Documente Academic
Documente Profesional
Documente Cultură
Submitted to:
Submitted by:
Khyati Shah(221)
Nikunjsinh Sodha (241)
(March 2016)
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Table of Content
1.viii
1.ix
1.ix.1
1.ix.2
1.ix.3
1.ix.4
1.ix.5
1.ix.6
1.ix.7
2.i
2.ii
2.iii
2.iv
2.v
2.vi
2.vii
2.viii
2.ix
1.i
1.ii
1.iii
1.iv
1.v
1.vi
1.vii
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No.
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PREFACE
This report is completed as a partial requirement of our Final
Project, which is compulsory for every student of Xcellon
Institute-School of Business. We got the opportunity to learn,
Credit Analysis Process of Public, Private and NBFCs. To get
the idea of Credit Analysis Process and relevant mechanism
we had to work the Credit Department of the banks. For this
report we had to collect all information from different written
Documents, banks and NBFCs officers, and well as from bank
web site. In this report we tried to cover up a clear overview of
various banks, our three months research experience and our
main report part credit appraisal months research experience
and our main report part credit analysis process of various
banks and NBFCs.
This report is divided into some portion where we have tried to
portray the banks and NBFCs overall picture. Also try to make
some my own observation and recommendation in this part.
Then we also talked about my main project topic. Our project
topic is Credit Analysis Process of Public, Private and NBFCs.
Here we have explained all the process regarding credit
analysis system of different banks and NBFCs. Credit Analysis
is the part of lending procedure. The procedure starts when
borrowers come to any branch and seeking for loan and
continues until the clients adjust to total loan. Here we have
focused on different until the clients procedure to assess the
credit appraisal process. We showed it in a sequential flow
chart. We also find out some problem related with the credit
analysis process and try to give some possible
recommendations.
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ACKNOWLEDGEMENT
This satisfaction and joy that accompanies the successful
completion of a task is incomplete without mentioning name of
the person who extended his help and support in making it a
success. We are greatly indebted to Prof. Devang Patel, our
Project Guide for devoting his valuable time ad efforts towards
our project. We thank him for being a constant source of
knowledge, inspiration and help during this project of making
project.
Khyati Shah(M00221)
Nikunjsinh Sodha(M00241)
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EXECUTIVE SUMMARY
Technology has become a part of all walks of life and across all business sectors, and even
more so in banking. There has been massive use of technology across many areas of
banking business in India, both from the asset and the liability side of a banks balance
sheet. Delivery channels have immensely increased the choices offered to the customer to
conduct transactions with ease and convenience. Various wholesale and retail payment
and settlement systems have enabled faster means of moving the money to settle funds
among banks and customers, facilitating improved turnover of commercial and financial
transactions. Banks have been taking up new projects like data warehousing, customer
relationship management and financial inclusion initiatives to further innovate and
strategies for the future and to widen the reach of banking.
The dependence on technology is such that the banking business cannot be thought of in
isolation without technology; such has been the spread of technology footprints across the
Indian commercial banking landscape. Developments in IT have also brought along a whole
set of challenges to deal with. The dependence on technology has led to various challenges
and issues like frequent changes or obsolescence, multiplicity and complexity of systems,
different types of controls for different types of technologies/systems, proper alignment with
business objectives and legal/regulatory requirements, dependence on vendors due to
outsourcing of IT services, vendor related concentration risk, segregation of duties, external
threats leading to cyber frauds/crime, higher impact due to intentional or unintentional acts
of internal employees, new social engineering techniques employed to acquire confidential
credentials, need for governance processes to adequately manage technology and
information security, need for appreciation of cyber laws and their impact and to ensure
continuity of business processes in the event of major exigencies.
Technology risks not only have a direct impact on a bank as operational risks but can also
exacerbate other risks like credit risks and market risks. Given the increasing reliance of
customers on electronic delivery channels to conduct transactions, any security related
issues have the potential to undermine public confidence in the use of e-banking channels
and lead to reputation risks to the banks. Inadequate technology implementation can also
induce strategic risk in terms of strategic decision making based on inaccurate
data/information. Compliance risk is also an outcome in the event of non-adherence to any
regulatory or legal requirements arising out of the use of IT. These issues ultimately have
the Report of the Working Group on Electronic Banking Page.
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Business Segmentation
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Before going further it is necessary to understand the need and basic framework of the
project. Therefore this chapter provides an introduction to the topic, objective of the project,
reasons for selecting the project and the basic structure and framework how the project
proceeds. In order to understand the importance of the topic selected an introduction to the
overview of the commercial bank, its functions, and present trends and growth in bank credit
are required and it is covered in this chapter.
Management of Reserves
Banks are expected to hold a part of their deposits in form of ready cash which is
known as CASH RESERVES.
Central bank decides the reserve ratio known as the CRR.
Creation of Credit
Bank Credit
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The borrowing capacity provided to an individual by the banking system, in the form of
credit or a loan is known as a bank credit. The total bank credit the individual has is the
sum of the borrowing capacity each lender bank provides to the individual.
The operating paradigms of the banking industry in general and credit dispensation
in particular have gone through a major upheaval.
Lending rates have fallen sharply.
Traditional growth and earning such as corporate credit has been either slow or
not profitable as before.
Banks moving into retail finance, interest rate on the once attractive retail loans also
started coming down.
Credit risks has went up and new types risks are surfaced
Types of creditBank in India provide mainly short term credit for financing working capital needs although,
as will be seen subsequently, their term loans have increased over the years. The various
types of advances provide by them are:
(a) Term Loans,
(b) Cash credit,
(c) Overdrafts,
(d) Demand Loans,
(e) Purchase and discounting of commercial bills, and,
(f) Installment or hire purchase credit.
Volume of Credit
Commercial banks are a major source of finance to industry and commerce. Outstanding
bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19,124 crore in 1978, to
Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90 , Rs 2,82,702 crore in 1997 and to
Rs 6,09,053 crore in 2002. Banks have introduced many innovative schemes for the
disbursement of credit. Among such schemes are village adoption, agriculture development
branches and equity fund for small units. Recently, most of the banks have introduced
attractive education loan schemes for pursuing studies at home or abroad. They have
introduced attractive educational loan schemes for pursuing studies at home or abroad.
They have moved in the direction of bridging certain defects or gaps in their policies, such
as giving too much credit to large scale industrial units and commerce and giving too little
credit to agriculture, small industries and so on.
The Public Sector Banks are still the leading lenders though growth has declined
compared to previous quarter. The credit growth rate has dipped sharply in foreign and
private banks compared to previous quarter. In all, the credit growth has slipped in this
quarter
March 28 2008
2009
Public Sector Banks
March 27
22.5
20.4
The rates have gone down compared to previous quarter when it was seen that there was
no changes in loan rates in private and foreign banks. But then compared to rate cuts
done by RBI, they still need to go lower.
Table 16: Reduction in Deposit and Lending Rates
(October 2008 April 2009*)
(Basis points)
Bank Group
125-250
125-225
75-200
100-125
100-200
0-100
BPLR
Oct 13
Mar 14
13.7514.75
11.50-14.00 11.50-13.50
125-225
12.75-16.75 12.50-16.75
100-125
14.25-15.75 14.25-15.75
0-100
14.25-
Banks
16.75
Apr 15
Change
(from Oct to
Apr)
Sector-wise credit points credit has increased to agriculture, industry and real estate
whereas has declined to NBFCs and Housing. A bank group wise sectoral allocation is also
given which suggests private banks have increases exposure to agriculture and real estate
but has declined to industry. Public sector banks have increased allocation to industry and
real estate. There is a more detailed analysis in the macroeconomic report released before
the monetary policy.
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Sector
As on
As on
February
February 15,
27
% share
Variations
% share
Variations
in total
(per cent)
in total
(per cent)
Agriculture
9.2
16.4
13
21.5
Industry
45.2
25.9
52.5
25.8
Real Estate
3.1
26.7
8.5
61.4
Housing
7.3
12
4.7
7.5
NBFCs
5.7
48.6
6.6
41.7
Overall Credit
100
22
100
19.5
To sum up, the credit conditions seems to have worsened after January 2013. The rates
have declined but lending has not really picked up. However, the question still remains
whether credit decline is because banks are not lending (supply) or
Because people/corporate are not borrowing (lack of demand). It is usually seen that all
financial variables as lead indicators say if credit growth (along with other fin indicators) is
picking, actual growth will also rise. However, it is actually seen the relation is far from
clear. In fact, the financial indicators hardly help predict any change in business cycle. Most
rise in good times and fall in bad times. Most financial indicators failed to predict this global
financial crisis and kept rising making everyone all the more complacent.
