CREDIT APPRAISAL & NPA MANAGEMENT

ARKADIP GUPTAPGDMB14-101

CONTENTS: INTRODUCTION IOB – a general introduction CREDIT APPRAISAL – methods used NPA MANAGEMENT – provisioning of

assets CASE STUDY ANALYSIS –

i. ABC TRADERSii. ABC GRAPHICS

CONCLUSION

INTRODUCTION

Experience at IOB

Case study details

Lessons learnt

INDIAN OVERSEAS BANK

Recent Achievements IOB adjudged Best Public Sector Bank in

Priority Sector Lending by Dun & Bradstreet. IOB has bagged Best bank Award from Govt

of Tamil Nadu for its support to Self Help Group (SHGs) in the State.

IOB received “Banking Excellence Award “ from Finance Ministry, GOI

IOB awarded Customer Focus Award for constantly delivering industry leading service standards.

Commendable IT Achievements (CBS, CTS, Mobile Banking, Payment gateway, etc)

SWOT ANALYSIS

Recent performances (financial)in CroreSOURCES OF FUNDS :

Capital 1,235.35 924.1 797 618.75 544.8

Reserves Total 14,934.82 12,533.26 11,130.65 8,706.18 6,979.78

Deposits 227,976.09 202,135.35 178,434.18 145,228.75 110,794.71

Borrowings 24,456.04 23,322.86 23,613.85 19,355.40 8,982.20

Other Liabilities &

Provisions6,302.55 5,740.47 5,661.45 4,875.19 3,790.14

TOTAL LI ABI LI TI ES 274,904.85 244,656.04 219,637.13 178,784.27 131,091.63

APPLI CATI ON OF

FUNDS :

Cash & Balances with RBI 11,735.10 9,837.82 10,198.91 10,010.89 7,666.45

Balances with Banks &

money at Call7,273.68 5,420.60 6,062.19 2,007.76 2,158.19

I nvestments 70,236.80 61,417.35 55,565.88 48,610.45 37,650.56

Advances 175,887.77 160,364.12 140,724.45 111,832.98 78,999.16

Fixed Assets 2,567.10 1,847.04 1,744.05 1,681.11 1,699.57

Other Assets 7,167.12 5,769.11 5,341.65 4,641.08 2,917.70

Miscellaneous Exp not

written off0 0 0 0 0

TOTAL ASSETS 274,904.85 244,656.04 219,637.13 178,784.27 131,091.63

Contingent Liability 84,280.17 71,001.21 59,192.54 45,075.89 39,340.52

Bills f or collection 14,345.76 12,645.16 8,336.52 4,253.20 3,205.15

Trend Analysis of IOB

NAME OF RATIO VALUE FOR IOB (in crore)

Gross NPA ratio. 4.98%

Net NPA ratio 3.19%

Important ratios in NPA analysis and values

CREDIT APPRAISAL

6 C’s of CREDIT APPRAISAL

WORKING CAPITAL A measure of both a company's efficiency

and its short-term financial health. The working capital is calculated as:  

Methods:I. Turnover MethodII. Max. Permissible Banking FinanceIII. Cash Budget Method

CA WCCL

Types of Loan Fund Based

I. WC loanII. Term loansIII. Composite loans

Non-Fund BasedI. Bank GuaranteeII. Letter of Credit

The workflow of CREDIT APPRAISAL

START

Receipt of documents

from applicants

Document

verification

Pre sanction visit by official

Preparation of financial

data

Proposal Assessme

nt

Proposal preparatio

n

Proposal approval

Documentation

mortgaging and

agreements

Disbursement of loans

Document

verification

Post sanction process

STOP

NPA MANAGEMENT

Importance of NPA management Reasons:

I. Internal factorsII. External factors

Impacts:I. Restriction of cash flowsII. Drain of profitsIII. Bad effect on equity valueIV. Bad effect on goodwill

Asset CategorizationStandard

Asset

• Regular servicing of interest and the principal owed to the bank• Their arrears normally don’t exceed the timeframe of 90 days

Sub-

Stanard

Asset

• Irregular servicing of interest with period varying from 91days to 1 year• The level of provisioning varies according to the category

Doubtfu

l Asset

• Being in the substandard category for over a year reduces the asset to this category.

• They require heavy provisioning and have very low salvage value

LossAsset

• They have very little salvage value to account off.• Once inspected by auditors they are normally written off• They require 100% provisioning

NPA provisioning

SARFAESI ACT,2002Allows the banks to recover their non-performing assets without the legal intervention. The Act provides three alternate measures:I. SecuritizationII. Asset ReconstructionIII. Enforcement of security without legal

powers

Other preventive measures

DRT

LOAN RESTRUCTURING

COMPROMISE / SETTLEMENT SCHEMES

BIFR

SALE OF NPAs TO OTHER BANKS

CASE STUDY ANALYSIS

1. ABC TRADERS (extension of WC loan)2. ABC GRAPHICS ( extension of WC loan,

failure of interest payment and subsequent sub standard account)

ABC TRADERS WORKING CAPITAL RENEWAL LOAN

The company primarily was distributor of imported papers and boards

The method followed for renewal of the WC loan was “Nayak Committee Method”

Owing to their foreign transactions, they were also given a LG of 1 CR.

