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Management Research Project

End Review Report

A comparative study on Credit analysis process
followed by select Private Banks, Public
Banks and NBFCs

Submitted to:

Submitted by:

Prof. Devang Patel

Khyati Shah(221)
Nikunjsinh Sodha (241)

(March 2016)


Table of Content


Section-1 Industry Analysis

Introduction to the Industry
Brief Evolution and Growth in the
Major Trends in Credit Industry
Major Players of the Banking Industry
Comparison of Market Shares of Major
Challenges faced by Indian Banking
Technological Changes in the Banking
Non-Performing Assets(NPA)
Application of the Industry Tools
SWOT Analysis
BCG Matrix
Snake Diagram
Porter Five Force Model
PEST Analysis
Value Chain Analysis
Strategic Group Mapping


Section- 2 Research Methodology

Literature Review
Research Plan
Analysis and Learning from Interview
Research Limitation
Discussion Guide




This report is completed as a partial requirement of our Final
Project, which is compulsory for every student of Xcellon
Institute-School of Business. We got the opportunity to learn,
Credit Analysis Process of Public, Private and NBFCs. To get
the idea of Credit Analysis Process and relevant mechanism
we had to work the Credit Department of the banks. For this
report we had to collect all information from different written
Documents, banks and NBFCs officers, and well as from bank
web site. In this report we tried to cover up a clear overview of
various banks, our three months research experience and our
main report part credit appraisal months research experience
and our main report part credit analysis process of various
banks and NBFCs.
This report is divided into some portion where we have tried to
portray the banks and NBFCs overall picture. Also try to make
some my own observation and recommendation in this part.
Then we also talked about my main project topic. Our project
topic is Credit Analysis Process of Public, Private and NBFCs.
Here we have explained all the process regarding credit
analysis system of different banks and NBFCs. Credit Analysis
is the part of lending procedure. The procedure starts when
borrowers come to any branch and seeking for loan and
continues until the clients adjust to total loan. Here we have
focused on different until the clients procedure to assess the
credit appraisal process. We showed it in a sequential flow
chart. We also find out some problem related with the credit
analysis process and try to give some possible

This satisfaction and joy that accompanies the successful
completion of a task is incomplete without mentioning name of
the person who extended his help and support in making it a
success. We are greatly indebted to Prof. Devang Patel, our
Project Guide for devoting his valuable time ad efforts towards
our project. We thank him for being a constant source of
knowledge, inspiration and help during this project of making

Khyati Shah(M00221)
Nikunjsinh Sodha(M00241)


Technology has become a part of all walks of life and across all business sectors, and even
more so in banking. There has been massive use of technology across many areas of
banking business in India, both from the asset and the liability side of a banks balance
sheet. Delivery channels have immensely increased the choices offered to the customer to
conduct transactions with ease and convenience. Various wholesale and retail payment
and settlement systems have enabled faster means of moving the money to settle funds
among banks and customers, facilitating improved turnover of commercial and financial
transactions. Banks have been taking up new projects like data warehousing, customer
relationship management and financial inclusion initiatives to further innovate and
strategies for the future and to widen the reach of banking.
The dependence on technology is such that the banking business cannot be thought of in
isolation without technology; such has been the spread of technology footprints across the
Indian commercial banking landscape. Developments in IT have also brought along a whole
set of challenges to deal with. The dependence on technology has led to various challenges
and issues like frequent changes or obsolescence, multiplicity and complexity of systems,
different types of controls for different types of technologies/systems, proper alignment with
business objectives and legal/regulatory requirements, dependence on vendors due to
outsourcing of IT services, vendor related concentration risk, segregation of duties, external
threats leading to cyber frauds/crime, higher impact due to intentional or unintentional acts
of internal employees, new social engineering techniques employed to acquire confidential
credentials, need for governance processes to adequately manage technology and
information security, need for appreciation of cyber laws and their impact and to ensure
continuity of business processes in the event of major exigencies.
Technology risks not only have a direct impact on a bank as operational risks but can also
exacerbate other risks like credit risks and market risks. Given the increasing reliance of
customers on electronic delivery channels to conduct transactions, any security related
issues have the potential to undermine public confidence in the use of e-banking channels
and lead to reputation risks to the banks. Inadequate technology implementation can also
induce strategic risk in terms of strategic decision making based on inaccurate
data/information. Compliance risk is also an outcome in the event of non-adherence to any
regulatory or legal requirements arising out of the use of IT. These issues ultimately have
the Report of the Working Group on Electronic Banking Page.



1. i Introduction to the Industry
Industry scenario of the Indian banking Industry
The growth in the Indian Banking Industry has been more qualitative than
quantitative and it is expected to remain the same in the coming years. Based on the
projections made in the "India Vision 2020" prepared by the Planning Commission
and the Draft 10th Plan, the report forecasts that the pace of expansion in the
balance-sheets of banks is likely to decelerate. The total assets of phone banking,
ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian
Banking Industry all scheduled commercial banks by end-March 2010 is estimated at
Rs 40, 90,000 crores.
That will comprise about 65 per cent of GDP at current market prices as compared
to 67 per cent in 2002-03. Bank assets are expected to grow at an annual
composite rate of 13.4 per cent during the rest of the decade as against the growth
rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that
there will be large additions to the capital base and reserves on the liability side.
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 Public
Sector Banks (PSBs), which are the base of the Banking sector in India account for
more than 78 per cent of the total banking industry assets. Unfortunately they are
burdened with excessive Non Performing assets (NPAs), massive manpower and
lack of modern technology. On the other hand the Private Sector Banks are making
tremendous progress. They are leaders in Internet banking, mobile banking.


Structure of Banking Industry

Business Segmentation


Product and Services

Introduction of Bank Credit

The last year financial crises have become the main cause for recession which was started
in 2006 from US and was spread across the world. The world economy has been majorly
affected from the crisis. The securities in stock exchange have fallen down drastically
which has become the root cause of bankruptcy of many financial institutions and
individuals. The root cause of the economic and financial crisis is credit default of big
companies and individuals which has badly impacted the world economy. So in the present
scenario analyzing ones credit worthiness has become very important for any financial
institution before providing any form of credit facility so that such situation doesnt arise in
near future again.
Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to
understand the credit appraisal system followed by the banks this project has been conducted.
The project has analyzed the credit appraisal procedure with special reference to Punjab
National Bank which includes knowing about the different credit facilities provided by the banks
to its customers, how a loan proposal is being made, what are the formalities that is to be
satisfied and most importantly knowing about the various credit appraisal techniques which
are different for each type of credit facility.

Before going further it is necessary to understand the need and basic framework of the
project. Therefore this chapter provides an introduction to the topic, objective of the project,
reasons for selecting the project and the basic structure and framework how the project
proceeds. In order to understand the importance of the topic selected an introduction to the
overview of the commercial bank, its functions, and present trends and growth in bank credit
are required and it is covered in this chapter.

About Banks and Credit Analysis Process followed by them


Commercial banks and its objectives

A commercial bank is a type of financial intermediary that provides checking
accounts, savings accounts, and money market accounts and that accepts time
deposits. Some use the term "commercial bank" to refer to a bank or a division of a
bank primarily dealing with deposits and loans from corporations or large businesses.
This is what people normally call a "bank". The term "commercial" was used to
distinguish it from an investment bank.
Commercial banks are the oldest, biggest and fastest growing financial intermediaries
in India. They are also the most important depositories of public savings and the most
important disbursers of finance. Commercial banking in India is a unique banking
system, the like of which exists nowhere in the world. The truth of this statement
becomes clear as one studies the philosophy and approaches that have contributed to
the evolution of banking policy, programmers 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.
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.

Major objectives of commercial bank

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
Central bank decides the reserve ratio known as the CRR.

Creation of Credit

Bank 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 the individual has is the
sum of the borrowing capacity each lender bank provides to the individual.
The operating paradigms of the banking industry in general and credit dispensation
in particular have gone through a major upheaval.
Lending rates have fallen sharply.
Traditional growth and earning such as corporate credit has been either slow or
not profitable as before.
Banks moving into retail finance, interest rate on the once attractive retail loans also
started coming down.
Credit risks has went up and new types risks are surfaced

Types of creditBank in India provide mainly short term credit for financing working capital needs although,
as will be seen subsequently, their term loans have increased over the years. The various
types of advances provide by them are:
(a) Term Loans,
(b) Cash credit,
(c) Overdrafts,
(d) Demand Loans,
(e) Purchase and discounting of commercial bills, and,
(f) 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

Credit (YOY Growth)

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March 28 2008
Public Sector Banks

March 27



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



Private Sector Banks



Five Major Foreign Banks




Oct 13

Mar 14

Public Sector Banks


11.50-14.00 11.50-13.50


12.75-16.75 12.50-16.75


14.25-15.75 14.25-15.75


13.75Private Sector Banks 17.75

Five Major Foreign




Apr 15

(from Oct to

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.

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As on

As on


February 15,


% share


% share


in total

(per cent)

in total

(per cent)











Real Estate















Overall Credit





To sum up, the credit conditions seems to have worsened after January 2013. 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/corporate are not borrowing (lack of demand). It is usually seen that all
financial variables as lead indicators say if credit growth (along with other fin indicators) is
picking, actual growth will also rise. However, it is actually seen the relation is far from
clear. In fact, the financial indicators hardly help predict any change in business cycle. Most
rise in good times and fall in bad times. Most financial indicators failed to predict this global
financial crisis and kept rising making everyone all the more complacent.

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Procedure for providing Bank CreditBanks 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:

Monitoring & Asset

Source- Self constructed

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

Credit Appraisal
The process by which a lender appraises the creditworthiness of the prospective borrower
is known as Credit Appraisal. This normally involves appraising the borrowers payment
history and establishing the quality and sustainability of his income. The lender satisfies
himself of the good intentions of the borrower, usually through an interview.
The credit requirement must be assessed by all Indian Financial Institutions or
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specialised institution set up for this purpose.

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

In such cases due diligence on the inability of the projects are well defined and
assessed. State government guarantee may not be taken as a substitute for satisfactory
credit appraisal.
The important thing to remember is not to be overwhelmed by marketing or profit centre reasons
to book a loan but to take a balanced view when booking a loan, taking into account the risk
reward aspects. Generally everyone becomes optimistic during the upswing of the business
cycle, but tend to forget to see how the borrower will be during the downturn, which is a shortsighted approach. Furthermore greater emphasis is given on financials, which are usually
outdated; this is further exacerbated by the fact that a descriptive approach is usually taken,
rather than an analytical approach, to the credit. Thus a forward looking approach should also be
adopted, since the loan will be repaid primarily from future cash flows, not historic performance;
however both can be used as good repayment indicators.

Credit philosophy
To achieve credit expansion required for sustaining
the profitability of the bank and emphasis on quality assets, profitable
relationships and prudent growth.

Credit Policy
Bank follows following broad policy imperatives:Reduction in dependence upon short term corporate loans, especially unsecured
Aiming to achieve more sanctions at levels closer to the customer.
Changing the mix of the portfolio in favor of better diffused and higher yielding credit.
Building competencies in credit management through training & promotion of self
directed learning.

Objectives of credit policy

A balanced growth of credit portfolio, which does not compromise safety.
Adoption of a forward looking and market responsive approach for moving into profitable
new areas on lending which emerge, within the pre determined exposure ceilings.

Sound risk management practices to identify measure, monitor and control risks.
Maximize interest yields from credit portfolio through a judicious management of
varying spreads of loan assets based upon their size, credit rating and tenure.
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Leverage on strong relationships with existing long-standing clients to source a bulk of

new business by addressing their requirements comprehensively.
Ensure due compliance of various regulatory norms including CAR, income recognition
and asset classification
Accomplish balanced development of credit to various sectors and geographical regions.
Achieve growth of credit to priority sectors / subsectors and continue to surpass the
targets stipulated by reserve bank of India.
Using of pricing as a tool of competitive advantage ensuring however that earnings
are protected.
Objectives in Credit
To maintain healthy balance betweenCredit volumes
Asset quality
within the framework of regulatory prescriptions, corporate goals and banks
social responsibilities.
Introduction to loans
Loans are advances for fixed amounts repayable on demand or in instalment. They are
normally made in lump sums and interest is paid on the entire amount. The borrower
cannot draw funds beyond the amount sanctioned.
A key function of the Bank is deploying funds for income-yielding assets. A major part of
Banks assets are the loans and advances portfolio and investments in approved securities.

Loans & Advances refer to long-term and short-term credit facilities to various types of
borrowers and non-fund facilities like Bank Guarantees, Letters of Credit, Letters of
Solvency etc. Bill facilities represent structured commitments which are negotiable claims
having a market by way of negotiable instruments. Thus, Banks extend credit facilities by
way of fund-based long-term and short-term loans and advances as also by way of non-fund

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Classification of Loans and Process of Loans:



Fund Based

Non-Fund Based

Retail Loan
Bank Guarantee

Cash Credit

Post shipment Finance

Export Finance

Letter of Credit

Bill Discounting
Pre-shipment Finance
Term Loan
Bank provides credit in various forms. These are broadly classified into two categoriesFund based and Non Fund Based. Fund based refers to the type of credit where cash is
directly involved i.e. where bank provides money to the seeker in anticipation of getting it
back. Where as in a Non-fund Based, Bank doesnt pay cash directly but gives assurance
or takes guarantee on behalf of its customer to pay if they fail to do so. In case on Fund
Based there are different categories of loans which are discussed as follows

Retail banking in India is not a new phenomenon. It has always been prevalent in India
in various forms. For the last few years it has become synonymous with mainstream
banking for many banks.
The typical products offered in the Indian retail banking segment are:Housing loans
Consumer loans for purchase of durables
Auto loans
Educational loans
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Credit Cost.

