A STUDY ON LOAN APPRAISAL PROCESS AT PUNJAB

NATIONAL BANK
A Summer Training Project Report
Submitted in partial fulfillment of the requirement for the
Award of Degree of Master of Business Administration
2014 2016

SUBMITTED BY

IN THE GUIDANCE OF

ABHISHEK SINGH

DR V.K. KHURANA

07214803914

DEPARTMENT OF MANAGEMENT
MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY
(Affiliated to G.G.S.I.P. University)
Sector 22, Rohini, Delhi -110086
An ISO 9001:2008 Certified Institute
AICTE NBA Accredited Institute

STUDENT UNDERTAKING

This is to certify that I ABHISHEK SINGH had completed the Project

titled

STUDY ON LOAN APPRAISAL PROCESS AT PUNJAB

NATIONAL BANK in PUNJAB NATIONAL BANK under the guidance

of Dr.V.K KHURANA in the partial fulfillment of the requirement for the
award of degree of MBA from Maharaja Agrasen Institute of Technology
(Affiliated to G.G.S.I.P. University), New Delhi. This is an original piece of
work and I had neither copied nor submitted it earlier elsewhere.

Student Name and Signature

Course
Dated -

Certificate from Guide

This is to certify that the project titled A STUDY ON LOAN APPRAISAL
PROCESS AT PUNJAB NATIONAL BANK is an academic work done by
ABHISHEK SINGH submitted in the partial fulfillment of the
requirement for the award of the Degree of MBA from Maharaja Agrasen
Institute of Technology (Affiliated to G.G.S.I.P. University), New Delhi
under my guidance and direction. To the best of my knowledge and belief
the data and information presented by him/her in the project has not been
submitted earlier.

Name and signature of Faculty Guide

Designation

ACKNOWLEDGEMENT

I would like to thank all those who helped me through the project of
familiarization I would like to express my sincere appreciation to my guide
Dr.V.K.KHURANA for his enlightenment of my knowledge of feed back
and the Banking industry, valuable advice and kind support throughout the
process of dissertation completion
Most importantly, I would like to thank my parents and sister who were
always there to motivate me.

I would like to thank all the focus group

members for giving their valuable time and thoughts to my project.

I would like to thank all the customers and employees of Banking for
sharing their valuable thoughts which helped me shape this project

EXECUTIVE SUMMARY
Banking means transacting business with a bank depositing or withdrawing
funds or requesting a loan etc. or engaging in the business of banking
maintaining savings and checking accounts and issuing loans and credit etc.
The banks provide the necessary financial assistance to the government in
the process of attaining its socio and economic objectives. Nowadays the
banks have taken the primary responsibility in the implementation of various
schemes and program sponsored by the government. A bank may be defined
as a credit institution. It is an institution which studied deals in and
guarantees credit. While the bank receives large sum of money in the form
of deposits and lend to public in the form of loans. Such operations are
subordinate to the one great function that of granting credit. Banking has
been developed to meet the needs of business. Hence the extensively bank
credit is used and the more extensively bank credit is used and the more
important banking becomes in the transaction amount of money.

INDEX
S

CONTENTS

N
1 Chapter I

PAGE
NO.

INTRODUCTION
1. INDIAN BANKING INDUSTRY

7-10

2. PUNJAB NATIONAL BANK

11-22

Chapter II

3. CREDIT APPRAISAL
RESEARCH METHODOLOGY

23-40
41-50

Chapter III

DATA ANALYSIS AND INTERPRETATION

51-57

Chapter IV

FINDINGS

58-64

Chapter V

CONCLUSION

65-67

Chapter VI

REFERENCES

68-69

CHAPTER 1
INTRODUCTION

1.

INDIAN BANKING INDUSTRY

A bank is a financial institution that provides banking and other financial

services to their customers. A bank is generally understood as an institution
which provides fundamental banking services such as accepting deposits and
providing loans. There are also nonbanking institutions that provide certain
banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry. A banking system also referred as a
system provided by the bank which offers cash management services for
customers, reporting the transactions of their accounts and portfolios,
throughout the day. The banking system in India should not only be hassle
free but it should be able to meet the new challenges posed by the
technology and any other external and internal factors. For the past three
decades, Indias banking system has several outstanding achievements to its
credit. The Banks are the main participants of the financial system in India.
The Banking sector offers several facilities and opportunities to their
customers. All the banks safeguards the money and valuables and provide
loans, credit, and payment services, such as checking accounts, money
orders, and cashiers cheques. The banks also offer investment and insurance
products.

Need of the Banks

Before the establishment of banks, the financial activities were handled by
money lenders and individuals. At that time the interest rates were very high.
Again there were no security of public savings and no uniformity regarding
loans. So as to overcome such problems the organized banking sector was
established, which was fully regulated by the government. The organized
banking sector works within the financial system to provide loans, accept
deposits and provide other services to their customers.

History of Indian Banking System

The first bank in India, called The General Bank of India was established in
the year 1786. The East India Company established The Bank of
Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras
(1843). The next bank was Bank of Hindustan which was established in
1870. These three individual units (Bank of Calcutta, Bank of Bombay, and
Bank of Madras) were called as Presidency Banks. Allahabad Bank which
was established in 1865 was for the first time completely run by Indians.
Punjab National Bank Ltd. was set up in 1894 with head quarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In
1921, all presidency banks were amalgamated to 22 from the Imperial Bank
of India which was run by European Shareholders. After that the Reserve
Bank of India was established in April 1935.
At the time of first phase the growth of banking sector was very slow.
Between 1913 and 1948 there were approximately 1100 small banks in
9

India. To streamline the functioning and activities of commercial banks, the

Government of India came up with the Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of
1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of banking in India as a Central Banking
Authority. After independence, Government has taken most important steps
in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of
India was nationalized and was given the name "State Bank of India", to act
as the principal agent of RBI and to handle banking transactions all over the
country. It was established under State Bank of India Act, 1955. Seven banks
forming subsidiary of State Bank of India was nationalized in 1960. On 19th
July, 1969, major process of nationalization was carried out. At the same
time 14 major Indian commercial banks of the country were nationalized. In
1980, another six banks were nationalized, and thus raising the number of
nationalized banks to 20. Seven more banks were nationalized with deposits
over 200 Crores. Till the year 1980 approximately 80% of the banking
segment in India was under governments ownership. On the suggestions of
Narsimhan Committee, the Banking Regulation Act was amended in 1993
and thus the gates for the new private sector banks were opened.

2.

PUNJAB NATION BANK

10

INTRODUCTION
PNB was founded in the year 1894 at Lahore (presently in Pakistan) as an
off-shoot of the Swadeshi Movement. Among the inspired founders were
Sardar Dayal Singh Majithia, Lala HarKishen Lal, Lala Lalchand, Shri Kali
Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram.
With a common missionary zeal they set about establishing a national bank;
the first one with Indian capital owned, managed and operated by the
Indians for the benefit of the Indians. The Lion of Punjab, Lala Lajpat Rai,
was actively associated with the management of the Bank in its formative
years.
The Bank made steady progress right from its inception. It has shown
resilience to tide over many a crisis. It withstood the crisis in banking
industry

of

1913

and

the

severe

depression

of

the

thirties.

It survived the most critical period in its history the Partition of

1947 when it was uprooted from its major area of operations. It was the
farsightedness of the management that the registered office of the Bank was
shifted from Lahore to Delhi in June 1947 even before the announcement
of the Partition.

LALA LAJPAT RAI

11

With the passage of time the Bank grew to strength spreading its wings from
one corner of the country to another. Some smaller banks like, The Bhagwan
Dass Bank Limited, Universal Bank of India, The Bharat Bank Limited, The
Indo-Commercial Bank Limited, The Hindustan Commercial Bank Limited
and

The

Nedungadi

Bank

were

brought

within

its

fold.

PNB has the privilege of maintaining accounts of the illustrious national

leaders like Mahatma Gandhi, Shri Jawahar Lal Nehru, Shri Lal Bahadur
Shastri, Shrimati Indira Gandhi besides the account of the famous Jalianwala
BaghCommittee.
Nationalization of the fourteen major banks on 19th July, 1969 was a major
step for the banking industry. PNB was one amongst these. As a result,
banking

was

given

new

direction

and

thrust.

The banks were expected to reach people in every nook and corner, meet
their needs, and work for their economic enlistment. Removal of poverty and
regional

imbalances

were

accorded

high

priority.