The interest rate was 4.50% over BPLR. The collateral was worth of 2.26Cr. It was private limited company with

presence in Tamil Nadu and parts of Karnataka

ABC TRADERS BALANCE SHEET

Particulars AUDI TED AUDI TED AUDI TED ESTI MATED

31.03.2011 31.03.2012 31.03.2013 31.03.2014

1. NET SALES

i. Receipts 1463.8748 1612.72553 965.46 1062

ii. Export Receipts 0 0 0 0

TOTAL 1463.8748 1612.72553 965.46 1062

2. COST OF SALES

i. Opening Stock 0 0 223.38 241.36

ii. ADD : Payments 1368.52558 1509.0158 927.76 1025.54

Trading Expenses 0 0 4.57 5.02

iii. LESS Closing Stock 0 0 241.36 265.5

SUB TOTAL 1368.52558 1509.0158 914.35 1006.42

3. Gross Profit (+) / Loss (- ) {1 - 2} 95.34922 103.70973 51.11 55.58

4. Selling & Administrative Expenses 57.65416 60.08418 19.88 21.86

5. I nterest & Financial Charges 26.12761 29.35476 24.5 24.5

6. Depreciation on Other Assets 5.92431 5.01462 1.12 0.96

SUB TOTAL 89.70608 94.45356 45.5 47.32

7. Operating Profit / Loss (3- 4+5+6) 5.64314 9.25617 5.61 8.26

8. Other I ncome / Expenses

i. Other I ncome 2.12239 4.75393

ii. LESS Other Expenses 1.47576 0

SUB TOTAL 0.64663 4.75393 0 0

9. PROFI T / LOSS BEFORE TAX 6.28977 14.0101 5.61 8.26

10. I ncome Tax Paid 0 47.01781 1.12 1.65

11. Net Profit / Loss after Tax 6.28977 - 33.00771 4.49 6.61

12. Dividend

13. Retained Profit 6.28977 - 33.00771 4.49 6.61

14. Cash Accrual 12.21408 - 27.99309 5.61 7.57

Calculation:1. NAYAK Committee method

AUDI TED AUDI TED AUDI TED ESTI MATED

AS PER NAYAK COMMI TTEE 31.03.2011 31.03.2012 31.03.2013 31.03.2014

Net Sales 1463.8748 1612.72553 965.46 1062

Reqd Working Capital 25% of sales (A) 365.9687 403.181383 241.365 265.5

Promoter's Contribution : 5 % ( B ) 73.19374 80.6362765 48.273 53.1

Available N.W.C. ( C ) 21.57332 -24.15776 76.75 83.73

Minimum Permissible Bank Finance

( A ) - ( B ) 292.77496 322.545106 193.092 212.4

( A ) - ( C ) 344.39538 427.339143 164.615 181.77

WHI CHEVER I S LESS 292.77496 322.545106 164.615 181.77

2. TANDON Committee method (II method)

AS PER TANDON COMMI TTEE AUDI TED AUDI TED AUDI TED ESTI MATED

31.03.2011 31.03.2012 31.03.2013 31.03.2014

Net Sales 1463.8748 1612.72553 965.46 1062

Current Assets:

i. Stock in Trade 0 0 241.36 265.5

ii. Sundry Debtors 288.79913 202.39395 185.05 199.13

iii. Other Current Assets 1.09836 1.06036 62.75 55.08

TOTAL CURRENT ASSETS (A) 289.89749 203.45431 489.16 519.71

Current Liabilities other than Bank Borrowings

i. Creditors for Purchases 80.94977 25.92937 231.94 256.38

ii. Other Current Liabilities 0 0 5.47 4.6

TOTAL CURRENT LI ABI LI TI ES (B) 80.94977 25.92937 237.41 260.98

WORKI NG CAPI TAL GAP ( C ) 208.94772 177.52494 251.75 258.73

UNDER SECOND METHOD

N W C Required (25 % of TCA) ( D ) 72.4743725 50.8635775 122.29 129.9275

Net Working Capital Available ( E ) 21.57332 -24.15776 76.75 83.73

Maximum Permissible Bank Finance

( C ) - ( D ) 136.473348 126.661363 129.46 128.8025

( C ) - ( E ) 187.3744 201.6827 175 175

WHI CHEVER I S LESS 136.473348 126.661363 129.46 128.8025

ABC GRAPHICS WORKING CAPITAL LOAN

The proprietorial company dealt mainly with printing of cards and minor animation projects

The method followed for renewal of the WC loan was “ Tandon Committee Method”

The interest rate was the standard BPLR. The collateral was worth of 10L. Its interest servicing was poor and it was

reduced to sub-standard account.

