SUMMER INTERNSHIP PROJECT

ON
AN OVERVIEW OF CREDIT APPRESAL PROCESS WITH SPECIAL REFERENCE TO
DIFFERNENT LOANS OFFER BY INDIAN BANK

SUBMITTED BY
ABINASH NAYAK
19 MBA FM-009

A Thesis submitted to the MBA (financial management), Utkal university in

partial fulfilment of requirement for the degree of master of business
Administration.

UNDER THE GUIDANCE OF

INTERNAL GUIDE : EXTERNAL GUIDE :

PROF. PRABODHA KUMAR HOTA ASMITA PATI
HEAD OF THE DEPARTMENT CHIEF
MANAGER
P.G. DEPT. OF COMMERCE CUTTACK
BRANCH
UTKAL UNIVERSITY ,BHUBANESWAR INDIAN BANK
 STUDENT DECLARATION
I hereby declare that the project report entitled CREDIT APPRAISAL submitted
for the degree of MBA is my original work carried out by me under the
guidance of Prof. Prabodha Kumar Hota for the partial fulfilment of the award
of the degree of MASTER OF BUSINESS ADMINISTRATION. The matter
embodied in this report has not submitted anywhere else for the award of any
other degree/diploma.

Place: Name:
Date: Roll No:
 Acknowledgement
It is a pleasure to acknowledge my debt to all the people involved
directly or indirectly, in the development of this project. This
experience will definitely help me in my future endeavors of work.
I now take the opportunity to thank my project guide Mrs. ASMITA
PATI, chief manager, Indian Bank, Cuttack branch for her foresight in
giving me the opportunity to develop the ideas. I truly admire her skill
and capacity of making clear-cut points for the requirement
understanding.
I also extend my gratitude to Prof. Prabodha Kumar Hota, H.O.D. &
Professor, P.G. Department of Commerce, Utkal University for being a
constant source of encouragement and guidance required for the
completion of the project.
I would like to thank my parents, who always inspired me and
provided necessary functional requirements, which helped to attain
my goal.
My obligations remain to all those people and friends who have
directly or indirectly helped me in successful completion of my
project. No amount of words written here will suffice for my sense of
gratitude towards all of them.

PLACE: NAME:
DATE: ROLL NO:
 TABLE OF CONTENTS
CHAPTERS
1. INTRODUCTION
 Background of the study
 Objective of this study
 Limitation of the study
 Research methodology
2. CREDIT POLICY OF COMMERCIAL BANK
 Commercial banks and its objectives
 Recent policy developments regarding bank credit
 Changing phase of bank credit
 Procedures for providing bank credit
 Credit Appraisal
3. THE PROFILE ORGANISATION OF INDIAN BANK
 Indian banking sector & its major challenges
 Indian bank at a glance
 Mission and Vision
 Organizational structure of INDIAN ABNK
4. CREDIT PHILOSOPHY & POLICY WITH REGARDS TO INDIAN BANK
 Credit philosophy
 Credit policy
 Introduction to loans
 Classification of loans
 Building up of a proposal
 Requirements as per constitution of borrower
 Financial Appraisal
5. ANALYSIS AND INTERPRETATION OF DATA
  Credit Appraisal techniques
 Process of credit appraisal for providing cash credit
 Appraisal techniques for bank credit
6. CASE STUDY

7. CONCLUSIONS
 CONCLUSION

 BIBLIOGRAPHY
BACKGROUND OF THIS STUDY:-
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans and advances /project finance & also checks the
commercial , financial & technical viability of the project proposed its funding
pattern & further checks the primary & collateral security cover available for
recover of such funds.
The latest financial crisis have become the main cause for recession which was
started before corona virus and in this pandemic the world economy has been
majorly affected from this. The securities in the 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 present scenario analysing 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 again.
Analysis of the credit worthiness of the borrowers is known as Credit Appraisal.
In order to understand the credit appraisal system followed by the banks this
project has been conducted. The project has analysed the credit appraisal
procedures with special reference to Indian 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 impotartanly knowing about the various credit appraisal techniques
which are different for each type credit facility. Before going further it is
necessary to understand the need and basic framework of the project.
Therefore this chapter provides an introduction to this topic, Objective of this
project, limitations of this project and basic structure and framework how the
project proceeds .In order to understand the importance of the topic selected
an introduction to the overview of the commercial bank, its functions, and
present trends and growth in bank credit are required and it is covered in this
chapter.
OBJECTIVE OF THIS STUDY
CHAPTER-2
COMMERCIAL BANKS AND ITS OBJECTIVE
Commercial Banks are the oldest, biggest and fastest growing financial
intermediaries in India. They are also the important depositories of public
savings and the most disburse of finance. Commercial banks in India is a
unique banking system, the like of which exists nowhere in the world. The
truth of this statement becomes clear as one studies the philosophy and
approaches that have contributed to the evolution of banking policy,
programmes and operations in India.
The banking sector in India works under constraints that go with social control
and public ownership. The public ownership of banks has been archived in
three stages: 1995, July 1969, and April 1980. Not only the public sector banks
but also the privet sector and foreign banks are required to meet the targets in
respect of sectorial deployment of credit, regional distribution of branches and
regional credit deposit ratios. The operations of bank have been determined by
lead bank scheme, differential rate of interest scheme , Credit authorization
scheme, inventory norms and leading systems prescribed by the authorities,
the formulation of credit plan and service area approach.
Commercial Banks in India have special role in India. The privileged role of
banks is the result of their unique feature. The liabilities of Banks are money
and therefore they are important part of the payment mechanism of any
country. For a financial system to mobilise and allocate savings of the country
successfully and productively and to facility 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 banking system
are integral to a countries 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 sector.
Major objectives of commercial banks:-

Bank Credit:-
The borrowing capacity provided to an individual by the banking system, in the
form of credit or a loan is known as a bank credit. The total bank credit the
individual has is the sum of the borrowing capacity each lender banks provided
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:-
-Banks in India mainly provide 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 advance provided by them are:
1. Term Loans
2. Cash Credit
3. Overdrafts
4. Demand loans
5. Purchasing and discounting of commercial bills and
6. Instalment or hire purchase credit

Recent policy development regarding bank credit:-

Changing phase of bank credit:-

Trends of bank credit in India:-

Trends for the year 2020-21:-

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%
 Bank may also take up financing infrastructure project independently /
exclusively in respect of borrowers /promoters of repute with excellent
past record in project implementation.
 In such cases due diligence on the inability of the projects are well
defined and assessed. State government guarantee may not be taken as
a substitute for satisfactory credit appraisal.

