Credit Appraisal

What is credit appraisal

Credit appraisal means an investigation/assessment
done by the bank prior or 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 is the process of appraising the credit
worthiness of the loan applicant.
WHAT IS CREDIT APPRAISAL?
(CONTD)
Age
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
5 C of credit are must be kept in mind for lending funds:-
Character, Capacity, Collateral, Capital and Condition, if any
one of these are missing in the lending, officer must question
the viability of credit
BRIEF OVERVIEW OF LOANS
Loans can be of following types such as Fund based, Non-
fund based & Asset based:
FUND BASED includes:
Working Capital &
Term Loan
NON-FUND BASED includes:
Letter of Credit &
Bank Guarantee
Asset Based
 Letter of Credit & Bank Guarantee

Aletter of creditis aletterfrom a bank guaranteeing that

a buyer's payment to a seller will be received on time and for
the correct amount. In the event that the buyer is unable to
make payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase.
ABank guaranteeis a promise from abankthat the
liabilities of a debtor will be met in the event that you fail to
fulfill your contractual obligations.
Abank guaranteeand aletter of creditare similar in many
ways but they're two different things. Letters of credit ensure
that a transaction proceeds as planned, while bank
guarantees reduce the loss if the transaction doesn't go as
planned.
CREDIT APPRAISAL PROCESS
Receipt of application from applicant
Receipt of documents (Balance sheet, KYC papers, Different govt.
registration no., MOA, AOA, and Properties documents)
Pre-sanction visit by bank officers
Check for RBI defaulters list, willful defaulters list, CIBIL (Credit
Information Bureau India ltd.) data, ECGC (Export Credit
Guarantee Corporation) caution list, 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
Cont.
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
(on regular basis)
CREDIT APPRAISAL PROCESS
Receipt of application from applicant
|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties
documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list,
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
Cont.
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 STANDARDS

QUALITATIVE:
The proposition is examined from the angle of
viability & also from the Banks prudential
levels of exposure to the borrower, Group &
Industry
view is taken about banks past experience with
the promoters, if there is a track record to go by
Opinion reports from existing bankers &
published data if available
Cont.
Sector/ Mfg. Others
QUANTITATIVE: Parameters
Current Ratio 1.33 1.20
(min.) (For FBWC limits
(i)Working capital above Rs. 5cr)
1.00
(For FBWC limits
upto Rs. 5cr)
(ii)Term Loan TOL/ TNW (max.) 3.00 5.00

Technical Feasibility DSCR

Net (min.) 2:1 2:1
Economic Feasibility Gross (min.) 1.75:1 1.75:1
Debt/ Equity Ratio 2:1 2:1
Financial Feasibility (max.)
Promoters 30% 30%
Managerial Competency contribution
Cont.

Technical Feasibility: It is an assessment of the logistical

aspects of a business operation. It includes segments on
necessary materials, labor and technology, and the means
of shipping or transporting goods, etc.
Commercially Viable: The ability of a business, product,
or service to compete effectively and to make a profit
Economically Feasible: when a project proves to be
economically feasible, innovative and sustainable in
terms of investing financial resources into the project.
Financial Feasibility: It demonstrates, among other
things, that loan proceeds, together with cash flow of the
facility, are sufficient to complete the project and to cover
annual debt service requirements.
MEASURES

Current Ratio
Profitability Ratio
Turnover Ratio
Debt Equity Ratio:
Concept- Proportion of Debt fund of a company in relation to its equity
Formula - Long Term Debt /Tangible Net worth
Comments - This ratio is an indicator of leverage of a company It
measures a companys ability to borrow and repay money
Debt Service Coverage Ratio
Concept - The amount of cash flow available to meet annual interest
and principal payments
Formula - Net Operating Income/ Total Debt Service
Comments - DSCR less than 1 means negative cash flows
Credit Risk Assessment
The CRA models adopted by the Bank take into account
all possible factors into appraising the risks, associated
with a loan.
These have been categorized broadly into financial,
business, industrial & management risks are rated
separately.
These factors duly weighted are aggregated to arrive at
a credit decision whether loan should be given or not
Financial parameters: The assessment of financial risk
involves appraisal of the financial strength of the
borrower based on performance & financial indicators.
which assessed in terms of static ratios, future