CREDIT APPRAISAL

TABLE OF CONTENTS
Chapters

1. INTRODUCTION

Reason for selecting the project

Scheme of the project
Research Methodology
Limitation of the study

2. CREDIT POLICY OF COMMERCIAL BANK

Commercial banks and its objectives

Recent policy developments regarding bank credit
Changing phase of bank credit
Trends of bank credit in India
Procedure for providing bank credit
Credit Appraisal

3. THE PROFILE OF THE ORGANIZATION OF ICICI BANK

Indian banking sector & its major challenges

ICICI Bank at a glance
Mission and Vision
Organizational structure of ICICI Bank

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4. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO PNB

Credit philosophy
Credit policy
Introduction to loans
Classification of loans
Building up of a proposal
Requirements as per constitution of borrower
Financial Appraisal

5. ANALYSIS AND INTERPRETATION OF DATA

Credit Appraisal techniques

Process of credit appraisal for providing cash credit
Appraisal techniques for retail loans

6. CONCLUSION

Conclusion

BIBLIOGRAPHY

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CHAPTER 1
Introduction
The last year financial crises have become the main cause for recession which
was started in 2006 from US and was spread across the world. The world
economy has been majorly affected from the crisis. The securities in stock
exchange have fallen down drastically which has become the root cause of
bankruptcy of many financial institutions and individuals. The root cause of the
economic and financial crisis is credit default of big companies and individuals
which has badly impacted the world economy. So in the present scenario
analysing ones credit worthiness has become very important for any financial
institution before providing any form of credit facility so that such situation
doesnt arise in near future again.

Analysis of the credit worthiness of the borrowers is known as Credit Appraisal.

In order to understand the credit appraisal system followed by the banks this
project has been conducted. The project has analysed the credit appraisal
procedure with special reference to Punjab National Bank which includes
knowing about the different credit facilities provided by the banks to its
customers, how a loan proposal is being made, what are the formalities that is to
be satisfied and most importantly knowing about the various credit appraisal
techniques which are different for each type of credit facility.

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 ,

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its functions, and present trends and growth in bank credit are required and it is
covered in this chapter.

Reasons for selecting the project

Whenever an individual or a company uses a credit that means they are

borrowing money that they promise to repay with in a pre-decided period. In
order to assess the repaying capability i.e. to evaluate their credit worthiness
banks use various techniques that differ with the different types of credit
facilities provided by the bank. In the current scenario where it is seen that big
companies and financial institutions have been bankrupted just because of credit
default so Credit Appraisal has become an important aspect in the banking
sector and is gaining prime importance.

It is the incident of credit defaults that has given rise to the financial crisis of
2008-09. But in India the credit default is comparatively less that other
countries such as US. One of the reasons leading to this may be good appraisal
techniques used by banks and financial institutions in India. Eventually the
importance of this project is mainly to understand the credit appraisal
techniques used by the banks with special reference to Punjab National Bank.

Scheme of the project

It covers the objective and structure of the project which is discussed as

follows:-

Objective of the project

The overall objective of this project is to under stand the current credit appraisal
system used in banks. The Credit Appraisal system has been analysed as per the

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different credit facilities provided by the bank. The detailed explanation about
the techniques and process has been discussed in detail in the further chapters.

Structure or Plan of the project

The project first of all makes a study about the commercial banks- its important
functions. Then it highlights on the concept of Bank Credit & its recent trends.
The project then proceeds towards the lending procedure of banks and here it
highlights about credit appraisal being the first step in building up of a loan
proposal. Then it discusses the bank credit policy with respect to Punjab
National bank where the project was undertaken.

The project then proceeds with the review of literature i.e. review of some past
work regarding credit appraisal by various researchers. The project then moves
towards research methodology where it covers the information regarding the
type of data collected and the theoretical concepts used in the project are
discussed in detail. Then the project proceeds with the next chapter consisting of
the analysis part which covers the analysis of various techniques used by the
banks for the purpose of credit appraisal. Then the project moves to its next
chapter i.e. findings where some results found out are interpreted and then
moving on to the last and the final chapter i.e. the suggestions and conclusions
where some steps are suggested to be implemented to increase the work
efficiency and to reduce to work pressure

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CHAPTER 2

Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checking
accounts, savings accounts, and money market accounts and that accepts time
deposits. Some use the term "commercial bank" to refer to a bank or a division
of a bank primarily dealing with deposits and loans from corporations or large
businesses. This is what people normally call a "bank". The term "commercial"
was used to distinguish it from an investment bank.

Commercial banks are the oldest, biggest and fastest growing financial
intermediaries in India. They are also the most important depositories of public
savings and the most important disbursers of finance. Commercial banking in
India is a unique banking system, the like of which exists nowhere in the world.
The truth of this statement becomes clear as one studies the philosophy and
approaches that have contributed to the evolution of banking policy,
programmes and operations in India.

The banking system in India works under constraints that go with social control
and public ownership. The public ownership of banks has been achieved in
three stages: 1995, july 1969 and April, 1980. Not only the public sector banks
but also the private sector and foreign banks are required to meet the targets in
respect of sectoral deployment of credit, regional distribution of branches, and
regional credit deposit ratios. The operations of banks have been determined by
lead bank scheme, Differential Rate of interest scheme, Credit authorization

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scheme, inventory norms and lending systems prescribed by the authorities, the
formulation of credit plans, and service area approach.

Commercial Banks in India have a special role in India. The privileged role of
the banks is the result of their unique features. The liabilities of Bank are money
and therefore they are important part of the payment mechanism of any country.
For a financial system to mobilise and allocate savings of the country
successfully and productively and to facilitate day-to-day transactions there
must be a class of financial institutions that the public views are as safe and
convenient outlets for its savings. The structure and working of the banking
system are integral to a countrys financial stability and economic growth. It has
been rightly claimed that the diversification and development of Indian Economy are in
no small measure due to the active role banks have played financing economic activities of
different sectors.

Major objectives of commercial banks

Balancing profitability with liquidity management

As any other business concern, Banks also aim to make profit
but besides that they also need to maintain liquidity beacuse of
the nature of their liabilities.

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
Banks are said to create deposits or credit or money or it can be
said that every loan given by bank creates a deposit.
This has given rise to the important concept of money multiplier.

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 credit-

Bank 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) instalment 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

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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.

Credit (YOY Growth)

March 28 2008 March 27

2009

22.5 20.4
Public Sector Banks

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
Deposit Rates Lending Rates

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(BPLR)

125-250 125-225
Public Sector Banks

75-200 100-125
Private Sector Banks

100-200 0-100
Five Major Foreign Banks

Change (from
BPLR Oct 08 Mar 09 Apr 09
Oct to Apr)
13.75-
Public Sector Banks 11.50-14.00 11.50-13.50 125-225
14.75
13.75-
Private Sector Banks 12.75-16.75 12.50-16.75 100-125
17.75
Five Major Foreign14.25-
14.25-15.75 14.25-15.75 0-100
Banks 16.75

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

As on As on
Sector February 15, February
2008 27, 2009
% 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

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To sum up, the credit conditions seems to have worsened after January 2009.
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/corporates 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.

Recent policy developments Regarding Bank Credit

Bank lending was done for a long time by assessing the working capital needs
based on the concept of MPBF (maximum permissible bank finance). This
practice has been withdrawn with the effect from April 15 th 1997 in the sense
that the date, banks have been left free to choose their own method ( from the
method such as turnover , cash budget, present MPBF , or any other theory) of
assessing working Capital requirement of the borrowers.

The cash credit system has been the bane, yet it has exhibited a remarkable
strength of survival all these years. In spite of many efforts which were direct in
nature, only a slow progress has been made to reduce its importance and
increase bill financing. Therefore a concrete and direct policy step was taken on
April 21, 1995 which made it mandatory for banks, consortia, syndicates to

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restrict cash credit components to the prescribed limit , the balance being given
in the form of a short term loan, which would be a demand loan for a maximum
period of one year, or in case of seasonal industries , for six months. The interest
rates on the cash credit and loan components are to be fixed in accordance with
the prime lending rates fixed by the banks. This loan system was first made
applicable to the borrowers with an MPBF of Rs 20 crore and above; and in
their case , the ratio of cash credit (loan) to MPBF was progressively
reduced(increased) from 75 (25) per cent in April 1995 , to 60 (40) percent in
September 1995, 40 (60) per cent in April 1996 , and 20 (80) percent in April
1997. With the withdrawal of instructions about the MPBF in April 1997 , the
prescribed cash credit and loan components came to be related to the working
capital limit arrived in banks as per the method of their choice.

With effect from September 3, 1997, the RBI has permitted banks to raise their
existing exposure limit to a business group from 50% to 60%; the additional
10% limit being exclusively meant for investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993,
this limit was raised from Rs 10 crore to Rs 50 crore in case of a loan for a
single project by a single bank, and from Rs 150 crore to Rs 200 crore for a
single project by all the banks. The latter limit was subsequently raised to Rs
500 crore in the case of general projects and Rs 1000 crore for power projects.
From September3, 1997 these caps on term lending by banks were removed
subject to their compliance with the prudential exposure norms.

The banks can invest in and underwrite shares and debentures of corporate
bodies. At present, they can invest five percent of their incremental deposits in
equities of companies including other banks. Their investment in shares/ Bonds
of DFHI, Securities trading Corporation of India (STCI), all Indian financial

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institutions and bonds (debentures) and preference shares of the companies are
excluded from this ceiling of five per cent with affect from April 1997 . From
the same date banks could extend loans within this ceiling to the corporate
against shares held by them. They could also offer overdraft facilities to stock
brokers registered with help of SEBI against shares and debentures held by
them for nine months without change of ownership.

CHANGING PHASE OF BANK CREDIT-

A study group headed by Shri Prakash Tandon, the then Chairman of Punjab
National Bank, was constituted by the RBI in July 1974 with eminent
personalities drawn from leading banks, financial institutions and a wide cross-
section of the industry with a view to study the entire gamut of Bank's finance
for working capital and suggest ways for optimum utilization of Bank credit.
This was the first elaborate attempt by the central bank to organize the Bank
credit. Most banks in India even today continue to look at the needs of the
corporate in the light of methodology recommended by the Group. The report of
this group is widely known as Tandon Committee report.

The weaknesses in the Cash Credit system have persisted with the non-
implementation of one of the crucial recommendations of the Committee. In the
background of credit expansion seen in 1977-79 and its ill effects on the
economy, RBI appointed a working group to study and suggest-

i) Modifications in the Cash Credit system to make it amenable to better

management of funds by the Bankers and

ii) Alternate type of credit facilities to ensure better credit discipline and co
relation between credit and production. The Group was headed by Sh. K.B.
Chore of RBI and was named Chore Committee.

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Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted
the job of looking into the difficulties faced by Small Scale Industries due to the
sophisticated nature of Tandon & Chore Committee recommendations. His
report is applicable to units with credit requirements of less than Rs.50 lacs.

The recommendations made by Tandon Committee and reinforced by Chore

Committee were implemented in all Banks and Bank Credit became much
more organized. However, the recommendations were perceived as too strict by
the industry and there has been a continuous clamor from the Industry for
movement from mandatory control to a voluntary market related restraint. With
recent liberalization of economy and reforms in the financial sector, RBI has
given the freedom to the Banks to work out their own norms for inventory and
the earlier norms are now to be taken as guidelines and not a mandate. In fact,
beginning with the slack season credit policy of 1997-98, RBI has also given
full freedom to all the Banks to devise their own method of assessing the short
term credit requirements of their clients and grant lines of credit accordingly.
Most banks, however, continue to be guided by the principles enunciated in
Tandon Committee report.

Trends of Bank Credit in India

The face of Indian banking has changed radically in the last decade. A perusal
of the Basic Statistical Returns submitted by banks to the Reserve Bank of India
shows that between 1996 and 2005, personal loans have been the fastest
growing asset, increasing from 9.3 per cent of the total bank credit in 1996 to
22.2 per cent in 2005. Of course, this is partly due to the huge rise in housing
loans, which rose from 2.8 per cent of the bank credit to 11 per cent 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

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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.

Reasons for declining trend of bank credit

A major share of the economic growth has been led by the expansion of
the service sector
Capital intensity and investment intensity required for growth in the
current economic context may not be as high as it used to be in the past.
In manufacturing sector more efficient utilization of existing capacities
contributed to the sectoral growth rather rather than any large addition of
fresh capacities. The consequential increase in the demand for credit was
also subdued.
Greater and cheaper avenues for credit resulted in a bigger share of
disintermediation being resorted to by large borrowers.

The other trend has been the substantial drop in the share of rural credit, while
the share of metropolitan centres has increased. While bankers say that up
gradation of rural centres into semi-urban could be one reason (the share of
semi-urban centres has gone up), it is also true that the reforms have been
urban-centric and have tended to benefit the metros more. The number of rural
bank offices fell from 32,981 in March 1996 to 31,967 by March 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
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of which is maintained in Delhi. Clearly, the national capital has gained a lot
from liberalisation.

Trends for the year 2008-09

Theaggregatedepositsofscheduledcommercialbankshaveexpandedduring
200809atasomewhatslowerrate(19.8%)thanin200708(22.4%).Within
aggregate deposits demand deposits have shown anabsolute fall (Rs 4,179
crore)incontrasttothesizeableincrease(Rs94,579croreorby22%)in2007
08,.Ontheotherhand,timedepositshaveshownanacceleratedincreaseof
22.6%asagainst21.8%inthepreviousyear.
Intheinvestment portfolioof banks, theexpansionduring 2008 09atRs
194,031crorehasbeenmuchlowerthantheexpansionofRs340,250croreas
increaseinnetbankcredittogovernmentundermonetarydataforthesame
period.ThishashappenedbecausethelatterhasasizeableamountofRBIcredit
togovernmentfollowingtheincreasedopenmarketoperations.Finally,there
has occurred considerable slowdown in bank credit expansion. Because of
relativelyhigherprocurementoffoodgrains,foodcredithasexpandedbyRs
1,812croreduring200809asagainstanabsolutefallofRs2,121crorein
200708.NonfoodcreditgrowthatRs406,287hasbeenslowerthaninthe
previousyearatRs432,846.
Procedure for providing Bank Credit-
Banks 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:

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Credit
Appraisal

Sanctions

Monitoring &
Asset recovery
Management

Source- Self constructed

From the above chart we can see that Credit Appraisal is the core and the basic
function of a bank before providing loan to any person/company, etc. It is the
most important aspect of the lending procedure and therefore it is discussed in
detail as below.

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 specialised institution set up for this purpose.

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Wherever financing of infrastructure project is taken up under a

consortium / syndication arrangement banks exposure shall not exceed
25%
Bank may also take up financing infrastructure project independently /
exclusively in respect of borrowers /promoters of repute with excellent
past record in project implementation.
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 short-sighted 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.