PNB has always responded enthusiastically to the nation's needs. It has been
earnestly engaged in the task of national development. In the process, the
bank has emerged as a major nationalized bank.
Punjab National Bank (herein referred to as PNB) is one of the leading
banks in India and offers a wide variety of banking services, which include
corporate and personal banking, industrial finance, agricultural finance,
Financing of trade and International banking. Among the clients of the Bank
are Indian conglomerates, medium and small industrial units, exporters, nonresident Indians and multinational companies. Punjab National Bank was
incorporated in the year 1895. Since its humble beginning over hundred
12

years ago, the bank has grown in stature to become one of the leading
banking institutions in India. PNB is the second largest PSU bank in India
with a dominant presence in north India. Keeping in tune with changing
times and to provide its customers more efficient and speedy service, the
Bank has taken major initiative in the field of computerization. All the
Branches of the Bank have been computerized. The Bank has also launched
aggressively the concept of "Any Time, Any Where Banking" through the
introduction of Centralized Banking Solution (CBS) and over 2000 offices
have already been brought under its ambit.
COMPANY PROFILE
Punjab National Bank is a state-owned commercial bank located in New
Delhi. The Bank is one of the Big Four Banks of India. They offer banking
products, and also operate credit card and debit card business, bullion
business, life and non-life insurance business, and gold coins and asset
management business. They are recognized as the Bank offering highest
levels of customer satisfaction in Delhi and Chennai. The Bank has the
largest domestic network of 4997 offices, including 46 extension counters
among Nationalized Banks. All their branches offer Core/ Centralized
Banking Solution (CBS) along with a variety of financial products catering
to different market segments. They has international presence in 9 countries,
with a branch at Kabul, 2 branches in Hong Kong, representative offices at
Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK (with
5 branches), and a joint venture with Everest Bank Ltd, Nepal. Punjab
National Bank was incorporated in the year 1895 at Lahore, undivided India.
The Bank has the distinction of being the first Indian bank to have been
started solely with Indian capital. In the year 1940, the Bank absorbed
13

Bhagwan Dass Bank, a scheduled bank located in Delhi circle. In the year
1951, they acquired the 39 branches of Bharat Bank and in the year 1961,
they acquired Universal Bank of India. Punjab National Bank was
nationalized in July 1969 along with 13 other banks. In the year 1986, they
acquired Hindustan Commercial, which added Hindustan's 142 branches to
the Bank's network. In the year 1993, they acquired New Bank of India
which the GOI. During the year 1996, they developed a packaged for
corporate customers for fast remittance of funds from different up-country
branches. In the year, they set up a representative office in Almaty,
Kazakhstan. In the year 2000, the Bank has introduced a scheme for
providing finance against mortgage of immovable property. In September
2000, they commenced their gold business in the form of Gold Import
Scheme. In November 2000, they launched an International Co-branded
Credit Card of Punjab National Bank and Hongkong & Shanghai Banking
Corporation (HPNBC) in New Delhi. In March 2002, the Bank came out
with their first Initial public offer (IPO) for 5,30,60,700 equity shares of Rs
10 each which resulted in the reduction of the government's shareholding in
the Bank. During the year 2002, they started their branch in M.G. Road,
Bangalore named as Mid-Corporate Branch (MCD) to provide their
corporate clients with a credit limit of Rs 3.5 crore and above. They made
joint venture with Infosys for the implementation of a Centralized Banking
Solution for them. Also, they made a tie up with Cisco Systems for
networking 3,870 branches as part of their Rs 150 crore plan. In the year
2003, the Bank took over Kozhikode-based Nedungadi Bank Ltd (NBL).
The Bank entered into an alliance with New India Assurance for selling their
general insurance products. Also, they opened a representative office in
London. During the year, PNB Capital Service Ltd was amalgamated with
14

the Bank. In June 2003, the Bank entered into a MoU with Principal
Financial Services Inc (USA) and Vijaya Bank for joint venture partnership
in Life Insurance, Pensions and Asset Managements (MF) business. Also,
they formed a strategic alliance with Infrastructure Leasing and Financial
Services Ltd (IL&FS) for setting up a private equity fund for investing in
Domestic companies. In the year 2004, the Bank acquired the assets of
Hindustan Transmission Product Ltd. They signed a corporate agency
agreement with Export Credit Guarantee Corporation of India Ltd (ECGC)
for marketing ECGC's export credit insurance products through the network
of the bank's branches. Also, a MoU was signed with Intel for the
deployment of various IT-related solutions. During the year, the Bank signed
a MoU with ICICI Bank for ATM network sharing. They awarded a project
to Tata Consultancy Services (TCS) for implement human capital
management and payroll solution. They established a branch office in Kabul,
Afghanistan. Also, they opened a representative office in Shanghai. The
bank established an alliance with Everest Bank in Nepal that permits
migrants to transfer funds easily between India and Everest Bank's 12
branches in Nepal. In the year 2005, the Bank unveiled ATM at Edappal.
Also, they opened a representative office in Dubai. In the year 2006, the
Bank made a tie up with MasterCard International to launch a signaturebased debit card. Also, they made a tie up with Indian Airlines for online
booking of air tickets. They opened a new branch in Uttarakhand. In October
2007, the Bank entered into MoU with India Infrastructure Finance
Company with an aim to extend their cooperation and support to IIFC in
areas of creating a deal flow of infrastructure projects. In January 2008, the
Bank commenced commercial banking operations in Hong Kong. During the
year 2008-09, the Bank opened 168 branches, out of which 90 are new
15

branches and 78 branches was added through up gradation of Extension

Counters. They made collaboration with LIC for selling insurance policies
And also made a toe up with Oriental Insurance for selling non-life policies
on a referral basis. In June 2008, they entered into a MoU with ILFS Cluster
Development Initiative Ltd for providing finance for various industrial
infrastructure projects in the country. In September 2008, they signed a MoU
with SMC Global Securities Ltd and Net worth Stock Broking Ltd for
providing online trading facility to Company's customers. They offered a
unique '3 in 1 account' comprising of Saving, Demat and Trading account. In
February 2009, they commercially launched their credit cards with 2 types
of consumer credit cards, namely Gold and Classic. Also, they entered into
an agreement with Oriental Insurance Company to market insurance
products, a practice also known as ban assurance. In March 2009, the Bank
entered into an understanding with Tata Motors for financing entire range of
passenger cars. Also, they executed an agreement with The Life Insurance
Corporation of India for banc assurance, life insurance under the provisions
of IRDA's Referral Arrangement. During the year 2009-10, the Bank opened
524 domestic branches, out of which 347 are at new locations while 177
branches was added through up gradation of existing Extension Counters.
They deployed 1400 ATMs taking the the total count of ATMs to more than
3500 Nos. They opened two overseas branches 1 in Hong Kong
and another at DIFC Dubai and started a JV banking subsidiary 'DRUK PNB
Bank Ltd' in Bhutan. Also, they opened a representative office in Oslo,
Norway. During the year, the Bank sold 6.5% of their stake in UTI Assets
Management Co Ltd and UTI Trustee Pvt Ltd, thus bringing down their
stake in both these companies to 18.5%. They launched Corporate Credit
Card with Individual liability. Also they launched Merchant Acquiring
16

Business through installation of Point of Sale (PoS) Terminals at Merchant

Establishments and Internet Payment Gateway by integrating through
Merchant Website, with Brand Name PNB Biz. In May 2009, the Bank
incorporated a subsidiary company namely PNB Investment Services Ltd. In
November 2009, they entered into an agreement with FIM Bank (Malta),
Banca IFIS, Italy and Blend Financial Services Ltd, Mumbai for setting up a
joint venture company for providing factoring, forfeiting and trade finance
related business. During the year 2010-11, the Bank introduced new set of
products and services such as PNB Uphaar, PNB Suvidha and World Travel
Card. In December 13, 2010, they acquired 63.64% stake in JSC Dana Bank
of Kazakhstan. In January 12, 2011, the Bank's joint venture India factoring
and Finance Solutions Pvt Ltd started its commercial operations from Delhi,
Mumbai & Chennai. The total number of branches at the end of March 2011
rose to 5189. The branch network comprises 2047 Rural, 1154 Semi Urban,
1111 Urban and 877 Metropolitan branches. During the review period 210
domestic branches were opened. With 5189 branches, including 28
Extension Counters, the Bank has the largest network amongst the
nationalized banks. As part of customer segmentation, Bank has opened
specialized Branches that include 6 Micro Finance branches, 59 SME
branches, 11 International Banking Branches, 17 Asset Recovery
Management Branches, 13 Mid Corporate Branches, 11 Large Corporate
Branches, 73 Retail Asset Branches, 11 Agriculture Finance Branches, 3
high-tech agriculture branches, 1 Capital Market Services Branch and 1
International Service Branch. Besides, 41 Back Offices, 2 Special Foreign
Exchange Offices, 17 Special MICR Centers, 41 Service (Regional Clearing
Centre) centers, 4 Financial Inclusion Service Centers, 3 Centralized Draft
Payable Centers, 1 Central Clearing Service Centre and 1 Depository Back
17

