Credit App at Sbi

8/2/2019 Credit App at Sbi

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CHAPTER 1

EXECUTIVE SUMMARY


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The project is on credit appraisal process of State bank of India. Credit

appraisal is an important activity carried out by the credit department of the

bank to determine whether to accept or reject the proposal for finance. Credit

Appraisal is a process to ascertain the risks associated with the extension of the

credit facility. It is generally carried by the financial institutions like banks

which are involved in providing financial funding to its customers.

The project first of all makes a study of the state bank of India - its important

functions. Then it highlights on the concept of Bank Credit & its recent trends.

The project then proceed 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 state bank of

India 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 and analysis of the customers views

towards the credit policy system of the bank. 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

OBJECTIVE OF THE STUDY


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1.1 OBJECTIVE OF THE STUDY

Objectives of a project tell us why a project has been taken under study. It

helps us to know more about the topic that is being undertaken and helps us

to explore future prospects of that organization.

To analyse the importance of credit appraisal system in State bank of India

To find out the effectiveness of the credit appraisal system in State bank of

India.

To study the credit policy adopted by the bank for their lending activities

To analyse the credit risk assessment (CRA) system followed in the bank Carryout customer satisfaction survey to find out the perspective of the

customer towards the credit appraisal system of the bank


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CHAPTER 3

RESEARCH METHODOLOGY


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RESEARCH METHODOLOGY

In any research work, the methodology used is of crucial significance. Any

research methodology used must be able to meet certain goals. Any research

methodology used must help in achievement of the objectives of the study.

Secondly, the research methodology must deliver accurate data and, by

extension, accurate results.

Methods of Data collection:

The analysis tools used is of both types which include

1. Primary data.

a) Questionnaire.

b) Survey

2. Secondary Data.

a) Newspaper & Books

b) Internet & Journals.

Sample Area & Size:

A Survey was conducted in the area of thane with a Sample Size of 100Respondents.


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CHAPTER 4

LITERATURE REVIEW


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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 quantitativeassessment. 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 modeling banking products

appraisal problems. A Multiple Criteria process, strictly mathematically

defined, integrates the behavior 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, and 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 fromresearch 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 in Credit appraisal in the US by Elkhoury 2009 says

that Credit rating companies play a fundamental role in shaping economic

directions of countries. Credit rating agencies (CRAs) play a key role in

financial markets by helping to reduce the

informative asymmetry between lenders and investors, on one side, and issuers

on the other side, about the creditworthiness of companies or countries. CRAs'

role has expanded with financial globalization and has received an additional

boost from Basel II which incorporates the ratings of CRAs into the rules for

setting weights for credit risk. Ratings tend to be sticky, lagging markets, and

overreact when they do change. In the United States, just like in other

industrialised countries, credit rating agencies (CRA's) are crucially important

manifestations of financial spheres and their role in driving economies cannot

be underrated. Credit appraisal in the United States is an industry that continues

to face several challenges. Firstly, the industry has the agencies have continued

to operate within their own financial and market architectural frameworks,

despite massive changes which have continued to present themselves in the

financial sector. Of late, credit appraisal agencies in the United States has come

under focus due to the prevailing credit crisis facing the country and ,by

extension, the global economy as well. Several criticisms have been levelled

against the major credit rating agencies. Additionally, it has been noted that the

quality of the agencies rating process must be effective and accountable to

issuers of debts. In particular, it has been reported that in course of executing

their responsibilities, CRAs should not, ideally, encounter financial situations

which compromise their integrity. This, it has been shown, would reduce the

levels of risks of debt issuers. However, Kerr (2008) reports that the quality of

rating process of the agencies has been poor, with cases of conflict of interests

being detected. It has recommended expanding the [voluntary] code to try to


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ensure the quality of the rating process, avoid conflicts of interest, define

agencies responsibilities to issuers of debt and credit investors and clarify

agencies communication with market participants. However the author writes

that such measures are intended to 'enhancing competition, promoting

transparency, reducing conflicts of interest, and reducing ratings-dependent

regulation. These approaches are all broadly consistent with the dominant

academic theory of rating agencies, the "reputational capital" model, which is

taken to imply that under the right circumstances a well-functioning reputation

mechanism will deter low-quality ratings. The policy initiatives currently under

consideration can be seen as efforts to fix discrete problems with the rating

market so that the reputation mechanism can work properly.'

4. 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


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banks. 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.


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CHAPTER 5

INTRODUCTION TO BANKING SECTOR


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5.1A snapshot of the banking industry

The Reserve Bank of India (RBI), as the central bank of the country, closely

monitors developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs). As

at end March 2002, there were 296 Commercial banks operating in India. This

included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196

Regional Rural Banks. Also, there were 67 scheduled co-operative banks

consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-

operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14% as

against 18% registered in the previous year. And on advances, the growth was

14.5% against 17.3% of the earlier year.

State Bank of India is still the largest bank in India with the market share of

20% ICICI and its two subsidiaries merged with ICICI Bank, leading creatingthe second largest bank in India with a balance sheet size of Rs. 1040bn.

Higher provisioning norms, tighter asset classification norms, dispensing with

the concept of past due for recognition of NPAs, lowering of ceiling on

exposure to a single borrower and group exposure etc., are among the measures

in order to improve the banking sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to

strengthen the ability of banks to absorb losses and the ratio has subsequently

been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004

based on the Basle Committee recommendations.

Retail Banking is the new mantra in the banking sector. The home Loans alone

account for nearly two-third of the total retail portfolio of the bank. According

to one estimate, the retail segment is expected to grow at 30-40% in the coming


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years. Net banking, phone banking, mobile banking, ATMs and bill payments

are the new buzz words that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information

on borrowers / potential borrowers by banks and Financial Institutions, the

Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The

Bureau provides a framework for collecting, processing and sharing credit

information on borrowers of credit institutions. SBI and HDFC are the

promoters of the CIBIL.

