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In partial Fulfillment of the requirement for the

Award of Degree of Bachelor of Commerce – Banking & Insurance.



ROLL NO. - 10




MUMBAI – 400012.

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PAREL, MUMBAI – 400012.


This is to certify that MR. TUSHAR TUKARAM BHOGALE of B.Com

(Banking & Insurance) Semester V (2017-2018) has successfully
TERM LOAN IN BANK under the guidance of PROF. KUNAL SONI.

Course Coordinator Principal

Project Guide/Internal Examiner External Examiner

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I am MR. TUSHAR TUKARAM BHOGALE, the student of B. com

(Banking & Insurance) Semester V (2017-2018) hereby declares that I
have completed the Project on CREDIT APPRAISAL WITH REFERENCE
TO TERM LOAN IN BANK. The information submitted is true and
original to the best of my knowledge.

Signature of student

Name of Student


Roll No. 10

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The college, the faculty, the classmates & the atmosphere, in the
college were all the favorable contributory factors right from the
point when the topic was to be selected till the final copy was
prepared. It was a very enriching experience throughout the
contribution from the following individuals in the form in which it
appears today. We feel privileged to take this opportunity to put on
record my gratitude towards them.

PROF. KUNAL SONI made sure that the resource was made available
in time & also for immediate advice & guidance throughout making
this project. The principal of our college DR. T.P.GHULE has always
been inspiring & driving force. We are thankful to Mr. SANTOSH
SHINDE associated with administration part of Financial Markets &
Banking & Insurance section has been very helpful in making the
infrastructure available for data entry.

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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
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. In order to understand the credit appraisal system followed by the
banks this project has been conducted. The project has analyzed 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.

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1 1.1 Introduction 7
1.2 Reason for selecting topic
1.3 Objective of the project
1.4 Limitation of the study
1.5 Research methodology
2 2.1 Commercial banking and its objectives 10
2.2 Credit policy of commercial bank
2.3 The profile of organ of PNB
3 3.1 Credit philosophy 22

4 4.1 Policy regarding to PNB 27

4.2 Analysis and interpretation
5 5.1 Case study 50

6 6.1 Conclusion 55
6.2 Bibliography

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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
analyzing one’s credit worthiness has become very important for any financial institution
before providing any form of credit facility so that such situation doesn’t arise in near future

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 analyzed 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.


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
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

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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.


The overall objective of this project is to understand the current credit appraisal system used
in banks. The Credit Appraisal system has been analyzed 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.


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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This project related to corporate banking. This project is done only by secondary data.
This data collects a systematic method regarding the control of cash in banks it comprises
definition, tables, meaning, reference etc.

Secondary data

This data is collected through journals, magazines, newspapers and internet.

The data is also collected by SBI sites like recent changes in corporate sector.

The data is collected from the information available by various analysts.

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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,
programmees 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 mobilize
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 country’s 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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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

Types of credit-

Bank 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) installment or hire
purchase credit.

Volume of Credit-

Commercial 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

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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.

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
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.

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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


A 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

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i) 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
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

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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
▪ 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 centers has increased. While bankers say that up gradation of rural centers into
semi-urban could be one reason (the share of semi-urban centers 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 Delhi’s 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 liberalization.

Procedure for providing Bank Credit-

Banks 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:

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Monitoring & Asset


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 borrower’s
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.

• 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 – bank’s exposure shall not exceed 25%

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• Bank may also take up financing infrastructure project independently / exclusively in

respect of borrowers /promoters of repute with excellent past record in project
• 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.



Punjab National Bank (PNB) is an Indian multinational banking and financial services
company. It is a state-owned corporation based in New Delhi, India. The bank was founded
in 1894. As of 31 March 2017 the bank has over 80 million customers, 6,937 branches, and
10681 ATMs across 764 cities.[4]

PNB has a banking subsidiary in the UK (PNB International Bank, with seven branches in the
UK), as well as branches in Hong Kong, Kowloon, Dubai, and Kabul. It has representative
offices in Almaty (Kazakhstan), Dubai (United Arab Emirates), Shanghai (China), Oslo
(Norway), and Sydney (Australia). In Bhutan it owns 51% of Druk PNB Bank, which has
five branches. In Nepal PNB owns 20% of Everest Bank Limited, which has 50 branches.
Lastly, PNB owns 84% of JSC (SB) PNB Bank in Kazakhstan, which has four branches.

Punjab National Bank was registered on 19 May 1894 under the Indian Companies Act, with
its office in Anarkali Bazaar, Lahore, in present-day Pakistan. The founding board was drawn
from different parts of India professing different faiths and of varying back-ground with, the
common objective of creating a truly national bank that would further the economic interest
of the country.[1] PNB's founders included several leaders of the Swadeshi movement such as
Dyal Singh Majithia and Lala Harkishen Lal, Lala Lalchand, Kali Prosanna Roy, E. C.
Jessawala, Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass.[5][6] Lala Lajpat Rai was
actively associated with the management of the Bank in its early years. The board first met on
23 May 1894.[1] The bank opened for business on 12 April 1895 in Lahore.