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Procedure for providing Bank CreditBanks offers different types of credit facilities to the eligible borrowers. For this, there
are several procedures, controls and guidelines laid out. Credit Appraisal, Sanctions,
Monitoring and Asset Recovery Management comprise the entire gamut of activities
in the lending process of a bank which are clearly shown as below:
Credit
Appraisal
Sanctions
Monitoring & Asset
Recovery
Management
Credit Appraisal
Meaning
The process by which a lender appraises the creditworthiness of the prospective borrower
is known as Credit Appraisal. This normally involves appraising the borrowers payment
history and establishing the quality and sustainability of his income. The lender satisfies
himself of the good intentions of the borrower, usually through an interview.
The credit requirement must be assessed by all Indian Financial Institutions or
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In such cases due diligence on the inability of the projects are well defined and
assessed. State government guarantee may not be taken as a substitute for satisfactory
credit appraisal.
The important thing to remember is not to be overwhelmed by marketing or profit centre reasons
to book a loan but to take a balanced view when booking a loan, taking into account the risk
reward aspects. Generally everyone becomes optimistic during the upswing of the business
cycle, but tend to forget to see how the borrower will be during the downturn, which is a shortsighted approach. Furthermore greater emphasis is given on financials, which are usually
outdated; this is further exacerbated by the fact that a descriptive approach is usually taken,
rather than an analytical approach, to the credit. Thus a forward looking approach should also be
adopted, since the loan will be repaid primarily from future cash flows, not historic performance;
however both can be used as good repayment indicators.
Credit philosophy
To achieve credit expansion required for sustaining
the profitability of the bank and emphasis on quality assets, profitable
relationships and prudent growth.
Credit Policy
Bank follows following broad policy imperatives:Reduction in dependence upon short term corporate loans, especially unsecured
exposures.
Aiming to achieve more sanctions at levels closer to the customer.
Changing the mix of the portfolio in favor of better diffused and higher yielding credit.
Building competencies in credit management through training & promotion of self
directed learning.
Sound risk management practices to identify measure, monitor and control risks.
Maximize interest yields from credit portfolio through a judicious management of
varying spreads of loan assets based upon their size, credit rating and tenure.
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Loans & Advances refer to long-term and short-term credit facilities to various types of
borrowers and non-fund facilities like Bank Guarantees, Letters of Credit, Letters of
Solvency etc. Bill facilities represent structured commitments which are negotiable claims
having a market by way of negotiable instruments. Thus, Banks extend credit facilities by
way of fund-based long-term and short-term loans and advances as also by way of non-fund
facilities.
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Loans/Advances
Fund Based
Non-Fund Based
Retail Loan
Bank Guarantee
Cash Credit
Export Finance
Letter of Credit
Bill Discounting
Pre-shipment Finance
Term Loan
Bank provides credit in various forms. These are broadly classified into two categoriesFund based and Non Fund Based. Fund based refers to the type of credit where cash is
directly involved i.e. where bank provides money to the seeker in anticipation of getting it
back. Where as in a Non-fund Based, Bank doesnt pay cash directly but gives assurance
or takes guarantee on behalf of its customer to pay if they fail to do so. In case on Fund
Based there are different categories of loans which are discussed as follows
RETAIL LOANS
Retail banking in India is not a new phenomenon. It has always been prevalent in India
in various forms. For the last few years it has become synonymous with mainstream
banking for many banks.
The typical products offered in the Indian retail banking segment are:Housing loans
Consumer loans for purchase of durables
Auto loans
Educational loans
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Credit Cost.
Personal loans
Retail loan is the practice of loaning money to individuals rather than institutions. Retail
lending is done by banks, credit unions, and savings and loan associations. These
institutions make loans for automobile purchases, home purchases, medical care, home
repair, vacations, and other consumer uses. Retail lending has taken a prominent role in the
lending activities of banks, as the availability of credit and the number of products offered for
retail lending have grown. The amounts loaned through retail lending are usually smaller
than those loaned to businesses. Retail lending may take the form of instalment loans,
which must be paid off little by little over the course of years, or non-instalment loans, which
are paid off in one lump sum.
These loans are marketed under attractive brand names to differentiate the products
offered by different banks. As the Report on Trend and Progress of India, 2007-08 has
shown that the loan values of these retail lending typically range between Rs.20, 000 to
Rs.100 lakh. The loans are generally for duration of five to seven years with housing loans
granted for a longer duration of 15 years. Credit card is another rapidly growing subsegment of this product group. In recent past retail lending has turned out to be a key profit
driver for banks with retail portfolio. The overall impairment of the retail loan portfolio
worked out much less then the Gross NPA ratio for the entire loan portfolio. Within the retail
segment, the housing loans had the least gross asset impairment. In fact, retailing make
ample business sense in the banking sector.
Basic reasons that have contributed to the retail growth in India areFirst, economic prosperity and the consequent increase in purchasing power has given a
fillip to a consumer boom. Note that during the 10 years after 1992, India's economy grew
at an average rate of 6.8 percent and continues to grow at the almost the same rate not
many countries in the world match this performance.
Second, changing consumer demographics indicate vast potential for growth in
consumption both qualitatively and quantitatively. India is one of the countries having
highest proportion (70%) of the population below 35 years of age (young population). The
BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India
and China, mentioned Indian demographic advantage as an important positive factor for
India.
Third, technological factors played a major role. Convenience banking in the form of debit
cards, internet and phone-banking, anywhere and anytime banking has attracted many
new customers into the banking field. Technological innovations relating to increasing use
of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth
of retail banking in India.
Fourth, the Treasury income of the banks, which had strengthened the bottom lines of
banks for the past few years, has been on the decline during the last two years. In such a
scenario, retail business provides a good vehicle of profit maximisation. Considering the fact
that retails share in impaired assets is far lower than the overall bank loans and advances,
retail loans have put comparatively less provisioning burden on banks apart from
diversifying their income streams.
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Fifth, decline in interest rates have also contributed to the growth of retail credit
by generating the demand for such credit.
According to K V Kamath, the changing demographic profile and a downward
trend of the interest rates will propel retail credit in India."There is a huge retail
credit opportunity that is surfacing. Banks have low penetration in this segment
currently. But it is the one area that is providing the momentum in the banking
business now, India has among the lowest penetration of retail loans in Asia.
Though the sector has been growing at around 15 per cent, there is still a huge
opportunity to tap into.
Middle and -high-income homes in India has increased to 2.57 crore (25.7 million). Interest
rates on retail loans have been dropping rapidly too. For instance residential mortgages
slumped by 7 per cent over the last four years."The entry of a number of banks in India in
the last few years has helped provide increased coverage and a number of new products
in the market," says Kamath.
Term Loans
A bank loan to a company, with a fixed maturity and often featuring amortization of
principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after
the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon
after they become available. Bank term loans are very a common kind of lending.
Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates,
and monthly or quarterly repayment schedules and include a set maturity date. Bankers
tend to classify term loans into two categories:
Intermediate-term loans: Usually running less than three years, these loans are generally
repaid in monthly instalments (sometimes with balloon payments) from a business's cash
flow. According to the American Bankers Association, repayment is often tied directly to
the useful life of the asset being financed.
Long-term loans: These loans are commonly set for more than three years. Most are
between three and 10 years, and some run for as long as 20 years. Long-term loans are
collateralized by a business's assets and typically require quarterly or monthly payments
derived from profits or cash flow. These loans usually carry wording that limits the amount
of additional financial commitments the business may take on (including other debts but
also dividends or principals' salaries), and they sometimes require that a certain amount of
profit be set-aside to repay the loan.
Appropriate For: Established small businesses that can leverage sound financial statements
and substantial down payments to minimize monthly payments and total loan costs.
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Repayment is typically linked in some way to the item financed. Term loans require
collateral and a relatively rigorous approval process but can help reduce risk by minimizing
costs. Before deciding to finance equipment, borrowers should be sure they can they make
full use of ownership-related benefits, such as depreciation, and should compare the cost
with that leasing.
Supply: Abundant but highly differentiated. The degree of financial strength required to
receive loan approval can vary tremendously from bank to bank, depending on the level
of risk the bank is willing to take on.
Bill Discounting
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the bill after a discount charge to the customer's
account. The transaction is practically an advance against the security of the bill and the
discount represents the interest on the advance from the date of purchase of the bill until it
is due for payment.
Bills of exchange- A bill of exchange or "draft" is a written order by the drawer to the drawee
to pay money to the payee. A common type of bill of exchange is the cheque (check in
American English), defined as a bill of exchange drawn on a banker and payable on
demand. Bills of exchange are used primarily in international trade, and are written orders
by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the
advent of paper currency, bills of exchange were a common means of exchange. They are
not used as often today.
A bill of exchange is an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at fixed or determinable future time a sum certain in money to order or to bearer. It is
essentially an order made by one person to another to pay money to a third person.
A bill of exchange requires in its inception three parties--the drawer, the drawee, and
the payee.
The person who draws the bill is called the drawer. He gives the order to pay money to third
party. The party upon whom the bill is drawn id called the drawee. He is the person to
whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he
indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is
payable is called the payee.