The important thing to remember is not to be overwhelmed by marketing or

profit centre reasons to book a loan but to take a balanced view when booking
a loan, taking into account the risk reward aspects. Generally everyone
becomes optimistic during the upswing of the business cycle, but tend to
forget to see how the borrower will be during the downturn, which is a short-
sighted approach. Furthermore greater emphasis is given on financials, which
are usually outdated; this is further exacerbated by the fact that a descriptive
approach is usually taken, rather than an analytical approach, to the credit.
Thus a forward looking approach should also be adopted, since the loan will be
repaid primarily from future cash flows, not historic performance; however
both can be used as good repayment indicators.

Indian Banking Sector & Its Major Challenges

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

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

Interest rates and non-performing assets

The best indicator of the health of the banking industry in a country is its level
of NPAs. Given this fact, Indian banks seem to be better placed than they were
in the past. A few banks have even managed to reduce their net NPAs. But as
the bond yields start to rise the chances are the net NPAs will also start to go
up. This will happen because the banks have been making huge provisions
against the money they made on their bond portfolios in a scenario where
bond yields were falling.

Reduced NPAs generally gives the impression that banks have strengthened
their credit appraisal processes over the years. This does not seem to be the
case. With increasing bond yields, treasury income will come down and if the
banks wish to make large provisions, the money will have to come from their
interest income, and this in turn, shall bring down the profitability of banks.

Competition in retail banking

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

The urge to merge

In the recent past there has been a lot of talk about Indian Banks lacking in
scale and size. The State Bank of India is the only bank from India to make it to
the list of Top 100 banks, globally. Most of the PSBs are either looking to pick
up a smaller bank or waiting to be picked up by a larger bank. The central
government also seems to be game about the issue and is seen to be
encouraging PSBs to merge or acquire other banks.

Impact of BASEL-II norms

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

Over the last few years, the falling interest rates, gave banks very little
incentive to lend to projects, as the return did not compensate them for the
risk involved. This led to the banks getting into the retail segment big time. It
also led to a lot of banks playing it safe and putting in most of the deposits they
collected into government bonds. Now with the bond party over and the bond
yields starting to go up, the banks will have to concentrate on their core
function of lending. The banking sector in India needs to tackle these
challenges successfully to keep growing and strengthen the Indian financial
system.

Furthermore, the interference of the central government with

the functioning of PSBs should stop. A fresh autonomy package for public
sector banks is in offing.  The package seeks to provide a high degree of
freedom to PSBs on operational matters. This seems to be the right way to go
for PSBs. The growth of the banking sector will be one of the most important
inputs that shall go into making sure that India progresses and becomes a
global economic super power.

INDIAN BANK AT A GLANCE:

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

1. A research work on the topic “On the appraisal on consumer credit

banking products with the asset quality frame: A multiple criteria
application.” done by Panayiotis Xidonas, Alexandro’s Flames, Sortirios
Koussouris, Dimitrious Askouins & Ioannis Psarras from National
Technical University of Athens in 2007 says that Asset quality refers to
the likelihood that the bank's earning assets will continue to perform
and requires both a qualitative and quantitative assessment. Decision
problems like the "internal appraisal of banking products", are problems
with strong multiple-criteria character and it seems that the
methodological framework of Multiple Criteria Decision Making could
provide a reliable solution. In this paper, the Asset Quality banking
indicators are the, so called, "criteria", the value of these indicators are
the, so called, "scores" in each criterion and the P.R.O.METH.E.E.
[Preference Ranking Organization Method of Enrichment Evaluations,
 Brans & Vincke (1985)] Multiple Criteria method is applied, towards
modelling banking products appraisal problems. A Multiple Criteria
process, strictly mathematically defined, integrates the behaviour of
each indicator-criterion and utilizes each score in order to rank the so
called "alternatives", i.e. categories of banking products.

2. The research Paper on “Evaluation of decision support systems for credit

management decisions” by S. Kanungo, S.Sharma, P.K. Jain from Department
of studies, IIT Delhi have conducted a study to evaluate the efficiency of
decision support system (DSS) for credit management. This study formed a
larger initiative to access the effectiveness of the I.T based credit management
process at SBI. Such a study was necessitated since credit appraisal has
become an integral sub-function of the Indian banks in view of growing
incidence of non-performing assets. The DSS they have assessed was a credit
appraisal system developed by Quuattro pro at SBI. This system helps in
analysis of balance sheets, Calculation of financial ratios, cash flow analysis,
future projections, sensitivity analysis and risk evaluation as per SBI norms.

3. The research paper on the topic “Towards an appraisal of the FMHA farm
credit program: A case study of the efficiency of borrower by S. Mehdian,
Wm. McD. Herr, Phil Eberle, and Richard Grabowski” have studied that there
is a production frontier methodology is used to measure the overall efficiency
of a sample of farmers home administration (FMHA) compared to non
participants. The study did not find evidence that the efficiency FMHA farms
improved between a time period Results indicated that overall efficiency of
FMHA borrowers is associated with selected financial characteristics of the
farms. A review of the literature shows that agricultural finance specialists
have not been successful in evaluating whether FMHA pro- grams improve the
efficiency and income of probability of success. Liberal loan policies Eligible
borrowers. Inadequate evaluation of the FMHA program occurs partly because
of the difficulty of adequately deter-mining the impacts of changes in the
borrowers in a more normal period of the loan. This study addressed these
difficulties by utilizing a nonparametric production frontier technique to
measure overall efficiency and a matched pair statistical procedure to measure
how efficiency of farms receiving FMHA credit changed relative to a Non-FMHA
farmers.

4. The book named “Financial Analysis for Bank Lending in Liberalised

Economy” by Sampat.P.Singh and Dr.S.Singh have discussed the subject
financial analysis for bank lending has assumed considerable importance,
particularly since early 1990's when, like most of the countries, India opted for
the policy of liberalisation and globalisation after 1991.
The present volume is meant to be a standard reference as well as text book
on the varied facets of financial analysis with reference to credit management
by Banks and Financial Institutions. The book consists of three parts. Part I
discusses the concepts and tools of Financial Analysis; Part II explains various
concepts of working capital in its historical context; while Part III demonstrates
the application of these tools in the changing context of liberalised economy
by focusing on new concepts like 'Credit Worthiness', Risk-Analysis, Credit
Rating, Products-Differentiation, Pricing-Differentiation, Asset-Liability
Management, etc.
5. The research paper on the topic “Competitive analysis in banking: Appraisal
of the methodologies” by Nicola Cetorelli has discussed about the U.S. banking
industry has experienced significant structural changes as the result of an
intense process of consolidation.
. These significant changes raise important policy concerns. On the one hand,
one could argue that banks are merging to fully exploit potential economies of
scale and/or scope. The possible improvements in efficiency may translate into
welfare gains for the economy, to the extent that customers pay lower prices
for banks. Services or are able to obtain higher quality services or services that
could not have been offered before.1 On the other hand, from the point of
view of public policy it is equally important to focus on the effect of this
restructuring process on the competitive conditions of the banking industry.
Do banks gain market power from merging? If so, they will be able to charge
higher than competitive prices for their products, thus inflicting welfare costs
that could more than offset any presumed benefit associated with mergers. In
this article, analysis of competition in the banking industry is done highlighting
a very fundamental issue: How market power is measured and how do
regulators rely on accurate and effective procedures to evaluate the
competitive effects of a merger.

