STUDY OF CREDIT APPRAISAL IN IDBIGuided by: Suryanaryana S Presented by: Sravya Kamma

ITM Business School

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Agenda: Company Profile Objective

Methodology Case Study Findings

Limitations Suggestions Conclusion

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Company Profile: On Oct 1,2004 IDBI converted into Banking Company. Merger of IDBI bank with its parent company IDBI Ltd

on April 2, 2005 . Merger of United western Ltd with IDBI Bank on Oct 3,2006.

Vision: To be trusted partner in progress by leveraging quality human capital and selling global standards of excellence to build the most valued financial conglomerate3

Product Profile:

Preferred banking Deposits Loans Cards 24 Hours banking Corporate banking Investment Advisory SME finance Agri Finance NRI Services Lockers Institutional banking Services4

Objective: To understand the existing credit appraisal techniques in

IDBI. To understand the various valuations that happen in credit appraisal To understand the risk management that exists in credit appraisal.

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Methodology:

Study

Study of Credit Risk Rating

Study of the procedure involved in Credit Appraisal

Case Study

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Study of Credit Risk Rating:Risk Assessment Module

Andersen Module

Internal rating Models

Scoring sheets/ Models

Enhanced SME Rating Model

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Procedure in Credit Appraisal:Request from the corporate for credit Final Approval by Branch Head

Business screening by Regional Managers Financial Analysis by Regional Officers8

Credit Rating by Mumbai Head Quarters

Case Study of ABC Ltd: Introduction: ABC Ltd is a agro based company.

Data Sources: Secondary data collected from Company

Records, Books and Internet. Proposal : Request for credit extension from existing 25 crores to 75 crores. The credentials of the firm for credit extension have been evaluated on not just financial grounds but overall performance of the company in every aspect possible has been evaluated.9

Tools for Analysis:Background information

Industry Analysis

Tools for analysis

Market Analysis

Financial Indicators10

Background Information:Background Information

Business Activities

Product Profile

Awards and Rewards

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Industry Analysis: Deals with status of industry, growth rate, drawbacks and other

technical factors. Status of the industry: Eighth largest commercial seed market with

an estimated size of INR 49 billion.

STRENGTH

WEAKNESS

OPPURTUNITIES

THREATS12

Market Analysis:Market Analysis

Market Position

Level of Competition

Threats

Processing capacity and arrival of foreign seeds

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Financial Indicators: Tangible Net Worth800 700 600 500

Sales

500 Total Assets 400 300 Total Outside Liabilities Tangible Networth 200 100 Sales

400300 200 100 0 Year Year Year Year 1 2 3 4

PBDITNet Profits Year Year Year Year 1 2 3 4

0

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Financial Indicators:Net Working Capital90 80 70 60 50 40 30 20 10 0 Year Year Year Year 1 2 3 4 120 100 80 60 Net Working 40 Capital 20 0 Year Year Year Year 1 2 3 4

Current Assets/Net Sales(%)

Current Assets/Net Sales(%)

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Liquidity Ratios:1.61.4 1.2 1 0.8 0.6 0.4 0.2 0 Year 1 Year 2 Year 3 Year 416

Current Ratio Quick Ratio

Profitability Ratios3530 25 20 15 10 5 0 Year 1 year 2 Year 3 Year 417

PBDIT/Net Sales (%) OPBT/Net Sales(%)

Net Profit/Net Sales(%)

Growth ratios200180 160 140 120 100 80 60 40 Net Sales Growth(%) Net profit Growth(%)

Net Worth Growth(%)

200 -20 Year 2 Year 3 Year 418

Findings in the case: Sales and profit after tax are showing rapid growth Debt Equity Ratio is favourable.The value is showing a decrease. Current Ratio is favorable. The current assets are being properly

utilized to deal with current liabilities. An appropriate current ratio is an indication of the stability of the

sister firms too if they has being any diversion of firms. The other current assets declared are of current nature only. The bank borrowings declared are within the limits permitted by us. The directors report provided vital information on trading conditions,

plans for future, labor relations, impact of government policies, changes in management.

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Findings in the case: All profitability ratios namely operating profit/sales etc indicate good

performance and financial health of the firm. The turnover ratios of the firm are fair enough A critical examination of the cash flow statement tells us that funds have been effectively and efficiently used. There has been never undue building of fixed assets and also there has being increase in sales without increase in fixed assets. The proportion of increase in owned funds and borrowed funds to the proportion of increase in working capital is high. The firm has being fair enough in the apportionment of profits and payment of dividends. The credit rating as given by crisil is fair enough. The pre sanction inspection has been satisfactory and has helped in the validation of market information, correctness of particulars given in the credit application form so on and so forth.20

Other factors.. Marketing prowess Research and Development

Infrastructure Technology Operational performance achieved 450-460 crores INR against the projected 500 crores

42% increase in turnover with respect to the previous year. increase of 79% in cotton seeds

launched 11 number of varieties

Crisil rating21

Result. A blend of the characteristics defined above make thefirm a reliable client. In view of above analysis, it is recommended that credit could be provided to the borrower. Borrower request for enhancement of credit from 25 crores to 75 crores can be sanctioned. Borrower should be continuously monitored and steps should be taken to improve their financial position

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Limitations: Study limited to business loans. Findings and suggestions were based on secondary data

Study is limited to Hyderabad branch The findings cant be generalized for the varied range of

industries of borrowers

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Learnings: Financial Analysis is not the only requirement-overall

analysis is must. Updation on technology and tools is a must be it a individual or organization. Understanding the nature of business and the market conditions is crucial for effective credit appraisal Real time communication with clients helped me enhance my communication skills. Decent understanding of the credit appraisal techniques.

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Suggestions: Current Appraisal System is good. Direct Interaction with the clients should be improved. The loan processing time should be reduced. The documents required for processing the loan should be reduced. The bank should focus more on advertising to increase awareness

among the public about the services that it offers. The bank should completely eliminate the file system and go computerization at every stage as this removes paper work and creates transparency in the system. The bank should work on standardizing the processes and systems their follow. Care must be taken to ensure that the judgment in appraisal process does not depend on one single person and a single factor.25

Suggestions: Need for improvised methods that are on par with

international standards. Revising the factors on which appraisal is done to face the ever increasing violatility. Need for improvement in Risk Management system.

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Conclusion: The company is doing well in credit appraisal. Scale of funding is high compared to private banks.

The system in IDBI is risk-averse. Decreasing effect of the recession and ever increasing start

ups the bank can see a lot of business on its way. Need for upgradation-Increasing violatile markets and the upgradation of the financial techniques all around the globe. Need for revising the parameters on which the valuations are done.27

THANK YOU !!!

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