Promissory Note- A promissory note is a written promise by the maker to pay money to the
payee. Bank note is frequently transferred as a promissory note, a promissory note made
by a bank and payable to bearer on demand. A maker of a promissory note promises to
unconditionally pay the payee (beneficiary) a specific amount on a specified date.
A promissory note is an unconditional promise to pay a specific amount to bearer or to
the order of a named person, on demand or on a specified date.
A negotiable promissory note is unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at fixed or determinable
future time, sum certain in money to order or to bearer
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Export Finance
This type of a credit facility is provided to exporters who export their goods to different
places. It is divided into two parts- pre-shipment finance and post-shipment finance.
Pre Shipment Finance is issued by a financial institution when the seller want the payment
of the goods before shipment.
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or
seller against a shipment that has already been made. This type of export finance is granted
from the date of extending the credit after shipment of the goods to the realization date of
the exporter proceeds. Exporters dont wait for the importer to deposit the funds.
Non Fund Based loans generate income for the bank without committing the funds of
the bank. Bank generates substantial income under this head. There are two types of
credit under this category which are discussed as follows:-
Bank Guarantee
A bank guarantee is a written contract given by a bank on the behalf of a customer. By
issuing this guarantee, a bank takes responsibility for payment of a sum of money in case,
if it is not paid by the customer on whose behalf the guarantee has been issued. In return,
a bank gets some commission for issuing the guarantee.
Any one can apply for a bank guarantee, if his or her company has obligations towards a third
party for which funds need to be blocked in order to guarantee that his or her company fulfils its
obligations (for example carrying out certain works, payment of a debt, etc.).
Letter of Credit
A standard, commercial letter of credit is a document issued mostly by a financial
institution, used primarily in trade finance, which usually provides an irrevocable payment
undertaking.
The LC can also be the source of payment for traction, meaning that redeeming the letter of
credit will pay an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a
customer in another. They are also used in the land development process to ensure that
approved
public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a
letter of credit are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is a client.
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Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior
agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing
a transaction, letters of credit incorporate functions common to giros and Traveler's
cheques. Typically, the documents a beneficiary has to present in order to receive payment
include a commercial invoice, bill of lading, and documents proving the shipment were
insured against loss or damage in transit. However, the list and form of documents is open
to imagination and negotiation and might contain requirements to present documents issued
by a neutral third party evidencing the quality of the goods shipped, or their place of origin.
Building Up of a Proposal.
Partnership:
Copy of partnership deed
Copy of certificate of registration of firm (if registered)
Company :
Memorandum and articles of association
Certificate of incorporation
Certificate of commencement of business
Search report indicating subsisting charges on the assets of the company.
Board resolution for borrowings, creation on the assets of the company and execution of the
documents.
Cooperative societies
Bylaws
Permission from registrar for the borrowings, creation of charge on the assets of the society
and execution of documents.
Trusts
Trust deed
Resolution for the borrowings and execution of documents.
Industrial units :
Project report with cash flow, fund flow statements etc.
Industrial licenses/SSI registration certificate.
License from local authority, compliance of legal requirements or conditions as
applicable and clearance from regulatory bodies.
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Financial Appraisal
On receipt of a loan application the banker begins the process of financial appraisal. The
first thing done is to analyze the financial statements. Therefore, an understanding of these
financial statements is important for the appraiser.
Once balance sheet is taken for analysis the following items are checked up:
Fixed assets: To find out any revaluation of fixed assets done by the company to
improve their net worth.
The schedules of the fixed assets should be checked up.
Study notes on accounts and comments of auditors should be checked.
Schedule for reserve should be studied
Any change in the accounting procedure of depreciation should be checked
Current assets: to find out whether the assets stated are really liquid or not.
The schedules under current liabilities and current assets to ascertain any obsolete or
slow moving raw material or finished good and old debtors or receivables should be
checked
The auditors report should be read and understood properly.
The claims lodged against receivables must be studied
The receivables due from sister/associate concerns must be studied.
Other Current Assets: Their reasonableness and their need to maintain them for
the business.
Various components of other current assets and if the same is more than 5% -10%,
ascertain the nature and need for maintaining such amount ; any assets which is not used
in the into day business activity shall be removed and proper treatment is to be made
accordingly.
Bank guarantee or letter of credit margin shall be shown as non- current assets.
Contingent liabilities: To find out any unrecognized liabilities or losses if any.
The CDD/DBD other bills discounted liability, if any ,is reported in the auditors report ,
then increase the bank borrowing to the extent liability was not taken in the balance sheet
and also increases the debits/receivables to that extent.
Term liabilities: To find out whether the liabilities are long term or short term, and its
needs and regularity
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This shall be decreasing year after year; if it has increased, then the reason for the same
is to be looked into (may be irregular or new term loan availed for expansion etc.)
The term liabilities with repayment of the same and the amount payable during the year
shall be deducted from the term liabilities as current liabilities for finding out liquidity position
of the company should be checked.
Stocks:
The stock statements and QIS forms to find the authenticity of the figures reported
under stock/receivables.
Change in the valuation of the stock/finished goods, if any, is to be verified to find out
its effect on the profitability of the company.
Intangible assets :
Any abnormal increase in this figure shall be studied to find out the reasons for the
same; this may be due to take over by others also.
Accounting Norms:
Any change in the accounting norms from the past shall be studied to find out the
reasons for the same; its effect on the net profit, net worth of the company is to be
ascertained.
If the net worth is decreasing, reason may due to net loss or diversion; true reason needs to
be ascertained.
If the D/E ratio is less than 2:1 the same is good; further if the TOL/TNW is less than 5:1
then the units solvency is noted to be satisfactory. The ratio indicates that borrower has
not borrowed much and the outside debts within a reasonable limit.
Liquidity position of the party-Current ratio
If the current ratio is increasing and nearer to 1.5 and above then we can note the position is
satisfactory.
Expected Current ratio is 1.22:1 and above; if the ratio is less than 1.22:1 then the
promoters margin (Net working capital) towards Working Capital may not be sufficient to
cover the working capital limit; care shall be taken to ensure that sufficient Net
working capital for the working capital enjoyed is available.
When the Current ratio is poor and the Net working capital is not sufficient to cover the
existing limit, no further term loan shall be sanctioned and the party is to be advised not
to take up any fresh investment in fixed assets.
Quality of current assets :
The current assets holding period must be less than 3 months for traders and the 5
months for the industries depending upon the type of industry ;holding level more than the
above needs proper justification.
It should be ensured that the current assets turnover is at least more than four times in
a year.
Contingent liability:
The effect of this liability on the net worth of the company; if its effect is less than 5-10 %
of the net worth of the company ,the same may be noted; but if it threatens the existence
of the company then the position needs serious analysis.
Diversion from the business needs to be viewed carefully.
Reduction in Net working capital position( below the required level) when the unit has
earned cash profit and clearing of term loan installments when the unit is making cash loss
needs to be viewed seriously.
Reduction in the net worth of the firm (when they have shown net profit needs
further probing.
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Breakeven analysis
d) Disbursement
e) Follow up (post sanction)
Assessment :
For assessment purposes the forms prescribed are used and debt equity ratio,
average DSCR, BEP, pay back period, etc. are taken into consideration. The following
minimum financial parameters are required to be satisfied for a Term loan proposal to
merit consideration:
Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial
statements as well as companies'.
A high debt/equity ratio generally means that a company has been aggressive in financing
its growth with debt. This can result in volatile earnings as a result of the additional interest
expense. If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost (interest),
then the shareholders benefit as more earnings are being spread among the same amount
of shareholders. However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities and become too
much for the company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For
example for large projects (with project cost Rs. 100 crore and above) in Power, acceptable
level of DER is 2.33:1, in Iron and Steel Industry 2.25:1 , in Infrastructure and Capital
Intensive projects 2:1 and in Real Estate, level of DER is 1.75:1. The CH, GM, ED and CMD
have powers to further relax.
Debt Service Coverag Ratio (DSCR):
The ultimate purpose of project appraisal is to ascertain the viability of a project which has
a direct bearing on the repayment of the instalments under the proposed term loan /
deferred payment guarantee. While the repayment program will depend upon the
profitability of a project, the quantum of annual instalments has to be related to the size of
the annual cash flows. The repayment schedule should, therefore, be fixed after
ascertaining the annual servicing by the debt service coverage ratio.
The debt service coverage ratio is the core test ratio in project financing. This ratio indicates
the degree of viability of a project and influences in fixing the repayment period, and the
quantum of annual instalments. For the purpose of this ratio , debt means maturing term
obligations viz. instalments payable during a year under all the term loans/ deferred
payment guarantees and service means cash accruals (service) available to cover the
maturing obligation (debt) during each year.
