Credit App at Sbi
-
Upload
digvijay-diggi -
Category
Documents
-
view
218 -
download
0
Transcript of Credit App at Sbi
-
8/2/2019 Credit App at Sbi
1/127
CHAPTER 1
EXECUTIVE SUMMARY
-
8/2/2019 Credit App at Sbi
2/127
The project is on credit appraisal process of State bank of India. Credit
appraisal is an important activity carried out by the credit department of the
bank to determine whether to accept or reject the proposal for finance. Credit
Appraisal is a process to ascertain the risks associated with the extension of the
credit facility. It is generally carried by the financial institutions like banks
which are involved in providing financial funding to its customers.
The project first of all makes a study of the state bank of India - its important
functions. Then it highlights on the concept of Bank Credit & its recent trends.
The project then proceed towards the lending procedure of banks and here it
highlights about credit appraisal being the first step in building up of a loan
proposal. Then it discusses the bank credit policy with respect to state bank of
India where the project was undertaken.
The project then proceeds with the review of literature i.e. review of some past
work regarding credit appraisal by various researchers. The project then moves
towards research methodology where it covers the information regarding the
type of data collected and the theoretical concepts used in the project are
discussed in detail. Then the project proceeds with the next chapter consisting
of the analysis part which covers the analysis of various techniques used by the
banks for the purpose of credit appraisal and analysis of the customers views
towards the credit policy system of the bank. Then the project moves to its next
chapter i.e. findings where some results found out are interpreted and then
moving on to the last and the final chapter i.e. the suggestions and conclusions
where some steps are suggested to be implemented to increase the work
efficiency and to reduce to work pressure.
-
8/2/2019 Credit App at Sbi
3/127
CHAPTER 2
OBJECTIVE OF THE STUDY
-
8/2/2019 Credit App at Sbi
4/127
1.1 OBJECTIVE OF THE STUDY
Objectives of a project tell us why a project has been taken under study. It
helps us to know more about the topic that is being undertaken and helps us
to explore future prospects of that organization.
To analyse the importance of credit appraisal system in State bank of India
To find out the effectiveness of the credit appraisal system in State bank of
India.
To study the credit policy adopted by the bank for their lending activities
To analyse the credit risk assessment (CRA) system followed in the bank Carryout customer satisfaction survey to find out the perspective of the
customer towards the credit appraisal system of the bank
-
8/2/2019 Credit App at Sbi
5/127
CHAPTER 3
RESEARCH METHODOLOGY
-
8/2/2019 Credit App at Sbi
6/127
RESEARCH METHODOLOGY
In any research work, the methodology used is of crucial significance. Any
research methodology used must be able to meet certain goals. Any research
methodology used must help in achievement of the objectives of the study.
Secondly, the research methodology must deliver accurate data and, by
extension, accurate results.
Methods of Data collection:
The analysis tools used is of both types which include
1. Primary data.
a) Questionnaire.
b) Survey
2. Secondary Data.
a) Newspaper & Books
b) Internet & Journals.
Sample Area & Size:
A Survey was conducted in the area of thane with a Sample Size of 100Respondents.
-
8/2/2019 Credit App at Sbi
7/127
CHAPTER 4
LITERATURE REVIEW
-
8/2/2019 Credit App at Sbi
8/127
Review of Literature
Literature review provides available research with respect to the selected topic
of the project or the research findings by an author which has been done with
respect to the research topic. This chapter provides the overall view of the
available literature with respect to the topic of the project. The review of the
related research works are described as under:-
1. A research work on the topic On the appraisal on consumer credit banking
products with the asset quality frame: A multiple criteria application . done
by Panagiotis Xidonas, Alexandros Flamos, Sortirios Koussouris, Dimitrious
Askouins & Ioannis Psarras from National Technical University of Athens in
2007 says that Asset quality refers to the likelihood that the bank's earning
assets will continue to perform and requires both a qualitative and quantitativeassessment. 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 modeling banking products
appraisal problems. A Multiple Criteria process, strictly mathematically
defined, integrates the behavior of each indicator-criterion and utilizes each
score in order to rank the so called "alternatives", i.e. categories of banking
products.
