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CREDIT APPRAISAL

TABLE OF CONTENTS Chapters

1. INTRODUCTION Reason for selecting the project Scheme of the project Research Methodology Limitation of the study

2. CREDIT POLICY OF COMMERCIAL BANK Commercial banks and its objectives Recent policy developments regarding bank credit Changing phase of bank credit Trends of bank credit in India Procedure for providing bank credit Credit Appraisal

3. THE PROFILE OF THE ORGANIZATION OF PNB Indian banking sector & its major challenges Punjab National Bank at a glance Mission and Vision Organizational structure of PNB

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4. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO PNB Credit philosophy Credit policy Introduction to loans Classification of loans Building up of a proposal Requirements as per constitution of borrower Financial Appraisal

5. ANALYSIS AND INTERPRETATION OF DATA Credit Appraisal techniques Process of credit appraisal for providing cash credit Appraisal techniques for retail loans

6. CONCLUSION Conclusion

BIBLIOGRAPHY

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Introduction
The last year financial crises have become the main cause for recession which was started in 2006 from US and was spread across the world. The world economy has been majorly affected from the crisis. The securities in stock exchange have fallen down drastically which has become the root cause of bankruptcy of many financial institutions and individuals. The root cause of the economic and financial crisis is credit default of big companies and individuals which has badly impacted the world economy. So in the present scenario analysing ones credit worthiness has become very important for any financial institution before providing any form of credit facility so that such situation doesnt arise in near future again. Analysis of the credit worthiness of the borrowers is known as Credit Appraisal. In order to understand the credit appraisal system followed by the banks this project has been conducted. The project has analysed the credit appraisal procedure with special reference to Punjab National Bank which includes knowing about the different credit facilities provided by the banks to its customers, how a loan proposal is being made, what are the formalities that is to be satisfied and most importantly knowing about the various credit appraisal techniques which are different for each type of credit facility. Before going further it is necessary to understand the need and basic framework of the project. Therefore this chapter provides an introduction to the topic, objective of the project, reasons for selecting the project and the basic structure and framework how the project proceeds. In order to understand the importance of the topic selected an introduction to the overview of the commercial bank , its functions, and present trends and growth in bank credit are required and it is covered in this chapter.

Reasons for selecting the project


Whenever an individual or a company uses a credit that means they are borrowing money that they promise to repay with in a pre-decided period. In order to assess the repaying capability i.e. to evaluate their credit worthiness banks use various techniques that differ with
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the different types of credit facilities provided by the bank. In the current scenario where it is seen that big companies and financial institutions have been bankrupted just because of credit default so Credit Appraisal has become an important aspect in the banking sector and is gaining prime importance. It is the incident of credit defaults that has given rise to the financial crisis of 2008-09. But in India the credit default is comparatively less that other countries such as US. One of the reasons leading to this may be good appraisal techniques used by banks and financial institutions in India. Eventually the importance of this project is mainly to understand the credit appraisal techniques used by the banks with special reference to Punjab National Bank.

Scheme of the project


It covers the objective and structure of the project which is discussed as follows:-

Objective of the project


The overall objective of this project is to under stand the current credit appraisal system used in banks. The Credit Appraisal system has been analysed as per the different credit facilities provided by the bank. The detailed explanation about the techniques and process has been discussed in detail in the further chapters.

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Structure or Plan of the project


The project first of all makes a study about the commercial banks- its important functions. Then it highlights on the concept of Bank Credit & its recent trends. The project then proceeds towards the lending procedure of banks and here it highlights about credit appraisal being the first step in building up of a loan proposal. Then it discusses the bank credit policy with respect to Punjab National bank where the project was undertaken. The project then proceeds with the review of literature i.e. review of some past work regarding credit appraisal by various researchers. The project then moves towards research methodology where it covers the information regarding the type of data collected and the theoretical concepts used in the project are discussed in detail. Then the project proceeds with the next chapter consisting of the analysis part which covers the analysis of various techniques used by the banks for the purpose of credit appraisal. Then the project moves to its next chapter i.e. findings where some results found out are interpreted and then moving on to the last and the final chapter i.e. the suggestions and conclusions where some steps are suggested to be implemented to increase the work efficiency and to reduce to work pressure

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Commercial banks and its objectives


A commercial bank is a type of financial intermediary that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. Some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. This is what people normally call a "bank". The term "commercial" was used to distinguish it from an investment bank. Commercial banks are the oldest, biggest and fastest growing financial intermediaries in India. They are also the most important depositories of public savings and the most important disbursers of finance. Commercial banking in India is a unique banking system, the like of which exists nowhere in the world. The truth of this statement becomes clear as one studies the philosophy and approaches that have contributed to the evolution of banking policy, programmes and operations in India. The banking system in India works under constraints that go with social control and public ownership. The public ownership of banks has been achieved in three stages: 1995, july 1969 and April, 1980. Not only the public sector banks but also the private sector and foreign banks are required to meet the targets in respect of sectoral deployment of credit, regional distribution of branches, and regional credit deposit ratios. The operations of banks have been determined by lead bank scheme, Differential Rate of interest scheme, Credit authorization scheme, inventory norms and lending systems prescribed by the authorities, the formulation of credit plans, and service area approach. Commercial Banks in India have a special role in India. The privileged role of the banks is the result of their unique features. The liabilities of Bank are money and therefore they are important part of the payment mechanism of any country. For a financial system to mobilise and allocate savings of the country successfully and productively and to facilitate day-to-day transactions there must be a class of financial institutions that the public views are as safe and convenient outlets for its savings. The structure and working of the banking system are integral to a countrys financial stability and economic growth. It has been rightly claimed that the diversification and development of Indian Economy are in no small measure due to the active role banks have played financing economic activities of different sectors.

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Major objectives of commercial banks Balancing profitability with liquidity management


As any other business concern, Banks also aim to make profit but besides that they also need to maintain liquidity beacuse of the nature of their liabilities.

Management of Reserves
Banks are expected to hold a part of their deposits in form of ready cash which is known as CASH RESERVES. Central bank decides the reserve ratio known as the CRR.

Creation of Credit
Banks are said to create deposits or credit or money or it can be said that every loan given by bank creates a deposit. This has given rise to the important concept of money multiplier.

Bank Credit
The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan is known as a bank credit. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.

The operating paradigms of the banking industry in general and credit dispensation in particular have gone through a major upheaval.

Lending rates have fallen sharply. Traditional growth and earning such as corporate credit has been either slow or not profitable as before. Banks moving into retail finance, interest rate on the once attractive retail loans also started coming down. Credit risks has went up and new types risks are surfaced

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

Volume of CreditCommercial banks are a major source of finance to industry and commerce. Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90 , Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. Banks have introduced many innovative schemes for the disbursement of credit. Among such schemes are village adoption, agriculture development branches and equity fund for small units. Recently, most of the banks have introduced attractive education loan schemes for pursuing studies at home or abroad. They have introduced attractive educational loan schemes for pursuing studies at home or abroad. They have moved in the direction of bridging certain defects or gaps in their policies, such as giving too much credit to large scale industrial units and commerce and giving too little credit to agriculture, small industries and so on. The Public Sector Banks are still the leading lenders though growth has declined compared to previous quarter. The credit growth rate has dipped sharply in foreign and private banks compared to previous quarter. In all, the credit growth has slipped in this quarter. Credit (YOY Growth) March 28 2008 2009 Public Sector Banks 22.5 20.4 March 27

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The rates have gone down compared to previous quarter when it was seen that there was no changes in loan rates in private and foreign banks. But then compared to rate cuts done by RBI, they still need to go lower. Table 16: Reduction in Deposit and Lending Rates (October 2008 April 2009*) (Basis points) Lending Bank Group Public Sector Banks Private Sector Banks Five Major Foreign Banks
BPLR Oct 08 13.7514.75 13.7517.75

Rates

Deposit Rates (BPLR) 125-250 75-200 100-200


Mar 09

125-225 100-125 0-100


Change (from Oct to Apr) 125-225

Apr 09

Public Sector Banks

11.50-14.00 11.50-13.50

Private Sector Banks Five Banks Major

12.75-16.75 12.50-16.75

100-125

Foreign 14.2516.75

14.25-15.75 14.25-15.75

0-100

Sector-wise credit points credit has increased to agriculture, industry and real estate whereas has declined to NBFCs and Housing. A bank group wise sectoral allocation is also given which suggests private banks have increases exposure to agriculture and real estate but has declined to industry. Public sector banks have increased allocation to industry and real estate. There is a more detailed analysis in the macroeconomic report released before the monetary policy.

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As Sector February 2008 % share in total Agriculture Industry Real Estate Housing NBFCs Overall Credit 9.2 45.2 3.1 7.3 5.7 100 Variations (per cent) 16.4 25.9 26.7 12 48.6 22 on 15, As on

February 27, 2009 % share in total 13 52.5 8.5 4.7 6.6 100 Variations (per cent) 21.5 25.8 61.4 7.5 41.7 19.5

To sum up, the credit conditions seems to have worsened after January 2009. The rates have declined but lending has not really picked up. However, the question still remains whether credit decline is because banks are not lending (supply) or because people/corporates are not borrowing (lack of demand). It is usually seen that all financial variables as lead indicators say if credit growth (along with other fin indicators) is picking, actual growth will also rise. However, it is actually seen the relation is far from clear. In fact, the financial indicators hardly help predict any change in business cycle. Most rise in good times and fall in bad times. Most financial indicators failed to predict this global financial crisis and kept rising making everyone all the more complacent.

Recent policy developments Regarding Bank Credit


Bank lending was done for a long time by assessing the working capital needs based on the concept of MPBF (maximum permissible bank finance). This practice has been withdrawn with the effect from April 15th 1997 in the sense that the date, banks have been left free to choose their own method ( from the method such as turnover , cash budget, present MPBF , or any other theory) of assessing working Capital requirement of the borrowers.

The cash credit system has been the bane, yet it has exhibited a remarkable strength of survival all these years. In spite of many efforts which were direct in nature, only a slow progress has been made to reduce its importance and increase bill financing. Therefore a concrete and direct policy step was taken on April 21, 1995 which made it mandatory for banks, consortia, syndicates to restrict cash credit components to the prescribed limit , the
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balance being given in the form of a short term loan, which would be a demand loan for a maximum period of one year, or in case of seasonal industries , for six months. The interest rates on the cash credit and loan components are to be fixed in accordance with the prime lending rates fixed by the banks. This loan system was first made applicable to the borrowers with an MPBF of Rs 20 crore and above; and in their case , the ratio of cash credit (loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April 1995 , to 60 (40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80) percent in April 1997. With the withdrawal of instructions about the MPBF in April 1997 , the prescribed cash credit and loan components came to be related to the working capital limit arrived in banks as per the method of their choice.

With effect from September 3, 1997, the RBI has permitted banks to raise their existing exposure limit to a business group from 50% to 60%; the additional 10% limit being exclusively meant for investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993, this limit was raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank, and from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for power projects. From September3, 1997 these caps on term lending by banks were removed subject to their compliance with the prudential exposure norms.

The banks can invest in and underwrite shares and debentures of corporate bodies. At present, they can invest five percent of their incremental deposits in equities of companies including other banks. Their investment in shares/ Bonds of DFHI, Securities trading Corporation of India (STCI), all Indian financial institutions and bonds (debentures) and preference shares of the companies are excluded from this ceiling of five per cent with affect from April 1997 . From the same date banks could extend loans within this ceiling to the corporate against shares held by them. They could also offer overdraft facilities to stock brokers registered with help of SEBI against shares and debentures held by them for nine months without change of ownership.

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CHANGING PHASE OF BANK CREDITA study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilization of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank credit. Most banks in India even today continue to look at the needs of the corporate in the light of methodology recommended by the Group. The report of this group is widely known as Tandon Committee report. The weaknesses in the Cash Credit system have persisted with the non-implementation of one of the crucial recommendations of the Committee. In the background of credit expansion seen in 1977-79 and its ill effects on the economy, RBI appointed a working group to study and suggesti) Modifications in the Cash Credit system to make it amenable to better management of funds by the Bankers and ii) Alternate type of credit facilities to ensure better credit discipline and co relation between credit and production. The Group was headed by Sh. K.B. Chore of RBI and was named Chore Committee. Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted the job of looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of Tandon & Chore Committee recommendations. His report is applicable to units with credit requirements of less than Rs.50 lacs. The recommendations made by Tandon Committee and reinforced by Chore Committee were implemented in all Banks and Bank Credit became much more organized. However, the recommendations were perceived as too strict by the industry and there has been a continuous clamor from the Industry for movement from mandatory control to a voluntary market related restraint. With recent liberalization of economy and reforms in the financial sector, RBI has given the freedom to the Banks to work out their own norms for inventory and the earlier norms are now to be taken as guidelines and not a mandate. In fact, beginning with the slack
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season credit policy of 1997-98, RBI has also given full freedom to all the Banks to devise their own method of assessing the short term credit requirements of their clients and grant lines of credit accordingly. Most banks, however, continue to be guided by the principles enunciated in Tandon Committee report.