Credit Philosophy & Policy with regards to Indian Bank

An ideal advance is the one given to a reliable customer for an approval

purpose with adequate experience, safe in knowledge that the money will be
used to advantage and repayment will be made within a reasonable period
from trade receipts or known maturities due on or about given dates.
Credit philosophy – “To achieve credit expansion required for sustaining the
profitability of the bank and emphasis on quality assets, profitable
relationships and prudent growth.”

CREDIT POLICY

Bank follows following broad policy imperatives:-

 Reduction in dependence upon short term corporate loans, especially

unsecured exposures.
 Aiming to achieve more sanctions at levels closer to the customer.
 Changing the mix of the portfolio in favour of better diffused and higher
yielding credit.
 Building competencies in credit management through training &
promotion of self-directed learning.

Objectives of credit policy

1. A balanced growth of credit portfolio, which does not compromise

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

A key function of the Bank is deploying funds for income-

yielding assets. A major part of Bank’s assets are the loans and advances
portfolio and investments in approved securities. Loans & Advances refer to
long-term and short-term credit facilities to various types of borrowers and
non-fund facilities like Bank Guarantees, Letters of Credit, Letters of Solvency
etc. Bill facilities represent structured commitments which are negotiable
claims having a market by way of negotiable instruments. Thus, Banks extend
credit facilities by way of fund-based long-term and short-term loans and
advances as also by way of non-fund facilities.
 Classification of Loans

Loans/Advances
Loans/Advances

Fund Based Non-Fund Based

Retail Loan
Bank Guarantee

Post shipment Finance

Cash Credit

Export Finance
Letter of Credit

Bill Discounting
Pre-shipment Finance

Term Loan
Building Up of a Proposal
1. GATHERING CREDIT INFORMATION:-

An appraisal of a proposal begins with the gathering of adequate background

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

Information by definition is that data which is relevant and meaningful for

making decisions. An information system is an aid to the decision making,
carrying out and altering decisions. All information required by the banker in
the pre-sanction period should become part of a system. It should flow into the
information system from various sources, such as the borrower, bank’s own
record, environment etc. A significant basis of banker-borrower relationship is
governed by the information which flows between the two parties. After
ascertaining the credit needs of the borrower, the banker looks towards
information about his borrower’s credit worthiness. He seeks out the credit
information etc. from his co-bankers, other borrowers and market information.
2. VARIOUS SOURCES OF CREDIT INFORMATION 

Information regarding character, honesty, and financial position has to be

discreetly gathered from following sources:

a. The borrower: the bank should develop as much credit information as

possible during the initial interview with the borrower/partners of firm/
directors of company/ proposed guarantor /co-obligator and principal
officials of firms/company, nature of its business, past and expected
profitability, the degree of competition that the firm/company faces and
whether or not it has had or anticipated any difficulty etc.

Information regarding its principal officers should be collected during

such interview.

b. Borrower’s financial statements: for lending decisions, financial

information is a significant part of the total information system. It is
derived basically from borrowers:
 Trading and profit and loss statement
 Balance sheet
 Cash and fund flow statements

c. Banks own records: If he is an existing borrower, bank’s own records are

a rich source of additional information. Operations in the borrower’s
account and other dealings at the bank level in regard to collections,
discounting/retirement of bills etc. often useful clues to borrower’s
operating and financial transactions. A review of the previous year’s
operations in the account and assessments of borrowers’ financial
 statements relating to that period will provide a rich source of
information about the borrower.

d. Opinions: Bank should compile opinions on their borrowers. They should

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

e. From other banks: in respect of fresh proposals, enquiries with local

banks should be made before entertaining the proposal to avoid multiple
financing without our full knowledge. In case of new customer having
dealings with other banks, confidential opinion of his banker has to be
obtained.

f. Income tax assessment order- Income tax assessment orders agricultural

income tax assessment orders give an insight into the borrower’s account
and the extent to which it is profitable. Comments thereon by the income
tax office shall indicate the shortcomings (lacunae) in the business. In the
case of estate owners agricultural tax assessment orders to be obtained
to arrive at parties credit worthiness.
g. Sales tax assessment orders: Sales tax assessment orders will reveal the
turnover in business and when read with trading/ manufacturing and
profit & loss account, it may be possible to have a fair assessment of
tendencies in trade i.e., whether over-trading or carefully trading within
recourses at command or trading entirely on the borrowed funds.

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

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

j. Property statements: The property statement of borrower will give an

idea of his worth, liabilities and his income from real estate’s (immovable
properties).

k. Municipal property registers: reference to municipal property registers

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

l. Other external sources: other external sources, if any, like stock

exchange directory, business periodicals/magazines/journals etc.
REQUIREMENTS AS PER CONSTITUTION OF BOROWER:

Following Requirements as per constitution of borrower should be collected

for proposals emanating from-

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

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

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

4. Trusts
 Trust deed
 Resolution for the borrowings and execution of documents.
 5. Industrial units :
 Project report with cash flow, fund flow statements etc.
 Industrial licenses/SSI registration certificate.
 License from local authority, compliance of legal requirements or
conditions as applicable and clearance from regulatory bodies.

FINANCIAL APPRAISAL

On receipt of a loan application the banker begins the process of financial

appraisal. The first thing done is to analyze the financial statements. Therefore,
an understanding of these financial statements is important for the appraiser.
Once balance sheet is taken for analysis the following items are checked up:

1. Fixed assets: To find out any revaluation of fixed assets done by the
company to improve their net worth.
 The schedules of the fixed assets should be checked up.
 Study notes on accounts and comments of auditors should be
checked.
 Schedule for reserve should be studied
 Any change in the accounting procedure of depreciation should be
checked

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

3. Other Current Assets: Their reasonableness and their need to maintain

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

4. Contingent liabilities: To find out any unrecognized liabilities or losses if

any.
 The CDD/DBD other bills discounted liability, if any ,is reported in
the auditor’s report , then increase the bank borrowing to the
extent liability was not taken in the balance sheet and also
increases the debits/receivables to that extent.

