SUMMER INTERNSHIP PRESENTATION- 2014

CREDIT RISK
MANAGEMENT AT
PNB
Presented By:Nikhil Satija
A50050213001

ABOUT THE BANK

Established in 1895 in Anarkali Bazaar at Lahore.
Lala Lajpat Rai was one of the first customers
of the bank.
It was the first bank that was started with the
Indian capital.
Nationalized in July 1969.
Has over 4525 offices including 432 extension counters
in India.
Corporate office of bank at New Delhi.
UK, Nepal, Bhutan, Kazakhstan, China, Shanghai etc
PNB was ranked as 248th biggest bank in the world by
Bankers Almanac, London.

OBJECTIVES

VISION AND
To understand the process of credit appraisal
applied by the bank to provide loan to the corporate
VISION
MISSION

"To be a Leading Global Bank with Pan India

To understand
typesaofhousehold
risks involvedbrand
in
footprints
andvarious
become
in
providing
loan
the
Indo-Gangetic
Plains providing entire
range of financial products and services
under one roof".

To find out ways to mitigate these risks.

MISSION
To analyzefor
thethe
credit
worthiness of the clients
"Banking
unbanked".

ORGANIZATION STRUCTURE
HEAD OFFICE
7- BHAIKAJI CAMA PLACE,
NEW DELHI -66

CIRCLE OFFICES (67)

BRANCHES (5675)

RESEARCH METHODOLOGY
Sources of information:
PRIMARY SOURCES
Meetings and discussion with
the Chief Manager and the Senior Manager of Credit Department.
SECONDARY SOURCES:
Internal Circulars of the bank
Websites
Database at PNB
Referring to information provided by CIBIL, Income Tax files,
Registrar of Companies and Auditor reports.

CREDIT APPRAISAL
SYSTEM
IN
PUNJAB NATIONAL BANK

CREDIT

Credit is the trust which allows one party to provide resources to

another party where that second party does not reimburse the
first party immediately, but instead arranges either to repay or
return those resources at a later date.
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.

LOANS
FUND BASED

NON-FUND BASED

WORKING CAPITAL
RETAIL LOAN

BANK GUARANTEE

TERM LOAN
BILL DISCOUNTING
EXPORT FINANCE

LETTER OF CREDIT

CREDIT APPRAISAL
Its means an investigation/assessment done by the
bank prior before providing any loans &
advances/project finance & also checks the
commercial, financial & technical viability of the
project proposed.
Proper evaluation of the customer is preferred
which measures the financial condition & ability
to repay back the loan in future.

CREDIT APPRAISAL (Contd.)

Credit appraisal is the process of appraising the credit
worthiness of the loan applicant.
Factors like: Age
Income
Number of dependents
Nature of employment
Continuity of employment
Repayment capacity
Previous loans, etc. are taken into account while
appraising the credit worthiness of a person.

CREDIT APPRAISAL PROCESS

Receipt of application from applicant
Receipt of documents
(Balance sheet, KYC papers, MOA, AOA, and Properties documents)
Pre-sanction visit by bank officers
Check for RBI defaulters list, willful defaulters list, CIBIL data, etc.
Title clearance reports of the properties to be obtained from empanelled
advocates
Valuation reports of the properties to be obtained from empanelled
valuer/ engineers

CREDIT APPRAISAL PROCESS (Contd.)

Preparation of financial data
Proposal preparation
Assessment of proposal
Sanction/approval of proposal by appropriate sanctioning authority
Documentations, agreements, mortgages
Disbursement of loan
Post sanction activities such as receiving stock statements, review of
accounts, renew of accounts, etc.

CREDIT APPRAISAL (Contd.)

CREDIT INFORMATION OF THE BORROWING
COMPANY
Banks and Financial Institutions
Bank References
Credit Rating Agencies
Published Books
Company Financial Reports
Press Reports
Personal Visit
Factory Visit

CREDIT APPRAISAL (Contd.)

CREDIT INFORMATION TO BE
SUBMITTED BY THE
BORROWING COMPANY
Basic background information on the
company
Copy of certificate of registration of firm
Memorandum and Articles of Association
Required facility
Management
Details of the Security to be pledged
Key industry dynamics
Present Relation with the Bank

CREDIT ANALYSIS
Market Analysis
Technical Analysis
Management &
Organization Analysis
Financial Analysis

CREDIT ANALYSIS (Contd..)

