Submitted To:-
Submitted By:
Ankita Dogra
Assistant Professor
rd
MBA: 3 Semester
15412303913
DECLARATION
I hereby declare that the Internship Project Report titled Credit Risk Rating at PNB
submitted by me to Delhi Institute Of Advanced Studies, Rohini is a Bonaire work
undertaken during the period from
to
any other University or Institution for the award of any degree diploma / certificate or
published any time before.
Date:
/ 2011
ACKNOWLEDGEMENT
Success is the expression of diligence, insistence, motivation inspiration and novelty. While
making this project, I had a wonderful experience. But this journey I have not travelled all
alone. There are some special people who made my journey easier with the words of support
and more intellectually satisfying by offering help in improving the quality of this work and
bringing it to a finish.
I would like to thanks Mrs. Barkha Bahl (Director) who has been a constant source of
inspiration and my special thanks to Mrs. Roma Jaitly And Mrs.Ruchi (project guide from the
institute) for her extensive guidance, cooperation and support.
My warm thanks to my parents for their continuous encouragement, interest and advice given
throughout the study. My thanks are also to all those who have shown keen interest in this
work and provided the much needed encouragement.
Last but not the least, God helps those who help themselves and thus I kept on helping myself
and God helped me through infinite ways I cannot define and God is too grateful and big for
my unallied efforts to thank him.
Ankita Dogra
15412303913
CONTENTS
I. College Certificate
II. Company Certificate
III. Declaration
IV Acknowledgement.
V Executive Summary.
Topics
1. Introduction
2. Company Profile
3. Literature Review
4.Research Methodology
5. Conceptual Framework
8.Conclusion
9. Bibliography
10. Annexures
Page No.
EXECUTIVE SUMMARY
In India, the banking sector has been remarkably successful in some respects. Its immense
size and enormous penetration in rural areas are exemplary among developing countries, as is
its solid reputation for stability among depositors.
This project was undertaken at the Punjab National Bank Circle Office, Rajendra Place, New
Delhi, at the Credit Administration Department. This project explains various credit facilities
and processes followed by one of the most reputed bank in the country, Punjab National
Bank.
Each bank has its own set of policies that must be followed while sanctioning a loan and care
must be taken that the money provided by the bank is being used up for the intended purpose
only. The task ranging from acceptance of loan proposal to sanctioning of loan is carried out
at Credit Division of the bank. Moreover, each loan proposals fall under powers of different
levels depending on the size of the proposal.
Normally, the CAMEL approach is used for evaluating banks capital, asset quality,
management, earnings and liquidity. Banks earn interest income and fee based income on the
loans and advances disbursed. While expansion of credit facilities is in the interest of both
banks and businesses, at the same time there are risks associated with the disbursal of credit.
Banks have to be cautious in deciding how much and to whom credit is being provided.
Because of the rising NPA of the public sector banks it is having a dent on their profitability
.Over a period of time, sophisticated processes have been developed to ensure efficient
delivery of the credit while ensuring meticulous appraisal of proposals, evaluation from
different perspectives and risk analysis. RBI has established norms and issues guidelines at
regular intervals to the banks regarding the credit disbursal and administration.
While
extensive restrictions and regulation could hamper the growth and efficient functioning of
credit, credit disbursal without proper control and due diligence can lead to financial
instability. Objective of the credit policies is to balance the twin goals of providing
convenient and timely credit facilities to the businesses while minimizing the exposure to the
risk of default and fraud.
The internship is intended to understand the process of credit risk rating being followed at
PNB. With a developing economy and many multinational companies coming up, new
projects are being undertaken. These projects require huge amount of capital and thus banks
come forward to finance these projects depending on the feasibility of the project. PNB
carries out an extensive study of the project and checks for it feasibility and if the project
seems to be feasible, a decision is taken.
This process of carrying out the feasibility test of the project based on the financial position
of the company is called Project Appraisal.
Since the project appraisal also includes a very essential step of Credit Risk Rating carried
out at Risk Management Division (RMD) of the bank, I also took training under risk
department for two weeks in order to closely understand the working.