Office are established to reduce delivery time and improve response time.
The Bank received permission from RBI for setting up a representative
office in Sydney, Australia. Also, they are in the process of entering into
Canada. The company is having an aim to increase the customer base to 150
million by the year 2013.
REVIEW OF LITERATURE
The year 2013-2014 was a year that witnessed perfect storm-volatile oil
prices, asset bubbles and over leveraged banks, in a much interconnected
world-all leading to unarguably the greatest global financial crisis witnessed
in the human history? The Indian banking industry has not seen a collapse
like that of Lehman Brothers or Merrill Lynch, or not fully recession proof.
The year 2013-2014 was a very difficult year for the Indian banks. Many
large Indian banks were facing the problem of achieving a satisfactory
financial performance. Thus, it becomes important to analyze the
performance of leading banks of India for the year from 2013-2014.This
study tests the performance of a set of five leading Indian banks during the
year 2013-2014.the banks selected for the study are the banks that got the
top five ranking in the category of balance sheet size of more than amounts
in the survey by a leading business magazine business today during the year
2013- 2014. The year 2013-2014 was chosen for this study because of the
fact that it is was a crucial year for the financial systems of the whole world.
This study evaluates the performance of the banks based on eight
parameters- Net Interest Income, Cost to Income Ratio, Capital Adequacy
Ratio, Net NPAs, Deposit Growth, Return on Assets, Return on Capital
Employed and Operating Profit. These parameters have been identified as
the key performance indicators of banks by industry experts. This study
18

helps us to understand the commonly used performance measures of banks.

It helps to identify the bank that performs the best with regard to each
Performance parameter. This study also analyses the strengths and
weaknesses of each bank selected for the study. Review of literature has vital
relevance with any research work due to literature review the possibility of
repetition of study can be eliminated and another dimension can be selected
for the study. The literature review helps researcher to remove limitations of
existing work or may assist to extend prevailing study. Several researches
have been conducted to analyze the different aspects of performance of
commercial banks in India and abroad. But there are very few research and
literature available on the subject related to financial reforms and its impact
on Indian banks. The available literature and research are divided into four
major parts according to the area of research i.e., literature related to:
Review of literature related to performance appraisal of banks

Review

of

literature

related

to

policy

framework

and

recommendations for banks.

. Review of literature related to impact of reforms on Indian banks
. Review of literature related to service quality of Indian banks The

above mentioned literature have been obtained from following four

major sources such

PRODUCTS

19

PNB has a wide variety of products and services that meet diverse
requirements of its vast customer base. In the light of growing importance of
financial inclusion, the bank has introduced PNB Mitra - a no-frills savings
bank account that can be opened either by an individual, or jointly. A number
of deposit and loan schemes are available to customers such as housing
loans, car finance, customer finance, personal and several types of
educational loans. It has an international credit card, issued in collaboration
with Hong Kong and Shanghai Banking Corporation. HPNBC is the issuer
bank for the co branded credit card and it undertakes all front-end and backend operations relating to the co-branded credit card. Punjab National Bank
has formulated the Gold Card Scheme for its exporter clients based on the
scheme drawn up by Reserve Bank of India. The scheme ensures easy
availability of export credit on best terms to credit worthy exporters with a
good track record. The card offered by PNB is known as PNB Expo Gold
Card. The bank offers 12-hour banking services in 77 branches across India.
SWOT ANALYSIS OF PUNJAB NATIONAL BANK
Strengths:
PNB has a wide network of branches and ATMs allowing it to cater to
large no. of customers
Large customer base
The PNB brand is well established and very well recognized
PNB has adapted to technological changes in the banking sector and
can leverage it to cut costs as well as improve its services
PNB has all the products under its belt, which help it to extend the
relationship with existing customer. PNB has umbrella of products to
offer their customers, if once customer has relationship with the bank
20

Weaknesses:
Casual behavior of bank employees towards customers
Very high levels of gross NPA
Corruption and red tapism prevalent right through the organization
typical of a PSU setup
Slow decision making due to large hierarchy
PNB has a defensive approach in lending. Because of this policy
companies prefer other banks and PNB in turn sometimes loose
potential customers.
PNB is having little presence Outside India, because of which
companies prefer MNC Banks. So if PNB tries to emerge outside
India then it has a huge potential of customers.
With its increasing customer base, PNB is not however, increasing the
number of employees accordingly. This is leading to deterioration of
the standard of customer service
Opportunities:
Fast growing Indian economy presents tremendous credit growth
opportunity for the bank
Indian Banking sector is witnessing high growth thus PNB should also
grows
Dissatisfied Customers of Other Banks: There are many companies
which are not satisfied with its current bank, so PNB with its superior
service quality can capture those customers
The Banking sector stands to gain from liberalization which will help
PNB spread its wings
PNB can tap the huge potential in Micro Financing by leveraging the
penetration of its operations in rural and semi urban India
Threats
21

 Advent of MNC banks: Large numbers of MNC banks are

mushrooming in the Indian market duet the friendly policies adopted
by the government. This can increase the level of competition and
prove a potential threat for the market share of PNB.
Dissatisfied Customers: Poor customer support/ service is creating a
lot of dissatisfaction among the customers, this can prove to be a
serious problem as far as the market reputation of the bank is
concerned and cane be a major threat in future business acquisition
Increasing competition from other nationalized banks because of their
ever improving service standards

3. CREDIT APPRAISAL
Credit Appraisal 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 this measures the financial
condition & ability to repay back the loan in future.
CREDIT APPRAISAL PROCESS
22

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
value/engineers
Preparation of financial data
Proposal preparation
Assessment of proposal
Sanction/approval of proposal by appropriate sanctioning authority
Documentations, agreements, mortgages
DiPNBursement of loan
CREDIT APPRAISAL OF TERM LOANS BY FINANCIAL
INSTITUTIONS LIKE BANKS
Credit appraisal of a term loan denotes evaluating the proposal of the loan to
find out repayment capacity of the borrower. The primary objective is to
ensure safety of the money of the bank and its customers. The process
involves appraisal of market, management, technical, and financial.
Getting a term loan from financial institution is not so easy. The corporate
asking for the term loan has to go through several tests. The bank follows an
extensive process of credit appraisal before sanctioning any loan. It analyses
23

the loan proposal from all angles. The primary objective of credit appraisal
is to ensure that the money is given in right hands and the capital and
interest income of the bank is relatively secured.
While appraising a term loan, a financial institution would focus on
evaluating the credit worthiness of the company and future expected stream
of cash flow with the amount of risk attached to them. Credit worthiness is
assessed with parameters such as willingness of promoters to pay the money
back and repayment capacity of the borrower.
Four broad areas of appraisal by banks are market, management, technical
and management.
MARKET APPRAISAL:
As part of market appraisal, the very first thing a financial institution would
look at is the gap between demand and supply. Bigger the demand supply
gap, higher is the chances of flourishing of that business. The demand versus
the proposed supply by the borrower should have a wide difference like
demand of 50000 units against the proposed supply of 10000 units.
Another most important parameter is marketing efforts and infrastructure.
This is the factor which converts a demand into sales for a business.
Marketing side of the company needs to be very strong as it is very critical
to the success of the venture.
MANAGEMENT APPRAISAL:
Management of the company needs to be appraised for their intentions,
knowledge, and dedication towards the project. By intention, it is meant to
evaluate the willingness of the promoters of the company to pay the money
back. It needs to evaluate the real objective of borrowing. Only good
intentions would not generate cash flows to honor the installments of the