-
8/2/2019 Credit App at Sbi
9/127
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, and sensitivity analysis
and risk evaluation as per SBI norms. They have also used a strong Quassi
experimental design called Solomons four group design for the assessment. In
the experiment the managers of SBI who attended the training programme were
the subjects the experiment consisted of the measurements that were taken as
pre and post tests. An experimental intervention was applied between the pre-tests and the pro-tests. The intervention or stimulus consisted of DSS training
and use. There were four groups in the experiment. The stimulus remained
constant as the they took care to ensure that the course content as well as the
instructors remained the same during the course of the experiment. Two were
experimental groups and two were control groups. All four groups underwent
training in credit management between the pre and the post tests. Results fromresearch shows that while the DSS is effective, improvement needs to be done
in the methodology to assess such improvements. Moreover such assessment
frameworks while being adequate from a DSS-centric viewpoint do not respond
to the assessment of DSS in an organizational setting. In the concluding section
they have discussed how this evaluative framework can be strengthened to
initiate an activity that will allow the long term and possibly the only
meaningful evaluation framework for such a system
-
8/2/2019 Credit App at Sbi
10/127
3. The research paper in Credit appraisal in the US by Elkhoury 2009 says
that Credit rating companies play a fundamental role in shaping economic
directions of countries. Credit rating agencies (CRAs) play a key role in
financial markets by helping to reduce the
informative asymmetry between lenders and investors, on one side, and issuers
on the other side, about the creditworthiness of companies or countries. CRAs'
role has expanded with financial globalization and has received an additional
boost from Basel II which incorporates the ratings of CRAs into the rules for
setting weights for credit risk. Ratings tend to be sticky, lagging markets, and
overreact when they do change. In the United States, just like in other
industrialised countries, credit rating agencies (CRA's) are crucially important
manifestations of financial spheres and their role in driving economies cannot
be underrated. Credit appraisal in the United States is an industry that continues
to face several challenges. Firstly, the industry has the agencies have continued
to operate within their own financial and market architectural frameworks,
despite massive changes which have continued to present themselves in the
financial sector. Of late, credit appraisal agencies in the United States has come
under focus due to the prevailing credit crisis facing the country and ,by
extension, the global economy as well. Several criticisms have been levelled
against the major credit rating agencies. Additionally, it has been noted that the
quality of the agencies rating process must be effective and accountable to
issuers of debts. In particular, it has been reported that in course of executing
their responsibilities, CRAs should not, ideally, encounter financial situations
which compromise their integrity. This, it has been shown, would reduce the
levels of risks of debt issuers. However, Kerr (2008) reports that the quality of
rating process of the agencies has been poor, with cases of conflict of interests
being detected. It has recommended expanding the [voluntary] code to try to
-
8/2/2019 Credit App at Sbi
11/127
ensure the quality of the rating process, avoid conflicts of interest, define
agencies responsibilities to issuers of debt and credit investors and clarify
agencies communication with market participants. However the author writes
that such measures are intended to 'enhancing competition, promoting
transparency, reducing conflicts of interest, and reducing ratings-dependent
regulation. These approaches are all broadly consistent with the dominant
academic theory of rating agencies, the "reputational capital" model, which is
taken to imply that under the right circumstances a well-functioning reputation
mechanism will deter low-quality ratings. The policy initiatives currently under
consideration can be seen as efforts to fix discrete problems with the rating
market so that the reputation mechanism can work properly.'
4. 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. From 1975 to 1997, the number of
commercial banks decreased by about 35 percent, from 14,318 to 9,215. Since
the early 1980s, there have been an average of more than
400 mergers per year (see Avery et al., 1997, and Simmons and Stavins, 1998).
The relaxation of intrastate branching restrictions, effective to differing degrees
in all states by 1992, and the passage in 1994 of the Riegle.Neal Interstate
Banking and Branching Efficiency Act, which allows bank holding companies
to acquire banks in any state and, since June 1, 1997, to open interstate
branches, is certainly accelerating the process of consolidation. These
significant changes raise important policy concerns. On the one hand, one could
argue that banks are merging to fully exploit potential economies of scale
and/or scope. The possible improvements in efficiency may translate into
welfare gains for the economy, to the extent that customers pay lower prices for
-
8/2/2019 Credit App at Sbi
12/127
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.