Rating is done in order to find out the capability or the willingness of the company to pay its
debt. PNB uses its own model to rate a company and this model is one of its kind in the
country. The software used in this is known as PNB TRAC. Depending on the type of
project, a suitable model is chosen and based on financials of the company and the track
record of the management, rating is done. This rating also helps in determining the rate of
interest at which the loan should be given. Generally, a company with good ratings is gives
loan at a lower ROI as the risk involved is lower.
The study has been conducted with the purpose of getting in-depth knowledge about the
credit appraisal and credit risk rating procedure in the organization
Chapter :-1
Introduction
Risk Identification
Risk Measurement
Risk Reporting
Large corporate model: Accounts availing total limits of above Rs. 15 crore or having
turnover of more than Rs.100 crore.(except trading concerns)
Mid corporate model: Accounts availing total limits of above Rs. 5 crore and up to
Rs.15 crore OR having turnover of more than Rs.25 crore. All trading concerns falling
under large corporate category shall also be rated under this model.
Small loan borrowers model: Accounts availing total limits of above Rs.50 lacs and
up to Rs.5 crore AND having turnover up to Rs.25 crore.
Small loans II: Accounts availing total limits of above Rs. 2 lacs AND up to Rs.50
lacs (Except trading which are to be rated under PNB score model)
New projects model: New projects approaching our bank for total limits of above Rs.5
crore OR having total cost of project more than 15 crore.
Half-yearly review of rating model: Applicable to all large and mid corporate
accounts fund based and non-fund based limits above Rs.50 crore AND for all listed
irrespective of limits.
Credit rating model for banks/FI: Applicable to all banks and financial
Institutions.(Being done at HO level only)
Facility Rating Model :Applicable to all rating models based on Main default score
and securities available i.e., primary security, colletral security and cash margin etc
The total financial score (after subjective assessment and trend adjustment) is equal to
or less than 40%.
Score under the parameter Future cash flow adequacy is0(i.e. future cash flow
adequacy-company is likely to default)
AND
Score under the parameter TOL/TNW is 0(i.e. the ratio of TOL/TNW is >5)
Then the rating of the borrowal may be downgraded to B. if the cos rating is
already B or C then it will be downgraded by one notch.
The Credit risk rating derived from the model may be downgraded to B. If in such
case, the rating is B or C, the rating will be downgraded by one notch.
If the score the parameters commitments and sincerity and track record in debt
repayment is greater than 0 and up to 1,
The rating may be downgraded by one notch.
to
individuals
under
agriculture
(Direct),
Agriculture
Rating conducted by
Rating Approved by
BO Power
BO Rater
BO Veter
HUB Power
HUB Rater
HUB Veter
CO Veter
HO Power
HO Veter
Rating sheet along with IRR data feeding sheet duly signed by BO rater & veter.
Rating sheet along with financial statement data feeding sheet duly signed by BO
rater and veter.
Enhancement proposal
Project Report including projected B/sheet, P/L statement, cash flow, DSCR etc in
case of any expansion of capacity.
Rating sheet along with Financial statement data feeding sheet duly signed by BO
rater & veter.
Renewal Proposal
Rating sheet along with IRR/ Financial statement data feeding sheet duly signed by
BO rater & veter.
subjective(qualitative) parameters under these areas of evaluation but only the number of
parameters varies from model to model. There are maximum number of parameters in case of
large corporate model and minimum in case of Small-II model.
Rating conducted in two models and single point score : There are instances, when an
existing company/firm go in for expansion of their capacities or for establishing a new
venture. if the gross block proposed to be added for the expansion or new venture is more
than 50% of existing gross block (as per latest ABS) ,then the credit risk rating is concluded
in combination of two models (New project/ENBM and large/mid/small borrowal model
according to the proposed limit and turnover and final score is arrived at through weighted
average of individual rating model score and corresponding accepted level of turnover.
CMIE Prowess Database: Bank has subscribed the CMIE Database (named as Prowess)
for uploading annual audited financial statements and comparative financial ratios of peer
groups (i.e., companies engaged in similar activities with near-about capacities/turnover)in
large corporate rating models. The data base also provides very useful information like
capacities, production/sales, corporate governance, information on capital, management,
stock market perception, industry analysis, ratio analysis, quarterly results etc for all listed
companies and also for limited and some large private limited companies. Even if the
financials of the borrower for which rating is being carried out is not available at CMIE
Prowess, the financials of the companies engaged in similar activities can be viewed and
compared from this data base .Head office, all LCBs, all circle offices and some EL/VL
branches having many large corporate borrowers have given permission to subscribe the data
base.