Particulars AUDI TED ESTI MATED AUDI TED

31.03.2011 31.03.2012 31.03.2012

1. NET SALES

i. Receipts 30.14 38.73 23.53

ii. Export Receipts 0 0 0

TOTAL 30.14 38.73 23.53

2. COST OF SALES

i. Opening Stock 0 4.34 4.25

ii. ADD : Payments 26.8 28.77 20.87

Trading Expenses 3.24 3.87 4.73

iii. LESS Closing Stock 4.34 3.64 7.74

SUB TOTAL 25.7 33.34 22.11

3. Gross Profit (+) / Loss (- ) {1 - 2} 4.44 5.39 1.42

4. Selling & Administrative Expenses 1.17 1.87 2.25

5. I nterest & Financial Charges 0.68 0.84 0.84

6. Depreciation on Other Assets 0.64 1.12 0.86

SUB TOTAL 2.49 3.83 3.95

7. Operating Profit / Loss (3- 4+5+6) 1.95 1.56 - 2.53

8. Other I ncome / Expenses

i. Other I ncome 0.22 0.29

ii. LESS Other Expenses 0 0.3 0.48

SUB TOTAL 0.22 - 0.3 - 0.19

9. PROFI T / LOSS BEFORE TAX 2.17 1.26 - 2.72

10. I ncome Tax Paid 0.1 0 0

11. Net Profit / Loss after Tax 2.07 1.26 - 2.72

12. Dividend

13. Retained Profit 2.07 1.26 - 2.72

14. Cash Accrual 2.71 2.38 - 1.86

ABC GRAPHICS BALANCE SHEET

1. TANDON Committee method (II method)

AS PER TANDON COMMI TTEE AUDI TED AUDI TED ESTI MATED

31.03.2011 31.03.2012 31.03.2012

Net Sales 30.14 23.53 38.73

Current Assets:

i. Stock in Trade 12.65 7.74 14.28

ii. Sundry Debtors 1.47 2.84 1.5

iii. Other Current Assets 0.8 0.7 1.2

TOTAL CURRENT ASSETS (A) 14.92 11.28 16.98

Current Liabilities other than Bank Borrowings

i. Creditors for Purchases 0.73 1.85 0.86

ii. Other Current Liabilities 0.07 0.78 0.2

TOTAL CURRENT LI ABI LI TI ES (B) 0.8 2.63 1.06

WORKI NG CAPI TAL GAP ( C ) 14.12 8.65 15.92

UNDER SECOND METHOD

N W C Required (25 % of TCA) ( D ) 3.73 2.82 4.245

Net Working Capital Available ( E ) 7.98 3.36 10.52

Maximum Permissible Bank Finance

( C ) - ( D ) 10.39 5.83 11.675

( C ) - ( E ) 6.14 5.29 5.4

WHI CHEVER I S LESS 6.14 5.29 5.4

Notional Dues Calculationa) Outstanding as on the date upto which interest was last

debited 528980

Date of interest last debited/Date of NPA whichever is earlier

08/06/201

ADD:

b) Simple interest to be added from the date of interest last debited or date of NPA whichever is earlier till date of sub-mission of compromise Proposal at the Bank’s base rate prevailing on the date of submitting the proposal / contract rate / decreed rate of interest which ever is less.

13.25% pa

c) Debits such as Bills returned unpaid, DPGs invocation of Guarantees or any other business debits made after the date mentioned in col.(a) above

d) Interest on the (c ) above at the rate mentioned in col.(b) 70090

e) Other Expenses viz. ECGC/DICGC premium, Godown rent, Insurance premium paid, charges paid to Security agencies/ Personnel etc., subsequent to the date of NPA.

f) Legal and Other Expenses incurred subsequent to date mentioned in col. (a) above

15,009

SUBTOTAL: A 614079

LESS:

a) Recoveries made after the date mentioned in col. (a) and Countervailing Interest : Date Amount CV Interest Total X

b) CV Interest on ECGC / CGTMSE claim received amount. CV Interest Y Sub Total Z=X+Y

NOTIONAL AMOUNT DUE FROM THE PARTY (A - Z )

ABC GRAPHICS

Proprietary company They were new in the

area of business The projected sales

on the basis of which loan was approved was too ambitious

Their risk assessment was poor

ABC TRADERS

Private limited company

The proprietors were highly experienced in the paper industries

Its sales prediction were much accurate than the former

They had excellent history of borrowings with IOB

COMPARATIVE STUDY between the 2 cases

LESSONS LEARNT

Lessons learnt Proper evaluation of risk while providing

of loans The recovery workflows used by IOB in

case of an account turning NPA The general banking operations

especially the instrument clearing cycle.