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SUMMER TRAINING
PROJECT REPORTON
CREDIT APPRAISALOF
LORD KRISHNA BANK
IN PARTIAL FULFILMENT FOR THE REQUIREMENT
OF TWO YEARS FULL TIME POST GRADUATEPROGRAMME IN MANAGEMENT, 2005-2007
SUBMITTED BY:
SONICA CHHABRA
PGDBM: SEMESTER II
ROLL NO: 46
NEW DELHI INSTITUTE OF MANAGEMENT
NEW DELHI
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ACKNOWLEDGEMENT
I would like to present my sincere thanks to LORD KRISHNA BANKfor providing me a first hand experience in this ever expandingBanking Sector. I express my heartiest gratitude towards Mr. P.K.Mahana, credit manger, regional office, ITO, for guiding me andhelping me in the successful completion of this project.
I also wish to convey my special thanks and veneration to all myseniors as well as my colleagues for providing me a valuable acumeninto the banking sector. I would like to express my gratitude towardsthem for helping me and cooperating with me at every step of myproject.
Last but not the least I would like to express my gratitude to theteachers at New Delhi Institute of Management for conducting ourcourse with utmost sincerity and Mrs. Prerna Sareen for her guidance
and support.
(Sonica Chhabra)
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PREFACE
The main business of a banking company is to receive deposits and
lend money. Receiving deposits involves no risk, since the banker is
the creditor but in case of lending the risk involved is very high sincethere is no guarantee of the repayment. But lending being the main
source of income for the bank although has high levels of risks
associated with it is the indispensable function of banking
companies .As this lending is not out of his own capital but out of the
deposits from the public , the banks have to be follow very cautious
policy .
The project is a detailed study of credit appraisals done by lord
Krishna bank. it is a step by step procedure including companys
profile, types of advances, comparative analysis of different bank on
certain parameters and lastly concluding the study while putting some
recommendation hoping that it would help the bank maintain its
expansion path.
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TABLE OF CONTENT
Introduction of the Banking Industry
Profile of Lord Krishna Bank
Loans and Advances Product offerings of the Bank
Fund Based Advances
Retail Loans
Determination of Credit Worthiness and Credit rating
Post lending Supervision and Follow Up
Non Performing Assets
Recommendations
Bibliography
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EXECUTIVE SUMMARY
.
.Lending is an imperative function of a bank .it is the main source of
income for the bank although has high levels of risks associated with
it because it is done out of deposits of public.
This project gives detailed study of how credit appraisals are done
.Once the proposal is received ,it is analysed on various parameters
like financial,managerial,technical viability.Each proposal is evaluated
by the bank by analyzing the candidates psychographic position,
demographic position, assets cushion and the status of the financials
of the applicant. A process cum recommendation note and a scoring
module is prepared by branches and sent to the regional office for the
approval of the loan .The bank has developed different scoring
modules according to the nature of the various loans.once the loan
is sanctioned it is monitored on regular basis.This project involves acomparative analysis of different banks on various parameters like
BPLR,MLR,rate of interest on various schemes,NPA..finally I have
discussed working capital assessment for service and manufacturing
sectorwith the help of case studies.
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BANKING INDUSTRY
Banks are very important for the smooth functioning of financial
markets as they serve as repositories of vital financial information
and can potentially alleviate the problems created by information
asymmetries.
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 of commercial banks and cooperative banks.
Commercial banks can be further grouped in to 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 67000 branches spread across the country. Industry
estimates indicate that out of 274 commercial banks operating in India,
223 banks are in the public sector and 51 are in the private sector. The
private sector bank grid also includes 24 foreign banks that have
started their operations here.
In 1991, the Indian economy went through a process of economic
liberalization. Recognizing that the success of economic reforms was
contingent on the success of financial sector reform as well, the
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government initiated a fundamental banking sector reform package in
1992.These reforms were basically aimed at ensuring the safety andsoundness of financial institutions and at the same time at making the
banking system strong, efficient, functionally diverse and competitive.
The reforms included measures for arresting the decline in
productivity, efficiency and profitability of the banking sector.
Banking system plays a significant role in a nations economy. Abanking situation is indispensable in a modern society. It plays a
pivotal role in the economic development of a country and forms the
core of the money market in an advanced country. Being a prime
employment of the financial sector it forms an important sector on
which nearly all the other sectors depend. Management skills
acquired in banking sector can be utilized in other sector but not vice
versa.
Presently the banking sector contributes handsomely to the nation
building process not only by financing the priority/ weaker section but
also by including higher monetization in the economy. In June 1969
on the eve of nationalization, the share of priority sector in total credit
of SCB was a mere 14% (Rs. 504 Crore). By March 2002, with a
massive involvement of PSBs their outstanding lending to priority
sector had clam up to Rs 171,185.26 Crores. As percentage of net
bank credit the same was 43.12 %( against the mandated 40%
share.)
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The competitive environment created by financial sector reforms hascompelled the banks to gradually adopt modern technology, albeit to
a limited extent, to maintain their market share. The Indian banking
has finally worked up to the competitive dynamics of the new Indian
market and is addressing the relevant issues to take on the
multifarious challenges of globalization. Banks that employ IT
solutions are perceived to be futuristic and proactive players capable
of meeting the multifarious requirements of the large customers
base. Private Banks have been fast on the uptake and are reorienting
their strategies using the internet as a medium The Internet has
emerged as the new and challenging frontier of marketing with the
conventional physical world tenets being just as applicable like in any
other marketing medium.
The Indian banking has come from a long way from being a sleepy
business institution to a highly dynamic entity. This transformation
has been largely brought about by the large dose of liberalization and
economic reforms that allowed banks to explore new business
opportunities rather than generating revenues from conventional
streams (i.e. borrowing and lending).Modern day banks are not mere suppliers of money. They now
provide a basket of services such as selling insurance, mutual funds
and investment opportunities and playing the role of an advisor to
various individuals as well as Corporate. However, non-bank financial
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companies and development finance institutions are also emerging
as alternative sources of funding.
Banks are among the main participants of the financial system in India.
Banking offers several facilities & Opportunities. This section of the
provides comprehensive and updated information, guidance and
assistance on all areas of banking in India.
Bank of Hindustan, set up in 1870, was the earliest Indian Bank .
Banking in India on modern lines started with the establishment of
three presidency banks under Presidency Bank's act 1876 i.e. Bank of
Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency
banks were amalgamated to form the Imperial Bank of India.
The commercial banking structure in India consists of: Scheduled
Commercial Banks & Unscheduled Banks. Banking Regulation Act of
India, 1949 defines Banking as "accepting, for the purpose of lending
or investment of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheques, draft, order orotherwise."
The Software Packages for Banking Applications in India had their
beginnings in the middle of 80s, when the Banks. spurred on by RBI
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and the Rangarajan Committee Report, started computerising the
branches in a limited manner.
The arrival of foreign and private banks with their superior state-of-the-
art technology-based services pushed Indian Banks also to follow suit
by going in for the latest technologies so as to meet the threat of
competition and retain customer base.
The evolution of IT services outsourcing in the Indian banks has
presently moved on to the level of Facilities Management (FM). Banks
now looking at business process management (BPM) to increase
returns on investment, improve customer relationship management
(CRM) and employee productivity.
For, these entities sustaining long-term customer relationship
management (CRM) has become a challenge with almost everyone in
the market with similar products
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LATEST TRENDS IN BANKING
Advancements in technology have led to improvement in the
ways in which bank process information. Use of cheque
imaging, which allows bank to store photographed cheques on
computer, is one such example that is implemented by some
banks.
Availability and growing use of credit rating software allows
loan to be approved in minutes, rather than days making
lending department more efficient.
Electronic banking by phone or computer allows customers to
pay the bill and transfer the money from one account to another
through these channels, bank customer can access information
such as account balance and statement history
Many routine banking services that required letter such as
making a withdrawal or deposit are now available throughATMs that allow people to access accounts 24 hours a day
Also direct deposit allows cos and government to electronically
transfer payments into various accounts.
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Many banks now offer customers financial planning and asset
management services as well as brokerage and insuranceservicesoften through subsidiary or third partyothers are
beginning to investment banking services that help cos and
government to raise money through issuance of stock and
bonds through subsidiary.