CRISIL Industry Rating Report: Bank has been subscribing Industry rating from CRISIL
for around 70 industries and the same has been incorporated in the system on quarterly basis.
While conducting credit risk rating, the rater has to select industry according to activities of
the borrower and the rating model picks up the respective update industry score from the
system. Hence, selection of correct industry is very important to get the correct industry is
very important to get the correct industry score of a borrower. The quarterly and annual
CRISIL reports for all the industries are also available under RMD circular of e-circular site
of the bank.
Previously bank has been subscribing industry rating from ICRA
Final Rating score Category and risk Indicator:
The Credit Risk Rating has been divided into 7 categories (From PNB AAA, i.e., the best to
PNB D. the worst) according to the Total Final Score(%) obtained by the borrower, Further,
the rating categories PNB AA to PNB B are further suffixed with + of -sign as an
indicative sign to show its possibility of moving/slipping towards upper or lower category
.The detail table for scores vis-a-vis Rating category and Risk Indicator is placed below.
Score Obtained
Rating
Description
Above 80
AAA
Minimum Risk
77.50-80.00
AA+
Marginal Risk
72.50-77.50
AA
70.00-72.50
AA-
67.50-70.00
A+
62.50-67.50
60.00-62.50
A-
57.50-60.00
BB+
52.50-57.50
BB
50.00-52.50
BB-
47.50-50.00
B+
42.50-47.50
40.00-42.50
B-
40.00-42.50
High Risk
Caution
Moderate Risk
Average Risk
Rating Grade
Description
Defaulted Accounts
PNB-NS
NPA-Sub-Standard
NPA-Doubtful(I,II&III)
to NPA category)
NPA-Loss
PNB-NL
The NPA ratings classifications are to be marked, which will be treated as new ratings, as and
when a rated account becomes NPA and again as and when there is change in Asset
Classification of NPA account in the following manner:
When the same account is classified as Doubtful, it should be again rated as doubtful
account.
When the same account is classified as Loss, it should be again rated as loss account.
Any subsequent up gradation of asset into performing category would require fresh rating
of borrower as per the extant guidelines .All guidelines regarding rating/vetting authority
for credit risk rating will also be applicable for NPA rating.
You are required to download captioned circular from e-circular site, read the circular and
its annexure(where methodology is given) and as an onetime exercise, all existing
accounts in the branch, which were rated in PNB Trac and have become NPA in the past,
be marked as NPA immediately on receipt of this letter.
Open PNB Trac, using his/her existing User ID and to check whether any in-progress
rating is lying in his user ID, and if so, decision to be taken on them, i.e. to accept or
cancel or to transfer the same to same other Rater/Vetter ID.
To submit request for cancellation of User ID. For this purpose, the Rater/Vetter has
come to your Home-work list page and then to click Cancel User Profile under
Rating menu .A small form will be opened, which is to be submitted on-line by
clicking the submit button.
In case the Rater/Vetter has to get relieved in haste and does not find time to submit such
request before being relieved, he/she is advised to submit such request immediately on
joining the new office by logging in PNB Trac.
C.How to Transmit on-line rating to Higher office for vetting in PNB Trac.
Step 1 to 6: Same as above. Skip step 7 (No need to take print).
Step 8: Select Zonal office (not Regional Office for Delhi Circle) as the nomenclature
circle office has not yet incorporated in PNB Trac. The direct reporting branch shall select
Head Office for the ratings where sanctions falls under HO power.
Step 9 to 11: Same as above. Only at step 10,after clicking close window button under View
Rating Submit rating for vetting shall be activated and to be clicked.
D.How to cancel(delete) unnecessary/superfluous/duplicate rating from PNB Trac
At times, a rater starts rating but left it incomplete or he/she might have completed it but
subsequently the proposal did not move. There may be the case that the rating of same
borrower for same FY. Created two times. These superfluous/duplicate / Unnecessary rating
need to cancelled from the work list.