24

loan. The management needs to be strong in terms of their knowledge about

business, commitment towards achieving the set goals etc.
TECHNICAL APPRAISAL:
Technical appraisal is subject to the kind of business and industry of the
borrower. If its a manufacturing concern, all those parameters like project
site, availability of raw material and labor, capacity utilization, vicinity to
selling market, transportation etc would be examined. A project needs to be
technically very sound to be able to sustain all business cycles.
FINANCIAL APPRAISAL:
After all the other kinds of appraisal, everything boils down to financial
appraisal. This probably is the most important part of credit appraisal of a
business loans. The reason is that it expresses everything in terms of money.
Financial appraisal tries to assess the correctness or reasonability of the
estimates of costs and expenses and also the projected revenues. These may
include the estimation of selling price, cost of machinery, the overall cost of
project and the means of financing.
Financial appraisal involves extensive financial modeling in excel. Basically,
it takes the financial statements of previous periods and forecasts the future
financial position for at least till the loan matures. From that, the cash flows
of each year are compared with the installment of loan because ultimately
the cash flows are going to honor the payments of bank.
Feasibility of the project is evaluated in terms of debt servicing capacity of
the firm. Debt service coverage ratio is a key ratio which is calculated for
each future financial period and if that ratio is satisfying the norms accepted
by the bank, the loan would get another green signal.

25

It is difficult to explain the process of appraisal in an article or even a set of

articles. It is a very extensive work being done at financial institutions. They
have a separate team of professionals for conducting such project appraisals.
APPRAISALS AND APPRAISED VALUE
An appraisal is a comprehensive report that determines the value of your
property based on a number of valuation factors, ranging from gross living
space, to the view and the year a property was built.
If you plan on purchasing a new home or refinancing your current loan, you
will most likely need to order an appraisal. Typically, a bank or mortgage
broker will handle this for you, but you will still have to foot the bill unless
its built into your mortgage rate.
APPRAISAL COSTS
Appraisals typically cost anywhere from $250 to $500. The cost will vary
based on property type, location, and square footage. Multi-unit properties
and properties in rural areas will usually cost more to be appraised than a
single-family residence in a densely populated area.
The most common type of appraisal is the Uniform Residential Appraisal
Report, or URAR. It consists of interior and exterior photos, comparison
sales (comps), and a complete cost breakdown of the property. This type of
appraisal is a blend of both a market and cost approach.
HOW IS MY HOME APPRAISED?
The cost approach establishes value by determining what the cost would be
to rebuild the structure from the ground up. The value approach determines
value using comparison sales in the immediate area that have sold within a
recent period of time.
26

The comparison sales are broken down in the appraisal report as well, and
compared to the subject property. Each comparison sale is given or deducted
value in a number of categories based on how it stacks up against the subject
property. The net value of the comparison sales are then averaged to come
up with a median appraised value for the subject property.
The value of the subject property is really the most important factor when it
comes to securing financing. Banks and mortgage lenders need to ensure
your property is in good condition, and truly worth what you or your broker
say its worth. Any possible valuation inconsistencies will likely cause
investors to shy away from purchasing the mortgage, leaving the bank or
lender with a vacant property and a major loss if the property declines in
value. Even Donald Trump could buy a shack and fail to obtain a
mortgage because the property itself simply isnt marketable.
THE APPRAISAL REVIEW
Once an appraisal is ordered, most banks and lenders will order a review of
the appraisal. The review will be conducted by another appraiser or simply
by the use of an AVM, or Automated Valuation Model. This is where many
borrowers get into trouble. If the review comes in low, or if the property is
deemed incomplete, hazardous, or unique in any way, a bank may decline
the loan and deny financing to the potential borrower. Even if the borrower
has outstanding credit and assets galore, a faulty, unique, or overvalued
property can kill the deal. Thats why its always important to use a qualified
appraiser who assigns a realistic value to your home so there arent any
surprises when its do-or-die time. Its better to know the true value of your
home upfront before you sign any contingencies or purchase contracts. And

27

remember that the quality of your appraisal will determine the quality of
your review (unless its automated).
The review appraiser will always find the value based on whats given to
them. If they receive a poor appraisal report, they will likely assign a poor
value. Ive seen brokers submit multiple appraisals and receive completely
different values based solely on the original appraisal itself.
Come January 26th, 2015, Fannie Mae will let lenders use a proprietary tool
called Collateral Underwriter, which provides an automated appraisal risk
assessment complete with a risk score, risk flags (potential overvaluation),
and messages to the submitting lender that warrant further review.
CU works by leveraging an extensive database of property records, market
data, and analytical models to analyze appraisals for quality control and risk
management purposes.
In the future, lenders may be granted waiver of representations and
warranties on value so they can lend more freely, at least when it comes to
questionable property values.

WHAT IF THE APPRAISAL IS LOWER THAN THE PURCHASE

PRICE?
One issue that happens pretty frequently is the appraised value coming in
lower than the agreed upon purchase price.
For example, if you agree to buy a home for $200,000, and apply for a loan
with 20% down, youd need a loan of $160,000 and a $40,000 down
28

payment. That equates to a loan-to-value ratio of 80%, which is simply

$160k divided by $200k.
Now imagine the lender comes back and tells you that the property only
appraised for $190,000. Your $160,000 loan amount based on the $190,000
value would push the LTV to ~84%. And yes, lenders use the lower of the
sales price or the current appraised value. They dont care what youre
willing to pay for it.
This is a problem because your loan would now require private mortgage
insurance, and thats if the lender can even offer you a loan above 80% LTV.
The solution would be to either ask for a review of the appraisal, renegotiate
the purchase price (lower) with the seller, or put more money down,
assuming you have extra cash on hand. Of course, you might wonder if
youre overpaying for the property if it doesnt come in at value.
CURRENT SCENARIO
Important Guidelines and Schemes Regarding Housing Finance Housing
Loans under Priority Sector Lending: Loans up to Rs. 25 Lakh in
metropolitan centres with population above 10 Lakh and Rs. 15 Lakh in
other centres to individuals for purchase/construction of a dwelling unit per
family, excluding loans granted by banks to their own employees, w.e.f.
01.04.2011.

Loan To Value (LTV) Ratio: The LTV ratio in respect of

housing loans should not exceed 80%. However, for small value housing
loans i.e. housing loans up to Rs. 20 lakh (which get categorized as priority
sector advances), the LTV ratio should not exceed 90%.

Factors for

determining eligibility: The main concern of the bank is to make sure that
borrowers comfortably repay the loan on time and ensure end use. The
higher the monthly disposable income, higher will be the amount customer
will be eligible for loan. Typically a bank assumes that about 50-60 % of
29

monthly disposable/surplus income is available for repayment of loan. The

amount of the loan also depends on applicants age, tenure of the loan and
the interest rate.
INTEREST RATES:
Banks generally offer either of the following loan options, Floating Rate
Home Loans and Fixed Rate Home Loans. For a Fixed Rate Loan, the rate
of interest is fixed either for the entire tenure of the loan or a certain part of
the tenure of the loan. In case of a pure fixed loan, the EMI (Equated
Monthly Installment) due to the bank remains constant. The floating interest
rate is made up of two parts: the index and the spread. The index is a
measure of interest rates generally (based on say, government securities
prices), and the spread is an extra amount that the banker adds to cover
credit risk, profit mark-up etc. The prime lending rate or the base rate (1010.25% presently) is used as a basis for calculating the floating rate and the
interest rate charged is the prime interest rate / base rate plus a certain
spread. The EMI of a Floating Rate loan changes with changes in market
interest rates. If market rates increase, repayment increases. When rates fall,
dues also fall. Security: security for a housing loan is typically a first
mortgage of the property, normally by way of deposit of title deeds. Banks
also sometimes ask for other collateral security as may be necessary.
Collateral security assigned to bank could be Life Insurance policies, the
surrender value of which is set at a certain percentage to the loan amount,
guarantees from solvent guarantors, pledge of shares / securities and
investments like KVP/ NSC etc. that are acceptable to the banker. Banks
would also require the borrower to ensure that the title to the property is free
from any encumbrance. (i.e., there should not be any existing mortgage, loan
30

or litigation, which is likely to affect the title to the property adversely).