The debt service coverage ratio indicates the ability of the firm to generate cash accruals
for repayment of installment and interest. For example, a DSCR of 3:1 indicates that for
each Re.1/-long term debt including interest to be paid the business generates cash
accrual of Rs.3/- to be utilized for repayment of debt. The difference between the accruals
and debt is known as margin of safety (Rs.2/- in this case).
The ratio of 1.5 to 2 is considered reasonable. Ratio lower than this should be further looked
into. A very high ratio may indicate the need for lower moratorium period/repayment of loan
in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service
its debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The
ratio may vary from industry to industry but has to be viewed with circumspection when it is
less than 1.5.
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The CVP analysis provides answers to such questions as: level of operations needed to
avoid loss, level of sales required to achieve targeted profit, effect of product mix on
profits, impact of expansion, most and least profitable products etc. Break-even analysis
is the most widely used form of the CVP analysis.
Break-even analysis is one of the most useful techniques of profit planning and controlling.
The break-even analysis can help in making vital decisions relating to fixation of selling price
make or buy decision, maximizing production of the item giving higher contribution etc.
Further, the break-even analysis can help in understanding the impact of important cost
factors, such as, power, raw material, labor, etc. and optimizing product-mix to improve
project profitability.
It is a useful method for considering also the risk implications of alternative actions. From
one alternative a firm may expect higher profit and also a higher break-even point, while
another alternative may produce comparatively lower profit but at a lower break-even point.
The firm has to weigh the probability (riskiness) of reaching the break-even in the first case
before choosing that alternative. Generally, the preferred alternative would be where the
break-even will be reached earlier.
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Caution:
Relationship between revenue, variable costs and volume may not be linear.
It is not always easy to have a clean separation of costs into fixed and variable components.
Fixed costs may be stepped not fixed over all volumes.
Complexity involved in using BEP analysis in multi-product businesses
Illustration:
Assumed:
Fixed Costs
Variable Costs
Sales realization
Contribution
BEP (production)
BEP (sales)
Sensitivity Analysis
Projects do not always run to plan. Costs and benefits estimated at an early stage of a
project may indicate a profitable project, but this profit could be eroded by an increase in
costs or a decrease in the value of the benefits (the revenue). Sensitivity Analysis involves
changing input variable estimates from an original set of estimates (called the base case)
and determine their impact on a projects measured results, such as NPV (or IRR) from
investors viewpoint, or DSCR from bankers point of view.
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The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or
sensitive elements are identified which are assigned different values and the values
assigned are both optimistic and pessimistic such as increasing or reducing the sale
price/sale volume, increasing or reducing the cost of inputs etc. and then the project
viability is ascertained.
The critical variables can then be thoroughly examined by generally selecting the
pessimistic options so as to make possible improvements in the project and make it
operational on viable lines even in the adverse circumstances.
In the absence of any defined factors and its values for carrying out the sensitivity analysis,
a common 5% sensitivity factor on sale price/cost price of major raw materials is to be
applied in appraisals of all the projects irrespective of the industry. However, 10% sensitivity
factor may be applied in highly volatile industries by assessing the expected volatility in sale
price/ cost price of major raw materials in future on case to case basis.
Process of Credit Appraisal for providing Cash Credit / Working Capital Limits
Working capital for any unit means the total amount of circulating funds required for meeting
day to day requirements of the unit. For proper working a manufacturing unit needs a
specific level of current assets such as raw material, stock in process, finished goods,
receivables and other current assets such as cash in hand/ bank and advances etc. So the
working capital means the funds invested in current assets. The trading units need the
working capital for storing the goods and allowing credit to its customers.
Gross Working Capital and Net Working capital
Gross working capital means the total funds required for financing the total current assets.
Net Working capital means the difference the current assets and liabilities. In other words ,
net working capital denotes the portion of gross working capital contributed from long term
sources. As per practice of Indian banks net working capital should normally be 25% of total
current assets which will give a current ratio of 1.33 to the unit. When net working capital is
negative, it implies that the short term funds have been diverted / used for long term uses
and the unit is facing a liquidity crunch. Such situation may also arise due to losses. In such
a situation, the need of the hour is for raising long term sources. A unit needs working capital
because the production, sales and realizations are not simultaneous. The unit needs cash to
purchase the raw material and pay expenses as there may not be perfect matching between
cash inflows and outflows. The stock of raw material is kept to ensure the uninterrupted and
smooth production. It may also be required to cover the situations of shortages etc.
Factors affecting the requirement of working capital:
Nature of activity: Manufacturing units need more working capital as compared to
trading and service units.
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The length of operating cycle: More the length of operating cycle, more the requirement of
working capital. lengthy the process of manufacture, more the need of working capital due
to increase of length of working capital cycle
Market trend: The market trend of allowing credit to customers also varies from industry
to industry and city to city. More the credit allowed to customers, more the need of
working capital.
Availability of raw materials: When the availability of raw material is assured and
comfortable, lower stock maintenance is required. When there is expectation of shortage
or expectation of rise in prices, more amounts is blocked in raw materials.
Location of the unit: When the unit is located near the source of raw material, lower
stock maintenance is required.
Type of customers: When there are regular customers, low stock of finished products
is needed. When the sales are to be made to walk- in customers, more level of stock of
finished products is required.
Seasonality Factor: When the raw material required is available in a particular season, the
stock for whole of year is to be purchased in the particular season. E.g. Sugarcane, Cotton,
Paddy etc. Similarly the woollen products and products required in a particular season such
as ACs, for keeping the production running, higher level of finished stocks have to be kept.
Role of Banker:
The unit should have sufficient amount of working capital. A portion of it is to be financed
from long term sources called the liquid surplus or net working capital (NWC). The remaining
is normally financed by the bank in the form of working capital limits. Excess maintenance of
working capital may result in idle resources and high interest cost whereas less amount of
working capital may mean disruption in the working. So both the situations are to be
avoided. That is why the technique of calculation of right amount of working capital assumes
significance. For financing of working capital, a banker should be able to calculate right
amount of working capital needed by the unit being financed. It shall mean right amount of
financing which will result in higher profitability for the unit and safety of funds of the bank.
Parameters for various stages in computation of working capital:
Stage
i
Time
ii
SIP
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Value
RM into FG production)
iii
FG
Holding period of
FG before being
sold
iv
(sales)
The assessment of working capital requirement of business unit has been engaging the
attention of the Govt., RBI and a series of committees were set up to suggest
appropriate modalities of financing working capital as under.
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Third Method: 75% [(Total Current Assets Core Current Assets) Other Current liabilities)
Third method of lending was not accepted by RBI and hence rejected.
(iii) Style of Credit.
Tandon Committee suggested that instead of making available entire limit by way of cash
credit it may be bifurcated into demand loan and cash credit component (modified by Chore
Committee).
(iv) Quarterly Follow-up and Supervision
Tandon Committee suggested quarterly forms under the information system made
applicable to borrowers with working capital credit of Rs. 1 crore and over from the
banking system. These forms aim at ensuring proper end-use of credit.
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Presently this limit of Rs. 50 lac has been raised to Rs. 1 Crore.
(c) Withdrawal of bifurcation of cash credit
The recommendation of the Tandon Study Group to bifurcate cash credit accounts
into demand loan and cash credit components has been withdrawn.
(d) Separate limit for peak level and non-peak level
A recommendation that will induce a greater degree of credit planning pertains to the
separate 'Peak-level' and `non-peak level' credit limits, wherever considered feasible. The
period during which these limits will be utilised will now be indicated in the bank's advice
conveying sanction of credit. This recommendation is based on the pronounced seasonal
trends in agriculture-based industries, (such as tea. coffee, sugar, jute, vegetable oils, etc.),
and in the case of some consumer industries such as those manufacturing fans,
refrigerators etc. One of the major determinants of borrower's peak-level and non-peak level
credit limits will be their availment during the corresponding period in the past. Borrower in
whose cases there are no pronounced seasonal trends, may be sanctioned only one limit as
peak-level and non-peak level concepts will not be relevant in such cases.
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Dialogue with the borrower will be initiated to set right the position in regard to defective
credit planning and to ensure that such instances are avoided in future.
(f) Penalty for delayed or non submission of returns
Non-submission of returns, within the prescribed time limit, will henceforth entail penal of 2%
per annum on the total outstanding for the period of default in the submission of returns.
Simultaneously, a notice would be issued to the borrower stating that if the default persists it
would be open to the bank to freeze the account without further notice to the borrower. lf the
default persists despite imposition of penal interest and the bank is satisfied that deterrent
action is warranted, the operations in the account may be frozen on the basis of the notice
issued to the borrower.
(g) Adhoc or temporary limits
The working group has conceded that in exceptional cases, ad-hoc or temporary limits could
be sanctioned to borrowers through demand loan or non-operatable cash credit accounts.
On those limits, banks are required to charge additional 1% interest per annum over the
normal rate. However, in certain cases like natural calamities it would be the discretion of the
bank to charge interest of 1% per annum.
