application
form.
3. Valuation: The fourth step involves obtaining the valuation of the properties
the client provides as the collateral. The valuation of the properties is
outsourced to some third party firm, which provides the bank the fair market
value of the securities. Based on the value the, sanction limit is decided.
4. Proposal Note Preparation: This step is also called the note preparation step
and is the most important step in the entire credit appraisal process. This
proposal note is forwarded to the Credit Risk Management Department of the
bank, which is the sanctioning authority. The proposal note consists of the
following information:
a. Company Overview: The proposal note contains the information
about the type of the company whether proprietorship, partnership or
private limited. It also contains the information about the business
model of the company as well as the line of activity in which the
company is involved .It also includes the promoters background, their
experience. It also includes the address of their registered office and
any FB or NFB based facilities enjoyed by the company from different
banks.
b. Financial Analysis: The proposal note also includes a financial
summary of the client prepared using the audited financial statements
of the last three years and the provisional financial statements of the
current year as well as the projections of the next year. The financial
summary usually includes the sales, profit margin and ratios. The main
aim of this analysis to check the financial soundness of the company.
c. Banking Analysis: This analysis involves checking all the accounts of
the client in ING Vysya Bank as well as accounts in any other bank.
This involves checking for inward and outward check returns, credit
summation, cases of L/C Devolvement/BG invocation etc.
d. Market Reference Check: This helps us in understanding the
relations with the suppliers and clients to identify any kind of
discrepancy. Timely and accurate dealing in terms of goods and
services as well as payments is looked into.
e. SWOT Analysis: SWOT (Strength, Weakness, Opportunity, Threat)
guides IVBL to identify the positives and negatives inside the
organization (S-W) and outside of it, in the external environment (O-
T).
5. Sanction: The next step involves forwarding of the proposal to the credit risk
management department. It reviews the proposal created and it may raise
various queries, which need to be handled by the officer who created the
proposal. After all the queries have been resolved the department takes the
final decision.
6. Disbursement: After the sanctioning authority approves the proposal,
disbursement process starts. Before disbursement the bank follows some
processes to ensure protection against future risks. Activities like transfer of
documents of collaterals from client to bank, opening an account of the client,
charging processing fee, etc. are performed. After all the pre disbursement
documents are signed and processes completed, disbursement of
requested/decided limit is done depending on the conditions stated in the
sanctioning/decision letter.