-
8/2/2019 Credit App at Sbi
13/127
CHAPTER 5
INTRODUCTION TO BANKING SECTOR
-
8/2/2019 Credit App at Sbi
14/127
5.1A snapshot of the banking industry
The Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.
The banking sector is dominated by Scheduled Commercial Banks (SBCs). As
at end March 2002, there were 296 Commercial banks operating in India. This
included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196
Regional Rural Banks. Also, there were 67 scheduled co-operative banks
consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-
operative banks.
Scheduled commercial banks touched, on the deposit front, a growth of 14% as
against 18% registered in the previous year. And on advances, the growth was
14.5% against 17.3% of the earlier year.
State Bank of India is still the largest bank in India with the market share of
20% ICICI and its two subsidiaries merged with ICICI Bank, leading creatingthe second largest bank in India with a balance sheet size of Rs. 1040bn.
Higher provisioning norms, tighter asset classification norms, dispensing with
the concept of past due for recognition of NPAs, lowering of ceiling on
exposure to a single borrower and group exposure etc., are among the measures
in order to improve the banking sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to
strengthen the ability of banks to absorb losses and the ratio has subsequently
been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004
based on the Basle Committee recommendations.
Retail Banking is the new mantra in the banking sector. The home Loans alone
account for nearly two-third of the total retail portfolio of the bank. According
to one estimate, the retail segment is expected to grow at 30-40% in the coming
-
8/2/2019 Credit App at Sbi
15/127
years. Net banking, phone banking, mobile banking, ATMs and bill payments
are the new buzz words that banks are using to lure customers.
With a view to provide an institutional mechanism for sharing of information
on borrowers / potential borrowers by banks and Financial Institutions, the
Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The
Bureau provides a framework for collecting, processing and sharing credit
information on borrowers of credit institutions. SBI and HDFC are the
promoters of the CIBIL.
The RBI is now planning to transfer of its stakes in the SBI, NHB and Nationalbank for Agricultural and Rural Development to the private players. Also, the
Government has sought to lower its holding in PSBs to a minimum of 33% of
total capital by allowing them to raise capital from the market. Banks are free to
acquire shares, convertible debentures of corporate and units of equity oriented
mutual funds, subject to a ceiling of 5% of the total outstanding advances
(including commercial paper) as on March 31 of the previous year.
The finance ministry spelt out structure of the government-sponsored ARC
called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot
project of the ministry would pave way for smoother functioning of the credit
market in the country. The government will hold 49% stake and private players
will hold the rest 51%- the majority being held by ICICI Bank (24.5%).
-
8/2/2019 Credit App at Sbi
16/127
Reforms in the Banking sector
The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from Class banking to Mass banking. Thisin turn resulted in a significant growth in the geographical coverage of banks.
Every bank has to earmark a minimum percentage of their Loan portfolio to
sectors identified as priority sectors. The m anufacturing sector also grew
during the 1970s in protected environs and the banking sector was a critical
source. The next wave of reforms saw the nationalization of 6 more commercial
banks in 1980. Since then the number scheduled commercial banks increased
four-fold and the number of banks branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the
sector in the early nineties, the Public Sector Banks (PSB) s found it extremely
difficult to complete with the new private sector banks and the foreign banks.
The new private sector banks first made their appearance after the guidelines
permitting them were issued in January 1993. Eight new private sector banksare presently in operation. This banks due to their late start have access to state-
of-the-art technology, which in turn helps them to save on manpower costs and
provide better services.
During the year 2000, the State Bank of India (SBI) and its 7 associates
accounted for a 25% share in deposits and 28.1% share in credit. The 20
nationalized banks accounted for 53.5% of the deposits and 47.5% of credit
during the same period. The share of foreign banks ( numbering 42 ), regional
rural banks and other scheduled commercial banks accounted for 5.7%, 3.9%
and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively
in credit during the year 2000
-
8/2/2019 Credit App at Sbi
17/127
Classification of Banks:
The Indian banking industry, which is governed by the Banking Regulation Act
of India
1949 can be broadly classified into two major categories, non-scheduled
banks and scheduled banks. Scheduled banks comprise commercial banks
and the co-operative banks. In Terms of ownership, commercial banks can be
further grouped into nationalized banks, the State Bank of India and its group
banks, regional rural banks and private sector banks (the old / new domestic
and foreign). These banks have over 67,000 branches spread across the country.