PNB has the distinction of being the first Indian bank to have been started solely with Indian
capital that has survived to the present. (The first entirely Indian bank, Oudh Commercial
Bank, was established in 1881 in Faizabad, but failed in 1958.)

PNB has had the privilege of maintaining accounts of national leaders such as Mahatma
Gandhi, Jawahar Lal Nehru, Lal Bahadur Shastri, Indira Gandhi, as well as the account of the
famous Jalianwala Bagh Committee.[1]

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In 1900 PNB established its first branch outside Lahore in India. Branches in Karachi and
Peshawar followed. The next major event occurred in 1940 when PNB absorbed Bhagwan (or
Bhugwan) Dass Bank, which had its head office in Dehra Dun.

At the Partition of India and the commencement of Pakistani independence, PNB lost its
premises in Lahore, but continued to operate in Pakistan. Partition forced PNB to close 92
offices in West Pakistan, one-third of its total number of branches, and which held 40% of the
total deposits. PNB still maintained a few caretaker branches. On 31 March 1947, even
before Partition, PNB had decided to leave Lahore and transfer its registered office to India; it
received permission from the Lahore High Court on 20 June 1947, at which time it
established a new head office at Under Hill Road, Civil Lines in New Delhi. Lala Yodh Raj
was the Chairman of the Bank.

In 1951, PNB acquired the 39 branches of Bharat Bank (est. 1942). Bharat Bank became
Bharat Nidhi Ltd. In 1960, PNB again shifted its head office, this time from Calcutta to
Delhi. In 1961, PNB acquired Universal Bank of India, which Ramakrishna Jain had
established in 1938 in Dalmianagar, Bihar. PNB also amalgamated Indo Commercial Bank
(est. 1932 by S. N. N. Sankaralinga Iyer) in a rescue. In 1963, The Burmese revolutionary
government nationalized PNB's branch in Rangoon (Yangon). This became People's Bank
No. 7.[7] After the Indo-Pak war, in September 1965 the government of Pakistan seized all the
offices in Pakistan of Indian banks. PNB also had one or more branches in East Pakistan

The Government of India (GOI) nationalized PNB and 13 other major commercial banks, on
19 July 1969. In 1976 or 1978, PNB opened a branch in London. some ten years later, in
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. That same year, 1986, PNB acquired
Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition added Hindustan's 142
branches to PNB's network. In 1993, PNB acquired New Bank of India, which the GOI had
nationalized in 1980. In 1998 PNB set up a representative office in Almaty, Kazakhstan.

In 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. In 2004, PNB established a branch in Kabul, Afghanistan, a representative office in
Shanghai, and another in Dubai. PNB also established an alliance with Everest Bank Limited
in Nepal that permits migrants to transfer funds easily between India and Everest Bank's 12
branches in Nepal. Currently, PNB owns 20% of Everest Bank. Two years later, PNB
established PNBIL – Punjab National Bank (International) – in the UK, with two offices, one
in London, and one in Southall. Since then it has opened more branches, this time in
Leicester, Birmingham, Ilford, Wembley, and Wolverhampton. PNB also opened a branch in
Hong Kong. In January 2009, PNB established a representative office in Oslo, Norway. PNB
hopes to upgrade this to a branch in due course. In January 2010, PNB established a
subsidiary in Bhutan. PNB owns 51% of Druk PNB Bank, which has branches in Thimpu,
Phuentsholing, and Wangdue. Local investors own the remaining shares. Then on 1 May,
PNB opened its branch in Dubai's financial center. PNB purchased a small minority stake in
Kazakhstan-based JSC Danabank established on 20 October 1992 in Pavlodar. Within the

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year PNB increased its ownership till 84% of what has become JSC (SB) PNB, with its share
currently decreased to 49%. The associate in Kazakhstan now called JSC Tengri Bank has
branches in Almaty, Astana, Karaganda, Pavlodar and Shymkent. September 2011: PNB
opened a representative office in Sydney, Australia. December 2012: PNB signed an
agreement with US based life Insurance company Metlife to acquire a 30% stake in MetLife's
Indian affiliate MetLife India Limited. The company would be renamed PNB MetLife India
Limited and PNB would sell MetLife's products in its branches. assets = ₹6,435 billion
(US$100 billion) (2015)

Financial performance
FY 2008- FY 2009- FY 2010- FY 2011- FY 2012-
Particulars 09 10 11 12 13

Total Assets (' INR crores) 246,919 296,633 378,325 458,192 478,877

Operating Profit (' INR

5,690 7,326 9,056 10,614 10,907

Net Profit 3,091 3,905 4,433 4,884 4,748

Business/Employee 655 808 1,018 1,132 1,165

Profit/Employee (' INR

5.64 7.31 8.35 8.42 8.06

Return on assets (%) 1.39 1.44 1.34 1.19 1.00

Gross NPAs (%) 1.60 1.71 1.79 2.93 4.27

Net NPAs (%) 0.17 0.53 0.85 1.52 2.35

Total Branches 4,665 4,997 5,189 5,670 5,874

Mergers and acquisitions

Number Company Location Price Ref(s).

Bharat Bank
1 1951 New Delhi, India —

Universal Bank
2 1961 Dalmianagar, Bihar, India —
of India

3 1962 Indo- India —


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Number Company Location Price Ref(s).


4 1986 Commercial India —

New Bank of
5 1993 New Delhi, India —

6 2003 Kozhikode, Kerala, India —

Listings and shareholding

PNB's equity shares are listed on Bombay Stock Exchange and the National Stock Exchange
of India. It is a constituent of the CNX Nifty at the NSE.

Shareholders (as on 31-Dec-2013) Shareholding

Promoter Group (Govt. of India) 58.87%

Foreign Institutional Investors (FII) 17.51%

Insurance Companies 15.46%

Individual shareholders 04.05%

Banks/Financial Institutions/Mutual Funds/UTI 03.02%

Others 01.09%

Total 100.0%


PNB office in Lucknow

As on 31 March 2015, the bank had 68,290 employees. As

of 31 March 2013, it also had 919 employees with
disabilities on the same date (1.45%). The average age of
bank employees on the same date was 46 years. The bank

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reported business of INR 11.65 crores per employee and net profit of INR 8.06 lakhs per
employee during the FY 2012-13. The company incurred INR 5,751 crores towards employee
benefit expenses during the same financial year.

Awards and recognitions

• Punjab National Bank was ranked #717 in the Forbes Global 2000 in May 2013.
• Punjab National Bank was ranked #26 in the Fortune India 500 ranking of 2011.
• PNB was awarded the 'Best Public Sector Bank' by CNBC TV18 in 2012.
• The bank was recognized as the 'most socially responsive bank' by Business world
and PwC in 2012.
• In 2011, it received Golden Peacock Award for "Excellence in Corporate Social
Responsibility" and "National Training Award".

The bank incurred INR 3.24 crores on CSR activities like medical camps, farmer trainings,
tree plantations, blood donation camps etc. during the FY 2012-13.

Page 21

It is well recognized 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. Indian banks have compared favorably on growth,
asset quality and profitability with other regional banks over the last few years.

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)

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'.

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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 Coverage 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 installments under the proposed term loan / deferred
payment guarantee. While the repayment program will depend upon the profitability of a
project, the quantum of annual installments 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 installments. For the purpose of this ratio , “debt” means maturing term
obligations viz. installments 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.

Page 23

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.


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:

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 utilization.

Page 24

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. Break-
even 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.

➢ 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
➢ Fixed costs may be ‘stepped’ – not fixed over all volumes.
Complexity involved in using BEP analysis in multi-product businesses


Normal year production 75 lakh units (93.75% of installed

Fixed Costs Rs. 13.71 lakh
Variable Costs Rs. 13.35 lakh

Page 25

Sales realization Rs. 41.25 lakh

Contribution 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

Page 26


Policy regarding to PNB

Mission and 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"


"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

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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
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.

Page 28

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
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
Parameters for various stages in computation of working capital:

Stage Time Value

i Raw Material Holding period value of RM consumed
during the period

ii SIP Time taken in RM + Mfg.Exp. during the

converting the period (Cost of
RM into FG production)

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iii FG Holding period of R.M + Mfg. Exp. +Adm

FG before being overheads for the
sold period (Cost of sales)

iv Receivables Credit allowed RM+ Mfg. Exp. + Adm.

to buyer Exp.+ Profit for the period

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.


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
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 To be submitted within 6 weeks from the close of quarter to which it relates
Form-11 To be submitted within 2 months from the close of Half Year to which it

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

QMS form II gives us half yearly profitability statement and fund flow statements.

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By comparing with the projections as given in CMA, we can see whether the performance is
going on as projected.

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.


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.


In order to instill a sense of credit discipline among the borrowers, RBI has permitted banks
to levy penal interest 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:

Page 31

 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


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


• 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
• 3% above the sanctioned rate in case of non compliance of terms and conditions in
adhoc/temporary limit


• Amount of default in – instalment /excess drawals or borrowings or amount of
irregularities in account/overdue bill not debited to account.

• 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.

Page 32



Till some year’s 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

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.

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

Page 33

Concept 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
Courses Studies in India
eligible 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
Eligibility • 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)

More than one In case of more than one loan in a family, the family as a unit is to be
loan in a family 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 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
Age of student There is no restriction with regard to age of student for being eligible
for the loan.
Income No Income criteria are prescribed for the parents. However amount of
Criteria loan be decided by judging Income of the parents.

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.

Capital Risk Weight as per BASEL-I 100%

Requirement Risk Weight as per BASEL-II 75%

Margin ➢ 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)
Security 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

Page 34

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, co-
obligator can be spouse or parents or parents-in-law. Grand parents
can also become co-obligants.
Security for ➢ Lien on Terminal dues
staff members ➢ Extension of EM of IP
➢ Fresh Mortgage if there is no HL
➢ Co-obligation of employee
Penal Interest Up to 25000/- ----NIL , Above 25000/- @ 2% on OVERDUE
Upfront fee ➢ NIL
➢ 0.50% (Maximum 5000/-) for studies abroad which is eligible for
refund on availment of loan.
Documentation ➢ Upto 4.00 lac - Rs. 270/- plus service tax
Charges ➢ Above 4.00 lac Rs. 450/- plus service tax
Repayment 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.
Calculation of Simple interest is to be charged during moratorium period and kept in
interest a separate account. The accrued interest during repayment holiday will
be added to Principal for fixing of EMI.
Interest 1% interest concession is allowed if it is serviced during holiday
concession 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.

Constitutes of Tuition fees, Hostel charges, Exam fees, Library/Lab charges, Books,
loan 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
imbursement also on merits.(RBD Cir. No. 12/10 Dt. 16/02/2010)
Documents Documents will be executed both by student and the parent/guardian.

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
Follow up intervals.
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
Mahindra of student borrower between age group of 18-33 years. The coverage is
between 20000-15 lac. Single premium will be paid. It will vary

Page 35

according to age and total insurance Tenor. The scheme is valid for one
Relaxations for It has been decided to permit the following relaxations to the students
students of securing admission in IITs/IIMs/MDI Gurgaon/XLRI Jamshedpur and
IIT,IIM, MDI, ISB Hyderabad:
➢ Exemption from making parent/guardian as co-borrower.
➢ Exemption from taking guarantee for loans up to 7.50 l
Other ➢ CR of the borrower is not required. Brief CR of the guarantor to be
provisions prepared.
➢ “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.
Disposal of It has been decided to curtail the period of disposal of education loan
loan applications to maximum 1 week except cases of CH and above level
applications where the outer limit of disposal will be 2 weeks from the date of receipt
of complete application.


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 known as PNB
SARTHI and CAR Loan & details about its processing, eligibility, margin etc are discussed

Page 36


Eligibility ➢ 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/-.
Margin ➢ 5% where salary is disbursed through branch or check-off facility
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
Guarantee ➢ Generally it is not required. In cases where there is no Income
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.
Insurance Comprehensive Insurance with bank clause and policy to remain with
the bank.
Security ➢ PNB 551 is required for the Ist time. In case account is regular,
Inspection PNB 551 is not required thereafter.
➢ In case the account is irregular, Qtrly. Inspection is must.
Upfront fee Rs 200/- + Service Tax For students – Nil

Documentation Rs. 270/- plus service tax

Other ➢ Driving License is required.
Requirements ➢ 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.

Conveyance Loan (Public) for Car

Eligibility Individual & Business concerns, Professionals & Agriculturists with

6M transaction records.
Purpose & Car, Van & Jeep, Multi New or Old (not older than 3 years – CH
Utility Vehicles/Sports powers)
Utility Vecles

Page 37

Extent Individuals ➢ 25 times of net monthly salary or Rs. 25

lac whichever is lower for one or more
➢ CH may relax the criteria within
powers keeping in view the repayment
➢ Income of spouse can be considered
provided he/she stands as additional
Business Corporate and No Ceiling. One or more vehicle can be
non-corporate purchased. Earning and repaying capacity
will be considered.
Agriculturists --do--
Margin General 20% - Cost of Insurance and one-
time road tax can be considered as
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.
Repayment ➢ 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.
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.
Upfront fee 1% of loan subject to maximum 6000/- exclusive of service tax.

Documentation Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac + ST

charges Rs. 450/- (Tie up arrangement Rs.1700/- ) Above Rs. 2.00 lac + ST

Security ➢ Hypothecation of the vehicle

➢ RC in joint name of borrower and bank
➢ Bill of the vehicle will also be in the joint name.
Guarantee 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.
Insurance Comprehensive Insurance with bank clause and policy to remain with
the bank.
Security ➢ PNB 551 is required for the 1st. time. In case account is regular,
Inspection PNB 551 is not required thereafter.
➢ In case the account is irregular, Qtrly. Inspection is must.
Other ➢ 15% depreciation on St. line method is to be applied in case of Old
➢ Driving License is not at all required.
Page 38

Provisions ➢ 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.


IV. 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 weight age 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.
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.

Page 39

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
Eligibility Individual & Joint Owners

Purpose & Purchase of Plot Rs.20 lac. However, RM & above

Extent 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.
Freehold & ➢ The loan can be granted both for freehold and for leasehold
Lease hold 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.
Capital Loan limit up to 30 lac Risk Weight is 50%
Requirement Loan limit above 30 lac Risk Weight is 75%
LTV Ratio more than 75% Risk Weight is 100%
Margin Land/Plot 40%
Construction/repair/addition 25%
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.

Page 40

Concessional Bank has decided to extend concessions to Defense personnel who are
Rate of Interest raising Housing Loans under bank’s regular Housing Loan scheme for
for Defense public as under:
➢ 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
➢ 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.
Graduated PNB offers benefit of graduated EMI. This means that the customer
EMI has the option of choosing EMI that can increase or decrease during
repayment period rather than being given a fixed EMI over repayment

Upfront fee 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.
Documentation Rs.1350 + service tax

Security ➢ Equitable/Registered Mortgage of Immovable Property

➢ Tripartite agreement be executed amongst Housing Board/Dev

Page 41

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.
Guarantee 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.

Insurance In case of building at Re-construction cost.

Priority Sector Repair & Renovation Rs.1.00 lac (Rural & Semi/Urban)
Rs.2.00 lac (Urban)

Others Rs. 20.00 lac

Other features ➢ 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 takeover, permission of higher authority is not required
Important 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 within
30 days from date of circular by which either the interest is
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

Page 42

or in case the plot is sold, penal interest @2% over and above the
applicable rate be charged.

Expression of It is a letter issued by the bank/branch wherein the lender expresses

Interest intention to make advance to the intended borrower on the basis of
eligibility criteria subject to the fulfillment of terms and conditions.
Grih Raksha It is Mortgage Reducing Term Assurance Policy issued in Tie up
Kavach 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.
Iffco Tokyo The coverage for accidental death and permanent total disability (due
general to accident) along with mandatory insurance “Fire Policy – including
insurance co. earthquake” is offered in tie up arrangement with Iffco Tokyo General
Insurance Co. Ltd. To all existing as well as new borrowers.
Earnest Money ➢ To meet the requirement of earnest money to apply for
Deposit plot/flat/house from State Housing Boards and Urban
Scheme 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 to OD facility can be allowed to existing Housing Loan borrowers there
existing H/L 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
➢ 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 &
➢ Rs. 5.00 lac.
➢ ROI is equal to BPLR
➢ 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
On review, it has been decided to do away with the condition of

Page 43

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)
PNB Flexible This is an attractive variant of Housing Loan Scheme offered by the
Housing Loan PNB for its customers. Under this scheme, OD facility is made
Scheme 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 80%

Overdraft 20%

➢ 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
➢ Rate of Interest as given above in the table in
Housing Loan scheme (general)
For Overdraft portion, R/I is equal to BPLR

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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 Pensioners drawing pension from the branch, Family Pensioners,

DPDO Pensioners, Ex-employees
Purpose & 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 Equivalent to 18 months net pension or Rs. 150000 (for borrowers up

calculation 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

Nature DL or TL or OD on monthly reducing DP

Margin NIL

Guarantee Personal guarantee of spouse eligible for family pension or any

other family member or 3rd party guarantee.

Upfront fee NIL

Documentation Rs. 270/- plus service tax

Repayment 60 EMIs . 24 EMIs in case age is more than 75 years which can be
extended up to 48 months by the sanctioning authority.
Miscellaneous ➢ PPO be kept with the loan documents
➢ Affidavit from the pensioner that present disbursing branch will
not be changed without bank’s consent.
➢ The loan can be availed more than once only after adjustment of
earlier loan


Eligibility Only PNB Account holders are eligible. Minimum 6 months’ salary
should be routed in the account or 6 months satisfactory transaction
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

Page 45

➢ 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
Check off It means that the employer undertakes to deduct monthly installment
Facility from the salary and remit the same towards adjustment of the loan till
its liquidation and also confirms attachment of terminal dues of the
Purpose & Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00 lac or 20
Extent 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/-.
Nature TL or OD
Sanction and All branches can generate leads for processing at Retail Hubs/CCPCs.
Disbursement 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.
Minimum net Metro Rs. 15000/- p.m.
monthly Urban Rs. 12500/- p.m.
income SU & Rural areas Rs. 10000/- p.m.
Defence personnel and Teachers Rs. 7500/- p.m.
Margin NIL

Repayment 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
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.
Guarantee Suitable 3rd party guarantee. RM/CM may waive
RBL Sheet PNB Score system will be applicable and the applicant will have to
score at least 50% marks to avail loan.
Upfront fee % of loan amount + service tax
NIL for defense personnel.
Docm. Charges Rs. 270/- up to Rs. 2.00 lac. Rs. 450/- Above Rs. 2.00 lac + ST

NIL for defense personnel.

Other ➢ In case of Army personnel, a copy of authority letter be sent to
Requirements 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.

Page 46

➢ Affidavit that no other loan from other bank is availed be

➢ 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.
RBD Cir. No. ➢ It is clarified that the branches eligible for
27/09 dt. disbursement/maintaining the accounts shall obtain blanket
26.5.2009 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 Dep't. Of the employer of applicant. Hubs should ensure
drawing of CIRs from CIBIL Data base for considering request of
Personal Loans.

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 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.
Purpose & ➢ To lead a decent life
Extent ➢ 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.
Margin 20% of realizable value of the property to arrive at the qualifying
Income criteria No

Rate of Interest 10.5% with reset clause of 5 years.

Disbursement In the shape of monthly installments (to be calculated on reverse
annuity basis) during loan tenor of 15-20 years for age group of

Page 47

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 lakh,

On 10 year tenor of loan, monthly installment will be Rs. 475/-, On

15 year tenor, monthly installment will be Rs. 230/- and on 20 year
tenor, monthly installment will be Rs. 125/-

The series of monthly installments would continue after death of first

spouse during life time of surviving spouse.

Tenor of loan Age group of 60-70 years 15-20 years

Age group above 70 years 10 –15 years

Insurance Against fire, Earthquake and other calamities at the cost of the
Security 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.
Upfront fee Amount equal to half month’s loan subject to maximum of Rs.
15000/- + Service Tax @10.30%
Docm. Charges NIL

Repayment 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.
Others ➢ Residual life of property should be at least 20 years.
➢ Purpose of loan should not be speculation or trading.
➢ It should be ensured that they will executed by the borrower is the
last will.
➢ Life certificate is to be obtained once in a year in November.
Age of Residual life of property should be at least 20 years. A certificate from
Property architect at the time of first valuation be obtained. Revaluation of
property will be done once in 5 years.
Ancestral Now it has been decided to accept ancestral property provided bank is
property as satisfied that there are no other legal heirs or original title deed is not
security available. For this, documentary evidence is required. Circle Head will
deal such proposals.
TERM LOANS A lump sum Term loan can be sanctioned up to Rs. 15.00 lac. The
UNDER PNB cases can be considered on selective basis by HO only for medical
BAGHBAN purpose to senior citizens for treatment of self, spouse and dependents.
Amendments Following two amendments have been carried out in IT Act, 1961.
in PNB 1. Reverse Mortgage does not tantamount to transfer; therefore there is
Baghban no Capital Gain Tax. Income tax is levied only at the time of

Page 48

Scheme 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.


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 project’s measured results, such as NPV (or IRR) from
investor’s viewpoint, or DSCR from banker’s point of view.

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

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.

Page 49


Credit Is Inevitable In Banking: A Case Study Of Premier

Bank On Credit Appraisal & Assessment
Credit risk simply means the risk of default being made by a customer owing to non
repayment of the credit obtained by him from a bank. Proper evaluation of the customer
measures the financial condition and the ability of the customer to repay loan in future. Credit
appraisal is a process of collecting related information of customers and projects to undertake
risk assessment exercise by the bank prior providing any loans & also checks the technical,
economical & financial viability of the project proposed. It also includes verification of
primary & collateral security available for recovery of such funds being lent to the customer.
Credit Appraisal thus ascertains the risks associated with lending functions in banks. It is
generally carried out by the banks which are engaged in providing finance to its customers. In
the present case, process used in Credit risk assessment and appraisal has been studied taking
SME credit account in sample to observe various parameters and stages in risk assessment
and appraisal process exist in one of the largest public sector banks in India. The bank has
been named ‘Premier Bank (PB)’ in the study to keep original identity of the bank

Credit Risk Assessment & Appraisal – An

Risk is inability or unwillingness of borrower customer or counter -party to meet their
repayment obligations/ honor their commitments, as per the stipulated terms. Numerous tasks
and activities associated with risk assessment are summarized below in the matrix –

Lender’s task Credit & Risk are Twins

1. Identify the risk factors

2. Measurement of Risk
3. Mitigate the risk
4. Both are two sides of the same coin.
5. All credit proposals have some inherent risks
6. Go hand in hand

Probable reasons of risk Factors for good credit

1. Deficiencies on the part of the management
2. Uncertainties in the business & industrial environment
3. Weaknesses in the financial position
4. Un-hedging market risks etc.
5. Managerial ability
6. Favorable business & industrial environment

Page 50

7. Adequate financial strength

8. Proper due diligence & hedging of risk

Lending being the core banking function, banks should not deter from financing merely
because of risks in credit. A banker’s task is to identify the risk parameters & to mitigate
them on a continuous basis. It is prudent to have some idea about the degree of risk
associated with any credit proposal and banker should take calculated risk, based on risk-
absorption & hedging capacity of the Bank. Credit risk assessment models adopted by the
Premier Bank take into account all possible factors which go into appraising the risks
associated with a loan. For assessment of risk, the rating structure evaluates four major risks
such as Industry Risk, Business Risk, Financial Risk and Management Quality / Risks. To
arrive at the overall risk rating, the parameters are duly weighted & calibrated to arrive at a
single point indicator of risk associated with the credit decision.

Industry Risk
The characteristics of an industry which pose varying degrees of risk are built into Bank’s
risk assessment model such as competition, industry outlook, regulatory risks, contemporary
issues. The assessment of this part is external to the borrower and is done through assessment
of Industry related macro- economic parameters like demand supply gap, capacity utilization
level, financial ratios like ROCE /OPM etc. applicable to the specific Industry and having
different risk weights.

Business Risk
The assessment of this factor is based on internal working of the borrower and relates to
parameters such as after sales service, distribution set up etc. The parameters, which are only
relevant to a particular industry, are selected for scoring having different risk weights.

Financial Risk
The assessment of financial risk includes appraisal of the financial strength of the borrower
based on performance & financial indicators. The overall financial risk is assessed in terms of
static ratios, future prospects & risk mitigation (collateral security / financial standing). The
assessment of this parameter is based on internal working of the borrower and relates to
parameters such as past (not in case of a green field / infrastructure company under
implementation stage) and projected financials. The CMA based data input sheet is uploaded
into the software and the same allows computation of financial rating automatically based on
the computation of financial ratios like Net Profit Margin, Current Ratio, DSCR, Interest
Coverage etc.

Management Quality
The management of an enterprise / group is rated on the parameters related to the
management such as integrity (corporate governance), track record, managerial competence /
commitment, expertise, structure & systems, experience in the industry, credibility - ability to
meet sales projections, ability to meet profit (PAT) projections, Payment record, Strategic
initiatives, Length of relationship with the Bank and many more. Thus, internal being the
factors to assess this parameter the score would base on internal working of the Borrower’s
management and relates to parameters such as past repayment record, quality of information

Page 51

submitted, group support etc. Taking above broad parameters into account, the bank assesses
the risk under three dimensions such as obligor rating to determine investment grade and
worthiness of the customer based on the assessment of past and projected cash flows of the
borrower and it indicates probability of default (PD). It’s grading range from PB-1 to PB-10.
Facility rating evaluates the riskiness of facilities assessed on the basis of security coverage
for a given facility indicating the Loss Given Default (LGD) and its grades range from FR-1
to FR-8. The composite rating is the combination of PD and LGD indicating the expected
loss (EL) in case the facility defaulted which is worked out automatically by the software
based on the matrix of obligor & facility rating.

Credit Appraisal & Assessment – A Case of

SME unit: M/s Hindustan Industries
M/s Hindustan Industries is a proprietorship firm constituted in April 2012 engaged in
manufacturing of Lead Acid Batteries. Firm is registered with District Industries Center
(DIC) Jaipur as Small enterprises (manufacturing) and it is also registered with Central Sales
Tax department for the purpose of manufacturing & trading of Cell, Batteries, Invertors,
Electric transformers, Lead Plates, stabilizers etc. Firm has power connection of 50HP from
State Electricity Board. NOC from Pollution Control Board has been obtained to set the unit.
Firm has commenced its operations from May 2012 and its product is largely consumed by
the associate concern M/s Indian Batteries Private Limited which is already in the field of
trading of batteries for last 10 years. Besides, other important clients of the firm are M/s New
Super Power House, Jaipur; M/s Bharat Battery House, Jaipur; M/s Pawan Battery House,
Jaipur thus the firm has no problem for marketing its products. Main raw materials of the
firm is Lead, Lead Oxide, Red Oxide, Acid, Tub Bag 115 MM, Tub Bag 250 MM, Battery P
P Container, Peg Separator, I T separator, Indicator. Some of the main suppliers of raw
material to the firm are M/s Manoj Metal, Kanpur; M/s Luxmi Industries, Ghaziabad; M/s
Siddharth Traders; M/s Accum Bags, Delhi; M/s j G Exports, Delhi, M/s Associated Traders,
Proprietor of the firm has rich experience of this line of activity and she will be closely
assisted by her husband Mr. K S Jha who along with the proprietor of the borrowing firm is
director of associate concern M/s Indian Batteries Private Limited. Firm is maintaining
current account with our Jaipur Branch & the conduct of account is satisfactory. Factory land
value of INR 7 Mn is in name of the firm and would be available for the security in loan from
bank. Besides firm is eligible to be covered under collateral free lending scheme of finance
under CGTMSE Scheme and customer is agreed for the same. Customer has requested for a
term loan of INR 7 Mn and working capital limit of INR 3 Mn for purchasing plant &
machines and cash credit to run her unit successfully. SMELH needs to take decisions on the
proposal (received 17.02.2013) to adhere to turnaround time (TAT) which is 14 days at
present. The cost of project and means of finance for the proposed term finance is given
below: -

Cost of Project Amount Means of Finance Amount

Land Development & Building 3.00 Promoters Contribution 9.50
Plant & Machinery 11.65 Term Loan 7.00
Margin Money of Working Capital 1.85
Total 16.50 Total 16.50
1. DE ratio of the project works out 0.74, which is favorable for bank finance.

Page 52

2. Firm has requested Term Loan only for Plant & Machinery as other items of the project
would be self financed by the firm.
3. Overall margin on cost of project is 57.57% as against normally acceptable margin
between 25-30%.

The firm proposed to repay the term loan amount of INR 7 Mn in 80 monthly installments on
ballooning pattern commencing from June 2013 (after 4 months moratorium) and ending in
January 2020. The implementation schedule is given below:

Findings of the Case

1. Proprietor of the firm has rich experience of this line of activity and she will be closely
assisted by her husband Mr. K S Jha who along with the proprietor of the borrowing firm is
director of associate concern M/s Indian Batteries Private Limited which is in the business of
trading of batteries for last 10 years.

2. Firm has commenced its operation from May 2012 and its product is largely being
consumed by the associate concern M/s Indian Batteries Private Limited besides firm has tied
up with good number of buyers of its product thus the firm has no problem for marketing its

3. Firm has all necessary infrastructure including power connection, water, manpower to
meet the demand of the market.

4. proposed additional plant& machinery the capacity of the firm will further increase to 150
batteries per day.

5. Being the first year of its operation firm has estimated to achieve sales of INR10.65 Mn for
the period ending 31.03.2013. Firm has so far achieved sales of INR5.33 Mn till January
2013(as per sales VAT/Tax returns, & firm’s book of accounts) which is over 50% of the
total estimated sales. Firm has also mentioned that summer season commences from last
week of March thus demand of batteries will be high from current month and firm has
confirmed orders of batteries for February & March 2013 for INR2.57 Mn & INR 2.78 Mn
respectively from M/s Indian Batteries Private Ltd well in advance hence the firm will easily
surpass the estimated sales target.

6. Firm has installed capacity of manufacturing 1250 batteries per month i.e. 50 batteries per
day but to be on conservative side it has projected following capacity which is reasonable.

7. With the increase in capacity after proposed installation of additional machines firm has
estimated to increase capacity from 7 batteries per day to 14 batteries per day in first year of
its operations after installing the new machines i.e. year 2014 and hence projected to achieve
sales of INR21.21 Mn for the year ending 31.03.2014 based on the assumptions that average
sales price per battery is INR5050. Looking to the high demand of the product in the market,
reputed name of the associate concern in this field, rich experience of the proprietor the
estimated/projected sales is reasonable & thus acceptable.

8. Being the regulatory manufacturing MSE Unit, guarantee cover of INR 6.25 Mn is
available under CGTMSE Scheme besides bank’s charge on primary securities.

Page 53

Credit appraisal is done to assess the technical, economical and financial viability of the
project. Loan policy of Bank contains various norms for sanction of different types of loans
under SME segment and all these norms do not necessarily apply to each & every case. The
credit risk assessment models adopted by the bank take into account all possible factors
which go into appraising the risk associated with a loan. These have been categorized broadly
into financial, business, industrial, and management risks. Rating of the account is being
worked out under three dimensions such as Obligor, Facility and Composite rating to
determine investment grade and also to charge rate of interest. The assessment of financial
risk includes appraisal of the financial strength of the customer based on performance &
financial indicators. Non financial parameters are also being considered in person appraisal
and credit scores of the credit information bureau / companies are also given due weight age
in appraisal of credit business. Credit risk arising from lending business in banks is therefore,
two sides of a coin and bankers should never deter from financing. Banks need to strengthen
their credit risk assessment mechanism and appraisal process for qualitative growth in credit
and also to mitigate risks effectively.

Suggestive Notes
Trainees should be given adequate time to thoroughly read the case with basic objectives –

1. To be aware of the flow of credit appraisal and various parameters associated with the
credit risk assessment.

2. To understand modalities how the credit risk assessment module (RAM) functions in the
Bank to determine investment grade of the proposal and also to ascertain pricing (ROI) in

3. To list various items of due diligence while appraising the borrower and proposal

4. To get acquaintance of methods of lending for working capital finance prevailing in the
Bank and based on the understanding of methods need based working capital limit to be
worked out for funding

5. To know various norms of term lending such as margin, verification of project cost
envisaged in the proposal, important factors to be kept in mind during pre-sanction visit of
the site.

6. To recommend ways for making the credit risk assessment & appraisal more effective at
operating units of the branches.

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Credit appraisal is a process of appraising the credit worthiness of loan applicants. The fund
of depositors i.e. general public are mobilized 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 it’s 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
✓ 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
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

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determined under worsened condition. Credit rating or PNB scoring is

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.



iii. BOOKS


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