As banks respond to deregulation and as competition in this
sector grows,the nature of banking industry will continue to
undergo significant change.
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LORD KRISHNA BANK
IN 1940, LKB was born in a small Kolmet at Kodungallur in Thrissur
district of Kerala. Although the bank started at a very modest level, by
1960 the bank was in position to take over three commercial banks:
Thiya bank, Josna bank & Kara union bank. From 1999 majority
stake in the bank is held by Mohan group (Puri group), which is a
pioneer in the field of banking, financial services & international trade
etc.
Today, while the bank continues to retain its trademark values of
personalized customer care, it has grown exponentially in size and
scope, from a local player to a national player. It is one of the oldest &
most successful private sector banks in India. The 64 year old Kerala
based bank has today 106 branches spread in 11 States and U.T of
Chandigarh. To reach out more customers and offer them innovativeservices and financial products, the bank is opening more fully
automated branches across the country. The Bank has opened 10
branches since 31.03.2003.Further the bank holds license for
opening 8 more new branches spread over India during the current
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fiscal. From traditionally a people driven entity it is redefining
relationship banking with the ideal partnership of man and machine.In tune with this the network of 92 branches are well supported by 6
extensions counters & 23 ATMs. The bank has taken important
initiatives towards computerizing its network .It is investing heavily in
the field of IT. In order to provide easy & better access to its
customers, the bank is in negotiation with major software & solution
providers. At present 90% of the banks business is computerized.
The bank plans to adopt state-of-the-art technology for inter-
connectivity in anywhere, anytime banking
LKB has branches in 11 states and 1 union territory
ANDHRA PRADESH
DELHI
HARYANA
GUJARAT
KARNATAKA
KERALA
MAHARASHTRA
PUNJABTAMIL NADU
UTTER PRADESH
CHANDIGARH
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Lord Krishna bank has ambitious plans for business growth in the
year ahead.highlights of the plans are
Goals
Total business to cross Rs. 5000 crores
Reduce average cost of deposits by increasing focus on
mobalisation of low cost clients
Quantum increase in customer base through sustained focus
on retail and SME clients
Achieve zero NPA by 2007
Expand delivery channels through increase in branch network,
extention counters,ATMs and alternate banking channels
Customize existing products and develop new products in order
to attract specific target groups.
KEY PERFORMANCE INDICTORS
PARTICULARS 31-03-04 31-03-05 % GROWTH
Capital and reserves 1392454 1601278 15.00%Average deposits 17395900 20647300 18.69%
Average advances 8037000 11339700 41.09%
Investment 10471445 8470283 -19.11%
Working funds 26045614 25251505 -3.82%
CRAR 16.68% 11.74%
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LOANS AND ADVANCES
The main business of a banking company is to receive deposits and
lend money. Receiving deposits involves no risk, since the banker is
the creditor but in case of lending the risk involved is very high since
there is no guarantee of the repayment. But lending being the main
source of income for the bank although has high levels of risks
associated with it is the indispensable function of banking
companies .As this lending is not out of his own capital but out of the
deposits from the public , the banks have to be follow very cautious
policy .
The banking in India is highly fragmented with 30 banking units
contributing to almost 50% of deposits and 60% of advances. Indian
nationalized banks (banks owned by the government) continue to be
the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization.
Through aggressive marketing efforts, Lord Krishna Bank increased
its gross Advances to Rs.1419 Cr. as on 31.03.2005 as compared to
Rs. 1118 Cr for the previous year,registering a growth of 26.92%
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during the year.
GENERAL PRINCIPLES OF SOUND LENDING
Safety of funds-the loan should be paid to reliable borrower
who could repay it within short period from reasonably
dependable sources.
Social objective
Assured repayment
Spread of risk
Purpose of loan
Law of limitation-
Security- safety of funds is assured by obtaining marketable
security as collateral besides primary security so that in the
event of default of repayment of advances by the borrower the
banker can fall back upon the securities for the realization of
dues to him
Profit earning of the bank- the aspect of profitability has
remained the ultimate objective of lending. No prudent banker
would like to do the business of lending which yields no return
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LIQUIDITYOF
BORROWER
PROFITEARNINGS
OFBANK
SECURITY
PURPOSEOF
LOAN
SPREAD OFCREDIT RISK
ASSUREDREPAY-
MENT
SOCIALOBJECTIVE
LAW OFLIMITATION
ACT
SAFETYOF
FUNDS
PRINCIPLESOF
LENDING
or which results in loss.banks have to see that the profit is kept
at an ascending level so as to be able to pay divident atincreasing rate year after year to sustain investors interest in
the bank.
Liquidity of the borrower
LKB offers wide range of retail products
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TwowheelerLoans
Used carLoan
Personalloan
HomeLoan
GoldLoan
Retail products
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CarLoan
PARTICULARS SALARIEDPERSONS
SELF EMPLOYED
Target Governmentservants,employeesof psus and listed
cos of repute
Self-employedbusinessmen
Eligible Confiremedemployee
Minimum 2 years inexisting line ofbusiness with 3
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years of totalexperience
Purpose Purchase of 2wheelers
Purachase of 2wheelers
Age Minimum-21 yearsMaximum-60 years
or the age ofretirement whichever
is earlier
Minimum-21 yearsMaximum-60 years
at the end ofrepayment period
Loan tenure 12-36 months 12-36 months
Rate of interest 13% 13%
Processing fees Rs.500 Rs.500
Penal interest 2.5% 2.5%
Cheque returncharges
Rs. 1000 per chequereturned
Rs. 1000 percheque returned
Income criteria Minimum net takehome-Rs
8000/month,Rs.1 lacp.a
Minimum annualincomers.1.25 lacs
Minimum loanamount
25000 25000
maximum loanamount
80% of market valueof approved valuer
80% of the price
Bank statement Last 6 months Last 6 months
Eligibility incomeratiosFOIR
EMI 50% of incomeafter tax
EMI 50% of cashgeneration or
income after tax
PCRI N/a N/a
Margin 20% 20%
Prepaymentcharges 2% of theoutstanding amount 2% of theoutstanding amount
Clubbing of spouseincome
Allowed Allowed
Guarantee Hypothecation of Two wheeler
Hypothecation ofTwo wheeler
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HOME LOANS
Purpose Purchase of land,construction,repair etc
Age Minimum-21 yearsMaximum-60 years or age of retirement
whichever is earlier
Maximum loan 50/45/50 times gross monthly salary as per thecategories
rent income-income upto-65% to be considered
Bank statement Last 6 months
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Eligibility criteriaCategory 1A
1. employee with central government/state
government/public sectorundertaking/MNCs in supervisororycategory without any maximum salary
stipulation2. professional and self employed individuals
like doctors,CAs,qualified architects3. all gazetted officers appointed through
UPSC like IAS, IPS, IRS, IFS,and statepublic service commission and state
administrative services
Category 1 1. employed with central government/stategovernment/MNCs/profit making cos withmonthly minimum gross income of 6000
and clubbed income of 100002. professionals and self employed individuals
like doctors.CAs,Qualifiedarchitects,management consultants
3. self employed businessmen having sameline of business for last 3 years having
latest IT return of minimum 1 lacs4. cluster home loans through society without
any minimum number5. borrowers having good repayment track of
12 months in respect of existing loansunder any category with us or other
banks/NBFC/FIs
General category All individuals other than above with minimumdeclared monthly income of 5000 or above
Rate of interest Category 1A and 1 generalcategory
Floating rates p/aUpto 5 years-7.25%
8.25%6-10 years 7.5%
8.5%
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Lord Krishna Banks exposure to housing loan for quarter ending 31-03-
06 is 3.24%
11-20 years- 8% 9%
fixed ratesUpto 5 years-7.5% 8.5%6-10 years 7.75%
8.75%11-20 years- not available not
available
all loans above 10 yearsshall be floating rates only
CAR LOANS
PARTICULARS SALARIEDPERSONS
SELF EMPLOYED
Target Governmentservants,employees ofpsus and listed cos of
repute
Self-employedbusinessmen
Eligible Confiremed employee Minimum 2 years inexisting line ofbusiness with 3years of totalexperience
Purpose Purchase of 2wheelers
Purachase of 2wheelers
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Age Minimum-21 yearsMaximum-60 years orthe age of retirementwhichever is earlier
Minimum-21 yearsMaximum-60 years