Trends of Bank Credit in India


The face of Indian banking has changed radically in the last decade. A perusal of the Basic Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996 and 2005, personal loans have been the fastest growing asset, increasing from 9.3 per cent of the total bank credit in 1996 to 22.2 per cent in 2005. Of course, this is partly due to the huge rise in housing loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the period, but other personal loans comprising loans against fixed deposits, gold loans and unsecured personal loans also rose from 6.1 per cent to 10.7 per cent. Other categories whose share increased were loans to professionals and loans to finance companies. In contrast, there has been a sharp decline in the share of lendings to industry. Credit to small scale industries fell from 10.1 per cent of the total in 1996 to 4.1 per cent in 2005.

Reasons for declining trend of bank credit

A major share of the economic growth has been led by the expansion of the service sector Capital intensity and investment intensity required for growth in the current economic context may not be as high as it used to be in the past. In manufacturing sector more efficient utilization of existing capacities contributed to the sectoral growth rather rather than any large addition of fresh capacities. The consequential increase in the demand for credit was also subdued.

Greater and cheaper avenues for credit resulted in a bigger share of disintermediation being resorted to by large borrowers.

The other trend has been the substantial drop in the share of rural credit, while the share of metropolitan centres has increased. While bankers say that up gradation of rural centres into

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semi-urban could be one reason (the share of semi-urban centres has gone up), it is also true that the reforms have been urban-centric and have tended to benefit the metros more. The number of rural bank offices fell from 32,981 in March 1996 to 31,967 by March 2005. The states have been the main beneficiaries of bank credit are the northern region as it has increased its share from 18.7 per cent of the total credit in 1996 to 22.2 per cent in 2005. As it was seen that Delhis share went up from 9.5 per cent to 12.1 per cent over the period. This is not due to food credit, the account of which is maintained in Delhi. Clearly, the national capital has gained a lot from liberalisation.

Trends for the year 2008-09


The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within aggregate deposits demand deposits have shown an absolute fall (-Rs 4,179 crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 2007-08,. On the other hand, time deposits have shown an accelerated increase of 22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the previous year. In the investment portfolio of banks, the expansion during 2008- 09 at Rs 194,031crore has been much lower than the expansion of Rs 340,250 crore as increase in net bank credit to government under monetary data for the same period. This has happened because the latter has a sizeable amount of RBI credit to government following the increased open market operations. Finally, there has occurred considerable slowdown in bank credit expansion. Because of relatively higher procurement of foodgrains, food credit has expanded by Rs 1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in 2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than in the previous year at Rs 432,846 (23.0%).

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Procedure for providing Bank CreditBanks offers different types of credit facilities to the eligible borrowers. For this, there are several procedures, controls and guidelines laid out. Credit Appraisal, Sanctions, Monitoring and Asset Recovery Management comprise the entire gamut of activities in the lending process of a bank which are clearly shown as below:

Credit Appraisal Sanctions

Monitoring & Asset recovery Management

Source- Self constructed

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

Credit Appraisal
Meaning - The process by which a lender appraises the creditworthiness of the prospective
borrower is known as Credit Appraisal. This normally involves appraising the borrowers payment history and establishing the quality and sustainability of his income. The lender satisfies himself of the good intentions of the borrower, usually through an interview.

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The credit requirement must be assessed by all Indian Financial Institutions or specialised institution set up for this purpose. Wherever financing of infrastructure project is taken up under a consortium / syndication arrangement banks exposure shall not exceed 25% Bank may also take up financing infrastructure project independently / exclusively in respect of borrowers /promoters of repute with excellent past record in project implementation. In such cases due diligence on the inability of the projects are well defined and assessed. State government guarantee may not be taken as a substitute for satisfactory credit appraisal. The important thing to remember is not to be overwhelmed by marketing or profit centre reasons to book a loan but to take a balanced view when booking a loan, taking into account the risk reward aspects. Generally everyone becomes optimistic during the upswing of the business cycle, but tend to forget to see how the borrower will be during the downturn, which is a short-sighted approach. Furthermore greater emphasis is given on financials, which are usually outdated; this is further exacerbated by the fact that a descriptive approach is usually taken, rather than an analytical approach, to the credit. Thus a forward looking approach should also be adopted, since the loan will be repaid primarily from future cash flows, not historic performance; however both can be used as good repayment indicators.

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Indian Banking Sector & Its Major Challenges


It is well recognised by the world that India is one of the fastest growing economies in the world. Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. Indias banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. A weak banking structure has been unable to fuel continued growth, which has harmed the long-term health of their economies. In this white paper, we emphasise the need to act both decisively and quickly to build an enabling, rather than a limiting, banking sector in India. Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. While bank lending has been a significant driver of GDP growth and employment, periodic instances of the failure of some weak banks have often threatened the stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour
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laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously weaken the health of the sector. Further, the inability of bank managements (with some notable exceptions) to improve capital allocation, increase the productivity of their service platforms and improve the performance ethic in their organisations could seriously affect future performance. India has a better banking system in place Vis a Vis other developing countries, but there are several issues that need to be ironed out. Major challenges of Indian banking sector are mentioned below.

Interest rate risk


Interest rate risk can be defined as exposure of bank's net interest income to adverse movements in interest rates. A bank's balance sheet consists mainly of rupee assets and liabilities. Any movement in domestic interest rate is the main source of interest rate risk. Over the last few years the treasury departments of banks have been responsible for a substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield on 10-year government bonds (a barometer for domestic interest rates) fell, from 13 per cent to 4.9 per cent. With yields falling the banks made huge profits on their bond portfolios. Now as yields go up (with the rise in inflation, bond yields go up and bond prices fall as the debt market starts factoring a possible interest rate hike), the banks will have to set aside funds to mark to market their investment. This will make it difficult to show huge profits from treasury operations. This concern becomes much stronger because a substantial percentage of bank deposits remain invested in government bonds. Banking in the recent years had been reduced to a trading operation in government securities. Recent months have shown a rise in the bond yields has led to the profit from treasury operations falling. The latest quarterly reports of banks clearly show several banks making losses on their treasury operations. If the rise in yields continues the banks might end up posting huge losses on their trading books. Given these facts, banks will have to look at alternative sources of investment.

Interest rates and non-performing assets


The best indicator of the health of the banking industry in a country is its level of NPAs. Given this fact, Indian banks seem to be better placed than they were in the past. A few banks have even managed to reduce their net NPAs to less than one percent (before the merger of Global Trust Bank into Oriental Bank of Commerce OBC was a zero NPA bank). But as the bond yields start to rise the chances are the net NPAs will also start to go up. This will

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happen because the banks have been making huge provisions against the money they made on their bond portfolios in a scenario where bond yields were falling. Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal processes over the years. This does not seem to be the case. With increasing bond yields, treasury income will come down and if the banks wish to make large provisions, the money will have to come from their interest income, and this in turn, shall bring down the profitability of banks.

Competition in retail banking


The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporate. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose from. With supply far exceeding demand it has been a race to the bottom, with the banks undercutting one another. A lot of foreign banks have already burnt their fingers in the retail game and have now decided to get out of a few retail segments completely.The nimble footed new generation private sector banks have taken a lead on this front and the public sector banks are trying to play catch up. The PSBs have been losing business to the private sector banks in this segment. PSBs need to figure out the means to generate profitable business from this segment in the days to come.

The urge to merge


In the recent past there has been a lot of talk about Indian Banks lacking in scale and size. The State Bank of India is the only bank from India to make it to the list of Top 100 banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a larger bank. The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired, majority of the mergers/acquisitions do not really work. So in the zeal to merge with or acquire another bank the PSBs should not let their common sense take a back seat. Before a merger is carried out cultural issues should be looked into. A bank based primarily out of North India might want to acquire a bank based primarily out of South India to increase its geographical presence but their cultures might be very different. So the integration process
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might become very difficult. Technological compatibility is another issue that needs to be looked into in details before any merger or acquisition is carried out.

Impact of BASEL-II norms


Banking is a commodity business. The margins on the products that banks offer to its customers are extremely thin vis a vis other businesses. As a result, for banks to earn an adequate return of equity and compete for capital along with other industries, they need to be highly leveraged. The primary function of the bank's capital is to absorb any losses a bank suffers (which can be written off against bank's capital).Norms set in the Swiss town of Basel determine the ground rules for the way banks around the world account for loans they give out. These rules were formulated by the Bank for International Settlements in 1988. Essentially, these rules tell the banks how much capital the banks should have to cover up for the risk that their loans might go bad. The rules set in 1988 led the banks to differentiate among the customers it lent out money to. Different weightage was given to various forms of assets, with zero percentage weightings being given to cash, deposits with the central bank/govt. etc, and 100 per cent weighting to claims on private sector, fixed assets, real estate etc. The summation of these assets gave us the risk-weighted assets. Against these risk weighted assets the banks had to maintain a (Tier I + Tier II) capital of 9 per cent i.e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital. To put it simply the banks had to maintain a capital adequacy ratio of 9 percent. The problem with these rules is that they do not distinguish within a category i.e. all lending to private sector is assigned a 100 per cent risk weighting, be it a company with the best credit rating or company which is in the doldrums and has a very low credit rating. This is not an efficient use of capital. The company with the best credit rating is more likely to repay the loan vis a vis the company with a low credit rating. So the bank should be setting aside a far lesser amount of capital against the risk of a company with the best credit rating defaulting vis a vis the company with a low credit rating. With the BASEL-II norms the bank can decide on the amount of capital to set aside depending on the credit rating of the company. Credit risk is not the only type of risk that banks face. These days the operational risks that banks face are huge. The various risks that come under operational risk are competition risk, technology risk, casualty risk, crime risk etc. The original BASEL rules did not take into account the operational risks. As per the BASEL-II norms, banks will have to set aside 15 per cent of net income to protect themselves against operational risks.

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Over the last few years, the falling interest rates, gave banks very little incentive to lend to projects, as the return did not compensate them for the risk involved. This led to the banks getting into the retail segment big time. It also led to a lot of banks playing it safe and putting in most of the deposits they collected into government bonds. Now with the bond party over and the bond yields starting to go up, the banks will have to concentrate on their core function of lending. The banking sector in India needs to tackle these challenges successfully to keep growing and strengthen the Indian financial system. Furthermore, the interference of the central government with the functioning of PSBs should stop. A fresh autonomy package for public sector banks is in offing. The package seeks to provide a high degree of freedom to PSBs on operational matters. This seems to be the right way to go for PSBs. The growth of the banking sector will be one of the most important inputs that shall go into making sure that India progresses and becomes a global economic super power.

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Punjab National Bank at a Glance


Punjab National Bank (PNB) was established in 1895 in anarkali bazaar at Lahore, undivided India, Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital. The bank was nationalised in July 1969 along with 13 other banks. From its modest beginning, the bank has grown in size and stature to become a front-line banking institution in India at present. Today, the Bank is the second largest government-owned commercial bank in India with about 5000 branches across 764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bank in the world by the Bankers Almanac, London. The bank's total assets for financial year 2007 were about US$60 billion. It has Strong correspondent banking relationships with more than 217 international banks of the world. More than 50 renowned international banks maintain their Rupee Accounts with PNB. PNB has a banking subsidiary in the UK, as well as branches in Hong Kong, Dubai and Kabul, and representative offices in Almaty, Dubai, Oslo, and Shanghai. PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management of the Bank in its early years.