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CHAPTER3

Indian Banking Sector & Its Major Challenges

It is well recognised by the world that India is one of the fastest growing
economies in the world. Evidence from across the world suggests that a sound
and evolved banking system is required for sustained economic development.
The last decade has seen many positive developments in the Indian banking
sector. The policy makers, which comprise the Reserve Bank of India (RBI),
Ministry of Finance and related government and financial sector regulatory
entities, have made several notable efforts to improve regulation in the sector.
The sector now compares favourably with banking sectors in the region on
metrics like growth, profitability and non-performing assets (NPAs). A few
banks have established an outstanding track record of innovation, growth and
value creation. This is reflected in their market valuation. However, improved
regulations, innovation, growth and value creation in the sector remain limited
to a small part of it. The cost of banking intermediation in India is higher and

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bank penetration is far lower than in other markets. Indias banking industry
must strengthen itself significantly if it has to support the modern and vibrant
economy which India aspires to be. While the onus for this change lies mainly
with bank managements, an enabling policy and regulatory framework will also
be critical to their success.
The failure to respond to changing market realities has stunted the
development of the financial sector in many developing countries. A weak
banking structure has been unable to fuel continued growth, which has harmed
the long-term health of their economies. In this white paper, we emphasise the
need to act both decisively and quickly to build an enabling, rather than a
limiting, banking sector in India.
Indian banks have compared favourably on growth, asset quality and
profitability with other regional banks over the last few years. The banking
index has grown at a compounded annual rate of over 51 per cent since April
2001 as compared to a 27 per cent growth in the market index for the same
period. Policy makers have made some notable changes in policy and regulation
to help strengthen the sector. These changes include strengthening prudential
norms, enhancing the payments system and integrating regulations between
commercial and co-operative banks. However, the cost of intermediation
remains high and bank penetration is limited to only a few customer segments
and geographies. While bank lending has been a significant driver of GDP
growth and employment, periodic instances of the failure of some weak banks
have often threatened the stability of the system. Structural weaknesses such as
a fragmented industry structure, restrictions on capital availability and
deployment, lack of institutional support infrastructure, restrictive labour laws,
weak corporate governance and ineffective regulations beyond Scheduled
Commercial Banks (SCBs), unless addressed, could seriously weaken the health
of the sector. Further, the inability of bank managements (with some notable
exceptions) to improve capital allocation, increase the productivity of their

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service platforms and improve the performance ethic in their organisations

could seriously affect future performance. India has a better banking system in
place Vis a Vis other developing countries, but there are several issues that need
to be ironed out. Major challenges of Indian banking sector are mentioned
below.

Interest rate risk

Interest rate risk can be defined as exposure of bank's net interest income to
adverse movements in interest rates. A bank's balance sheet consists mainly of
rupee assets and liabilities. Any movement in domestic interest rate is the main
source of interest rate risk.

Over the last few years the treasury departments of banks have been responsible
for a substantial part of profits made by banks. Between July 1997 and Oct
2003, as interest rates fell, the yield on 10-year government bonds (a barometer
for domestic interest rates) fell, from 13 per cent to 4.9 per cent. With yields
falling the banks made huge profits on their bond portfolios. Now as yields go
up (with the rise in inflation, bond yields go up and bond prices fall as the debt
market starts factoring a possible interest rate hike), the banks will have to set
aside funds to mark to market their investment. This will make it difficult to
show huge profits from treasury operations. This concern becomes much
stronger because a substantial percentage of bank deposits remain invested in
government bonds. Banking in the recent years had been reduced to a trading
operation in government securities. Recent months have shown a rise in the
bond yields has led to the profit from treasury operations falling. The latest
quarterly reports of banks clearly show several banks making losses on their
treasury operations. If the rise in yields continues the banks might end up
posting huge losses on their trading books. Given these facts, banks will have to
look at alternative sources of investment.

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Interest rates and non-performing assets

The best indicator of the health of the banking industry in a country is its level
of NPAs. Given this fact, Indian banks seem to be better placed than they were
in the past. A few banks have even managed to reduce their net NPAs to less
than one percent (before the merger of Global Trust Bank into Oriental Bank of
Commerce OBC was a zero NPA bank). But as the bond yields start to rise the
chances are the net NPAs will also start to go up. This will happen because the
banks have been making huge provisions against the money they made on their
bond portfolios in a scenario where bond yields were falling.

Reduced NPAs generally gives the impression that banks have strengthened
their credit appraisal processes over the years. This does not seem to be the
case. With increasing bond yields, treasury income will come down and if the
banks wish to make large provisions, the money will have to come from their
interest income, and this in turn, shall bring down the profitability of banks.

Competition in retail banking

The entry of new generation private sector banks has changed the entire
scenario. Earlier the household savings went into banks and the banks then lent
out money to corporate. Now they need to sell banking. The retail segment,
which was earlier ignored, is now the most important of the lot, with the banks
jumping over one another to give out loans. The consumer has never been so
lucky with so many banks offering so many products to choose from. With
supply far exceeding demand it has been a race to the bottom, with the banks
undercutting one another. A lot of foreign banks have already burnt their fingers
in the retail game and have now decided to get out of a few retail segments
completely.The nimble footed new generation private sector banks have taken a
lead on this front and the public sector banks are trying to play catch up. The

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PSBs have been losing business to the private sector banks in this segment.
PSBs need to figure out the means to generate profitable business from this
segment in the days to come.

The urge to merge

In the recent past there has been a lot of talk about Indian Banks
lacking in scale and size. The State Bank of India is the only bank
from India to make it to the list of Top 100 banks, globally. Most of
the PSBs are either looking to pick up a smaller bank or waiting to be
picked up by a larger bank. The central government also seems to be
game about the issue and is seen to be encouraging PSBs to merge or
acquire other banks. Global evidence seems to suggest that even
though there is great enthusiasm when companies merge or get
acquired, majority of the mergers/acquisitions do not really work. So
in the zeal to merge with or acquire another bank the PSBs should not
let their common sense take a back seat. Before a merger is carried
out cultural issues should be looked into. A bank based primarily out
of North India might want to acquire a bank based primarily out of
South India to increase its geographical presence but their cultures
might be very different. So the integration process might become very
difficult. Technological compatibility is another issue that needs to be
looked into in details before any merger or acquisition is carried out.

Impact of BASEL-II norms

Banking is a commodity business. The margins on the products

that banks offer to its customers are extremely thin vis a vis

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other businesses. As a result, for banks to earn an adequate

return of equity and compete for capital along with other
industries, they need to be highly leveraged. The primary
function of the bank's capital is to absorb any losses a bank
suffers (which can be written off against bank's capital).Norms
set in the Swiss town of Basel determine the ground rules for
the way banks around the world account for loans they give
out. These rules were formulated by the Bank for International
Settlements in 1988. Essentially, these rules tell the banks how
much capital the banks should have to cover up for the risk
that their loans might go bad. The rules set in 1988 led the
banks to differentiate among the customers it lent out money
to. Different weightage was given to various forms of assets,
with zero percentage weightings being given to cash, deposits
with the central bank/govt. etc, and 100 per cent weighting to
claims on private sector, fixed assets, real estate etc. The
summation of these assets gave us the risk-weighted assets.
Against these risk weighted assets the banks had to maintain a
(Tier I + Tier II) capital of 9 per cent i.e. every Rs100 of risk
assets had to be backed by Rs 9 of Tier I + Tier II capital. To put
it simply the banks had to maintain a capital adequacy ratio of
9 percent. The problem with these rules is that they do not
distinguish within a category i.e. all lending to private sector is
assigned a 100 per cent risk weighting, be it a company with
the best credit rating or company which is in the doldrums and
has a very low credit rating. This is not an efficient use of
capital. The company with the best credit rating is more likely
to repay the loan vis a vis the company with a low credit rating.
So the bank should be setting aside a far lesser amount of
capital against the risk of a company with the best credit rating
defaulting vis a vis the company with a low credit rating. With
the BASEL-II norms the bank can decide on the amount of
capital to set aside depending on the credit rating of the
company. Credit risk is not the only type of risk that banks face.
These days the operational risks that banks face are huge. The
various risks that come under operational risk are competition
risk, technology risk, casualty risk, crime risk etc. The original

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BASEL rules did not take into account the operational risks. As
per the BASEL-II norms, banks will have to set aside 15 per cent
of net income to protect themselves against operational risks.

Over the last few years, the falling interest rates, gave banks very little incentive
to lend to projects, as the return did not compensate them for the risk involved.
This led to the banks getting into the retail segment big time. It also led to a lot
of banks playing it safe and putting in most of the deposits they collected into
government bonds. Now with the bond party over and the bond yields starting
to go up, the banks will have to concentrate on their core function of lending.
The banking sector in India needs to tackle these challenges successfully to
keep growing and strengthen the Indian financial system.

Furthermore, the interference of the central government with

the functioning of PSBs should stop. A fresh autonomy package for public
sector banks is in offing. The package seeks to provide a high degree of
freedom to PSBs on operational matters. This seems to be the right way to go
for PSBs. The growth of the banking sector will be one of the most important
inputs that shall go into making sure that India progresses and becomes a global
economic super power.

ICICI BANK

ICICI Bank (Industrial Credit and Investment Corporation of India) is

an Indian multinational banking and financial services company headquartered
in Mumabi, Maharashtra , India, with its registered office in Vadodara. In 2014,
it was the second largest bank in India in terms of assets and third in term
of market capitalisation. It offers a wide range of banking products and financial
services for corporate and retail customers through a variety of delivery
channels and specialised subsidiaries in the areas of investment
banking, life, non-life insurance, venture capital and asset management. The

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bank has a network of 4,450 branches and 13,995 ATMs in India, and has a
presence in 19 countries including India.

ICICI Bank is one of the Big Four banks of India, along with State Bank of
India, Bank of Baroda and Punjab National Bank. The bank has subsidiaries in
the United Kingdom and Canada; branches in United States, Singapore, Bahrain,
Hong Kong, Sri Lanka, Qatar, Oman, Dubai International Finance Centre,
China and South Africa; and representative offices in United Arab Emirates,
Bangladesh, Malaysia and Indonesia. The company's UK subsidiary has also
established branches in Belgium and Germany.

HISTORY
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian
financial institution, and was its wholly-owned subsidiary. ICICI's shareholding
in ICICI Bank was reduced to 46% through a public offering of shares in India
in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in
fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock
amalgamation in fiscal 2001, and secondary market sales by ICICI to
institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955
at the initiative of the World Bank, the Government of India and representatives
of Indian industry. The principal objective was to create a development financial
institution for providing medium-term and long-term project financing to Indian
businesses.

In the 1990s, ICICI transformed its business from a development financial

institution offering only project finance to a diversified financial services group
offering a wide variety of products and services, both directly and through a
number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become
the first Indian company and the first bank or financial institution from non-
Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context

of the emerging competitive scenario in the Indian banking industry, and the
move towards universal banking, the managements of ICICI and ICICI Bank

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formed the view that the merger of ICICI with ICICI Bank would be the optimal
strategic alternative for both entities, and would create the optimal legal
structure for the ICICI group's universal banking strategy. The merger would
enhance value for ICICI shareholders through the merged entity's access to low-
cost deposits, greater opportunities for earning fee-based income and the ability
to participate in the payments system and provide transaction-banking services.
The merger would enhance value for ICICI Bank shareholders through a large
capital base and scale of operations, seamless access to ICICI's strong corporate
relationships built up over five decades, entry into new business segments,
higher market share in various business segments, particularly fee-based
services, and access to the vast talent pool of ICICI and its subsidiaries.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the
merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI
Personal Financial Services Limited and ICICI Capital Services Limited, with
ICICI Bank. The merger was approved by shareholders of ICICI and ICICI
Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March
2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of
India in April 2002. Consequent to the merger, the ICICI group's financing and
banking operations, both wholesale and retail, have been integrated in a single
entity.

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Mission and Vision

VISION

To be the leading provider of financial services in India and a major

global bank

MISSION

We will leverage our people, technology, speed and financial capital to:

Be the banker of first choice for our customers by delivering high

quality, world-class products and services.

Expand the frontiers of our business globally.

Play a proactive role in the full realisation of Indias potential.

Maintain a healthy financial profile and diversify our earnings across

businesses and geographies.

Maintain high standards of governance and ethics.

Contribute positively to the various countries and markets in which

we operate.

Create value for our stakeholders.

Products and Services

Corporate banking

Personal banking

Industrial finance

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Agriculture finance

Financing of trade

International banking

Home loan

Auto loan

ATM/Debit card

Deposit interest rate

Credit interest rate

Other services: lockers facility, internet banking, EFT & Clearing

services, Manage account, Fund transfer, etc.

Award & Achievements 2016

ICICI Bank has won the Best Private Sector Bank award under the Global
Businesses category at Dun & Bradstreet Banking Awards 2016.

ICICI Bank has won 11 awards at the 17th National Awards for Excellence in
Energy Management organized by the Confederation of Indian Industries (CII).

ICICI Bank has won bronze in the Banking Services category at the Golden
Cart Summit and Awards 2016.

ICICI Bank Tower- Gachibowli, Hyderabad and ICICI Bank Branch-

Madhapur, Hyderabad, have been awarded 4 star and 3 star ratings respectively
in the Service/ Office/ Software category at the CII (South Region) Leadership
and Excellence Awards in Environment, Health and Safety 2016.

ICICI Bank has won Gold at the Energy and Environment Foundation (EEF)
Global Environment Award 2016 during the World Renewable Energy
Technology Congress & Expo-2016.

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ICICI Bank has won Gold in Not-for-Profit (Interactive Campaign) and Silver
in Creative Affectiveness, Social Media, both for the #GiftALivelihood
campaign at 2016 DMA Asia ECHO Awards India edition.

ICICI Bank has won Gold for #GiftALivelihood in the Social Cause
Supported by a Corporate/Brand category at Campaign India Digital Crest
Awards (CIDCA), 2016.

ICICI Bank was the exclusive recipient of awards in the categories of Website
of the Year India and Core Banking System Initiative of the Year India and
received a silver in the category of Branch Innovation of the Year in the Asian
Banking and Finance (ABF) Retail Banking Awards 2016.

ICICI Bank has been declared winner in the category of Enterprise Mobility at
Intelligent Enterprise Awards 2016, organised by the Indian Express Group.

ICICI Bank has won Gold awards in the Bank and Credit card issuing Bank
segments under Finance category in the Readers Digest Trusted Brand 2016
Survey.

ICICI Bank has won second prize for the ICICI Bank BKC Tower in the
Service category at 12th - CII (Western Region) Safety, Health and
Environment Excellence Award 2015-16.

ICICI Bank has won two awards in the categories of Best Core Banking
Project- Single Country and Best Retail Payments Project at The Asian
Banker Technology Innovation Awards 2016.

ICICI Bank has been declared as winner in the category of Private - Service
Sector (Large)' at the 13th National Awards for Excellence in Cost
Management-2015.

ICICI Bank Canada won the 2016 Employment Equity Achievement Award for
Improved Representation by the Government of Canadas Ministry of
Employment, Workforce Development and Labour.

ICICI Bank won the Golden Peacock Innovative Product/Service Award for the
year 2016 under the category of Financial Sector (Banking). The Bank
received the award for the project on One kWp solar retrofit system for
ensuring un-interrupted power supply to gramin branches.

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ICICI Bank has been declared national runner-up in Commercial Vehicle

Financers category at the 5th edition of Mahindra Transport Excellence
Awards, organised by Mahindra & Mahindra Limited.

ICICI Bank was ranked first in the Best Bank- Innovation category in the
Business Today-KPMG survey on India's best banks. The Bank was ranked
second in the category of Bank of the Year.

ICICI Bank was ranked first in The Brand Trust Report, India Study 2016
done by Trust Research Advisory (TRA) under the BFSI category. The Bank
was also ranked 10th among the overall 1,000 brands as per the report.