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

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

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

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

BALANCE SHEET ANALYSIS

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

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

2. Long term Strength of a company is calculated based on the level of the

net worth of the company /promoters stake/loans from close relatives-

 If the net worth has increased due to infusion of fresh capital or

plough back of profit, it can be termed as satisfactory; even
increase of loan from friends & relatives is a good sign.
 If the net worth is decreasing, reason may due to net loss or
diversion; true reason needs to be ascertained.
 If the D/E ratio is less than 2:1 the same is good; further if the
TOL/TNW is less than 5:1 then the unit’s solvency is noted to be
satisfactory. The ratio indicates that borrower has not borrowed
much and the outside debts within a reasonable limit.
3. Liquidity position of the party-Current ratio

 If the current ratio is increasing and nearer to 1.5 and above then
we can note the position is satisfactory.
 Expected Current ratio is 1.22:1 and above; if the ratio is less than
1.22:1 then the promoter’s margin (Net working capital) towards
Working Capital may not be sufficient to cover the working capital
limit; care shall be taken to ensure that sufficient Net working
capital for the working capital enjoyed is available.
 When the Current ratio is poor and the Net working capital is not
sufficient to cover the existing limit, no further term loan shall be
sanctioned and the party is to be advised not to take up any fresh
investment in fixed assets.

4. Quality of current assets :

 The current assets holding period must be less than 3 months for
traders and the 5 months for the industries depending upon the
type of industry ;holding level more than the above needs proper
justification.
 It should be ensured that the current assets turnover is at least
more than four times in a year.

5. Contingent liability:
 The effect of this liability on the net worth of the company; if
it’s effect is less than 5-10 % of the net worth of the company ,the
same may be noted; but if it threatens the existence of the
company then the position needs serious analysis.
 6. Diversion from the business needs to be viewed carefully.
 Reduction in Net working capital position (below the required
level) when the unit has earned cash profit and clearing of term
loan instalments when the unit is making cash loss needs to be
viewed seriously.
 Reduction in the net worth of the firm (when they have shown net
profit needs further probing.

Credit Appraisal Techniques

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

Process of Credit appraisal for Term Loans

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

b) Where loan is on participation basis, a copy of the appraisal note of the lead
institution / bank should be obtained.

c) Scrutiny of proposals

 The scope of the project:

 Background of promoters
 Government consents
 The technical appraisal
 Cost of the project
 Sources of finance
 The schedule of implementation
 The financial projections and profitability
 Cash flow statements
 Calculation of debt service coverage ratio (DSCR)
 Breakeven analysis
d) Disbursement

e) Follow up (post sanction)

Assessment:

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

Not more than 2.33:1(1.7:1 may be

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

Ratios for appraising term loans:

 Debt equity ratio: long term debt

Tangible net worth

 Average DSCR : Net profit + Depreciation + interest on TL

Term loan instalment + 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'.
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
shareholder 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 instalments under
the proposed term loan / deferred payment guarantee. While the repayment
program will depend upon the profitability of a project, the quantum of annual
instalments has to be related to the size of the annual cash flows. The
repayment schedule should, therefore, be fixed after ascertaining the annual
servicing by the debt service coverage ratio.

The debt service coverage ratio is the core test ratio in project financing. This
ratio indicates the degree of viability of a project and influences in fixing the
repayment period, and the quantum of annual instalments. For the purpose of
this ratio , “debt” means maturing term obligations viz. instalments payable
during a year under all the term loans/ deferred payment guarantees and
‘service’ means cash accruals (service) available to cover the maturing
obligation (debt) during each year.

The debt service coverage ratio indicates the ability of the firm to
generate cash accruals for repayment of installment and interest. For
example, a DSCR of 3:1 indicates that for each Re.1/-long term debt including
interest to be paid the business generates cash accrual of Rs.3/- to be utilized
for repayment of debt. The difference between the accruals and debt is known
as margin of safety (Rs.2/- in this case).
The ratio of 1.5 to 2 is considered reasonable. Ratio lower than
this should be further looked into. A very high ratio may indicate the need for
lower moratorium period/repayment of loan in a shorter schedule. This ratio
provides a measure of the ability of an enterprise to service its debts i.e.
`interest' and `principal repayment' besides indicating the margin of safety.
The ratio may vary from industry to industry but has to be viewed with
circumspection when it is less than 1.5.
BREAK EVEN POINT OR COST VOLUME PROFIT (CVP) ANALYSIS:

A. The breakeven point is calculated to note the level of production at which

the unit neither earns profit nor incur loss. BEP is the level of operations (in
terms of sales or production or capacity utilization) at which total revenues are
equal to total operating costs (fixed and variable) or, in other words, the
operating profit is equal zero. He firm starts earning operating profits only after
the break-even is reached. At BEP, “contribution” exactly equals the “fixed
costs.

B. The formula for calculating the break-even point for each year is as under:

Total fixed cost/Contribution

C. Certain items of the cost that are to be incurred by the unit irrespective of
the level of production are called as fixed cost. The same includes depreciation,
repairs and maintenance, interest, certain portion of salaries, rent, insurance,
selling expenses other than variable items and administrative expenses

D. The variable cost changes with the levels of production. It includes cost of
raw materials, direct wages and other items, which are apportion able to unit
of production.

E. The breakeven point is generally expressed in terms of percentage of

capacity utilization

Break even analysis is generally expressed in terms of percentage of capacity

utilisation.

The CVP analysis provides answers to such questions as:

level of operations needed to avoid loss, level of sales required to achieve
targeted profit, effect of product mix on profits, impact of expansion, most and
least profitable products etc. 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.

Caution:
 Relationship between revenue, variable costs and volume may not be
linear.
 It is not always easy to have a clean separation of costs into fixed and
variable components.
 Fixed costs may be ‘stepped’ – not fixed over all volumes.

Complexity involved in using BEP analysis in multi-product businessesThe

Sensitivity Analysis helps in arriving at profitability of the project wherein
critical or sensitive elements are identified which are assigned different values
and the values assigned are both optimistic and pessimistic such as increasing
or reducing the sale price/sale volume, increasing or reducing the cost of
inputs etc. and then the project viability is ascertained.

The critical variables can then be thoroughly examined by generally selecting

the pessimistic options so as to make possible improvements in the project
and make it operational on viable lines even in the adverse circumstances.

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

Process of Credit Appraisal for providing Cash Credit / Working Capital Limits

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

Gross Working Capital and Net Working capital

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

Factors affecting the requirement of working capital:

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

The unit should have sufficient amount of working capital. A portion of it is to

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

Stage Time Value

i Raw Material Holding period value of RM consume

During the period

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

Converting the period (Cost of
RM into FG production)

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

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
(Sales)

The assessment of working capital requirement of business unit has been

engaging the attention of the Govt., RBI and a series of committees were set
up to suggest appropriate modalities of financing working capital as under.