(h) Switching over to Second Method of lending
A major recommendation of the working group relates to switching over the borrowers from
the first to the second method of lending. Recognising that in some cases this may not be
possible immediately, Reserve Bank has stipulated that in such cases, the excess
borrowings are to be segregated and treated as WCTL (Working Capital Term Loan),
which should be made repayable in half-yearly instalments within a definite period but not
exceeding five years in any case.
Present Status:
The concept of MPBF was the cornerstone of financing which had emerged as a result of
recommendation of Tandon and Chore. However RBI has now abolished the guidelines for
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MPBF and advised the banks to draw the guidelines for credit dispensation. Our bank is still
following MPBF system. However the relaxations on case to cases are being allowed.
In case the margin with the party is more than 5% , PBF may be adjusted
accordingly.
The 20% limit is the minimum. As a temporary relief measure for SME Units, RBI
has allowed banks to finance upto 25% under stimulus package. The same shall be
reviewed after 30.6.09. However if the working capital cycle is longer than 3 months, higher
limit may be fixed. If the working capital cycle is less than 3 months, the limit may be fixed
@ 20 % of turnover but actual withdrawal should be allowed only on the basis of actual D.P.
However lower limit can be sanctioned if requested in writing by the borrower.
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The QMS discipline is to be enforced on all borrowers enjoying working capital limits of Rs.1
crore and over from the banking system, irrespective of whether they are exporters or
otherwise.
In case the limits have been sanctioned on the basis of Naik Committtee, QMS forms and
CMA data need not be submitted.
The forms for QMS and time period for submission are as under.
Form- 1
Form-11 To be submitted within 2 months from the close of Half Year to which it
relates.
QMS form I gives us the quarterly data of production and sales and quarterly levels of
current assets and current liabilities.
QMS form II gives us half yearly profitability statement and fund flow statements.
By comparing with the projections as given in CMA, we can see whether the performance is
going on as projected.
QIS I:
QIS I which was earlier discontinued has been reintroduced and is to be submitted
in addition to QMS I and QMS II.
For all borrowed accounts availing fund based working capital credit limits of Rs.5
crore & above from our bank, Quarterly Information System (QIS) Form-I may be obtained
for fixing up of quarterly operative limits in addition to the QMS Forms. The QIS Form-I is to
be submitted in the week preceding the commencement of the quarter to which it relates.
-
COMMITMENT CHARGES
To discourage the borrowers from non-availment of credit already provided to them by
banking institutions and to indirectly help the banks in their Asset Management, RBI has
permitted bank to charge penalty on unavailed portion of sanctioned limit known as a
commitment charge. It is applicable to the working capital limits of Rs.5 crore or above and
charged @ 1% per annum with a tolerance limit of 15% based upon the limit sanctioned.
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The unutilized part of the limit is found out by calculating the average utilization during the
quarter. While calculating the average utilization, overdrawn portion or excess portion is not
taken into consideration. If the average utilization is less than 85% than commitment
charges is levied on the entire unavailed position.
Commitment charge is not applicable in case of export unit and sick unit.
PENAL INTEREST
In order to instil a sense of credit discipline among the borrowers, RBI has permitted banks
to levy penal intt. over and above the sanctioned rate of interest in case of non compliance
of various terms and conditions
The broad areas of non compliance where bank charges penal interest are:
Default in repayment of loans
Irregularity in cash credit account
Non submission of stock statements and other financial data
Default in adhering to borrowing covenants
Non payment of bills
Excess borrowings arising out of excess current assets
Non submission of information under Quarterly Monitoring System
EXEMPTION FROM PENAL INTEREST
All advances up to 25000/Sick unit under rehabilitation
Sick unit remained closed
Advance against deposits/LIC policy/Govt. securities/Gold & Jewellery where the drawings
are within available value of security
Account transferred to Protested category
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Vehicle Loans
Today, vehicles can be financed using a number of options such as loans, lease, or hire
purchase agreement. Obtaining a vehicle loan is one of the more straightforward ways of
financing a two or four wheeler. In this manner, the vehicle purchased is actually
possessed by the bank or lending institution. This means the car or motorbike is
hypothecated. Therefore, though the consumer owns the vehicle, the bank or the lending
institution is actually using it as a security against the loan that the consumer has
obtained.
Housing Loans
Housing loans have emerged as an attractive avenue for credit deployment for banks in the
recent past. Industry level statistics reveal that NPAs in this segment is relatively low.
Housing loans are fully secured as they are backed by mortgages of residential properties.
Small housing loans up to Rs 10 lakhs can be classified as priority sector credit and hence
help in achieving/ maintaining the mandated priority sector lending targets. Risk weightage
for housing loans is only 50 % , enabling expansion of the credit portfolio with lesser capital
requirement. The prevailing lower interest rates, which have resulted in greater affordability
and the tax concessions offered by the government have made this one of the fastest
growing financial products. Further since the housing loan portfolio typically comprises a
large pool of small and medium sized loans, risk is distributed over a large number of
accounts, which is ideal from Risk Management point of view. Hence growth of quality
assets under Housing Finance is one of the major areas of focus for the bank.
Home Loan offers the most consumer friendly home loans and housing finance schemes at
attractive rates. PNB Housing Loans, with an aim to make purchase and construction of
homes a comfortable task, provides fixed as well as floating home loans at different rate of
interest
for
different
tenures
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increasing the spending power of people. And a sum total of all these reduces poverty
and better life styles.
But the problem is that banks have not been able to reach a vast majority of the rural
population; the rural poor have limited access to organized, affordable and transparent
financial services such as savings, loans, remittances and insurance services etc. It is
important for them to have access to banking services, especially credit and insurance,
to enlarge livelihood opportunities and to empower themselves to take charge of their
lives.
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over the period, but other personal loans comprising loans against fixed deposits, gold
loans and unsecured personal loans also rose from 6.1 per cent to 10.7 per cent. Other
categories whose share increased were loans to professionals and loans to finance
companies. In contrast, there has been a sharp decline in the share of lendings to industry.
Credit to small scale industries fell from 10.1 per cent of the total in 1996 to 4.1 per cent in
2005.
The states have been the main beneficiaries of bank credit are the northern region as it has
increased its share from 18.7 per cent of the total credit in 1996 to 22.2 per cent in 2005. As
it was seen that Delhis share went up from 9.5 per cent to 12.1 per cent over the period.
This is not due to food credit, the account of which is maintained in Delhi. Clearly, the
national capital has gained a lot from liberalization.
State Bank
of India
PNB
BOB
ICICI Bank
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Credit
Portfolio
as in
March
201415(Rs.
Billion)
7567
Market
Share
NIMS
(2014-15)
Tier I
Capital %
as in
March
2014-15
Return on
Net Worth
(2014-15)
Gross
NPA % as
in March
2014-15
18%
2.9%
7.8%
13%
3.3%
2421
2287
2164
6%
5%
5%
3.5%
2.8%
2.3%
8.4%
10.0%
13.2%
24%
24%
10%
1.8%
1.4%
4.5%
Bank of
India
2131
5%
2.5%
8.3%
17%
2.2%
Canara
Bank
2125
5%
2.6%
10.9%
26%
1.5%
HDFC
Bank
1600
4%
4.2%
12.2%
17%
1.1%
IDBI Bank
Axis Bank
Central
Bank of
India
1571
1424
1297
4%
3%
3%
1.8%
3.1%
2.7%
8.1%
9.4%
6.45%
16%
19%
18%
1.8%
1.1%
2.2%
Total
Banking
Sector
42874
100%
2.9%
9.7%
17%
2.3%
Source: http://www.icra.in/files/ticker/banking%20note-final.pdf
Market Share
19%
17%
HDFC Bank
ICICI Bank
Axis Bank
14%
DCB Bank
30%
20%
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Market Share
11%
18%
BOI
Dena Bank
14%
SBI
16%
PNB
Canara Bank
29%
12%
Market Share
1%
TATA Capital
37%
LIC
Reliance Capital
50%
Muthoot Finance
Bajaj Finance
1%
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11%
Computerization
The process of computerization marked the beginning of all technological initiatives in the
banking industry. Computerisation of bank branches had started with installation of simple
computers to automate the functioning of branches, especially at high traffic branches.
Thereafter, Total Branch Automation was in use, which did not involve bank level branch
networking, and did not mean much to the customer
Networking of branches are now undertaken to ensure better customer service. Core
Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable the
customers to operate their accounts from any bank branch, regardless of which branch he
opened the account with. The networking of branches under CBS enables centralized data
management and aids in the implementation of internet and mobile banking. Besides, CBS
helps in bringing the complete operations of banks under a single technological platform.