CERSAI REGISTRATION:
To prevent frauds in loan cases the Government has facilitated setting up of
the Central Registry of Securitization Asset Reconstruction and Security
Interest of India (CERSAI) under the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act, 2002). This Registry has become operational with effect
from March 31, 2011. The objective of setting up the Central Registry is to
provide a database of security interest over property rights to secure loans
and advances granted by banks and financial institutions. Availability of
encumbrance status, inter alia, help in preventing frauds involving cases
where loans are taken from different lenders against the same immovable
property by creating multiple mortgages by deposit of title deeds as well as
fraudulent sale of property without disclosing the security interest over such
property. The operation of CERSAI is currently being managed by National
Housing Bank partially.
FEES: A home loan often requires payment of various fees, such as loan
origination or processing charges, administrative charges, documentation,
late payment, changing the loan tenure, switching to different loan package
during the loan tenure, restructuring of loan, changing from fixed to floating
interest rate loan and vice versa, legal fee, technical inspection fee, recurring
annual service fee, document retrieval charges and pre-payment charges, if
someone wants to prepay the loan. Many of these fees are negotiable / can
be waived also.
TAX BENEFIT ON THE LOAN
Resident Indians are eligible for certain tax benefits on both principal and
interest components of loan installments under the Income Tax Act, 1961.
31

Section 80C and Section 24B grant income tax rebates to people who have
taken home loans.
Section
80C
24B

Component
Principal
Interest

Benefits per annum (w.e.f 1.04.14)

Rs. 1,50,000 /Rs. 2,00,000 /

CREDIT HISTORY CHECKING

A Credit History is basically a record of an individual's or company's past
borrowing, repayments of loans and credit card bills including information
about late payments & bankruptcy. There is a central database available with
the Credit Information Bureau (India) Limited (CIBIL) which collects and
maintains records of an individuals payments pertaining to loans and credit
cards. These records are submitted to CIBIL by member banks and credit
institutions, on a monthly basis. The CIBIL Trans Union Score is a 3 digit
numeric summary of a persons credit history which indicates applicants
financial & credit health. The Score is derived from the credit history as
detailed in the Credit Information Report [CIR] and ranges from 300 to 900
points. Credit score tells the lender how likely the applicant is to pay back
loan or credit card dues based on past repayment behavior. The higher is the
score, the more is the chance of partys loan application getting approved!
Before approving a loan a financial institution always checks with CIBIL on
applicants repayment track record. 4. Housing Loan Policy of Indian
Overseas Bank IOB is offering home loans under different schemes for the
Indian residents and NRIs at attractive interest rates for both the employed
and self-employed persons instantly with very less documentation. Thus,
with the simple processing of a few steps, people can get the Home loan

32

from Indian Overseas Bank for purchasing a new house / flat or to renovate /
rebuild an existing home.
ELIGIBILITY GROUPS OF INDIVIDUALS
Members of Co-operative Societies.
Individuals not more than 55 years of age.
However individuals may be considered at the age of 60 provided
their legal heirs join along with them.
Loan must be liquidated before attaining 65 Years of age.
For salaried individual:
A permanent job with a minimum of 2 or 3 years service.
For self-employed professional:
A minimum period of three years of activity in the related field.
PURPOSE
To purchase / construct / repair / renovate flat or house.

QUANTUM OF LOAN
A maximum of 90% of the cost of the house / flat excluding Registration and
Documentation charges. The amount depends on applicants age and
repayment capacity.
MARGIN
33

The minimum margin is 10% of the estimated cost (including the cost of the
land) for new as well as old houses/flats.
RATE OF INTEREST

Loan Amount
Up to Rs 30 lakhs
Above Rs.30 lacs & up to

Interest Rate % p.a.

Others
@ Base Rate i.e.10.25
@ Base Rate i.e.10.25

Rs 75 lacs
Above Rs 75 lakhs

Base

Rate

Irrespective of Tenor
Women Borrowers
@ Base Rate i.e.10.25
@ Base Rate i.e.10.25
+0.25 @ Base Rate i.e.10.25

i.e.10.50

REPAYMENT
Repayable in equated monthly installments for a maximum period of 30
years. No pre-payment charges
HOLIDAY / MORATORIUM PERIOD
A maximum holiday period of 18 months from the date of first disbursement
or completion of construction - whichever is earlier. In case the house is
purchased, the holiday period is 3 months.
SECURITY
First mortgage on the property to be bought, constructed or renovated The
land should be in the applicant's name or jointly with spouse who should be
a co-borrower Should have a clear and marketable title over the property
Should have comprehensive insurance on the property for adequate value
Additional security in the form of NSC, LIC, Units of UTI will also be
accepted 4.9 Documents required

34

An application form Salary certificate as a proof of income (for employed

individuals)
Financial statements (for professionals, businessman) Agreement for sale of
house/flat Proof of membership (for co-operative societies etc.) Proof for
experience in the line of activity (for professionals, business people etc.)
Estimates for Construction / Valuation Report for Acquisition / Legal
opinion on the Property from Bank approved Engineer / Lawyer
6. Loan Review Mechanism
Loan Review Mechanism (LRM) is an effective tool for constantly
evaluating the quality of loan book and to bring about qualitative
improvements in credit administration. Banks should, therefore, put in place
proper Loan Review Mechanism for large value accounts with
responsibilities assigned in various areas such as, evaluating the
effectiveness of loan administration, maintaining the integrity of
credit grading process, assessing the loan loss provision, portfolio quality,
etc. The purpose of LRM is to detect problem accounts
early and to mitigate against probable losses either through loan
restructuring or the termination of poor quality loans.
The main objectives of LRM could be:
To identify loans promptly which develop credit weaknesses and initiate
timely corrective action;
To evaluate portfolio quality and isolate potential problem areas;
To provide information for determining adequacy of loan loss provision;
To assess the adequacy of and adherence to, loan policies and procedures,
and to monitor compliance with relevant laws and regulations; and

35

 To provide top management with information on credit administration,

including credit sanction process, risk evaluation and post-sanction followup.
The loan approval process comprises of processing and evaluating loan
applications, documenting loan decisions and distributing loan funds. It is
important that management establish a loan approval process which includes
controls over lending authority and accountability.
A properly functioning loan approval process requires the following:
Loans follow a pre-established loan processing flow, which sets out the
proper movement of loan applications within the credit union;
Borrower information and credit analysis are properly documented
against established credit criteria;
Loans decisions are made and approved by appropriate staff, with the
appropriate authorization and accountability;
Loan funds are disbursed, after applicable security is in place, through
proper channels, with proper safeguards against theft or fraud.
The process should cover the entire credit cycle starting from the origination
of the credit in a financial institutions books to the point the credit is
extinguished from the books. It should provide for sound practices in:
Credit Processing/Appraisal;
Credit Approval/Sanction;
Credit Documentation;
Credit Administration;
Disbursement;
Monitoring and Control Of Individual Credits;
Monitoring the Overall Credit Portfolio (Stress Testing)
Credit Classification; And
36

 Managing Problem Credits /Recovery.

Credit Processing/Appraisal
Credit processing is the pre-qualification screening criteria where all
required information on credit is gathered and applications are
screened. The criteria may include rejecting applications from blacklisted
customers. In this connection, financial institutions should
have a checklist to ensure that all required information is, in fact, collected.
This would help institutions avoid processing and
screening applications that would be later rejected.
The next stage to credit screening is credit appraisal where the financial
institution assesses the customers ability to meet his
Obligations. Banks should be equipped with well designed credit appraisal
criteria to ensure that facilities are granted only to
Creditworthy customers who can make repayments from reasonably
determinable sources of cash flow on a timely basis.
Financial institutions usually require collateral or guarantees in support of a
credit in order to mitigate risk. Banks must have a policy
for valuing collateral, taking into account the Reserve Bank of India
guidelines dealing with the matter. Such a policy shall, among
other things, provide for acceptability of various forms of collateral, their
periodic valuation, process for ensuring their continuing
legal enforceability and realization value.
The appraisal criteria look into the following issues while granting loan:
Determining the amount and purpose of lending
Determining credit worthiness of the applicant to assume the credit
obligation;
37