TANDON COMMITTEE RECOMMENDATIONS

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

1. To suggest guidelines to commercial banks to follow up and supervise credit

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

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

(i) Norms for Inventory and Receivables

With a view to curbing speculative and hoarding tendencies, the Committee
fixed norms (in terms of the weeks/month consumption) in respect inventory
and receivables which industrial units may hold. The norms were fixed for 15
major industries and indicate the maximum permissible limits for inventory
holding. Deviations from norms not allowed for meeting unforeseen situations.
(ii) Approach to Lending.
The three methods of lending as suggested by the committee are:
 First Method: 75% of Working Capital Gap (Total Current Assets –
Other Current liabilities)
 Second Method: 75% Total Current Assets – Other Current
liabilities
 Third Method: 75% [(Total Current Assets – Core Current Assets) –
Other Current liabilities)
Third method of lending was not accepted by RBI and hence rejected.

(iii) Style of Credit.

Tandon Committee suggested that instead of making available entire limit by
way of cash credit it may be bifurcated into demand loan and cash credit
component (modified by Chore Committee).

(iv) Quarterly Follow-up and Supervision

Tandon Committee suggested quarterly forms under the information system
made applicable to borrowers with working capital credit of Rs. 1 crore and
over from the banking system. These forms aim at ensuring proper end-use of
credit.

CHORE COMMITTEE RECOMMENDATIONS

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

(a) Annual Review

All working capital credit limits of Rs. 50 lacs and above from the banking
system should be reviewed at least once a year. These reviews are intended to
ensure that the limits are need-based and continue to be viable propositions.
(b) Information System
The scope of the quarterly information system originally envisaged by the
study group to frame guidelines for follow-up of bank credit has been enlarged
bringing into its ambit all borrowers having credit limits of Rs. 50 lacs and over
from the banking system.

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

(c) Withdrawal of bifurcation of cash credit

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

(d) Separate limit for peak level and non-peak level

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

(e) Determination of Quarterly Operative limits

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

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

(f) Penalty for delayed or non-submission of returns

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

(g) Adhoc or temporary limits

The working group has conceded that in exceptional cases, ad-hoc or
temporary limits could be sanctioned to borrowers through demand loan or
non-operatable cash credit accounts. On those limits, banks are required to
charge additional 1% interest per annum over the normal rate. However, in
certain cases like natural calamities it would be the discretion of the bank to
charge interest of 1% per annum.

(h) Switching over to Second Method of lending

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

(i) Encouragement of Bills system

To encourage bills systems of financing purchase of raw material inventory,
the Working Group has recommended that banks should extend at least 50%
of the cash credit limit against raw materials to manufacturing units, whether
in the public or private sector, by way of drawee bills only.
Present Status:
The concept of MPBF was the cornerstone of financing which had emerged as
a result of recommendation of Tandon and Chore. However RBI has now
abolished the guidelines for MPBF and advised the banks to draw the
guidelines for credit dispensation. Our bank is still following MPBF system.
However the relaxations on case to cases are being allowed.

NAYAK COMMITTEE RECOMMENDATIONS

To give a comprehensive and straight line method for the assessment of

working capital requirement of the borrowers, RBI constituted a working
group under the chairmanship of Shri P.R.Nayak. The study group gave its
recommendations in March 1993. In April, 1993, RBI implemented the
recommendations of Nayak Committee for assessing the credit requirements
of village industries, tiny industries and other SSI units . Initially the
recommendations were for SSI units only but now other units have also been
covered. Presently units covered under these guidelines are those having
aggregate fund-based working capital credit limits less than Rs.200 lacs for
other than SSI and Rs. 500 lacs for SSI from the banking system.

It has been advised not to apply the norms for inventory and receivables as
also the Methods of Lending. Instead such units be provided working capital
limits computed on the basis of a minimum of 20% of their Projected Annual
Turn-Over (PATO) for new as well as existing units. Their working capital
requirement be assessed at a minimum of 25% of their Projected Annual Turn-
Over (PATO) assessed on realistic basis for new as well as existing units. Out of
this, at least 4/5th(20% of their PATO) be provided by the bank and the
borrower should contribute 1/5th of this estimated working capital
requirement (5% of PATO) as margin money of working capital.

- In case the margin with the party is more than 5%, PBF may be adjusted
accordingly.

- The 20% limit is the minimum. As a temporary relief measure for SME
Units, RBI has allowed banks to finance up to 25% under stimulus

Package. The same shall be reviewed after 30.6.09. However if the working

Capital cycle is longer than 3 months, higher limit may be fixed. If the working

Capital cycle is less than 3 months, the limit may be fixed @ 20 % of turnover

But actual withdrawal should be allowed only on the basis of actual D.P.

However lower limit can be sanctioned if requested in writing by the borrower.

LENDING DISCIPLINE - QUARTERLY MONITORING SYSTEM (QMS)

Consequent to operational freedom granted by RBI in regard to submission of
statements under QIS/Monthly Cash Budget System prescribed under CMA,
Bank reviewed the same and submission of QIS was replaced with Quarterly
Monitoring System (QMS)
The QMS discipline is to be enforced on all borrowers enjoying working capital
limits of Rs.1 crore and over from the banking system, irrespective of whether
they are exporters or otherwise
In case the limits have been sanctioned on the basis of Naik Committee, 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 relates.

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

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

COMMITMENT CHARGES

To discourage the borrowers from non-availment of credit already provided to

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

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

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

PENAL INTEREST
In order to instil 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:
 Default in repayment of loans
 Irregularity in cash credit account
 Non submission of stock statements and other financial data
 Default in adhering to borrowing covenants
 Non-payment of bills
 Excess borrowings arising out of excess current assets
 Non submission of information under Quarterly Monitoring
System
EXEMPTION FROM PENAL INTEREST
o All advances up to 25000/-
o Sick unit under rehabilitation
o Sick unit remained closed
o Advance against deposits/LIC policy/Govt. securities/Gold &
Jewellery where the drawings are within available value of
security
o Account transferred to Protested category

RATE OF PENAL INTEREST

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

AMOUNT ON WHICH PENAL INTEREST TO BE CHARGED

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

 Total amount of outstanding – for non-submission of stock statement

and other financial data/default adhering to borrowing
covenants/non-submission of information under QMS.
APPRAISAL TECHNIQUES FOR RETAIL LOANS

I. EDUCATION LOANS

Till some 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 loans

Student loans in India (popularly known as Education loans) have become a

popular method of funding higher education in India with the cost of
educational degrees going higher. The spread of self-financing
institutions(which has less to no funding from the government) for higher
education in fields of engineering, medical and management which has higher
fees than their government aided counterparts have encouraged the trend in
India. Most large public sector and private sector banks offer educational
loans.