HISTORY
1895: PNB commenced its operations in Lahore. 1904: PNB established branches in Karachi and Peshawar. 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle. 1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but continued to operate in Pakistan. 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became Bharat Nidhi Ltd. 1961: PNB acquired Universal Bank of India. 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon). 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which may have moved to Karachi. PNB also had one or more branches in East Pakistan Bangladesh. 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.
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1969: The Government of India (GOI) nationalized PNB and 13 other major commercial banks, on July 19, 1969. 1976 or 1978: PNB opened a branch in London. 1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal. 1988: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition added Hindustan's 142 branches to PNB's network. 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980. 1998: PNB set up a representative office in Almaty, Kazakhstan. 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that its shareholders received no payment for their shares. PNB also opened a representative office in London 2004: PNB established a branch in Kabul, Afghanistan. PNB also opened a representative office in Shanghai. PNB 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. 2005: PNB opened a representative office in Dubai. 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with two offices, one in London, and one in South Hall. Since then it has opened a third branch in Leicester, and is planning a fourth in Birmingham. 2008: PNB opened a branch in Hong Kong. 2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong Kong, this in Kowloon. 2010: PNB received permission to upgrade its representative office in the Dubai International Financial Centre to a branch. Bank with over 56 million satisfied customers and 5002 offices, PNB continue to retain its leadership position among nationalised banks. The bank enjoys strong fundamental, large franchise value and good brand image. Besides being ranked as one

of India's top service brands, PNB has remained fully committed to its guiding principles
of sound and prudent banking. Apart from offering banking products, the bank has also

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entered the credit card & debit card business; bullion business; life and non-life insurance business; Gold coins & asset management business, etc. PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 435931 crore. Today, with assets of more than Rs 2,96,633 crore, PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest network of branches (5002 offices including 5 overseas branches ).During the FY 2009-10, with 40.85% share of CASA deposits, the bank achieved a net profit of Rs 3905 crore. Bank has a strong capital base with capital adequacy ratio of 14.16% as on Mar10 as per Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As on March10, the Bank has the Gross and Net NPA ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher than the stipulated requirement of 40% & 18%. The Bank has maintained its stake holders interest by posting an improved NIM of 3.57% in Mar10 (3.52% Mar09) and a Return on Assets of 1.44% (1.39% Mar09). The Earning per Share improved to Rs 123.98 (Rs 98.03 Mar09) while the Book value per share improved to Rs 514.77 (Rs 416.74 Mar09) Punjab National Bank continues to maintain its frontline position in the Indian banking industry. In particular, the bank has retained its NUMBER ONE position among the nationalized banks in terms of number of branches, Deposit, Advances, total Business, Assets, Operating and Net profit in the year 2009-10. The impressive operational and financial performance has been brought about by Banks focus on customer based business with thrust on CASA deposits, Retail, SME & Agri Advances and with more inclusive approach to banking; better asset liability management; improved margin management, thrust on recovery and increased efficiency in core operations of the Bank. The performance highlights of the bank in terms of business and profit are shown below: Rs in Crore Parameters Operating Profit Net Profit Deposit Advance Total Business Mar'08 4006 2049 166457 119502 285959 Mar'09 5744 3091 209760 154703 364463 Mar'10 7326 3905 249330 186601 435931 CAGR (%) 22.29 23.98 14.42 16.01 15.09

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PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its IT strategy follows the Business strategy so as to arrive at Best Fit. The bank has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution (CBS) since Dec08, thus covering 100% of its business and providing Anytime Anywhere banking facility to all customers including customers of more than 3000 rural & semi urban branches. The bank has also been offering Internet banking services to the customers of CBS branches like booking of tickets, payment of bills of utilities, purchase of airline tickets etc. Towards developing a cost effective alternative channels of delivery, the bank with more than 3500 ATMs has the largest ATM network amongst Nationalized Banks. With the help of advanced technology, the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. With its policy of inclusive growth in the Indo-Genetics belt, the Banks mission is Banking for Unbanked. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. Under Branchless Banking model, the Bank is implementing 40 projects in 16 States. The Bank launched an ambitious Project Namaskar under which 1 lakh touch points will be established in unbanked villages by 2013 to extend the Banks outreach. Under this, 30 Kiosks have been opened covering 119 Villages reaching 1.32 Lakh beneficiaries. Backed by strong domestic performance, the bank is planning to realize its global aspirations. Bank continues its selective foray in international markets with presence in 9 countries, with branches at Kabul and Dubai, Hong Kong & representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK, a joint venture with Everest Bank Ltd. Nepal and a JV banking subsidiary DRUK PNB Bank Ltd. in Bhutan. Bank is pursuing up gradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney, Australia and taking controlling stake in JSC Dana Bank in Kazakhstan.

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Mission and Vision


VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

MISSION
"Banking for the unbanked" TO provide excellent professional services and improve its position as a leader in financial and related services; build and maintain a team of motivated and committed workforce with high work ethos; use latest technology aimed at the customer satisfaction and act as effective catalyst for socio- economic development

Products and Services


Corporate banking Personal banking Industrial finance Agriculture finance Financing of trade International banking Home loan Auto loan ATM/Debit card Deposit interest rate Credit interest rate Other services: lockers facility, internet banking, EFT & Clearing services etc

Award & Achievements


Best IT Team of the year Award SKOTCH Challenger Award for Change Management for the year 2005-06 Best IT User in Banking & Financial by NASSCOM in partnership with Economic Services Industry - 2004 Times Golden Peacock Award FICCI's Rural Development Award for Excellence in Corporate Governance - 2005 by Institute of Directors for Excellence in Rural Development 2005

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Skotch Challenger Award for Exemplary use of Technology for becoming a pioneer in Public Banks - 2005

Golden Peacock National Training by Institute of Directors 2004 & 2005 National Award for Excellence in SSI Lending Banking Technology Awards 2004 Runner up in 'Best IT Team of the Year Award 2005' Money Outlook Award - 2004 Runner up in 'Best Bank (public Sector) of the year Award' -2005 Niryat Bandhu Gold Trophy for excellence in export perforamnce for 3 consecutive years 2001, 2002 & 2003 by Federation of Indian Exporters Organization (FIEO) by the leading Financial Daily The Economic Times, June 2005 A.C Nielson Survey, The Economic Times Dec 2004 The Bankers' Almanac, January 2006 The Banker, London July 2005 Ranked 2nd for 4 consecutive years - 2002, 2003, 2004 & 2005 Jointly Adjudged by IBA, Finacle & TFCI

21st Amongst Top 500 Companies 9th amongst India's Top 50 Most Trusted Service Brands 3rd Rank amongst Banking Sector in India 323rd Rank in the World 368 amongst Top 1000 Global Banks

Skoch Challenger Award for Exemplary Use of Technology FICCI's Rural Development Award

Winner for becoming a pioneer in public banks by Skoch consultancy services pvt ltd, Gurgaon 2005 Award for excellence in rural development 2005

Amity Business School, Noida has conferred the Award to PNB, after an in-depth research to analyse the strengths and core competencies of Amity Global Corporate Excellence the Global 500 companies and banks which have Award already made an indelible most admired impression on the Indian economy. 2008 & 2007 & 2005 Banking Technology Awards PC Quest Users Choice Award Symantec Visionary Award Money Outlook Award Banking Technology Awards IBA, Finacle & TFCI jointly adjudged PNB as runner up in "Best IT Team of the year Award" 2005 Best IT Implementation 2007 & 2005 Information Security Impact 2005 Money Outlok adjudged PNB as runner up in "Best Bank (Public Sector) of the year Award" 2005 IBA, Finacle & TFCI runner up Award for
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Outstanding Achiever of the Year (Individual). 2005 Golden Peacock Innovative Product/Service Award 2010 (for BCP implementation)

Golden Peacock Award for Winner in the Large Joint Entry.2009 & Excellence in Corporate Governance 2007 & 2005 Skoch Challenger Award for Change For upliftment of Weaker sections of society Management 2006 IDRBT Banking Technology Awards National Award For Excellence in lending to Tiny sector Skoch Challenger Award for capacity building for FTC initiative Computer Associates Excellence Award CIO 100 Award National Award for Excellence in Lending to Micro Enterprises Best IT Team of the Year Award 2006 First Prize by By Ministry of Small Scale Industries.2006 Skoch Consultancy Services Pvt Ltd 2007 Excellence in EMS Roll Out. 2007 For Best IT Implementation by IDG Media Pvt. Ltd.2007, 2008 & 2009 For Lending to Micro enterprises 2007

Award for the use of Technology for Institute for Development and Research in Financial Inclusion. Banking Technology (IDRBT), Hyderabad. 2008 Dun & Bradstreet Award for Priority Sector Lending including Financial Inclusion. Dun & Bradstreet 2009

Khadi & Village Industry Commission, Ministry National Award for Excellence in of Micro, Small & Medium Enterprises, Govt. of Lending for Institutional Finance in India Propagating KVI Programmes in (Interest Subsidy Eligibility Certificate Scheme) NORTH ZONE 2009 National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in (Interest Subsidy Eligibility Certificate Scheme) CENTRAL ZONE 2009 Khadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of National Award for Excellence in Lending for Institutional Finance in India Propagating KVI Programmes in NATIONAL LEVEL (Interest Subsidy Eligibility Certificate Scheme) 2009 National Award for Excellence in Khadi & Village IndustryCommission, Ministry Lending for Institutional Finance for of Micro, Small & Medium Enterprises, Govt. of
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Khadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of India

CREDIT APPRAISAL
Propagating KVI Programmes in NORTH ZONE India (Prime Minister Employment Generation Programme) 2009 Khadi & Village IndustryCommission, Ministry of Micro, Small & Medium Enterprises, Govt. of National Award for Excellence in Lending for Institutional Finance for India Propagating KVI Programmes in CENTRAL ZONE (Prime Minister Employment Generation Programme) 2009 India Pride Award by dainik Bhaskar and Daily News analysis Indira Gandhi Rajbhasha Shield Best InfoSphere Warehouse Solution Award by IBM Excellence in PSU 2009 Promoting Hindi 2009 2009 (for implementation of Enterprise Wide Data Warehouse)

Emerson Uptime Champion Awards 2009

Organizational structure of Punjab National Bank


Head Office 7, Bhikhaji Cama Place, New Delhi-110066

Circle Office

Branches

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Hierarchy
Chairman

Executive Director

General Manager (GM)

Deputy GM

Assistant GM

Chief Manager

Senior Manager

Manager

Officers

Subordinate clerks

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Board of Directors
Sh.K.R. Kamath:- He has been appointed as a chairman and managing director of Punjab National Bank by Govt. Of India. Sh. M.V.Tanksale:- Executive Director Sh. Nagesh Pydah:- Executive Director Smt. Ravneet Kaur:- Govt. of India Nominee Director Shri L.M.Fonseca:- Reserve Bank of India Nominee Director Shri Mushtaq A Antulay:- Part-time non-official Director Shri Gautam P. Khandelwal:- Part-time non-official Director Shri Vinod Kumar Mishra:- Part-time non-official Director Shri Tribhuwan Nath Chaturvedi :- Share Holder Director Shri G R Sundaravadivel:- Share Holder Director Shri Devinder Kumar Singla: Share Holder Director Sh. M P Singh:- Workmen Employees Director Sh. Pradeep Kumar:- Officer Director

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Review of Literature

Literature review provides available research with respect to the selected topic of the project or the research findings by an author which has been done with respect to the research topic. This chapter provides the overall view of the available literature with respect to the topic of the project. The review of the related research works are described as under:-

1. A research work on the topic On the appraisal on consumer credit banking products with the asset quality frame: A multiple criteria application. done by Panagiotis Xidonas, Alexandros Flamos, Sortirios Koussouris, Dimitrious Askouins & Ioannis Psarras from National Technical University of Athens in 2007 says that Asset quality refers to the likelihood that the bank's earning assets will continue to perform and requires both a qualitative and quantitative assessment. Decision problems like the "internal appraisal of banking products", are problems with strong multiple-criteria character and it seems that the methodological framework of Multiple Criteria Decision Making could provide a reliable solution. In this paper, the Asset Quality banking indicators are the, so called, "criteria", the value of these indicators are the, so called, "scores" in each criterion and the P.R.O.METH.E.E. [Preference Ranking Organization Method of Enrichment Evaluations, Brans & Vincke (1985)] Multiple Criteria method is applied, towards modelling banking products appraisal problems. A Multiple Criteria process, strictly mathematically defined, integrates the behaviour of each indicator-criterion and utilizes each score in order to rank the so called "alternatives", i.e. categories of banking products. 2. The research Paper on Evaluation of decision support systems for credit management decisions by S. Kanungo, S.Sharma, P.K. Jain from Department of studies, IIT Delhi have conducted a study to evaluate the efficiency of decision support system (DSS) for credit management. This study formed a larger initiative to access the effectiveness of the I.T based credit management process at SBI. Such a study was necessitated since credit appraisal has become an integral sub-function of the Indian banks in view of growing incidence of nonperforming assets. The DSS they have assessed was a credit appraisal system developed by Quuattro pro at SBI. This system helps in analysis of balance sheets, Calculation of financial ratios, cash flow analysis, future projections, sensitivity analysis and risk evaluation as per
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SBI norms. They have also used a strong Quassi experimental design called Solomons four group design for the assessment. In the experiment the managers of SBI who attended the training programme were the subjects the experiment consisted of the measurements that were taken as pre and post tests. An experimental intervention was applied between the pretests and the pro-tests. The intervention or stimulus consisted of DSS training and use. There were four groups in the experiment. The stimulus remained constant as the they took care to ensure that the course content as well as the instructors remained the same during the course of the experiment. Two were experimental groups and two were control groups. All four groups underwent training in credit management between the pre and the post tests. Results from research shows that while the DSS is effective, improvement needs to be done in the methodology to assess such improvements. Moreover such assessment frameworks while being adequate from a DSS-centric viewpoint do not respond to the assessment of DSS in an organizational setting . In the concluding section they have discussed how this evaluative framework can be strengthened to initiate an activity that will allow the long term and possibly the only meaningful evaluation framework for such a system. 3. The research paper on the topic Towards an appraisal of the FMHA farm credit program: A case study of the efficiency of borrower by S. Mehdian, Wm. McD. Herr, Phil Eberle, and Richard Grabowski have studied that the a production frontier methodology is used to measure the overall efficiency of a sample of farmers home administration(FMHA) compared to non participants. The study did not find evidence that the efficiency FMHA farms improved between a time period Results indicated that overall efficiency of FMHA borrowers is associated with selected financial characteristics of the farms. A review of the literature shows that agricultural finance specialists have not been successful in evaluating whether FMHA pro- grams improve the efficiency and income of probability of success. Liberal loan policies Eligible borrowers. Inadequate evaluation of the FMHA program occurs partly because of because the difficulty of adequately deter-mining the impacts of changes in the econborrowers in a more normal period of the loan. This study addressed these difficulties by utilizing a nonparametric production frontier technique to measure overall efficiency and a matched pair statistical procedure to measure how efficiency of farms receiving FMHA credit changed relative to a Non-FMHA farmers.