Personal loans
Retail loan is the practice of loaning money to individuals rather than institutions. Retail
lending is done by banks, credit unions, and savings and loan associations. These
institutions make loans for automobile purchases, home purchases, medical care, home
repair, vacations, and other consumer uses. Retail lending has taken a prominent role in the
lending activities of banks, as the availability of credit and the number of products offered for
retail lending have grown. The amounts loaned through retail lending are usually smaller
than those loaned to businesses. Retail lending may take the form of instalment loans,
which must be paid off little by little over the course of years, or non-instalment loans, which
are paid off in one lump sum.
These loans are marketed under attractive brand names to differentiate the products
offered by different banks. As the Report on Trend and Progress of India, 2007-08 has
shown that the loan values of these retail lending typically range between Rs.20, 000 to
Rs.100 lakh. The loans are generally for duration of five to seven years with housing loans
granted for a longer duration of 15 years. Credit card is another rapidly growing subsegment of this product group. In recent past retail lending has turned out to be a key profit
driver for banks with retail portfolio. The overall impairment of the retail loan portfolio
worked out much less then the Gross NPA ratio for the entire loan portfolio. Within the retail
segment, the housing loans had the least gross asset impairment. In fact, retailing make
ample business sense in the banking sector.
Basic reasons that have contributed to the retail growth in India areFirst, economic prosperity and the consequent increase in purchasing power has given a
fillip to a consumer boom. Note that during the 10 years after 1992, India's economy grew
at an average rate of 6.8 percent and continues to grow at the almost the same rate not
many countries in the world match this performance.
Second, changing consumer demographics indicate vast potential for growth in
consumption both qualitatively and quantitatively. India is one of the countries having
highest proportion (70%) of the population below 35 years of age (young population). The
BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India
and China, mentioned Indian demographic advantage as an important positive factor for
Third, technological factors played a major role. Convenience banking in the form of debit
cards, internet and phone-banking, anywhere and anytime banking has attracted many
new customers into the banking field. Technological innovations relating to increasing use
of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth
of retail banking in India.
Fourth, the Treasury income of the banks, which had strengthened the bottom lines of
banks for the past few years, has been on the decline during the last two years. In such a
scenario, retail business provides a good vehicle of profit maximisation. Considering the fact
that retails share in impaired assets is far lower than the overall bank loans and advances,
retail loans have put comparatively less provisioning burden on banks apart from
diversifying their income streams.
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Fifth, decline in interest rates have also contributed to the growth of retail credit
by generating the demand for such credit.
According to K V Kamath, the changing demographic profile and a downward
trend of the interest rates will propel retail credit in India."There is a huge retail
credit opportunity that is surfacing. Banks have low penetration in this segment
currently. But it is the one area that is providing the momentum in the banking
business now, India has among the lowest penetration of retail loans in Asia.
Though the sector has been growing at around 15 per cent, there is still a huge
opportunity to tap into.
Middle and -high-income homes in India has increased to 2.57 crore (25.7 million). Interest
rates on retail loans have been dropping rapidly too. For instance residential mortgages
slumped by 7 per cent over the last four years."The entry of a number of banks in India in
the last few years has helped provide increased coverage and a number of new products
in the market," says Kamath.


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

Term Loans
A bank loan to a company, with a fixed maturity and often featuring amortization of
principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after
the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon
after they become available. Bank term loans are very a common kind of lending.
Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates,
and monthly or quarterly repayment schedules and include a set maturity date. Bankers
tend to classify term loans into two categories:
Intermediate-term loans: Usually running less than three years, these loans are generally
repaid in monthly instalments (sometimes with balloon payments) from a business's cash
flow. According to the American Bankers Association, repayment is often tied directly to
the useful life of the asset being financed.
Long-term loans: These loans are commonly set for more than three years. Most are
between three and 10 years, and some run for as long as 20 years. Long-term loans are
collateralized by a business's assets and typically require quarterly or monthly payments
derived from profits or cash flow. These loans usually carry wording that limits the amount
of additional financial commitments the business may take on (including other debts but
also dividends or principals' salaries), and they sometimes require that a certain amount of
profit be set-aside to repay the loan.
Appropriate For: Established small businesses that can leverage sound financial statements
and substantial down payments to minimize monthly payments and total loan costs.
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Repayment is typically linked in some way to the item financed. Term loans require
collateral and a relatively rigorous approval process but can help reduce risk by minimizing
costs. Before deciding to finance equipment, borrowers should be sure they can they make
full use of ownership-related benefits, such as depreciation, and should compare the cost
with that leasing.
Supply: Abundant but highly differentiated. The degree of financial strength required to
receive loan approval can vary tremendously from bank to bank, depending on the level
of risk the bank is willing to take on.

Bill Discounting
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the bill after a discount charge to the customer's
account. The transaction is practically an advance against the security of the bill and the
discount represents the interest on the advance from the date of purchase of the bill until it
is due for payment.
Bills of exchange- A bill of exchange or "draft" is a written order by the drawer to the drawee
to pay money to the payee. A common type of bill of exchange is the cheque (check in
American English), defined as a bill of exchange drawn on a banker and payable on
demand. Bills of exchange are used primarily in international trade, and are written orders
by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the
advent of paper currency, bills of exchange were a common means of exchange. They are
not used as often today.
A bill of exchange is an unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on demand
or at fixed or determinable future time a sum certain in money to order or to bearer. It is
essentially an order made by one person to another to pay money to a third person.

A bill of exchange requires in its inception three parties--the drawer, the drawee, and
the payee.
The person who draws the bill is called the drawer. He gives the order to pay money to third
party. The party upon whom the bill is drawn id called the drawee. He is the person to
whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he
indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is
payable is called the payee.
Promissory Note- A promissory note is a written promise by the maker to pay money to the
payee. Bank note is frequently transferred as a promissory note, a promissory note made
by a bank and payable to bearer on demand. A maker of a promissory note promises to
unconditionally pay the payee (beneficiary) a specific amount on a specified date.
A promissory note is an unconditional promise to pay a specific amount to bearer or to
the order of a named person, on demand or on a specified date.
A negotiable promissory note is unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at fixed or determinable
future time, sum certain in money to order or to bearer

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Export Finance
This type of a credit facility is provided to exporters who export their goods to different
places. It is divided into two parts- pre-shipment finance and post-shipment finance.

Pre Shipment Finance is issued by a financial institution when the seller want the payment
of the goods before shipment.
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or
seller against a shipment that has already been made. This type of export finance is granted
from the date of extending the credit after shipment of the goods to the realization date of
the exporter proceeds. Exporters dont wait for the importer to deposit the funds.
Non Fund Based loans generate income for the bank without committing the funds of
the bank. Bank generates substantial income under this head. There are two types of
credit under this category which are discussed as follows:-

Bank Guarantee
A bank guarantee is a written contract given by a bank on the behalf of a customer. By
issuing this guarantee, a bank takes responsibility for payment of a sum of money in case,
if it is not paid by the customer on whose behalf the guarantee has been issued. In return,
a bank gets some commission for issuing the guarantee.
Any one can apply for a bank guarantee, if his or her company has obligations towards a third
party for which funds need to be blocked in order to guarantee that his or her company fulfils its
obligations (for example carrying out certain works, payment of a debt, etc.).

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

guarantee remains valid until the customer dully releases the bank from its liability.
In the situations, where a customer fails to pay the money, the bank must pay the
amount within three working days. This payment can also be refused by the bank, if the
claim is found to be unlawful.

Letter of Credit
A standard, commercial letter of credit is a document issued mostly by a financial
institution, used primarily in trade finance, which usually provides an irrevocable payment
The LC can also be the source of payment for traction, meaning that redeeming the letter of
credit will pay an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a
customer in another. They are also used in the land development process to ensure that
public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a
letter of credit are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is a client.

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Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior
agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing
a transaction, letters of credit incorporate functions common to giros and Traveler's
cheques. Typically, the documents a beneficiary has to present in order to receive payment
include a commercial invoice, bill of lading, and documents proving the shipment were
insured against loss or damage in transit. However, the list and form of documents is open
to imagination and negotiation and might contain requirements to present documents issued
by a neutral third party evidencing the quality of the goods shipped, or their place of origin.
Building Up of a Proposal.

Gathering Credit Information

An appraisal of a proposal begins with the gathering of adequate background knowledge
about borrowers character and credit worthiness. In the concept of appraisal, much
reliance is placed on the credentials of the borrower. Therefore, there is a necessity for
evaluation of the borrower in regard to his standing in the business, means and
respectability. The result of the elaborate scrutiny concerning all these aspects is required
to be put into a precise credit report which helps in taking decision on a credit proposal.
Each individual case has to be examined in the light of its own circumstances and judgment
exercised on issues enumerated above and a final decision has to be arrived at on the
basis of scrutiny of all the issues.
Information by definition is that data which is relevant and meaningful for making decisions.
An information system is an aid to the decision making, carrying out and altering decisions.
All information required by the banker in the pre-sanction period should become part of a
system. It should flow into the information system from various sources, such as the
borrower, banks own record, environment etc. A significant basis of banker-borrower
relationship is governed by the information which flows between the two parties. After
ascertaining the credit needs of the borrower, the banker looks towards information about
his borrowers credit worthiness. He seeks out the credit information etc. from his cobankers, other borrowers and market information.

Various Sources of Credit Information

Information regarding character, honesty, and financial position has to be discreetly
gathered from following sources:
The borrower: the bank should develop as much credit information as possible during the
initial interview with the borrower/partners of firm/ directors of company/ proposed
guarantor /co-obligator and principal officials of firms/company, nature of its business, past
and expected profitability, the degree of competition that the firm/company faces and
whether or not it has had or anticipated any difficulty etc.
Information regarding its principal officers should be collected during such interview.
Borrowers financial statements: for lending decisions, financial information is a
significant part of the total information system. It is derived basically from borrowers:
Trading and profit and loss statement
Balance sheet
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Cash and fund flow statements

Banks own records: If he is an existing borrower, banks own records are a rich source of
additional information. Operations in the borrowers account and other dealings at the bank
level in regard to collections, discounting/retirement of bills etc. often useful clues to
borrowers operating and financial transactions. A review of the previous years operations
in the account and assessments of borrowers financial statements relating to that period
will provide a rich source of information about the borrower.
Opinions: Bank should compile opinions on their borrowers. They should contain full and
reliable records of the character, estimated means and business activities of all firms and
individuals who are under any form of liability to the bank, whether as direct borrowers or
as co-obligators. Full particulars of parties immovable properties where they are situated,
whether they are free from encumbrance and in the case of land, acreage should be
recorded together with fair estimates of their value. As far as possible written statements of
their properties should be taken in evaluating properties owned by parties jointly with
others and as a rule such properties should be disregarded in arriving at the net means.
From other banks: in respect of fresh proposals, enquiries with local banks should be
made before entertaining the proposal to avoid multiple financing without our full
knowledge. In case of new customer having dealings with other banks, confidential opinion
of his banker has to be obtained.
Income tax assessment order- Income tax assessment orders agricultural income tax
assessment orders give an insight into the borrowers account and the extent to which it is
profitable. Comments thereon by the income tax office shall indicate the shortcomings
(lacunae) in the business. In the case of estate owners agricultural tax assessment orders
to be obtained to arrive at parties credit worthiness.
Sales tax assessment orders: Sales tax assessment orders will reveal the turnover in
business and when read with trading/ manufacturing and profit & loss account, it may
be possible to have a fair assessment of tendencies in trade i.e., whether over-trading
or carefully trading within recourses at command or trading entirely on the borrowed
Wealth tax assessment orders: wealth tax assessment order will indicate the net worth of
individuals and reveals the liquid source available to bring the required margin money for
the venture.
Market sources: Constant touch with the market will help to have first hand information
about the gains or losses in particular business transactions of the borrowers.
Property statements: The property statement of borrower will give an idea of his worth,
liabilities and his income from real estates (immovable properties).
Municipal property registers: reference to municipal property registers will give an idea of
building owned within the municipality, Rental Values and house tax payable. It may be
noted that the said registers are open for reference to all persons.
Other external sources: other external sources, if any, like stock exchange directory,
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business periodicals/magazines/journals etc.

Requirement as per Constitution of Borrower:

Following Requirements as per constitution of borrower should be collected for proposals
emanating from-

Copy of partnership deed
Copy of certificate of registration of firm (if registered)

Company :
Memorandum and articles of association
Certificate of incorporation
Certificate of commencement of business
Search report indicating subsisting charges on the assets of the company.
Board resolution for borrowings, creation on the assets of the company and execution of the

Cooperative societies
Permission from registrar for the borrowings, creation of charge on the assets of the society
and execution of documents.
Trust deed
Resolution for the borrowings and execution of documents.