MARKET ANALYSIS
Market Demand and Potential for each product item and its
variants/substitutes.
Critical Analysis regarding Size of the Market.
Influence of Government policies like Government Import
Policy and Import duty structure also need to be evaluated.
TECHNICAL ANALYSIS
Location and Size
Raw Material
Plant & Machinery,
Plant Capacity and
Manufacturing Process.

CREDIT ANALYSIS (Contd..)

MANAGEMEMENT & ORGANIZATION ANALYSIS
Strengths and Weaknesses of the Management by commenting on the
background, qualifications, experience, and capability of the Promoter.
FINANCIAL ANALYSIS
Cost of Project & Means of Financing
Profitability Statement
Break-Even Analysis
Fund-Flow Statement
Balance Sheet Projections
Internal Rate of Return
Sensitivity Analysis
Financial Ratios
Debt-Equity Ratio
Debt-Service Coverage Ratio
Current Ratio
Output Investment Ratio

POST-SANCTION FOLLOW UP
To keep a watch on the project during implementation stage so
that there are no time & cost overruns.
To ensure that is no diversion of funds.
To monitor operations in the account particularly cash credit
facilities which indicate health of the account.
To obtain market report on the borrower, to gather information
like reputation/financial standing etc.
To ensure that the unit's management and organizational set-up
is effective.
To detect signals and symptoms of sickness or deterioration
taking place in conduct/performance of the account.

Case Study:The proposal falls under the powers of ED on account of total exposure of Rs. 55.00
crores
Name of the Borrower:
M/s. SANYA HOSPITALITY PRIVATE LIMITED ( SHPL)
GIST OF THE PROPOSAL
Sanction of Term Loan of Rs. 55.00 crores

Purpose

Acquisition

Construction of hotel
Cost of Project

279.95

Total Debt

165.00

Promoters contribution

114.95

Proposed TL (our share)

55.00

DER

1.44:1

Repayment Period

96 months

Door to door tenor

108 months

Part-1
Borrowers Profile:- Its a private limited company dealing in acquisition and running of hotel. Dealing
with PNB for the first time.
Credit rating by the agencies has not been done yet.
Details of proposed Working Capital Limits and term loan from the Consortium:-

Financial Position of the Company (Rs. Lacs):The company has not started commercial operations and
hence no Profit & Loss statement has been prepared.

he Company has requested for sanction of term loan of Rs. 55.00 Crores for part
anc for purchase of Hotel at total cost of Rs. 279.95 cores

) Purpose
cquisition of Marriot Courtyard Hotel, Gurgaon from M/s. Unitech group at cost of
s. 279.95 Crores

i) Appraising agency

he financial appraisal report for acquisition of the hotel project has been prepare
y SBI Capital Markets Limited. Who has find that the project is financial viable

ummary of cost of project and means of finance:-

SWOT ANALYSIS:Strengths:Location of a hotel is of prime importance. As the proposed hotel of SHPL is located very
close to the IT Hub in Gurgaon, it can easily attract business tourists both domestic and
foreign.
Creation of high-end facilities in the hotel like well-equipped rooms, specialty restaurants,
health club, modern business center facilities etc. will be an added advantage.
The presence of the banquet and the hotel in the same complex can boost the occupancy
level of the hotel.
The hotel is located just 9 kms from the airport.
Weaknesses:The promoters do not have any experience of running a hotel. The hotel will be operated by
Marriott Courtyard with which a management agreement has been signed.
A number of new hotels are being planned in Gurgaon. Since most of the hotels are being
planned in the 5 star category & SHPL plans to open a 4 star hotel which will be more
competitive price wise with almost equal service & facilities.

SWOT ANALYSIS:Opportunities:Steady growth rate in international tourists arrivals in the National Capital Region is
expected to continue in the future thereby increasing demand for rooms.
Falling domestic airfares and introduction of low cost carriers will also increase tourist
arrivals in Gurgaon / New Delhi
Gurgaon is expected to strengthen its position in the IT and ITES sector. It is also expected
that the city will attract the sunrise industries such as automobile and biotech industry.
The Commonwealth Games in 2010 will be attracting a number of foreign tourists in the
National Capital Region.
Threats:Lack of appropriate long term infrastructure development plan can slow down the
commercial development in Gurgaon.
IT majors are planning accommodation facilities in its existing campus so as to overcome
the non availability of hotel rooms and reduce the travelling time of their business travelers
and such capacity creation can seriously affect the demand from eminent corporate.