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4. The book named Financial Analysis for Bank Lending in Liberalised Economy by Sampat.P.Singh and Dr.S.Singh have discussed the subject financial analysis for bank lending has assumed considerable importance, particularly since early 1990's when, like most of the countries, India opted for the policy of liberalisation and globalisation after 1991. The present volume is meant to be a standard reference as well as text book on the varied facets of financial analysis with reference to credit management by Banks and Financial Institutions. The book consists of three parts. Part I discusses the concepts and tools of Financial Analysis; Part II explains various concepts of working capital in its historical context; while Part III demonstrates the application of these tools in the changing context of liberalised economy by focusing on new concepts like 'Credit Worthiness', Risk-Analysis, Credit Rating, Products-Differentiation, Pricing-Differentiation, Asset-Liability Management, etc. The book contains- Bank Lending and Industrial Finance in India ,Basic Economics for Bankers and Business Managers ,Introduction to Fundamentals Accounting Principles ,Profit and Loss Account (Operating Statement) ,Analysis of Profit and Loss Account (Operating Statement) ,Structure and Analysis of Balance Sheet ,Ratios as Tools of Financial Statements Analysis ,Accounting Flows : Income, Cash and Funds ,Break-even Analysis and Margin of Safety ,Appraisal of Capital Projects ,New Conceptual Framework for Analysis, Liberalised Era and New Focus of Bank Lending ,Managing Working Capital by Strategic Choice , Financing Working Capital : Conceptual and Historical Exposition,Creditworthiness and Credit Rating : At Centre stage Nucleus of Credit Appraisal , Working Capital Management-I : MPBF System of Appraisal and Bifurcation of Fund-Based Limit in Two Components Working Capital Management-II : Alternative Methods of Appraisal ,Working Capital Management-III : Follow-up and Supervision , Appraisal of a New Project Involving Term Loan , Management of Problem Accounts , Management of Non-Performing Assets (NPAs), Rehabilitation of Sick Industrial Units, Working Capital Management : Concepts and Techniques , 1st Committee on Financial Sector Reform and the 2nd Committee on Banking System Reform (Known as Narasimham Committee Report, 1998).

5. The research paper on the topic Competitive analysis in banking: Appraisal of the methodologies by Nicola Cetorelli has discussed about the U.S. banking industry has experienced significant structural changes as the result of an intense process of consolidation.
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From 1975 to 1997, the number of commercial banks decreased by about 35 percent, from 14,318 to 9,215. Since the early 1980s, there have been an average of more than 400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998). The relaxation of intrastate branching restrictions, effective to differing degrees in all states by 1992, and the passage in 1994 of the Riegle.Neal Interstate Banking and Branching Efficiency Act, which allows bank holding companies to acquire banks in any state and, since June 1, 1997, to open interstate branches, is certainly accelerating the process of consolidation. These significant changes raise important policy concerns. On the one hand, one could argue that banks are merging to fully exploit potential economies of scale and/or scope. The possible improvements in efficiency may translate into welfare gains for the economy, to the extent that customers pay lower prices for banks. services or are able to obtain higher quality services or services that could not have been offered before.1 On the other hand, from the point of view of public policy it is equally important to focus on the effect of this restructuring process on the competitive conditions of the banking industry. Do banks gain market power from merging? If so, they will be able to charge higher than competitive prices for their products, thus inflicting welfare costs that could more than offset any presumed benefit associated with mergers. In this article, analysis of competition in the banking industry is done highlighting a very fundamental issue: How market power is measured and how do regulators rely on accurate and effective procedures to evaluate the competitive effects of a merger.

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Credit Philosophy & Policy with regards to Punjab National Bank


An ideal advance is the one given to a reliable customer for an approval purpose with adequate experience, safe in knowledge that the money will be used to advantage and repayment will be made within a reasonable period from trade receipts or known maturities due on or about given dates.

Credit philosophy
prudent growth.

To achieve credit expansion required for sustaining the

profitability of the bank and emphasis on quality assets, profitable relationships and

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

Objectives of credit policy


1. A balanced growth of credit portfolio, which does not compromise safety. 2. Adoption of a forward looking and market responsive approach for moving into profitable new areas on lending which emerge, within the pre determined exposure ceilings. 3. Sound risk management practices to identify measure, monitor and control risks. 4. Maximize interest yields from credit portfolio through a judicious management of varying spreads of loan assets based upon their size, credit rating and tenure.
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5. Leverage on strong relationships with existing long-standing clients to source a bulk of new business by addressing their requirements comprehensively. 6. Ensure due compliance of various regulatory norms including CAR, income recognition and asset classification 7. Accomplish balanced development of credit to various sectors and geographical regions. 8. Achieve growth of credit to priority sectors / subsectors and continue to surpass the targets stipulated by reserve bank of India. 9. Using of pricing as a tool of competitive advantage ensuring however that earnings are protected. 10. Develop and maintain enhanced competencies in credit management at all levels through a combination of training initiatives, promotion of self directed learning and dissemination of best practices.

Objectives in Credit
To maintain healthy balance between Credit volumes Earnings Asset quality

within the framework of regulatory prescriptions, corporate goals and banks social responsibilities.

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Introduction to loans
Loans are advances for fixed amounts repayable on demand or in instalment. They are normally made in lump sums and interest is paid on the entire amount. The borrower cannot draw funds beyond the amount sanctioned. A key function of the Bank is deploying funds for income-yielding assets. A major part of Banks assets are the loans and advances portfolio and investments in approved securities. Loans & Advances refer to long-term and short-term credit facilities to various types of borrowers and non-fund facilities like Bank Guarantees, Letters of Credit, Letters of Solvency etc. Bill facilities represent structured commitments which are

negotiable claims having a market by way of negotiable instruments. Thus, Banks extend credit facilities by way of fund-based long-term and short-term loans and advances as also by way of non-fund facilities.

Classification of Loans
Loans/Advances Loans/Advances

Fund Based

Non-Fund Based

Fund Based Retail Loan

Bank Guarantee Post shipment Finance

Cash Credit

Export Finance

Letter of Credit

Bill Discounting

Pre-shipment Finance

Term Loan

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

I.

RETAIL LOANS-

Retail banking in India is not a new phenomenon. It has always been prevalent in India in various forms. For the last few years it has become synonymous with mainstream banking for many banks. The typical products offered in the Indian retail banking segment are:

Housing loans Consumer loans for purchase of durables Auto loans Educational loans Credit Cost. Personal loans

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

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According to K V Kamath, the changing demographic profile and a downward trend of the interest rates will propel retail credit in India."There is a huge retail credit opportunity that is surfacing. Banks have low penetration in this segment currently. But it is the one area that is providing the momentum in the banking business now, India has among the lowest penetration of retail loans in Asia. Though the sector has been growing at around 15 per cent, there is still a huge opportunity to tap into. Middle and -high-income homes in India has increased to 2.57 crore (25.7 million). Interest rates on retail loans have been dropping rapidly too. For instance residential mortgages slumped by 7 per cent over the last four years."The entry of a number of banks in India in the last few years has helped provide increased coverage and a number of new products in the market," says Kamath.

II.

WORKING CAPITAL / CASH CREDIT

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

III.

TERM LOANS
A bank loan to a company, with a fixed maturity and often featuring amortization of

principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending. Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates, and monthly or quarterly repayment schedules and include a set maturity date. Bankers tend to classify term loans into two categories:

Intermediate-term loans: Usually running less than three years, these loans are generally repaid in monthly instalments (sometimes with balloon payments) from a business's cash flow. According to the American Bankers Association, repayment is often tied directly to the useful life of the asset being financed.
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Long-term loans: These loans are commonly set for more than three years. Most are between three and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry wording that limits the amount of additional financial commitments the business may take on (including other debts but also dividends or principals' salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan.

Appropriate For: Established small businesses that can leverage sound financial statements and substantial down payments to minimize monthly payments and total loan costs. Repayment is typically linked in some way to the item financed. Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing. Supply: Abundant but highly differentiated. The degree of financial strength required to receive loan approval can vary tremendously from bank to bank, depending on the level of risk the bank is willing to take on.

IV.

BILL DISCOUNTING

While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment. Bills of exchange- A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.
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A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties--the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn id called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. Promissory Note- A promissory note is a written promise by the maker to pay money to the payee. Bank note is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date. A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date. A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money to order or to bearer

V.

EXPORT FINANCE-

This type of a credit facility is provided to exporters who export their goods to different places. It is divided into two parts- pre-shipment finance and post-shipment finance. Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to
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the realization date of the exporter proceeds. Exporters dont wait for the importer to deposit the funds.

Non Fund Based loans generate income for the bank without committing the funds of
the bank. Bank generates substantial income under this head. There are two types of credit under this category which are discussed as follows:-

I.

BANK GUARANTEE-

A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.

Any one can apply for a bank guarantee, if his or her company has obligations towards a third party for which funds need to be blocked in order to guarantee that his or her company fulfils its obligations (for example carrying out certain works, payment of a debt, etc.).

In case of any changes or cancellation during the transaction process, a bank guarantee remains valid until the customer dully releases the bank from its liability.

In the situations, where a customer fails to pay the money, the bank must pay the amount within three working days. This payment can also be refused by the bank, if the claim is found to be unlawful.

II.

LETTER OF CREDIT-

A standard, commercial letter of credit is a document issued mostly by a financil institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking. The LC can also be the source of payment for traction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer
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in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment were insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

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Building Up of a Proposal
1.GATHERING CREDIT INFORMATION:An appraisal of a proposal begins with the gathering of adequate background knowledge about borrowers character and credit worthiness. In the concept of appraisal, much reliance is placed on the credentials of the borrower. Therefore, there is a necessity for evaluation of the borrower in regard to his standing in the business, means and respectability. The result of the elaborate scrutiny concerning all these aspects is required to be put into a precise credit report which helps in taking decision on a credit proposal. Each individual case has to be examined in the light of its own circumstances and judgment exercised on issues enumerated above and a final decision has to be arrived at on the basis of scrutiny of all the issues.

Information by definition is that data which is relevant and meaningful for making decisions. An information system is an aid to the decision making, carrying out and altering decisions. All information required by the banker in the pre-sanction period should become part of a system. It should flow into the information system from various sources, such as the borrower, banks own record, environment etc. A significant basis of banker-borrower relationship is governed by the information which flows between the two parties. After ascertaining the credit needs of the borrower, the banker looks towards information about his borrowers credit worthiness. He seeks out the credit information etc. from his co-bankers, other borrowers and market information.

2. VARIOUS SOURCES OF CREDIT INFORMATION Information regarding character, honesty, and financial position has to be discreetly gathered from following sources: a. The borrower: the bank should develop as much credit information as possible during the initial interview with the borrower/partners of firm/ directors of company/ proposed guarantor /co-obligator and principal officials of firms/company, nature of its business, past and expected profitability, the degree of competition that the firm/company faces and whether or not it has had or anticipated any difficulty etc.

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Information regarding its principal officers should be collected during such interview. b. Borrowers financial statements: for lending decisions, financial information is a significant part of the total information system. It is derived basically from borrowers: Trading and profit and loss statement Balance sheet Cash and fund flow statements

c. Banks own records: If he is an existing borrower, banks own records are a rich source of additional information. Operations in the borrowers account and other dealings at the bank level in regard to collections, discounting/retirement of bills etc. often useful clues to borrowers operating and financial transactions. A review of the previous years operations in the account and assessments of borrowers financial statements relating to that period will provide a rich source of information about the borrower.

d. Opinions: Bank should compile opinions on their borrowers. They should contain full and reliable records of the character, estimated means and business activities of all firms and individuals who are under any form of liability to the bank, whether as direct borrowers or as co-obligators. Full particulars of parties immovable properties where they are situated, whether they are free from encumbrance and in the case of land, acreage should be recorded together with fair estimates of their value. As far as possible written statements of their properties should be taken in evaluating properties owned by parties jointly with others and as a rule such properties should be disregarded in arriving at the net means.

e. From other banks: in respect of fresh proposals, enquiries with local banks should be made before entertaining the proposal to avoid multiple financing without our full knowledge. In case of new customer having dealings with other banks, confidential opinion of his banker has to be obtained.

f. Income tax assessment order- Income tax assessment orders agricultural income tax assessment orders give an insight into the borrowers account and the extent to which it
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is profitable. Comments thereon by the income tax office shall indicate the shortcomings (lacunae) in the business. In the case of estate owners agricultural tax assessment orders to be obtained to arrive at parties credit worthiness.

g. Sales tax assessment orders: Sales tax assessment orders will reveal the turnover in business and when read with trading/ manufacturing and profit & loss account, it may be possible to have a fair assessment of tendencies in trade i.e., whether over-trading or carefully trading within recourses at command or trading entirely on the borrowed funds.

h. Wealth tax assessment orders: wealth tax assessment order will indicate the net worth of individuals and reveals the liquid source available to bring the required margin money for the venture.

i. Market sources: Constant touch with the market will help to have first hand information about the gains or losses in particular business borrowers. transactions of the

j. Property statements: The property statement of borrower will give an idea of his worth, liabilities and his income from real estates (immovable properties).

k. Municipal property registers: reference to municipal property registers will give an idea of building owned within the municipality, Rental Values and house tax payable. It may be noted that the said registers are open for reference to all persons.

l. Other external sources: other external sources, if any, like stock exchange directory, business periodicals/magazines/journals etc.

REQUIREMENTS AS PER CONSTITUTION OF BOROWER:


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

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1. Partnership: Copy of partnership deed Copy of certificate of registration of firm (if registered)

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

3. Cooperative societies Bylaws Permission from registrar for the borrowings, creation of charge on the assets of the society and execution of documents.

4. Trusts Trust deed Resolution for the borrowings and execution of documents.

5. Industrial units : Project report with cash flow, fund flow statements etc. Industrial licenses/SSI registration certificate. License from local authority, compliance of legal requirements or conditions as applicable and clearance from regulatory bodies.

FINANCIAL APPRAISAL

On receipt of a loan application the banker begins the process of financial appraisal. The first thing done is to analyze the financial statements. Therefore, an understanding of these financial statements is important for the appraiser. Once balance sheet is taken for analysis the following items are checked up:
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1. Fixed assets: To find out any revaluation of fixed assets done by the company to improve their net worth. The schedules of the fixed assets should be checked up. Study notes on accounts and comments of auditors should be checked. Schedule for reserve should be studied Any change in the accounting procedure of depreciation should be checked

2. Current assets: to find out whether the assets stated are really liquid or not. The schedules under current liabilities and current assets to ascertain any obsolete or slow moving raw material or finished good and old debtors or receivables should be checked The auditors report should be read and understood properly. The claims lodged against receivables must be studied The receivables due from sister/associate concerns must be studied.

3. Other Current Assets: Their reasonableness and their need to maintain them for the business. Various components of other current assets and if the same is more than 5% 10%, ascertain the nature and need for maintaining such amount ; any assets which is not used in the into day business activity shall be removed and proper treatment is to be made accordingly. Bank guarantee or letter of credit margin shall be shown as non- current assets.

4. Contingent liabilities: To find out any unrecognized liabilities or losses if any. The CDD/DBD other bills discounted liability, if any ,is reported in the auditors report , then increase the bank borrowing to the extent liability was not taken in the balance sheet and also increases the debits/receivables to that extent.

5. Term liabilities: To find out whether the liabilities are long term or short term, and its needs and regularity
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This shall be decreasing year after year; if it has increased, then the reason for the same is to be looked into (may be irregular or new term loan availed for expansion etc.) The term liabilities with repayment of the same and the amount payable during the year shall be deducted from the term liabilities as current liabilities for finding out liquidity position of the company should be checked.

6. Stocks: The stock statements and QIS forms to find the authenticity of the figures reported under stock/receivables. Change in the valuation of the stock/finished goods, if any, is to be verified to find out its effect on the profitability of the company.

7. Intangible assets : Any abnormal increase in this figure shall be studied to find out the reasons for the same; this may be due to take over by others also.

8. Accounting Norms: Any change in the accounting norms from the past shall be studied to find out the reasons for the same; its effect on the net profit, net worth of the company is to be ascertained.

BALANCE SHEET ANALYSIS


1. Comments on the performance of the unit vis--vis last year sales-

Increased in last year sales are always good; if the net profit also has increased correspondingly the performance can be noted as satisfactory. If the sales has come down or the net profit has also come down then the reason has to be ascertained. If the unit earned at least cash profit then the position may be considered as satisfactory.
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If the NP to N/sales is positive, that is sufficient for accepting as satisfactory; but as per the credit rating chart maximum marks are assigned if the borrower achieves 8% as percentage of net profit/net sales. Return on investment or Return on equity may also be used to find out the return on capital invested.

2. Long term Strength of a company is calculated based on the level of the net worth of the company /promoters stake/loans from close relatives-

If the net worth has increased due to infusion of fresh capital or plough back of profit, it can be termed as satisfactory; even increase of loan from friends & relatives is a good sign.

If the net worth is decreasing, reason may due to net loss or diversion; true reason needs to be ascertained. If the D/E ratio is less than 2:1 the same is good; further if the TOL/TNW is less than 5:1 then the units solvency is noted to be satisfactory. The ratio indicates that borrower has not borrowed much and the outside debts within a reasonable limit.

3. Liquidity position of the party-Current ratio

If the current ratio is increasing and nearer to 1.5 and above then we can note the position is satisfactory. Expected Current ratio is 1.22:1 and above; if the ratio is less than 1.22:1 then the promoters margin (Net working capital) towards Working Capital may not be sufficient to cover the working capital limit; care shall be taken to ensure that sufficient Net working capital for the working capital enjoyed is available.

When the Current ratio is poor and the Net working capital is not sufficient to cover the existing limit, no further term loan shall be sanctioned and the party is to be advised not to take up any fresh investment in fixed assets.
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4. Quality of current assets : The current assets holding period must be less than 3 months for traders and the 5 months for the industries depending upon the type of industry ;holding level more than the above needs proper justification. It should be ensured that the current assets turnover is at least more than four times in a year.

5. Contingent liability: The effect of this liability on the net worth of the company; if its effect is

less than 5-10 % of the net worth of the company ,the same may be noted; but if it threatens the existence of the company then the position needs serious analysis.

6. Diversion from the business needs to be viewed carefully. Reduction in Net working capital position( below the required level) when the unit has earned cash profit and clearing of term loan installments when the unit is making cash loss needs to be viewed seriously. Reduction in the net worth of the firm (when they have shown net profit needs further probing.

MOVEMENT OF CREDIT PROPOSALS


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

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Credit Appraisal Techniques


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

Process of Credit appraisal for Term Loans

Term loans- Loans which are repayable in not less than 36 months are referred to as term
loans. In the interest of sound risk management practices, banks monitor the percentage of Term loans in their credit portfolio with a view to keeping the term loan component within a pre-determined percentage.

Requirements to be obtained with the proposal:


a) Copies of project report b) Where loan is on participation basis, a copy of the appraisal note of the lead institution / bank should be obtained. c) Scrutiny of proposals The scope of the project: Background of promoters Government consents The technical appraisal Cost of the project Sources of finance The schedule of implementation The financial projections and profitability
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Cash flow statements Calculation of debt service coverage ratio (DSCR) Breakeven analysis d) Disbursement e) Follow up (post sanction)

Assessment :
For assessment purposes the forms prescribed are used and debt equity ratio, average DSCR, BEP, pay back period, etc. are taken into consideration. The following minimum financial parameters are required to be satisfied for a Term loan proposal to merit consideration:

Not more than 2.33:1(1.7:1 may be accepted in Debt Equity Ratio the case of real estate sector and generally for different type of industry different level of DER is acceptable.) Not less than 1.5to 2 (ratio lower than this is to Average DSCR be looked into)

Ratios for appraising term loans:

Debt equity ratio:

long term debt Tangible net worth

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

Breakeven point : Fixed cost_______ Sales-Variable cost (contribution)

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It should be noted that the banks generally consider only term loans repayable within 5 to 7 yrs. Term loans with maturity beyond 7 yrs are normally not experienced except infrastructure loans.

Debt Equity Ratio:


A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as companies'. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance

increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For example for large projects (with project cost Rs. 100 crore and above) in Power, acceptable level of DER is 2.33:1, in Iron and Steel Industry 2.25:1 , in Infrastructure and Capital Intensive projects 2:1 and in Real Estate, level of DER is 1.75:1. The CH, GM, ED and CMD have powers to further relax.

Debt Service Coverag Ratio (DSCR):


The ultimate purpose of project appraisal is to ascertain the viability of a project which has a direct bearing on the repayment of the instalments under the proposed term loan / deferred payment guarantee. While the repayment program will depend upon the profitability of a
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project, the quantum of annual instalments has to be related to the size of the annual cash flows. The repayment schedule should, therefore, be fixed after ascertaining the annual servicing by the debt service coverage ratio.

The debt service coverage ratio is the core test ratio in project financing. This ratio indicates the degree of viability of a project and influences in fixing the repayment period, and the quantum of annual instalments. For the purpose of this ratio , debt means maturing term obligations viz. instalments payable during a year under all the term loans/ deferred payment guarantees and service means cash accruals (service) available to cover the maturing obligation (debt) during each year. The debt service coverage ratio indicates the ability of the firm to generate cash accruals for repayment of installment and interest. For example, a DSCR of 3:1 indicates that for each Re.1/-long term debt including interest to be paid the business generates cash accrual of Rs.3/- to be utilized for repayment of debt. The difference between the accruals and debt is known as margin of safety (Rs.2/- in this case). The ratio of 1.5 to 2 is considered reasonable. Ratio lower than this should be further looked into. A very high ratio may indicate the need for lower moratorium

period/repayment of loan in a shorter schedule. This ratio provides a measure of the ability of an enterprise to service its debts i.e. `interest' and `principal repayment' besides indicating the margin of safety. The ratio may vary from industry to industry but has to be viewed with circumspection when it is less than 1.5.

BREAK EVEN POINT OR COST VOLUME PROFIT (CVP) ANALYSIS:


A. The breakeven point is calculated to note the level of production at which the unit neither earns profit nor incur loss. BEP is the level of operations (in terms of sales or production or capacity utilization) at which total revenues are equal to total operating costs (fixed and variable) or, in other words, the operating profit is equal zero. He firm starts earning operating profits only after the break-even is reached. At BEP, contribution exactly equals the fixed costs. B. The formula for calculating the break-even point for each year is as under:
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Total fixed cost/Contribution C. Certain items of the cost that are to be incurred by the unit irrespective of the level of production are called as fixed cost. The same includes depreciation, repairs and maintenance, interest, certain portion of salaries, rent, insurance, selling expenses other than variable items and administrative expenses D. The variable cost changes with the levels of production. It includes cost of raw materials, direct wages and other items, which are apportion able to unit of production. E. The breakeven point is generally expressed in terms of percentage of capacity utilization Break even analysis is generally expressed in terms of percentage of capacity utilisation. The CVP analysis provides answers to such questions as: level of operations needed to avoid loss, level of sales required to achieve targeted profit, effect of product mix on profits, impact of expansion, most and least profitable products etc. Breakeven analysis is the most widely used form of the CVP analysis. Break-even analysis is one of the most useful techniques of profit planning and controlling. The break-even analysis can help in making vital decisions relating to fixation of selling price make or buy decision, maximizing production of the item giving higher contribution etc. Further, the break-even analysis can help in understanding the impact of important cost factors, such as, power, raw material, labor, etc. and optimizing product-mix to improve project profitability.

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

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

Illustration: Assumed:

Normal year production

75 lakh units (93.75% of installed capacity)

Fixed Costs Variable Costs Sales realization Contribution

Rs. 13.71 lakh Rs. 13.35 lakh Rs. 41.25 lakh Rs. 27.90 lakh

BEP (production)

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

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

BEP (sales)

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

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

The Sensitivity Analysis helps in arriving at profitability of the project wherein critical or sensitive elements are identified which are assigned different values and the values assigned are both optimistic and pessimistic such as increasing or reducing the sale price/sale volume, increasing or reducing the cost of inputs etc. and then the project viability is ascertained.
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The critical variables can then be thoroughly examined by generally selecting the pessimistic options so as to make possible improvements in the project and make it operational on viable lines even in the adverse circumstances.

In the absence of any defined factors and its values for carrying out the sensitivity analysis, a common 5% sensitivity factor on sale price/cost price of major raw materials is to be applied in appraisals of all the projects irrespective of the industry. However, 10% sensitivity factor may be applied in highly volatile industries by assessing the expected volatility in sale price/ cost price of major raw materials in future on case to case basis.

Process of Credit Appraisal for providing Cash Credit / Working Capital Limits
Working capital for any unit means the total amount of circulating funds required for meeting day to day requirements of the unit. For proper working a manufacturing unit needs a specific level of current assets such as raw material, stock in process, finished goods, receivables and other current assets such as cash in hand/ bank and advances etc. So the working capital means the funds invested in current assets. The trading units need the working capital for storing the goods and allowing credit to its customers.

Gross Working Capital and Net Working capital


Gross working capital means the total funds required for financing the total current assets. Net Working capital means the difference the current assets and liabilities. In other words , net working capital denotes the portion of gross working capital contributed from long term sources. As per practice of Indian banks net working capital should normally be 25% of total current assets which will give a current ratio of 1.33 to the unit. When net working capital is negative, it implies that the short term funds have been diverted / used for long term uses and the unit is facing a liquidity crunch. Such situation may also arise due to losses. In such a situation, the need of the hour is for raising long term sources. A unit needs working capital because the production, sales and realizations are not simultaneous. The unit needs cash to purchase the raw material and pay expenses as there may not be perfect matching between

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cash inflows and outflows. The stock of raw material is kept to ensure the uninterrupted and smooth production. It may also be required to cover the situations of shortages etc.

Factors affecting the requirement of working capital:


1. Nature of activity: Manufacturing units need more working capital as compared to trading and service units. 2. The length of operating cycle: More the length of operating cycle, more the requirement of working capital. lengthy the process of manufacture, more the need of working capital due to increase of length of working capital cycle 3. Market trend: The market trend of allowing credit to customers also varies from industry to industry and city to city. More the credit allowed to customers, more the need of working capital. 4. Availability of raw materials: When the availability of raw material is assured and comfortable, lower stock maintenance is required. When there is expectation of shortage or expectation of rise in prices, more amounts is blocked in raw materials. 5. Location of the unit: When the unit is located near the source of raw material, lower stock maintenance is required. 6. Type of customers: When there are regular customers, low stock of finished products is needed. When the sales are to be made to walk- in customers, more level of stock of finished products is required. 7. Seasonality Factor: When the raw material required is available in a particular season, the stock for whole of year is to be purchased in the particular season. E.g. Sugarcane, Cotton, Paddy etc. Similarly the woollen products and products required in a particular season such as ACs, for keeping the production running, higher level of finished stocks have to be kept.

Role of Banker:
The unit should have sufficient amount of working capital. A portion of it is to be financed from long term sources called the liquid surplus or net working capital (NWC). The remaining is normally financed by the bank in the form of working capital limits. Excess maintenance of working capital may result in idle resources and high interest cost whereas less amount of working capital may mean disruption in the working. So both the situations
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are to be avoided. That is why the technique of calculation of right amount of working capital assumes significance. For financing of working capital, a banker should be able to calculate right amount of working capital needed by the unit being financed. It shall mean right amount of financing which will result in higher profitability for the unit and safety of funds of the bank. Parameters for various stages in computation of working capital:

Stage i Raw Material

Time Holding period

Value value of RM consumed during the period

ii

SIP

Time taken in converting the RM into FG

RM + Mfg.Exp. during the period (Cost of production)

iii

FG

Holding period of FG before being sold

R.M + Mfg. Exp. +Adm overheads for the period (Cost of sales)

iv

Receivables

Credit allowed to buyer

RM+ Mfg. Exp. + Adm. Exp.+ Profit for the period (sales)

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

TANDON COMMITTEE RECOMMENDATIONS

Realising the absence of a proper control system in the flow of bank credit for working capital, RBI constituted a working group Tandon Committee in July 1974 under the chairmanship of Shri P.L. Tandon. The main task of the group was:

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1. To suggest guidelines to commercial banks to follow up and supervise credit from the view of ensuring proper end use of the funds and keeping a watch on the safety of the advances. 2. To suggest as to what constitutes the working capital requirements of industry and to suggest the sources for financing the minimum working capital requirements. 3. To suggest the maximum level of bank finance and the method to compute the same. 4. To make recommendations as to whether the existing pattern of financing working capital requirements by cash credit or overdraft etc. requires to be modified. If so, to suggest suitable modifications.

The group submitted its final report during December 1975. The recommendations of this Committee are summarised below:

(i)

Norms for Inventory and Receivables

With a view to curbing speculative and hoarding tendencies, the Committee fixed norms (in terms of the weeks/month consumption) in respect inventory and receivables which industrial units may hold. The norms were fixed for 15 major industries and indicate the maximum permissible limits for inventory holding. Deviations from norms not allowed for meeting unforeseen situations.

(ii)

Approach to Lending.

The three methods of lending as suggested by the committee are: First Method: 75% of Working Capital Gap (Total Current Assets Other Current liabilities) Second Method: 75% Total Current Assets Other Current liabilities Third Method: 75% [(Total Current Assets Core Current Assets) Other Current liabilities) Third method of lending was not accepted by RBI and hence rejected.

(iii) Style of Credit. Tandon Committee suggested that instead of making available entire limit by way of cash credit it may be bifurcated into demand loan and cash credit component (modified by Chore Committee).
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(iv) Quarterly Follow-up and Supervision Tandon Committee suggested quarterly forms under the information system made applicable to borrowers with working capital credit of Rs. 1 crore and over from the banking system. These forms aim at ensuring proper end-use of credit.

CHORE COMMITTEE RECOMMENDATIONS

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

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

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

Presently this limit of Rs. 50 lac has been raised to Rs. 1 Crore.

(c) Withdrawal of bifurcation of cash credit The recommendation of the Tandon Study Group to bifurcate cash credit accounts into demand loan and cash credit components has been withdrawn.

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

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

Dialogue with the borrower will be initiated to set right the position in regard to defective credit planning and to ensure that such instances are avoided in future.

(f) Penalty for delayed or non submission of returns Non-submission of returns, within the prescribed time limit, will henceforth entail penal of 2% per annum on the total outstanding for the period of default in the submission of returns. Simultaneously, a notice would be issued to the borrower stating that if the default persists it would be open to the bank to freeze the account without further notice to the borrower. lf the default persists despite imposition of penal interest and the bank is satisfied that deterrent action is warranted, the operations in the account may be frozen on the basis of the notice issued to the borrower.

(g) Adhoc or temporary limits The working group has conceded that in exceptional cases, ad-hoc or temporary limits could be sanctioned to borrowers through demand loan or non-operatable cash credit accounts. On those limits, banks are required to charge additional 1% interest per annum over the normal

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rate. However, in certain cases like natural calamities it would be the discretion of the bank to charge interest of 1% per annum.

(h) Switching over to Second Method of lending A major recommendation of the working group relates to switching over the borrowers from the first to the second method of lending. Recognising that in some cases this may not be possible immediately, Reserve Bank has stipulated that in such cases, the excess borrowings are to be segregated and treated as WCTL (Working Capital Term Loan), which should be made repayable in half-yearly instalments within a definite period but not exceeding five years in any case.

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

Present Status: The concept of MPBF was the cornerstone of financing which had emerged as a result of recommendation of Tandon and Chore. However RBI has now abolished the guidelines for MPBF and advised the banks to draw the guidelines for credit dispensation. Our bank is still following MPBF system. However the relaxations on case to cases are being allowed.

NAYAK COMMITTEE RECOMMENDATIONS

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

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

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

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

The forms for QMS and time period for submission are as under. Form- 1 Form-11 To be submitted within 6 weeks from the close of quarter to which it relates To be submitted within 2 months from the close of Half Year to which it
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relates.

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

and quarterly levels of

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

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

COMMITMENT CHARGES

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

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

Commitment charge is not applicable in case of export unit and sick unit.

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PENAL INTEREST

In order to instil a sense of credit discipline among the borrowers, RBI has permitted banks to levy penal intt. over and above the sanctioned rate of interest in case of non compliance of various terms and conditions The broad areas of non compliance where bank charges penal interest are: Default in repayment of loans Irregularity in cash credit account Non submission of stock statements and other financial data Default in adhering to borrowing covenants Non payment of bills Excess borrowings arising out of excess current assets Non submission of information under Quarterly Monitoring System

EXEMPTION FROM PENAL INTEREST o All advances up to 25000/o Sick unit under rehabilitation o Sick unit remained closed o Advance against deposits/LIC policy/Govt. securities/Gold & Jewellery where the drawings are within available value of security o Account transferred to Protested category

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

AMOUNT ON WHICH PENAL INTEREST TO BE CHARGED Amount of default in instalment /excess drawals or borrowings or amount of irregularities in account/overdue bill not debited to account.
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Total amount of outstanding for non-submission of stock statement and other financial data/default adhering to borrowing covenants/non-submission of information under QMS.

APPRAISAL TECHNIQUES FOR RETAIL LOANS

I.

EDUCATION LOANS

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

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Education loan is becoming popular day by day because of the rising fee structure of higher education. It came into existence in 1995 started first by SBI bank and after that many banks started offering study loan. The education loan provided by Punjab National bank is known as Vidyalakshyapurti scheme. The details regarding its eligibility, processing, documentation etc. are given as follows:-

Concept

Courses eligible

VIDYALAKSHYAPURTI Scheme is the main scheme and its variant PNB Sarvotam Shiksha scheme stands merged with the main scheme with effect from 20.12.2008 Studies in India School level including. +2, Graduation, Post graduation, Professional courses, Computer courses and Evening courses, other courses leading to diploma /degree approved by UGC, Govt, AICTE, AIBMS, ICMR etc. and Advance diploma in Banking Tech. It includes professional & commercial & pilot training courses in India and abroad. For study in India. Institutes approved by DGCA are included. Studies Abroad Graduation, PG and Courses offered by CIMA London , CPA in USA Indian National Secured Admission Secured pass marks in qualifying exam. Branches need not go into technicalities of admission process (selection through management quota etc.) and may consider loan based on admission advice. ( RBD Cir. No. 60/08 dt. 20.12.2008) In case of more than one loan in a family, the family as a unit is to be taken into account for considering the loan and security taken in relation to total quantum of loan subject to margin and repaying capacity of the parents. Top up loans may be sanctioned to students for pursuing further studies within overall eligibility limits with appropriate reschedulement of existing loans and required permission by the CH There is no restriction with regard to age of student for being eligible for the loan. No Income criteria are prescribed for the parents. However amount of loan be decided by judging Income of the parents.

Eligibility

More than one loan in a family Top up Loans

Age of student Income Criteria

Amount of loan Rs. 10.00 lac in India and 20.00 lac for abroad. CH can exercise higher powers. Priority Sector Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.
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Capital Requirement Margin Risk Weight as per BASEL-I Risk Weight as per BASEL-II 100% 75%

Security

Security for staff members Penal Interest Upfront fee

Documentation Charges Repayment

Calculation of interest Interest concession

NIL Up to Rs. 4.00 lac 5% Above Rs. 4.00 lac in India 15% Above Rs. 4.00 lac abroad (Scholarship/assistance may be included in the margin) NIL Up to Rs. 4.00 lac 3rd party guarantee for loans above 4.00 lac upto Rs. 7.5 lac (Exemption from taking guarantee for loan up to 7.50 lakh for students of IIT, IIM, XLRI etc. EM of IP or other Coll. Security for loans above 7.50 lac (should be interpreted as loan amount of Rs. 7.51 lac and above in terms Hypothecation of assets if created out of loan amount. Co-obligation of students parents as well as assignment of future income of student in loan above Rs. 7.5 lac. For married persons, coobligator can be spouse or parents or parents-in-law. Grand parents can also become co-obligants. Lien on Terminal dues Extension of EM of IP Fresh Mortgage if there is no HL Co-obligation of employee Up to 25000/- ----NIL , Above 25000/- @ 2% on OVERDUE AMOUNT NIL 0.50% (Maximum 5000/-) for studies abroad which is eligible for refund on availment of loan. Upto 4.00 lac Rs. 270/- plus service tax Above 4.00 lac Rs. 450/- plus service tax 5 to 7 years with moratorium period equal to Course period + 1 year or 6 months after getting job whichever is earlier. BM is empowered to permit extension in moratorium period up to 2 years as against present provision of max. 1 year in deserving cases under reporting to circle head. Simple interest is to be charged during moratorium period and kept in a separate account. The accrued interest during repayment holiday will be added to Principal for fixing of EMI. 1% interest concession is allowed if it is serviced during holiday period. The concession will be given at start of repayment and EMI will be fixed accordingly. Rebate of 0.5% is allowed to students of IITs, IIMs etc.

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Tuition fees, Hostel charges, Exam fees, Library/Lab charges, Books, Equipment, Instruments, Uniform, Building fund, Refundable deposit, Travel expenses & Computers. (Advances for Computers are allowed in Computer/Management courses only.) Fees re- Within 6 months. Circle Head can allow beyond a period of 6 months also on merits.(RBD Cir. No. 12/10 Dt. 16/02/2010) imbursement Documents will be executed both by student and the parent/guardian. Documents Constitutes of loan 1. Letter of admission and proof of last qualifying exam. 2. Loan application 3. Agreement on PNB 1116 if student is minor. 4. Agreement on PNB 1117 if student is major. 5. Letter of guarantee if loan is above Rs. 4.00 lac. 6. EM of IP if loan amount is above Rs. 7.5 lac Post sanction Follow up with the college/university for getting progress report at regular intervals. Follow up Life Insurance In terms of guidelines contained in RBD-A cir no. 16/08 dt. 26.3.08, by Kotak Insurance policy can be obtained to meet the exigencies in case of death of student borrower between age group of 18-33 years. The coverage is Mahindra between 20000-15 lac. Single premium will be paid. It will vary according to age and total insurance Tenor. The scheme is valid for one year. Relaxations for It has been decided to permit the following relaxations to the students securing admission in IITs/IIMs/MDI Gurgaon/XLRI Jamshedpur and students of IIT,IIM, MDI, ISB Hyderabad: XLRI, ISB Exemption from making parent/guardian as co-borrower. Exemption from taking guarantee for loans up to 7.50 l CR of the borrower is not required. Brief CR of the guarantor to be Other prepared. provisions No due Certificate is not to be insisted upon. Application will be rejected by next higher authority. 2nd time loan can be considered by the CH within limits. Capability Certificated may be issued for studies abroad. Education loan to the institutions previously under Sarvotam Shiksha Scheme can be sanctioned by the branch (other than place of residence of parents) convenient to the borrower depending upon genuineness, accessibility and aspect of recovery. On-line applications are being accepted for grant of education loan. Loan applications are to be disposed of within 15 days under branch/hub sanction and 21 days under CH and above. CH has full powers to relax eligibility, margin and security norms. Parents, grandparents, spouse, parents-in-law can be co-obligants. Passport and Visa is required for study abroad. It has been decided to curtail the period of disposal of education loan Disposal of applications to maximum 1 week except cases of CH and above level loan where the outer limit of disposal will be 2 weeks from the date of receipt applications of complete application.

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II.

VEHICLE LOANS

Today, vehicles can be financed using a number of options such as loans, lease, or hire purchase agreement. Obtaining a vehicle loan is one of the more straightforward ways of financing a two or four wheeler. In this manner, the vehicle purchased is actually possessed by the bank or lending institution. This means the car or motorbike is hypothecated. Therefore, though the consumer owns the vehicle, the bank or the lending institution is actually using it as a security against the loan that the consumer has obtained. Vehicle loan provided by Punjab National Bank are under two categories know as PNB SARTHI and CAR Loan & details about its processing, eligibility, margin etc are discussed below:PNB SARATHI Individuals with Income proof Students above 18 years with parents as co-borrowers Business concerns Individuals without income proof but residing at the given address for the last at least 3 years. Individuals with good repayment track without default. Purpose & Purchase of Scooter/Motor Cycle/Moped Extent Maximum Rupees. 100000/-. 5% where salary is disbursed through branch or check-off facility Margin is available. 25% for students where parents are co-borrowers. 30% for business or where there is no income proof. 10% for others. Income criteria 10000/- pm. Is the minimum criteria. Income of parents be considered in case of students. Income of spouse can be added. Switch over to On flat fee of 2% new scheme Generally it is not required. In cases where there is no Income Guarantee proof, Guarantee of some family member or 3 rd. party In cases where income of spouse is to be added, Guarantee of spouse can be taken. Comprehensive Insurance with bank clause and policy to remain with Insurance the bank. PNB 551 is required for the Ist time. In case account is regular, Security PNB 551 is not required thereafter. Eligibility
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Inspection Upfront fee Documentation Charges Other Requirements In case the account is irregular, Qtrly. Inspection is must. Rs 200/- + Service Tax For students Nil Rs. 270/- plus service tax Driving License is required. Statement of account for the last 3 years is required. Income Tax Proof Salary certificate Income of spouse can be considered if he/she is made guarantor.

CAR LOAN Conveyance Loan (Public) for Car Eligibility Purpose & Extent Individual & Business concerns, Professionals & Agriculturists with 6M transaction records. Car, Van & Jeep, Multi New or Old (not older than 3 years CH Utility Vehicles/Sports powers) Utility Vecles Individuals 25 times of net monthly salary or Rs. 25 lac whichever is lower for one or more vehicles. CH may relax the criteria within powers keeping in view the repayment capacity. Income of spouse can be considered provided he/she stands as additional guarantor Business Corporate and No Ceiling. One or more vehicle can be non-corporate purchased. Earning and repaying capacity will be considered. Agriculturists --do-General 20% - Cost of Insurance and onetime road tax can be considered as margin. Govt./PSU employees 15% (Repayment in 84 EMIs) If net income is more than 6 lac Margin can be reduced to 15% by Sanctioning Authority. Old Vehicles 30% CH may reduce up to 10% in deserving cases. Maximum 7 years without any Moratorium period Old Vehicles 5 years Agriculturists 14 H/years as per crop pattern CH and above empowered to relax repayment by 12M Maximum age for EMI 65 years relaxable up to 70 years. Carry home pay should not be more than 50% of gross salary Advance cheques equal to no. of installments be obtained.
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Margin

Repayment

CREDIT APPRAISAL
Rate of Interest The rate is on fixed option with reset clause of 1 year. Rate of interest is linked with tenure of loan. Presently 0.5% extra interest is charged if repayment period is 3 years and above. 1% of loan subject to maximum 6000/- exclusive of service tax. Upfront fee Documentation charges Security Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac + ST Rs. 450/- (Tie up arrangement Rs.1700/- ) Above Rs. 2.00 lac + ST Hypothecation of the vehicle RC in joint name of borrower and bank Bill of the vehicle will also be in the joint name. Spouse if employed or Suitable 3rd party guarantee or Collateral Security in shape of IP/liquid security equal to 100% of loan amount. CH and above can waive the guarantee/collateral security. Comprehensive Insurance with bank clause and policy to remain with the bank. PNB 551 is required for the 1st. time. In case account is regular, PNB 551 is not required thereafter. In case the account is irregular, Qtrly. Inspection is must. 15% depreciation on St. line method is to be applied in case of Old Car Driving License is not at all required. Statement of account for the last 6 M. is required. Car loan finance to business concerns for personal use of executives shall be outside the purview of corporate banking and may be sanctioned by officials under vested powers even in case where existing facilities have been sanctioned by higher authorities in terms of RBD cir. No. 51 dt. 15/09/09.

Guarantee

Insurance Security Inspection Other Provisions

III.
IV.

5.8.3 HOUSING LOANS


Housing loans have emerged as an attractive avenue for credit deployment for banks in the recent past. Industry level statistics reveal that NPAs in this segment is relatively low. Housing loans are fully secured as they are backed by mortgages of residential properties. Small housing loans up to Rs 10 lakhs can be classified as priority sector credit and hence help in achieving/ maintaining the mandated priority sector lending targets. Risk weightage for housing loans is only 50 % , enabling expansion of the credit portfolio with lesser capital requirement. The prevailing lower interest rates, which have resulted in greater affordability and the tax concessions offered by the government have made this one of the fastest growing financial products. Further since the housing loan portfolio typically comprises a large pool of small and medium sized loans, risk is distributed over a large number of accounts, which is ideal from Risk Management point of view.
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Hence growth of quality assets under Housing Finance is one of the major areas of focus for the bank. PNB-(Punjab National Bank) Home Loan offers the most consumer friendly home loans and housing finance schemes at attractive rates. PNB Housing Loans, with an aim to make purchase and construction of homes a comfortable task, provides fixed as well as floating home loans at different rate of interest for different tenures. PNB Housing Finance covers 80% of the cost of your home or renovation / repairing of your home loan up to Rs. 10 Lacs for buying land and up to Rs. 2 Lacs for furnishing can be availed from PNB Home Loan. The details of housing loan product of Punjab National Bank regarding its purpose, eligibility criteria, assessment, processing, documentation, cut back, margin, pre-sanction follow ups, etc. are as foll 1. HOUSING FINANCE (PUBLIC) Individual & Joint Owners Eligibility Purpose & Extent Purchase of Plot Rs.20 lac. However, RM & above may consider Loan upto 50 lac. Construction of House Need based Semi -built House/flat from Small/Medium branch Rs. 10 lac Pvt Builders Large branch Rs. 20 lac ELB/VLBs Rs. 40 lac CH (AGM) Rs. 100 lac CH (DGM) Rs 100 lac GM Rs.150 lac Repair & Renovation Rs. 20 lac Cost of furnishing Max. 10% of the loan upto maximum of Rs. 2.00 lac Pari pasu Charge CH powers up to 20 lac to Govt. Employees The loan can be granted both for freehold and for leasehold property. In case of Leasehold, loan can be granted on the basis of P/A from original allottee where DDA/PUDA/HUDA permit conversion of leasehold into freehold property. Otherwise advance is not permitted against plots purchased on Power of Attorney basis. Loan limit up to 30 lac Risk Weight is 50% Loan limit above 30 lac Risk Weight is 75% LTV Ratio more than 75% Risk Weight is 100% Land/Plot 40% Construction/repair/addition 25%

Freehold & Lease hold

Capital Requirement Margin

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Rate of Interest Rate of Interest as per LA Circulars issued from time to time. 0.50 % extra will be charged on H/L for 3rd House. The interest can be fixed or floating Option can be changed from fixed to floating and vice versa with flat charges of 2% fee on Balance outstanding Fixed Interest rate be reviewed/reset after a block of 5 years in respect of loans disbursed on or after 1.8.2006. Bank has decided to extend concessions to Defense personnel who are Concessional Rate of Interest raising Housing Loans under banks regular Housing Loan scheme for public as under: for Defense Employees 25 bps relaxation in interest rates 50 bps relaxation in processing fee These relaxations are to be made applicable in all new cases where defense personnel avail housing loan either in single name or along with spouse. (RBD Cir. No. 11/2010 dt. 16.2.2010) Repayment Maximum 25 years including Moratorium period of 18 months Installment can be fixed up to maximum age of 65 years. Hub Incharge of Scale-IV and above besides Circle Head can relax the age up to 70 years, Repayment of loan for repair/renovation/addition/alteration restricted to 10 years including moratorium period of 6M. All deductions should not exceed 50% of Gross monthly income. However where gross monthly salary is above 50000/-, the deduction can be up to 60% and if gross monthly salary is above 100000/-, the deduction can be up to 70% with the permission of CH. The income of earning spouse and children can be taken into account. The Income of spouse and earning children can be taken into account provided they are made co-borrowers. Father/mother can also be made co-borrowers in cases where property is in the single name of his/her son and also clubbing of their income is permitted for determining eligibility criteria. Minimum 24 advance cheques should be obtained. As and when, 6 cheques remain, fresh lot be obtained. Out of 24, 23 cheques should be of installments and 1 cheque should be of the amount equal to the balance amount. PNB offers benefit of graduated EMI. This means that the customer has the option of choosing EMI that can increase or decrease during repayment period rather than being given a fixed EMI over repayment tenor. 0.90 % of loan amount + service tax & education cess (10.30%) on loans above 300 crore. Processing fees @ 0.50% of loan amount (max. 20000) +service tax for loans up to 300 crore.
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Graduated EMI

Upfront fee

CREDIT APPRAISAL
Documentation charges Rs.1350 + service tax

Security

Guarantee

Equitable/Registered Mortgage of Immovable Property Tripartite agreement be executed amongst Housing Board/Dev Authority/Coop Society/Builder, the borrower and the bank where mortgage cannot be created immediately. In such cases, 3rd party guarantee is also to be obtained. EM of other IP or pledge of NSC etc. up to 125% of loan amount if property is being purchased from 1st P/A holder and where there is delay in execution of Tripartite agreement or where the mortgage of property is not possible being an ancestral property (without title deeds) or Lal Dora Land. Verification of security is required once in 2 years. In case of NPAs accounts, security is to be verified on Half yearly basis. In general, no guarantee is to be asked for. But while preparing RBL score sheet, if score is less than 50%, then 3rd party guarantee can be obtained to raise score of the applicant. In case of building at Re-construction cost. Repair & Renovation Rs.1.00 lac (Rural & Semi/Urban) Rs.2.00 lac (Urban) Others Rs. 20.00 lac

Insurance Priority Sector inclusion

Other features

Important conditions

Loan can be sanctioned by the branch/hub near to the present place of work/posting/residence of the borrower. However, if the property is situated at other place, services of branch/hub located at that center may be availed for verification of Security and NEC/Valuation etc. Loan can be granted even if property is in the name of wife/parents provided that the owner is made co-borrower. Loan can be granted for 2nd house in the same city. Loan can be granted for purchase of house for rental purpose. For take over, permission of higher authority is not required Loan cannot be granted For construction in Un-authorized colonies If property is to be used for commercial purpose Without approved Map ( In Compliance of Delhi High Court Orders) Pre-payment charges of 2% be recovered on account being taken over by another bank. In case, the loan is pre-paid out of own sources or the loan is taken over by another bank with in 30 days from date of circular by which either the interest is
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raised or any important term or condition is changed, there will be no pre-payment charges. Flat pre-payment charges of 2% be recovered from borrowers who pre-pay without construction on the plot before 5 years. Powers of concessions in rate of interest/other charges stand withdrawn vide RBD cir no. 52/07 dt. 13.11.07. In case, the construction of house is not completed within 3 years or in case the plot is sold, penal interest @2% over and above the applicable rate be charged. Expression of Interest Grih Raksha Kavach It is a letter issued by the bank/branch wherein the lender expresses intention to make advance to the intended borrower on the basis of eligibility criteria subject to the fulfillment of terms and conditions. It is Mortgage Reducing Term Assurance Policy issued in Tie up arrangement with TATA-AIG. There is one-time premium of 2.5% (approx) and that amount can also be financed. The coverage of the scheme is 1-20 years. The sum assured is between Rs.10000 to Rs. 1.00 crore. In case of death of the borrower, receipt from insurance company can be utilized towards adjustment of loan amount as per amortization table. Prior permission of TATA-AIG is required if amount is over Rs. 80.00 lac. The coverage for accidental death and permanent total disability (due to accident) along with mandatory insurance Fire Policy including earthquake is offered in tie up arrangement with Iffco Tokyo General Insurance Co. Ltd. To all existing as well as new borrowers. To meet the requirement of earnest money to apply for plot/flat/house from State Housing Boards and Urban Development authorities. These authorities undertake to refund or issue allotment letter to the bank subject to eligibility of the bank for proposed loan and future requirement of Housing Loan. Extent of loan is 90% of EMD or max. Rs 2.00 lac in the shape of Demand Loan ROI is BPLR 1.75% Repayment through Refund order/Housing Loan/Bullet Payment. Guarantee clause deleted OD facility can be allowed to existing Housing Loan borrowers there is no IR irregularity. Other features of the scheme are as under: Minimum 50000/- and Maximum Rs. 5.00 lac. Additional limit and present o/s should not exceed 75% of current market price of the house so as to maintain margin of 25%. Upfront fees is NIL and documentation charges are Rs. 500/-. Take home salary should not be less than 40% of gross salary. Loaning powers are SB-Nil, MB- Rs.4.00 lac, LB, ELB & VLB Rs. 5.00 lac. ROI is equal to BPLR
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Iffco Tokyo general insurance co. Earnest Money Deposit Scheme

OD Facility to existing H/L borrowers

CREDIT APPRAISAL
After HL is repaid, OD can be continued/ renewed provided the sanctioning authority is satisfied about repaying capacity of the borrower and Value of security. OD facility for personal use should not be sanctioned to the borrowers, who have availed loan for plot , construction on which is yet to be completed in terms of RBD cir. no. 43 dt.21/08/09 On review, it has been decided to do away with the condition of minimum 2 year of repayment track record of the borrower for considering OD facility up to 5 lac. However this is subject to compliance of all other terms and conditions such as KYC norms, CIBIL database, takeover guidelines, security norms, maintenance of margin etc. This facility is outside the purview of Hub and Spoke model in the accounts of existing HL borrowers. (RBD Cir. No. 64 dt. 19.12.2009) This is an attractive variant of Housing Loan Scheme offered by the PNB for its customers. Under this scheme, OD facility is made available to the HL borrower. He can deposit his savings and withdraw the same as per his requirement. The features of the scheme are as under: Eligibility Age of the applicant must be less than 50. Existing HL borrowers can also apply provided their loan account is regular and no IR irregularity persists. Purpose All purposes as per original scheme except Purchase of Land / Plot. Extent Term Loan Overdraft 80% 20%

PNB Flexible Housing Loan Scheme

After lapse of 3 years, enhancement in OD will be allowed equal to reduction in Term Loan and thereafter on yearly basis. After lapse of 5 years, 20% increase in original limit is allowed in the shape of TL/OD for personal needs. Market Value of Property should be sufficient to cover the margin of 25% After attaining age of 55 years, OD facility will be reduced on monthly basis so that whole limit and T/L are adjusted by the end of 65 years. Maximum OD limit should not exceed 50% of Total limit. HL can be sanctioned by the branch/hub situated near the workplace/posting/residence. Security verification can be done by nearby branch. Rate of Interest as given above in the table in
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Housing Loan scheme (general) For Overdraft portion, R/I is equal to BPLR

IV. 5.8.4 Personal Loan For Pensioner & Public Two types of personal loans are being offered by PNB. Personal loan for pensioner is special category of retail lending scheme being offered by Punjab National Bank to pensioner. The main intension of this loan is to meet each and every personal needs including medical expense of senior citizen. Details regarding the same are mentioned below. Eligibility Purpose & Extent Pensioners drawing pension from the branch, Family Pensioners, DPDO Pensioners, Ex-employees Personal needs Up to 75 years of age: 1.50 lac (Minimum Rs. 25000/-) Above 75 years of age: 0.70 lac (Minimum Rs. 25000/-) Limit calculation Equivalent to 18 months net pension or Rs. 150000 (for borrowers up to 75 years age) and 12 months net pension or Rs 70000 (for borrowers above 75 years age) whichever is lower. For defense retirees, the loan equivalent to 20 M net Pension can be granted. Take home Pension should not be less than 50% of monthly pension DL or TL or OD on monthly reducing DP NIL Personal guarantee of spouse eligible for family pension or any other family member or 3rd party guarantee. NIL Rs. 270/- plus service tax 60 EMIs . 24 EMIs in case age is more than 75 years which can be extended up to 48 months by the sanctioning authority. PPO be kept with the loan documents Affidavit from the pensioner that present disbursing branch will not be changed without banks consent. The loan can be availed more than once only after adjustment of earlier loan

Nature Margin Guarantee Upfront fee Documentation charges Repayment Miscellaneous

Eligibility

PERSONAL LOANS FOR PUBLIC Only PNB Account holders are eligible. Minimum 6 months salary should be routed in the account or 6 months satisfactory transaction
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record for non salary saving accounts. Permanent Defence, CRPF, BSF & ITBP Personnel (Not to be granted to those who are due to retirement within next 24 M. Confirmed permanent employees of Central/state Govt./PSUs/Reputed Co./Schools/Institutions who fulfill any of the following 2 conditions: Route of salary through branch Check-off facility Professionally qualified practicing doctors viz. MBBS, BDS and above having customer relationship with PNB at least for 6 months having annual income of Rs. 4.00 lac and above. Doctors should be tax payers for 3 years and ITRs be kept on record. It means that the employer undertakes to deduct monthly installment from the salary and remit the same towards adjustment of the loan till its liquidation and also confirms attachment of terminal dues of the borrower/employee. Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00 lac or 20 times net salary whichever is lower depending upon the repaying capacity & Rs. 5.00 lac for those salaried persons who have completed 3 years in the present organization and drawing net monthly salary not less than Rs. 30000/-. TL or OD All branches can generate leads for processing at Retail Hubs/CCPCs. However disbursement can be made only by branches having recovery percentage of not less than 90% under Personal Loan segment as at end of previous half year. Metro Rs. 15000/- p.m. Urban Rs. 12500/- p.m. SU & Rural areas Rs. 10000/- p.m. Defence personnel and Teachers Rs. 7500/- p.m. NIL TL 60 EMIs OD- Reducing DP spread over 60 M. Defence Personnel 36 M. Amount of EMI should not be more than 50% of net monthly income. 60 advance cheques (maximum) signed by the borrower along with letter of deposit be obtained. Obtention of advance cheques is applicable where check off facility is not available. Suitable 3rd party guarantee. RM/CM may waive PNB Score system will be applicable and the applicant will have to score at least 50% marks to avail loan. % of loan amount + service tax NIL for defense personnel. Rs. 270/- up to Rs. 2.00 lac. Rs. 450/- Above Rs. 2.00 lac + ST
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Check off Facility Purpose & Extent

Nature Sanction and Disbursement Minimum net monthly income Margin Repayment

Guarantee RBL Sheet Upfront fee Docm. Charges

CREDIT APPRAISAL
NIL for defense personnel. In case of Army personnel, a copy of authority letter be sent to Controller of Defense Account (CDAO) Pune so that salary is remitted till liquidation of loan Statement of account for at least 6 m. be obtained. Affidavit that no other loan from other bank is availed be obtained. Copy of IT return for previous 3 years be obtained. Form 16 be taken if loan is granted to employee. A Registered letter be sent to the employer informing about details of loan raised by the employee. It is clarified that the branches eligible for disbursement/maintaining the accounts shall obtain blanket permission from CH for disbursement in the next 25 accounts submitting performance of the branch under the portfolio. The genuineness of salary certificates be independently got verified from HR Deptt. Of the employer of applicant.Hubs should ensure drawing of CIRs from CIBIL Data base for considering request of Personal Loans.

Other Requirements

RBD Cir. No. 27/09 dt. 26.5.2009

V. 5.8.5 PNB Baghban scheme for senior citizen PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based product for senior citizen titled "PNB Baghban". The product addresses one of the very important requirements of the society in the fast changing culture of Indian society. The main objective of this scheme is to address the financial needs of senior citizens owning self occupied property (house), for leading a decent life. The salient features of the product are given hereunder:

Eligibility

Purpose & Extent

Senior citizens owning Self-occupied property. If property in single name, there must be will in favors of spouse and it should be registered. In case of joint property, one of the spouses must be of 60 years and above. The other spouse should be at least 58 years old. If there is no spouse, loan will be made in favor of single. To lead a decent life Maximum qualifying amount can be Rs. 1.00 crore which will depend upon realizable value of property after maintaining margin of 20%. The monthly payment will be made to the borrower on the basis of reverse mortgage annuity table.
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Margin Income criteria 20% of realizable value of the property to arrive at the qualifying amount No

Rate of Interest 10.5% with reset clause of 5 years. In the shape of monthly instalments (to be calculated on reverse Disbursement annuity basis) during loan tenor of 15-20 years for age group of of loan individuals between 60-70 years and 10-15 years for age group of over 70 years or till death of last surviving spouse, whichever is earlier. For example, if Qualifying amount is Rs. 1.00 lac, On 10 year tenor of loan, monthly installment will be Rs. 475/-, On 15 year tenor, monthly instalment will be Rs. 230/- and on 20 year tenor, monthly instalment will be Rs. 125/The series of monthly instalments would continue after death of first spouse during life time of surviving spouse. Tenor of loan Age group of 60-70 years Age group above 70 years Insurance Security 15-20 years 10 15 years

Upfront fee Docm. Charges Repayment

Against fire, Earthquake and other calamities at the cost of the borrower EM of IP in favor of the bank. Valuation of property to be got done from approved valuer. Revaluation be also got done once in a span of 5 years. Amount equal to half months loan subject to maximum of Rs. 15000/- + Service Tax @10.30% NIL The loan becomes due for payment after 6 months from death of both the spouses. In case the loan is not repaid by legal heirs within 6 months from the death, the bank is within its right to sell the property for adjustment of the loan in case the consent of the legal heirs is not received within 6 months from the death of last survivor. Residual life of property should be at least 20 years. Purpose of loan should not be speculation or trading. It should be ensured that the will executed by the borrower is the last will. Life certificate is to be obtained once in a year in November. Residual life of property should be at least 20 years. A certificate from architect at the time of first valuation be obtained. Revaluation of property will be done once in 5 years. Now it has been decided to accept ancestral property provided bank is satisfied that there are no other legal heirs or original title deed is not available. For this, documentary evidence is required. Circle Head will deal such proposals.
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Others

Age of Property Ancestral property as security

CREDIT APPRAISAL
TERM LOANS UNDER PNB BAGHBAN SCHEME Amendments in PNB Baghban Scheme A lump sum Term loan can be sanctioned up to Rs. 15.00 lac. The cases can be considered on selective basis by HO only for medical purpose to senior citizens for treatment of self, spouse and dependents. Following two amendments have been carried out in IT Act, 1961. 1. Reverse Mortgage does not tantamount to transfer; therefore there is no Capital Gain Tax. Income tax is levied only at the time of alienation of Mortgaged property by mortgagee for recovery of loan. 2. Stream of payment received by Sr. Citizen would not be treated as Income. Therefore, bank has to obtain the following at the time of application of loan: Cost and year of acquisition of Capital asset. Cost and year of improvement. PAN No. of all legal heirs. Changes, if any made in the Registered Will.

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Conclusion
Credit appraisal is a process of appraising the credit worthiness of loan applicants. The fund of depositors i.e. general public are mobilised by means of such advances / investments. Thus it is extremely important for lender bank to assess the risk associated with credit, thereby ensure the security for fund deposited by depositors. Therefore my analyses regarding credit appraisal procedure of Punjab National Bank are as follows: 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:I. 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. II. 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. III. 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. IV. Risk analysis is done by bank to determine the risk associated with the project. This is mainly done by sensitivity analysis and by PNB credit rating or scoring. With sensitive analysis feasibility of project is determined under worsened condition. Credit rating or PNB scoring is

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done of various parameters such as personal, management, financial etc , thereby determine credit worthiness of customer. V. It is on basis of credit risk level, a collateral security to be given by borrower is determined. This shows that Punjab National Bank has sound credit appraisal system.

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BIBLIOGRAPHY

i. ii. iii.

PUNJAB NATIONAL BANK ANNUAL REPORT PNB JOURNALS BOOKS

MANAGEMENT OF INDIAN FINANCIAL INSTITUTION, SRIVASTAVA R.M


& NIGAM DIVYA, 10TH EDITION,2010, HIMALYA PUBLISHING HOUSE, GURGAON MUMBAI

FINANCIA INSTITUTION AND MARKETS, BHOLE L.M, 5TH EDITION,2009,


TATA Mc GRAW- HILLS,7 WEST PATEL NAGAR, NEW DELHI iv. WEBSITE

www.pnbindia.com www.rbi.gov.in www.google.com

v. NEWSPAPER

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