 Understanding risk profile of the borrower

Forecast operating environment of the borrower
Inspection of the borrowers business premises as well as the facility that
is the subject of the proposed financing
Ensuring goodwill of applicant
ASSET-BASED LENDING: ADVANTAGES VS. DISADVANTAGES
Small as well as large businesses have been greatly influenced by the
recent financial crisis in the economy. This has tightened the lending
structure for businesses. Unsecured loans of many companies are not getting
passed these days due to changes in the lending system.
Many companies have taken the option of asset-based lending to overcome
this problem. Interestingly, this option of lending was considered the last
resort by many companies, but it is now growing to be a preferred lending
form. Asset-based lending is generally done when it is not possible for the
company to raise funds thorough normal lending routes. Normal lending is
done by selling bonds in the capital market, mortgage secured or normal
unsecured lending from the bank. Asset-based lending is also preferred when
the companies need immediate capital for financing their projects by
purchasing inventory as well as debt, mergers, and acquisitions.
This is a favored choice for companies that do not have enough credit
ranking, time or capacity, and track record to opt for traditional capital
sources. It is also a good way for companies to satisfy their short-term
requirements of cash. It has four major asset classes namely inventory, real

38

estate, accounts receivable, and equipment. Recently, addition of intangible

assets like customer lists and trademarks have been added to it.
ADVANTAGES OF ASSET-BASED LENDING
One of the biggest advantages of this type of lending is that it provides
money to fast growing organizations. This helps them to a great extent by
addressing the cash flow problem of the companies.
They are also a good choice for those companies that do not have
outstanding credit. The companies can make use of intangible assets to get
the loan.
Another advantage of asset-based lending system is that it is very fast.
Applying for a loan to the bank is a lengthy and complicated process. But
asset-based lending system is much faster. It also offers a variety of related
services like accounts receivable processing, invoices, and collection. The
flexibility and speed that this lending system provides helps even the
companies with poor credit ratings.
This lending system offers very good value when the lent assets are good.
When the company makes use of inventory as its guarantee or security, the
amount of the loan may go up to 80% of the value of the inventory. In case
the company lends intangible assets, 75% of them can be credited.
DISADVANTAGES OF ASSET-BASED LENDING
One of the major disadvantages of asset-based lending is that the lender gets
to seize the assets in the event of failure of repayment.

39

High rate of interest on the assets is another disadvantage of this lending

system.
As opposed to the high rate of interest, the limit of lending may be lower in
this approach.
It requires a lot of monitoring and auditing.
It also has many appraisal costs.
Another disadvantage of asset-based lending is that the up-front legal costs
of this system are high.

40

CHAPTER II

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY
The present paper is a case study which is restricted to branch of PNB in
Delhi. The objective of research paper is to study the Credit Risk
Assessment Model of PNB and to check the commercial, financial &
technical viability of the project proposed & its funding pattern. To observe
the movements to reduce various risk parameters which are broadly
41

categorized into financial risk, business risk, industrial risk & management
risk. For the purpose, the secondary data is collected through the Books &
magazines, Database at PNB, Websites, E-circulars of PNB.
A) CREDIT RISK ASSESSMENT & APPRAISAL PROCESS OF PNB
CREDIT RISK ASSESSMENT RISK
Risk is inability or unwillingness of borrower-customer or counter-party to
meet their repayment obligations/ honor their commitments, as per the
stipulated terms.
LENDER TASK
Identify the risk factors, and
Mitigate the risk
RISK ARISES IN CREDIT:
In the business world, Risk arises out of
Deficiencies / lapses on the part of the management (Internal factor)
Uncertainties in the business environment (External factor)
Uncertainties in the industrial environment (External factor)
Weakness in the financial position (Internal factor)
TO PUT IN ANOTHER WAY, SUCCESS FACTORS BEHIND A
BUSINESS ARE
Managerial ability
Favorable business environment
Favorable industrial environment
42

 Adequate financial strength

CREDIT & RISK
Go hand in hand.
They are like twin brothers.
They can be compared to two sides of the same coin.
All credit proposals have some inherent risks, excepting the almost
negligible volume of lending against liquid collaterals with adequate
margin
LENDING DESPITE RISKS
So, risk should not deter a Banker from lending.
A bankers task is to identify/ assess the risk factors/ parameters &
manage / mitigate them on a continuous basis.
But its always prudent to have some idea about the degree of risk
associated with any credit proposal.
The banker has to take a calculated risk, based on risk-absorption/
risk-hedging capacity & risk-mitigation techniques of the Bank.

CREDIT RISK ASSESSMENT (CRA) MINIMUM SCORES /

HURDLE RATES
1. The CRA models adopted by the Bank take into account all possible
factors which go into appraising the risks associated with a loan. These have
been categorized broadly into financial, business, industrial & management
43

risks and are rated separately. To arrive at the overall risk rating, the factors
duly weighted are aggregated & calibrated to arrive at a single point
indicator of risk associated with the credit decision.
2. FINANCIAL PARAMETERS:
The assessment of financial risk involves appraisal of the financial strength
of the borrower based on performance & financial indicators. The overall
financial risk is assessed in terms of static ratios, future prospects & risk
mitigation (collateral security / financial standing).
3. INDUSTRY PARAMETERS: The following characteristics of an
industry which pose varying degrees of risk are built into Banks CRA
model:
Competition
Industry outlook
Regulatory risk
Contemporary issues like WTO etc.
4. MANAGEMENT PARAMETERS: The management of an enterprise /
group is rated on the following parameters:
Integrity (corporate governance)
Track record
Managerial competence / commitment
Expertise
Structure & systems
Experience in the industry
Credibility ability to meet sales projections
44

 Credibility ability to meet profit (PAT) projections

Payment record
Strategic initiatives
Length of relationship with the Bank
4. RISK PARAMETERS: as mentioned above are individually scored to
arrive at an aggregate score of 100 (subject to qualitative factors negative
parameters). The overall score thus obtained (out of a max. of 100) is rated
on an 8 point scale from PNB/PNBTL1 to PNB 8 /PNBTL8

1. SALIENT FEATURES OF CRA MODELS

(A) TYPE OF MODELS

45

S.

Exposure Level

Non

Trading Trading Sector

No (FB + NFB Limits )

Sector (C&I , SSI , ( Trade & Services)

Over Rs. 5.00 crore

AGL)
Regular Model

Rs 0.25 crore to Rs. 5.00 Simplified Model

Regular Model
Simplified Model

crore
(B) TYPE OF RATINGS
S. No.

Model

Type of Rating

Regular Model

Borrower Rating

Simplified Model

Facility Rating
Borrower Rating

New Rating Scales Borrower Rating: 16 Rating Grades

There is different rating given to the different banks. For example
S. No. Borrower Rating

Range

Risk level

Comfort Level

of scores

46

PNB 1

94-100

Virtually Zero risk

Virtually Absolute safety

PNB 2

90-93

Lowest Risk

Highest safety

PNB 3

86-89

Lower Risk

Higher safety

PNB 4

81-85

Low Risk

High safety

PNB 5

76-80

Moderate Risk with Adequate Adequate safety

Cushion

PNB 6

70-75

PNB 7

64-69

PNB 8

57-63

PNB 9

50-56

10

PNB 10

45-49

Moderate Risk

Moderate Safety

Average risk

Above Safety Threshold

Acceptable

Risk

(Risk Safety Threshold

Tolerance Threshold)
11

PNB 11

40-44

Borderline risk

Inadequate safety

12

PNB 12

35-39

High Risk

Low safety

13

PNB 13

30-34

Higher risk

Lower safety

14

PNB 14

25-29

Substantial risk

Lowest safety

15

PNB 15

< 24

Pre-Default Risk (extremely Nil

Vulnerable to default)

16

PNB 16

----

Default Grade

---------

Bank has introduced New Rating Scales for borrower for giving loans.
Rating is given on the basis of scores out of 100. Bank gives loans to the
borrower as per their rating like PNB gives loans to the borrower up to
PNB8 rating as it has average risk till PNB8 rating. From PNB9 rating the
risk increases. So banks do not give loans after PNB rating.
47

31st March
Net Sales
Operating

Aud.
2009
501.78
149.64

Aud.
2010
546.65
182.92

Annual
2011
713.82
234.24

Annual
2012
898.65
326.69

Annual
2013
898.65
374.32

Annual
2014
898.65
404.08

Projected
2015
898.65
425.06

Profit(afterinterest)
PBT
PBT/Sales (%)