The steps are as under:Step 1 to 6: Almost same as above. Only at Common Details Page i.e. 1st page of rating
,change the sanctioning authority to Branch Manager, even if it was originally meant for
higher office. If all the data in the rating is not filled up, select a simpler model and fill up
arbitrary data and random options, submit all the pages and finally submit to Vetters ID step
7(No need to take print).
Step 8 to 11:For the rating to be deleted from the system ,the Vetter may not move through
all the pages and he/she can directly go to conduct of account or submit page. There are
vetter should select Cancel option and then View rating, close window and the bottom
centre position and finally complete rating process. The work list will pop and this page
now to be refreshed by clicking Home(at the top left corner).
E.How to View/take print of already vetted rating
Go to Search menu (2nd option) at the top band of PNB Trac and click rating. Then search
the rating either typing the rating Id or borrower code or by typing the name or part name of
that borrower. The respective radio button is to be clicked. In case the name of borrower is
having some abbreviated letters(say, N.V. Distilleries),then check the exact way (i.e. dot
,space etc) the borrower has been created in the system. This can be cross checked from the
earlier vetted report.
In case the rating has been transmitted on-line to higher officer but still under process (i.e.
vetting not yet done), then rating cant be viewed. The higher office, of course(where the
rating is under process),can take a print on your behalf by changing the draft number.
HOW THE RATING IS DONE
1. The scores are assigned to each of the parameters of each of the broad
category in the different s e c t i o n s o n a s c a l e o f 0 t o 4 u p t o t w o
d e c i m a l p o i n t s w i t h 0 b e i n g v e r y p o o r a n d 4 b e i n g excellent. The
scoring of some of these parameters is subjective while for some others it is
done on the basis of pre-defined objective criteria.
2.
The
scores given
to the
individual
parameters
multiply
Factor
Weight
obtained
Financial
Weighted
score
55.00
40.00%
22.00
50.00
25.00%
12.50
80.00
20.00%
16.00
75.00
15.00%
11.25
evaluation
Business
&industry
evaluation
Management
evaluation
Conduct
of
account
Table 2.2: EXAMPLE OF RATING PROCESS
So, AGGREGATE SCORE: 61.75
The Aggregate Score of 61.75 refers toPNB- A-
ii.
iii.
iv.
v.
Power grid
vi.
Benlon ltd.
vii.
viii.
b) There are no discounts offered to any of the debtor in Punjab National Bank.
c) In Punjab National Bank, for mitigating risk from default of debtors, they have formed
a recovery department in circle office that helps the bank to get back their money. In
Punjab National Bank, bad debts do not exist. While giving loans, they asked their
debtors to give collateral security in exchange of loan, if the debtor is not able to pay
money, banks recovery department gets money by selling that collateral security.
Sources of Finance
a) Long term financing is done only through government bonds, government securities
and short term financing is done through accrual basis and from money market. As
PNB is very renowned and faithful bank, so they dont face as such any obstacle for
raising funds.
b) Factors that this company bears in mind while deciding source of financing are:
i)
Cost of capital
ii)
iii)
Debt-equity ratio.
iv)
v)
Economic atmosphere.
Credit policy
a) Companys current credit policies
i.
To keep a watch on the project during implementation stage so that time and cost
overruns do not occur.
ii.
To ensure that the funds released are utilized for the purpose for which these have
been provided and there is no diversion of each funds.
iii.
iv.
To ensure that the terms and conditions as stipulated in the sanction have been
complied with.
v.
vi.
vii.
viii.
ix.
x.
xi.
To keep all the securities mortgaged or hypothecated to the bank fully insured
against fire and other risks which may be considered necessary. The insurance
policies should be in the joint names of the borrower and the bank with the agreed
bank clause and remain in the custody of the bank.
ii.
Its product like senior citizen savings scheme, the tenure is 5 years etc.
c) Credit evaluation is done by credit risk department of PNB. They rate the
individual/firm/company on the basis of many factors like financial data, relationship
with the bank, current status, good will etc. There are no changes in credit policies.