Industrial units :
Project report with cash flow, fund flow statements etc.
Industrial licenses/SSI registration certificate.
License from local authority, compliance of legal requirements or conditions as
applicable and clearance from regulatory bodies.
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Financial Appraisal
On receipt of a loan application the banker begins the process of financial appraisal. The
first thing done is to analyze the financial statements. Therefore, an understanding of these
financial statements is important for the appraiser.
Once balance sheet is taken for analysis the following items are checked up:
Fixed assets: To find out any revaluation of fixed assets done by the company to
improve their net worth.
The schedules of the fixed assets should be checked up.
Study notes on accounts and comments of auditors should be checked.
Schedule for reserve should be studied
Any change in the accounting procedure of depreciation should be checked
Current assets: to find out whether the assets stated are really liquid or not.
The schedules under current liabilities and current assets to ascertain any obsolete or
slow moving raw material or finished good and old debtors or receivables should be
The auditors report should be read and understood properly.
The claims lodged against receivables must be studied
The receivables due from sister/associate concerns must be studied.
Other Current Assets: Their reasonableness and their need to maintain them for
the business.
Various components of other current assets and if the same is more than 5% -10%,
ascertain the nature and need for maintaining such amount ; any assets which is not used
in the into day business activity shall be removed and proper treatment is to be made
Bank guarantee or letter of credit margin shall be shown as non- current assets.
Contingent liabilities: To find out any unrecognized liabilities or losses if any.
The CDD/DBD other bills discounted liability, if any ,is reported in the auditors report ,
then increase the bank borrowing to the extent liability was not taken in the balance sheet
and also increases the debits/receivables to that extent.
Term liabilities: To find out whether the liabilities are long term or short term, and its
needs and regularity
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This shall be decreasing year after year; if it has increased, then the reason for the same
is to be looked into (may be irregular or new term loan availed for expansion etc.)
The term liabilities with repayment of the same and the amount payable during the year
shall be deducted from the term liabilities as current liabilities for finding out liquidity position
of the company should be checked.
The stock statements and QIS forms to find the authenticity of the figures reported
under stock/receivables.
Change in the valuation of the stock/finished goods, if any, is to be verified to find out
its effect on the profitability of the company.
Intangible assets :
Any abnormal increase in this figure shall be studied to find out the reasons for the
same; this may be due to take over by others also.
Accounting Norms:
Any change in the accounting norms from the past shall be studied to find out the
reasons for the same; its effect on the net profit, net worth of the company is to be

Balance Sheet Analysis

Comments on the performance of the unit vis--vis last year salesIncreased in last year sales are always good; if the net profit also has
increased correspondingly the performance can be noted as satisfactory.
If the sales has come down or the net profit has also come down then the reason has to be
ascertained. If the unit earned at least cash profit then the position may be considered as
If the NP to N/sales is positive, that is sufficient for accepting as satisfactory; but as per the
credit rating chart maximum marks are assigned if the borrower achieves 8% as
percentage of net profit/net sales.
Return on investment or Return on equity may also be used to find out the return on
capital invested.
Long term Strength of a company is calculated based on the level of the net worth of the
company /promoters stake/loans from close relativesIf the net worth has increased due to infusion of fresh capital or plough back of profit, it can
be termed as satisfactory; even increase of loan from friends & relatives is a good sign.
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If the net worth is decreasing, reason may due to net loss or diversion; true reason needs to
be ascertained.
If the D/E ratio is less than 2:1 the same is good; further if the TOL/TNW is less than 5:1
then the units solvency is noted to be satisfactory. The ratio indicates that borrower has
not borrowed much and the outside debts within a reasonable limit.
Liquidity position of the party-Current ratio
If the current ratio is increasing and nearer to 1.5 and above then we can note the position is
Expected Current ratio is 1.22:1 and above; if the ratio is less than 1.22:1 then the
promoters margin (Net working capital) towards Working Capital may not be sufficient to
cover the working capital limit; care shall be taken to ensure that sufficient Net
working capital for the working capital enjoyed is available.

When the Current ratio is poor and the Net working capital is not sufficient to cover the
existing limit, no further term loan shall be sanctioned and the party is to be advised not
to take up any fresh investment in fixed assets.
Quality of current assets :
The current assets holding period must be less than 3 months for traders and the 5
months for the industries depending upon the type of industry ;holding level more than the
above needs proper justification.
It should be ensured that the current assets turnover is at least more than four times in
a year.
Contingent liability:
The effect of this liability on the net worth of the company; if its effect is less than 5-10 %
of the net worth of the company ,the same may be noted; but if it threatens the existence
of the company then the position needs serious analysis.
Diversion from the business needs to be viewed carefully.
Reduction in Net working capital position( below the required level) when the unit has
earned cash profit and clearing of term loan installments when the unit is making cash loss
needs to be viewed seriously.
Reduction in the net worth of the firm (when they have shown net profit needs
further probing.

Movement of Credit Proposal

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

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

Process of Credit appraisal for Term Loans

Term loans- Loans which are repayable in not less than 36 months are referred to as term
loans. In the interest of sound risk management practices, banks monitor the percentage of
Term loans in their credit portfolio with a view to keeping the term loan component within a
pre-determined percentage.
Requirements to be obtained with the proposal:
a) Copies of project report
b) Where loan is on participation basis, a copy of the appraisal note of the lead institution /
bank should be obtained.
c) Scrutiny of proposals
The scope of the project:
Background of promoters
Government consents
The technical appraisal
Cost of the project
Sources of finance
The schedule of implementation
The financial projections and profitability
Cash flow statements
Calculation of debt service coverage ratio (DSCR)

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Breakeven analysis
d) Disbursement
e) Follow up (post sanction)
Assessment :
For assessment purposes the forms prescribed are used and debt equity ratio,
average DSCR, BEP, pay back period, etc. are taken into consideration. The following
minimum financial parameters are required to be satisfied for a Term loan proposal to
merit consideration:

Debt Equity Ratio

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

The case of real estate sector and generally for
different type of industry different level of DER is

Not less than 1.5to 2 (ratio lower than this is to

be looked into)
Average DSCR

Ratios for appraising term loans:

Debt equity ratio: long term debt

Tangible net worth
Average DSCR : Net profit + Depreciation + interest on TL
Term loan installment + interest on TL

Breakeven point : Fixed cost_______

Sales-Variable cost (contribution)
It should be noted that the banks generally consider only term loans repayable within 5 to 7
yrs. Term loans with maturity beyond 7 yrs are normally not experienced except
infrastructure loans.
Debt Equity Ratio:
A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the company
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Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial
statements as well as companies'.
A high debt/equity ratio generally means that a company has been aggressive in financing
its growth with debt. This can result in volatile earnings as a result of the additional interest
expense. If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost (interest),
then the shareholders benefit as more earnings are being spread among the same amount
of shareholders. However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities and become too
much for the company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For
example for large projects (with project cost Rs. 100 crore and above) in Power, acceptable
level of DER is 2.33:1, in Iron and Steel Industry 2.25:1 , in Infrastructure and Capital
Intensive projects 2:1 and in Real Estate, level of DER is 1.75:1. The CH, GM, ED and CMD
have powers to further relax.
Debt Service Coverag Ratio (DSCR):
The ultimate purpose of project appraisal is to ascertain the viability of a project which has
a direct bearing on the repayment of the instalments under the proposed term loan /
deferred payment guarantee. While the repayment program will depend upon the
profitability of a project, the quantum of annual instalments has to be related to the size of
the annual cash flows. The repayment schedule should, therefore, be fixed after
ascertaining the annual servicing by the debt service coverage ratio.
The debt service coverage ratio is the core test ratio in project financing. This ratio indicates
the degree of viability of a project and influences in fixing the repayment period, and the
quantum of annual instalments. For the purpose of this ratio , debt means maturing term
obligations viz. instalments payable during a year under all the term loans/ deferred
payment guarantees and service means cash accruals (service) available to cover the
maturing obligation (debt) during each year.
The debt service coverage ratio indicates the ability of the firm to generate cash accruals
for repayment of installment and interest. For example, a DSCR of 3:1 indicates that for
each Re.1/-long term debt including interest to be paid the business generates cash
accrual of Rs.3/- to be utilized for repayment of debt. The difference between the accruals
and debt is known as margin of safety (Rs.2/- in this case).
The ratio of 1.5 to 2 is considered reasonable. Ratio lower than this should be further looked
into. A very high ratio may indicate the need for lower moratorium period/repayment of loan
in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service
its debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The
ratio may vary from industry to industry but has to be viewed with circumspection when it is
less than 1.5.

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A. The breakeven point is calculated to note the level of production at which the unit neither
earns profit nor incur loss. BEP is the level of operations (in terms of sales or production or
capacity utilization) at which total revenues are equal to total operating costs (fixed and
variable) or, in other words, the operating profit is equal zero. He firm starts earning
operating profits only after the break-even is reached. At BEP, contribution exactly equals
the fixed costs.
B. The formula for calculating the break-even point for each year is as under:
Total fixed cost/Contribution
C. Certain items of the cost that are to be incurred by the unit irrespective of the level of
production are called as fixed cost. The same includes depreciation, repairs and
maintenance, interest, certain portion of salaries, rent, insurance, selling expenses other
than variable items and administrative expenses
D. The variable cost changes with the levels of production. It includes cost of raw materials,
direct wages and other items, which are apportion able to unit of production.
E. The breakeven point is generally expressed in terms of percentage of capacity utilization
Break even analysis is generally expressed in terms of percentage of capacity utilisation.

The CVP analysis provides answers to such questions as: level of operations needed to
avoid loss, level of sales required to achieve targeted profit, effect of product mix on
profits, impact of expansion, most and least profitable products etc. Break-even analysis
is the most widely used form of the CVP analysis.
Break-even analysis is one of the most useful techniques of profit planning and controlling.
The break-even analysis can help in making vital decisions relating to fixation of selling price
make or buy decision, maximizing production of the item giving higher contribution etc.
Further, the break-even analysis can help in understanding the impact of important cost
factors, such as, power, raw material, labor, etc. and optimizing product-mix to improve
project profitability.

It is a useful method for considering also the risk implications of alternative actions. From
one alternative a firm may expect higher profit and also a higher break-even point, while
another alternative may produce comparatively lower profit but at a lower break-even point.
The firm has to weigh the probability (riskiness) of reaching the break-even in the first case
before choosing that alternative. Generally, the preferred alternative would be where the
break-even will be reached earlier.

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Relationship between revenue, variable costs and volume may not be linear.
It is not always easy to have a clean separation of costs into fixed and variable components.
Fixed costs may be stepped not fixed over all volumes.
Complexity involved in using BEP analysis in multi-product businesses


Normal year production

75 lakh units (93.75% of installed


Fixed Costs

Rs. 13.71 lakh

Variable Costs

Rs. 13.35 lakh

Sales realization

Rs. 41.25 lakh


Rs. 27.90 lakh

BEP (production)

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

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

BEP (sales)

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

Sensitivity Analysis
Projects do not always run to plan. Costs and benefits estimated at an early stage of a
project may indicate a profitable project, but this profit could be eroded by an increase in
costs or a decrease in the value of the benefits (the revenue). Sensitivity Analysis involves
changing input variable estimates from an original set of estimates (called the base case)
and determine their impact on a projects measured results, such as NPV (or IRR) from
investors viewpoint, or DSCR from bankers point of view.

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The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or
sensitive elements are identified which are assigned different values and the values
assigned are both optimistic and pessimistic such as increasing or reducing the sale
price/sale volume, increasing or reducing the cost of inputs etc. and then the project
viability is ascertained.
The critical variables can then be thoroughly examined by generally selecting the
pessimistic options so as to make possible improvements in the project and make it
operational on viable lines even in the adverse circumstances.
In the absence of any defined factors and its values for carrying out the sensitivity analysis,
a common 5% sensitivity factor on sale price/cost price of major raw materials is to be
applied in appraisals of all the projects irrespective of the industry. However, 10% sensitivity
factor may be applied in highly volatile industries by assessing the expected volatility in sale
price/ cost price of major raw materials in future on case to case basis.
Process of Credit Appraisal for providing Cash Credit / Working Capital Limits
Working capital for any unit means the total amount of circulating funds required for meeting
day to day requirements of the unit. For proper working a manufacturing unit needs a
specific level of current assets such as raw material, stock in process, finished goods,
receivables and other current assets such as cash in hand/ bank and advances etc. So the
working capital means the funds invested in current assets. The trading units need the
working capital for storing the goods and allowing credit to its customers.
Gross Working Capital and Net Working capital
Gross working capital means the total funds required for financing the total current assets.
Net Working capital means the difference the current assets and liabilities. In other words ,
net working capital denotes the portion of gross working capital contributed from long term
sources. As per practice of Indian banks net working capital should normally be 25% of total
current assets which will give a current ratio of 1.33 to the unit. When net working capital is
negative, it implies that the short term funds have been diverted / used for long term uses
and the unit is facing a liquidity crunch. Such situation may also arise due to losses. In such
a situation, the need of the hour is for raising long term sources. A unit needs working capital
because the production, sales and realizations are not simultaneous. The unit needs cash to
purchase the raw material and pay expenses as there may not be perfect matching between
cash inflows and outflows. The stock of raw material is kept to ensure the uninterrupted and
smooth production. It may also be required to cover the situations of shortages etc.
Factors affecting the requirement of working capital:
Nature of activity: Manufacturing units need more working capital as compared to
trading and service units.

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The length of operating cycle: More the length of operating cycle, more the requirement of
working capital. lengthy the process of manufacture, more the need of working capital due
to increase of length of working capital cycle
Market trend: The market trend of allowing credit to customers also varies from industry
to industry and city to city. More the credit allowed to customers, more the need of
working capital.
Availability of raw materials: When the availability of raw material is assured and
comfortable, lower stock maintenance is required. When there is expectation of shortage
or expectation of rise in prices, more amounts is blocked in raw materials.
Location of the unit: When the unit is located near the source of raw material, lower
stock maintenance is required.
Type of customers: When there are regular customers, low stock of finished products
is needed. When the sales are to be made to walk- in customers, more level of stock of
finished products is required.
Seasonality Factor: When the raw material required is available in a particular season, the
stock for whole of year is to be purchased in the particular season. E.g. Sugarcane, Cotton,
Paddy etc. Similarly the woollen products and products required in a particular season such
as ACs, for keeping the production running, higher level of finished stocks have to be kept.
Role of Banker:
The unit should have sufficient amount of working capital. A portion of it is to be financed
from long term sources called the liquid surplus or net working capital (NWC). The remaining
is normally financed by the bank in the form of working capital limits. Excess maintenance of
working capital may result in idle resources and high interest cost whereas less amount of
working capital may mean disruption in the working. So both the situations are to be
avoided. That is why the technique of calculation of right amount of working capital assumes
significance. For financing of working capital, a banker should be able to calculate right
amount of working capital needed by the unit being financed. It shall mean right amount of
financing which will result in higher profitability for the unit and safety of funds of the bank.
Parameters for various stages in computation of working capital:



Raw Material Holding period value of RM consumed

during the period



Time taken in RM + Mfg.Exp. during the

converting the period (Cost of

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RM into FG production)



Holding period of

R.M + Mfg. Exp. +Adm

FG before being

overheads for the



period (Cost of sales)

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

to buyer

Exp.+ Profit for the period


The assessment of working capital requirement of business unit has been engaging the
attention of the Govt., RBI and a series of committees were set up to suggest
appropriate modalities of financing working capital as under.