ICICI Bank has won two awards in the categories of Best Retail Bank in India
and Best Employee Engagement Initiative in Asia Pacific, Middle-East and
Africa at the Asian Banker Excellence in Retail Financial Services International
Awards 2016. The award programme is the most prestigious of its kind in the
industry. More than 250 banks across 42 countries were evaluated for the
awards this year.

ICICI Bank was ranked second in Total Income Listing and ranked seventh in
Total Business Listing in the list of India's Leading BFSI Companies 2016 by
Dun & Bradstreet.

ICICI Bank received two awards at the IBA Banking Technology Awards
2016. In the large banks segment, the Bank was declared winner in the
category of 'The Best Use of Technology to Enhance Customer Experience' and
runner up in the category of 'The Best Use of Digital and Channels Technology'.

ICICI Bank won the bronze under the Financial Services category for
advertising effectiveness on the Expressions Debit Card campaign at 2015 Effie
Awards.

ICICI Bank won the 'Global Safety Awards 2016' organised by The Energy and
Environment Foundation. This award is sponsored by Ministry of Power,
Ministry of Petroleum & Natural Gas and Ministry of Coal, Government of
India.

ICICI Banks corporate office, Chandivali, Mumbai won the first prize, and
CIBD office, Vashi, won the third prize under Commercial Building category
at the 10th State Level Awards for Excellence in Energy Conservation and
Management, organised by Maharashtra Energy Development Agency.

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ICICI Bank was ranked first in India at the Euromoney Private Banking &
Wealth Management Survey, in four categories. They were: Net-worth-specific
services, Philanthropic Advice, SRI/Social Impact Investing and Innovative
Technology - Client Experience. The Bank was ranked sixth in Asia, in the
category of Innovative Technology - Client Experience.

ICICI Bank was declared runner up in the categories of IMPS (Immediate

Payment Service), CTS (Cheque Truncation System) and NFS (National
Financial Switch) at the National Payments Excellence Awards 2015 organised
by the NPCI (National Payments Corporation of India). The Bank was also
felicitated with a special award for issuing large number of RuPay Platinum
cards.

Organizational structure of ICICI Bank

Head Office
7, Bhikhaji Cama Place, New Delhi-110066

Circle Office

Branches

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Hierarchy

Chief Executive Officer (CEO) & Managing

Director (MD)

Executive Director

General Manager (GM)

Deputy GM

Assistant GM

Chief Manager

Senior Manager

Manager

Senior Officers

Officers

Subordinate clerks

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Board of Directors
Mr M.K.Sharma :- Chairman
Mr. Dileep Choksi :- Board Member
Mr. Homi R. Khusrokhan :- Board Member
Mr. M.S. Ramachandran :- Board Member
Dr. Tushaar Shah :- Board Member
Mr. V. K. Sharma :- Board Member
Mr. V. Sridar :- Board Member
Mr. Alok Tandon :- Board Member
Mrs. Chanda Kochhar :- CEO & MD
Mr. N.S.Kannan :- Executive Officer
Mr. Rajiv Sabharawal :- Executive Officer
Mr. Vijay Chandok :- Executive Officer
Mrs. Vishakha Mulye :- Executive Officer

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Review of Literature

Literature review provides available research with respect to the selected topic
of the project or the research findings by an author which has been done with
respect to the research topic. This chapter provides the overall view of the
available literature with respect to the topic of the project. The review of the
related research works are described as under:-

1. A research work on the topic On the appraisal on consumer credit banking

products with the asset quality frame: A multiple criteria application. done by
Panagiotis Xidonas, Alexandros Flamos, Sortirios Koussouris, Dimitrious
Askouins & Ioannis Psarras from National Technical University of Athens in
2007 says that Asset quality refers to the likelihood that the bank's earning
assets will continue to perform and requires both a qualitative and quantitative
assessment. Decision problems like the "internal appraisal of banking products",
are problems with strong multiple-criteria character and it seems that the
methodological framework of Multiple Criteria Decision Making could provide
a reliable solution. In this paper, the Asset Quality banking indicators are the, so
called, "criteria", the value of these indicators are the, so called, "scores" in each
criterion and the P.R.O.METH.E.E. [Preference Ranking Organization Method
of Enrichment Evaluations, Brans & Vincke (1985)] Multiple Criteria method is
applied, towards modelling banking products appraisal problems. A Multiple
Criteria process, strictly mathematically defined, integrates the behaviour of
each indicator-criterion and utilizes each score in order to rank the so called
"alternatives", i.e. categories of banking products.

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2. The research Paper on Evaluation of decision support systems for credit

management decisions by S. Kanungo, S.Sharma, P.K. Jain from Department
of studies, IIT Delhi have
conducted a study to evaluate the efficiency of decision support system (DSS)
for credit management. This study formed a larger initiative to access the
effectiveness of the I.T based credit management process at SBI. Such a study
was necessitated since credit appraisal has become an integral sub-function of
the Indian banks in view of growing incidence of non-performing assets. The
DSS they have assessed was a credit appraisal system developed by Quuattro
pro at SBI. This system helps in analysis of balance sheets, Calculation of
financial ratios, cash flow analysis, future projections, sensitivity analysis and
risk evaluation as per SBI norms. They have also used a strong Quassi
experimental design called Solomons four group design for the assessment. In
the experiment the managers of SBI who attended the training programme were
the subjects the experiment consisted of the measurements that were taken as
pre and post tests. An experimental intervention was applied between the pre-
tests and the pro-tests. The intervention or stimulus consisted of DSS training
and use. There were four groups in the experiment. The stimulus remained
constant as the they took care to ensure that the course content as well as the
instructors remained the same during the course of the experiment. Two were
experimental groups and two were control groups. All four groups underwent
training in credit management between the pre and the post tests. Results from
research shows that while the DSS is effective, improvement needs to be done
in the methodology to assess such improvements. Moreover such assessment
frameworks while being adequate from a DSS-centric viewpoint do not respond
to the assessment of DSS in an organizational setting . In the concluding section
they have discussed how this evaluative framework can be strengthened to
initiate an activity that will allow the long term and possibly the only
meaningful evaluation framework for such a system.

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3. The research paper on the topic Towards an appraisal of the FMHA farm
credit program: A case study of the efficiency of borrower by S. Mehdian,
Wm. McD. Herr, Phil Eberle, and Richard Grabowski have studied that the a
production frontier methodology is used to measure the overall efficiency of a
sample of farmers home administration(FMHA) compared to non participants.
The study did not find evidence that the efficiency FMHA farms improved
between a time period Results indicated that overall efficiency of FMHA
borrowers is associated with selected financial characteristics of the farms. A
review of the literature shows that agricultural finance specialists have not been
successful in evaluating whether FMHA pro- grams improve the efficiency and
income of probability of success. Liberal loan policies
Eligible borrowers. Inadequate evaluation of the FMHA program occurs partly
because of because the difficulty of adequately deter-mining the impacts of
changes in the econ- borrowers in a more normal period of the loan. This study
addressed these difficulties by utilizing a nonparametric production frontier
technique to measure overall efficiency and a matched pair statistical procedure
to measure how efficiency of farms receiving FMHA credit changed relative to
a Non-FMHA farmers.
4. The book named Financial Analysis for Bank Lending in Liberalised
Econ

APPRAISAL TECHNIQUES FOR RETAIL LOANS

I EDUCATION LOANS

Till some years back higher education and quality education was not affordable to some
illustrious students because of the financial constraints. There was no any alternative but to
jump in the job market prematurely. And this led to untimely end of budding talents and their
forceful transformation into to the mediocrity. Scholarships were there, but those were so less
in numbers that only luckier few could avail them. But now the scene has changed

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drastically. The boom in the banking sector has led to release of large amount of funds for
education loans
Student loans in India (popularly known as Education loans) have become a popular
method of funding higher education in India with the cost of educational degrees going
higher. The spread of self-financing institutions(which has less to no funding from the
government) for higher education in fields of engineering, medical and management which
has higher fees than their government aided counterparts have encouraged the trend in India.
Most large public sector and private sector banks offer educational loans.

Under section 80(e) of the Indian Income tax act, a person can exempt the amount paid
against the interest of the education loan - either for self or for his/her spouse or children - for
eight years from the year (s)he starts to repay the loan or for the duration the loan is in effect,
whichever is lesser.

Education loan is becoming popular day by day because of the rising fee structure of higher
education. It came into existence in 1995 started first by SBI bank and after that many banks
started offering study loan.

The education loan provided by Punjab National bank is known as Vidyalakshyapurti

scheme. The details regarding its eligibility, processing, documentation etc. are given as
follows:-

Concept VIDYALAKSHYAPURTI Scheme is the main scheme and its

variant PNB Sarvotam Shiksha scheme stands merged with the main
scheme with effect from 20.12.2008
Courses Studies in India
eligible School level including. +2, Graduation, Post graduation, Professional
courses, Computer courses and Evening courses, other courses leading
to diploma /degree approved by UGC, Govt, AICTE, AIBMS, ICMR
etc. and Advance diploma in Banking Tech. It includes professional &
commercial & pilot training courses in India and abroad. For study in
India. Institutes approved by DGCA are included.

Studies Abroad
Graduation, PG and Courses offered by CIMA London , CPA in USA
Eligibility Indian National

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Secured Admission
Secured pass marks in qualifying exam. Branches need not go into
technicalities of admission process (selection through management
quota etc.) and may consider loan based on admission advice.
( RBD Cir. No. 60/08 dt. 20.12.2008)

More than one In case of more than one loan in a family, the family as a unit is to be
loan in a family taken into account for considering the loan and security taken in
relation to total quantum of loan subject to margin and repaying
capacity of the parents.
Top up Loans Top up loans may be sanctioned to students for pursuing further
studies within overall eligibility limits with appropriate
reschedulement of existing loans and required permission by the CH
Age of student There is no restriction with regard to age of student for being eligible
for the loan.
Income No Income criteria are prescribed for the parents. However amount of
Criteria loan be decided by judging Income of the parents.

Amount of loan Rs. 10.00 lac in India and 20.00 lac for abroad. CH can exercise
higher powers.
Priority Sector Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.

Capital Risk Weight as per BASEL-I 100%

Requirement Risk Weight as per BASEL-II 75%

Margin NIL Up to Rs. 4.00 lac

5% Above Rs. 4.00 lac in India
15% Above Rs. 4.00 lac abroad
(Scholarship/assistance may be included in the margin)
Security NIL Up to Rs. 4.00 lac
3rd party guarantee for loans above 4.00 lac upto Rs. 7.5 lac
(Exemption from taking guarantee for loan up to 7.50 lakh for
students of IIT, IIM, XLRI etc.
EM of IP or other Coll. Security for loans above 7.50 lac (should be
interpreted as loan amount of Rs. 7.51 lac and above in terms
Hypothecation of assets if created out of loan amount.
Co-obligation of students parents as well as assignment of future
income of student in loan above Rs. 7.5 lac. For married persons, co-
obligator can be spouse or parents or parents-in-law. Grand parents
can also become co-obligants.
Security for Lien on Terminal dues
staff members Extension of EM of IP
Fresh Mortgage if there is no HL
Co-obligation of employee
Penal Interest Up to 25000/- ----NIL , Above 25000/- @ 2% on OVERDUE
AMOUNT

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Upfront fee NIL

0.50% (Maximum 5000/-) for studies abroad which is eligible for
refund on availment of loan.
Documentation Upto 4.00 lac - Rs. 270/- plus service tax
Charges Above 4.00 lac Rs. 450/- plus service tax
Repayment 5 to 7 years with moratorium period equal to Course period + 1 year
or 6 months after getting job whichever is earlier. BM is empowered
to permit extension in moratorium period up to 2 years as against
present provision of max. 1 year in deserving cases under reporting to
circle head.
Calculation of Simple interest is to be charged during moratorium period and kept in
interest a separate account. The accrued interest during repayment holiday will
be added to Principal for fixing of EMI.
Interest 1% interest concession is allowed if it is serviced during holiday
concession period. The concession will be given at start of repayment and EMI
will be fixed accordingly.
Rebate of 0.5% is allowed to students of IITs, IIMs etc.

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Constitutes of Tuition fees, Hostel charges, Exam fees, Library/Lab charges, Books,
loan Equipment, Instruments, Uniform, Building fund, Refundable deposit,
Travel expenses & Computers. (Advances for Computers are allowed in
Computer/Management courses only.)
Fees re- Within 6 months. Circle Head can allow beyond a period of 6 months
imbursement also on merits.(RBD Cir. No. 12/10 Dt. 16/02/2010)
Documents Documents will be executed both by student and the parent/guardian.

1 Letter of admission and proof of last qualifying exam.

2 Loan application
3 Agreement on PNB 1116 if student is minor.
4 Agreement on PNB 1117 if student is major.
5 Letter of guarantee if loan is above Rs. 4.00 lac.
6 EM of IP if loan amount is above Rs. 7.5 lac
Post sanction Follow up with the college/university for getting progress report at
Follow up regular intervals.
Life Insurance In terms of guidelines contained in RBD-A cir no. 16/08 dt. 26.3.08,
by Kotak Insurance policy can be obtained to meet the exigencies in case of death
Mahindra of student borrower between age group of 18-33 years. The coverage is
between 20000-15 lac. Single premium will be paid. It will vary
according to age and total insurance Tenor. The scheme is valid for one
year.
Relaxations for It has been decided to permit the following relaxations to the students
students of securing admission in IITs/IIMs/MDI Gurgaon/XLRI Jamshedpur and
IIT,IIM, MDI, ISB Hyderabad:
XLRI, ISB
Exemption from making parent/guardian as co-borrower.
Exemption from taking guarantee for loans up to 7.50 l
Other CR of the borrower is not required. Brief CR of the guarantor to be
provisions prepared.
No due Certificate is not to be insisted upon. Application will be
rejected by next higher authority.
2nd time loan can be considered by the CH within limits.
Capability Certificated may be issued for studies abroad.
Education loan to the institutions previously under Sarvotam Shiksha
Scheme can be sanctioned by the branch (other than place of
residence of parents) convenient to the borrower depending upon
genuineness, accessibility and aspect of recovery.
On-line applications are being accepted for grant of education loan.
Loan applications are to be disposed of within 15 days under
branch/hub sanction and 21 days under CH and above.
CH has full powers to relax eligibility, margin and security norms.
Parents, grandparents, spouse, parents-in-law can be co-obligants.
Passport and Visa is required for study abroad.

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It has been decided to curtail the period of disposal of education loan

Disposal of applications to maximum 1 week except cases of CH and above level
loan where the outer limit of disposal will be 2 weeks from the date of receipt
applications of complete application.

II 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.

Vehicle loan provided by Punjab National Bank are under two categories know as PNB
SARTHI and CAR Loan & details about its processing, eligibility, margin etc are discussed
below:-

PNB SARATHI

Eligibility Individuals with Income proof

Students above 18 years with parents as co-borrowers

Business concerns

Individuals without income proof but residing at the given address

for the last at least 3 years.
Individuals with good repayment track without default.
Purpose & Purchase of Scooter/Motor Cycle/Moped
Extent Maximum Rupees. 100000/-.
Margin 5% where salary is disbursed through branch or check-off facility
is available.
25% for students where parents are co-borrowers.
30% for business or where there is no income proof.
10% for others.
Income criteria 10000/- pm. Is the minimum criteria.
Income of parents be considered in case of students.
Income of spouse can be added.