1.20
0.24

2.90
0.53

22.48
3.15

92.62
10.31

125.47
13.96

143.51
15.97

151.96
16.91

PAT
Cash Accruals
PBDIT
Paid up Capital

1.20
39.05
54.44
21.04

2.90
40.51
52.41
22.56

22.48
129.25
150.01
91.00

92.62
233.74
266.99
113.48

125.47
224.25
247.21
181.10

143.51
212.66
226.20
256.57

151.96
200.36
203.72
340.08

TNW
Adjusted TNW

21.04
21.04

22.56
22.56

113.48
113.48

181.10
181.10

256.57
256.57

340.08
340.08

427.04
427.04

TOL/TNW
TOL/Adjusted

12.22
12.22

12.80
12.80

5.04
5.04

2.15
2.15

1.01
1.01

0.47
0.47

0.27
0.27

1.42
1.97

2.22
2.22

2.53
4.49

2.71
5.66

3.80
5.83

6.47
6.47

103.87

86.14

349.18

323.80

361.29

438.25

TNW
Current Ratio
1.57
Current
Ratio 2.34
(Excl.TL
installments)
NWC

100.20

48

MOVEMENT IN TNW
2009
Opening TNW 17.63
Add PAT
1.20
Add. Increase 8.42
in equity /
premium
Add./Subtract
change in
intangible
assets
Adjust prior

2010
21.04
2.90
10.17

2011
22.56
22.48
68.44

(Rs. in lacs)
2012
113.48
92.62

2013
181.10
125.47

2014
256.57
143.51

2015
340.08
151.96

49

year expenses
Deduct
Dividend
Payment
/Withdrawals
Closing TNW

6.21

11.55

21.04

22.56

113.48

25.00

50.00

60.00

65.00

181.10

256.57

340.08

427.04

CHAPTER III

DATA ANALYSIS
AND
50

INTERPRETATION

DATA ANALYSIS AND INTERPRETATION

Data collected from published annual reports was tabulated and analyzed
using appropriate ratio. The ratio were calculated with the help of Microsoft
excel. The comparative analyses of performance of banks were done with
the help of tables, bar charts and pie charts. The period selected for study is
the year 2013-2014, as this year was a very crucial year for the financial
systems around the world due to the financial meltdown faced by the world.
In this part, a comparison has been made of the performance of the top five
banks (as per the Business Today Survey) during the year 2013-2014 by
testing their performance with the help of various ratios. Business today had
51

given the following ranking for banks, with a balance sheet size of more
than amount during the year 2013-2014.

Table 1: Top Five Banks of India

Rank Banks
Bank of India
1
Punjab National Bank
2
Bank of Baroda
3
Indian Bank
4
Union Bank of India
5
These banks performances are analyzed with the above mentioned
parameters. The advantages of these parameters are that many of them are
specifically designed for evaluating bank performance.
52

A detailed analysis of these performance parameters is done. Which is as

follows?
I. OPERATING PROFIT:
The profit earned from a firm normal core business operations. This value
Does not include any profit earned from the firms investments (such as
earnings from firms in which the company has partial interest) and the
effects of interest and taxes. It is also known as earnings before interest and
tax (EBIT) or operating income. Calculated as
Operating revenue-operating expenses (Or) Operating profit per share (Rs)*
Number of shares
Here, the operating profit of various banks is compared in order to know
their operational efficiency. The table 2 below shows the operating profit of
the selected five banks for the year 2013-2014
Table 2: Operating profit Ratio of five Leading Banks
Bank

Operating Profit

Bank of India
Punjab National Bank
Bank of Baroda
Indian Bank
Union Bank of India

1489.26
7160.15
5173.31
1633.48
2590.34

Source: Annual Report of the Banks

53

INTERPRETATION:
The table 2 indicates that the operating profit of Punjab national bank
(7160.15) is the highest profit among the top five banks, the bank of India
(1489.26) shows that the lowest profit among the five banks

Table 3: Net Interest Income Ratio of five Leading Banks

Bank

Net Interest Income

Bank of India
Punjab National Bank
Bank of Baroda
Indian Bank
Union Bank of India

2.11
3.14
1.98
2.49
2.37

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Source: Annual Report of the Banks

INTERPRETATION:
The table-3 indicates that the Net Interest Income is highest for Punjab
national bank (3.14%).The net interest income is very less for Bank of
Baroda (1.98%),so it should take urgent measures to improve its net interest
income, so that it can improve its profitability

Operating Expenses Operating Income

Table 4: cost to Income Ratio of five Leading Banks
Bank

Cost to Income

Bank of India
Punjab National Bank
Bank of Baroda
Indian Bank
Union Bank of India

0.44
0.45
0.43
0.49
0.51

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INTERPRETATION:
The table-4 shows that the performance of bank of Baroda is the best
regarding cost to income ratio, as it has the lowest ratio (0.43) among the
five banks, union bank of India has high cost to income ratio (0.51). Thus
union bank of India has to take urgent measures to lower its costs, so that it
can improve its profitability.

Table 5: Capital Adequacy Ratio of five leading Banks

Bank

Capital Adequacy Ratio

Bank of India
Punjab National Bank
Bank of Baroda
Indian Bank
Union Bank of India

10.76
12.29
12.28
13.10
10.80

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Source: Annual Report of the Banks

INTERPRETATION:
The table -5 indicates that the capital adequacy ratio of Indian bank (13.10)
is the highest ratio among the top five banks, the bank of India (10.76)
shows that the lowest ratio among the top five banks.

CHAPTER IV

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FINDINGS

FINDINGS
WHAT IS A LOAN? - DEFINITION, TYPES, ADVANTAGES &
DISADVANTAGES
DEFINITION
58

If you have never received a loan to purchase something, you certainly are in
the minority! Loans can be a great thing, but they can also get you into
trouble. One of the keys to being financially successful understands when
loans are a good solution for your situation. Loans are never a good idea if
you can't afford to pay them back in the required time frame. Let's explore
what a loan is and find out some of the common ways to borrow money.
A loan is when you receive money from a friend, bank or financial
institution in exchange for future repayment of the principal, plus interest.
The principal is the amount you borrowed, and the interest is the amount
charged for receiving the loan. Since lenders are taking a risk that you may
not repay the loan, they have to offset that risk by charging a fee - known as
the interest. Loans typically are secured or unsecured. A secured loan
involves pledging an asset (such as a car, boat or house) as collateral for the
loan. If the borrower defaults, or doesn't pay back the loan, the lender takes
possession of the asset. An unsecured loan option is preferred, but not as
common. If the borrower doesn't pay back the unsecured loan, the lender
doesn't have the right to take anything in return.

TYPES OF LOANS
Personal Loans - You can get these loans at almost any bank. The good news
is that you can usually spend the money however you like. You might go on
vacation, buy a jet ski or get a new television. Personal loans are often
unsecured and fairly easy to get if you have average credit history. The

59

downside is that they are usually for small amounts, typically not going over
$5,000, and the interest rates are higher than secured loans.
Cash Advances - If you are in a pinch and need money quickly, cash
advances from your credit card company or other pay day loan institutions
are an option. These loans are easy to get, but can have extremely high
interest rates. They usually are only for small amounts: typically $1,000 or
less. These loans should really only be considered when there are no other
alternative ways to get money.
STUDENT LOANS
These are great ways to help finance a college education. The most common
loans are Stafford loans and Perkins loans. The interest rates are very
reasonable, and you usually don't have to pay the loans back while you are a
full-time college student. The downside is that these loans can add up to well
over $100,000 in the course of 4, 6 or 8 years, leaving new graduates with
huge debts as they embark on their new careers.

COLLEGE LOAN
Mortgage Loans - This is most likely the biggest loan you will ever get! If
you are looking to purchase your first home or some form of real estate, this

60

is likely the best option. These loans are secured by the house or property
you are buying. That means if you don't make your payments in a timely
manner, the bank or lender can take your house or property back! Mortgages
help people get into homes that would otherwise take years to save for. They
are often structured in 10-, 15- or 30-year terms, and the interest you pay is
tax-deductible and fairly low compared to other loans.
HOME LOAN
Home-Equity Loans and Lines of Credit - Homeowners can borrow against
equity they have in their house with these types of loans. The equity or loan
amount would be the difference between the appraised value of your home
and the amount you still owe on your mortgage. These loans are good for
home additions, home improvements or debt consolidation. The interest rate
is often tax deductible and also fairly low compared to other loans.
Small Business Loans - Your local banks usually offer these loans to people
looking to start a business. They do require a little more work than normal
and often require a business plan to show the validity of what you are doing.
These are often secured loans, so you will have to pledge some personal
assets as collateral in case the business fails.