The RBI is now planning to transfer of its stakes in the SBI, NHB and Nationalbank for Agricultural and Rural Development to the private players. Also, the

Government has sought to lower its holding in PSBs to a minimum of 33% of

total capital by allowing them to raise capital from the market. Banks are free to

acquire shares, convertible debentures of corporate and units of equity oriented

mutual funds, subject to a ceiling of 5% of the total outstanding advances

(including commercial paper) as on March 31 of the previous year.

The finance ministry spelt out structure of the government-sponsored ARC

called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot

project of the ministry would pave way for smoother functioning of the credit

market in the country. The government will hold 49% stake and private players

will hold the rest 51%- the majority being held by ICICI Bank (24.5%).


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Reforms in the Banking sector

The first phase of financial reforms resulted in the nationalization of 14 major

banks in 1969 and resulted in a shift from Class banking to Mass banking. Thisin turn resulted in a significant growth in the geographical coverage of banks.

Every bank has to earmark a minimum percentage of their Loan portfolio to

sectors identified as priority sectors. The m anufacturing sector also grew

during the 1970s in protected environs and the banking sector was a critical

source. The next wave of reforms saw the nationalization of 6 more commercial

banks in 1980. Since then the number scheduled commercial banks increased

four-fold and the number of banks branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the

sector in the early nineties, the Public Sector Banks (PSB) s found it extremely

difficult to complete with the new private sector banks and the foreign banks.

The new private sector banks first made their appearance after the guidelines

permitting them were issued in January 1993. Eight new private sector banksare presently in operation. This banks due to their late start have access to state-

of-the-art technology, which in turn helps them to save on manpower costs and

provide better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates

accounted for a 25% share in deposits and 28.1% share in credit. The 20

nationalized banks accounted for 53.5% of the deposits and 47.5% of credit

during the same period. The share of foreign banks ( numbering 42 ), regional

rural banks and other scheduled commercial banks accounted for 5.7%, 3.9%

and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively

in credit during the year 2000


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Classification of Banks:

The Indian banking industry, which is governed by the Banking Regulation Act

of India

1949 can be broadly classified into two major categories, non-scheduled

banks and scheduled banks. Scheduled banks comprise commercial banks

and the co-operative banks. In Terms of ownership, commercial banks can be

further grouped into nationalized banks, the State Bank of India and its group

banks, regional rural banks and private sector banks (the old / new domestic

and foreign). These banks have over 67,000 branches spread across the country.

The Indian banking industry is a mix of the public sector, private sector

and foreign banks. The private sector banks are again spilt into old banks

and new banks.


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Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI

Commercial Regional Rural Land Development Cooperative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Banks


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Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checkingaccounts, 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

scheme, inventory norms and lending systems prescribed by the authorities, the

formulation of credit plans, and service area approach.


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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 mobilize 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.


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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.


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5.2 LOCAL SCENARIO OF BANKING SECTOR


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Indian Banking System: The Current State & Road Ahead

Introduction

Recent time has witnessed the world economy develop serious difficulties in

terms of lapse of banking & financial institutions and plunging demand.

Prospects became very uncertain causing recession in major economies.

However, amidst all this chaos Indias banking sector has been amongst the few

to maintain resilience.

A progressively growing balance sheet, higher pace of credit expansion,

expanding profitability and productivity akin to banks in developed markets,

lower incidence of nonperforming assets and focus on financial inclusion have

contributed to making Indian banking vibrant and strong. Indian banks have

begun to revise their growth approach and re-evaluate the prospects on hand to

keep the economy rolling. The way forward for the Indian banks is to innovateto take advantage of the new business opportunities and at the same time ensure

continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken

by the Committee on Financial Sector Assessment (CFSA) also shows that the

commercial banks are robust and versatile. The single-factor stress tests

undertaken by the CFSA divulge that the banking system can endure

considerable shocks arising from large possible changes in credit quality,

interest rate and liquidity conditions. These stress tests for credit, market and

liquidity risk show that Indian banks are by and large resilient.


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Thus, it has become far more imperative to contemplate the role of the Banking

Industry in fostering the long term growth of the economy. With the purview of

economic stability and growth, greater attention is required on both political

and regulatory commitment to long term development programme. FICCI

conducted a survey on the Indian Banking Industry to assess the competitive

advantage offered by the banking sector, as well as the policies and structures

that are required to further the pace of growth. The results of our survey are

given in the following sections.


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General Banking Scenario

The pace of development for the Indian banking industry has been tremendous

over the past decade. As the world reels from the global financial meltdown,

Ind ias banking sector has been one of the very few to actually maintain

resilience while continuing to provide growth opportunities, a feat unlikely to

be matched by other developed markets around the world. FICCI conducted a

survey on the Indian Banking Industry to assess the competitive advantage

offered by the banking sector, as well as the policies and structures required to

further stimulate the pace of growth.

The predicament of the banks in the developed countries owing to excessive

leverage and lax regulatory system has time and again been compared with

somewhat unscathed Indian Banking Sector. An attempt has been made to

understand the general sentiment with regards to the performance, the

challenges and the opportunities ahead for the Indian Banking Sector.

A majority of the respondents, almost 69% of them, felt that the Indian banking

Industry was in a very good to excellent shape, with a further 25% feeling it

was in good shape and only 6% of the respondents feeling that the performance

of the industry was just average. In fact, an overwhelming majority (93.33%) of

the respondents felt that the banking industry compared with the best of the

sectors of the economy, including pharmaceuticals, infrastructure, etc.