Realising the absence of a proper control system in the flow of bank credit for working
capital, RBI constituted a working group Tandon Committee in July 1974 under the
chairmanship of Shri P.L. Tandon. The main task of the group was:
To suggest guidelines to commercial banks to follow up and supervise credit from the view
of ensuring proper end use of the funds and keeping a watch on the safety of the advances.
To suggest as to what constitutes the working capital requirements of industry and
to suggest the sources for financing the minimum working capital requirements.
To suggest the maximum level of bank finance and the method to compute the same.
To make recommendations as to whether the existing pattern of financing working capital
requirements by cash credit or overdraft etc. requires to be modified. If so, to suggest
suitable modifications.
The group submitted its final report during December 1975. The recommendations of this
Committee are summarised below:

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Norms for Inventory and Receivables

With a view to curbing speculative and hoarding tendencies, the Committee fixed norms
(in terms of the weeks/month consumption) in respect inventory and receivables which
industrial units may hold. The norms were fixed for 15 major industries and indicate the
maximum permissible limits for inventory holding. Deviations from norms not allowed for
meeting unforeseen situations.
Approach to Lending.
The three methods of lending as suggested by the committee are:
First Method: 75% of Working Capital Gap (Total Current Assets Other Current liabilities)
Second Method:

75% Total Current Assets Other Current liabilities

Third Method: 75% [(Total Current Assets Core Current Assets) Other Current liabilities)
Third method of lending was not accepted by RBI and hence rejected.
(iii) Style of Credit.
Tandon Committee suggested that instead of making available entire limit by way of cash
credit it may be bifurcated into demand loan and cash credit component (modified by Chore
(iv) Quarterly Follow-up and Supervision
Tandon Committee suggested quarterly forms under the information system made
applicable to borrowers with working capital credit of Rs. 1 crore and over from the
banking system. These forms aim at ensuring proper end-use of credit.


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

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(a) Annual Review

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

(b) Information System

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

Presently this limit of Rs. 50 lac has been raised to Rs. 1 Crore.
(c) Withdrawal of bifurcation of cash credit
The recommendation of the Tandon Study Group to bifurcate cash credit accounts
into demand loan and cash credit components has been withdrawn.
(d) Separate limit for peak level and non-peak level
A recommendation that will induce a greater degree of credit planning pertains to the
separate 'Peak-level' and `non-peak level' credit limits, wherever considered feasible. The
period during which these limits will be utilised will now be indicated in the bank's advice
conveying sanction of credit. This recommendation is based on the pronounced seasonal
trends in agriculture-based industries, (such as tea. coffee, sugar, jute, vegetable oils, etc.),
and in the case of some consumer industries such as those manufacturing fans,
refrigerators etc. One of the major determinants of borrower's peak-level and non-peak level
credit limits will be their availment during the corresponding period in the past. Borrower in
whose cases there are no pronounced seasonal trends, may be sanctioned only one limit as
peak-level and non-peak level concepts will not be relevant in such cases.

(e) Determination of Quarterly Operative limits

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

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Dialogue with the borrower will be initiated to set right the position in regard to defective
credit planning and to ensure that such instances are avoided in future.
(f) Penalty for delayed or non submission of returns
Non-submission of returns, within the prescribed time limit, will henceforth entail penal of 2%
per annum on the total outstanding for the period of default in the submission of returns.
Simultaneously, a notice would be issued to the borrower stating that if the default persists it
would be open to the bank to freeze the account without further notice to the borrower. lf the
default persists despite imposition of penal interest and the bank is satisfied that deterrent
action is warranted, the operations in the account may be frozen on the basis of the notice
issued to the borrower.
(g) Adhoc or temporary limits
The working group has conceded that in exceptional cases, ad-hoc or temporary limits could
be sanctioned to borrowers through demand loan or non-operatable cash credit accounts.
On those limits, banks are required to charge additional 1% interest per annum over the
normal rate. However, in certain cases like natural calamities it would be the discretion of the
bank to charge interest of 1% per annum.
(h) Switching over to Second Method of lending
A major recommendation of the working group relates to switching over the borrowers from
the first to the second method of lending. Recognising that in some cases this may not be
possible immediately, Reserve Bank has stipulated that in such cases, the excess
borrowings are to be segregated and treated as WCTL (Working Capital Term Loan),
which should be made repayable in half-yearly instalments within a definite period but not
exceeding five years in any case.

(i) Encouragement of Bills system

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

Present Status:
The concept of MPBF was the cornerstone of financing which had emerged as a result of
recommendation of Tandon and Chore. However RBI has now abolished the guidelines for

37 | P a g e

MPBF and advised the banks to draw the guidelines for credit dispensation. Our bank is still
following MPBF system. However the relaxations on case to cases are being allowed.


To give a comprehensive and straight line method for the assessment of working capital
requirement of the borrowers, RBI constituted a working group under the chairmanship of
Sh P.R.Nayak. The study group gave its recommendations in March 1993. In April, 1993,
RBI implemented the recommendations of Nayak Committee for assessing the credit
requirements of village industries, tiny industries and other SSI units . Initially the
recommendations were for SSI units only but now other units have also been covered.
Presently units covered under these guidelines are those having aggregate fund-based
working capital credit limits less than Rs.200 lacs for other than SSI and Rs. 500 lacs for
SSI from the banking system.
It has been advised not to apply the norms for inventory and receivables as also the
Methods of Lending. Instead such units be provided working capital limits computed on the
basis of a minimum of 20% of their Projected Annual Turn-Over (PATO) for new as well as
existing units. Their working capital requirement be assessed at a minimum of 25% of their
Projected Annual Turn-Over (PATO) assessed on realistic basis for new as well as existing
units. Out of this, at least 4/5th(20% of their PATO) be provided by the bank and the
borrower should contribute 1/5th of this estimated working capital requirement (5% of PATO)
as margin money of working capital.

In case the margin with the party is more than 5% , PBF may be adjusted
The 20% limit is the minimum. As a temporary relief measure for SME Units, RBI
has allowed banks to finance upto 25% under stimulus package. The same shall be
reviewed after 30.6.09. However if the working capital cycle is longer than 3 months, higher
limit may be fixed. If the working capital cycle is less than 3 months, the limit may be fixed
@ 20 % of turnover but actual withdrawal should be allowed only on the basis of actual D.P.
However lower limit can be sanctioned if requested in writing by the borrower.


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

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The QMS discipline is to be enforced on all borrowers enjoying working capital limits of Rs.1
crore and over from the banking system, irrespective of whether they are exporters or
In case the limits have been sanctioned on the basis of Naik Committtee, QMS forms and
CMA data need not be submitted.
The forms for QMS and time period for submission are as under.
Form- 1

To be submitted within 6 weeks from the close of quarter to which it relates

Form-11 To be submitted within 2 months from the close of Half Year to which it

QMS form I gives us the quarterly data of production and sales and quarterly levels of
current assets and current liabilities.

QMS form II gives us half yearly profitability statement and fund flow statements.
By comparing with the projections as given in CMA, we can see whether the performance is
going on as projected.

QIS I which was earlier discontinued has been reintroduced and is to be submitted
in addition to QMS I and QMS II.
For all borrowed accounts availing fund based working capital credit limits of Rs.5
crore & above from our bank, Quarterly Information System (QIS) Form-I may be obtained
for fixing up of quarterly operative limits in addition to the QMS Forms. The QIS Form-I is to
be submitted in the week preceding the commencement of the quarter to which it relates.

Non adherence to the operative limits will attract penal interest.

To discourage the borrowers from non-availment of credit already provided to them by
banking institutions and to indirectly help the banks in their Asset Management, RBI has
permitted bank to charge penalty on unavailed portion of sanctioned limit known as a
commitment charge. It is applicable to the working capital limits of Rs.5 crore or above and
charged @ 1% per annum with a tolerance limit of 15% based upon the limit sanctioned.

39 | P a g e

The unutilized part of the limit is found out by calculating the average utilization during the
quarter. While calculating the average utilization, overdrawn portion or excess portion is not
taken into consideration. If the average utilization is less than 85% than commitment
charges is levied on the entire unavailed position.

Commitment charge is not applicable in case of export unit and sick unit.
In order to instil a sense of credit discipline among the borrowers, RBI has permitted banks
to levy penal intt. over and above the sanctioned rate of interest in case of non compliance
of various terms and conditions
The broad areas of non compliance where bank charges penal interest are:
Default in repayment of loans
Irregularity in cash credit account
Non submission of stock statements and other financial data
Default in adhering to borrowing covenants
Non payment of bills
Excess borrowings arising out of excess current assets
Non submission of information under Quarterly Monitoring System
All advances up to 25000/Sick unit under rehabilitation
Sick unit remained closed
Advance against deposits/LIC policy/Govt. securities/Gold & Jewellery where the drawings
are within available value of security
Account transferred to Protested category

40 | P a g e


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


Amount of default in installment /excess drawls or borrowings or amount of irregularities in
account/overdue bill not debited to account.
Total amount of outstanding for non-submission of stock statement and other financial
data/default adhering to borrowing covenants/non-submission of information under QMS.

Appraisal Technique of Retail loans

Education Loan
Till some years back higher education and quality education was not affordable to some
illustrious students because of the financial constraints. There was no any alternative but to
jump in the job market prematurely. And this led to untimely end of budding talents and
their forceful transformation into to the mediocrity. Scholarships were there, but those were
so less in numbers that only luckier few could avail them. But now the scene has changed
drastically. The boom in the banking sector has led to release of large amount of funds for
education loans
Student loans in India (popularly known as Education loans) have become a popular
method of funding higher education in India with the cost of educational degrees going
higher. The spread of self-financing institutions(which has less to no funding from the
government) for higher education in fields of engineering, medical and management
which has higher fees than their government aided counterparts have encouraged the
trend in India. Most large public sector and private sector banks offer educational loans.
Under section 80(e) of the Indian Income tax act, a person can exempt the amount paid
against the interest of the education loan - either for self or for his/her spouse or children
- for eight years from the year (s)he starts to repay the loan or for the duration the loan is
in effect, whichever is lesser.
Education loan is becoming popular day by day because of the rising fee structure of higher
education. It came into existence in 1995 started first by SBI bank and after that many
banks started offering study loan.

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Vehicle Loans
Today, vehicles can be financed using a number of options such as loans, lease, or hire
purchase agreement. Obtaining a vehicle loan is one of the more straightforward ways of
financing a two or four wheeler. In this manner, the vehicle purchased is actually
possessed by the bank or lending institution. This means the car or motorbike is
hypothecated. Therefore, though the consumer owns the vehicle, the bank or the lending
institution is actually using it as a security against the loan that the consumer has

Housing Loans
Housing loans have emerged as an attractive avenue for credit deployment for banks in the
recent past. Industry level statistics reveal that NPAs in this segment is relatively low.
Housing loans are fully secured as they are backed by mortgages of residential properties.
Small housing loans up to Rs 10 lakhs can be classified as priority sector credit and hence
help in achieving/ maintaining the mandated priority sector lending targets. Risk weightage
for housing loans is only 50 % , enabling expansion of the credit portfolio with lesser capital
requirement. The prevailing lower interest rates, which have resulted in greater affordability
and the tax concessions offered by the government have made this one of the fastest
growing financial products. Further since the housing loan portfolio typically comprises a
large pool of small and medium sized loans, risk is distributed over a large number of
accounts, which is ideal from Risk Management point of view. Hence growth of quality
assets under Housing Finance is one of the major areas of focus for the bank.
Home Loan offers the most consumer friendly home loans and housing finance schemes at
attractive rates. PNB Housing Loans, with an aim to make purchase and construction of
homes a comfortable task, provides fixed as well as floating home loans at different rate of

42 | P a g e

1. ii Brief Evolution and Growth of the Industry

Evolution in the Indian Banking Sector

43 | P a g e

Growth and Development of the Industry

The worlds second largest populated country, India, is the apple of the eye for the world
now. The world economies are seeing it as their potential market. This has been going on
since quite some time now, ever since 1991 reforms of liberalization, globalization and
privatization. Indian markets in urban areas have grown appreciably and are on the verge of
saturation, so corporates have started tapping rural markets, since more than 60 per cent of
Indias population lives in rural areas.
During this global meltdown and fall of exports, if the Fast Moving Consumer Goods
(FMCG) sector has been able to show rising quarterly growths, it is because of the Rural
Markets and their rising spending power, which have not been affected by this meltdown. If
we look at the strategies followed by Rural Marketers in the FMCG sector, it is to sell many
small sachets of Rs. 2 shampoo pouches, Rs. 5 Maggi packs and the Rs. 5 chota Pepsi,
because here, the strength lies in volume sale, considering the large consumer base in
these rural markets which wont spend altogether at once on buying large family packs of
500ml shampoo or super saver packs of Maggi or a Pepsi pet bottle of 2 litres.
Therefore, consumption trends followed by the rural Indian are considered to be the driver
of future growth of companies. And this trend of tapping rural markets is visible across all
sectors now, be it FMCG, IT, Banking, education etc. For example, today, India is in better
state than China because our GDP is less dependent on exports as compared to them,
where maximum revenues come from exporting to the European and US markets. Thus,
tapping the rural markets is most important for us to be a self sustaining economy.
India has been considerably shielded from the global recession. Firstly, we are not very
dependent on the exports for our GDP and have a good consumer base in India.
Secondly, we are a saving prone economy, unlike western economies which are
consumption prone. Thirdly, when banks across the world are falling like a pyramid of
playing cards; we are safe, steady and strong, with our banks which have acted like a
strong backbone of our economy during present turmoil. And just like thr FMCG sector,
there is tremendous growth potential in the banking sector, because firstly, the rural
masses have the habit of saving and spending only when needed. Secondly, their small
credit requirements for agriculture, cottage industry and marriages etc.
According to researches carried out by the Reserve Bank of India (RBI), on an all
India basis, 59 per cent of the adult population in the country has bank accounts and
41 per cent dont. In rural areas, the coverage of banks is 39 per cent, against 60 per
cent in urban areas. There is only one bank for a population of13000.
Tapping the rural market by banks becomes all the more important, not only for the
banking sector, but all other industrial sectors as well. If there is growth in the banking
sector, it benefits the other sectors as well. By this, it is meant that in this sector, the
trickledown theory of economic growth or top down approach works, if we keep the
banks at the apex in India Inc. Reasons being, as banks promote savings in the
economy, they speed up the capital formation and then become the source of finance
of trade and credit for the industry. Then they provide credit to enable entrepreneurs in
their ventures, which promotes production and employment. This production and
employment generates income and consumption and supply and demand, by
44 | P a g e

increasing the spending power of people. And a sum total of all these reduces poverty
and better life styles.
But the problem is that banks have not been able to reach a vast majority of the rural
population; the rural poor have limited access to organized, affordable and transparent
financial services such as savings, loans, remittances and insurance services etc. It is
important for them to have access to banking services, especially credit and insurance,
to enlarge livelihood opportunities and to empower themselves to take charge of their