Proposed Hotel in Gurgaon

The proposed hotel of SHPL will be operational in FY 2009 and catch the
Commonwealth Games 2010 in New Delhi. By acquisition of Gurgaon Hotel of
UDHPL, SHPL will get an entry into the hospitality industry without the
construction risk associated with it.

Management/Quality of Management Marketing:

The Marriott Courtyard is an international hotel operator who will operate the h
and will be responsible for the day to day operations of the hotel.

ASSUMPTION OF THE FINANCIAL PROJECTIONS

Number of Rooms
The number of rooms has been assumed as follows Description

No.

Standard Rooms Single Occupancy

110

Standard Rooms Double Occupancy

80

Executive Suites

Deluxe Suites

Total No. of Rooms

199

Room Rent
The following room rent has been assumed in the hotel
Type of Room

Room Rent in FY 2009 - 10 (in Rs.)

Standard Rooms Single Occupancy

8,000.00

Standard Rooms Double Occupancy

9,000.00

Executive Suites

8,500.00

Deluxe Suites
Average Room Rent (ARR)
Revenue per Available Room (RevPAR)

10,000.00
8,469.85
5,505.40

The room rates given above are assumed to be the applicable rates
for the FY 2009 - 10. Thereafter the rates have been increased by 7%
every year.
Expenses
Expenses
F&B Cost

32%

of F&B Revenue

Room Consumables

3%

of Room Revenue

Other Expenses

3%

of total Hotel Revenue

House Up Keep & services

3%

of total Hotel Revenue

Salaries & Wages

3.71

Rs. in Crs for first year (inc of 5% every year)

Power, Fuel & Water

9%

of Room Revenue

Repairs & Maintenance

1.50%

of Gross Fixed Assets

Advt & Sales Promotion Expenses

3%

of total Hotel Revenue

Admn. Overheads

4.00%

of total Hotel Income

Operating Fee

0.25%

of total Hotel Revenue

Interest Rate
For Term Loan agreed bank rate has been assumed as 13% & for working
capital loan the interest rate of 13.25% has been assumed.
Income Tax
The income tax rate for the Hotel located in National Capital Region has
been taken as per Section 80ID of the IT Act.

Conclusion:In case of retail lending bank strictly follow its circular and fulfils all requirement
of necessary documents required for different types of loan so that bank do not
suffer any types of loss.
Bank is very much particular about CIBIL report of borrowers in case of each
type of lending.
Bank lending process in case of retail loan is very much fast after compiling
with all the criteria of bank.
In case of project financing bank follow lengthy norms to check the feasibility
of the project such as:Firstly personal appraisal of promoter is done by the bank to ensure that
promoters are experienced in the line of business and capable to implement
and run the project efficiently.
Secondly detail study about the technical aspect is done to find the technical
soundness of project such as proper scrutiny of financial report is done,
valuation of property by government approved valuer is done and view
regarding each and every area of project is done under technical analysis.

Conclusion:A detail study relating financial viability of project is done by detail study of cash
flow, fund flow statements and by calculating import ratio which is very much
necessary for project appraisal such as DSCR, DER etc. the main purpose of
financial appraisal is insure that project will ensure sufficient surplus to repay the
instalment and interest.
It is on basis of credit risk level, a collateral security to be given by borrower is
determined.
Risk analysis is done by bank to determine the risk associated with the project.
.

Recommendations: Hassel Free Paper Work

The loan processing time should be reduced.
The bank should completely eliminate the file system and go computerization
at every stage as this removes paper work and creates transparency in the system.
Care must be taken to ensure that the judgment in appraisal process does not
depend on one single person and a single factor.
The biggest loop hole in the bank is its recruitment process of its employees.
The bank has lost its large number of customers due to strict norms followed by
the bank in giving credit to its customers. The bank in this case should make its
policy a little easier for its customers to make them loyal customers of the Bank.
.