Under section 80(e) of the Indian Income tax act, a person can exempt the
amount paid against the interest of the education loan - either for self or for
his/her spouse or children - for eight years from the year (s)he starts to repay
the loan or for the duration the loan is in effect, whichever is lesser.
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 INDIAN BANK is known as Vidyalakshyapurti

scheme. The details regarding its eligibility, processing, documentation etc. are
given as follows:-

Concept VIDYALAKSHYAPURTI Scheme is the main scheme and its

variant INDIAN BANK 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 In case of more than one loan in a family, the family as a
one loan in a unit is to be taken into account for considering the loan and
family 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 There is no restriction with regard to age of student for
student being eligible for the loan.
Income No Income criteria are prescribed for the parents. However
Criteria amount of loan be decided by judging Income of the
parents.
Amount of Rs. 10.00 lac in India and 20.00 lac for abroad. CH can
loan exercise higher powers.
Priority Rs. 10.00 lac in India and Rs. 20.00 lac for abroad.
Sector
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
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  Extension of EM of IP
members  Fresh Mortgage if there is no HL
 Co-obligation of employee
Penal Up to 25000/- ----NIL , Above 25000/- @ 2% on OVERDUE
Interest AMOUNT
Upfront fee  NIL
 0.50% (Maximum 5000/-) for studies abroad which is
eligible for refund on availment of loan.
Documentati  Upto 4.00 lac - Rs. 270/- plus service tax
on 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
interest and kept in 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
concession holiday period. The concession will be given at start of
repayment and EMI will be fixed accordingly.
Rebate of 0.5% is allowed to students of IITs, IIMs etc.
Constitutes Tuition fees, Hostel charges, Exam fees, Library/Lab charges,
of loan Books, Equipment, Instruments, Uniform, Building fund,
Refundable deposit, Travel expenses & Computers. (Advances
for Computers are allowed in Computer/Management courses
only.)
Fees re- Within 6 months. Circle Head can allow beyond a period of 6
imbursement months 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 INDIAN BANK 1116 if student is minor.
4. Agreement on INDIAN BANK 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
Follow up report at regular intervals.
Life Insurance In terms of guidelines contained in RBD-A cir no. 16/08 dt.
by Kotak 26.3.08, Insurance policy can be obtained to meet the
Mahindra exigencies in case of death 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 according to age and
total insurance Tenor. The scheme is valid for one year.
Relaxations It has been decided to permit the following relaxations to the
for students students securing admission in IITs/IIMs/MDI Gurgaon/XLRI
of IIT,IIM, Jamshedpur and ISB Hyderabad:
MDI, XLRI,
ISB  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
provisions guarantor to be 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
loan education loan applications to maximum 1 week except cases
applications of CH and above level where the outer limit of disposal will be
2 weeks from the date of receipt of complete application.

II. VEHICLE LOANS

Today, vehicles can be financed using a number of options such as loans, lease,
or hire purchase agreement. Obtaining a vehicle loan is one of the more
straightforward ways of financing a two or four wheeler. In this manner, the
vehicle purchased is actually possessed by the bank or lending institution. This
means the car or motorbike is hypothecated. Therefore, though the consumer
owns the vehicle, the bank or the lending institution is actually using it as a
security against the loan that the consumer has obtained.

Vehicle loan provided by INDIAN BANK are under two categories know as
INDIAN BANK SARTHI and CAR Loan & details about its processing, eligibility,
margin etc are discussed below:-

INDIAN BANK SARATHI

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  10000/- pm. Is the minimum criteria.
criteria  Income of parents be considered in case of students.
 Income of spouse can be added.
Switch over On flat fee of 2%
to 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  INDIAN BANK 551 is required for the Ist time. In case
Inspection account is regular, INDIAN BANK 551 is not required
thereafter.
 In case the account is irregular, Qtrly. Inspection is must.
Upfront fee Rs 200/- + Service Tax For students – Nil
Documentati Rs. 270/- plus service tax
on Charges
Other  Driving License is required.
Requirement  Statement of account for the last 3 years is required.
s  Income Tax Proof
 Salary certificate
 Income of spouse can be considered if he/she is made
guarantor.
 CAR LOAN
Conveyance Loan (Public) for Car

Eligibility Individual & Business concerns, Professionals &

Agriculturists with 6M transaction records.
Purpose & Car, Van & Jeep, New or Old (not older than 3 years –
Extent Multi Utility CH powers)
Vehicles/Sports
Utility Vecles
Individuals  25 times of net monthly salary or
Rs. 25 lac whichever is lower for
one or more vehicles.
 CH may relax the criteria within
powers keeping in view the
repayment capacity.
 Income of spouse can be
considered provided he/she
stands as additional guarantor
Business Corporate No Ceiling. One or more vehicle can
and non-corporate be 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 margin.
Govt./PSU employees 15% (Repayment in 84 EMIs)
If net income is more than 6 Margin can be reduced to
lac 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 The rate is on fixed option with reset clause of 1 year. Rate
Interest 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.
Documentati Rs. 270/- (Tie up arrangement Rs.1270/- ) up to Rs. 2.00 lac
on charges + ST
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  INDIAN BANK 551 is required for the 1 st. time. In case
Inspection account is regular, INDIAN BANK 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
Provisions case of Old Car
 Driving License is not at all required.
 Statement of account for the last 6 M. is required.
 Car loan finance to business concerns for personal use
of executives shall be outside the purview of corporate
banking and may be sanctioned by officials under vested
powers even in case where existing facilities have been
sanctioned by higher authorities in terms of RBD cir. No.
51 dt. 15/09/09.
 III. 5.8.3 HOUSING LOANS
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 weightage for housing
loans is only 50 % , enabling expansion of the credit portfolio with
lesser capital requirement. The prevailing lower interest rates, which
have resulted in greater affordability and the tax concessions offered
by the government have made this one of the fastest growing
financial products. Further since the housing loan portfolio typically
comprises a large pool of small and medium sized loans, risk is
distributed over a large number of accounts, which is ideal from Risk
Management point of view. Hence growth of quality assets under
Housing Finance is one of the major areas of focus for the bank.

  INDIAN BANK-(INDIAN BANK) Home Loan offers the most

consumer friendly home loans and housing finance schemes at attractive
rates. INDIAN BANK 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. INDIAN BANK
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 INDIAN BANK Home Loan. 
The details of housing loan product of INDIAN BANK regarding its
purpose, eligibility criteria, assessment, processing, documentation, cut
 back, margin, pre-sanction follow ups, etc. are as follows

1. HOUSING FINANCE (PUBLIC)

Eligibility
Individual & Joint Owners

Purpose & Extent

Purchase of Plot
Rs.20 lac. However, RM & above may consider Loan upto 50 lac.