CBS implementation in the Indian banking industry is still underway. The vast geographical
spread of the branches in the country is the primary reason for the inability of banks to
attain complete CBS implementation
Satellite Banking
Satellite banking is also an upcoming technological innovation in the Indian banking
industry, which is expected to help in solving the problem of weak terrestrial communication
links in many parts of the country. The use of satellites for establishing connectivity
between branches will help banks to reach rural and hilly areas in a better way, and offer
better facilities, particularly in relation to electronic funds transfers. However, this involves
very high costs to the banks. Hence, under the proposal made by RBI, it would be bearing a
part of the leased rentals for satellite connectivity, if the banks use it for connecting the
north eastern states and the under banked districts.
Development of Distribution Channels
The major and upcoming channels of distribution in the banking industry, besides branches
are ATMs, internet banking, mobile and telephone banking and card based delivery
systems.
Introduction of Biometrics
Banks across the country have started the process of setting up ATMs enabled with
biometric technology to tap the potential of rural markets. A large proportion of the
population in such centers does not adopt technology as fast as the urban centers due to
the large scale illiteracy. Development of biometric technology has made the use of self
service channels like ATMs viable with respect to the illiterate population. Though
expensive to install, the scope of biometrics is expanding rapidly. It provides for better
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Multilingual ATMs
Installation of multilingual ATMs has also entered pilot implementation stage for many large
banks in the country. This technological innovation is also aimed at the rural banking
business believed to have large untapped potential. The language diversity of India has
proved to be a major impediment to the active adoption of new technology, restrained by
the lack of knowledge of English.
Multifunctional ATMs
Multifunctional ATMs are yet to be introduced by most banks in India, but have already
been recognized as a very effective means to access other banking services.
Multifunctional ATMs are equipped to perform other functions, besides dispensing cash and
providing account information. Mobile recharges, ticketing, bill payment, and advertising are
relatively new areas that are being explored via multifunctional ATMs, which have the
potential to become revenue generators for the banks by effecting sales, besides acting as
delivery channels. Most of the service additions to the ATM route require specific approval
from the regulator.
Internet Banking
Internet banking in India began taking roots only from the early 2000s. Internet banking
services are offered in three levels. The first level is of a banks informational website,
wherein only queries are handled; the second level includes Simple Transactional
Websites, which enables customers to give instructions, online applications and balance
enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to
be conducted. Internet banking in India has reached level three, offering Fully Transactional
Websites, which allow for fund transfers and various value added services.
Internet banking poses high operational, security and legal risks. This has restrained the
development of internet banking in India. The guidelines governing internet banking
operations in India covers a number of technological, security related and legal issues to be
addressed in relation to internet banking. According to the earlier guidelines, all internet
banking services had to be denominated in local currency, but now, even foreign exchange
services, for the permitted underlying transactions, can be offered through internet banking.
Internet banking can be offered only by banks licensed and supervised in India, having a
physical presence in India. Overseas branches of Indian banks are allowed to undertake
internet banking only after satisfying the host supervisor in addition to the home supervisor.
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Criteria
Loans dont go bad right away. Most loans allow customers a certain grace period. Then
they are marked overdue. After a certain number of days, the loan is classified as
a nonperforming loan.
Banks usually classify as nonperforming assets any commercial loans which are more than
90 days overdue and any consumer loans which are more than 180 days overdue.
For agricultural loans, if the interest and/or the installment or principal remains overdue for
two harvest seasons; it is declared as NPAs. But, this period should not exceed two years.
After two years any unpaid loan/installment will be classified as NPA.
Categories
1. Sub-standard: When the NPAs have aged <= 12 months.
2. Doubtful: When the NPAs have aged > 12 months.
3. Loss assets: When the bank or its auditors have identified the loss, but it has not been
written off.
After a certain amount of time, a bank will try to recoup its money by foreclosing on the
property that secures the loan. The way money is recouped is a highly contentious issue not
just with banks but also with Micro-Finance Institutions (MFIs). We will discuss it later in the
article.
All of this can be explained in a much more technical manner, but that is not required here.
For example, we do not need to list all the conditions that make the banks declare an asset
as NPAs like respect of derivative transactions, the overdue receivables representing
positive mark-to-market value of a derivative contract, if these remain unpaid for a period of
90 days from the specified due date for payment.
Only understanding the basic concepts will suffice. UPSC is not going to ask you these
details, but about the impact and solutions of NPAs. Even in prelims, these details will not be
asked. So we avoid technicalities and jargons here. It is not useful for a GS paper, even if
some of it may be useful for Economics optional paper
EXTENT OF NPAs
Gross NPAs of domestic banks jumped to 4.2 % of total lending by the end of September
2013 from 3.6 % six months before, according to the Reserve Bank of India (RBI).
As per a recent warning by the RBI, bad loans (NPAs) could climb to 7% of total advances
by 2015.
In absolute terms, gross NPAs are estimated to touch Rs 2.50 lakh crores by the end of
March this year. This is equal to the size of the budget of Uttar Pradesh. The biggest chunk
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of the soured debts is with state-run banks (Public sector banks or PSBs), which account for
two-thirds of loans but 80 % of the bad assets
External Factors
Reasons Related to Corporate Sector
Apart from the slowdown in India, the global economy has also slowed down.
This has adversely impacted the corporate sector in India. Continuing uncertainty in the
global markets has lead to lower exports of various products like textiles, engineering
goods, leather, gems etc. It can be noted that imports and exports combined equal to
around 40% of Indias GDP!
A hurt corporate sector is finding it difficult to pay loans
The ban in mining projects, delay in environmental related permits affecting power,
iron and steel sector, volatility in prices of raw material and the shortage in availability of
power have all impacted the performance of the corporate sector. This has affected
their ability to pay back loans.
Internal Factor
1 Indiscriminate lending by some state-owned banks during the high growth period (200408) is one of the main reasons for the deterioration in asset quality.
2. Bankers say there is a lack of rigour in loan appraisal systems and monitoring of warning
signals at state-run banks. This is particularly true in case of infrastructure projects, many of
which are struggling to repay loans. Besides, these projects go on for 20 to 30 years.
3. Poor recovery and use of coercive techniques by banks in recovering loans
Examples of NPAs
Vijay Mallyas Kingfisher Airlines is king of defaulters at Rs 4,022 crore
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HDFC bank is the second largest private banking sector in India having 2,201 branches and
7,110 ATMs
HDFC bank is located in 1,174 cities in India and has more than 800 locations to serve
customers through Telephone banking
The banks ATM card is compatible with all domestic and international Visa/Master card,
Visa Electron/ Maestro, Plus/cirus and American Express. This is one reason for HDFC
cards to be the most preferred card for shopping and online transactions
HDFC bank has the high degree of customer satisfaction when compared to other private
banks
The attrition rate in HDFC is low and it is one of the best places to work in private banking
sector
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HDFC has lots of awards and recognition, it has received Best Bank award from various
financial rating institutions like Dun and Bradstreet, Financial express, Euro money awards
for excellence, Finance Asia country awards etc
HDFC has good financial advisors in terms of guiding customers towards right investments
Weakness
HDFC bank doesnt have strong presence in Rural areas, where as ICICI bank its direct
competitor is expanding in rural market
HDFC cannot enjoy first mover advantage in rural areas. Rural people are hard core loyals
in terms of banking services.
Some of the banks product categories lack in performance and doesnt have reach in the
market
The share prices of HDFC are often fluctuating causing uncertainty for the investors
Opportunities
HDFC bank has better asset quality parameters over government banks, hence the profit
growth is likely to increase
The companies in large and SME are growing at very fast pace. HDFC has good reputation
in terms of maintaining corporate salary accounts
HDFC bank has improved its bad debts portfolio and the recovery of bad debts are high
when compared to government banks
Greater scope for acquisitions and strategic alliances due to strong financial position
Threats
HDFCs nonperforming assets (NPA) increased from 0.18 % to 0.20%. Though it is a slight
variation its not a good sign for the financial health of the bank
The non banking financial companies and new age banks are increasing in India
The HDFC is not able to expand its market share as ICICI imposes major threat
The government banks are trying to modernize to compete with private banks
RBI has opened up to 74% for foreign banks to invest in Indian market
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ICICI is the second largest bank in terms of total assets and market share
Total assets of ICICI is Rs. 4062.34 Billion and recorded a maximum profit after tax of Rs.
51.51 billion and located in 19 countries
One of the major strength of ICICI bank according to financial analysts is its strong and
transparent balance sheet
ICICI bank has first mover advantage in many of the banking and financial services. ICICI
bank is the first bank in India to introduce complete mobile banking solutions and jewelry
card
The bank has PAN India presence of around 2,567 branches and 8003 ATMs
ICICI bank is the first bank in India to attach life style benefits to banking services for
exclusive purchases and tie-ups with best brands in the industry such as Nakshatra, Asmi,
Ddamas etc
ICICI bank has the longest working hours and additional services offering at ATMs which
attracts customers
Marketing and advertising strategies of ICICI have good reach compared to other banks in
India
Weaknesses
Customer support of ICICI section is not performing well in terms of resolving complaints
The ICICI bank has the most stringent policies in terms of recovering the debts and loans,
and credit payments. They employ third party agency to handle recovery management
There are also complaints of customer assault and abuse while recovering and the credit
payment reminders are sent even before the deadlines which annoys the customers
The employees of ICICI are bank in maximum stress because of the aggressive policies of
the management to win ahead in the race. This may result in less productivity in future years
Opportunities
Banking sector is expected to grow at a rate of 17% in the next three years
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The concept of saving in banks and investing in financial products is increasing in rural
areas as more than 62% percentage of Indias population is still in rural areas.