Most of the respondents were positive with regard to the growth rate attainable

by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33%

of the view that growth would be between 15-20% for the year 2009-10 and

greater than 20% for 2014-15.


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Banking Activities

Over the last three decades, there has been a remarkable increase in the size,

spread and scope of activities of banks in India. The business profile of banks

has transformed dramatically to include non-traditional activities like merchant

banking, mutual funds,new financial services and products and the human

resource development.

Their survey finds that within retail operations, banks rate product development

and differentiation; innovation and customization; cost reduction; cross selling

and technological up gradation as equally important to the growth of their retailoperations. Additionally a few respondents also find pro-active financial

inclusion, credit discipline and income growth of individuals and customer

orientation to be significant factors for their retail growth.

There is, at the same time, an urgent need for Indian banks to move beyond

retail banking, and further grow and expand their fee- based operations, which

has globally remained one of the key drivers of growth and profitability. In fact,

over 80% of banks in their survey have only up to 15% of their total incomes

constituted by fee- based income; and barely 13% have 20-30% of their total

income constituted by fee-based income.

Out of avenues for non-interest income, we see that Banc assurance (85.71%)

and FOREX Management (71.43%) remain most profitable for banks.

Derivatives, understandably, remains the least profitable business opportunity

for banks as the market for derivatives is still in its nascent stage in India.

There is nevertheless a visibly increased focus on fee based sources of income.

71% of banks in their survey saw an increase in their fee based income as a

percentage of their total income for the FY 2008-09 as compared to FY 2007-

08. Indian banks are fast realizing that fee-based sources of income have to be


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actively looked at as a basis for future growth, if the industry is to become a

global force to reckon with.


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5.3Bank Credit

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 theindividual 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
http://www.businessdictionary.com/definition/borrowing.htmlhttp://www.investorwords.com/5872/capacity.htmlhttp://www.investorwords.com/5872/capacity.htmlhttp://www.businessdictionary.com/definition/borrowing.html


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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 increasedover the years. The various types of advances provide by them are: (a) Term

Loans, (b) cash credit, (c) overdrafts, (d) demand Loans , (e) purchase and

discounting of commercial bills, and, (f) installment or hire purchase credit.

Volume of Credit -

Commercial banks are a major source of finance to industry and commerce.Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to

Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-

90 , Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. Banks have

introduced many innovative schemes for the disbursement of credit. Among

such schemes are village adoption, agriculture development branches and

equity fund for small units. Recently, most of the banks have introduced

attractive education loan schemes for pursuing studies at home or abroad. They

have introduced attractive educational loan schemes for pursuing studies at

home or abroad. They have moved in the direction of bridging certain defects

or gaps in their policies, such as giving too much credit to large scale industrial

units and commerce and giving too little credit to agriculture, small industries

and so on.

The Public Sector Banks are still the leading lenders though growth has

declined compared to previous quarter. The credit growth rate has dipped

sharply in foreign and private banks compared to previous quarter. In all, the

credit growth has slipped in this quarter.


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Credit (YOY Growth)

March 28 2008 March 27

2009 Public Sector Banks 22.5 20.4

The rates have gone down compared to previous quarter when it was seen that

there was no changes in loan rates in private and foreign banks. But then

compared to rate cuts done by RBI, they still need to go lower.

Table 16: Reduction in Deposit and Lending Rates

(October 2008 April 2009*)

(Basis points)

Bank Group

Deposit

Rates

Lending Rates

(BPLR)

Public Sector Banks 125-250 125-225Private Sector Banks 75-200 100-125

Five Major Foreign Banks 100-200 0-100

BPLR Oct 08 Mar 09 Apr 09

Change

(from Oct

to Apr)

Public SectorBanks

13.75-14.75

11.50-14.00

11.50-13.50

125-225

Private Sector

Banks

13.75-

17.75

12.75-

16.75

12.50-

16.75100-125

Five Major

Foreign Banks

14.25-

16.75

14.25-

15.75

14.25-

15.750-100


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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

Sector

As on

February

15, 2008

As on

February

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

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
http://rbi.org.in/scripts/PublicationsView.aspx?id=11347http://rbi.org.in/scripts/PublicationsView.aspx?id=11347


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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

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 systemwas 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


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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 corporatebodies. 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

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 corporateagainst 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.


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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 eminentpersonalities 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 reportof 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.

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


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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.


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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

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.


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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

of which is maintained in Delhi. Clearly, the national capital has gained a lot

from liberalisation.


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Trends for the year 2008-09

The aggregate deposits of scheduled commercial banks have expanded during

2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Withinaggregate deposits demand deposits have shown an absolute fall (-Rs 4,179

crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 2007-

08,. On the other hand, time deposits have shown an accelerated increase of

22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the

previous year.

In the investment portfolio of banks, the expansion during 2008- 09 at Rs

194,031crore has been much lower than the expansion of Rs 340,250 crore as

increase in net bank credit to government under monetary data for the same

period. This has happened because the latter has a sizeable amount of RBI

credit to government following the increased open market operations. Finally,

there has occurred considerable slowdown in bank credit expansion. Because of

relatively higher procurement of foodgrains, food credit has expanded by Rs

1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in

2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than

in the previous year at Rs 432,846 (23.0%).


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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:

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.

CreditAppraisal

Sanctions

Monitoring & AssetrecoveryManagement


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CHAPTER 6

INTRODUCTION TO STATE BANK OF INDIA


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6.1ABOUT SBI

THE PLACE TO SHARE THE NEWS ...

SHARE THE VIEWS

The State Bank of India, the countrys oldest Bank and a premier in terms of

balance sheet size, number of branches, market capitalization and profits is

today going through a momentous phase of Change and Transformation the

two hundred year old Public sector behemoth is today stirring out of its Public

Sector legacy and moving with an agility to give the Private and Foreign Banksa run for their money.