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Switch over to On flat fee of 2%

new scheme
Guarantee Generally it is not required. In cases where there is no Income
proof, Guarantee of some family member or 3 rd. party
In cases where income of spouse is to be added, Guarantee of
spouse can be taken.
Insurance Comprehensive Insurance with bank clause and policy to remain with
the bank.
Security PNB 551 is required for the Ist time. In case account is regular,
Inspection PNB 551 is not required thereafter.
In case the account is irregular, Qtrly. Inspection is must.
Upfront fee Rs 200/- + Service Tax For students Nil

Documentation Rs. 270/- plus service tax

Charges
Other Driving License is required.
Requirements Statement of account for the last 3 years is required.
Income Tax Proof
Salary certificate
Income of spouse can be considered if he/she is made guarantor.

CAR LOAN
Conveyance Loan (Public) for Car

Eligibility Individual & Business concerns, Professionals & Agriculturists with 6M tra

Purpose & Extent Car, Van & Jeep, Multi Utility New or Old (not older than
Vehicles/Sports Utility Vecles
Individuals 25 times of net month
more vehicles.
CH may relax the cri
capacity.
Income of spouse can
guarantor
Business Corporate and non-corporate No Ceiling. One or more
capacity will be considered
Agriculturists --do--
Margin General 20% - C
considered
Govt./PSU employees 15% (Rep
If net income is more than 6 lac Margin ca
Old Vehicles 30%
CH may reduce up to 10% in deserving cases.
Repayment Maximum 7 years without any Moratorium period

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Old Vehicles 5 years

Agriculturists 14 H/years as per crop pattern
CH and above empowered to relax repayment by 12M
Maximum age for EMI 65 years relaxable up to 70 years.
Carry home pay should not be more than 50% of gross salary
Advance cheques equal to no. of installments be obtained.
Rate of Interest The rate is on fixed option with reset clause of 1 year. Rate of interest is lin
is charged if repayment period is 3 years and above.
Upfront fee 1% of loan subject to maximum 6000/- exclusive of service tax.

Documentation charges Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac + ST
Rs. 450/- (Tie up arrangement Rs.1700/- ) Above Rs. 2.00 lac + ST
Security Hypothecation of the vehicle
RC in joint name of borrower and bank
Bill of the vehicle will also be in the joint name.
Guarantee Spouse if employed or Suitable 3 rd party guarantee or Collateral Security
amount.
CH and above can waive the guarantee/collateral security.
Insurance Comprehensive Insurance with bank clause and policy to remain with the b

Security Inspection PNB 551 is required for the 1st. time. In case account is regular, PNB 55
In case the account is irregular, Qtrly. Inspection is must.
Other Provisions 15% depreciation on St. line method is to be applied in case of Old Car
Driving License is not at all required.
Statement of account for the last 6 M. is required.
Car loan finance to business concerns for personal use of executives s
may be sanctioned by officials under vested powers even in case whe
authorities in terms of RBD cir. No. 51 dt. 15/09/09.

III 5.8.3 HOUSING LOANS

IV 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

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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.

PNB-(Punjab National 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. PNB Housing
Finance covers 80% of the cost of your home or renovation / repairing of your home loan up
to Rs. 10 Lacs for buying land and up to Rs. 2 Lacs for furnishing can be availed from PNB
Home Loan.
The details of housing loan product of Punjab National Bank regarding its
purpose, eligibility criteria, assessment, processing, documentation, cut back, margin,
pre-sanction follow ups, etc. are as foll
1 HOUSING FINANCE (PUBLIC)
Eligibility Individual & Joint Owners

Purpose & Purchase of Plot Rs.20 lac. However, RM & above

Extent may consider Loan upto 50 lac.
Construction of House Need based
Semi -built House/flat from Small/Medium branch Rs. 10 lac
Pvt Builders Large branch Rs. 20 lac
ELB/VLBs Rs. 40 lac
CH (AGM) Rs. 100 lac
CH (DGM) Rs 100 lac
GM Rs.150 lac
Repair & Renovation Rs. 20 lac
Cost of furnishing Max. 10% of the loan upto maximum
of Rs. 2.00 lac
Pari pasu Charge CH powers up to 20 lac to Govt.
Employees
Freehold & The loan can be granted both for freehold and for leasehold
Lease hold property.
In case of Leasehold, loan can be granted on the basis of P/A from
original allottee where DDA/PUDA/HUDA permit conversion of
leasehold into freehold property.
Otherwise advance is not permitted against plots purchased on
Power of Attorney basis.
Capital Loan limit up to 30 lac Risk Weight is 50%
Requirement Loan limit above 30 lac Risk Weight is 75%
LTV Ratio more than 75% Risk Weight is 100%

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Margin Land/Plot 40%

Construction/repair/addition 25%
Rate of Interest Rate of Interest as per LA Circulars issued from time to time.
0.50 % extra will be charged on H/L for 3rd House.
The interest can be fixed or floating
Option can be changed from fixed to floating and vice versa with
flat charges of 2% fee on Balance outstanding
Fixed Interest rate be reviewed/reset after a block of 5 years in
respect of loans disbursed on or after 1.8.2006.

Concessional Bank has decided to extend concessions to Defense personnel who are
Rate of Interest raising Housing Loans under banks regular Housing Loan scheme for
for Defense public as under:
Employees
25 bps relaxation in interest rates
50 bps relaxation in processing fee
These relaxations are to be made applicable in all new cases where
defense personnel avail housing loan either in single name or along
with spouse.

(RBD Cir. No. 11/2010 dt. 16.2.2010)

Repayment Maximum 25 years including Moratorium period of 18 months

Installment can be fixed up to maximum age of 65 years. Hub
Incharge of Scale-IV and above besides Circle Head can relax the
age up to 70 years,
Repayment of loan for repair/renovation/addition/alteration
restricted to 10 years including moratorium period of 6M.
All deductions should not exceed 50% of Gross monthly income.
However where gross monthly salary is above 50000/-, the
deduction can be up to 60% and if gross monthly salary is above
100000/-, the deduction can be up to 70% with the permission of
CH. The income of earning spouse and children can be taken into
account.
The Income of spouse and earning children can be taken into
account provided they are made co-borrowers.
Father/mother can also be made co-borrowers in cases where
property is in the single name of his/her son and also clubbing of
their income is permitted for determining eligibility criteria.
Minimum 24 advance cheques should be obtained. As and when, 6
cheques remain, fresh lot be obtained. Out of 24, 23 cheques
should be of installments and 1 cheque should be of the amount
equal to the balance amount.
Graduated PNB offers benefit of graduated EMI. This means that the customer

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EMI has the option of choosing EMI that can increase or decrease during
repayment period rather than being given a fixed EMI over repayment
tenor.

Upfront fee 0.90 % of loan amount + service tax & education cess (10.30%) on
loans above 300 crore.
Processing fees @ 0.50% of loan amount (max. 20000) +service tax
for loans up to 300 crore.
Documentation Rs.1350 + service tax
charges

Security Equitable/Registered Mortgage of Immovable Property

Tripartite agreement be executed amongst Housing Board/Dev
Authority/Coop Society/Builder, the borrower and the bank where
mortgage cannot be created immediately. In such cases, 3rd party
guarantee is also to be obtained.
EM of other IP or pledge of NSC etc. up to 125% of loan amount if
property is being purchased from 1st P/A holder and where there is
delay in execution of Tripartite agreement or where the mortgage of
property is not possible being an ancestral property (without title
deeds) or Lal Dora Land.
Verification of security is required once in 2 years. In case of NPAs
accounts, security is to be verified on Half yearly basis.
Guarantee In general, no guarantee is to be asked for. But while preparing
RBL score sheet, if score is less than 50%, then 3 rd party guarantee
can be obtained to raise score of the applicant.

Insurance In case of building at Re-construction cost.

Priority Sector Repair & Renovation Rs.1.00 lac (Rural & Semi/Urban)
inclusion
Rs.2.00 lac (Urban)

Others Rs. 20.00 lac

Other features Loan can be sanctioned by the branch/hub near to the present place
of work/posting/residence of the borrower. However, if the property
is situated at other place, services of branch/hub located at that
center may be availed for verification of Security and
NEC/Valuation etc.
Loan can be granted even if property is in the name of wife/parents
provided that the owner is made co-borrower.
Loan can be granted for 2nd house in the same city.
Loan can be granted for purchase of house for rental purpose.

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For take over, permission of higher authority is not required

Important Loan cannot be granted
conditions
For construction in Un-authorized colonies
If property is to be used for commercial purpose
Without approved Map
( In Compliance of Delhi High Court Orders)

Pre-payment charges of 2% be recovered on account being

taken over by another bank. In case, the loan is pre-paid out of
own sources or the loan is taken over by another bank with in
30 days from date of circular by which either the interest is
raised or any important term or condition is changed, there will
be no pre-payment charges.
Flat pre-payment charges of 2% be recovered from borrowers
who pre-pay without construction on the plot before 5 years.
Powers of concessions in rate of interest/other charges stand
withdrawn vide RBD cir no. 52/07 dt. 13.11.07.
In case, the construction of house is not completed within 3 years or
in case the plot is sold, penal interest @2% over and above the
applicable rate be charged.

Expression of It is a letter issued by the bank/branch wherein the lender expresses

Interest intention to make advance to the intended borrower on the basis of
eligibility criteria subject to the fulfillment of terms and conditions.
Grih Raksha It is Mortgage Reducing Term Assurance Policy issued in Tie up
Kavach arrangement with TATA-AIG. There is one-time premium of 2.5%
(approx) and that amount can also be financed. The coverage of the
scheme is 1-20 years. The sum assured is between Rs.10000 to Rs. 1.00
crore. In case of death of the borrower, receipt from insurance company
can be utilized towards adjustment of loan amount as per amortization
table. Prior permission of TATA-AIG is required if amount is over Rs.
80.00 lac.
Iffco Tokyo The coverage for accidental death and permanent total disability (due to
general accident) along with mandatory insurance Fire Policy including
insurance co. earthquake is offered in tie up arrangement with Iffco Tokyo General
Insurance Co. Ltd. To all existing as well as new borrowers.
Earnest Money To meet the requirement of earnest money to apply for
Deposit plot/flat/house from State Housing Boards and Urban Development
Scheme authorities.
These authorities undertake to refund or issue allotment letter to the
bank subject to eligibility of the bank for proposed loan and future
requirement of Housing Loan.
Extent of loan is 90% of EMD or max. Rs 2.00 lac in the shape of
Demand Loan
ROI is BPLR 1.75%

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Repayment through Refund order/Housing Loan/Bullet Payment.

Guarantee clause deleted
OD Facility to OD facility can be allowed to existing Housing Loan borrowers there is
existing H/L no IR irregularity. Other features of the scheme are as under:
borrowers
Minimum 50000/- and Maximum Rs. 5.00 lac.
Additional limit and present o/s should not exceed 75% of
current market price of the house so as to maintain margin of
25%.
Upfront fees is NIL and documentation charges are Rs. 500/-.
Take home salary should not be less than 40% of gross salary.
Loaning powers are SB-Nil, MB- Rs.4.00 lac, LB, ELB & VLB
Rs. 5.00 lac.
ROI is equal to BPLR
After HL is repaid, OD can be continued/ renewed provided the
sanctioning authority is satisfied about repaying capacity of the
borrower and Value of security.
OD facility for personal use should not be sanctioned to the
borrowers, who have availed loan for plot , construction on
which is yet to be completed in terms of RBD cir. no. 43
dt.21/08/09
On review, it has been decided to do away with the condition of
minimum 2 year of repayment track record of the borrower for
considering OD facility up to 5 lac. However this is subject to
compliance of all other terms and conditions such as KYC norms,
CIBIL database, takeover guidelines, security norms, maintenance of
margin etc.

This facility is outside the purview of Hub and Spoke model in the
accounts of existing HL borrowers.
(RBD Cir. No. 64 dt. 19.12.2009)
PNB Flexible This is an attractive variant of Housing Loan Scheme offered by the
Housing Loan PNB for its customers. Under this scheme, OD facility is made
Scheme available to the HL borrower. He can deposit his savings and withdraw
the same as per his requirement. The features of the scheme are as
under:

Eligibility Age of the applicant must be less than 50.

Existing HL borrowers can also apply provided their
loan account is regular and no IR irregularity persists.
Purpose All purposes as per original scheme except Purchase of
Land / Plot.

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Extent Term Loan 80%

Overdraft 20%

After lapse of 3 years, enhancement in OD will be

allowed equal to reduction in Term Loan and
thereafter on yearly basis.
After lapse of 5 years, 20% increase in original
limit is allowed in the shape of TL/OD for personal
needs.
Market Value of Property should be sufficient to
cover the margin of 25%
After attaining age of 55 years, OD facility will be
reduced on monthly basis so that whole limit and
T/L are adjusted by the end of 65 years.
Maximum OD limit should not exceed 50% of
Total limit.
HL can be sanctioned by the branch/hub situated
near the workplace/posting/residence.
Security verification can be done by nearby branch.
Rate of Interest as given above in the table in
Housing Loan scheme (general)
For Overdraft portion, R/I is equal to BPLR

IV. 5.8.4 Personal Loan For Pensioner & Public

Two types of personal loans are being offered by PNB. Personal loan for pensioner is special
category of retail lending scheme being offered by Punjab National Bank to pensioner. The
main intension of this loan is to meet each and every personal needs including medical
expense of senior citizen. Details regarding the same are mentioned below.

Eligibility Pensioners drawing pension from the branch, Family Pensioners,

DPDO Pensioners, Ex-employees
Purpose & Personal needs
Extent
Up to 75 years of age: 1.50 lac (Minimum Rs. 25000/-)
Above 75 years of age: 0.70 lac (Minimum Rs. 25000/-)

Limit Equivalent to 18 months net pension or Rs. 150000 (for borrowers up

calculation to 75 years age) and 12 months net pension or Rs 70000 (for
borrowers above 75 years age) whichever is lower. For defense
retirees, the loan equivalent to 20 M net Pension can be granted. Take

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home Pension should not be less than 50% of monthly pension

Nature DL or TL or OD on monthly reducing DP

Margin NIL

Guarantee Personal guarantee of spouse eligible for family pension or any

other family member or 3rd party guarantee.

Upfront fee NIL

Documentation Rs. 270/- plus service tax

charges
Repayment 60 EMIs . 24 EMIs in case age is more than 75 years which can be
extended up to 48 months by the sanctioning authority.
Miscellaneous PPO be kept with the loan documents
Affidavit from the pensioner that present disbursing branch will
not be changed without banks consent.
The loan can be availed more than once only after adjustment of
earlier loan

PERSONAL LOANS FOR PUBLIC

Eligibility Only PNB Account holders are eligible. Minimum 6 months salary
should be routed in the account or 6 months satisfactory transaction
record for non salary saving accounts.

Permanent Defence, CRPF, BSF & ITBP Personnel (Not to

be granted to those who are due to retirement within next 24
M.
Confirmed permanent employees of Central/state
Govt./PSUs/Reputed Co./Schools/Institutions who fulfill any
of the following 2 conditions:
Route of salary through branch
Check-off facility
Professionally qualified practicing doctors viz. MBBS, BDS
and above having customer relationship with PNB at least for
6 months having annual income of Rs. 4.00 lac and above.
Doctors should be tax payers for 3 years and ITRs be kept on
record.
Check off It means that the employer undertakes to deduct monthly installment
Facility from the salary and remit the same towards adjustment of the loan till
its liquidation and also confirms attachment of terminal dues of the
borrower/employee.
Purpose & Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00 lac or 20
Extent times net salary whichever is lower depending upon the repaying
capacity & Rs. 5.00 lac for those salaried persons who have completed
3 years in the present organization and drawing net monthly salary not

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less than Rs. 30000/-.