Chapter:-2
Company Profile
The last decade has seen many positive developments in the Indian banking sector. The
growth in the Indian Banking Industry has been more qualitative than quantitative and it is
expected to remain the same in the coming years. Based on the projections made in the "India
Vision 2020" prepared by the Planning Commission, the report forecasts that the pace of
expansion i n the balance-sheets of banks is likely to decelerate. The total assets of all
scheduled commercial banks by end-March 2010 are estimated at Rs.40, 90,000 crores. That
will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent
in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent
during the rest of the decade as against the growth rate of 16.7 per cent that existed between
1994-95 and 2002-03. It is expected that there will be large additions to the capital base and
reserves on the liability side.
The Indian Banking Industry can be categorized into non-scheduled banks and scheduled
banks. Scheduled banks constitute of commercial banks and co-operative banks. There are
about 67,000 branches of Scheduled banks spread across India. As far as the present scenario
is concerned the Banking Industry in India is going through a transitional phase. The Public
Sector Banks (PSBs), which are the base of the Banking sector in India account for more than
78 per cent of the total banking industry assets. Unfortunately they are burdened with
excessive Non-Performing assets (NPAs), massive manpower and lack of modern
technology. On the other hand the Private Sector Banks are making tremendous progress.
They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as
foreign banks are concerned they are likely to succeed in the Indian Banking Industry.
Currently, banking in India is generally fairly mature in terms of supply, product range and
reach-even though reaching rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate-and this has mostly been true. With the
growth in the Indian economy expected to be strong for quite some time-especially in its
services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&as, takeovers, and
asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. They have a combined
network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited,
a rating agency, the public sector banks hold over 75 percent of total assets of the banking
industry, with the private and foreign banks holding 18.2% and 6.5% respectively. 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 favorably with banking sectors in
the region on metrics like growth, profitability and non-performing assets (NPAs). Indian
banks have compared favorably 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.
Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being
the first Indian bank to have been started solely with Indian capital. The bank was
nationalized in July1969 along with 13 other banks. Today, PNB is a professionally managed
bank with a successful track record of over 110 years. The bank has the 2nd largest branch
network in India, with4525 branches including 432 extension counters spread throughout the
country. PNB was ran ked as248th biggest bank in the world by Bankers Almanac, London.
Punjab National Bank is not only the first bank to specialize in credit rating models in India
but also the first one to launch image based cheque transaction system for collection of intra
bank intercity cheques thereby providing credits merely in 48 hrs. in 13 cities. PNB has
achieved significant growth in business which at the end of March 2010 amounted to Rs4,
35,931 crore.
Today, with assets of more than Rs.2,96,633 crore, PNB is ranked as the 3rdlargest bank in
the country (after SBI and ICICI Bank) and has the 2nd largest network
of
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%.
Punjab National Bank is a multinational bank. Presently, the bank has its overseas presence in
10 countries by way of 5 branches (Hong Kong, Dubai, Kabul, & OBU-Mumbai), 3
subsidiaries (London, Bhutan and Kazakhstan), a joint venture (at Nepal) and 5 representative
offices (Sydney, Shanghai, Oslo, Dubai and Almaty).
Competition Information
Name
Last Price
Market
Cap. Net
(Rs. cr.)
Income
Total Assets
SBI
2,473.90
184,694.72
136,350.80
10,891.17
1,792,234.60
Bank of Baroda
909.40
39,165.95
38,939.71
4,541.08
659,504.53
PNB
976.50
35,356.13
43,223.25
3,342.57
550,419.92
Canara Bank
406.25
18,738.64
39,547.61
2,438.19
374,160.20
Bank of India
281.00
18,068.30
37,910.10
2,729.27
573,190.20
IDBI Bank
91.40
14,660.07
26,597.51
1,121.40
328,996.62
Union Bank
205.05
12,924.43
29,349.39
1,696.25
353,780.90
UCO Bank
102.50
10,400.77
18,229.92
1,510.54
239,124.75
Central Bank
69.50
9,385.55
24,427.55
-1,262.84
289,496.22
IOB
70.35
8,690.68
22,643.55
601.74
274,904.85
Weaknesses
number of customers.
of
products
to
offer
to
customers.
approach.
Opportunity
Threat
India.
Expansion
crisis
and
economic
fluctuations.
in
other
countries
for
international banking.
customers services.