The bank is entering into many new businesses with strategic tie ups Pension

Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking,

Point of Sale Merchant Acquisition, Advisory Services, structured products etc

each one of these initiatives having a huge potential for growth.

The Bank is forging ahead with cutting edge technology and innovative new

banking models, to expand its Rural Banking base, looking at the vast untapped

potential in the hinterland and proposes to cover 100,000 villages in the next

two years.

It is also focusing at the top end of the market, on whole sale banking

capabilities to provide Indias growing mid / large Corporate with a complete
http://upload.wikimedia.org/wikipedia/en/c/cc/SBI-log


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array of products and services. It is consolidating its global treasury operations

and entering into structured products and derivative instruments. Today, the

Bank is the largest provider of infrastructure debt and the largest arranger of

external commercial borrowings in the country. It is the only Indian bank to

feature in the Fortune 500 list.

The Bank is changing outdated front and back end processes to modern

customer friendly processes to help improve the total customer experience.

With about 11448 of its own branches and another 6500+ branches of its

Associate Banks already networked, today it offers the largest banking network

to the Indian customer. Banking behemoth State Bank of India is planning to

set up 15,000 ATMs in the country by March 2010 investing more than Rs

1,000 crore.

The Bank is also in the process of providing complete payment solution to its

clientele with its ATMs, and other electronic channels such as Internet banking,

debit cards, mobile banking, etc.

With four national level Apex Training Colleges and 54 learning Centres

spread all over the country the Bank is continuously engaged in skill

enhancement of its employees. Some of the training programes are attended by

bankers from banks in other countries.

The bank is also looking at opportunities to grow in size in India as well asinternationally. It presently has 82 foreign offices in 32 countries across the

globe. It has also 8 Subsidiaries in India SBI Capital Markets Ltd, SBI

Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI

Cards and Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund

Management Pvt. Ltd, SBI Canada - forming a formidable group in the Indian

Banking scenario. It is in the process of raising capital for its growth and also

consolidating its various holdings.


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6.2 BACKGROUND

State Bank of India is the largest and one of the oldest commercial bank in

India, in existence for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank

namely Reserve Bank of India (RBI) is the major share holder of the bank with

59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public

holding (other than promoters) at 40.3%.

SBI has the largest branch and ATM network spread across every corner of

India. The bank has a branch network of over 17000 branches (including

subsidiaries). Apart from Indian network it also has a network of 73 overseas

offices in 30 countries in all time zones, correspondent relationship with 520

International banks in 123 countries. In recent past, SBI has acquired banks in

Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as

on 31st March, 2008. Of this, 29.51% are officers, 45.19% clerical staff and the

remaining 25.30% were sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock

Exchange and Ahmadabad Stock Exchange while its GDRs are listed on the

London Stock Exchange.

SBI group accounts for around 25% of the total business of the banking

industry while it accounts for 35% of the total foreign exchange in India. With

this type of strong base, SBI has displayed a continued performance in the last

few years in scaling up its efficiency levels. Net Interest Income of the bank has

witnessed a CAGR of 13.3% during the last five years. During the same period,

net interest margin (NIM) of the bank has gone up from as low as 2.9% in

FY02 to 3.40% in FY06 and currently is at 3.32%.


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1. KEY AREAS OF OPERATION

The business operations of SBI can be broadly classified into the key incomegenerating areas such as National Banking, International Banking, Corporate

Banking, & Treasury operations. The functioning of some of the key divisions

is enumerated below:

a) Corporate Banking

The corporate banking segment of the bank has total business of around

Rs1,193 bn. SBI has created various Strategic Business Units (SBU) in order to

streamline its operations.

These SBUs are as follows:

i) Corporate Accounts

ii) Leasing

iii) Project Finance

iv) Mid Corporate Group

v) Stressed Assets Management


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b) National Banking

The national banking group has 14 administrative circles encompassing a vast

network of 9,177 branches, 4 sub-offices, 12 exchange bureaus, 104 satellite

offices and 679 extension counters, to reach out to customers, even in the

remotest corners of the country. Out of the total branches, 809 are specialized

branches. This group consists of four business group which are enumerated

below:

i) Personal Banking SBU

ii) Small & Medium Enterprises

iii) Agricultural Banking

iv) Government Banking

c) International Banking

SBI has a network of 73 overseas offices in 30 countries in all time zones and

correspondent relationship with 520 international banks in 123 countries. The

bank is keen to implement core banking solution to its international branches

also. During FY06, 25 foreign offices were successfully switched over to

Finacle software. SBI has installed ATMs at Male, Muscat and Colombo

Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial

Bank Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank

incorporated a company SBI Botswana Ltd. at Gaborone.


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d) Treasury

The bank manages an integrated treasury covering both domestic and foreign

exchange markets. In recent years, the treasury operation of the bank has

become more active amidst rising interest rate scenario, robust credit growth

and liquidity constraints. The bank diversified its operations more actively into

alternative assets classes with a view to diversify the portfolio and build

alternative revenue streams in order to offset the losses in fixed income

portfolio. Reorganization of the treasury processes at domestic and global

levels is also being undertaken to leverage on the operational synergy between

business units and network. The reorganization seeks to enhance the

efficiencies in use of manpower resources and increase maneuverability of

banks operations in the markets both domestic as well as international.

e) Associates & Subsidiaries

The State Bank Group with a network of 14,061 branches including 4,755

branches of its seven Associate Banks dominates the banking industry in India.

In addition to banking, the Group, through its various subsidiaries, provides a

whole range of financial services which includes Life Insurance, Merchant

Banking, Mutual Funds, Credit Card, and Factoring, Security trading and

primary dealership in the Money Market.