Nature TL or OD
Sanction and All branches can generate leads for processing at Retail Hubs/CCPCs.
Disbursement However disbursement can be made only by branches having
recovery percentage of not less than 90% under Personal Loan
segment as at end of previous half year.
Minimum net Metro Rs. 15000/- p.m.
monthly Urban Rs. 12500/- p.m.
income SU & Rural areas Rs. 10000/- p.m.
Defence personnel and Teachers Rs. 7500/- p.m.
Margin NIL

Repayment TL 60 EMIs
OD- Reducing DP spread over 60 M.
Defence Personnel 36 M.
Amount of EMI should not be more than 50% of net monthly
income.
60 advance cheques (maximum) signed by the borrower along with
letter of deposit be obtained. Obtention of advance cheques is
applicable where check off facility is not available.
Guarantee Suitable 3rd party guarantee. RM/CM may waive
RBL Sheet PNB Score system will be applicable and the applicant will have to
score at least 50% marks to avail loan.
Upfront fee % of loan amount + service tax
NIL for defense personnel.
Docm. Charges Rs. 270/- up to Rs. 2.00 lac. Rs. 450/- Above Rs. 2.00 lac + ST

NIL for defense personnel.

Other In case of Army personnel, a copy of authority letter be sent to
Requirements Controller of Defense Account (CDAO) Pune so that salary is
remitted till liquidation of loan
Statement of account for at least 6 m. be obtained.
Affidavit that no other loan from other bank is availed be
obtained.
Copy of IT return for previous 3 years be obtained. Form 16 be
taken if loan is granted to employee.
A Registered letter be sent to the employer informing about
details of loan raised by the employee.
RBD Cir. No.
27/09 dt. It is clarified that the branches eligible for
26.5.2009 disbursement/maintaining the accounts shall obtain blanket
permission from CH for disbursement in the next 25 accounts
submitting performance of the branch under the portfolio.

The genuineness of salary certificates be independently got verified

from HR Deptt. Of the employer of applicant.Hubs should ensure
drawing of CIRs from CIBIL Data base for considering request of

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Personal Loans.

V. 5.8.5 PNB Baghban scheme for senior citizen

PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept
based product for senior citizen titled "PNB Baghban". The product addresses
one of the very important requirements of the society in the fast changing
culture of Indian society. The main objective of this scheme is to address the
financial needs of senior citizens owning self occupied property (house), for
leading a decent life. The salient features of the product are given hereunder:

Eligibility Senior citizens owning Self-occupied property. If property in single

name, there must be will in favors of spouse and it should be
registered. In case of joint property, one of the spouses must be of 60
years and above. The other spouse should be at least 58 years old. If
there is no spouse, loan will be made in favor of single.
Purpose & To lead a decent life
Extent Maximum qualifying amount can be Rs. 1.00 crore which will
depend upon realizable value of property after maintaining
margin of 20%. The monthly payment will be made to the
borrower on the basis of reverse mortgage annuity table.
Margin 20% of realizable value of the property to arrive at the qualifying
amount
Income criteria No

Rate of Interest 10.5% with reset clause of 5 years.

Disbursement In the shape of monthly instalments (to be calculated on reverse
of loan annuity basis) during loan tenor of 15-20 years for age group of
individuals between 60-70 years and 10-15 years for age group of over
70 years or till death of last surviving spouse, whichever is earlier.

For example, if Qualifying amount is Rs. 1.00 lac,

On 10 year tenor of loan, monthly installment will be Rs. 475/-, On

15 year tenor, monthly instalment will be Rs. 230/- and on 20 year
tenor, monthly instalment will be Rs. 125/-

The series of monthly instalments would continue after death of first

spouse during life time of surviving spouse.

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Tenor of loan Age group of 60-70 years 15-20 years

Age group above 70 years 10 15 years

Insurance Against fire, Earthquake and other calamities at the cost of the
borrower
Security EM of IP in favor of the bank. Valuation of property to be got done
from approved valuer. Revaluation be also got done once in a span of
5 years.
Upfront fee Amount equal to half months loan subject to maximum of Rs.
15000/- + Service Tax @10.30%
Docm. Charges NIL

Repayment The loan becomes due for payment after 6 months from death of both
the spouses. In case the loan is not repaid by legal heirs within 6
months from the death, the bank is within its right to sell the property
for adjustment of the loan in case the consent of the legal heirs is not
received within 6 months from the death of last survivor.
Others Residual life of property should be at least 20 years.
Purpose of loan should not be speculation or trading.
It should be ensured that the will executed by the borrower is the
last will.
Life certificate is to be obtained once in a year in November.
Age of Residual life of property should be at least 20 years. A certificate from
Property architect at the time of first valuation be obtained. Revaluation of
property will be done once in 5 years.
Ancestral Now it has been decided to accept ancestral property provided bank is
property as satisfied that there are no other legal heirs or original title deed is not
security available. For this, documentary evidence is required. Circle Head will
deal such proposals.
TERM LOANS A lump sum Term loan can be sanctioned up to Rs. 15.00 lac. The
UNDER PNB cases can be considered on selective basis by HO only for medical
BAGHBAN purpose to senior citizens for treatment of self, spouse and dependents.
SCHEME

Amendments Following two amendments have been carried out in IT Act, 1961.
in PNB 1. Reverse Mortgage does not tantamount to transfer; therefore there is
Baghban no Capital Gain Tax. Income tax is levied only at the time of
Scheme alienation of Mortgaged property by mortgagee for recovery of loan.
2. Stream of payment received by Sr. Citizen would not be treated as
Income. Therefore, bank has to obtain the following at the time of
application of loan:

Cost and year of acquisition of Capital asset.

Cost and year of improvement.

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 CREDIT APPRAISAL

PAN No. of all legal heirs.

Changes, if any made in the Registered Will.

omy by Sampat.P.Singh and Dr.S.Singh have discussed the subject financial

analysis for bank lending has assumed considerable importance, particularly
since early 1990's when, like most of the countries, India opted for the policy of
liberalisation and globalisation after 1991.
The present volume is meant to be a standard reference as well as text book on
the varied facets of financial analysis with reference to credit management by
Banks and Financial Institutions. The book consists of three parts. Part I
discusses the concepts and tools of Financial Analysis; Part II explains various
concepts of working capital in its historical context; while Part III demonstrates
the application of these tools in the changing context of liberalised economy by
focusing on new concepts like 'Credit Worthiness', Risk-Analysis, Credit
Rating, Products-Differentiation, Pricing-Differentiation, Asset-Liability
Management, etc. The book contains- Bank Lending and Industrial Finance in
India ,Basic Economics for Bankers and Business Managers ,Introduction to
Fundamentals Accounting Principles ,Profit and Loss Account (Operating
Statement) ,Analysis of Profit and Loss Account (Operating Statement)
,Structure and Analysis of Balance Sheet ,Ratios as Tools of Financial
Statements Analysis ,Accounting Flows : Income, Cash and Funds ,Break-even
Analysis and Margin of Safety ,Appraisal of Capital Projects ,New Conceptual
Framework for Analysis, Liberalised Era and New Focus of Bank Lending
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 CREDIT APPRAISAL

,Managing Working Capital by Strategic Choice , Financing Working Capital :

Conceptual and Historical Exposition,Creditworthiness and Credit Rating : At
Centre stage Nucleus of Credit Appraisal , Working Capital Management-I :
MPBF System of Appraisal and Bifurcation of Fund-Based Limit in Two
Components Working Capital Management-II : Alternative Methods of
Appraisal ,Working Capital Management-III : Follow-up and Supervision ,
Appraisal of a New Project Involving Term Loan , Management of Problem
Accounts , Management of Non-Performing Assets (NPAs), Rehabilitation of
Sick Industrial Units, Working Capital Management : Concepts and
Techniques , 1st Committee on Financial Sector Reform and the 2nd
Committee on Banking System Reform (Known as Narasimham Committee
Report, 1998).

5. The research paper on the topic Competitive analysis in banking: Appraisal

of the methodologies by Nicola Cetorelli has discussed about the U.S. banking
industry has experienced significant structural changes as the result of an
intense process of consolidation. From 1975 to 1997, the number of commercial
banks decreased by about 35 percent, from 14,318 to 9,215. Since the early
1980s, there have been an average of more than

400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998).
The relaxation of intrastate branching restrictions, effective to differing degrees
in all states by 1992, and the passage in 1994 of the Riegle.Neal Interstate
Banking and Branching Efficiency Act, which allows bank holding companies
to acquire banks in any state and, since June 1, 1997, to open interstate
branches, is certainly accelerating the process of consolidation. These
significant changes raise important policy concerns. On the one hand, one could
argue that banks are merging to fully exploit potential economies of scale and/or
scope. The possible improvements in efficiency may translate into welfare gains
for the economy, to the extent that customers pay lower prices for banks.
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 CREDIT APPRAISAL

services or are able to obtain higher quality services or services that could not
have been offered before.1 On the other hand, from the point of view of public
policy it is equally important to focus on the
effect of this restructuring process on the competitive conditions of the banking
industry. Do banks gain market power from merging? If so, they will be able to
charge higher than competitive prices for their products, thus inflicting welfare
costs that could more than offset any presumed benefit associated with mergers.
In this article, analysis of competition in the banking industry is done
highlighting a very fundamental issue: How market power is measured and how
do regulators rely on accurate and effective procedures to evaluate the
competitive effects of a merger.

CHAPTER 4
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 favour of better diffused and higher
yielding credit.
Building competencies in credit management through training &
promotion of self directed learning.

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Objectives of credit policy

1. A balanced growth of credit portfolio, which does not compromise safety.

2. Adoption of a forward looking and market responsive approach for
moving into profitable new areas on lending which emerge, within the pre
determined exposure ceilings.
3. Sound risk management practices to identify measure, monitor and
control risks.
4. Maximize interest yields from credit portfolio through a judicious
management of varying spreads of loan assets based upon their size,
credit rating and tenure.
5. Leverage on strong relationships with existing long-standing clients to
source a bulk of new business by addressing their requirements
comprehensively.
6. Ensure due compliance of various regulatory norms including CAR,
income recognition and asset classification
7. Accomplish balanced development of credit to various sectors and
geographical regions.
8. Achieve growth of credit to priority sectors / subsectors and continue to
surpass the targets stipulated by reserve bank of India.
9. Using of pricing as a tool of competitive advantage ensuring however that
earnings are protected.
10.Develop and maintain enhanced competencies in credit management at
all levels through a combination of training initiatives, promotion of self
directed learning and dissemination of best practices.

Objectives in Credit

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 CREDIT APPRAISAL

To maintain healthy balance between-

Credit volumes
Earnings
Asset quality

within the framework of regulatory prescriptions, corporate goals and banks

social responsibilities.

Introduction to loans
Loans are advances for fixed amounts repayable on demand or in instalment.
They are normally made in lump sums and interest is paid on the entire amount.
The borrower cannot draw funds beyond the amount sanctioned.

A key function of the Bank is deploying funds for income-yielding assets. A

major part of Banks assets are the loans and advances portfolio and investments
in approved securities. 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.

Classification of Loans

Loans/Advances
Loans/Advances

Fund Based Non-Fund

Based

Retail Loan
Page 59 Bank
Guarantee

Cash Post shipment Letter of

Bill Pre-shipment
Export Finance
Credit Credit
 CREDIT APPRAISAL

Term
Loan

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Bank provides credit in various forms. These are broadly classified into two
categories- Fund 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

I. 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
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.

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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 sub-segment 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 are-

First, 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

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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.
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.

II. WORKING CAPITAL / CASH CREDIT

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Cash credit is a short-term cash loan to a company. A bank provides this type of
funding, but only after the required security is given to secure the loan. Once a
security for repayment has been given, the business that receives the loan can
continuously draw from the bank up to a certain specified amount. The bank
provides certain amount to the company for its day to day working keeping
certain margin in hand.

III. 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

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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. 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.

IV. 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

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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.

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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

V. 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:-

I. BANK GUARANTEE-

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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 gurantee

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.).

In case of any changes or cancellation during the transaction process, a bank

guarantee remains valid until the customer dully releases the bank from its
liability.

In the situations, where a customer fails to pay the money, the bank must pay
the amount within three working days. This payment can also be refused by the
bank, if the claim is found to be unlawful.

II. LETTER OF CREDIT-

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A standard, commercial letter of credit is a document issued mostly by a

financil 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. 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.

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Building Up of a Proposal
1.GATHERING CREDIT INFORMATION:-

An appraisal of a proposal begins with the gathering of adequate background

knowledge about borrowers character and credit worthiness. In the concept of
appraisal, much reliance is placed on the credentials of the borrower. Therefore,
there is a necessity for evaluation of the borrower in regard to his standing in
the business, means and respectability. The result of the elaborate scrutiny
concerning all these aspects is required to be put into a precise credit report
which helps in taking decision on a credit proposal. Each individual case has to
be examined in the light of its own circumstances and judgment exercised on
issues enumerated above and a final decision has to be arrived at on the basis of
scrutiny of all the issues.

Information by definition is that data which is relevant and meaningful for

making decisions. An information system is an aid to the decision making,
carrying out and altering decisions. All information required by the banker in
the pre-sanction period should become part of a system. It should flow into the
information system from various sources, such as the borrower, banks own
record, environment etc. A significant basis of banker-borrower relationship is
governed by the information which flows between the two parties. After
ascertaining the credit needs of the borrower, the banker looks towards
information about his borrowers credit worthiness. He seeks out the credit
information etc. from his co-bankers, other borrowers and market information.

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2. VARIOUS SOURCES OF CREDIT INFORMATION

Information regarding character, honesty, and financial position has to be

discreetly gathered from following sources:

a. The borrower: the bank should develop as much credit information as

possible during the initial interview with the borrower/partners of firm/
directors of company/ proposed guarantor /co-obligator and principal
officials of firms/company, nature of its business, past and expected
profitability, the degree of competition that the firm/company faces and
whether or not it has had or anticipated any difficulty etc.