SHOULD YOU USE AN ONLINE MORTGAGE LENDER? THE

PROS AND CONS OF GETTING A MORTGAGE ONLINE
Online lenders less time-consuming and sometimes cheaper
Generally speaking, the home loan application process through online
lenders is a bit dumped-down compared to going to a large financial
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Institution or meeting one-on-one with a mortgage broker. Thats one of the

main reasons they are so popular; who doesnt want to apply for a mortgage
while watching TV and eating dinner at the same time?
With an online lender, there is no need to have time-consuming in-person
meetings, which can save time.
Online lenders tend to undercut traditional mortgage brokers on rates and
fees, too. Due to the tough competition for online lending, these lenders
realize the best way to grab more customers is by offering the lowest interest
rates and most flexible payment terms out there. They also have low closing
costs because they dont have to pay for the same type of expenses (offices,
etc.) as mortgage brokers do.
If your credit score is lower than 700, its another reason you may want to
try applying for a loan with an online lender. They dont always use the
same underwriting investors as the big banks do, so you may be able to
qualify for a loan even if you were rejected by a local bank.
The cons of online mortgage lenders
As you might expect, there is an increased risk of fraud, scams and illegal
business practices with online mortgage lending. You have to know who
youre dealing with.
You should never need to pay money for a pre-approval or quote. Many
lenders charge an application fee that covers your appraisal, credit check,
and other expenses, but you should not need to pay this fee until later in the
application process.
Its also quite common (though illegal) for online lenders to advertise very
low rates in order to entice you to fill out an application. Once they get your
whole application, run your credit and get the process started, theyll tell you
that introductory rate is no longer available. Theres little you can do to
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avoid this, except to keep your options open and pay close attention to every
step of the process.
Although online lenders tend to approve applicants with lower credit scores
that mortgage brokers will turn down, the interest rates tend to be extremely
high for borrowers with poor credit. Just because you can get approved for a
mortgage doesnt mean you can afford to buy a home. If you have a low
enough credit score that youll pay a higher mortgage interest rate, its a
better idea to continue to rent as you pay off debt, build your savings, and
repair your credit rather than buy a home at an above-market rate.
Tread lightly with online forms
If you use an online mortgage lender, be careful with the online forms as
well. Since there is no one there to answer your questions (except maybe a
1-800 number with limited hours), it can be easy to misunderstand the
questions on the loan application. If you misinterpret the questions or click
enter and move on to the next page without reading the fine print, it could
result in higher fees or a problem with your approval later down the line.
And if youre doing a home purchase, you need good communication from
your lender once youre in escrow.
If you have an issue with the appraisal or the loan funding and the call center
is closed for the weekend or holiday, it might kill the whole deal. Therefore,
ask plenty of questions about the lenders availability and response time.
After all, what is the point of going to an online lender who offers lower?
Closing costs than your mortgage broker would if they cause you to fall out
of escrow and lose your earnest money.
Mortgage brokers trust and reliability
Whereas tailored advice hand-holding may be online lenders weakness, its
the greatest strength of local mortgage brokers.
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Mortgage brokers want to win your business and they know one of the best
ways to do that is by offering superior customer service. A good mortgage
broker, just like a good real estate broker, creates a relationship of trust and
reliability. They will hold your hand through the process, help prevent you
from making major mistakes and answer all of your questions.
driven in many cases by personal relationships with local loan officers says
John Robbins, CEO of Bexil American Mortgage, in an article from
Bloomberg Business. Many home buyers find the face-to-face relationship
with their lender to be imperative in the already-stressful process of buying a
home.
Though interest rates and fees may be lower with online lenders (think less
overhead), it isnt always the case. A mortgage broker can shop around to a
variety of different lenders, loan programs and underlying investors to find
the loan that best suits your needs. They may even end up saving you
money.
We recommend you consider both online mortgage lenders and a local
broker perhaps getting mortgage pre-approval from both before
committing to a lender. With online lenders, think convenience and
competitive rates. Look to local brokers and banks for personal, face-to-face
service.

64

CHAPTER VI
CONCLUSIONS

CONCLUSIONS
Credit appraisal is done to check the commercial, financial & technical
viability of the project proposed its funding pattern & further checks the
primary or collateral security cover available for the recovery of such funds
PNB loan policy contains various norms for sanction of different types of
loans such as
65

 These all norms does not apply to each & every case.
PNB norms for providing loans are flexible & it may differ from case to
case
The CRA models adopted by the bank take into account all possible factors
which go into appraising the risk associated with a loan
These have been categorized broadly into financial, business, industrial,
and management risks & are rated separately
The assessment of financial risk involves appraisal of the financial strength
of the borrower based on performance & financial indicators
After case study we found that in some cases, loan is sanctioned due to
strong financial parameters
From the case study analysis it was also found that in some cases, financial
performance of the firm was poor, even though loan was sanctioned due to
some other strong parameters such as the unit has got confirm order, the unit
was an existing profit making unit & letter of authority was received for
direct payment to the bank from ONGC which is public sector.
Different appraisal scheme has been introduced by the bank to cater
different industries such as: Doctor plus scheme for doctors
Transport plus scheme for transport
School, collages & educational institutions
Traders easy loan
Warehouse receipt financing for commodity traders
(Agriculture related stock, cotton ginning, etc.)
In the business world risk arises out of:
Deficiencies / lapses on the part of the management
66

 Uncertainties in the business environment

Uncertainties in the industrial environment
Weakness in the financial position
Credit is the core activity of the banks & important source of their earnings
which go to pay interest to depositors, salaries to employees & dividend to
shareholders
Credit & risk go hand in hand
Banks main function is to lend funds/ provide finance but it appears that
norms are taken as guidelines not as a decision making
A bankers task is to identify/assess the risk factors/parameters &
manage/mitigate them on continuous basis.

CHAPTER VII
REFERENCES
Uwe Wehrspohn (2005) Credit Risk Evaluation: Modeling - Analysis - Management,
Center for Risk & Evaluation , Vol. 33 , pp 345-356, June 14, 2005

67

 Christian Roland(2006) Banking Sector Liberalization in India Indian

Institute of Capital Markets 9th Capital Markets Conference Paper, January
25, 2006.
Arnoud W. A. Boot, Anjan V. Thakor (2007) Corporate Finance, Financial
Intermediation
and Banking: An Overview, CORPORATE FINANCE, FINANCIAL
INTERMEDIATION
AND BANKING: AN OVERVIEW, Amsterdam Center for Law &
Economics Working
Paper No. 2007-07 , Oct. 23,2007.
Gary B. Gorton (2009) Securitized Banking and the Run on Repo
National Bureau of
Economic Research (NBER), Research Paper Series No.G01, G1, G12, G18,
G21.
Abhijit V. Banerjee (2002) Contracting Constraints, Credit Markets and
Economic
Development, MIT Dept. of Economics Working Paper No. 02-17 , April
25, 2002

Agarwala, R.G., Banking Finance A Leading Monthly of Banking &

Finance Published by Sashi Publications, Vol. XXII No.1 January,
2008,ISSN-0971-4498

68

 Alan D. Morrison (2001) Banking Sector Liberalization in India Oxford

Financial
Research Centre Working Paper No.2001-FE-01.
Simona Mihai Yiannaki (2008) Bank Risk Regulation and the Credit
Crunch, Journal of elibrary no. G 34, June 17, 2008,
Simone Westerfeld , Hans-Dieter Zimmermann (2008) Credit Risk
Measurement under
Basel II: An Overview and Implementation Issues for Developing Countries
Swiss Institute
of Banking and Finance, Vol.45, pp 347-76
Wolf Wagner(2004) The Liquidity of Bank Assets and Banking
StabilityDecember 2004
Uwe Wehrspohn (2005) Credit Risk Evaluation: Modeling - Analysis Management,
Center for Risk & Evaluation , Vol. 33 , pp 345-356, June 14, 2005

MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY

ATTENDANCE FOR SUMMER TRAINING PROJECT REPORT
Name of the student

Class :
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Roll No.

Name of the Supervisor :

S.No.

Date

Time

Progress

Signature

Report

of

Signature

the of

student

Supervisor

70

9
10

*Minimum (8out of 10) 80% attendance compulsory.

Coordin
ator

71