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i) Associates Banks:

SBI has six associate banks namely

State Bank of Indore

State Bank of Travancore

State Bank of Bikaner and Jaipur

State Bank of Mysore

State Bank of Patiala

State Bank of Hyderabad

ii) Non-Banking Subsidiaries/Joint Ventures

SBI Capital Markets Ltd,

SBI Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI Cards and Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund Management Pvt. Ltd, SBI


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CHAPTER 7

INDUSTRY ANALYSIS


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7.1 COMPETITIVE FORCES MODEL IN THE BANKING INDUSTRY

(PORTERS FIVE -FORCE MODEL)

Prof. Michael Porters competitive forces Model applies to each and every

company as well as industry. This model with regards to the Banking Industry

is presented below.

(2)

Potential Entrants is high asdevelopment financialinstitutions as well as privateand foreign banks haveentered in a big way.

(5)

Organizing power of thesupplier is high. With thenew financial instrumentsthey are asking higherreturn on the investments.

(1)

Rivalry among existing firms has increased withliberalization. New productsand improved customerservices is the focus.

(4)

Bargaining power of buyers is high as corporate can raisefunds easily due to highcompetition.

(3)

Threat from substitute is highdue to competition from

NBFCs and insurancecompanies as they offer a highrate of interest than banks.


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1. Rivalry among existing firms

With the process of liberalization, competition among the existing banks has

increased. Each bank is coming up with new products to attract the customers

and tailor made loans are provided. The quality of services provided by banks

has improved drastically.

2. Potential Entrants

Previously the Development Financial Institutions mainly provided project

finance and development activities. But they now entered into retail banking

which has resulted into stiff competition among the exiting players.

3. Threats from Substitutes

Banks face threats from Non-Banking Financial Companies. NBFCs offer a

higher rate of interest.

4. Bargaining Power of Buyers

Corporate can raise their funds through primary market or by issue of GDRs,

FCCBs. As a result they have a higher bargaining power. Even in the case of

personal finance, the buyers have a high bargaining power. This is mainlybecause of competition.

5. Bargaining Power of Suppliers

With the advent of new financial instruments providing a higher rate of returns

to the investors, the investments in deposits is not growing in a phased manner.

The suppliers demand a higher return for the investments.


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6. Overall Analysis

The key issue is how banks can leverage their strengths to have a better future.

Since the availability of funds is more and deployment of funds is less, banks

should evolve new products and services to the customers. There should be a

rational thinking in sanctioning loans, which will bring down the NPAs. As

there is a expected revival in the Indian economy Banks have a major role to

play. Funding corporate at a low cost of capital is a special requisite.


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7.2 SWOT ANALYSIS

The banking sector is also taken as a proxy for the economy as a whole. The

performance of bank should therefore, reflect Trends in the Indian Economy.Due to the reforms in the financial sector, banking industry has changed

drastically

with the opportunities to the work with, new accounting standards new entrants

and information technology. The deregulation of the interest rate, participation

of banks in project financing has changed in the environment of banks.

The performance of banking industry is done through SWOT Analysis. It

mainly helps to know the strengths and Weakness of the industry and to

improve will be known through converting the opportunities into strengths. It

also helps for the competitive environment among the banks.


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a) STRENGTHS

1. Availability of Funds:

There are seven lakh crore wroth of deposits available in the banking system.

Because of the recession in the economy and volatility in capital markets,

consumers prefer to deposit their money in banks. This is mainly because of

liquidity for investors.

2. Banking network:After nationalization, banks have expanded their branches in the country, which

has helped banks build large networks in the rural and urban areas. Private

Banks allowed operating but they mainly concentrate in metropolis.

3. Large Customer Base:

This is mainly attributed to the large network of the banking sector. Depositors

in rural areas prefer banks because of the failure of the NBFCs.

4. Low Cost of Capital:

Corporate prefers borrowing money from banks because of low cost of capital.

Middle income people who want money for personal financing can look to

banks as they offer at very low rates of interests. Consumer credit forms the

major source of financing by banks.


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b) WEAKNESS

1. Loan Deployment:

Because of the recession in the economy the banks have idle resources to the

tune of 3.3 lakh crores. Corporate lending has reduced drastically

2. Powerful Unions:

Nationalization of banks had a positive outcome in helping the Indian Economy

as a whole. But this had also proved detrimental in the form of strong unions,which have a major influence in decision-making. They are against automation.

3. Priority Sector Lending:

To uplift the society, priority sector lending was brought in during

nationalization. This is good for the economy but banks have failed to manage

the asset quality and their intensions were more towards fulfilling government

norms. As a result lending was done for non-productive purposes.

4. High Non-Performing Assets:

Non-Performing Assets (NPAs) have become a matter of concern in the

banking industry. This is because of change in the total outstanding advances,

which has to be reduced to meet the international standards.


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c) OPPORTUNITIES

1. Universal Banking:

Banks have moved along the valve chain to provide their customers more

products and services. For example: - SBI is into SBI home finance, SBI

Capital Markets, SBI Bonds etc.

2. Differential Interest Rates:

As RBI control over bank reduces, they will have greater flexibility to fix theirown interest rates which depends on the profitability of the banks.

3. High Household Savings:

Household savings has been increasing drastically. Investment in financial

assets has also increased. Banks should use this opportunity for raising funds.

4. Overseas Markets:

Banks should tape the overseas market, as the cost of capital is very low.

5. Interest Banking:

The advance in information technology has made banking easier. Business can

effectively carried out through internet banking.


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d) THREATS

1. NBFCs, Capital Markets and Mutual funds:

There is a huge investment of household savings. The investments in NBFCs

deposits, Capital Market Instruments and Mutual Funds are increasing.

Normally these instruments offer better return to investors.

2. Change in the Government Policy:

The change in the government policy has proved to be a threat to the bankingsector.