Information regarding its principal officers should be collected during such

interview.

b. Borrowers financial statements: for lending decisions, financial

information is a significant part of the total information system. It is
derived basically from borrowers:
Trading and profit and loss statement
Balance sheet
Cash and fund flow statements

c. Banks own records: If he is an existing borrower, banks own records are

a rich source of additional information. Operations in the borrowers
account and other dealings at the bank level in regard to collections,
discounting/retirement of bills etc. often useful clues to borrowers
operating and financial transactions. A review of the previous years
operations in the account and assessments of borrowers financial

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statements relating to that period will provide a rich source of information

about the borrower.

d. Opinions: Bank should compile opinions on their borrowers. They

should contain full and reliable records of the character, estimated means
and business activities of all firms and individuals who are under any form
of liability to the bank, whether as direct borrowers or as co-obligators.
Full particulars of parties immovable properties where they are situated,
whether they are free from encumbrance and in the case of land, acreage
should be recorded together with fair estimates of their value. As far as
possible written statements of their properties should be taken in
evaluating properties owned by parties jointly with others and as a rule
such properties should be disregarded in arriving at the net means.

e. From other banks: in respect of fresh proposals, enquiries with local

banks should be made before entertaining the proposal to avoid multiple
financing without our full knowledge. In case of new customer having
dealings with other banks, confidential opinion of his banker has to be
obtained.

f. Income tax assessment order- Income tax assessment orders agricultural

income tax assessment orders give an insight into the borrowers account
and the extent to which it is profitable. Comments thereon by the income
tax office shall indicate the shortcomings (lacunae) in the business. In the
case of estate owners agricultural tax assessment orders to be obtained to
arrive at parties credit worthiness.

g. Sales tax assessment orders: Sales tax assessment orders will reveal the
turnover in business and when read with trading/ manufacturing and profit

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& loss account, it may be possible to have a fair assessment of tendencies

in trade i.e., whether over-trading or carefully trading within recourses at
command or trading entirely on the borrowed funds.

h. Wealth tax assessment orders: wealth tax assessment order will indicate
the net worth of individuals and reveals the liquid source available to bring
the required margin money for the venture.

i. Market sources: Constant touch with the market will help to have first
hand information about the gains or losses in particular business
transactions of the borrowers.

j. Property statements: The property statement of borrower will give an

idea of his worth, liabilities and his income from real estates (immovable
properties).

k. Municipal property registers: reference to municipal property registers

will give an idea of building owned within the municipality, Rental Values
and house tax payable. It may be noted that the said registers are open for
reference to all persons.

l. Other external sources: other external sources, if any, like stock

exchange directory, business periodicals/magazines/journals etc.

REQUIREMENTS AS PER CONSTITUTION OF BOROWER:

Following Requirements as per constitution of borrower should be collected for

proposals emanating from-

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1. Partnership:
Copy of partnership deed
Copy of certificate of registration of firm (if registered)

2. 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.

3. Cooperative societies
Bylaws
Permission from registrar for the borrowings, creation of charge on
the assets of the society and execution of documents.

4. Trusts
Trust deed
Resolution for the borrowings and execution of documents.

5. Industrial units :
Project report with cash flow, fund flow statements etc.
Industrial licenses/SSI registration certificate.

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License from local authority, compliance of legal requirements or

conditions as applicable and clearance from regulatory bodies.

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:

1. 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

2. 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.

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3. 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.

4. 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.

5. Term liabilities: To find out whether the liabilities are long term or
short term, and its needs and regularity
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.

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6. 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.

7. 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.

8. 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.

BALANCE SHEET ANALYSIS

1. Comments on the performance of the unit vis--vis last year

sales-

Increased in last year sales are always good; if the net profit also
has increased correspondingly the performance can be noted as
satisfactory.
If the sales has come down or the net profit has also come down
then the reason has to be ascertained. If the unit earned at least cash
profit then the position may be considered as satisfactory.

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If the NP to N/sales is positive, that is sufficient for accepting as

satisfactory; but as per the credit rating chart maximum marks are
assigned if the borrower achieves 8% as percentage of net profit/net
sales.
Return on investment or Return on equity may also be used to find
out the return on capital invested.

2. Long term Strength of a company is calculated based on the level

of the net worth of the company /promoters stake/loans from close
relatives-

If the net worth has increased due to infusion of fresh capital or

plough back of profit, it can be termed as satisfactory; even
increase of loan from friends & relatives is a good sign.
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.

3. 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.

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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.

4. 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.

5. 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.

6. 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

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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.
MOVEMENT OF CREDIT PROPOSALS
With reference to Punjab National Bank the movements of credit proposals are
studied carefully and the detailed process is discussed as follows:
The movement of credit proposals follows a pre-defined path which has
been structured in keeping with the risk management principle that the
credit granting process should involve multiple credit approvers who
should subject the proposals to credit approvals at various stages
accordingly.

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CHAPTER 5

Credit Appraisal Techniques

Credit appraisal techniques act as tool for the credit portfolio managers to take right
decisions. It is the first and the prime most function performed by the Credit Appraisal Cell
before providing any sort loans or advances. The appraisal technique for each type of loan is
separate from each other. Each type of loan whether secured or unsecured has to be analyzed
in a different way. The different techniques of credit analysis or credit appraisal are discussed
as under:

Process of Credit appraisal for Term Loans

Term loans- Loans which are repayable in not less than 36 months are referred to as term
loans. In the interest of sound risk management practices, banks monitor the percentage of
Term loans in their credit portfolio with a view to keeping the term loan component within a
pre-determined percentage.
Requirements to be obtained with the proposal:

a) Copies of project report

b) Where loan is on participation basis, a copy of the appraisal note of the lead institution /
bank should be obtained.

c) Scrutiny of proposals

The scope of the project:

Background of promoters
Government consents

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The technical appraisal

Cost of the project
Sources of finance
The schedule of implementation
The financial projections and profitability
Cash flow statements
Calculation of debt service coverage ratio (DSCR)
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:

Not more than 2.33:1(1.7:1 may be accepted in

Debt Equity Ratio the case of real estate sector and generally for
different type of industry different level of DER
is acceptable.)
Not less than 1.5to 2 (ratio lower than this is to
Average DSCR be looked into)

Ratios for appraising term loans:

Debt equity ratio: long term debt

Tangible net worth

Average DSCR : Net profit + Depreciation + interest on TL

Term loan installment + interest on TL

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Breakeven point : Fixed cost_______

Sales-Variable cost (contribution)

It should be noted that the banks generally consider only term loans repayable
within 5 to 7 yrs. Term loans with maturity beyond 7 yrs are normally not
experienced except infrastructure loans.

Debt Equity Ratio:

A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the company
is using to finance its assets.

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):

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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.

BREAK EVEN POINT OR COST VOLUME PROFIT (CVP) ANALYSIS:

A. The breakeven point is calculated to note the level of production at which the unit neither
earns profit nor incur loss. BEP is the level of operations (in terms of sales or production or
capacity utilization) at which total revenues are equal to total operating costs (fixed and
variable) or, in other words, the operating profit is equal zero. He firm starts earning

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operating profits only after the break-even is reached. At BEP, contribution exactly equals
the fixed costs.

B. The formula for calculating the break-even point for each year is as under:

Total fixed cost/Contribution

C. Certain items of the cost that are to be incurred by the unit irrespective of the level of
production are called as fixed cost. The same includes depreciation, repairs and maintenance,
interest, certain portion of salaries, rent, insurance, selling expenses other than variable items
and administrative expenses

D. The variable cost changes with the levels of production. It includes cost of raw materials,
direct wages and other items, which are apportion able to unit of production.

E. The breakeven point is generally expressed in terms of percentage of capacity utilization

Break even analysis is generally expressed in terms of percentage of capacity utilisation.

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:

Normal year production 75 lakh units (93.75% of installed

capacity)
Fixed Costs Rs. 13.71 lakh
Variable Costs Rs. 13.35 lakh
Sales realization Rs. 41.25 lakh
Contribution Rs. 27.90 lakh

BEP (production) : (Fixed cost / Contribution)* 75 lakh = 36.85 lakh units

BEP (capacity utilization): (Fixed cost / Contribution)* 93.75 = 46.07%

BEP (sales) : (Fixed cost / Contribution)* Rs. 41.25 lakh = Rs. 20.27 lakh

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.

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

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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

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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:

1. Nature of activity: Manufacturing units need more working capital as compared to
trading and service units.
2. 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
3. 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.
4. 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.
5. Location of the unit: When the unit is located near the source of raw material, lower
stock maintenance is required.
6. 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.
7. 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

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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 Time Value

i Raw Material Holding period value of RM consumed
during the period

ii SIP Time taken in RM + Mfg.Exp. during the

converting the period (Cost of
RM into FG production)

iii FG Holding period of R.M + Mfg. Exp. +Adm

FG before being overheads for the
sold period (Cost of sales)

iv Receivables Credit allowed RM+ Mfg. Exp. + Adm.

to buyer Exp.+ Profit for the period
(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.

TANDON COMMITTEE RECOMMENDATIONS

Realising the absence of a proper control system in the flow of bank credit for working
capital, RBI constituted a working group Tandon Committee in July 1974 under the
chairmanship of Shri P.L. Tandon. The main task of the group was:

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1. To suggest guidelines to commercial banks to follow up and supervise credit from the
view of ensuring proper end use of the funds and keeping a watch on the safety of the
advances.
2. To suggest as to what constitutes the working capital requirements of industry and to
suggest the sources for financing the minimum working capital requirements.
3. To suggest the maximum level of bank finance and the method to compute the same.
4. To make recommendations as to whether the existing pattern of financing working capital
requirements by cash credit or overdraft etc. requires to be modified. If so, to suggest
suitable modifications.

The group submitted its final report during December 1975. The recommendations of this
Committee are summarised below:

(i) Norms for Inventory and Receivables

With a view to curbing speculative and hoarding tendencies, the Committee fixed norms (in
terms of the weeks/month consumption) in respect inventory and receivables which industrial
units may hold. The norms were fixed for 15 major industries and indicate the maximum
permissible limits for inventory holding. Deviations from norms not allowed for meeting
unforeseen situations.

(ii) Approach to Lending.

The three methods of lending as suggested by the committee are:
First Method: 75% of Working Capital Gap (Total Current
Assets Other Current liabilities)
Second Method: 75% Total Current Assets Other Current liabilities
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.

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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.

CHORE COMMITTEE RECOMMENDATIONS

In April 1979, a working group under the chairmanship of Sh K.B.Chore was constituted to
review the system of cash credit. The committee submitted the report in Dec 1980. The
lending discipline, as enunciated by Tandon Committee, has been streamlined by certain
recommendations made by Chore Committee. The gist of these recommendations is as
follows:

(a) Annual Review

All working capital credit limits of Rs. 50 lacs and above from the banking system should be
reviewed at least once a year. These reviews are intended to ensure that the limits are need-
based and continue to be viable propositions.

(b) Information System

The scope of the quarterly information system originally envisaged by the study group to
frame guidelines for follow-up of bank credit has been enlarged bringing into its ambit all
borrowers having credit limits of Rs. 50 lacs and over from the banking system.

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

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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.

(e) Determination of Quarterly Operative limits

Before the commencement of each quarter, the borrowers will now be required to indicate
limits sanctioned for their requirements of funds during the ensuing quarter. This will be
termed as the operative limit for the relevant quarter. The operative limit indicated by the
borrower would virtually set the level of drawing in that quarter subject to tolerances of 10%
either way. Hence forth, excess-utilisation or under- utilisation of the operative limit, beyond
the tolerance level referred to above would be considered as an irregularity in the account.
This will be treated as an indication of defective credit planning by the borrower.

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

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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.

(i) Encouragement of Bills system

To encourage bills systems of financing purchase of raw material inventory, the Working
Group has recommended that banks should extend at least 50% of the cash credit limit
against raw materials to manufacturing units, whether in the public or private sector, by
way of drawee bills only.

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
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.

NAYAK COMMITTEE RECOMMENDATIONS

To give a comprehensive and straight line method for the assessment of working capital
requirement of the borrowers, RBI constituted a working group under the chairmanship of
Sh P.R.Nayak. The study group gave its recommendations in March 1993. In April, 1993,
RBI implemented the recommendations of Nayak Committee for assessing the credit
requirements of village industries, tiny industries and other SSI units . Initially the
recommendations were for SSI units only but now other units have also been covered.

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Presently units covered under these guidelines are those having aggregate fund-based
working capital credit limits less than Rs.200 lacs for other than SSI and Rs. 500 lacs for SSI
from the banking system.

It has been advised not to apply the norms for inventory and receivables as also the Methods
of Lending. Instead such units be provided working capital limits computed on the basis of a
minimum of 20% of their Projected Annual Turn-Over (PATO) for new as well as existing
units. Their working capital requirement be assessed at a minimum of 25% of their Projected
Annual Turn-Over (PATO) assessed on realistic basis for new as well as existing units. Out of
this, at least 4/5th(20% of their PATO) be provided by the bank and the borrower should
contribute 1/5th of this estimated working capital requirement (5% of PATO) as margin money
of working capital.

- 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.

LENDING DISCIPLINE - QUARTERLY MONITORING SYSTEM (QMS)

Consequent to operational freedom granted by RBI in regard to submission of statements
under QIS/Monthly Cash Budget System prescribed under CMA, Bank reviewed the same
and submission of QIS was replaced with Quarterly Monitoring System (QMS)

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.

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The forms for QMS and time period for submission are as under.
Form- 1 To be submitted within 6 weeks from the close of quarter to which it relates
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.
- Non adherence to the operative limits will attract penal interest.

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.

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.

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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

o All advances up to 25000/-
o Sick unit under rehabilitation
o Sick unit remained closed
o Advance against deposits/LIC policy/Govt. securities/Gold & Jewellery where
the drawings are within available value of security
o Account transferred to Protested category

RATE OF PENAL INTEREST

2% above the sanctioned rate where irregularity and default and non-compliance of
terms and conditions as given earlier.
2% above the sanctioned rate where adhoc/temporary limit are sanctioned to
borrower.
3% above the sanctioned rate in case of non compliance of terms and conditions in
adhoc/temporary limit

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AMOUNT ON WHICH PENAL INTEREST TO BE CHARGED

Amount of default in instalment /excess drawals or borrowings or amount of
irregularities in account/overdue bill not debited to account.

Total amount of outstanding for non-submission of stock statement and other

financial data/default adhering to borrowing covenants/non-submission of
information under QMS.

APPRAISAL TECHNIQUES FOR RETAIL LOANS

I. EDUCATION LOANS

Till some years back higher education and quality education was not affordable to some
illustrious students because of the financial constraints. There was no any alternative but to
jump in the job market prematurely. And this led to untimely end of budding talents and their
forceful transformation into to the mediocrity. Scholarships were there, but those were so less
in numbers that only luckier few could avail them. But now the scene has changed
drastically. The boom in the banking sector has led to release of large amount of funds for
education loans
Student loans in India (popularly known as Education loans) have become a popular
method of funding higher education in India with the cost of educational degrees going
higher. The spread of self-financing institutions(which has less to no funding from the
government) for higher education in fields of engineering, medical and management which
has higher fees than their government aided counterparts have encouraged the trend in India.
Most large public sector and private sector banks offer educational loans.

Under section 80(e) of the Indian Income tax act, a person can exempt the amount paid
against the interest of the education loan - either for self or for his/her spouse or children - for

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eight years from the year (s)he starts to repay the loan or for the duration the loan is in effect,
whichever is lesser.

Education loan is becoming popular day by day because of the rising fee structure of higher
education. It came into existence in 1995 started first by SBI bank and after that many banks
started offering study loan.

The education loan provided by Punjab National bank is known as Vidyalakshyapurti

scheme. The details regarding its eligibility, processing, documentation etc. are given as
follows:-

Concept VIDYALAKSHYAPURTI Scheme is the main scheme and its

variant PNB Sarvotam Shiksha scheme stands merged with the main
scheme with effect from 20.12.2008
Courses Studies in India
eligible School level including. +2, Graduation, Post graduation, Professional
courses, Computer courses and Evening courses, other courses leading
to diploma /degree approved by UGC, Govt, AICTE, AIBMS, ICMR
etc. and Advance diploma in Banking Tech. It includes professional &
commercial & pilot training courses in India and abroad. For study in
India. Institutes approved by DGCA are included.