As per 2010 data in TOI, the total number b-schools in India are more than 1500. This can
ensure regular supply of trained human power in financial products and banking services
Within next four years ICICI bank is planning to open 1500 new branches
Small and non performing banks can be acquired by ICICI because of its financial strength
ICICI bank is expected to have 20% credit growth in the coming years.
Threats
Government sector banks are in urge of modernizing the capacities to ensure the customers
switching to new age banks are minimized
HDFC is the major competitor for ICICI, and other upcoming banks like AXIS, HSBC impose
a major threat
Though customer acquisition is high on one side, the unsatisfied customers are increasing
and make them to switch to other banks
Axis bank has been given the rating as one of top three positions in terms of fastest growth
in private sector banks
Financial express has given number two position and BT-KPMG has rated AXIS bank as the
best bank with some 26 parameters
The bank has a network of 1,493 domestic branches and 8,324 ATMs
The banks financial positions grows at a rate of 20% every year which is a major positive
sign for any bank
The companys net profit is Q3FY12 is 1,102.27 which has a increase of 25.19% growth
compared to 2011
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Weaknesses
Gaps Majorly they concentrated in corporate, wholesale banking, treasury services, retail
banking
Very recently the bank started focusing its attention towards personal banking and rural
areas
The share rates of AXIS bank is constantly fluctuating in higher margins which makes
investors in an uncomfortable position most of the time
There are lot of financial product gaps in terms of performance as well as reaching out to the
customer
There are many fraudulent activities involved in credit cards as the banks process credit
card approval even without verification of original documents
Their financial consultants are not wise enough to guide the customers towards right
investments
Customer service has to improve a lot in order to be in race with other major players
Opportunities
In 2009, Alliance with Motilal Oswal for online trading for 10 million customers
In 2010, acquired Enam Securities Pvt Ltd broking and investment banking
In Sep 2009, SEBI approved Axis Asset Management Co. for mutual fund business
Geographical expansion to rural market 80% of them have no access to formal lending
Last quarter there were 48 new branches opened across the Nation
Since its a new age banking there are lot of opportunities to have the advance technicalities
in banking solutions compared to existing major players
The assets in their international operations are growing at a very faster pace with a growth
rate of 9%.
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The concept of ETM (Everywhere teller machine) by AXIS Bank had a good response in
terms of attracting new customers in personal banking segment
Threats
Government schemes are most often serviced only by govern banks like SBI ,Indian Banks,
Punjab National Bank etc
ICICI and HDFC are imposing strong threats in terms of their expansion in customer base by
their aggressive marketing strategies
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Opportunities
1.Venturing into rural areas
2.Installtion of more ATMs
3.Use of mobile banking, internet banking on a large scale
Threats
1.New banking licenses
2.Foreign players
3. Disinvestments
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High
low
Low
Stars
Question Mark
HDFC Bank
Service
Debit Card
Cash cow
Dogs
Insurance
Traveler Cheque
HDFC BANK stands at star position in BCG matrix. As HDFC bank have the high market
growth and they also have high market share. There is a lot of growth potential for the
banking industry because of increasing disposable income of customers, increasing working
class, more volatility in other markets also increasing importance of savings and already
discussed almost 30% of the market is still untapped HDFC bank have a 28% of market
share.
AXIS Bank
High
High
Low
Stars
Question Mark
Service , loan
Cash cow
Dogs
Casa a/c
Rupay
Low
AXIS BANK stands at star position in BCG matrix. As AXIS bank have the high market
Growth and they also have high market share. There is a lot of growth potential for the
Banking industry because of increasing disposable income of customers, increasing working
Class, axis bank have a 15% of market share.
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High
Low
Stars
Question mark
Insurance ,
loan ,
Demat a/c
Debit card
Cash cow
Dogs
Low
PNB stands at Question Mark position in BCG matrix Punjab Notational Bank have
the low market share they have a market share of 4 .22% of market share . they also fall in
question mark.
Low
Stars
Service ,
Question Mark
Debit card
Cash cow
Loan
Dogs
High
Low
SBI bank have a high market share they have a market share of 25.5% .they also fall in
stare There is a lot of growth potential for the banking industry because of increasing
disposable income of customers, increasing working capital .
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Variables
HDFC
Bank
ICICI
Bank
Axis
Bank
DCB
Bank
Kotak
Bank
Branches
1174
4183
2500
250
641
ATM
11843
13692
12922
400
1159
Interest
rate
9.5%
9.7%
9.95%
10.7%
9.65%
Service
Excellent
Good
Excellent
Average
Good
Financial
product
Good
Good
Good
Average
Good
Technology Good
Good
Good
Average
Average
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Public bank
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Variables
BOI
Dena
Bank
SBI
PNB
Canara
Bank
Branches
4228
1703
13660
6760
5000
ATM
1859
1471
21000
1400
9153
Interest rate
9.75%
9.70%
9.70%
9.65%
9.75%
Service
Average
Average
Good
Good
Good
Financial product
Average
Good
Good
Good
Good
Technology
Average
Good
Good
Good
Good
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NBFCs
Sources:
Marketing91.com
Mbaskool.com
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Variables
Reliance
Capital
Bajaj
Finance
Muthoot
Finance
LIC
Housing
TATA
capital
Branches
1252
1132
1531
8100
850
Turnover
1.1Billion
500cr
100million
14.25%
14%
12%
9.80%
Service
Good
Good
Good
Financial
Product
Good
Good
Good
Technology
Good
Good
Good
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reporting . it is expected that banks would migrate to global accounting standards smoothly,
although it would mean greater disclosure and tighter norms ,the report adds.
The first phase of banking reforms was born out of panic .The second phase can
implemented from a position of strength and confidence in a compressed time frame .
Economical Analysis
Growing economy
The Indian economy has shown tremendous growth over the past decade. This statement
may seem odd to the economists who keep comparing the growth rates to that of china or
the east Asian tigers .These countries have definitely shown good economic growth, but
indies is nothing to be scoffed at.
This assertion is not being made by comparing the GDP growth FDI inflow , changes in per
capita income and other economic criteria ,but by looking at the increase in the availability of
goods and services.
An economist may argue that availability of cell phones and branded water does not indicate
a developed economy .But even they have to agree that Indian seems to have changed from
a country of shortages to one of plenty. And along with plentiful supplies there is also variety.
Western economy have grown party because of consumption economics .those economies
produced large number of goods, employing more and more people to produce these goods.
These employees in turn consumed the goods, creating a virtuous cycle. Maybe india is
following this path.
All the good are available in plenty. Now the living standard of people has to be improved so
that they start consuming these goods. Maybe that is why the new finance ministers wants
to put more money in the housewives hand.
SOCIAL ANALYSIS
All these development need not mean banks will give the go by to social banking . Rather
than being seen as directed lending such lending would be business driven, the report
predicts. Rural market comprises 74 percent of the population .41 percent of middle class
and 58 percent disposable income.
Consumer growth is taking place at a first pace in 17000 odd villages with a population of
more than 5000 of these, more than 50% are concentrated in just seven states. Small scale
industry would remain important for banks.
However instead of the narrow definition of ssi based on the investment in fix assets the
focus may shift to amall and medium enterprises as a group. Changes could be expected in
the delivery channel for small borrowers, agriculturists and unorganized sectors also.
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TECHNOLOGOCAL ANALYSIS
Technological development would render flow of information and faster lending to faster
appraisal and decision making. This would enable banks to make credit management more
effective, besides leading to an appreciable reduction in transaction cost.
To reduce investment costs in technology , banks are likely to resort more and more to
sharing facilities such as ATM networks, banks are financial institution will join to gather
facilities in areas of payment and settlement , bank office processing data warehousing and
so an.
The advent of new technology could see the emergence of new players doing financial
intermediation .for example bill payment service or supermarket or retailers doing basic
landing operation. The conventional definition of banking might undergo changes
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appraisal, risk analysis and lending decisions, while keeping in mind the
broad framework of corporate banking strategy, this book emphasizes that
lending is no longer an activity restricted to the assets side of the balance
sheet.
Risk Assessment Model for Assessing NBFCs(Asset Financing)
Customers by Srinivas Gumparthi
Non-banking financial companies (NBFCs) form an integral part of the Indian
financial system. The history of the NBFC Industry in India is a story of underregulation followed by over-regulation. Policy makers have swung from one
extreme position to another in their attempt to set controls and then restrain
them so that they do not curb the growth of the industry. Most of this NBFCs
are operating with high risk of lending and more often NBFCs lend credit to
Small and Medium size enterprises, which are categorized as high risk class
of Assets. To assess such high risk assets we need to have a comprehensive
model. This paper aim is to build Risk Assessment Model for NBFCs based
on both qualitative and quantitative aspects of the client.