3. Inflation:

The interest rates go down with a fall in inflation. Thus, the investors will shift

his investments to the other profitable sectors.

4. Recession:

Due to the recession in the business cycle the economy functions poorly and

this has proved to be a threat to the banking sector. The market oriented

economy and globalization has resulted into competition for market share. The

spread in the banking sector is very narrow. To meet the competition the banks

has to grow at a faster rates and reduce the overheads. They can introduce the

new products and develop the existing services.


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CHAPTER 8

OVERVIEW OF CREDIT APPRAISAL


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8.1 CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior

before providing any loans & advances/project finance & also checks thecommercial, financial & technical viability of the project proposed its funding

pattern & further checks the primary & collateral security cover available for

recovery of such funds.

Brief overview of credit:

Credit Appraisal is a process to ascertain the risks associated with the extension

of the credit facility. It is generally carried by the financial institutions which

are involved in providing financial funding to its customers. Credit risk is a risk

related to non repayment of the credit obtained by the customer of a bank. Thus

it is necessary to appraise the credibility of the customer in order to mitigate the

credit risk. Proper evaluation of the customer is performed which measures the

financial condition and the ability of the customer to repay back the loan in

future? Generally the credit facilities are extended against the security know as

collateral. But even though the loans are backed by the collateral, banks are

normally interested in the actual loan amount to be repaid along with the

interest. Thus, the customer's cash flows are ascertained to ensure the timely

payment of principal and the interest.

It is the process of appraising the credit worthiness of a loan applicant. Factors

like age, income, number of dependents, nature of employment, continuity of

employment, repayment capacity, previous loans, credit cards, etc. are taken

into account while appraising the credit worthiness of a person. Every bank or

lending institution has its own panel of officials for this purpose.


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However the 3 C of credit are crucial & relevant to all borrowers/ lending

which must be kept in mind at all times.

Character Capacity Collateral

If any one of these are missing in the equation then the lending officer must

question the viability of credit.

There is no guarantee to ensure a loan does not run into problems; however if

proper credit evaluation techniques and monitoring are implemented thennaturally the loan loss probability / problems will be minimized, which should

be the objective of every lending officer.

Credit is the provision of resources (such as granting a loan) by one party to

another party where that second party does not reimburse the first party

immediately, thereby generating a debt, and instead arranges either to repay or

return those resources (or material(s) of equal value) at a later date. The first

party is called a creditor, also known as a lender, while the second party is

called a debtor, also known as a borrower.

Credit allows you to buy goods or commodities now, and pay for them later.

We use credit to buy things with an agreement to repay the loans over a period

of time. The most common way to avail credit is by the use of credit cards.

Other credit plans include personal loans, home loans, vehicle loans, student

loans, small business loans, trade.

A credit is a legal contract where one party receives resource or wealth from

another party and promises to repay him on a future date along with interest. In

simple terms, a credit is an agreement of postponed payments of goods bought

or loan. With the issuance of a credit, a debt is formed.


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Basic types of credit:

There are four basic types of credit. By understanding how each works, you

will be able to get the most for your money and avoid paying unnecessarycharges.

Service credit is monthly payments for utilities such as telephone, gas,

electricity, and water. You often have to pay a deposit, and you may pay a late

charge if your payment is not on time.

Loans let you borrow cash. Loans can be for small or large amounts and for afew days or several years. Money can be repaid in one lump sum or in several

regular payments until the amount you borrowed and the finance charges are

paid in full. Loans can be secured or unsecured.

Installment credit may be described as buying on time, financing through the

store or the easy payment plan. The borrower takes the goods home in

exchange for a promise to pay later. Cars, major appliances, and furniture are

often purchased this way. You usually sign a contract, make a down payment,

and agree to pay the balance with a specified number of equal payments called

installments. The finance charges are included in the payments. The item you

purchase may be used as security for the loan.

Credit cards are issued by individual retail stores, banks, or businesses. Usinga credit card can be the equivalent of an interest-free loan--if you pay for the

use of it in full at the end of each month.


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8.2SBI NORMS FOR CREDIT APPRAISAL

Credit appraisal means an investigation/assessment done by the bank prior

before providing any loans & advances/project finance & also checks the

commercial, financial & technical viability of the project proposed its funding

pattern & further checks the primary & collateral security cover available for

recovery of such funds.

1. Loan policy An Introduction

State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its

mission of retaining the banks position as a Premier Financial Services

Group, with World class standards & significant global business,

committed to excellence in customer, shareholder & employee

satisfaction & to play a leading role in the expanding & diversifying

financial services sector, while continuing emphasis on its Development

Banking role. The Loan Policy of the any bank has successfully withstood the test of

time and with inbuilt flexibilities, has been able to meet the challenges in

the market place. The policy exits & operates at both formal & informal

levels. The formal policy is well documented in the form of circular

instructions, periodic guidelines & codified instructions, apart from the

Book of Instructions, where procedural aspects are highlighted. The policy, at the holistic level, is an embodiment of the Banks

approach to sanctioning, managing & monitoring credit risk & aims at

making the systems & controls effective.

The Loan Policy also aims at striking a balance between underwriting

assets of high quality, and customer oriented selling. The objective is to

maintain Banks undisputed leadership in the Indian Banking scene.


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The Policy aims at continued growth of assets while endeavoring to

ensure that these remain performing & standard. To this end, as a matter

of policy the Bank does not take over any Non-Performing Asset (NPA)

from other banks.