The Indian banking industry is a mix of the public sector, private sector
and foreign banks. The private sector banks are again spilt into old banks
and new banks.
-
8/2/2019 Credit App at Sbi
18/127
Banking System in India
Reserve bank of India (Controlling Authority)
Development Financial institutions Banks
IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank SIDBI
Commercial Regional Rural Land Development Cooperative
Banks Banks Banks Banks
Public Sector Banks Private Sector Banks
SBI Groups Nationalized Banks Indian Banks Foreign Banks
-
8/2/2019 Credit App at Sbi
19/127
Commercial banks and its objectives
A commercial bank is a type of financial intermediary that provides checkingaccounts, savings accounts, and money market accounts and that accepts time
deposits. Some use the term "commercial bank" to refer to a bank or a division
of a bank primarily dealing with deposits and loans from corporations or large
businesses. This is what people normally call a "bank". The term "commercial"
was used to distinguish it from an investment bank.
Commercial banks are the oldest, biggest and fastest growing financial
intermediaries in India. They are also the most important depositories of public
savings and the most important disbursers of finance. Commercial banking in
India is a unique banking system, the like of which exists nowhere in the world.
The truth of this statement becomes clear as one studies the philosophy and
approaches that have contributed to the evolution of banking policy,
programmes and operations in India.
The banking system in India works under constraints that go with social control
and public ownership. The public ownership of banks has been achieved in
three stages: 1995, July 1969 and April, 1980. Not only the public sector banks
but also the private sector and foreign banks are required to meet the targets in
respect of sectoral deployment of credit, regional distribution of branches, and
regional credit deposit ratios. The operations of banks have been determined by
lead bank scheme, Differential Rate of interest scheme, Credit authorization
scheme, inventory norms and lending systems prescribed by the authorities, the
formulation of credit plans, and service area approach.
-
8/2/2019 Credit App at Sbi
20/127
Commercial Banks in India have a special role in India. The privileged role of
the banks is the result of their unique features. The liabilities of Bank are
money and therefore they are important part of the payment mechanism of any
country. For a financial system to mobilize and allocate savings of the country
successfully and productively and to facilitate day-to-day transactions there
must be a class of financial institutions that the public views are as safe and
convenient outlets for its savings. The structure and working of the banking
system are integral to a countrys financial stability and economic growth. It
has been rightly claimed that the diversification and development of Indian
Economy are in no small measure due to the active role banks have played
financing economic activities of different sectors.
-
8/2/2019 Credit App at Sbi
21/127
Major objectives of commercial banks
Balancing profitability with liquidity management As any other business concern, Banks also aim to make profit but besides that they also need to maintain liquidity beacuse of
the nature of their liabilities.
Management of Reserves Banks are expected to hold a part of their deposits in form of
ready cash which is known as CASH RESERVES. Central bank decides the reserve ratio known as the CRR.
Creation of Credit Banks are said to create deposits or credit or money or it can be
said that every loan given by bank creates a deposit. This has given rise to the important concept of money multiplier.
-
8/2/2019 Credit App at Sbi
22/127
5.2 LOCAL SCENARIO OF BANKING SECTOR
-
8/2/2019 Credit App at Sbi
23/127
Indian Banking System: The Current State & Road Ahead
Introduction
Recent time has witnessed the world economy develop serious difficulties in
terms of lapse of banking & financial institutions and plunging demand.
Prospects became very uncertain causing recession in major economies.
However, amidst all this chaos Indias banking sector has been amongst the few
to maintain resilience.
A progressively growing balance sheet, higher pace of credit expansion,
expanding profitability and productivity akin to banks in developed markets,
lower incidence of nonperforming assets and focus on financial inclusion have
contributed to making Indian banking vibrant and strong. Indian banks have
begun to revise their growth approach and re-evaluate the prospects on hand to
keep the economy rolling. The way forward for the Indian banks is to innovateto take advantage of the new business opportunities and at the same time ensure
continuous assessment of risks.