Studies Abroad
Graduation, PG and Courses offered by CIMA London , CPA in USA
Eligibility Indian National
Secured Admission
Secured pass marks in qualifying exam. Branches need not go into
technicalities of admission process (selection through management
quota etc.) and may consider loan based on admission advice.
( RBD Cir. No. 60/08 dt. 20.12.2008)

More than one In case of more than one loan in a family, the family as a unit is to be
loan in a family taken into account for considering the loan and security taken in
relation to total quantum of loan subject to margin and repaying
capacity of the parents.
Top up Loans Top up loans may be sanctioned to students for pursuing further
studies within overall eligibility limits with appropriate
reschedulement of existing loans and required permission by the CH
Age of student There is no restriction with regard to age of student for being eligible
for the loan.
Income No Income criteria are prescribed for the parents. However amount of
Criteria loan be decided by judging Income of the parents.

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Amount of loan Rs. 10.00 lac in India and 20.00 lac for abroad. CH can exercise
higher powers.
Priority Sector Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.

Capital Risk Weight as per BASEL-I 100%

Requirement Risk Weight as per BASEL-II 75%

Margin NIL Up to Rs. 4.00 lac

5% Above Rs. 4.00 lac in India
15% Above Rs. 4.00 lac abroad
(Scholarship/assistance may be included in the margin)
Security NIL Up to Rs. 4.00 lac
3rd party guarantee for loans above 4.00 lac upto Rs. 7.5 lac
(Exemption from taking guarantee for loan up to 7.50 lakh for
students of IIT, IIM, XLRI etc.
EM of IP or other Coll. Security for loans above 7.50 lac (should be
interpreted as loan amount of Rs. 7.51 lac and above in terms
Hypothecation of assets if created out of loan amount.
Co-obligation of students parents as well as assignment of future
income of student in loan above Rs. 7.5 lac. For married persons, co-
obligator can be spouse or parents or parents-in-law. Grand parents
can also become co-obligants.
Security for Lien on Terminal dues
staff members Extension of EM of IP
Fresh Mortgage if there is no HL
Co-obligation of employee
Penal Interest Up to 25000/- ----NIL , Above 25000/- @ 2% on OVERDUE
AMOUNT
Upfront fee NIL
0.50% (Maximum 5000/-) for studies abroad which is eligible for
refund on availment of loan.
Documentation Upto 4.00 lac - Rs. 270/- plus service tax
Charges Above 4.00 lac Rs. 450/- plus service tax
Repayment 5 to 7 years with moratorium period equal to Course period + 1 year
or 6 months after getting job whichever is earlier. BM is empowered
to permit extension in moratorium period up to 2 years as against
present provision of max. 1 year in deserving cases under reporting to
circle head.
Calculation of Simple interest is to be charged during moratorium period and kept in
interest a separate account. The accrued interest during repayment holiday will
be added to Principal for fixing of EMI.
Interest 1% interest concession is allowed if it is serviced during holiday
concession period. The concession will be given at start of repayment and EMI
will be fixed accordingly.
Rebate of 0.5% is allowed to students of IITs, IIMs etc.

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Constitutes of Tuition fees, Hostel charges, Exam fees, Library/Lab charges, Books,
loan Equipment, Instruments, Uniform, Building fund, Refundable deposit,
Travel expenses & Computers. (Advances for Computers are allowed in
Computer/Management courses only.)
Fees re- Within 6 months. Circle Head can allow beyond a period of 6 months
imbursement also on merits.(RBD Cir. No. 12/10 Dt. 16/02/2010)
Documents Documents will be executed both by student and the parent/guardian.

1. Letter of admission and proof of last qualifying exam.

2. Loan application
3. Agreement on PNB 1116 if student is minor.
4. Agreement on PNB 1117 if student is major.
5. Letter of guarantee if loan is above Rs. 4.00 lac.
6. EM of IP if loan amount is above Rs. 7.5 lac
Post sanction Follow up with the college/university for getting progress report at
Follow up regular intervals.
Life Insurance In terms of guidelines contained in RBD-A cir no. 16/08 dt. 26.3.08,
by Kotak Insurance policy can be obtained to meet the exigencies in case of death
Mahindra of student borrower between age group of 18-33 years. The coverage is
between 20000-15 lac. Single premium will be paid. It will vary
according to age and total insurance Tenor. The scheme is valid for one
year.
Relaxations for It has been decided to permit the following relaxations to the students
students of securing admission in IITs/IIMs/MDI Gurgaon/XLRI Jamshedpur and
IIT,IIM, MDI, ISB Hyderabad:
XLRI, ISB
Exemption from making parent/guardian as co-borrower.
Exemption from taking guarantee for loans up to 7.50 l
Other CR of the borrower is not required. Brief CR of the guarantor to be
provisions prepared.
No due Certificate is not to be insisted upon. Application will be
rejected by next higher authority.
2nd time loan can be considered by the CH within limits.
Capability Certificated may be issued for studies abroad.
Education loan to the institutions previously under Sarvotam Shiksha
Scheme can be sanctioned by the branch (other than place of
residence of parents) convenient to the borrower depending upon
genuineness, accessibility and aspect of recovery.
On-line applications are being accepted for grant of education loan.
Loan applications are to be disposed of within 15 days under
branch/hub sanction and 21 days under CH and above.
CH has full powers to relax eligibility, margin and security norms.
Parents, grandparents, spouse, parents-in-law can be co-obligants.
Passport and Visa is required for study abroad.
It has been decided to curtail the period of disposal of education loan
Disposal of applications to maximum 1 week except cases of CH and above level
loan where the outer limit of disposal will be 2 weeks from the date of receipt
applications of complete application.

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II. 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.

Vehicle loan provided by Punjab National Bank are under two categories know as PNB
SARTHI and CAR Loan & details about its processing, eligibility, margin etc are discussed
below:-

PNB SARATHI

Eligibility Individuals with Income proof

Students above 18 years with parents as co-borrowers

Business concerns

Individuals without income proof but residing at the given address

for the last at least 3 years.
Individuals with good repayment track without default.
Purpose & Purchase of Scooter/Motor Cycle/Moped
Extent Maximum Rupees. 100000/-.
Margin 5% where salary is disbursed through branch or check-off facility
is available.
25% for students where parents are co-borrowers.
30% for business or where there is no income proof.
10% for others.
Income criteria 10000/- pm. Is the minimum criteria.
Income of parents be considered in case of students.
Income of spouse can be added.
Switch over to On flat fee of 2%
new scheme
Guarantee Generally it is not required. In cases where there is no Income
proof, Guarantee of some family member or 3 rd. party
In cases where income of spouse is to be added, Guarantee of
spouse can be taken.
Insurance Comprehensive Insurance with bank clause and policy to remain with

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the bank.
Security PNB 551 is required for the Ist time. In case account is regular,
Inspection PNB 551 is not required thereafter.
In case the account is irregular, Qtrly. Inspection is must.
Upfront fee Rs 200/- + Service Tax For students Nil

Documentation Rs. 270/- plus service tax

Charges
Other Driving License is required.
Requirements Statement of account for the last 3 years is required.
Income Tax Proof
Salary certificate
Income of spouse can be considered if he/she is made guarantor.

CAR LOAN
Conveyance Loan (Public) for Car

Eligibility Individual & Business concerns, Professionals & Agriculturists with

6M transaction records.
Purpose & Car, Van & Jeep, Multi New or Old (not older than 3 years CH
Extent Utility Vehicles/Sports powers)
Utility Vecles
Individuals 25 times of net monthly salary or Rs.
25 lac whichever is lower for one or
more vehicles.
CH may relax the criteria within
powers keeping in view the repayment
capacity.
Income of spouse can be considered
provided he/she stands as additional
guarantor
Business Corporate and No Ceiling. One or more vehicle can be
non-corporate purchased. Earning and repaying capacity
will be considered.
Agriculturists --do--
Margin General 20% - Cost of Insurance and one-
time road tax can be considered as
margin.
Govt./PSU employees 15% (Repayment in 84 EMIs)
If net income is more than 6 lac Margin can be reduced to 15% by
Sanctioning Authority.
Old Vehicles 30%
CH may reduce up to 10% in deserving cases.
Repayment Maximum 7 years without any Moratorium period
Old Vehicles 5 years
Agriculturists 14 H/years as per crop pattern
CH and above empowered to relax repayment by 12M

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Maximum age for EMI 65 years relaxable up to 70 years.

Carry home pay should not be more than 50% of gross salary
Advance cheques equal to no. of installments be obtained.
Rate of Interest The rate is on fixed option with reset clause of 1 year. Rate of interest
is linked with tenure of loan. Presently 0.5% extra interest is charged
if repayment period is 3 years and above.
Upfront fee 1% of loan subject to maximum 6000/- exclusive of service tax.

Documentation Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac + ST

charges Rs. 450/- (Tie up arrangement Rs.1700/- ) Above Rs. 2.00 lac + ST

Security Hypothecation of the vehicle

RC in joint name of borrower and bank
Bill of the vehicle will also be in the joint name.
Guarantee Spouse if employed or Suitable 3 rd party guarantee or Collateral
Security in shape of IP/liquid security equal to 100% of loan amount.
CH and above can waive the guarantee/collateral security.
Insurance Comprehensive Insurance with bank clause and policy to remain with
the bank.
Security PNB 551 is required for the 1st. time. In case account is regular,
Inspection PNB 551 is not required thereafter.
In case the account is irregular, Qtrly. Inspection is must.
Other 15% depreciation on St. line method is to be applied in case of Old
Provisions Car
Driving License is not at all required.
Statement of account for the last 6 M. is required.
Car loan finance to business concerns for personal use of
executives shall be outside the purview of corporate banking and
may be sanctioned by officials under vested powers even in case
where existing facilities have been sanctioned by higher
authorities in terms of RBD cir. No. 51 dt. 15/09/09.

III. 5.8.3 HOUSING LOANS

IV. 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

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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.

PNB-(Punjab National 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. PNB Housing
Finance covers 80% of the cost of your home or renovation / repairing of your home loan up
to Rs. 10 Lacs for buying land and up to Rs. 2 Lacs for furnishing can be availed from PNB
Home Loan.
The details of housing loan product of Punjab National Bank regarding its
purpose, eligibility criteria, assessment, processing, documentation, cut back, margin,
pre-sanction follow ups, etc. are as foll
1. HOUSING FINANCE (PUBLIC)
Eligibility Individual & Joint Owners

Purpose & Purchase of Plot Rs.20 lac. However, RM & above

Extent may consider Loan upto 50 lac.
Construction of House Need based
Semi -built House/flat from Small/Medium branch Rs. 10 lac
Pvt Builders Large branch Rs. 20 lac
ELB/VLBs Rs. 40 lac
CH (AGM) Rs. 100 lac
CH (DGM) Rs 100 lac
GM Rs.150 lac
Repair & Renovation Rs. 20 lac
Cost of furnishing Max. 10% of the loan upto maximum
of Rs. 2.00 lac
Pari pasu Charge CH powers up to 20 lac to Govt.
Employees
Freehold & The loan can be granted both for freehold and for leasehold
Lease hold property.
In case of Leasehold, loan can be granted on the basis of P/A from
original allottee where DDA/PUDA/HUDA permit conversion of
leasehold into freehold property.
Otherwise advance is not permitted against plots purchased on
Power of Attorney basis.
Capital Loan limit up to 30 lac Risk Weight is 50%
Requirement Loan limit above 30 lac Risk Weight is 75%
LTV Ratio more than 75% Risk Weight is 100%
Margin Land/Plot 40%
Construction/repair/addition 25%

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Rate of Interest Rate of Interest as per LA Circulars issued from time to time.
0.50 % extra will be charged on H/L for 3rd House.
The interest can be fixed or floating
Option can be changed from fixed to floating and vice versa with
flat charges of 2% fee on Balance outstanding
Fixed Interest rate be reviewed/reset after a block of 5 years in
respect of loans disbursed on or after 1.8.2006.

Concessional Bank has decided to extend concessions to Defense personnel who are
Rate of Interest raising Housing Loans under banks regular Housing Loan scheme for
for Defense public as under:
Employees
25 bps relaxation in interest rates
50 bps relaxation in processing fee
These relaxations are to be made applicable in all new cases where
defense personnel avail housing loan either in single name or along
with spouse.

(RBD Cir. No. 11/2010 dt. 16.2.2010)

Repayment Maximum 25 years including Moratorium period of 18 months

Installment can be fixed up to maximum age of 65 years. Hub
Incharge of Scale-IV and above besides Circle Head can relax the
age up to 70 years,
Repayment of loan for repair/renovation/addition/alteration
restricted to 10 years including moratorium period of 6M.
All deductions should not exceed 50% of Gross monthly income.
However where gross monthly salary is above 50000/-, the
deduction can be up to 60% and if gross monthly salary is above
100000/-, the deduction can be up to 70% with the permission of
CH. The income of earning spouse and children can be taken into
account.
The Income of spouse and earning children can be taken into
account provided they are made co-borrowers.
Father/mother can also be made co-borrowers in cases where
property is in the single name of his/her son and also clubbing of
their income is permitted for determining eligibility criteria.
Minimum 24 advance cheques should be obtained. As and when, 6
cheques remain, fresh lot be obtained. Out of 24, 23 cheques
should be of installments and 1 cheque should be of the amount
equal to the balance amount.
Graduated PNB offers benefit of graduated EMI. This means that the customer
EMI has the option of choosing EMI that can increase or decrease during
repayment period rather than being given a fixed EMI over repayment
tenor.

Upfront fee 0.90 % of loan amount + service tax & education cess (10.30%) on
loans above 300 crore.
Processing fees @ 0.50% of loan amount (max. 20000) +service tax

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for loans up to 300 crore.

Documentation Rs.1350 + service tax
charges

Security Equitable/Registered Mortgage of Immovable Property

Tripartite agreement be executed amongst Housing Board/Dev
Authority/Coop Society/Builder, the borrower and the bank where
mortgage cannot be created immediately. In such cases, 3 rd party
guarantee is also to be obtained.
EM of other IP or pledge of NSC etc. up to 125% of loan amount if
property is being purchased from 1st P/A holder and where there is
delay in execution of Tripartite agreement or where the mortgage
of property is not possible being an ancestral property (without
title deeds) or Lal Dora Land.
Verification of security is required once in 2 years. In case of NPAs
accounts, security is to be verified on Half yearly basis.
Guarantee In general, no guarantee is to be asked for. But while preparing
RBL score sheet, if score is less than 50%, then 3rd party guarantee
can be obtained to raise score of the applicant.

Insurance In case of building at Re-construction cost.

Priority Sector Repair & Renovation Rs.1.00 lac (Rural & Semi/Urban)
inclusion
Rs.2.00 lac (Urban)

Others Rs. 20.00 lac

Other features Loan can be sanctioned by the branch/hub near to the present place
of work/posting/residence of the borrower. However, if the
property is situated at other place, services of branch/hub located at
that center may be availed for verification of Security and
NEC/Valuation etc.
Loan can be granted even if property is in the name of wife/parents
provided that the owner is made co-borrower.
Loan can be granted for 2nd house in the same city.
Loan can be granted for purchase of house for rental purpose.
For take over, permission of higher authority is not required
Important Loan cannot be granted
conditions
For construction in Un-authorized colonies
If property is to be used for commercial purpose
Without approved Map
( In Compliance of Delhi High Court Orders)

Pre-payment charges of 2% be recovered on account being

taken over by another bank. In case, the loan is pre-paid out of
own sources or the loan is taken over by another bank with in

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30 days from date of circular by which either the interest is

raised or any important term or condition is changed, there will
be no pre-payment charges.
Flat pre-payment charges of 2% be recovered from borrowers
who pre-pay without construction on the plot before 5 years.
Powers of concessions in rate of interest/other charges stand
withdrawn vide RBD cir no. 52/07 dt. 13.11.07.
In case, the construction of house is not completed within 3 years
or in case the plot is sold, penal interest @2% over and above the
applicable rate be charged.