Construction of House
Need based

Semi -built House/flat from Pvt Builders

Small/Medium branch
Rs. 10 lac
Large branch
Rs. 20 lac
ELB/VLBs
Rs. 40 lac
CH (AGM)
Rs. 100 lac
CH (DGM)
Rs 100 lac
GM Rs.150 lac

Repair & Renovation

Rs. 20 lac
Cost of furnishing
Max. 10% of the loan upto maximum of Rs. 2.00 lac

Pari pasu Charge

CH powers up to 20 lac to Govt. Employees

Freehold & Lease hold

 The loan can be granted both for freehold and for leasehold property.
 In case of Leasehold, loan can be granted on the basis of P/A from original
allottee where DDA/PUDA/HUDA permit conversion of leasehold into
freehold property.
 Otherwise advance is not permitted against plots purchased on Power of
Attorney basis.

Capital Requirement
Loan limit up to 30 lac Risk Weight is 50%
Loan limit above 30 lac Risk Weight is 75%
LTV Ratio more than Risk Weight is 100%
75%

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.

Concessional Rate of Interest for Defense Employees

Bank has decided to extend concessions to Defense personnel who are raising
Housing Loans under bank’s regular Housing Loan scheme for 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 account.
 The Income of spouse and earning children can be taken into account
provided they are made co-borrowers.
 Father/mother can also be made co-borrowers in cases where property is
in the single name of his/her son and also clubbing of their income is
permitted for determining eligibility criteria.
 Minimum 24 advance cheques should be obtained. As and when, 6
cheques remain, fresh lot be obtained. Out of 24, 23 cheques should be of
installments and 1 cheque should be of the amount equal to the balance
amount.

Graduated EMI
INDIAN BANK offers benefit of graduated EMI. This means that the customer
has the option of choosing EMI that can increase or decrease during
repayment period rather than being given a fixed EMI over repayment tenor.

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 charges
Rs.1350 + service tax

Security
 Equitable/Registered Mortgage of Immovable Property
 Tripartite agreement be executed amongst Housing Board/Dev
Authority/Coop Society/Builder, the borrower and the bank where
mortgage cannot be created immediately. In such cases, 3 rd 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 1 st 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 3 rd party guarantee can be obtained to
raise score of the applicant.

Insurance
In case of building at Re-construction cost.

Priority Sector inclusion

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 take over, permission of higher authority is not required

Important conditions
Loan cannot be granted
 For construction in Un-authorized colonies
 If property is to be used for commercial purpose
 Without approved Map
( In Compliance of Delhi High Court Orders)
 Pre-payment charges of 2% be recovered on account being taken over
by another bank. In case, the loan is pre-paid out of own sources or the
loan is taken over by another bank with in 30 days from date of circular
by which either the interest is raised or any important term or condition
 is changed, there will be no pre-payment charges.
 Flat pre-payment charges of 2% be recovered from borrowers who pre-
pay without construction on the plot before 5 years.
 Powers of concessions in rate of interest/other charges stand
withdrawn vide RBD cir no. 52/07 dt. 13.11.07.
In case, the construction of house is not completed within 3 years or in case
the plot is sold, penal interest @2% over and above the applicable rate be
charged.
Expression of Interest
It is a letter issued by the bank/branch wherein the lender expresses intention
to make advance to the intended borrower on the basis of eligibility criteria
subject to the fulfillment of terms and conditions.

Grih Raksha Kavach

It is Mortgage Reducing Term Assurance Policy issued in Tie up arrangement
with TATA-AIG. There is one-time premium of 2.5% (approx) and that amount
can also be financed. The coverage of the scheme is 1-20 years. The sum
assured is between Rs.10000 to Rs. 1.00 crore. In case of death of the
borrower, receipt from insurance company can be utilized towards
adjustment of loan amount as per amortization table. Prior permission of
TATA-AIG is required if amount is over Rs. 80.00 lac.

Iffco Tokyo general insurance co.

The coverage for accidental death and permanent total disability (due to
accident) along with mandatory insurance “Fire Policy – including earthquake”
is offered in tie up arrangement with Iffco Tokyo General Insurance Co. Ltd. To
all existing as well as new borrowers.

Earnest Money Deposit Scheme

 To meet the requirement of earnest money to apply for plot/flat/house
from State Housing Boards and Urban Development authorities.
 These authorities undertake to refund or issue allotment letter to the bank
subject to eligibility of the bank for proposed loan and future requirement
of Housing Loan.
 Extent of loan is 90% of EMD or max. Rs 2.00 lac in the shape of Demand
Loan
 ROI is BPLR – 1.75%
 Repayment through Refund order/Housing Loan/Bullet Payment.
 Guarantee clause deleted

OD Facility to existing H/L borrowers

OD facility can be allowed to existing Housing Loan borrowers there is no IR
irregularity. Other features of the scheme are as under:
 Minimum 50000/- and Maximum Rs. 5.00 lac.
 Additional limit and present o/s should not exceed 75% of current
market price of the house so as to maintain margin of 25%.
 Upfront fees is NIL and documentation charges are Rs. 500/-.
 Take home salary should not be less than 40% of gross salary.
 Loaning powers are SB-Nil, MB- Rs.4.00 lac, LB, ELB & VLB
 Rs. 5.00 lac.
 ROI is equal to BPLR
 After HL is repaid, OD can be continued/ renewed provided the
sanctioning authority is satisfied about repaying capacity of the
borrower and Value of security.
 OD facility for personal use should not be sanctioned to the
borrowers, who have availed loan for plot , construction on which is
yet to be completed in terms of RBD cir. no. 43 dt.21/08/09
On review, it has been decided to do away with the condition of minimum 2
year of repayment track record of the borrower for considering OD facility up
to 5 lac. However this is subject to compliance of all other terms and
conditions such as KYC norms, CIBIL database, takeover guidelines, security
norms, maintenance of margin etc.

This facility is outside the purview of “Hub and Spoke“ model in the accounts
of existing HL borrowers.
(RBD Cir. No. 64 dt. 19.12.2009)

INDIAN BANK Flexible Housing Loan Scheme

This is an attractive variant of Housing Loan Scheme offered by the INDIAN
BANK for its customers. Under this scheme, OD facility is made available to the
HL borrower. He can deposit his savings and withdraw the same as per his
requirement. The features of the scheme are as under:
Eligibility
 Age of the applicant must be less than 50.
 Existing HL borrowers can also apply provided their loan account is regular
and no IR irregularity persists.

Purpose
All purposes as per original scheme except Purchase of Land / Plot.