Indian banking sector credit growth has grown at a healthy pace

Credit off-take has been surging ahead over the past decade, aided by strong economic
growth, rising disposable incomes, increasing consumerism and easier access to credit

Total credit extended went up to US$ 1,089 billion by FY15

Credit to non-food industries increased 9.75 per cent to US$ 1,073.4 billion in FY15, from
the previous financial year
Demand has grown for both corporate and retail loans

45 | P a g e

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 15th 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 system was first made applicable to the
borrowers with an MPBF of Rs 20 crore and above; and in their case , the ratio of cash
credit (loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April
1995 , to 60 (40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80)
percent in April 1997. With the withdrawal of instructions about the MPBF in April 1997 , the
prescribed cash credit and loan components came to be related to the working capital limit
arrived in banks as per the method of their choice.
With effect from September 3, 1997, the RBI has permitted banks to raise their
existing exposure limit to a business group from 50% to 60%; the additional 10% limit
being exclusively meant for investment in infrastructure projects.
The term lending by banks also has subject to the limits fixed by RBI. In 1993, this limit was
raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank,
and from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit
was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore
for power projects. From September3, 1997 these caps on term lending by banks were
removed subject to their compliance with the prudential exposure norms.
The banks can invest in and underwrite shares and debentures of corporate bodies. At
present, they can invest five percent of their incremental deposits in equities of
companies including other banks. Their investment in shares/ Bonds of DFHI, Securities
trading Corporation of India (STCI), all Indian financial institutions and bonds
(debentures) and preference shares of the companies are excluded from this ceiling of
five per cent with affect from April 1997 . From the same date banks could extend loans
within this ceiling to the corporate against shares held by them. They could also offer
overdraft facilities to stock brokers registered with help of SEBI against shares and
debentures held by them for nine months without change of ownership.

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1.iii Major Trends in Credit Industry

A study group headed by Shri Prakash Tandon, the then Chairman of Punjab National
Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from
leading banks, financial institutions and a wide cross-section of the industry with a view to
study the entire gamut of Bank's finance for working capital and suggest ways for optimum
utilization of Bank credit. This was the first elaborate attempt by the central bank to organize
the Bank credit. Most banks in India even today continue to look at the needs of the
corporate in the light of methodology recommended by the Group. The report of this group
is widely known as Tandon Committee report.
The weaknesses in the Cash Credit system have persisted with the non-implementation of
one of the crucial recommendations of the Committee. In the background of credit expansion
seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study
and suggesti) 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 more organized. However,
the recommendations were perceived as too strict by the industry and there has been a
continuous clamor from the Industry for movement from mandatory control to a voluntary
market related restraint. With recent liberalization of economy and reforms in the financial
sector, RBI has given the freedom to the Banks to work out their own norms for inventory
and the earlier norms are now to be taken as guidelines and not a mandate. In fact,
beginning with the slack season credit policy of 1997-98, RBI has also given full freedom to
all the Banks to devise their own method of assessing the short term credit requirements of
their clients and grant lines of credit accordingly. Most banks, however, continue to be
guided by the principles enunciated in Tandon Committee report.

Trends of Bank Credit in India

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

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

Reasons for declining trend of bank credit

A major share of the economic growth has been led by the expansion of the service sector
Capital intensity and investment intensity required for growth in the current economic context
may not be as high as it used to be in the past.
In manufacturing sector more efficient utilization of existing capacities contributed to the
sectoral growth rather rather than any large addition of fresh capacities. The consequential
increase in the demand for credit was also subdued.
Greater and cheaper avenues for credit resulted in a bigger share of disintermediation being
resorted to by large borrowers.
The other trend has been the substantial drop in the share of rural credit, while the share of
metropolitan centres has increased. While bankers say that up gradation of rural centers into
semi-urban could be one reason (the share of semi-urban centers 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 liberalization.

1.iv Major Players of the Banking Industry

Name of

State Bank
of India

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as in



Tier I
Capital %
as in

Return on
Net Worth

NPA % as
in March












Bank of





















Axis Bank
Bank of















1.v Comparison of Market Shares of Major Players

Market Share of Major Players of Private Banks

Market Share


Axis Bank


DCB Bank

Kotak Mahindra Bank

Indusind Bank


49 | P a g e

Market Share of Major Players of Public Banks

Market Share


Dena Bank



Canara Bank


Market Share of Major Players of NBFCs

Market Share

TATA Capital


Reliance Capital

Muthoot Finance
Bajaj Finance


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11% Challenges faced by Indian Banking Industry

1.vii Technological Changes in the Banking Industry

Technology Impact
Information technology is one of the most important facilitators for the transformation of the
Indian banking industry in terms of its transactions processing as well as for various other
internal systems and processes. The various technological platforms used by banks for the
conduct of their day to day operations, their manner of reporting and the way in which
interbank transactions and clearing is affected has evolved substantially over the years.
The technological evolution of the Indian banking industry has been largely directed by the
various committees set up by the RBI and the government of India to review the
implementation of technological change. No major breakthrough in technology
implementation was achieved by the industry till the early 80s, though some working groups
and committees made stray references to the need for mechanization of some banking
processes. This was largely due to the stiff resistance by the very strong bank employees
unions. The early 1980s were instrumental in the introduction of mechanisation and
computerisation in Indian banks. This was the period when banks as well as the RBI went
very slow on mechanisation, carefully avoiding the use of computers to avoid resistance
from employee unions. However, this was the critical period acting as the icebreaker, which
led to the slow and steady move towards large scale technology adoption.
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The process of computerization marked the beginning of all technological initiatives in the
banking industry. Computerisation of bank branches had started with installation of simple
computers to automate the functioning of branches, especially at high traffic branches.
Thereafter, Total Branch Automation was in use, which did not involve bank level branch
networking, and did not mean much to the customer
Networking of branches are now undertaken to ensure better customer service. Core
Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable the
customers to operate their accounts from any bank branch, regardless of which branch he
opened the account with. The networking of branches under CBS enables centralized data
management and aids in the implementation of internet and mobile banking. Besides, CBS
helps in bringing the complete operations of banks under a single technological platform.
CBS implementation in the Indian banking industry is still underway. The vast geographical
spread of the branches in the country is the primary reason for the inability of banks to
attain complete CBS implementation

Satellite Banking
Satellite banking is also an upcoming technological innovation in the Indian banking
industry, which is expected to help in solving the problem of weak terrestrial communication
links in many parts of the country. The use of satellites for establishing connectivity
between branches will help banks to reach rural and hilly areas in a better way, and offer
better facilities, particularly in relation to electronic funds transfers. However, this involves
very high costs to the banks. Hence, under the proposal made by RBI, it would be bearing a
part of the leased rentals for satellite connectivity, if the banks use it for connecting the
north eastern states and the under banked districts.
Development of Distribution Channels
The major and upcoming channels of distribution in the banking industry, besides branches
are ATMs, internet banking, mobile and telephone banking and card based delivery

Automatic Teller Machines

ATMs were introduced to the Indian banking industry in the early 1990s initiated by foreign
banks. Most foreign banks and some private sector players suffered from a serious
handicap at that time- lack of a strong branch network. ATM technology was used as a
means to partially overcome this handicap by reaching out to the customers at a lower
initial and transaction costs and offering hassle free services. Since then, innovations in
ATM technology have come a long way and customer receptiveness has also increased
manifold. Public sector banks have also now entered the race for expansion of ATM
networks. Development of ATM networks is not only leveraged for lowering the transaction
costs, but also as an effective marketing channel resource.

Introduction of Biometrics
Banks across the country have started the process of setting up ATMs enabled with
biometric technology to tap the potential of rural markets. A large proportion of the
population in such centers does not adopt technology as fast as the urban centers due to
the large scale illiteracy. Development of biometric technology has made the use of self
service channels like ATMs viable with respect to the illiterate population. Though
expensive to install, the scope of biometrics is expanding rapidly. It provides for better
52 | P a g e

security system, by linking credentials verification to recognition of the face, fingerprints,

eyes or voice. Some large banks of the country have taken their first steps towards large
scale introduction of biometric ATMs, especially for rural banking. At the industry level,
however, this technology is yet to be adopted; the high costs involved largely accounting for
the delay in adoption.

Multilingual ATMs
Installation of multilingual ATMs has also entered pilot implementation stage for many large
banks in the country. This technological innovation is also aimed at the rural banking
business believed to have large untapped potential. The language diversity of India has
proved to be a major impediment to the active adoption of new technology, restrained by
the lack of knowledge of English.

Multifunctional ATMs
Multifunctional ATMs are yet to be introduced by most banks in India, but have already
been recognized as a very effective means to access other banking services.
Multifunctional ATMs are equipped to perform other functions, besides dispensing cash and
providing account information. Mobile recharges, ticketing, bill payment, and advertising are
relatively new areas that are being explored via multifunctional ATMs, which have the
potential to become revenue generators for the banks by effecting sales, besides acting as
delivery channels. Most of the service additions to the ATM route require specific approval
from the regulator.

ATM Network Switches

ATM switches are used to connect the ATMs to the accounting platforms of the respective
banks. In order to connect the ATM networks of different banks, apex level switches are
required that connect the various switches of individual banks. Through this technology,
ATM cards of one bank can be used at the ATMs of other banks, facilitating better customer
convenience. Under the current mechanism, banks owning the ATM charge a fee for
allowing the customers of some other bank to access its ATM.
Among the various ATM network switches are CashTree, BANCS, Cashnet Mitr and
National Financial Switch. Most ATM switches are also linked to Visa or MasterCard
gateways. In order to reduce the cost of operation for banks, IDRBT, which administers the
National Financial Switch, has waived the switching fee with effect from December 3, 2007.

Internet Banking
Internet banking in India began taking roots only from the early 2000s. Internet banking
services are offered in three levels. The first level is of a banks informational website,
wherein only queries are handled; the second level includes Simple Transactional
Websites, which enables customers to give instructions, online applications and balance
enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to
be conducted. Internet banking in India has reached level three, offering Fully Transactional
Websites, which allow for fund transfers and various value added services.
Internet banking poses high operational, security and legal risks. This has restrained the
development of internet banking in India. The guidelines governing internet banking
operations in India covers a number of technological, security related and legal issues to be
addressed in relation to internet banking. According to the earlier guidelines, all internet
banking services had to be denominated in local currency, but now, even foreign exchange
services, for the permitted underlying transactions, can be offered through internet banking.
Internet banking can be offered only by banks licensed and supervised in India, having a
physical presence in India. Overseas branches of Indian banks are allowed to undertake
internet banking only after satisfying the host supervisor in addition to the home supervisor.
53 | P a g e

Phone Banking and Mobile Banking

Phone and mobile banking are a fairly recent phenomenon for the Indian banking industry.
There exist operative guidelines and restrictions on the type and quantum of transactions
that can be undertaken via this route. Phone banking channels function through an
Interactive Voice Response System (IVRS) or telebanking executives of the banks. The
transactions are limited to balance enquiries, transaction enquiries, stop payment
instructions on cheques and funds transfers of small amounts (per transaction limit of Rs
2500, overall cap of Rs 5000 per day per customer). According to the draft guidelines on
mobile banking, only banks which are licensed and supervised in India and have a physical
presence in India re allowed to offer mobile banking services. Besides, only rupee based
services can be offered. Mobile banking services are to be restricted to bank account and
credit card account holders which are KYC and AMC compliant.
With the rapidly growing mobile penetration in the country, mobile banking has the potential
to become a mass banking channel, with very minimum investment required by the banks.
However, more security issues need to be addressed before banking can be conducted
more freely via this channel.

Card Based Delivery Systems

Among the card based delivery mechanisms for various banking services, are credit cards,
debit cards, smart cards etc. These have been immensely successful in India since their
launch. Penetration of these card based systems have increased manifold over the past
decade. Aided by expanding ATM networks and Point of Sale (POS) terminals, banks have
been able to increase the transition of customers towards these channels, thereby reducing
their costs too.

Payment and Settlement Systems

The innovations in technology and communication infrastructure in recent years have
impacted banks in a large way through the development of payment and settlement
systems, which are central to the major portion of the businesses of banks.
In order to strengthen the institutional framework for the payment and settlement systems in
the country, the RBI constituted, in 2005, a Board for Regulation and Supervision of
Payment and Settlement Systems (BPSS) as a Committee of its Central Board. The BPSS
now lays down policies relating to the regulation and supervision of all types of payment
and settlement systems, sets standards for existing and future systems, approves criteria
for authorisation of payment and settlement systems, and determines criteria for
membership to these systems, including continuation, termination and rejection of
membership. Thereafter, the government and the RBI felt the need for a legal framework
dedicated to the efficient functioning of the payment and settlement systems. The Payment
and Settlement Systems Act was passed in December 2007, which empowered the RBI to
regulate and supervise the payment and settlement systems and provided a legal basis for
multilateral netting and settlement.
Important technological innovations in payment and settlement systems introduced by the
RBI in recent years are discussed here.