The Central Board of the Bank is the apex authority in formulating all

matters of policy in the bank. The Board has permitted setting up of the

Credit Policy & Procedures Committee (CPPC) at the Corporate Centre

of the Bank of which the Top Management are members, to deal with

issues relating to credit policy & procedures on a Bank-wide basis. The

CPPC sets broad policies for managing credit risk including industrial

rehabilitation, sets parameters for credit portfolio in terms of exposure

limits, reviews credit appraisal systems, approves policies for

compromises, write offs, etc. & general management of NPAs besides

dealing with the issues relating to Delegation of Powers.


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Based on the present indications, following exposure levels are prescribed

Term Loans (loans with residual maturity of over 3 years) should not in

the aggregate exceed 35% of the total advances of SBI. The Bank shall endeavour to restrict fund based exposure to a particular

industry to 15% of the Banks total fund based exposure.

The Bank shall restrict the term loan exposure to infrastructure projects

to 10% of Banks total advances.

The Bank shall endeavour to restrict exposure to sensitive sectors (i.e. to

capital market, real estate, and sensitive commodities listed by RBI) to10% of Banks total advances.

The Banks aggregate exposure to the capital markets shall not exceed

5% of the total outstanding advances (including commercial paper) as on

March 31 of the previous year.

Individuals as borrowers Maximum aggregate credit facilities of

Rs. 20 crores

( Fund based & non-fund based )

Non-corporates

(e.g.Partnerships,JHF, Associations )

Maximum aggregate credit facilities of

Rs. 80 crores

( Fund based & non-fund based )

Corporates Maximum aggregate credit facilities as

per prudential norms of RBI on exposures


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8.3 Credit Appraisal Standards

(A) Qualitative:

At the outset, the proposition is examined from the angle of viability & also

from the Banks prudential levels of exposure to the borrower, Group &

Industry. Thereafter, a view is taken about our past experience with the

promoters, if there is a track record to go by. Where it is a new connection for

the bank but the entrepreneurs are already in business, opinion reports from

existing bankers & published data if available are carefully pursued. In case of

a maiden venture, in addition to the drill mentioned heretofore, an element of

subjectively has to be perforce introduced as scant historical data weightage to

be placed on impressions gained out of the serious dialogues with the promoter

& his business contacts.


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(B) Quantitative:

(a) Working capital:

The basis quantitative parameters underpinning the Banks credit appraisal

are as follows:-

Sector/ Parameters Mfg Others

Liquidity

Current Ratio (min.)

1.33 1.20(For FBWC limits above Rs. 5 cr.)

1.00(For FBWC limits upto Rs. 5 cr.)

Financial Soundness

TOL/TNW (max.)

3.00 5.00

DSCR Net (min.)

Gros (min.)

2:1

1.75:1

2:1

1.75:1

Gearing

D/E (max.)

2:1 2:1

Promoters contribution (min.) 30% of equity 20% of equity


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(i) Liquidity:

Current Ratio (CR) of 1.33 will generally be considered as a benchmark level

of liquidity. However the approach has to be flexible. CR of 1.33 is only

indicative & may not be deemed mandatory. In cases where the CR is projected

at a lower than the benchmark or a slippage in the CR is proposed, it alone will

not be a reason for rejection for the loan proposal or for the sanction of the loan

at a lower level. In such cases, the reason for low CR or slippage should be

carefully examined & in deserving cases the CR as projected may be accepted.

In cases where projected CR is found acceptable, working capital finance as

requested may be sanctioned. In specific cases where warranted, such sanction

can be with the condition that the borrower should bring in additional long-term

funds to a specific extent by a given future date. Where it is felt that the

projected CR is not acceptable but the borrower deserves assistance subject to

certain conditions, suitable written commitment should be obtained from the

borrower to the effect that he would be bringing in required amounts within a

mutually agreed time frame.

(ii) Net Working Capital:

Although this is a corollary of current ratio, the movements in Net Working

Capital are watched to ascertain whether there is a mismatch of long term

sources vis--vis long term uses for purposes which may not be readily

acceptable to the Bank so that corrective measures can be suggested.


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(iii) Financial Soundness:

This will be dependent upon the owners stake or the leverage. Here again the

benchmark will be different for manufacturing, trading, hire-purchase & leasing

concerns. For industrial ventures a Total Outside Liability/ Tangible Net worth

ratio of 3.0 is reasonable but deviations in selective cases for understandable

reasons may be accepted by the sanctioning authority.

(iv) Turn-Over:

The trend in turnover is carefully gone into both in terms of quantity & valve as

also market share wherever such data are available. What is more important to

establish a steady output if not a rising trend in quantitative terms because sales

realization may be varying on account of price fluctuations.

(v) Profits:

While net profit is ultimate yardstick, cash accruals, i.e., profit before

depreciation & taxation conveys the more comparable picture in view of

changes in rate of depreciation & taxation, which have taken place in theintervening years. However, for the sake of proper assessment, the non-

operating income is excluded, as these are usually one time or extraordinary

income. Companies incurring net losses consistently over 2 or more years will

be given special attention, their accounts closely monitored, and if necessary,

exit options explored.

(vi) Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any

instrument such as CP / FD this will be taken into account while arriving at the

final decision. However as the credit rating involves additional expenditure, we

would not normally insist on this and only use this tool if such an agency had

already looked into the company finances.


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(b) Term Loan

(i) In case of term loan & deferred payment guarantees, the project report is

obtained from the customer,

(ii) Which may be compiled either in-house or by a firm of consultants/

merchant bankers? The technical feasibility & economic viability is

vetted by the bank & wherever it is felt necessary, the Credit Officer

would seek the benefit of a second opinion either from the Banks

Technical Consultancy cell or from the consultants of the Bank/ SBI

Capital Markets Ltd.

(iii)Promoters contribution of at least 20% in the total equity is what we

normally expect. But promoters contribution may vary largely in mega

projects. Therefore there cannot be a definite benchmark. The

sanctioning authority will have the necessary discretion to permit

deviations.