at the end ofrepayment period
Bank statement Last 6 months Last 6 months
Eligibility incomeratiosFOIR
EMI 50% of incomeafter tax
EMI 50% of cashgeneration or income
after tax
PCRI N/a N/a
Margin 10% 10%
Prepayment charges 2% of the outstandingamount
2% of theoutstanding amount
Clubbing of spouseincome
Allowed Allowed
Guarantee Hypothecation of Twowheeler
Hypothecation ofTwo wheeler
Lord Krishna Banks exposure to vehicle loan for quarter ending31-03-06 is 0.13%
Personal loan
Purpose Personal needs
Age Minimum-21 yearsMaximum-60 years at the time of repayment
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Tenure
12-48 months
Minimum loan 30000
Maximum loan 10 times of take home,maximum rs. 5 lacsBank statement 6 months
Rate of interest Category 1A13% interest.5% processing feescategory 114% interest1% processing fees
EDUCATION LOAN
Eligibility Courses in India school education including +2 stage
graduation,phd,PG, professional courses
computer certificate courses by universities/institutes
accredited to DoE ICWA,CA,CFA
Professional courses of foreign universities
Studies AbroadGraduation: job oriented professional/technical coursesoffered by reputed universities approved by AICTEPost graduation: MCA,MBA,MS,courses conducted byCIMA in London and CPA in USA
Studenteligibility
Should be Indian national
Secured admission to professional courses through
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entrance tests Minors represented by P/G
Major jointly with P/G Children of employees eligible: net take home pay
minimum 40% Flexibility in income criteria considered upto 10% in
deserving cases
Expenseseligible
All fees payable,purchase of
books,equipment/uniforms Caution deposit,building fund,refundable deposits
Travel expenses/ passage money for students
abroad Purchase of computer(for study)
Any other expenses like study tour,project
work,thesis
Quantum of finance
IndiaUpto and including 4 lacs-nil
Above 4 lacs-5%Abroad-15%Scholorship to be treated as margin
Security Common for inland and foreign studiesAbove 4 lacs-security equal to 125% of loan includinginterest accrued for moratarium periodLand/building/government securities/NSC/LIC/KVP etc
Rate of interest 12%
Processing fees Nil
Repayment Holiday/moratarium: course period + 1yearOr6 months after getting job whichever is earliar
to be repaid in 5-7 years after commencement ofrepayment
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Lord Krishna Banks exposure to Education loan for quarter ending 31-03-06 is .0018%
PROCESSING OF THE RETAIL LOANS
Each proposal is evaluated by the bank by analyzing the candidates
psychographic position, demographic position, assets cushion and
the status of the financials of the applicant.
A process cum recommendation note and a scoring module is
prepared by branches and sent to the regional office for the approval
of the loan .The bank has developed different scoring modules
according to the nature of the various loans taking the following
basic factors into consideration:
Qualifications of the Applicant
Occupation of the Applicant
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Experience of Work
Age of the Applicant
Family Background( Financial Support, No of
Dependents, Saving
habits, etc.)
Repayment history of the previous loans
Collateral Security
Income Category of the applicant (i.e. Salaried
or Self Employed )
Income of the Applicant for the past 2 Years.
Status of the Guarantor
The relevant score for the applicant is determined for each category
and evaluated against the minimum acceptance score, good score
and excellent score criteria of the bank.
The loan amount for the applicant is determined as follows:
Gross Income (A)
Add: Income through other sources (Rent etc.)(B)
Less: Deductions(C)
Eligible Loan Amount = (A+B-C)
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The following ratios are also calculated for the quantitative analyses
of the financial adequacy of the applicant:
Per Capita Residual
Income(PCRI)
Installment to Income Ratio
Fixed Obligation to Income
Ratio
LTV Ratio
Per Capita Residual Income (PCRI)
PCRI = Net Monthly Income - EMI
No of Dependents
This amount calculated as per this ratio presents the net per capita
disposable income of the applicant. Bank prefers an amount of more
than Rs. 1000 for sanctioning of the loan.
Installment to Income Ratio (IIR)
IIR = EMI X 100
Net Income
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IIR ratio indicates the percentage of income absorbed by the equalmonthly installments of the applicant. A figure higher than 40%
implies a high degree of risk for the bank. The bank generally avoids
granting loans to such applicants.
Fixed Obligation to Income Ratio (FOIR)
FOIR= EMI +Deductions from the salary+ Installments of other loans
x 100
Gross Income
The percentage calculated through this ratio should not be less than
70%
LTV RATIOLTV = Loan amount X 100Cost of Property
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FUNDBASED
NON FUNDBASED
CURRENTASSETS
FIXEDASSETS
CURRENTASSETS
FIXED
CASH CREDIT,
BANK
OVERDRAFT,
BILLS
PAYABLE,
PACKING
CREDIT LOAN
BANK
GAURANTE,
PAYMENT
GAURANTEE
LETTER
OF
CREDIT
BANK
GAURANTEELord Krishna Bank while confronting its competitionoffers a gallery of banking solutions such as:
ADVANCES
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OVERDRAFT AGAINST DIFFERENT TYPES OFSECURITIES
A borrower generally borrows from the bank against the following:
Term Deposits
LIC policies
Shares and Securities
Advances against Term Deposits
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Lord Krishna Bank also grants loans against term deposits, such a
loan is granted only on those deposits in respect of which there in nolien. Such deposits should be free from encumbrance, provided the
deposits are in the name of the applicants. Loan up to the amount of
90% of the deposit can be sanctioned and a rate of interest of 2%
above the deposit rate is charged. A lien is marked on the original
term deposit receipt and is retained by the bank.
Documents required:
Demand Promissory note
Letter of Delivery
Letter of Cancellation
Advances against LIC Policies
Policies issued by Life Insurance Corporation of India are an
approved security by Banks for the grant of advances. A loan amount
of 90% against the surrender value of the policy can be sanctioned by
the bank.
Policies acceptable for Loan
Endowment Policies
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Whole life Policies
Postal life insurance Policies
Policies not acceptable for Loan
Childrens endowment policies
until the policies are assigned in favor of the minor on
attaining majority.
Policies with nomination under
Marreid womens property act.
Children Deferred assurance
policies until the policies are adopted by the minor on
attaining majority.
Policies taken on the lives of
minors until they are assigned in their favor on their
attaining majority.
The following information concerning the policy offered as security
should be obtained:
1. Face value, Paid up Value, Surrender Value.
2. Due dates of premium and premium payable
monthly/quarterly /half yearly/ yearly.
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3. Whether the age assured has been admitted. If admitted, the
same will be mentioned on the front page of the policy itself.If admitted later (i.e. after issue of the policy), an
endorsement would be seen in the policy document.
4. All previous assignments and registration/reassignment of
each such assignment.
5. The latest premium paid receipt.
6. The bank also obtains the surrender value directly from the
insurance where the policy is being serviced.
Assignment:
The policy is charged in favor of the bank by the assured
/beneficiaries on the policy as well as in a separate document. The
copy of the assignment, the policy document containing the
assignment is sent to the office of the insurer along with his notice
of assignment. The same policy is reassigned in the name to the
assured on the closure of the loan amount.
Advances against Securities
The bank also issues overdraft against Government securities such
as stock certificates, Government promissory notes, NSCs, etc.
these government securities constitute the borrowings made by the
central and state government from public.
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Stock certificates are issued by the
President and the Governor of the state in token for
having registered the name of the owner as the
proprietor of a certain amount of a specified loan of a
particular government. Since stock certificate is not a
negotiable instrument, the property therein cannot be
transferred by mere endorsement and delivery. Thus
these certificates can only be transferred through the
means of a transfer deed (printed on the reverse side
of the certificate).
Government Promissory Note can be
transferred by endorsement and delivery as they are
the promissory notes.
Therefore, while taking an overdraft against such a security, the
bonds are endorsed by the borrower in favor of the Bank as
Pay Lord Krishna Bank Ltd. Before granting the loan the bank
examines all the prior endorsements carefully.
While granting the overdraft against Stock Certificates and GP Notes
a margin of 25- 40% is maintained on the market value for deciding
the quantum of advance. The market value of each these securities
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can be ascertained from the debt market quotations of any of the
leading stock exchange or NSE.
A demand loan or overdraft can be
availed by the borrower against the NSC/KVP of the
post office. The quantum of loan is ascertained as a
margin of 25% on the face value +accrued interest for
NSC and 25% of the purchase value+ accrued interest
in case of KVP.
TERM LOANS
Bank term loans are the basic vanilla commercial loan. They typically
carry fixed interest rates, monthly or quarterly repayment schedules
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and a set maturity date. Bankers tend to classify term loans into two
categories:
Intermediate-term loans: Usually running less than three years, these
loans are generally repaid in monthly installments (sometimes with
balloon payments) from a business's cash flow. Repayment is often
tied directly to the useful life of the asset being financed.
Long-term loans: These loans are commonly set for more than three
years. Most are between 3 and 10 years, and some run for as long as
20 years. Long-term loans are collateralized by a business's assets
and typically require quarterly or monthly payments derived from
profits or cash flow. These loans usually carry wording that limits the
amount of additional financial commitments the business may take on
(including other debts but also dividends or principals' salaries), and
they sometimes require a profit set-aside earmarked to repay the
loan.
Cash credit
It is fund based working capital credit facility provided totraders/manufactures and the like
It is a running account facility extended for a short period say 1
year and is reviewed .on review limits can be renewd ,enchanced
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or decreased,after fresh appraisal of working capital credit
reqirement of borrowerIt is a presale finance against stock of raw material,finished goods
So the primary security for a banker is stock of goods details of
which are furnished by the borrower in the form of statement of
stock every monthto the former
The drawable limit under cash credit is fixed by bank after applying
security margin over the value of stock declared in statement by
borrower.therefore borrower can draw funds under drawable limits
subject to availability of stock and maintenance of security margin.
The cash credit is extended by taking goods either under
hypothecation or under pledge or sometimes coupled with
personal guarantee of third party.
The stock of goods which is a primary security should have had
covered under insurance against all risks of loss such as against
fire and other warranties.
Overdraft
It is a running account facility where the account holder should
remit and draw funds freely subject to limit granted in the account
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It is granted against lien/pledge of current assets like- bills
receivables,government securities,units of mulual funds,companysshare and debentures,LIC policies,NSC, banks fixed deposit
Sometimes ordinary current account which is normally in credit
becomes overdrawn by passeage of a cheque drawn for a sum
more than credit balance at the foot of the account.it is alone at
specific request of account holder to help them tide over their
financial problems for a short period.it is reffered to as temporary
overdraft.
CREDIT DEPARTMENT
FUNCTIONING OF CREDIT DEPARTMENT AT REGIONALOFFICE,LORD KRISHNA BANK
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HIERARCHY
Chief ManagerManager3 Assistant managersBanking Assistant
Diagram showing the hierarchy of credit department
REGIONAL HEAD
CHIEF MANAGER
MANAGER
ASSISTANT ASSISTANT ASSISTANT
MANAGER MANAGER MANAGER
Line of command
Reporting system
Work allocation
Lord Krishna bank follows single window concept
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It follows parabolic system of reporting which means that
everyone repots directly to the regional head. Credit appraisals of 21 branches are done in regional office,
Delhi.
Branch heads for sanctioning the loans up to certain limits uses
managers discretionary power. These proposals subsequently
come to regional office for ratification and noting. While
sanctioning the loan under MDP, the branch head would:
1. Check for sanctioning power from DP chart
2. Rate of interest
3. Adequacy of security
The following duties have been allocated to the staff of the
credit department in the regional office
Chief Manager
He is responsible for the appraisals of credit proposals (fresh,
review, renew,ad_hoc sanction under RO and AO power)
He is handling CP ,Gurgoan
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He is responsible for the appraisal of credit proposals(fresh,review,renew, ad-hoc sanction under RO and AO power)
He is handling Amritsar ,Chandidarh ,kalkaji, lajpat nagar,
Ludhiana and rajouri garden branches
He is responsible for all matters emanating on the basis of AO
Credit circulars
Assistant Manager
Appraisals of credit proposals (fresh,review,renew, ad-hoc
sanction under RO and AO power)
He is handling Ghaziabad, Jalander, Karor Bagh and Shahdara
branches
He handles cases pending at AO and RO
CH118 and its Follow up
Assistant manager 2
All the powers relating to retail loan
MDP statement of all branches under the region
Appraisals of credit proposals (fresh,review,renew, ad-hoc
sanction under RO and AO power) of phagwara and faridabad
branches
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Assistant Manager 3
271 R of all branches under the region
Appraisals of credit proposals of Jaipur, Paschim Vihar, Patiala,
Preet Vihar, branches
Banking Assistant
MIS ,NPA, Standard and irregular accounts
All the proposals for Rs. !crore and above shall be put up by
concerned official through Chief Manager to Regional head
APPRAISAL OF CREDIT PROPOSALS
Importance
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Proper credit appraisal is vital from the point of view of meeting need
based credit facilities, improving recovery performance and keeping
the overdues down to minimum. To ensure that scarce lendable
resources are allocated judiciously to various segments of the
economy and to spread the risk is yet another objective of a sound
credit appraisal.
Credit information
An appraisal of a credit proposal begins with the gathering of
adequate background knowledge about the applicants character and
creditworthiness. The credentials of the applicant is prime
consideration in a proposal. An objective evaluation of applicant with
regard to his business standing, means and respectability is required.
This will form the basis for taking a decision on the proposal.
Information can be gathered tactfully from the following sources;
1. Customers other bankers, if applicant is having dealing with
other banks
2. Income/sales Tax assessment orders
3. Market sources
4. Financial statements
5. Property statement
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PROCESSING OF PROPOSALS
Information collected relevant to the borrower and business shall be
made use of for an objective assessment of credit needs of the
applicant. There
should not be any compromise or relaxation in this regard. It is also
advisable to call for the bank statement and peruse the same to
ascertain whether operations in the account are satisfactory.
1.Appraisal report
A detailed appraisal report must be prepared which shall cover the
following aspects
Purpose of advance
Mode and sources of repayment
Performance of industry/business
Technical and economical aspects of proposal
Financial position of the applicant
Brief resume of the past dealings of the applicant with the
bank/other banks
Borrowing, if any from other other banks/institutions
Securities offered and their easy realisability
Prospects of ancillary business/deposit
Comments made, if any by RBI Inspectors, statutory auditors,
internal inspectors on the account and rectification details
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For proposals that are to be sanctioned by the Board, it is advisableto prepare the above details in the Board note format itself. The
decision-making authority based on the above should be in position
to take an objective decision on the proposal.
GENERAL GUIDELINES
Inspection and in- Depth study.
The branch manager should study the proposal in depth and discuss
the various aspects with the applicant after a spot inspection. He
must be satisfied about the bank ability of the proposal. The actual
location of the factory/business place, its accessibility and other
features will come to light only if a visit is undertaken to the place.
A Banker and other lenders.A banker is different from other lenders; the banker lends for a
productive purpose and they look for repayment in ordinary course of
business of the borrower.Realising the security for the repayment of
dues is done only as a last resort as realization of a security is a long
drawn out and cumbersome process. The liquidity of every advance
should be beyond doubt and is an insurance against any unexpected
development.
Recommendations.
The branch manager while recommending a credit proposal is
conveying the meaning that the applicant is a suitable person to carry
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out this proposal with the help of this advance. Only the branch
manager can do a considered judgment of the applicant, as he is theman on the spot. The remarks and recommendations of the manager
should be accurate, specific and precise.
Sanction at branch level.
If the proposal comes within the powers granted to the branch
manager, he should sanction the same by making an order on the
proposal. Even when the advance comes within the discretionary
powers of the branch manager, there should not be any relaxation in
the care and diligence of the examination of the proposal.
Renewals.