Paper Based Clearing Systems

Among the most important improvement in paper based clearing systems was the
introduction of MICR technology in the mid 1980s. Though improvements continued to be
made in MICR enabled instruments, the major transition is expected now, with the
implementation of the Cheque Truncation System for the processing of cheques.

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Cheque Transaction System (CTS)

Transaction is the process of stopping the movement of the physical cheque which is to be
truncated at some point en-route to the drawee branch and an electronic image of the
cheque would be sent to the drawee branch along with the relevant information like the
MICR fields, date of presentation, presenting banks etc. Thus, the CTS reduces the
probability of frauds, reconciliation problems, logistics problems and the cost of collection.
The cheque truncation system was launched on a pilot basis in the National Capital Region
of New Delhi on February 1, 2008, with the participation of 10 banks. The main advantage
of the cheque truncation system is that it obviates the physical presentation of the cheque
to the clearing house. Instead, the electronic image of the cheque would be required to be
sent to the clearing house. This would provide a more cost-effective mode of settlement
than manual and MICR clearing, enabling realization of cheques on the same day.
Amendments have already been made in the NI Act to give legal recognition to the
electronic image of the truncated cheque, providing for a sound legal framework for the
introduction of CTS.
Currently the effort is on increasing the processing efficiency with respect to paper based
transactions, and as far as possible, to reduce the burden on paper based clearing.
Through the introduction of advanced electronic funds transfer mechanisms, the RBI has
been successful in diverting a large portion of paper based transactions to the electronic

Electronic Funds Transfer Systems

The launch of the electronic funds transfer mechanisms began with the Electronic Funds
Transfer (EFT) System. The EFT System was operationalised in 1995 covering 15 centres
where the Reserve Bank managed the clearing houses.
Special EFT (SEFT) scheme, a variant of the EFT system, was introduced with effect from
April 1, 2003, in order to increase the coverage of the scheme and to provide for quicker
funds transfers. SEFT was made available across branches of banks that were
computerised and connected via a network enabling transfer of electronic messages to the
receiving branch in a straight through manner (STP processing). In the case of EFT, all
branches of banks in the 15 locations were part of the scheme, whether they are networked
or not.
A new variant of the EFT called the National EFT (NEFT) was decided to implemented
(November 2005) so as to broad base the facilities of EFT. This was a nation wide retail
electronic funds transfer mechanism between the networked branches of banks. NEFT
provided for integration with the Structured Financial Messaging Solution (SFMS) of the
Indian Financial Network (INFINET). The NEFT uses SFMS for EFT message creation and
transmission from the branch to the banks gateway and to the NEFT Centre, thereby
considerably enhancing the security in the transfer of funds. While RTGS is a real time
gross settlement funds transfer product, NEFT is a deferred net settlement funds transfer
product. As the NEFT system stabilized over time, the number of settlements in NEFT was
increased from the initial two to six. NEFT now provides six settlement cycles a day and
enables funds transfer to the beneficiaries account on T+0 basis, bringing it closer to real
time settlement.

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1.viii Non Performing Assets (NPA)

NPA is any asset of a bank which is not producing any income.
In other words, a loan or lease that is not meeting its stated principal and interest payments.
On a banks balance sheet, loans made to customers are listed as assets. The biggest risk
to a bank is when customers who take out loans stop making their payments, causing the
value of the loan assets to decline.

Loans dont go bad right away. Most loans allow customers a certain grace period. Then
they are marked overdue. After a certain number of days, the loan is classified as
a nonperforming loan.
Banks usually classify as nonperforming assets any commercial loans which are more than
90 days overdue and any consumer loans which are more than 180 days overdue.
For agricultural loans, if the interest and/or the installment or principal remains overdue for
two harvest seasons; it is declared as NPAs. But, this period should not exceed two years.
After two years any unpaid loan/installment will be classified as NPA.

1. Sub-standard: When the NPAs have aged <= 12 months.
2. Doubtful: When the NPAs have aged > 12 months.
3. Loss assets: When the bank or its auditors have identified the loss, but it has not been
written off.
After a certain amount of time, a bank will try to recoup its money by foreclosing on the
property that secures the loan. The way money is recouped is a highly contentious issue not
just with banks but also with Micro-Finance Institutions (MFIs). We will discuss it later in the
All of this can be explained in a much more technical manner, but that is not required here.
For example, we do not need to list all the conditions that make the banks declare an asset
as NPAs like respect of derivative transactions, the overdue receivables representing
positive mark-to-market value of a derivative contract, if these remain unpaid for a period of
90 days from the specified due date for payment.
Only understanding the basic concepts will suffice. UPSC is not going to ask you these
details, but about the impact and solutions of NPAs. Even in prelims, these details will not be
asked. So we avoid technicalities and jargons here. It is not useful for a GS paper, even if
some of it may be useful for Economics optional paper

Gross NPAs of domestic banks jumped to 4.2 % of total lending by the end of September
2013 from 3.6 % six months before, according to the Reserve Bank of India (RBI).
As per a recent warning by the RBI, bad loans (NPAs) could climb to 7% of total advances
by 2015.
In absolute terms, gross NPAs are estimated to touch Rs 2.50 lakh crores by the end of
March this year. This is equal to the size of the budget of Uttar Pradesh. The biggest chunk
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of the soured debts is with state-run banks (Public sector banks or PSBs), which account for
two-thirds of loans but 80 % of the bad assets

External Factors
Reasons Related to Corporate Sector
Apart from the slowdown in India, the global economy has also slowed down.
This has adversely impacted the corporate sector in India. Continuing uncertainty in the
global markets has lead to lower exports of various products like textiles, engineering
goods, leather, gems etc. It can be noted that imports and exports combined equal to
around 40% of Indias GDP!
A hurt corporate sector is finding it difficult to pay loans
The ban in mining projects, delay in environmental related permits affecting power,
iron and steel sector, volatility in prices of raw material and the shortage in availability of
power have all impacted the performance of the corporate sector. This has affected
their ability to pay back loans.

Internal Factor
1 Indiscriminate lending by some state-owned banks during the high growth period (200408) is one of the main reasons for the deterioration in asset quality.
2. Bankers say there is a lack of rigour in loan appraisal systems and monitoring of warning
signals at state-run banks. This is particularly true in case of infrastructure projects, many of
which are struggling to repay loans. Besides, these projects go on for 20 to 30 years.
3. Poor recovery and use of coercive techniques by banks in recovering loans

Examples of NPAs
Vijay Mallyas Kingfisher Airlines is king of defaulters at Rs 4,022 crore

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1.ix Application of Industry Tools

1.ix.1 SWOT Analysis
SWOT analysis of HDFC Bank

HDFC bank is the second largest private banking sector in India having 2,201 branches and
7,110 ATMs

HDFC bank is located in 1,174 cities in India and has more than 800 locations to serve
customers through Telephone banking

The banks ATM card is compatible with all domestic and international Visa/Master card,
Visa Electron/ Maestro, Plus/cirus and American Express. This is one reason for HDFC
cards to be the most preferred card for shopping and online transactions

HDFC bank has the high degree of customer satisfaction when compared to other private

The attrition rate in HDFC is low and it is one of the best places to work in private banking
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HDFC has lots of awards and recognition, it has received Best Bank award from various
financial rating institutions like Dun and Bradstreet, Financial express, Euro money awards
for excellence, Finance Asia country awards etc

HDFC has good financial advisors in terms of guiding customers towards right investments

HDFC bank doesnt have strong presence in Rural areas, where as ICICI bank its direct
competitor is expanding in rural market

HDFC cannot enjoy first mover advantage in rural areas. Rural people are hard core loyals
in terms of banking services.

HDFC lacks in aggressive marketing strategies like ICICI

The bank focuses mostly on high end clients

Some of the banks product categories lack in performance and doesnt have reach in the

The share prices of HDFC are often fluctuating causing uncertainty for the investors

HDFC bank has better asset quality parameters over government banks, hence the profit
growth is likely to increase

The companies in large and SME are growing at very fast pace. HDFC has good reputation
in terms of maintaining corporate salary accounts

HDFC bank has improved its bad debts portfolio and the recovery of bad debts are high
when compared to government banks

HDFC has very good opportunities in abroad

Greater scope for acquisitions and strategic alliances due to strong financial position

HDFCs nonperforming assets (NPA) increased from 0.18 % to 0.20%. Though it is a slight
variation its not a good sign for the financial health of the bank

The non banking financial companies and new age banks are increasing in India

The HDFC is not able to expand its market share as ICICI imposes major threat

The government banks are trying to modernize to compete with private banks

RBI has opened up to 74% for foreign banks to invest in Indian market

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SWOT analysis of ICICI Bank


ICICI is the second largest bank in terms of total assets and market share

Total assets of ICICI is Rs. 4062.34 Billion and recorded a maximum profit after tax of Rs.
51.51 billion and located in 19 countries

One of the major strength of ICICI bank according to financial analysts is its strong and
transparent balance sheet

ICICI bank has first mover advantage in many of the banking and financial services. ICICI
bank is the first bank in India to introduce complete mobile banking solutions and jewelry

The bank has PAN India presence of around 2,567 branches and 8003 ATMs

ICICI bank is the first bank in India to attach life style benefits to banking services for
exclusive purchases and tie-ups with best brands in the industry such as Nakshatra, Asmi,
Ddamas etc

ICICI bank has the longest working hours and additional services offering at ATMs which
attracts customers

Marketing and advertising strategies of ICICI have good reach compared to other banks in

Customer support of ICICI section is not performing well in terms of resolving complaints

There are lot of consumer complaints filed against ICICI

The ICICI bank has the most stringent policies in terms of recovering the debts and loans,
and credit payments. They employ third party agency to handle recovery management

There are also complaints of customer assault and abuse while recovering and the credit
payment reminders are sent even before the deadlines which annoys the customers

The bank service charges are comparatively higher

The employees of ICICI are bank in maximum stress because of the aggressive policies of
the management to win ahead in the race. This may result in less productivity in future years


Banking sector is expected to grow at a rate of 17% in the next three years
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The concept of saving in banks and investing in financial products is increasing in rural
areas as more than 62% percentage of Indias population is still in rural areas.

As per 2010 data in TOI, the total number b-schools in India are more than 1500. This can
ensure regular supply of trained human power in financial products and banking services

Within next four years ICICI bank is planning to open 1500 new branches

Small and non performing banks can be acquired by ICICI because of its financial strength

ICICI bank is expected to have 20% credit growth in the coming years.

ICICI bank has the minimum amount of non performing assets


RBI allowed foreign banks to invest up to 74% in Indian banking

Government sector banks are in urge of modernizing the capacities to ensure the customers
switching to new age banks are minimized

HDFC is the major competitor for ICICI, and other upcoming banks like AXIS, HSBC impose
a major threat

In rural areas the micro financing groups hold a major share

Though customer acquisition is high on one side, the unsatisfied customers are increasing
and make them to switch to other banks

SWOT analysis of Axis Bank


Axis bank has been given the rating as one of top three positions in terms of fastest growth
in private sector banks

Financial express has given number two position and BT-KPMG has rated AXIS bank as the
best bank with some 26 parameters

The bank has a network of 1,493 domestic branches and 8,324 ATMs

The bank has its presence in 971 cities and towns

The banks financial positions grows at a rate of 20% every year which is a major positive
sign for any bank

The companys net profit is Q3FY12 is 1,102.27 which has a increase of 25.19% growth
compared to 2011
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Gaps Majorly they concentrated in corporate, wholesale banking, treasury services, retail

Foreign branches constitute only 8% of total assets

Very recently the bank started focusing its attention towards personal banking and rural

The share rates of AXIS bank is constantly fluctuating in higher margins which makes
investors in an uncomfortable position most of the time

There are lot of financial product gaps in terms of performance as well as reaching out to the

There are many fraudulent activities involved in credit cards as the banks process credit
card approval even without verification of original documents

Their financial consultants are not wise enough to guide the customers towards right

Customer service has to improve a lot in order to be in race with other major players

Acquisitions to fill gap

In 2009, Alliance with Motilal Oswal for online trading for 10 million customers

In 2010, acquired Enam Securities Pvt Ltd broking and investment banking

In Sep 2009, SEBI approved Axis Asset Management Co. for mutual fund business

No. of e-transactions increased from 0.7 million to around 2 million

Geographical expansion to rural market 80% of them have no access to formal lending

46% use informal lending channels

24% unregulated money lenders

Now number of branches increased to 1493 from 339.

Last quarter there were 48 new branches opened across the Nation

Since its a new age banking there are lot of opportunities to have the advance technicalities
in banking solutions compared to existing major players

The assets in their international operations are growing at a very faster pace with a growth
rate of 9%.

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The concept of ETM (Everywhere teller machine) by AXIS Bank had a good response in
terms of attracting new customers in personal banking segment

Since 2009, RBI has increased CRR by 100 basis points

Increased repo rate reverse repo rate by 50 points 11 times of late

Increasing popularity of QIPs due to ease in fund raising

RBI allowed foreign banks to invest up to 74% in Indian banking

Government schemes are most often serviced only by govern banks like SBI ,Indian Banks,
Punjab National Bank etc

ICICI and HDFC are imposing strong threats in terms of their expansion in customer base by
their aggressive marketing strategies

SWOT analysis of DCB Bank

-high growth rate
-skilled workforce
-high profitability and revenue
-brand portfolio
-cost structure
-future profitability
-small business units
-high loan rates are possible
-future debt rating
-income level is at a constant increase
-growing economy
-new products and services
-global markets
-venture capital
-increasing costs
-growing competition and lower profitability
-financial capacity
-price changes
-technological problems
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SWOT of Kotak Mahindra Bank

1. Innovative financial products of diverse categories
2. Kotak Mahindra Finance Ltd. is the first company in the Indian banking history to convert
to a bank
3. Comprehensive Cash Management System
4. Has over 20,000 employees
5. Customer account base of over 2.7 million
1. Lesser penetration as being late entrants
2. Low publicity and marketing as compared to other premium banks in the urban areas
1. Increase in Industry banking
2. Explore opportunities abroad by International banking
1. Economic slowdown
2. Highly competitive environment
3. Stringent Banking Norms

SWOT analysis of Bank of India

1. A public sector undertaking. Thus, has government backing
2. Increasing profits over the years
3. Pan India presence with over 3400 branches
4. Founder of SWIFT (Society for Worldwide Inter Bank Financial Telecommunications)
5. Large employee base
1.Brand valued not as big as SBI or BoB
2.The branches are not modernized in many cities as compared to leading banks

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1.Venturing into rural areas
2.Installtion of more ATMs
3.Use of mobile banking, internet banking on a large scale
1.New banking licenses
2.Foreign players
3. Disinvestments

SWOT analysis of Dena bank

1. Rural banking expertise
2. Government schemes implementation
3. Innovative schemes for different groups like drive in ATMs
4. Emphasis on customer satisfaction through modules like customer ratings
1. Less penetration as compared to other banks
2. Limited advertising in comparison with leading banks
3. Less emphasis on IT support
1. International banking
2. Favourable Government schemes
3.Doing aggressive marketing in order to improve brand value
1. Economic crisis and fluctuating economic scenarios
2. Highly competitive environment with foreign banks

SWOT analysis of Reliance Capital

-high growth rate
-barriers of market entry
-experienced business units
-high profitability and revenue
-reduced labor costs
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-existing distribution and sales networks

-domestic market
-high loan rates are possible
-cost structure
-brand portfolio
-venture capital
-growth rates and profitability
-global markets
-new markets
-increasing costs
-increase in labor costs
-cash flow
-government regulations
-rising cost of raw materials
-external business risks
-price changes

SWOT analysis Muthoot Finance

-experienced business units
-high growth rate
-investments in research and development
-venture capital
-new acquisitions
-income level is at a constant increase
-new markets
-increase in labor costs
-tax changes
-rising cost of raw materials

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1.xi.2 BCG Matrix of Banks and NBFCs.






Question Mark


Debit Card

Cash cow



Traveler Cheque

HDFC BANK stands at star position in BCG matrix. As HDFC bank have the high market
growth and they also have high market share. There is a lot of growth potential for the
banking industry because of increasing disposable income of customers, increasing working
class, more volatility in other markets also increasing importance of savings and already
discussed almost 30% of the market is still untapped HDFC bank have a 28% of market





Question Mark

Service , loan

Credit card, debit card

Cash cow


Casa a/c



AXIS BANK stands at star position in BCG matrix. As AXIS bank have the high market
Growth and they also have high market share. There is a lot of growth potential for the
Banking industry because of increasing disposable income of customers, increasing working
Class, axis bank have a 15% of market share.
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Punjab National Bank





Question mark

Insurance ,
loan ,
Demat a/c

Debit card

Cash cow



PNB stands at Question Mark position in BCG matrix Punjab Notational Bank have
the low market share they have a market share of 4 .22% of market share . they also fall in
question mark.

State Bank of India



Service ,

Question Mark
Debit card

Cash cow




SBI bank have a high market share they have a market share of 25.5% .they also fall in
stare There is a lot of growth potential for the banking industry because of increasing
disposable income of customers, increasing working capital .

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1.xi.3 Snake Diagram

Private Banks

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Technology Good





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Public bank

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Interest rate












Financial product












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Interest rate 10.25%

















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1.xi.4 Porter Five Force Model

Banking is mainly a client oriented business. A high-quality of services to the client is crucial
for the growth and stability of any bank. A wider distribution and access of financial services
helps both consumers and producers to raise their welfare and productivity. Such access is
especially powerful for the poor as it provides them opportunities to build savings, make
investments, avail credit, and more important, insure themselves against income shocks and
emergencies. To survive in an increasingly competitive environment, bank need to come up
with various facilities like Internet banking, mobile banking etc. With the onset of mobile
banking, the industry finds itself at the threshold of the next major technological leap.

Buyer Power -high

High bargaining power of customers on account of banks renders uniform services to the
clients. Now a days almost all banks would like to provide requisite information very easily
by way to Internet, Mobile banking to the clients

Supplier Power- high

Low bargaining power of suppliers on account of RBI regulatory benchmarks. Banks have
to meet numerous regulatory standards created by RBI

Competitive Rivalry- high

High competition of account of number of prominent public, private, foreign along with
cooperative banks

Availability of Substitutes- High

High menace from substitutes like NBFCs, Mutual funds, Government securities and T-bills

Threat of new entrants -high

Low threat of new entrants on account of banking regulations. Before setting up of a new
bank, it is essential to take the consent of RBI.

1.xi.5 PEST Analysis

Political analysis
The excepted integration of various intermediaries in the financial system would require a
strong regulatory framework , the report states . it would also require a number of legislative
changes to enable the banking system to remain contemporary and competitive.
Understanding that development of best practices could evolve better through self regulation
rather than based on regulatory prescriptions.
For instance, to enlist the confidence of the global investors and international market
players, the banks will have to adopt the best global practices of financial accounting and
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reporting . it is expected that banks would migrate to global accounting standards smoothly,
although it would mean greater disclosure and tighter norms ,the report adds.
The first phase of banking reforms was born out of panic .The second phase can
implemented from a position of strength and confidence in a compressed time frame .

Economical Analysis
Growing economy
The Indian economy has shown tremendous growth over the past decade. This statement
may seem odd to the economists who keep comparing the growth rates to that of china or
the east Asian tigers .These countries have definitely shown good economic growth, but
indies is nothing to be scoffed at.
This assertion is not being made by comparing the GDP growth FDI inflow , changes in per
capita income and other economic criteria ,but by looking at the increase in the availability of
goods and services.
An economist may argue that availability of cell phones and branded water does not indicate
a developed economy .But even they have to agree that Indian seems to have changed from
a country of shortages to one of plenty. And along with plentiful supplies there is also variety.
Western economy have grown party because of consumption economics .those economies
produced large number of goods, employing more and more people to produce these goods.
These employees in turn consumed the goods, creating a virtuous cycle. Maybe india is
following this path.
All the good are available in plenty. Now the living standard of people has to be improved so
that they start consuming these goods. Maybe that is why the new finance ministers wants
to put more money in the housewives hand.

All these development need not mean banks will give the go by to social banking . Rather
than being seen as directed lending such lending would be business driven, the report
predicts. Rural market comprises 74 percent of the population .41 percent of middle class
and 58 percent disposable income.
Consumer growth is taking place at a first pace in 17000 odd villages with a population of
more than 5000 of these, more than 50% are concentrated in just seven states. Small scale
industry would remain important for banks.
However instead of the narrow definition of ssi based on the investment in fix assets the
focus may shift to amall and medium enterprises as a group. Changes could be expected in
the delivery channel for small borrowers, agriculturists and unorganized sectors also.

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Technological development would render flow of information and faster lending to faster
appraisal and decision making. This would enable banks to make credit management more
effective, besides leading to an appreciable reduction in transaction cost.
To reduce investment costs in technology , banks are likely to resort more and more to
sharing facilities such as ATM networks, banks are financial institution will join to gather
facilities in areas of payment and settlement , bank office processing data warehousing and
so an.
The advent of new technology could see the emergence of new players doing financial
intermediation .for example bill payment service or supermarket or retailers doing basic
landing operation. The conventional definition of banking might undergo changes

1.xi.6 Value Chain Analysis

In the 1970s, most banks were organized by department generally around branch
operations, product/service lines, operations and support services - as depicted in Figure 1
below. (Keep in mind that in the US in the 1970s, banks were limited to operations in one
Banking Industry Value Chain
Technological Development
Human Resources Infrastructure
Risk Management Guidelines
Advertising Branding
Sales Support
Multi-channel Management
Market Expansion
Product Expansion
Product Offering Payment

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Internal Value Chain

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1.ix. 7 Strategic Group Mapping

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2.i Literature Review :

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Credit Management By Hagos Mirach

This article is about the importance of credit management in the financial
institutions. This investigate the cause of credit management problems and
there solutions so that banks operate safely. The ability of banks to formulate
and adhere to policies and procedure that promotes credit quality and curtail
non performing loans is the means to survive in the stiff competition.
The main objective is to evaluate the performance of credit management.
Credit Risk Analysis in Indian Commercial Banks- An Empirical
Investigation By Swaranjeet Arora
In this article risk exposure in banking system has increased due to several
reasons. This results into various types of banking risk. For Commercial
banks credit risk analysis is the biggest challenge. This article also helps to
identify the factors that understand the credit risk analysis in different Indian
banks. Credit Worthiness and Collateral Requirement are the 2 important
factors to analyze the credit risk. It also shows the significance difference
between the Indian Public banks and Private Banks in analyzing the credit

Credit assessment practice of a commercial bank in Bangladesh by

Rana Al-Musharrafa
The banks act as an intermediary to mobilize the excess fund of surplus
sectors to provide necessary finance, to those sectors, which are needed to
promote for the sound development of the economy. Credit risk grading
technique is an important tool for credit management as it helps a bank to
understand various dimensions of risk involved in different credit transactions.
The main purpose of this study is to make possible suggestions to improve
present credit situation prevailing in the banking sector in Bangladesh by
analyzing a reputed commercial banks credit activity. Beside this a case
study of a well known commercial banks credit appraisal and risk grading
technique were also revealed to identify some problems as well as propose
some suggestions in this regard.
An Overview of Credit Appraisal System with special reference to Micro
Small and Medium Enterprises (MSME) by Miss Sughandha Sharma
The Credit Appraisal is a complete exercise which starts from the time a
potential borrower walks into the branch and concludes in credit delivery and
monitoring with the objective of certifying and maintaining the quality of
lending and managing credit risk. Credit appraisal is the assessment of the
viability of proposed long term investments in terms of shareholder wealth
and the formal analysis of all project costs and benefits which is used to
justify the project proposal. The liberalization of the financial sector demands
a new technology to cope with the rising pressures on the profitability of
banks and financial sector institutions. Analyzing lending strategies, credit

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appraisal, risk analysis and lending decisions, while keeping in mind the
broad framework of corporate banking strategy, this book emphasizes that
lending is no longer an activity restricted to the assets side of the balance
Risk Assessment Model for Assessing NBFCs(Asset Financing)
Customers by Srinivas Gumparthi
Non-banking financial companies (NBFCs) form an integral part of the Indian
financial system. The history of the NBFC Industry in India is a story of underregulation followed by over-regulation. Policy makers have swung from one
extreme position to another in their attempt to set controls and then restrain
them so that they do not curb the growth of the industry. Most of this NBFCs
are operating with high risk of lending and more often NBFCs lend credit to
Small and Medium size enterprises, which are categorized as high risk class
of Assets. To assess such high risk assets we need to have a comprehensive
model. This paper aim is to build Risk Assessment Model for NBFCs based
on both qualitative and quantitative aspects of the client.
Relationship between Credit Appraisal Process and the level of NonPerforming loans of the women Enterprise Fund loans Offered through
financial intermediaries In Kenya By Anne Wangu Mureithi
Granting credit to customers is an important activity for any lending institution
thus the importance of credit risk management in these institutions .Lenders
must therefore ensure a thorough credit evaluation process to fore stalk
default. Factors that lead to the high levels of NPLs in the lending institutions
includes; weak credit appraisal process, insider lending, high interest rates
and weak credit policies among other factors. The purpose of this study was
to analyze the credit evaluation process adopted by the financial
intermediaries offering WEF loans in Kenya, to analyze the level of
nonperforming loans related to the WEF offered through the financial
intermediaries in Kenya and to establish whether there is any relationship
between the credit evaluation process and the level of nonperforming loans in
the WEF loans offered through financial intermediaries in Kenya.
Credit Analysis By Alina Mihaela Dima
The well performing companies suddenly one say announced losses due to
cesdit exposure. In response to this, commercial banks have almost
universally embarked upon an upgrading of their risk management and
control systems. The credit analysis is the qualitative and quantitative
analysis of a company. Credit analysis involves the examination of the link
between management performance or capital and the working relationship.
Term Lending to Business By Neil H Jacoby and Raymond Saulnier
Repayment of loans is not certain. So to minimize the risk the credit
standards by reference and credit appraisal methods should be adopted.
Probability of repayment of a term loan differs from pertaining the personal
loan, mortgage or form of credit.

2.ii Scope:
The study would be limited to selected banks and NBFCs and also to the information as to
analytical tools and techniques availed from banking industry and information received by
interview of professionals and customers.

Scope will be done on the basis of Region, Industry, Time and Population
To do industry analysis
Process followed by Banks and NBFCs to give loan
Understand the function of Banks and NBFCs
Procedure for granting loan
Focus is on 5 types of loans given by Banks and NBFCs

2.iii. Research Plan

Research Purpose: Comparative Credit Analysis Process followed by select Private
banks, Public banks and NBFCs.

Research Objective: To understand the credit analysis process of different banks and
NBFC and to compare the data.
To compare the Process level documentation followed by banks
To compare and contrast process
To understand the customer perspective towards procedure for loans
To understand the regulatory requirement followed by banks for loans.

Significance of Study: Want to understand the gap between the theory and practical
To understand the trends of industry
To understand the customer selection for taking loans

Research Design: The design is the structure of any specific work. It gives direction and
systematizes the research. The research design that we have selected for the purpose of
our research is Exploratory Research design. We have selected exploratory research
design because it helps to explore through a problem to provide understanding of scope of
portfolio management. Our exploratory research will be based on primary as well as
secondary data. One of the most important benefits of research methodology is that it helps
in identifying the problem, collecting, and analyzing the required information data and
providing an alternative solution to the problem.

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Research Instrument: Interview

Research Methodology:

Primary Research
Interview with officers of Banks and NBFCs who have approves loan to individual
and corporate


Secondary Research
Internet and websites of Banks and NBFCs
Journal Articles
Annual reports of the companies
Published reports of the Banking Sector

Sampling Methods
We have used Random Sampling for the sampling that requires complete knowledge about
all sampling units sampling units in India. Due to time constraints non- probability sampling
has been chosen by us for our research report. In Non- probability method of sampling we
have selected convenience sampling technique for the purpose of data collection.

Statistical Tools and Methods

Charts and Graphs

2.iv Interviews
a) Canara Bank- Navrangpura Branch
We took interview of Mr. Sanjeev Soni who is the Finance officer of Canara Bank of
Navarangpura Branch. He has total 3 years of experience in the credit field. He is
working in Canara Bank only from last 3 years. As Canara Bank is the public bank
the credit giving process is easy. First customer need is understood when s person
comes for loan then his background is checked, this KYC documents are taken. KYC
documents includes ID of the person, address proof, salary slip of last 6 months and
IT returns of last 1-2 years.From the KYC a CIBIL score is done and rating is
done(Defines risk level , 750 or above). Then they do the analysis of income and
willingness to pay back the loan(they check the IT returns). They visit home or
property of mortgage and then they decide where to give loan or not. Personal loan
is approved in 2 days and property loan is approved in 15 days.Canara Bank gives
all types of loan such as export and import, corporate, consumer, retail etc. Canara
Bank does not have any hidden charges but has nominal charges. Canara Bank is
different from other public bank such as there service process is good and fast, till
now the bank was never in loss, interest rate are negotiable and communication is
transparent. The problem faced by Mr. Sanjeev Soni is for talking the loan back they
have to do too much of follow up, the life cycle of person is not able to decided, and
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there is always risk of financial position of the person. The credit risk management is
done by managing managerial risk, credit risk and financial risk.

b) Central Bank of India- Mithakali Branch

We took interview of Miss. Ameesha Kureel who is the Assistant Manager of Central
Bank of India Mithakhali Branch. She has total 1.5 years of experience in the credit
field. The basic process of Central Bank of India for giving loan is application is taken
of the customer , KYC is taken, eligibility criteria is checked, visit to home ,analysis of
income is done, process is done and then it is decided that loan should be given or
not. There are no hidden charges in the bank for loan. The strength of the bank is
because it is an old bank and it always focus on the more corporate loan. The
problem she faces is shortage of time. The credit risk management is done on the
risk of bank and it is expose to bank only.
c) Rajkot Nagrick Sahakari Bank Ltd. Navranpura Branch
We took interview of Mr. Mukesh Panchal who is the Credit officer of Rajkot Nagrick
Sahakari Bank Ltd of Navrangpura Branch. He has total 15 years of experience in
credit field. This bank is the public bank(Commercial Bank).The process of bank is
little different. First a PMR form has to filled by the customer, then security against
should be given and KYC documents should be given, financial data of last 3 years,
site visit is done and IT returns are checked. The bank gives all types of loan. To
get a loan a person who wants loan has to become the shareholder of the bank. The
approval of loan is done 5 to 7 days for new and existing shareholders. The basic
documents to get a loan are loan form, letter of guarantee, letter of continuity, KYC,
Promissory note, Letter of lien and mortgage original papers. The strength of bank is
more collateral security less interest is charged on loan. The basic interest rate is
13.75 (+ or -). This called primary lending rate. There are no hidden charges but
process fees there and it is 100 rupees + service tax per lakh. For the collection of
loan notice is given first, then face to face meeting is done, penalty charges are
charges highly, then last is mortgage selling process is started if person is not paying
the loan.

d) The Ahmedabad District Co-op. Bank Ltd. (Nandej) Ahmedabad

We took interview of Mr. Bharat Patel who is the Branch Manager of The
Ahmedabad District Co-Op. Bank Ltd. Of Nandej of Daskroi of Ahmedabad. He has
total 15 to 16 years of experience in Credit field. The process of credit is application
form is filled, applicant and co-applicant sign should be there, guarantor sign should
be there, mortgage original papers and documents depending upon the type of loan.
There are no hidden charges but nominal charges are there. The strength of ADC
bank is it cooperates to borrower 100% and interest rate are negotiable. They
recovery of loan is done by a process. First the bank call them that a person has not
paid the installment, then a personal visit is done, then they call guarantor is called
and to both 90 days are given to pay money. If the person has not paid the money
then legal notice is sent to person, still not received money then second legal notice
is send and at last a case is filed and process to sell of mortgage is started.
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e) HDFC Bank- Ahmedabad

We took interview of Mr. Gopal Prajapati Branch Manager of HDFC Bank. There
Central Processing Centre is in Mumbai (there Head Office). They approve loan in 7
to 10 days. The documents they required for giving loan is Voter ID, Driving License,
Ration Card, PAN Card, PAN Card, Electricity Bill, Telephone Bill. All legal
documents are verified by 2 to 4 people before approving the loan. They also check
that person who has come for loan has applied for loan in some other banks or not
so that they can avoid fraud. They give loan to the people whos loan are rejected by
there own bank or by other banks if they find suitable for it. They also have tie up
with agencies for valuation of mortgage property so the bank can get fair value of
mortgage property. Mr. Gopal Prajapati has 8 to 9 years of years of experience in
banking and 5 to 6 years of experience in credit. There basic process of loan is they
take the income tax return of the person of last 3 years. Then they check the
documents, if the documents are proper then they check the value of mortgage
property and then they send there documents to CPC Centre. If the CPC centre
approves the loan then the bank can approves the loan with interest they are going
to charge. The problem he faces while giving loan is they are time limitation, interest
rates and mortgage property value etc. There are many hidden charges in HDFC
bank. The loss is totally exposure to bank if there are any NPAs or loss.


Bank of Baroda- Ahmedabad

We took interview of Mr. Avdhesh Vyas of Bank of Baroda. There Central processing
unit is in Baroda. Bank of Barodas first CPC is opened resent only. They approve
loan in 12 to 15 days .Documents required for loan are Voter ID, Driving License,
Ration Card, PAN Card, PAN Card, Electricity Bill, Telephone Bill. The legal
documents are first verified by officer, then by branch manager and then by CPC
officer then only loan is approved. They dont have tie-up with agencies for valuation
of mortgage property. They contact them when they require. He says strong
appraisal avoids frauds in the banks. He has 6 years of experience in credit field.
There loan is same as other banks except now after opening of CPC they have to
send documents there for approval. There no hidden charges in the bank. Expenses
in credit field after 1 customer is 1000 to 1500 rupees for bank.

g) Kotak Mahindra Bank- Ahmedabad

We took interview of Mr. Jignesh Bhavsar, Branch Manager of Kotak Mahindra Bank.
There CPC is in Ahmedabad. The bank takes 7 to 8 days to approve loan to
individual and 10 to 15 days to corporate loan. The documents they need for
approving loan are Voter ID, Driving License, Ration Card, PAN Card, PAN Card,
Electricity Bill, Telephone Bill. All legal documents are verified by 3 to 5 people in
bank for approving loan. He has 7 years of experience in banking. There basic
process for approving loan is individual comes for loan, need is understood, IT
returns are check, documents are taken if bank approves to give loan, documents
are checked, send to CPC, loan is given against mortgage property ad interest rate
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are decided. He says that there credit process is better than NBFCs and Public
Banks. There no hidden charges in bank. The bank always give loan against
mortgage with higher value so they can avoid loss.

h) Axis Bank- Ahmedabad

We took interview of Mr Amit Sharma, Branch Manager of Axis Bank. Axis is the
fastest growing bank in India. There Central Processing Unit is in Ahmedabad. They
approve loan in 7 days. They dont give loan to people whos loan is rejected. They
have tie-up with agencies for valuation of mortgage property. They also hire factors
after giving loan to retailers and corporate. He has 9 years of experience as a Branch
Manager. They say there service is the best from all the banks. The problem he
faces while giving loan is documents and getting payments from customers. The
documents they need for approving loan are Voter ID, Driving License, Ration Card,
PAN Card, PAN Card, Electricity Bill, Telephone Bill. All legal documents are verified
by 3 people in bank for approving loan. The expenses in credit giving is 1000 to
2000 rupees per customer and if corporate is 3000 to 4000 rupees. The credit risk
management is done by managing managerial risk, credit risk and financial risk. If a
person dont pay EMI then a huge penalty is charged on them. And penalty amount
increases with the time if payment is not done by customers.

2.v Analysis and Learning from Interviews:




CPC help banks to carry out all processing activities at one particular place
while only front ending activates are carried out at the different branches of the
bank. This results in better customer service and happy customers, and also
provides the branch banking staff with a better chance for cross selling and up
selling products. In case a bank is planning to outsource some of its processes ,
having a CPA places the bank is a ware of the exact cost of owning the process.
It also provides an option of going for selective outsourcing .
Processing occurs between days 5 and 20 of the loan . The processor reviews
the credit reports and verifies the borrowers debt and payment histories as the
VODs and VOEs are returned. If there are unacceptable late payments, collection
for judgement , etc, a written explanation is required from the borrower . The
processor also reviews the appraisal and survey and checks for property issues
that may require further discernment . The processors job is to put to gather an
entire package that may be underwritten by the lender.
The first thing is the filling of application form and signing it . then go through the
official site of the bank thoroughly to get information about the mandatory
documents needed for application . The main documents required for home loan
are proof of age proof of identity- passport, PAN card , ration card , voter ID ,etc

The pass the loan there are various document required and some of them which are major
amongst them are
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Voter ID

Ration card

Driving Licenses

Pan Card

Electricity Bill

Telephone Bill

Document management system (DMS) can be used for :

Scanning &archiving of Documents

Storing images files in TIFF,JPEG,GIF,PCX,PNG&BMP formats

Microsoft office Documents

Portable Document Format (PDF)

Audio video files , and CAD/CAM Drawings


KYC Document , most of the banks whether it may be private or public banks
they ask for documents which contains the Address proofs well as the photo
proof and they ask for pan card , voter id and electricity bill as seen in the cart


They unique feature of the Document Management system enable to scale and
provide a unique but consistent, effective and efficient open platform which
manages the process of creating and revising documents. It also improves the
content security , DMS can decrease your printing and strong cost .The DMS
products will consist of the following module :
Document Capturing
Document Indexing
E-Document Tracking
Storage and Archiving

Banking require all Document regarding pledge, KYC and IT return. From our finding we
came to know that for the sake of the identity verification, the entire Document listed out for
the purpose need not be insisted. If one document is produced and if the branches is
satisfied about the evidence and can prove at a later date that due diligence 9 had bee
observed in establishing the identity, the branch can go ahead and open the account ,. But if
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the branch is not satisfied about the document furnished then it can call for alternative
documents till it is satisfied in order t observe due diligence.


the objective of KYC guidelines is to prevent our bank from being used

Our KYC policy covers the following areas:

Customer Acceptance policy
Monitoring of Transaction and
Risk Management
Statutory Requirement
Dissemination of KYC Guidelines

Verification about all the document is necessary but is it possible to do . The responses are
same as shown in above chart . both private and public banks fell that is possible to verify
through government data , company data and through private agencies
So the procedure for this might be different but the importance is the same for both . Research Limitation

Every study or research id conducted under some limits and there are some restrictions
which have some impact on the project.
Limitations of this project are:
a) Coverage: The study aims at covering the banking sector of Ahmedabad only. But the
coverage of all Ahmedabad region is difficult.
b) The study aims at gaining the practical knowledge by taking help of bank personals. So,
there might have been tendencies among the personals to amplify or filter their responses
due to time limitation.
c) Credit appraisal for retail finance is study that needed specialized knowledge of the area,
so there is chance for interpretational error on my part.
d) Only 5 public, private banks and NBFCs were selected
e) Only retail loans are taken into consideration
f) Correct person to approach and there feedback
g) Only one section of banks will be studied
h) Will not be to study about the Insurance Industry, Mutual Fund Industry, Stock market and
Broking Industry

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2.vii. Bibliography

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2.viii Discussion Guide

What are your basic process for giving loan?
What are the basic documents required to give loan?
How would you define your credit process better than other banks and NBFCs?
Tell us a suggestion you have made that was implemented by you in the credit field?
How many years of experience do you have in credit field?
As a banker point of view what kind of problem you have and are facing for credit process?
How much time do you take to approve a persons loan?
Describe a typical work for bank credit analyst position?
Which kind of hidden charges are there while giving loan to customers? Should it be
disclosed to customers?
How to do credit risk management?
Do you have CPC?
Are legal documents verified properly
Do you check that person has applied to other bank for same loan?
Do you check that the person loan is rejected from other bank or not?
Do you have tie-up with agencies for valuation of mortgage property?

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2.ix. Conclusion
Credit appraisal is a process of the credit worthiness of loan application. The fund of
depositor i.e : general public are mobilized by means of such advance . Thus it is extremely
important for lender bank to assess the risk associated with credit , thereby ensure the
security for fund deposited by depositors . Therefore my analyses regarding credit appraisal
procedure of all banks is as follows:

In case of retail lending bank strictly follow its circular and fulfill all requirement of
necessary document required for different types of loan so bank do not suffer any
type of loss.

Bank is very particular about CIBIL report or internal department of borrowers in case
of each type of lending.

Bank lending process in case of retail loan is very much faster after compiling with all
criteria of bank.
Risk analysis is done by bank to determine the risk associated with the project .this is
mainly done by internal initially at bank counter and then at internal department. With
sensitive analysis feasibility of application is determined under worsened condition. Credit
rating or scoring is done of various parameters such as personal , management , financial
etc,: thereby determine credit worthiness of customer .
It is on basis of credit risk level, a collateral security to be given by borrower is determined.

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