(iv) The other basic parameter would be the net debt service coverage ratio

i.e. exclusive of interest payable, which should normally not go below 2.

On a gross basis DSCR should not be below 1.75. These ratios are

indicative & the sanctioning authority may permit deviations selectively.

(v) As regards margin on security, this will depend on Debt: Equity gearing

for the project, which should preferably be near about 1.5: 1 & should

not in any case be above 2:1, i.e., Debt should not be more than 2 times

the Equity contribution. The sanctioning authority in exceptional cases

may permit deviations from the norm very selectively.

(vi) Other parameters governing working capital facilities would also govern

Term Credit facilities to the extent applicable.


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(C) Lending to Non-Banking Financial Companies (NBFCs)

(D) Financing of infrastructure projects

(E) Lease Finance

(F) Letter of Credit, Guarantees & bills discounting

(G) Fair Practices for lenders


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8.4 Documentation standards

a. The systems and procedures for documentation have been laid down keepingin view the ultimate objective of documentation which is to serve as primary

evidence in any dispute between the Bank and the borrower and for enforcing

the Bank's right to recover the loan amount together with interest thereon

(through a court of law as a final resort), in the event of all other recourses

proving to be of no avail. In order that this objective is achieved, our

documentation process attempts to ensure that:

The owing of the debt to the Bank by the borrower is clearly established

by the documents.

The charge created on the borrower's assets as security for the debt is

maintained and enforceable

The Bank's right to enforce the recovery of the debt through court of law

is not allowed to become time-barred under the Law of Limitation.

b. Documentation is not confined to mere obtention of security documents at the

outset. It is a continuous and ongoing process covering the entire duration of

an advance comprising the following stages:

Pre-execution formalities:

These cover mainly searches at the Office of Registrar of Companies and

search of the Register of Charges (applicable to corporate borrowers), also

capacity of borrowers to borrow and the formalities to be completed by the

borrowers, searches at the office of the sub-Registrar of Assurances or Land

Registry to check the existence or otherwise of prior charge over the


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immovable property offered as security, besides taking other precautions before

creating equitable / registered mortgage.

Execution of Documents

This covers obtention of proper documents, appropriate stamping and correct

execution thereof as per terms of the sanction of the advance and the internal

directives of a corporate borrower such as Memorandum and Articles of

Association, etc.

Post-execution formalities:

This phase covers the completion of formalities in respect of mortgages, if any,

registration with the Registrar of Assurances, wherever applicable, and the

registration of charges with the Registrar of Companies within the stipulated

period, etc.

Protection from Limitation / Safeguarding Securities:

These measures aim at saving the documents from getting time-barred by

limitation and protecting the securities charged to the Bank from being diluted

by any charge that might be created by the borrower to secure his other debts, if

any. These objectives are sought to be achieved by:

(a) Obtention of revival letter within the stipulated period

(b) Obtention of Balance Confirmation from the borrower at least at annualintervals

(c) Making periodical searches at the Office of the Registrar of Companies.

(d) Insurance of Assets charged - (unless specifically waived) to insure the

Bank against the risk of fire, other hazards, etc..


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c. Keeping the above broad objectives and the documentation process in view,

the Bank has devised standard documents in most cases for various types of

loans given to the borrowers. Wherever standard specimens have not been

evolved, these are suitably drafted on a case-by-case basis with the help of in-

house legal department and, on occasions, with the help of reputed outside

solicitors. Furthermore, changes in the documentation procedures and the

implications involved are circularized from time to time to all the

branches/offices so that those who are responsible for obtaining and

safeguarding the documents are made fully conversant with them. This is

further strengthened through on-the-job training at the branches as well as at

the Bank's training colleges / centers, where the officials are briefed on the

documentation procedures so that the Bank's interest is protected in this crucial

area.

d . In respect of consortium advances, the documents are generally executed in

consultation with the other member banks in accordance with the guidelines

laid down by RBI /IBA in the matter. Similarly, where advances are extended

jointly with the financial institutions, documents are specially drafted in

consultation with the solicitors / in-house legal experts to ensure pari passu

charge and / or second charge, whichever is applicable, of the movable /

immovable assets of the borrower to protect the Bank's interests.

e. While it is the Bank's endeavor to standardize documents for all types of

facilities, in cases where documents have to be specially drafted, the Local

Head Offices are empowered to vet and approve such documents for facilities

which are sanctioned at their level. For facilities requiring sanction of COCC /

ECCB, such specially drafted documents are cleared by the Corporate Centre.


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8.5 Requirement Of Documents For Process Of Loan

Application for requirement of loan Copy of Memorandum & Article of Association Copy of incorporation of business Copy of commencement of business Copy of resolution regarding the requirement of credit facilities Brief history of company, its customers & supplies, previous track

records, orders in hand. Also provide some information about the

directors of the company

Financial statements of last 3 years including the provisional financial

statement for the year 2011-12

Copy of PAN/TAN number of company Copy of last Electricity bill of company Copy of GST/CST number Copy of Excise number Photo I.D. of all the directors Address proof of all the directors Copies related to the property such as 7/12 & 8A utara, lease/ sales deed,

2R permission, Allotment letter, Possession

Bio-data form of all the directors duly filled & notarized Financial statements of associate concern for the last 3 years


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8.6 Delegation of powers

a. A scheme of Delegation exercise by the various functional Powers

comprehensively documented in 1985 and amended from time to time is inoperation in the Bank in respect of financial and administrative matters for rise.

This is based on the premise that an executive is required to exercise only those

powers which are related to the responsibilities and duties entrusted to him/her.

In exercising the powers, the authorities concerned are required to ensure

compliance also with the relevant provisions of the State Bank of India Act and

the State Bank of India General Regulations and any rules, r