Expression of It is a letter issued by the bank/branch wherein the lender expresses

Interest intention to make advance to the intended borrower on the basis of
eligibility criteria subject to the fulfillment of terms and conditions.
Grih Raksha It is Mortgage Reducing Term Assurance Policy issued in Tie up
Kavach arrangement with TATA-AIG. There is one-time premium of 2.5%
(approx) and that amount can also be financed. The coverage of the
scheme is 1-20 years. The sum assured is between Rs.10000 to Rs.
1.00 crore. In case of death of the borrower, receipt from insurance
company can be utilized towards adjustment of loan amount as per
amortization table. Prior permission of TATA-AIG is required if
amount is over Rs. 80.00 lac.
Iffco Tokyo The coverage for accidental death and permanent total disability (due
general to accident) along with mandatory insurance Fire Policy including
insurance co. earthquake is offered in tie up arrangement with Iffco Tokyo General
Insurance Co. Ltd. To all existing as well as new borrowers.
Earnest Money To meet the requirement of earnest money to apply for
Deposit plot/flat/house from State Housing Boards and Urban
Scheme Development authorities.
These authorities undertake to refund or issue allotment letter to
the bank subject to eligibility of the bank for proposed loan and
future requirement of Housing Loan.
Extent of loan is 90% of EMD or max. Rs 2.00 lac in the shape of
Demand Loan
ROI is BPLR 1.75%
Repayment through Refund order/Housing Loan/Bullet Payment.
Guarantee clause deleted
OD Facility to OD facility can be allowed to existing Housing Loan borrowers there
existing H/L is no IR irregularity. Other features of the scheme are as under:
borrowers
Minimum 50000/- and Maximum Rs. 5.00 lac.
Additional limit and present o/s should not exceed 75% of
current market price of the house so as to maintain margin of
25%.
Upfront fees is NIL and documentation charges are Rs. 500/-.
Take home salary should not be less than 40% of gross salary.
Loaning powers are SB-Nil, MB- Rs.4.00 lac, LB, ELB &
VLB
Rs. 5.00 lac.

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ROI is equal to BPLR

After HL is repaid, OD can be continued/ renewed provided the
sanctioning authority is satisfied about repaying capacity of the
borrower and Value of security.
OD facility for personal use should not be sanctioned to the
borrowers, who have availed loan for plot , construction on
which is yet to be completed in terms of RBD cir. no. 43
dt.21/08/09
On review, it has been decided to do away with the condition of
minimum 2 year of repayment track record of the borrower for
considering OD facility up to 5 lac. However this is subject to
compliance of all other terms and conditions such as KYC norms,
CIBIL database, takeover guidelines, security norms, maintenance of
margin etc.

This facility is outside the purview of Hub and Spoke model in the
accounts of existing HL borrowers.
(RBD Cir. No. 64 dt. 19.12.2009)
PNB Flexible This is an attractive variant of Housing Loan Scheme offered by the
Housing Loan PNB for its customers. Under this scheme, OD facility is made
Scheme available to the HL borrower. He can deposit his savings and withdraw
the same as per his requirement. The features of the scheme are as
under:

Eligibilit Age of the applicant must be less than 50.

y Existing HL borrowers can also apply provided their
loan account is regular and no IR irregularity persists.
Purpose All purposes as per original scheme except Purchase of
Land / Plot.
Extent Term Loan 80%

Overdraft 20%

After lapse of 3 years, enhancement in OD will be

allowed equal to reduction in Term Loan and
thereafter on yearly basis.
After lapse of 5 years, 20% increase in original
limit is allowed in the shape of TL/OD for personal
needs.
Market Value of Property should be sufficient to
cover the margin of 25%
After attaining age of 55 years, OD facility will be
reduced on monthly basis so that whole limit and
T/L are adjusted by the end of 65 years.
Maximum OD limit should not exceed 50% of
Total limit.
HL can be sanctioned by the branch/hub situated
near the workplace/posting/residence.
Security verification can be done by nearby

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branch.
Rate of Interest as given above in the table in
Housing Loan scheme (general)
For Overdraft portion, R/I is equal to BPLR

IV. 5.8.4 Personal Loan For Pensioner & Public

Two types of personal loans are being offered by PNB. Personal loan for pensioner is special
category of retail lending scheme being offered by Punjab National Bank to pensioner. The
main intension of this loan is to meet each and every personal needs including medical
expense of senior citizen. Details regarding the same are mentioned below.

Eligibility Pensioners drawing pension from the branch, Family Pensioners,

DPDO Pensioners, Ex-employees
Purpose & Personal needs
Extent
Up to 75 years of age: 1.50 lac (Minimum Rs. 25000/-)
Above 75 years of age: 0.70 lac (Minimum Rs. 25000/-)

Limit Equivalent to 18 months net pension or Rs. 150000 (for borrowers up

calculation to 75 years age) and 12 months net pension or Rs 70000 (for
borrowers above 75 years age) whichever is lower. For defense
retirees, the loan equivalent to 20 M net Pension can be granted. Take
home Pension should not be less than 50% of monthly pension

Nature DL or TL or OD on monthly reducing DP

Margin NIL

Guarantee Personal guarantee of spouse eligible for family pension or any

other family member or 3rd party guarantee.

Upfront fee NIL

Documentation Rs. 270/- plus service tax

charges
Repayment 60 EMIs . 24 EMIs in case age is more than 75 years which can be
extended up to 48 months by the sanctioning authority.
Miscellaneous PPO be kept with the loan documents
Affidavit from the pensioner that present disbursing branch will
not be changed without banks consent.
The loan can be availed more than once only after adjustment of
earlier loan

PERSONAL LOANS FOR PUBLIC

Eligibility Only PNB Account holders are eligible. Minimum 6 months salary

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should be routed in the account or 6 months satisfactory transaction

record for non salary saving accounts.

Permanent Defence, CRPF, BSF & ITBP Personnel (Not to

be granted to those who are due to retirement within next 24
M.
Confirmed permanent employees of Central/state
Govt./PSUs/Reputed Co./Schools/Institutions who fulfill any
of the following 2 conditions:
Route of salary through branch
Check-off facility
Professionally qualified practicing doctors viz. MBBS, BDS
and above having customer relationship with PNB at least for
6 months having annual income of Rs. 4.00 lac and above.
Doctors should be tax payers for 3 years and ITRs be kept on
record.
Check off It means that the employer undertakes to deduct monthly installment
Facility from the salary and remit the same towards adjustment of the loan till
its liquidation and also confirms attachment of terminal dues of the
borrower/employee.
Purpose & Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00 lac or 20
Extent times net salary whichever is lower depending upon the repaying
capacity & Rs. 5.00 lac for those salaried persons who have completed
3 years in the present organization and drawing net monthly salary not
less than Rs. 30000/-.
Nature TL or OD
Sanction and All branches can generate leads for processing at Retail Hubs/CCPCs.
Disbursement However disbursement can be made only by branches having
recovery percentage of not less than 90% under Personal Loan
segment as at end of previous half year.
Minimum net Metro Rs. 15000/- p.m.
monthly Urban Rs. 12500/- p.m.
income SU & Rural areas Rs. 10000/- p.m.
Defence personnel and Teachers Rs. 7500/- p.m.
Margin NIL

Repayment TL 60 EMIs
OD- Reducing DP spread over 60 M.
Defence Personnel 36 M.
Amount of EMI should not be more than 50% of net monthly
income.
60 advance cheques (maximum) signed by the borrower along with
letter of deposit be obtained. Obtention of advance cheques is
applicable where check off facility is not available.
Guarantee Suitable 3rd party guarantee. RM/CM may waive
RBL Sheet PNB Score system will be applicable and the applicant will have to
score at least 50% marks to avail loan.
Upfront fee % of loan amount + service tax
NIL for defense personnel.

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Docm. Charges Rs. 270/- up to Rs. 2.00 lac. Rs. 450/- Above Rs. 2.00 lac + ST

NIL for defense personnel.

Other In case of Army personnel, a copy of authority letter be sent to
Requirements Controller of Defense Account (CDAO) Pune so that salary is
remitted till liquidation of loan
Statement of account for at least 6 m. be obtained.
Affidavit that no other loan from other bank is availed be
obtained.
Copy of IT return for previous 3 years be obtained. Form 16 be
taken if loan is granted to employee.
A Registered letter be sent to the employer informing about
details of loan raised by the employee.
RBD Cir. No.
27/09 dt. It is clarified that the branches eligible for
26.5.2009 disbursement/maintaining the accounts shall obtain blanket
permission from CH for disbursement in the next 25 accounts
submitting performance of the branch under the portfolio.

The genuineness of salary certificates be independently got verified

from HR Deptt. Of the employer of applicant.Hubs should ensure
drawing of CIRs from CIBIL Data base for considering request of
Personal Loans.

V. 5.8.5 PNB Baghban scheme for senior citizen

PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based
product for senior citizen titled "PNB Baghban". The product addresses one of the very
important requirements of the society in the fast changing culture of Indian society. The
main objective of this scheme is to address the financial needs of senior citizens owning self
occupied property (house), for leading a decent life. The salient features of the product are
given hereunder:

Eligibility Senior citizens owning Self-occupied property. If property in single

name, there must be will in favors of spouse and it should be
registered. In case of joint property, one of the spouses must be of 60
years and above. The other spouse should be at least 58 years old. If
there is no spouse, loan will be made in favor of single.
Purpose & To lead a decent life

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Extent Maximum qualifying amount can be Rs. 1.00 crore which will
depend upon realizable value of property after maintaining
margin of 20%. The monthly payment will be made to the
borrower on the basis of reverse mortgage annuity table.
Margin 20% of realizable value of the property to arrive at the qualifying
amount
Income criteria No

Rate of Interest 10.5% with reset clause of 5 years.

Disbursement In the shape of monthly instalments (to be calculated on reverse
of loan annuity basis) during loan tenor of 15-20 years for age group of
individuals between 60-70 years and 10-15 years for age group of over
70 years or till death of last surviving spouse, whichever is earlier.

For example, if Qualifying amount is Rs. 1.00 lac,

On 10 year tenor of loan, monthly installment will be Rs. 475/-, On

15 year tenor, monthly instalment will be Rs. 230/- and on 20 year
tenor, monthly instalment will be Rs. 125/-

The series of monthly instalments would continue after death of first

spouse during life time of surviving spouse.

Tenor of loan Age group of 60-70 years 15-20 years

Age group above 70 years 10 15 years

Insurance Against fire, Earthquake and other calamities at the cost of the
borrower
Security EM of IP in favor of the bank. Valuation of property to be got done
from approved valuer. Revaluation be also got done once in a span of
5 years.
Upfront fee Amount equal to half months loan subject to maximum of Rs.
15000/- + Service Tax @10.30%
Docm. Charges NIL

Repayment The loan becomes due for payment after 6 months from death of both
the spouses. In case the loan is not repaid by legal heirs within 6
months from the death, the bank is within its right to sell the property
for adjustment of the loan in case the consent of the legal heirs is not
received within 6 months from the death of last survivor.
Others Residual life of property should be at least 20 years.
Purpose of loan should not be speculation or trading.
It should be ensured that the will executed by the borrower is the
last will.
Life certificate is to be obtained once in a year in November.
Age of Residual life of property should be at least 20 years. A certificate from
Property architect at the time of first valuation be obtained. Revaluation of
property will be done once in 5 years.
Ancestral Now it has been decided to accept ancestral property provided bank is

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property assatisfied that there are no other legal heirs or original title deed is not
security available. For this, documentary evidence is required. Circle Head will
deal such proposals.
TERM LOANS A lump sum Term loan can be sanctioned up to Rs. 15.00 lac. The
UNDER PNB cases can be considered on selective basis by HO only for medical
BAGHBAN purpose to senior citizens for treatment of self, spouse and dependents.
SCHEME

Amendments Following two amendments have been carried out in IT Act, 1961.
in PNB 1. Reverse Mortgage does not tantamount to transfer; therefore there is
Baghban no Capital Gain Tax. Income tax is levied only at the time of
Scheme alienation of Mortgaged property by mortgagee for recovery of loan.
2. Stream of payment received by Sr. Citizen would not be treated as
Income. Therefore, bank has to obtain the following at the time of
application of loan:

Cost and year of acquisition of Capital asset.

Cost and year of improvement.
PAN No. of all legal heirs.
Changes, if any made in the Registered Will.

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CHAPTER 6

Conclusion
Credit appraisal is a process of appraising the credit worthiness of loan
applicants. The fund of depositors i.e. general public are mobilised by means of
such advances / investments. 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 Punjab National Bank are as follows:-

In case of retail lending bank strictly follow its circular and fulfils all
requirement of necessary documents required for different types of loan
so that bank do not suffer any types of loss.
Bank is very much particular about CIBIL report of borrowers in case of
each type of lending.
Bank lending process in case of retail loan is very much fast after
compiling with all the criteria of bank.
In case of project financing bank follow lengthy norms to check the
feasibility of the project such as:-
I. Firstly personal appraisal of promoter is done by the bank to
ensure that promoters are experienced in the line of business
and capable to implement and run the project efficiently.
II. Secondly detail study about the technical aspect is done to find
thetechnical soundness of project such as proper scrutiny of
financial report is done, valuation of property by government
approved valuer is done and view regarding each and every
area of project is done under technical analysis.

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III. A detail study relating financial viability of project is done by

detail study of cash flow, fund flow statements and by
calculating import ratio which is very much necessary for
project appraisal such as DSCR, DER etc. the main purpose of
financial appraisal is insure that project will ensure sufficient
surplus to repay the instalment and interest.
IV. Risk analysis is done by bank to determine the risk associated
with the project. This is mainly done by sensitivity analysis and
by PNB credit rating or scoring. With sensitive analysis
feasibility of project is determined under worsened condition.
Credit rating or PNB scoring is done of various parameters
such as personal, management, financial etc , thereby
determine credit worthiness of customer.
V. It is on basis of credit risk level, a collateral security to be
given by borrower is determined.

This shows that ICICI BANK has sound credit appraisal system.

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BIBLIOGRAPHY

i ICICI BANK ANNUAL REPORT

ii ICICI BANK JOURNALS

iii BOOKS
MANAGEMENT OF INDIAN FINANCIAL INSTITUTION,
SRIVASTAVA R.M & NIGAM DIVYA, 10TH EDITION,2010, HIMALYA
PUBLISHING HOUSE, GURGAON MUMBAI
FINANCIA INSTITUTION AND MARKETS, BHOLE L.M, 5TH
EDITION,2009, TATA Mc GRAW- HILLS,7 WEST PATEL NAGAR,
NEW DELHI
iv WEBSITE
www.iciciindia.com
www.rbi.gov.in
www.google.com

v. NEWSPAPER

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