All proposals for renewal should be taken up at least three months
before the date of expiry of the limits and such proposals should
reach the sanctioning authorities duly completed and with all
requirements at least30days prior to the date of expiry. All limits
Sanctioned to the same borrower must be taken up for renewal
simultaneousely.If a party enjoys limits at more than one branch, the
branch, which has originally forwarded the proposal shall be
responsible for obtaining and forwarding the renewal papers. In such
cases the proposal shall include comments of the respective branch
managers as well as details of the accounts at the different branches.No facilities shall be extended to parties against expired credit limits.If
for any reson like non-finalization of accounts,borrowers being
unavailable at ststion etc.the branch is not in a position to obtain the
regular proposal with full details,the branch shall seek provisional
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extension of the validity of the credit limits from the sanctioning
authority.While seeking such extension branches shall obtain arequest for this purpose from the borrower and forward it with suitable
recommendations.Such extension of validity of limits shall be sought
and obtained before the expiry of the existing limits.Limits sanctioned
at branch level under Managers discretionary powers also have to be
reviewed and renewed as stated above.
Forwarding of proposals to higher authorities for sanction.
In case of proposals falling within the powers of the regional office, a
copy of the proposal with all requirements and branch
recommendation should be sent to the regional office concerned .In
case of proposals falling within the powers of the managing
director/executive director/chief general manager /general manager
one copy each of the proposal is to be sent to the regional office
under whose control the branch functions and toAO.
Time limit for attending to credit proposals.
Branches should not take more than 30 days for disposing of a credit
proposal.At Regional office/AO also proposals should be disposed off
within 30 days.
Lapse and revalidation of sanction.
Any advance not availed of within 30 days of the date of the letter of
sanction shall stand lapsed .While applying for revalidation branches
Post Lending Follow Up and Supervision
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In the present competitive economic scenario, credit worthiness ofthe borrower is the centre piece of credit appraisal. Post lending
follow up and supervision activity is aimed at ensuring compliance of
terms of sanction, picking up signals on the health status of the client,
taking action and ensuring results of actions on continuous basis. The
ultimate objective of follow up is to ensure safety of the bank funds
and proper end use by calling for relevant information, both financial
and non financial periodically. Such follow up ensues into a better
NPA position of the bank by taking timely signals of the safety of the
bank fund
Information system Follow up:
A comprehensive system of follow up is applied in Lord Krishna Bank:
FOLLOW UP SYSTEM
Non Financial Follow up Financial Followup
1) Post Sanction audit of compliance 1) Quarterlyof terms and conditionsInformation
System.
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2) Monthly Stock Statements 2) Credit
Rating based follow up.
3) Annual Review, Renewal.
.4) Operations in the account
and value of connection
Non Financial Follow up
Monthly Stock Statement
The actual drawings or borrowings are regulated on the basis of
actual build up current assets. Therefore, stock statements
indicating the actual levels of inventories and book debts are
obtained at the end of every month and the DRAWING POWER
(D.P) for the borrower is calculated after deducting the stipulated
margins. While calculating this drawing power the unpaid stock is
not included.Also, a physical verification of stock is conducted by
the Branch Manager on the monthly/ bimonthly basis.
Annual Renewal and Renewal of all working capital limits:
Since the credit worthiness of the borrower is established by
analyzing the financial statements of the borrower including the
projections for the following year thereby to protect the quality of
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loan assets, the borrowing party is required to submit a complete
proposal, giving all relevant details which are critical for taking acredit decision within the 12 months of last sanction. The audited
information includes critical information such as credit facilities
taken from other banks and the key financial parameters i.e. actual
and projections for the next year and current years actual Vis- a-
vis projection submitted, etc.
Operation in the account and value of connection
A stalk of the various operations conducted through the account is
kept by the bank. Such a close watch is required for unwavering
feedback about its conduct. A poor turnover in the account,
persistent excess drawings, recurrent cash withdrawal, and
frequent return of bills or cheques are taken as serious signs of
peril.
The value of the client for the bank is judged from the total
earnings from the accounts accruing through the year. Such
earnings include interest on advances, installments for the
repayment of loan and service charges earned by the bank, etc.
Financial Follow Up
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Quarterly information system
The information system for the financial follow up as
recommended by the Chore Committee (a modification of the
recommendations made by the Tandon committee) requires a
submission of the following statements by the borrowers enjoying
a capital limit of Rs. 50 lakh and above:
I. Estimates for the ensuing quarter:
The form contains the following information such as:
Projected level of current assets and current liabilities,
including short
term bank borrowings.
Estimates of production and sales for the current year i.e.
including the ensuing quarter.
Operating statements furnishing the details of sales, cost of
goods sold, selling, general and administrative expenses,
interest paid and operating profit on the quarterly basisincluding the estimates for comparison.
The Funds Flow Statement giving the details of sources and
uses of funds for the last year(actual), current year(budgeted),
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last half year (estimates and actual) and current half year
(estimates).
The timely submission of this information is very important on the
part of the borrower to avoid the penalty levied by the bank.
The actual of the last half year are compared with the projected
figures and reasons for any large variations over and above the
standard norm such as 10% are ascertained. The estimates of the
current year checked and ensured that the projected bank
borrowings are within the MPBF.
Credit Rating Based Follow Up
On the basis of the credit worthiness and credit rating, the
borrowers are classified into eight categories. This rating is
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applicable for both fund based capital rating limits as well as
Demand loans and other Term Loans which are over and above25 lacs.
The following credit rating parameters are taken into consideration
while ascertaining such rating:
1. Current ratio
2. Debt Equity Ratio
3. Tangible Net worth Ratio
4. Fixed asset to coverage ratio.
5. Interest coverage ratio
6. Debt service coverage ratio(DCSR)
7. Achievement of projected Sales
8. Profit or loss
9. Timely Repayments
10. Operations in the account: Utilization of working capital limits,
BP/BD returned unpaid and cheques and bills returned.
11. Renewal and submission of stock /book debt statements,
Audited Financial Statements and other performance
indicators.12.Availability of collateral security
13. Value of relationship with the client.
14. The economic scenario of the industry and the efficiency of
the management.
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For the above parameters a scoring module including all theparameters has been designed to facilitate quantitative analysis of
the performance of the borrower.
For example,
If, Current Ratio is
Marks
i. Above 1.5
10
ii. Less than 1.5 but more than 1.33
8
iii. Less than 1.33 but more than 1.20
6
iv. Less than 1.20 but more than 1.17
4
v. Less than 1.77 but more than 1
2vi. Less than 1
0
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Similarly the relative scoring for each of the above parameter is
determined.The total marks scored are converted into percentage terms to
arrive at the applicable slab rate for chargeable rate of interest on
the basis of the, level of risk associated with the borrower.
Example:
Total Marks scored =85
In percentage terms the same is equivalent to 85%
The various weight ages can be analyzed in the following manner:
Range onweight ageon a scaleof 100
Rate Code INTERESTRATE
96% andabove
RRR++ Top notchgrading rate
BPLR-2%
91% to95%
RRR+ Top ratinggrading rate
BPLR-1%
86% to 90%
RRR Blue chipcompanies
BPLR-0.5%
81% to85%
RR+ Moderate riskcategories
BPLR
76% to80%
RR Moderate riskCategories
BPLR+1%
71% to75%
R + Moderate riskCategories
BPLR+2%
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66% to70%
R More thannormal riskcategories BPLR+3%
60% to
65%
R-1 More than
Normal riskCategories
BPLR+3.5%
Less than60%
Not to befinanced
The blue chip borrowers falling in the top three categories do not
require more than normal monitoring on the behalf of the bank.
Similarly borrowers falling into the next three slots (RR+, RR and
R+) also require normal monitoring. These borrowers are kept
under effective watch with the help of non financial follow up and
financial follow up.
However, for the borrowers falling into the category of R and R-1,
a more frequent follow up is conducted, thus for such categories
the bank frequently follows up the fortnightly/weekly stock
statements, monthly statement of statutory dues, etc. These are
considered as high risk borrowers and are kept under high
alert /watch list till their position improves and classification is
updated.
A separate rate of interest is charged from different categories i.e.
a borrower in the RR+ category shall be charged a higher rate of
interest than a borrower in the RRR+ category.
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36%
11%17%17%
8%
6%
2%
3%
0%
RRR++
RRR+
RRR
RR++
RR
R+R
R-1
below R-1
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BORROWERS RATING WISE DISTRIBUTION OFSTANDARD ADVANCES.