Relationship between Credit Appraisal Process and the level of NonPerforming loans of the women Enterprise Fund loans Offered through
financial intermediaries In Kenya By Anne Wangu Mureithi
Granting credit to customers is an important activity for any lending institution
thus the importance of credit risk management in these institutions .Lenders
must therefore ensure a thorough credit evaluation process to fore stalk
default. Factors that lead to the high levels of NPLs in the lending institutions
includes; weak credit appraisal process, insider lending, high interest rates
and weak credit policies among other factors. The purpose of this study was
to analyze the credit evaluation process adopted by the financial
intermediaries offering WEF loans in Kenya, to analyze the level of
nonperforming loans related to the WEF offered through the financial
intermediaries in Kenya and to establish whether there is any relationship
between the credit evaluation process and the level of nonperforming loans in
the WEF loans offered through financial intermediaries in Kenya.
Credit Analysis By Alina Mihaela Dima
The well performing companies suddenly one say announced losses due to
cesdit exposure. In response to this, commercial banks have almost
universally embarked upon an upgrading of their risk management and
control systems. The credit analysis is the qualitative and quantitative
analysis of a company. Credit analysis involves the examination of the link
between management performance or capital and the working relationship.
Term Lending to Business By Neil H Jacoby and Raymond Saulnier
Repayment of loans is not certain. So to minimize the risk the credit
standards by reference and credit appraisal methods should be adopted.
Probability of repayment of a term loan differs from pertaining the personal
loan, mortgage or form of credit.
2.ii Scope:
The study would be limited to selected banks and NBFCs and also to the information as to
analytical tools and techniques availed from banking industry and information received by
interview of professionals and customers.
Scope will be done on the basis of Region, Industry, Time and Population
To do industry analysis
Process followed by Banks and NBFCs to give loan
Understand the function of Banks and NBFCs
Procedure for granting loan
Focus is on 5 types of loans given by Banks and NBFCs
Research Objective: To understand the credit analysis process of different banks and
NBFC and to compare the data.
To compare the Process level documentation followed by banks
To compare and contrast process
To understand the customer perspective towards procedure for loans
To understand the regulatory requirement followed by banks for loans.
Significance of Study: Want to understand the gap between the theory and practical
knowledge.
To understand the trends of industry
To understand the customer selection for taking loans
Research Design: The design is the structure of any specific work. It gives direction and
systematizes the research. The research design that we have selected for the purpose of
our research is Exploratory Research design. We have selected exploratory research
design because it helps to explore through a problem to provide understanding of scope of
portfolio management. Our exploratory research will be based on primary as well as
secondary data. One of the most important benefits of research methodology is that it helps
in identifying the problem, collecting, and analyzing the required information data and
providing an alternative solution to the problem.
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Research Methodology:
i.
Primary Research
Interview with officers of Banks and NBFCs who have approves loan to individual
and corporate
ii.
Secondary Research
Internet and websites of Banks and NBFCs
Journal Articles
Newspaper
Annual reports of the companies
Published reports of the Banking Sector
Sampling Methods
We have used Random Sampling for the sampling that requires complete knowledge about
all sampling units sampling units in India. Due to time constraints non- probability sampling
has been chosen by us for our research report. In Non- probability method of sampling we
have selected convenience sampling technique for the purpose of data collection.
2.iv Interviews
a) Canara Bank- Navrangpura Branch
We took interview of Mr. Sanjeev Soni who is the Finance officer of Canara Bank of
Navarangpura Branch. He has total 3 years of experience in the credit field. He is
working in Canara Bank only from last 3 years. As Canara Bank is the public bank
the credit giving process is easy. First customer need is understood when s person
comes for loan then his background is checked, this KYC documents are taken. KYC
documents includes ID of the person, address proof, salary slip of last 6 months and
IT returns of last 1-2 years.From the KYC a CIBIL score is done and rating is
done(Defines risk level , 750 or above). Then they do the analysis of income and
willingness to pay back the loan(they check the IT returns). They visit home or
property of mortgage and then they decide where to give loan or not. Personal loan
is approved in 2 days and property loan is approved in 15 days.Canara Bank gives
all types of loan such as export and import, corporate, consumer, retail etc. Canara
Bank does not have any hidden charges but has nominal charges. Canara Bank is
different from other public bank such as there service process is good and fast, till
now the bank was never in loss, interest rate are negotiable and communication is
transparent. The problem faced by Mr. Sanjeev Soni is for talking the loan back they
have to do too much of follow up, the life cycle of person is not able to decided, and
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there is always risk of financial position of the person. The credit risk management is
done by managing managerial risk, credit risk and financial risk.
f)
are decided. He says that there credit process is better than NBFCs and Public
Banks. There no hidden charges in bank. The bank always give loan against
mortgage with higher value so they can avoid loss.
ii.
iii.
CPC help banks to carry out all processing activities at one particular place
while only front ending activates are carried out at the different branches of the
bank. This results in better customer service and happy customers, and also
provides the branch banking staff with a better chance for cross selling and up
selling products. In case a bank is planning to outsource some of its processes ,
having a CPA places the bank is a ware of the exact cost of owning the process.
It also provides an option of going for selective outsourcing .
Processing occurs between days 5 and 20 of the loan . The processor reviews
the credit reports and verifies the borrowers debt and payment histories as the
VODs and VOEs are returned. If there are unacceptable late payments, collection
for judgement , etc, a written explanation is required from the borrower . The
processor also reviews the appraisal and survey and checks for property issues
that may require further discernment . The processors job is to put to gather an
entire package that may be underwritten by the lender.
The first thing is the filling of application form and signing it . then go through the
official site of the bank thoroughly to get information about the mandatory
documents needed for application . The main documents required for home loan
are proof of age proof of identity- passport, PAN card , ration card , voter ID ,etc
The pass the loan there are various document required and some of them which are major
amongst them are
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Voter ID
Ration card
Driving Licenses
Pan Card
Electricity Bill
Telephone Bill
iv.
KYC Document , most of the banks whether it may be private or public banks
they ask for documents which contains the Address proofs well as the photo
proof and they ask for pan card , voter id and electricity bill as seen in the cart
above.
v.
They unique feature of the Document Management system enable to scale and
provide a unique but consistent, effective and efficient open platform which
manages the process of creating and revising documents. It also improves the
content security , DMS can decrease your printing and strong cost .The DMS
products will consist of the following module :
Document Capturing
Document Indexing
E-Document Tracking
Administration
Security
Storage and Archiving
Banking require all Document regarding pledge, KYC and IT return. From our finding we
came to know that for the sake of the identity verification, the entire Document listed out for
the purpose need not be insisted. If one document is produced and if the branches is
satisfied about the evidence and can prove at a later date that due diligence 9 had bee
observed in establishing the identity, the branch can go ahead and open the account ,. But if
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the branch is not satisfied about the document furnished then it can call for alternative
documents till it is satisfied in order t observe due diligence.
vi.
the objective of KYC guidelines is to prevent our bank from being used
Verification about all the document is necessary but is it possible to do . The responses are
same as shown in above chart . both private and public banks fell that is possible to verify
through government data , company data and through private agencies
So the procedure for this might be different but the importance is the same for both .
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2.vii. Bibliography
https://www.google.co.in/?gws_rd=ssl#q=ibef+banking+sector
http://www.ibef.org/download/banking50112.pdf
http://www.scribed.com/doc/54034165/49688842-credit-appraisal-canara-bank
http://www.scribed.com/doc/81060224/banking-not-final
http://www.scribed.com/doc/33484143/bank-of-baroda-annual-report
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2.ix. Conclusion
Credit appraisal is a process of the credit worthiness of loan application. The fund of
depositor i.e : general public are mobilized by means of such advance . Thus it is extremely
important for lender bank to assess the risk associated with credit , thereby ensure the
security for fund deposited by depositors . Therefore my analyses regarding credit appraisal
procedure of all banks is as follows:
In case of retail lending bank strictly follow its circular and fulfill all requirement of
necessary document required for different types of loan so bank do not suffer any
type of loss.
Bank is very particular about CIBIL report or internal department of borrowers in case
of each type of lending.
Bank lending process in case of retail loan is very much faster after compiling with all
criteria of bank.
Risk analysis is done by bank to determine the risk associated with the project .this is
mainly done by internal initially at bank counter and then at internal department. With
sensitive analysis feasibility of application is determined under worsened condition. Credit
rating or scoring is done of various parameters such as personal , management , financial
etc,: thereby determine credit worthiness of customer .
It is on basis of credit risk level, a collateral security to be given by borrower is determined.
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