Economic
6%
4%
Interset Income
Other Income
Fee Based
Income
90%
21%
48%
Corporate Banking
Retail Banking
Treasury
31%
ICICI Bank
HDFC Bank
Bank Of India
Canara bank
Bank of Baroda
Axis Bank
10
11
12
13
14
Indian Bank
15
16
17
Syndicate bank
Head Office
Field General Manager (FGM)
Circle Office
Branches
Board of
directors
CMD
ED
GM
(Credit)
GM
(Retail &
lending)
GM ( NPA
& Weak
Account)
DGM
AGM
GM
(Treasury)
DGM
AGM
GM
(IRMD)
GM
(Audit)
.......
......
DGM
AGM
GM
(Deposits)
......
Funtional
Head
religions are
hierarchical
organizations
with
different
levels
Chapter:-3
Literature Review
Ratings, including Rating Watches and Outlooks, assigned by Fitch are opinions based on
established criteria and methodologies that Fitch is continuously evaluating and updating.
Therefore, ratings are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating. Ratings are not facts, and therefore cannot be
described as being "accurate" or "inaccurate. Users should refer to the definition of each
individual rating for guidance on the dimensions of risk covered by such rating
The risk of loss of principal or loss of a financial reward stemming from a borrower's failure
to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a
borrower is expecting to use future cash flows to pay a current debt. Investors are
compensated for assuming credit risk by way of interest payments from the borrower or
issuer of a debt obligation.
look within internal ratings based approach recommended by the basel committee would
form the basis for a sophisticated risk management system for banks. a key element of the
basel committee's proposed new capital accord is the use of a bank's internal credit risk
ratings to calculate the minimum regulatory capital it would need to set aside for credit risk.
called the internal ratings based (irb) approach. it links capital adequacy to the rating of the
assets in a bank's books.
Credit risk measurement remains a critical field of top priority in banking finance, directly
implicated in the recent global financial crisis. This paper examines the dynamic linkages
between credit risk migration due to rating shifts and prevailing macroeconomic conditions,
reflected in alternative business cycle states. An innovative empirical methodology applies to
bank internal rating data, under different economic scenarios and investigates the
implications of credit risk quality shifts for risk rating transition matrices. The empirical
findings are useful and critical for banks to align to Basel guidelines in relation to core capital
requirements and risk-weighted assets in the underlying loan portfolio.
Chapter:-4
Objective of the study
To study broad contours of management of credit, the loan policy, credit appraisal for
business units i.e. for working capital loan or Term Loan
To utilize the above learning and appraise the creditworthiness organizations thoseapproach
PUNJAB NATIONAL BANK for credit. This would entail undertaking of the following
procedures:
Management Evaluation
Business / Industry Evaluation
Financial Evaluation
Credit Risk Rating
Chapter5:-Research
Methodology
The sources to study the application and feasibility of various theories and concepts, the
following sources of information are being used:
Primary sources
The primary sources are discussions with the company guide, staff members and other
department heads.
Secondary sources
The secondary sources of information are Reserve Bank of India guidelines regulating the
activities of the banks, banks Credit policy and related circulars and guidelines, research
papers, power point presentations and PDF files prepared by the bank audits related officials,
study of proposals and manuals, website of Punjab National Bank and other secondary
(published) sources.