MONITORING
The following reports are required for monitoring of loan
1. 271R to check overdraw on weekly basis
2. FRR-first review report is sent by branch to regional office
within 45 days from thye date of disbursement
3. Compliance Certificates-it is signed by the customeracknowledging that he will comply with terms and conditions
after the loan proposal has been sanctioned by the branch
4. Legal Report made by rating agencies or advocates like clear
title certificates
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5. Valuation report prepared by approved valuer.
6. CH_118 report-it is a report generated by regional office andsent to branchs to check overdrawals of any account.
7. cash credit and overdraft are subject to renewal after 12
months from the date of sanction.Regional office has to follow
up 3 months before the expiry of 12 months
8. If cash credit limit is more than 500000,then regional office
requests for audited balance sheetin case audited balance
sheet is not available RO would ask for CA certified provisional
balance sheet with the condition that the customer will have to
submit audited balance sheet
9. review report-it is prepared at the time of renewal of cash credit
or overdraft.it contains all the information about the accounts
like frequency of overdrawals,maximum amont drawn,minimum
amount drawn.
SCHEME FOR LOAN AGAINST RENT RECEIVABLES.
1. rent discounting/repayment period:The maximum rent
discounting/repayment period enchanced to 84 monthssubject
to enabling renewal clause in lease/rent agreement
2. guidelines for arriving at the loan quantum where leave and
licence system is in vogue
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3. prepayment charges:prepayment charges stands reduced from
2% to 1%
4. The amount paid under various heads by licence as part of
total monthly payment for usage of the building/premises along
with fixture and furniture stipulated in lease, rental may be
considered for the purpose of discounting and arriving at loan
quantum.
5. Financial analysis of the borrower- relaxation
The main criteria for considering loans under the scheme shall be
on the future cash flow out of rent,lease,strength of lessee and
security(property) being situated in good commercial area and
easily marketable
6. Maximum exposure shall be limited to 10% of gross advances
PURPOSE
For meeting any business and/or personal needs of applicants.
ELIGIBILITY
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a. bonus of commercial property/house
property.getting regular income as per lease/rentdeed
b. commercial properties rented out to reputed
corporates,MNCs,Banks,insurance cos,govt
department,PSUs etc
c. house property located in good and posh locality
owned by individuals and let out to reputed
corporates, banks,mncs,insurance cos etc
the house property should be free from all
encumbrances
HUF properties can be accepted
The building proposed to be mortgaged should be
not older than 25 yrs and should be in good condition
RATE OF INTEREST
The rate of interest to be charged is PLR +2% i.e. 14.5% at
present.However where branch desires to charge lower ratedepending on the merits of proposal like reputation of lessee and
lessor, value of security,loan amount,other business connections.
REPAYMENT PERIOD
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Repayment period to be arrived at based on net amount available forEMI for unexpired period subject to maximum of 60 months
SECURITY
Mortagage of property against which lease rentals are to be
securitised.
Any of the following may be accepted as substituted securities
1. Alternate commercial ,residential property with clear title
equivalent to 150% of loan amount.
2. LIC policies with adequate surrender value upto 125% of loan
amount.
3. NSCs /KVPs/ IVPs having face value/invested amount upto
125% of loan amount.
4. Banks own term deposit either in name of borrower or 3rd party
deposits and 115% of loan quantum in other cases.
LOAN AMOUNT
The lessor can get a loan upto an amount that can be serviced by
rent receivables for the unexpired period of lease,excluding
TDS,Building tax/municipal tax/security deposit/advance
deposit,amrgin for meeting maintenance,repair and other expenses
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ASSESSMENT OF A LOAN
1. Gross rent receivables for the unexpired lease periodexcluding
subsequent renewals in-built in lease deed.
LESS
a. TDS
b. Building Tax,Municipal Tax
c. Security deposit
d. Advance rent
= Net rent receivables
LESS margin 20%
= Margin available for EMI
EXAMPLE
Eligibe loan amount is to be worked out as follows
1. Gross rent received 3.00Lacs/month
2. Unexpired period of lease(months) 48 months
3.Rent advance/security deposit(6months) 18.00 Lacs
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Rent receivable for the unexpired period of lease 144(3.00 lacs *48)
LESS:TDS @ 16.5% 23.76
----------
120.24
LESS: security deposit 18.00
-----------
102.24
LESS Building Tax/Municipal Tax .50
----------
101.74
LESS: margin of 20% 20.35
-----------
Amount available for repayment of principal interest 81.39
-------------
Based on the amount available for repayment we have to arrive at
eligible loan amount as follows
Rate of interest 16%
Loan period (max) 48 months
Amount available for EMI 1.69 L
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(Rs. 81.39 lacs/28 months)
Eligible loan amount
Repayment factors for 48 mths @16%=35.4230
1.69 L * 35.4230=58.86 Lacs
Lord Krishna Banks exposure to loan againt rent receivables for
quarter ending31-03-06 is .0289%
Rate of interest charged by different banks for loan against rent
receivables
Name of bank Rate of interest
Lord Krishna bank 14.5
United bank of india 12.5
Punjab and sind bank 10.5
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0
5
10
15
BANKS
lord krishna bank
punjab and sind
bank
united bank of
india
CASE STUDY DEPICTING LOAN AGAINST RENT
RECEIVABLES WHERE LKB BRANCH IS A TENANT.
Proposal for loan against rent receivables of Mr. Praveen kapoor, Ms.
Sunita kapoor,Ms.neeru kapoor for 50 lacs(land loard of branc
premises)
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Calculation of eligible amount
Gross rent received 3 lacs per month
Unexpired period of lease 106 months
Period for which rent is discounted 60 months
Rent advance/security deposit 9 lacs for 3 months
Rent receivable for the unexpired 180 lacs
period of lease
(3 lacs * 60)
less TDS say @10.5% 29.7
150.3
less security deposit 9
141.3
less building tax/municipal tax 5.0
136.3
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less margin 20% 27.26
amount available for repayment
of principal and interest 109.04
amount available for repayment 109.04
interest and principal
rate of interest 9%
loan period 60 months
amount available for EMI
(112.64 ) 1.82 lacs
( 60 mnths )
amount available for loan 1.82 = 87.02
2077
amount applied for loan 50 lacs
EMI 103850
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THE LOAN PROPOSAL IS SANCTIONED ON FOLLOWING
TERMS AND CONDITIONS
Facility- loan against rent receivable by discounting of rent paid for
pitam pura branch
Limit- 50 lacs
ROI- BPLR-3.5%=9%
Period of 60 months
Repayment reduction from DP to the extent of EMI i.e. 104000
every month
SC/PC-nil
Security-
Primary security-assignment of rent to be paid by our branch
Collateral security-nil
Personal guarantee-
Praveen kapoor- net worth -232.57 lacs
Neeru kapoor- net worth 134.90 lacs
Sunita kapoor- net worth 133.72 lacs
CASE STUDY DEPICTING ASSESSMENT TO CASH CREDIT
UNDER TRADE LOAN SCHEME
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M/S Banbros Engineering pvt ltd is a company having 2 directots on
its board i.e. Mr. V.S. Bansal (aged 44) and Mr. Sunil Garg (aged35). The company was eastablished in the year 1996 and is engaged
in the business of trading and assembling of scientific equipment like
profile projectors, industrial microscope and microphotography, image
analysis etc
They have approached lord Krishna bank for cash credit limit of 20
lacs and FLC limit of 5 lacs.
The details are given below.
Borrower : m/s Banbros engineer
Address : 105 usha chambers
Dealing with bank jan 04
Constitution : pvt ltd company
Director: V.S. Bansal
Sunil Garg
Activity trading and assembling
Classification: non priority sector
Present requirement: CC (HYPO) of 20 lacs
FLC of 5 lacs
FINANCIAL INDICATORS OF THE FIRM
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Last 2
year
Current
year
projected
31-03-
03
31-03-
04
31-03-05 31-03-06
Sales and
other income
89 59.2 70.39 101
Net profit /loss .50 .30 .63 1.57
Paid up capital
and reserve
and surplus
8.01 8.31 8.94 10.51
Total net worth 8.01 8.31 8.94 10.51
Unsecured
loan from
others
1.13 .43 .04
Unsecured
loan from
others
1 4.3 4.3 7.5
Term loan .86 3.76 2.9 0
Current loan 44.3 39.89 29.48 32.22
Total outside
liabilities
47.29 48.42 36.72 39.72
Fixed assets 11.69 11.24 10.5 9.82
Current assets 43.58 45.47 35.14 40.40
Debt equity
ratio
.11 .45 .32
TOL/TNW 5.9 5.83 4.11 3.78
Current ratio .98 1.14 1.19 1.25
Net working
capital
-.72 5.58 5.66 8.18
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Assessment of PBF (as per Nayak committee)
Acceptable projected sales for the year ending 06 101 lacs
25% of projected sales (i.e. rs 101 lacs) 25.25 lacs
1/5 less margin 5.05 lacs
4/5 PBF @ 20% of projected sales 20.02 lacs
Assessment as per trade loan scheme
Average of last 2 yrs sale
(59.20 +70.39)/2 = 67.79 lacs
projected sales for current year
120 % of 64.74 = 77.75
PBF based on projection = 20% of 77.75=15.55 lacs
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Branch as has recommended CC limit of 20 lacs which is justified
from Nayak committee method
The loan was sanctioned on the following terms.
1. primary security- hypothecation of stock and book debts with
25% and 40% margin respectively.
2. rate of interest 11.5%
3. period 12 months
4. commission on flc as per bank norms
5. period 90 days
6. margin-25%
7. collateral security
EM of residential property
8. servise charges 1.1% upfront
9. Third party guarantee
Mr. V.s. Bansal networth 62.41 lacs
Mr. Sunil Garg networth 46.93lacs
Lord Krishna Banks exposure to Trade loan for quarter ending 31-03-
06 is .101%
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Rate of interest under trade loan scheme
NAME OF THE
BANK
TYPE OF
BANK
RATE OF INTEREST
Punjab and sind Public BPLR+2=13.5
State Bank Of
Patiala
State bank BPLR+1=12
ING Vysya Private BPLR-1=11.5
Lord Krishna bank private BPLR-2=10.5
United bank of
India
Private BPLR+.75=12
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0
2
4
6
8
10
12
14
BANKS
lord krishna bank
state bank of
patiala
ING vysya
punjab and sind
united bank of
india
CASE STUDY DEPICTING ASSESSMENT OF
TRADE LOAN TO ROAD TRANSPORT
OPERATORS
Mr.Fateh singh Libra is the promoter and MD of M/s libra highways
(p) ltd.The company is a leading bus service operator of north India.
The company was floated in the year 1973 and is having fleet of
approximately 60 deluxe /semi deluxe and Volvo buses. The
companys buses are plying on different routes of Punjab and
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adjoining states including the prestigiousDelhi Lahore route. The
group cosare already running 3 volvo buses under theagreementwith the DTC.The present proposal is for the purchase of
Volvo bus and 1 super deluxe bus which will ply on all India tourist
permit as per the resolution passed by the company.
He approaches lord Krishna bank for the sanction of term loan of Rs.
54 lacs for the purchase of Volvo bus at a cost of 60.36 lacs.
ASSESSMENT OF TERM LOAN
The following calculations have been made by assuming that the
proposed bus will run 600 km/day and the payment will be
RS.13.16/km as per rates of association of state transport
undertaking
S.N
O
ITEM Year 1 Year 2 Year 3 Year 4 Year 5
1 Insurance 125000 108000 95000 83000 70000
2 Maintenance
s
418000 418000 418000 418000 418000
3 Tyre tubes 18000 20000 50000 120000 1200004 Staff 90000 90000 90000 90000 90000
5 Term loan
installments
500000 400000 350000
0
200000 150000
6 Depreciation 120000
0
960000 768000 614000 491500
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TOTAL
EXPENSES
235100
0
199600
0
177100
0
152540
0
132950
0
Total income 288204
0
288204
0
288204
0
288204
0
288204
0
profit 531040 886040 111104
0
135664
0
155254
0
Calculation of DEBT SERVICE COVERAGE RATIO
Year 1 Year 2 Year 3 Year 4 Year 5
PAT 5.31 8.86 11.11 13.57 15.52
Dep 12 9.6 7.68 6.14 4.91
Term loan
interest
5 4 3.5 2 1.5
Term loan
installment
14.64 14.64 14.64 14.64 10.97
DSCR 1.52 1.53 1.52 1.48 1.97
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Average DSCR= 1.61
The average DSCR ratio is above the benchmark norm of Bank i.e.
1.5
The above proposal was accepted on following terms
Nature: term loan
Limit: 54 lacs
ROI :BPLR 3% i.e. 9% as against ROI of 15.5%
SC/PC : .25% as against applicable SC/PC of 1.1%
Purpose:
1. for the purchase of bus chasis volvo make at the cost of Rs.41.06
lacs as per invoice dated 30.05.05
2. for construction of body at cost of Rs. 19.3 lacs
period: 60 months
repayment: 57 EMI of 116900 to commence 3 months after
disbursement. Interest to be serviced every month during moratoriumof 3 months
margin 1.06 lacs on chassis(2.58%)
_ 5.3 lacs on the body(27.46%)
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primary security hypothecation of Volvo buscollateral nil
personal guarantee
MR. Kesar singh ENW rs. 46.20 lacs
Mr. Jasjit singh ENW Rs. 85 lacs
lord Krishna banks exposure to road transport operators for quarter
ending 31-03-06 is .006%
Lord Krishna Banks exposure to service sector loan for quarter ending
31-03-06 is .169%
Case study depicting assessment of cash credit facility
for a manufacturer.
M/s Shellhon Fibres ltd ,a joint stock company established in the year
1980 is manufacturing acrylic and cotton yarn, which has a
requirement of 30 lacs term loan and 120 lacs cash credit
,approaches LKB for the enhancement of cash credit limit from 80
lacs to 120 lacs.
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Profit and loss account
Particulars 31.03.05 31.03.06 31.03.07
Expenditure
Opening stock
Raw material
Work in process
Finished goods
25.3
9
25.7
311.1
9
24.2
44.5
10.5
29.5Raw material
purchased
324.2 393.1 537.2
Finished goods
purchased
35.6 36.8 42.1
Wages and
other direct
labour
32.1 39.5 54.1
Power and fuel 25.2 32.1 42.3
Repair and
maintenance
1.5 1.9 2.2
Salaries and
wages other
than factory
7.5 9.2 13
Interest ion
working capital
9.5 15 20
Interest on term
loan
4 6.5 5.5
Other bank
charges
.5 .7 10
Loss on sale of .2 0 0
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fixed assets
Depreciation 19 37.5
39
Selling
expenses
6 9.2 15.6
Profit before tax 45.3 55.9 104.5
Total 570.6 701.7 961
Tax paid 14.2 20 34
Dividend
payable
11.1 15.9 205
Income
Sales 503.9 614.2 839.4
Interest on
securities
1.5 1.8 2.7
Dividend
received
.5 .1 .1
Profit on sale of
fixed assets
.4 2 0
Insurance claim
relating to
previous year
0 0 1.2
Closing stock
Raw material
Work in process
Finished goods
31.1
9
24.2
44.5
10.5
29.5
64.2
16
36.5
total 570.6 701.7 961
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ANALYSIS OF BALANCE SHEET
Particulars 31.03.05
(actual)
31.03.06
(actual)
31.03.07
(projected)
Opening raw material 25.3 31.1 44.5
Add: raw material purchased 324.2 393.1 537.2
Less closing stock of raw
material
31.1 44.5 64.2
Raw material consumed 318.4 379.7 517.5
Add: factory wages 32.1 39.5 54.1
Add: power and fuel 25.2 32.1 42.3Prime cost 375.7 451.3 613.9
Add: opening work in progress 9.0 9.0 10.5
Less: closing work in progress 9.0 10.5 16.0
375.7 449.8 619.4
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Add repair and maintenance 1.5
1.9 2.2
Add: salaries 7.5 9.2 13.0
Add: depreciation 19.0 37.5 39.0Cost of production 403.7 498.4 673.6
Add: opening stock of finished
goods
25.7 24.2 29.5
Less : closing stock of finished
goods
24.2 29.5 36.5
Cost of production of goods
sold
402.5 493.1 666.6
Add: selling expenses 6.0 9.2 15.6
Cost of sales 411.2 502.3 682.2
For the calculation of MPBF following figures have been taken
Raw material 45
Work in progress 8
Finished goods 21
Debtors 45
Creditors 20
Particulars 31.03.0
5
31.03.06 31.03.07
Raw material closing raw 35.65 42.77 45.28
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material *365
Raw material
consumed
Work in progress closingW.I.P *365
Cost of
production
8.1 7.69 8.67
Finished goods closing finish
goods*365
Cost of sales
21.4 21.4 19.53
Debtors closingdebtors*365
Credit
sales
43 42.2 47.85
Creditors closing
creditors*365
Credit
purchases
38 20.4 16.9
CALCULATION OF MAXIMUM POSSIBLE BANK
FINANCE.
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In lacs
Raw material consumed (45*517.5)/365 63Work in progress (8*673.6)/365 14.8
Finished goods (21*682.2)/365 39.24
Debtors collection period (45*839.4)/365 103.48
Less
Creditors payment period (537.2*20)/365 29.43
Working capital gap 191.09
Less
25% margin 47.77
maximum possible bank finance 143.32
Assessment of PBF (as per Nayak committee)
In lacs
Acceptable projected sales for the year ending 07 839.40
25% of projected sales 209.85
1/5 less margin 41.97
4/5 PBF @ 20% of projected sales 167.88
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2004-05 2005-06
2006-07
Last 2 yearsactual
CurrentYear
PERFORMANCEHIGHLIGHTS
Projection
KEY RATIOS
Current Ratio 1.22 1.31 1.36
L.T debt to equity Ratio 0.64 0.76 0.38
Net profit ratio 6.17 5.84 8.39
Gross profit ratio 18.07 21.63 28.37
Growth of sales
- 22% 37%
Net worth 700 900 1550
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0
100
200
300
400
500
600
700
800
900
1st Qtr 2nd Qtr 3rd Qtr
sales
0
200
400
600
800
1000
1200
1400
1600
1800
1s t Qtr 2nd Qtr 3rd Qtr
net worth
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Should the Bank Sanction the Credit Limit?
On the basis of the above analysis the bank is in position to grant
the desired credit limit to the borrower.
The credit worthiness of XYZ Ltd has been analyzed by keeping allthe prescribed parameters in mind.
The industrial market for the product profile of the company
is growing
there is no significant competitor in this industry which
promises greater profit margins for the company for the
following years.
The future of the company is secure under the management
of its current promoter Mr. A, who through his managerial
competence along with his expertise and experience in the
1.15
1.2
1.25
1.3
1.35
1.4
1st Q tr 2nd Qtr 3rd Q tr
current ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1st Qtr 2nd Qtr 3rd Qtr
debt-equity ratio
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industry can help the company to achieve new heights of
success. The financial analysis of the company also provides a
satisfactory delineation of the business. sales figures are
showing upward trend
The net worth of the company is also showing a steady
increase
Overall, the financial position of the company is at the desired
level of profitability and the credit sanctioned by the bank to the
borrower involves low level of risk.
Non fund Based Advances
The non fund based advances of the bank include instruments
such as
Letters of Credit
Bank Guarantee
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Letters of Credit
Letters of Credit is an instrument which facilitates trade and
commercial transactions. It is an undertaking issued by the banker
on the behalf of the buyer to the seller, to pay for the goods and
services, provided that the seller presents documents that satisfy
the terms and conditions stipulated in the L/C .The documents
under a L/C include transport documents, bills of exchange,
commercial invoice, special invoice, certificate of origin, packing
list, inspection report or quality certificate or the beneficiary
certificate. Such a letter is issued by the bank at the request of the
buyer (customer) in favour of a seller (beneficiary).
Letters of Credit is broadly classified into two categories:
Inland letter
Foreign letter
By issuing a L/C, the banker is undertaking a future financialcommitment. Hence it becomes imperative for the banker to analyze
the following factors:
Credit worthiness of the Applicant.
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Integrity shown by the applicant in the conduct of thebusiness.
The financial solvency of the business.
Projected liquidity of the business when the payment is due.
Whether the applicant meets the requirements for exchangecontrol and trade control, if any.
The maximum limit of L/C.
Determination of Maximum Limit for L/C
Various different variables are taken into consideration while
computing the L/C limit which is taken as part of determining the
overall working capital credit requirements of the enterprise.
The major variables that are taken into consideration for this purposeare:
a) Annual consumption of materials under purchase
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b) The lead time from opening of credit to shipment.
c) The transit period for goods till they arrive at the factory.
d) Credit period
Reserve bank of India has issued detailed guidelines to commercial
banks in respect of credit for their customers who enjoy credit
facilities with them.some of the important points to be kept in view in
this regard are discussed below
Letter of credit
1. bank has to normally open letter of credit for their own
customers who enjoy credit facilities with them.customers
maintaining current account only and not enjoying any credit
limits should be granted L/C facilities except in cases where no
other credit facility is needed by the customer.
2. the request of such customer for sanctioning and opening ofletter of credit should be properly scrutinized to establish the
genuine need of the customer.the customer may be required to
submit a complete loan proposal including the financial
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statements to satisfy the bank about his needs and also his
financial resources to retire the bills drawn under L/C.3. where customer enjoys credit facilities with other bank,the
reason for his approaching the bank for sanctioning l/c limits
have to be clearly stated.the bank opening l/c on the behalf of
such customer should invariably make a reference to the
existing banker of the customer.
4. in all cases of opening of letter of credit,the bank has to ensuer
that the customer is able to retire the bills drawn under l/c as
per the financial arrangement already finalized.
Guarantees
1. the conditions relating to obligant being a customer of the bank
enjoying credit facilities as discussed in case of letter of credit
are equally applicable for guarantees also.in fact,guarantee
facilities also cannot be sanctioned in isolation.
2. financial guarantees can be issued by the bank only if they are
satisfied that the customer will be in a position to reimburse the
bank in case the guarantee is invoked and bank is required to
make the payment in terms of guarantee.3. performance guarantee will be issued by the banks only on the
behalf of those customers with whom the bank has sufficient
experience and is satisfied that the customer has the necessary
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experience and means to perform the obligation under the
contract and is not likely to commit any default.4. banks should not normally issue guarantees on behalf of those
customers who enjoy credit facilities with other banks.
Co-acceptance of bills
1. limits for co-acceptance of bills will be sanctioned by the banks
after detailed appraisal of customers requirement is completed
and bank is fully satisfied about the genuineness of the need of
the customer.
2. co-acceptance facilities will normally not be sanctioned to
customers enjoying credit limits with other banks.
A contract of guarantee is a contract to perform the promise or
discharge the liability of a third party in case of his default. The bank
which gives the guarantee is called Guarantor, the person in respect
of whose default the guarantee is given is called The Principal
Debtor and the person to whom the guarantee is given is called the
Beneficiary. A guarantee can be oral or written.
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There are two types of Guarantees:
Financial Guarantees
These are guarantees issued for purely monetary obligations. Such
guarantees are usually requested by contractors who are engaged in
civil works for various Government departments like PWD, CPWD,
etc. since these departments insist for specific amount as a
percentage of work from the contract bid, bank guarantees are issued
by the banks in lieu of the amount. The Guarantees are also issued
by the bank in lieu of customs duty payment, dealers of large
companies as security for securing dealership, release of money from
a company or department for works which are yet to be inspected,
etc.
Performance Guarantees
These are guarantees issued in respect of performance of a contract
or obligation. In such guarantees, in the event of non or short
performance of the obligation, the bank is called upon to make good
the monetary loss arising out of non fulfillment of the obligation.
A guarantee is a source of income as the bank charges a commission
on the guarantees.
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For example, on a Performance Guarantee Lord Krishna Bank
Charges Rs. 100 + 0.50% of the guarantee amount per quarter orpart thereof with a minimum of charges for six months.
Similarly on Financial Guarantee the rate charged by Lord Krishna is
Rs.100 + 0.75% of the guarantee amount per quarter or a part
thereof with a minimum of charges for six months.
The procedure for the apprai