A rigorous evaluation of the health of commercial banks, recently undertaken
by the Committee on Financial Sector Assessment (CFSA) also shows that the
commercial banks are robust and versatile. The single-factor stress tests
undertaken by the CFSA divulge that the banking system can endure
considerable shocks arising from large possible changes in credit quality,
interest rate and liquidity conditions. These stress tests for credit, market and
liquidity risk show that Indian banks are by and large resilient.
-
8/2/2019 Credit App at Sbi
24/127
Thus, it has become far more imperative to contemplate the role of the Banking
Industry in fostering the long term growth of the economy. With the purview of
economic stability and growth, greater attention is required on both political
and regulatory commitment to long term development programme. FICCI
conducted a survey on the Indian Banking Industry to assess the competitive
advantage offered by the banking sector, as well as the policies and structures
that are required to further the pace of growth. The results of our survey are
given in the following sections.
-
8/2/2019 Credit App at Sbi
25/127
General Banking Scenario
The pace of development for the Indian banking industry has been tremendous
over the past decade. As the world reels from the global financial meltdown,
Ind ias banking sector has been one of the very few to actually maintain
resilience while continuing to provide growth opportunities, a feat unlikely to
be matched by other developed markets around the world. FICCI conducted a
survey on the Indian Banking Industry to assess the competitive advantage
offered by the banking sector, as well as the policies and structures required to
further stimulate the pace of growth.
The predicament of the banks in the developed countries owing to excessive
leverage and lax regulatory system has time and again been compared with
somewhat unscathed Indian Banking Sector. An attempt has been made to
understand the general sentiment with regards to the performance, the
challenges and the opportunities ahead for the Indian Banking Sector.
A majority of the respondents, almost 69% of them, felt that the Indian banking
Industry was in a very good to excellent shape, with a further 25% feeling it
was in good shape and only 6% of the respondents feeling that the performance
of the industry was just average. In fact, an overwhelming majority (93.33%) of
the respondents felt that the banking industry compared with the best of the
sectors of the economy, including pharmaceuticals, infrastructure, etc.
Most of the respondents were positive with regard to the growth rate attainable
by the Indian banking industry for the year 2009-10 and 2014-15, with 53.33%
of the view that growth would be between 15-20% for the year 2009-10 and
greater than 20% for 2014-15.
-
8/2/2019 Credit App at Sbi
26/127
Banking Activities
Over the last three decades, there has been a remarkable increase in the size,
spread and scope of activities of banks in India. The business profile of banks
has transformed dramatically to include non-traditional activities like merchant
banking, mutual funds,new financial services and products and the human
resource development.
Their survey finds that within retail operations, banks rate product development
and differentiation; innovation and customization; cost reduction; cross selling
and technological up gradation as equally important to the growth of their retailoperations. Additionally a few respondents also find pro-active financial
inclusion, credit discipline and income growth of individuals and customer
orientation to be significant factors for their retail growth.
There is, at the same time, an urgent need for Indian banks to move beyond
retail banking, and further grow and expand their fee- based operations, which
has globally remained one of the key drivers of growth and profitability. In fact,
over 80% of banks in their survey have only up to 15% of their total incomes
constituted by fee- based income; and barely 13% have 20-30% of their total
income constituted by fee-based income.
Out of avenues for non-interest income, we see that Banc assurance (85.71%)
and FOREX Management (71.43%) remain most profitable for banks.
Derivatives, understandably, remains the least profitable business opportunity
for banks as the market for derivatives is still in its nascent stage in India.
There is nevertheless a visibly increased focus on fee based sources of income.
71% of banks in their survey saw an increase in their fee based income as a
percentage of their total income for the FY 2008-09 as compared to FY 2007-
08. Indian banks are fast realizing that fee-based sources of income have to be
-
8/2/2019 Credit App at Sbi
27/127
actively looked at as a basis for future growth, if the industry is to become a
global force to reckon with.
-
8/2/2019 Credit App at Sbi
28/127
5.3Bank 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 theindividual has is the sum of the borrowing capacity each lender bank provides
to the individual.