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

IV. 5.8.4 Personal Loan For Pensioner & Public

Two types of personal loans are being offered by INDIAN BANK. Personal loan
for pensioner is special category of retail lending scheme being offered by
INDIAN 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
Extent 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
calculation borrowers up to 75 years’ age) and 12 months net pension
or Rs 70000 (for borrowers above 75 years’ age)
whichever is lower. For defense retirees, the loan
equivalent to 20 M net Pension can be granted. Take
home Pension should not be less than 50% of monthly
pension
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
charges
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
 PERSONAL LOANS FOR PUBLIC
Eligibility Only INDIAN BANK 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 M.
 Confirmed permanent employees of Central/state
Govt./PSUs/Reputed Co./Schools/Institutions who
fulfill any of the following 2 conditions:
 Route of salary through branch
 Check-off facility
 Professionally qualified practicing doctors viz. MBBS,
BDS and above having customer relationship with
INDIAN BANK at least for 6 months having annual
income of Rs. 4.00 lac and above. Doctors should be
tax payers for 3 years and ITRs be kept on record.
Check off It means that the employer undertakes to deduct monthly
Facility installment from the salary and remit the same towards
adjustment of the loan till its liquidation and also confirms
attachment of terminal dues of the borrower/employee.
Purpose & Personal needs. Minimum Rs. 50000 & Maximum Rs. 4.00
Extent lac or 20 times net salary whichever is lower depending
upon the repaying capacity & Rs. 5.00 lac for those
salaried persons who have completed 3 years in the
present organization and drawing net monthly salary not
less than Rs. 30000/-.
Nature TL or OD
Sanction and All branches can generate leads for processing at Retail
Disbursement Hubs/CCPCs. However disbursement can be made only by
branches having recovery percentage of not less than
90% under Personal Loan segment as at end of previous
half year.
Metro Rs. 15000/- p.m.
Minimum net Urban Rs. 12500/- p.m.
monthly SU & Rural areas Rs. 10000/- p.m.
income 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 income.
60 advance cheques (maximum) signed by the borrower
along with letter of deposit be obtained. Obtention of
advance cheques is applicable where check off facility is
not available.
Guarantee Suitable 3rd party guarantee. RM/CM may waive
RBL Sheet INDIAN BANK 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
Requirements be sent to Controller of Defense Account (CDAO)
Pune so that salary is remitted till liquidation of loan
 Statement of account for at least 6 m. be obtained.
 Affidavit that no other loan from other bank is
availed be obtained.
 Copy of IT return for previous 3 years be obtained.
Form 16 be taken if loan is granted to employee.
 A Registered letter be sent to the employer
informing about details of loan raised by the
employee.
RBD Cir. No.  It is clarified that the branches eligible for
27/09 dt. disbursement/maintaining the accounts shall obtain
26.5.2009 blanket permission from CH for disbursement in the
next 25 accounts submitting performance of the
 branch under the portfolio.

The genuineness of salary certificates be independently

got verified from HR Deptt. Of the employer of
applicant.Hubs should ensure drawing of CIRs from CIBIL
Data base for considering request of Personal Loans.

V. 5.8.5 INDIAN BANK Baghban scheme for senior citizen

INDIAN BANK is the first Public Sector Bank to come out with a Reverse
Mortgage concept based product for senior citizen titled "INDIAN BANK
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 amount
Income No
criteria
Rate of 10.5% with reset clause of 5 years.
Interest
Disbursemen In the shape of monthly instalments (to be calculated on
t of loan reverse annuity basis) during loan tenor of 15-20 years for
age group of individuals between 60-70 years and 10-15
years for age group of over 70 years or till death of last
surviving spouse, whichever is earlier.
For example, if Qualifying amount is Rs. 1.00 lac,
On 10 year tenor of loan, monthly installment will be Rs.
475/-, On 15 year tenor, monthly instalment will be Rs.
230/- and on 20 year tenor, monthly instalment will be Rs.
125/-
The series of monthly instalments would continue after
death of first spouse during life time of surviving spouse.
Tenor of loan Age group of 60-70 years 15-20 years
Age group above 70 years 10 –15 years
Insurance Against fire, Earthquake and other calamities at the cost of
the borrower
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. NIL
Charges
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 the 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
Property certificate from 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
property as provided bank is satisfied that there are no other legal heirs
security or original title deed is not 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
UNDER lac. The cases can be considered on selective basis by HO
INDIAN BANK only for medical purpose to senior citizens for treatment of
BAGHBAN self, spouse and dependents.
SCHEME
Amendments Following two amendments have been carried out in IT Act,
in INDIAN 1961. 1. Reverse Mortgage does not tantamount
BANK to transfer; therefore there is no Capital Gain Tax. Income
Baghban tax is levied only at the time of alienation of Mortgaged
Scheme 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.

Conclusion
Credit appraisal is a process of appraising the credit worthiness of loan
applicants. The fund of depositors i.e. general public are mobilised by means
of such advances / investments. Thus it is extremely important for lender bank
to assess the risk associated with credit, thereby ensure the security for fund
deposited by depositors. Therefore my analyses regarding credit appraisal
procedure of INDIAN 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 lending.
 Bank lending process in case of retail loan is very much fast after
compiling with all the criteria of bank.
 In case of project financing bank follow lengthy norms to check the
feasibility of the project such as:-
I. Firstly personal appraisal of promoter is done by the bank to
ensure that promoters are experienced in the line of business
and capable to implement and run the project efficiently.
II. Secondly detail study about the technical aspect is done to
find the technical soundness of project such as proper
scrutiny of financial report is done, valuation of property by
government approved valuer is done and view regarding each
and every area of project is done under technical analysis.
III. A detail study relating financial viability of project is done by
detail study of cash flow, fund flow statements and by
calculating import ratio which is very much necessary for
project appraisal such as DSCR, DER etc. the main purpose of
financial appraisal is insure that project will ensure sufficient
surplus to repay the instalment and interest.
IV. Risk analysis is done by bank to determine the risk associated
 with the project. This is mainly done by sensitivity analysis
and by INDIAN BANK credit rating or scoring. With sensitive
analysis feasibility of project is determined under worsened
condition. Credit rating or INDIAN BANK 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 INDIAN BANK has sound credit appraisal system.
 BIBLIOGRAPHY

i. INDIAN BANK ANNUAL REPORT

ii. INDIAN BANK JOURNALS
iii. BOOKS
 MANAGEMENT OF INDIAN FINANCIAL INSTITUTION, SRIVASTAVA R.M
& NIGAM DIVYA, 10TH EDITION,2010, HIMALYA PUBLISHING
HOUSE, GURGAON MUMBAI
 FINANCIA INSTITUTION AND MARKETS, BHOLE L.M, 5TH EDITION,2009,
TATA Mc GRAW- HILLS,7 WEST PATEL NAGAR, NEW DELHI
iv. WEBSITE
 www.INDIAN BANKindia.com
 www.rbi.gov.in
 www.google.com

v. NEWSPAPER