Basel Accord has classified in to three categories-Credit risk, Market risk, and Operational
risk.Of the three the most prominent risk is credit risk constituting 90-95% of risk segment
of banks.RBI has approved standardized approach for credit risk measurement.whereby a
borrower is to be rated by approved credit rating agency for taking lending decisions.Punjab
National Bank has developed an assessment model for the purpose of risk ratings of its
borrowers known as PNB TRAC It has categorized as borrowers as large corporate borrowers
,mid corporate borrowers small loans, NBFC,New Project rating models and entrepreneur
new business model for rating purpose and has the rating scales starting from D to AAA as
follows
Score Obtained
Rating
Description
Above 80
AAA
Minimum Risk
77.50-80.00
AA+
Marginal Risk
72.50-77.50
AA
70.00-72.50
AA-
67.50-70.00
A+
62.50-67.50
60.00-62.50
A-
57.50-60.00
BB+
52.50-57.50
BB
50.00-52.50
BB-
47.50-50.00
B+
42.50-47.50
40.00-42.50
B-
40.00-42.50
High Risk
Caution
Moderate Risk
Average Risk
CASE
For the purpose of illustrating the rating procedure by using PNB TRAC Entrepreneur new
business model is selected. Borrower is a Private Ltd company locally providing
services.PNB TRACs evaluation criteria includes Management evaluation, Business
evaluation, Financial evaluation-Both objective and subjective also key risk factor. The
evaluation is reported as follows
2. Address
3. Constituition
4. Industry
5. Activity
7. Borrower code
8. Rating Id
9. Exposure
Management Evaluation(Score0-4)
Parameters
Comments
Managerial capabilities
Capable
Rate
of
efficient 2.00
management
Commitment & Sincerity
3.00
3.00
group support
Track
record
in
debt N.A
Repayment
Relationship with Bank
Prameters
Comments
Rate
Location of unit
3.00
Marketing service
Easily marketable
2.50
Core competency
One
promoter
id
highly 2.50
qualified
Infrastructure Available
Quality
Good
quality
maintained
Others
NA
of
service 2.50
Financial Evaluation-Subjective
Parameters
Comments
Rate
of
/Impairment
in
2.50
appraiser
value
of
assets
Conduct of A/c
NA
Total Score
SL no
Parameters
Max score
Score
Weight
Obtained
Weighted
Score
1.
Management
100
68.00
40
27.20
2.
Business
100
67.50
35
23.63
23.
Financial
100
70.42
25
17.61
Chapter:-7
Findings
After completing the entire project at Punjab National Bank the following key findings as
mentioned below were observed.
1. At Punjab National Bank, Circle Office the priority to appraise a proposal was given to
new or fresh clients over the existing clients presenting proposals for renewal
2. Ratings, as being performed at PNB, are done once a year. Therefore, the ratings do not take
into account short term drastic changes like price level changes (which are an issue with any
method based on accounting statements, since annual reports are based onhistorical cost basis
of accounting and other changes like sudden mishap/ of thecounterparty are not readily
accounted for by the rating system due to long lag between repeat ratings on the same
account.
3. Some of the parameters in Business and industry evaluation are based on the information
provided by company, which in some cases may not be sufficient. No specific guidelines are
followed in such cases. Also, some of the parameters here may be rendered redundant in
some cases and may push up/ push down the rating needlessly in these cases.
4. The present risk rating model does not have any mechanism to prioritize certain sectors of the
economy. There are certain sector in the economy where risk spread is low and certain sectors
where spread
infrastructural
of risk
projects
is high like
which
real estate.
need
Also,
to
there
are certain
be
prioritized.
The risk rating model is not flexible to incorporate all these issues.
5. The BPLR system will soon be replaced by Base Rate system. Banks may choose any
benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparenly.
6. With the deregulation of the financial sector, the ability of the banks to service the credit
requirements of the SME sector depends on the underlying transaction costs, efficient
recovery processes and available security. There is an immediate need for the banking
sectorto focus on credit and finance requirements of SMEs.
Chapter:-8
Suggestions
The Credit Department at PNB, works at its full potential and the staff is highly experienced
and has a very strong intuitive sense. So, there is no such recommendation on the entire
process. However to make the process more flexible and efficient, an electronic database
should be designed carrying all the available and important information related to the
proposals accepted, and it shRould be easily accessible to the Credit Department. This will
help reduce paperwork and loss of information.
Chapter :-9
Bibilography
Websites
https://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scal
es.pdf
http://www.investopedia.com/terms/c/creditrisk.asp
http://www.investopedia.com/terms/c/creditrating.asp
https://www.google.co.in/?gfe_rd=cr&ei=I255VM3vLubA8ge5j4GIBw&gws_rd=ssl
#q=articles+of+credit+risk+rating
http://articles.economictimes.indiatimes.com/keyword/credit-risk
http://en.wikipedia.org/wiki/Internal_Ratings-Based_Approach_%28Credit_Risk%29
http://www.mdpi.com/2227-7072/2/1/122
http://www.investopedia.com/articles/fundamental/03/061803.asp
http://www.pnbindia.in/
http://en.wikipedia.org/wiki/Punjab_National_Bank
PNB journals: