CREDIT APPRAISAL PROCESS

2.1 Banking Industry

A bank is a financial institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly by loaning or indirectly through capital markets. A
bank is the connection between customers that have capital deficits and customers with capital surpluses.
Due to their influence within a financial system and the economy, banks are highly regulated in
most countries. Most banks operate under a system known as fractional reserve banking where they hold
only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to
minimum capital requirements which are based on an international set of capital standards, known as
the Basel Accords.
Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but
in many ways was a continuation of ideas and concepts of credit and lending that had its roots in
the ancient world. In the history of banking, a number of banking dynasties have played a central role over
many centuries.

2.2 HISTORY OF BANKINGBanking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to
the rich cities in the north like Florence, Lucca, Siena, Veniceand Genoa.The Bardi and Peruzzi families
dominated banking in 14th century Florence, establishing branches in many other parts of Europe. One of
the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397. The
earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407
at Genoa, Italy.
The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which
has been operating continuously since 1472. It is followed by Berenberg Bank of Hamburg
(1590) and Sveriges Riksbank of Sweden (1668).
The origins of banking can be traced to ancient times, starting with rudimentary money lending and
bartering practices for agricultural and other commodities. But it gained great momentum only after
industrial revolution which commenced in Europe in the 17th century, when Europeans started establishing
colonies around the world and the need for credit for trade was felt like never before.
Ever since bank started operating, their essential mode of operations remained much the same until
late into 20th century. But the arrival of Internet in 1990s changed all that. A plethora of possibilities
emerged for worldwide commerce, which naturally impact the functioning of banks as well. Even now,
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technology evolution shape the nature and extent of global economic activity and continuous to
fundamentally alter the global banking landscape.

2.3 BANKING IN INDIA

In India, banking as an institution originated in the late 18 th century and primarily catered to needs
of the British. Post-independence, the nationalization of major private sector banks in 1969 an important
milestone in Indian banking system made banking accessible to the unbanked population in India.
The economic liberalization in early 1990s ushered in the era of privatization wherein new private
banks the new generation tech-savvy banks were launched. A few foreign banks commenced their
India operation as well. All these banks were quick to leverage emerging technology, were competitive in
wooing them over by providing professional services. This helped infuse a sense of urgency in public
sector banks and older private sector banks to mend their ways, which in turns completely revitalized
banking operation in India.
Indias banking sector is growing at a fast pace. It has become one of the most preferred banking
destinations in the world. Indian markets provide growth opportunities, which are unlikely to be matched
by the mature banking markets around the world. FICCI conducted a survey to analyze the potential
offered by Indian Banking System and achievement of global competitiveness by Indian banks.
Some of the major strengths of the Indian banking industry, which have helped mark its place on
the global banking scene as highlighted by our survey respondents were Regulatory Systems (84.21%),
Economic Growth Rate

(63.15%), Technological Advancement (52.63%), Risk Assessment Systems

(47%) and Credit Quality (42.1%)

Some of the areas that need to be geared up for future growth, identified by the survey respondents
are Diversification of markets beyond big cities (84.2%), HR Systems (63.15%), Size of banks (52.63%)
High Transaction Costs (47.3%), Banking Infrastructure (42%) and Labour Inflexibilities (42%).
To a question on achieving global competitiveness, Consolidation in the financial sector has
emerged to be the most significant measure required to create world class banking system followed by
Strict Corporate Governance Norms, Regional Expansion, Higher FDI limits and FTAs.
To a question on achieving global competitiveness, Consolidation in the financial sector has
emerged to be the most significant measure required to create world class banking system followed by
Strict Corporate Governance Norms, Regional Expansion, Higher FDI limits and FTAs.

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2.4 NBFC-Non-Banking Financial Company

Non-bank financial companies (NBFCs) are financial institutions that provide banking services
without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These
institutions are not allowed to take deposits from the public. Nonetheless, all operations of these
institutions are still exercised under bank regulation. However this depends on the jurisdiction, as in some
jurisdictions, such as New Zealand, any company can do the business of banking, and there are no banking
licenses issued. If an organisation in New Zealand intends to describe itself as a bank and intends to use the
word bank in its title it must first receive approval and official registration and thus license from the
nation's central bank, the Reserve Bank of New Zealand.
NBFCs offer most sorts of banking services, such as loans and credit facilities, private education
funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term
Finance Certificate) and other obligations. These institutions also provide wealth management such as
managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice
on merger and acquisition activities. The number of non-banking financial companies has expanded greatly
in the last several years as venture capital companies, retail and industrial companies have entered the
lending business. Non-bank institutions also frequently support investments in property and prepare
feasibility, market or industry studies for companies.
However they are typically not allowed to take deposits from the general public and have to find
other means of funding their operations such as issuing debt instruments.

2.5 Difference between banks & NBFCs

An often heard question from the laymen is what is the difference between a bank and a non
banking finance company? Say for example, what would be the difference between ICICI Bank and
Mahindra Finance? Yes, banks and other non banking financial institutions differ in some functional area.
NBFCs lend and make investments and hence their activities are akin to that of banks.
However there are a few differences as given below:

NBFC cannot accept demand deposits;

NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on
itself

NBFC cannot issue Demand Drafts like banks

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Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available
to depositors of NBFCs, unlike in case of banks.

While banks are incorporated under banking companies act, NBFC is incorporated under company
act of 1956

Other features of NBFCs are :

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and
maximum period of 60 months. They cannot accept deposits repayable on demand.

The deposits with NBFCs are not insured. The repayment of deposits by NBFCs is not guaranteed
by RBI.

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