The operating paradigms of the banking industry in general and credit
dispensation in particular have gone through a major upheaval.
Lending rates have fallen sharply.
Traditional growth and earning such as corporate credit has been either
slow or not profitable as before.
Banks moving into retail finance, interest rate on the once attractive retail
loans also started coming down.
Credit risks has went up and new types risks are surfaced
http://www.businessdictionary.com/definition/borrowing.htmlhttp://www.investorwords.com/5872/capacity.htmlhttp://www.investorwords.com/5872/capacity.htmlhttp://www.businessdictionary.com/definition/borrowing.html -
8/2/2019 Credit App at Sbi
29/127
Types of credit
Bank in India provide mainly short term credit for financing working capital
needs although, as will be seen subsequently, their term loans have increasedover the years. The various types of advances provide by them are: (a) Term
Loans, (b) cash credit, (c) overdrafts, (d) demand Loans , (e) purchase and
discounting of commercial bills, and, (f) installment or hire purchase credit.
Volume of Credit -
Commercial banks are a major source of finance to industry and commerce.Outstanding bank credit has gone on increasing from Rs 727 crore in 1951 to
Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-
90 , Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. Banks have
introduced many innovative schemes for the disbursement of credit. Among
such schemes are village adoption, agriculture development branches and
equity fund for small units. Recently, most of the banks have introduced
attractive education loan schemes for pursuing studies at home or abroad. They
have introduced attractive educational loan schemes for pursuing studies at
home or abroad. They have moved in the direction of bridging certain defects
or gaps in their policies, such as giving too much credit to large scale industrial
units and commerce and giving too little credit to agriculture, small industries
and so on.
The Public Sector Banks are still the leading lenders though growth has
declined compared to previous quarter. The credit growth rate has dipped
sharply in foreign and private banks compared to previous quarter. In all, the
credit growth has slipped in this quarter.
-
8/2/2019 Credit App at Sbi
30/127
Credit (YOY Growth)
March 28 2008 March 27
2009 Public Sector Banks 22.5 20.4
The rates have gone down compared to previous quarter when it was seen that
there was no changes in loan rates in private and foreign banks. But then
compared to rate cuts done by RBI, they still need to go lower.
Table 16: Reduction in Deposit and Lending Rates
(October 2008 April 2009*)
(Basis points)
Bank Group
Deposit
Rates
Lending Rates
(BPLR)
Public Sector Banks 125-250 125-225Private Sector Banks 75-200 100-125
Five Major Foreign Banks 100-200 0-100
BPLR Oct 08 Mar 09 Apr 09
Change
(from Oct
to Apr)
Public SectorBanks
13.75-14.75
11.50-14.00
11.50-13.50
125-225
Private Sector
Banks
13.75-
17.75
12.75-
16.75
12.50-
16.75100-125
Five Major
Foreign Banks
14.25-
16.75
14.25-
15.75
14.25-
15.750-100
-
8/2/2019 Credit App at Sbi
31/127
Sector-wise credit points credit has increased to agriculture, industry and real
estate whereas has declined to NBFCs and Housing. A bank group wise
sectoral allocation is also given which suggests private banks have increases
exposure to agriculture and real estate but has declined to industry. Public
sector banks have increased allocation to industry and real estate. There is a
more detailed analysis in the macroeconomic report released before the
monetary policy
Sector
As on
February
15, 2008
As on
February
27, 2009
% share Variations % share Variations
in total (per cent) in total (per cent)
Agriculture 9.2 16.4 13 21.5
Industry 45.2 25.9 52.5 25.8
Real Estate 3.1 26.7 8.5 61.4
Housing 7.3 12 4.7 7.5
NBFCs 5.7 48.6 6.6 41.7
Overall Credit 100 22 100 19.5
To sum up, the credit conditions seems to have worsened after January 2009.
The rates have declined but lending has not really picked up. However, the
question still remains whether credit decline is because banks are not lending
(supply) or because people/corporates are not borrowing (lack of demand). It is
usually seen that all financial variables as lead indicators say if credit growth
(along with other fin indicators) is picking, actual growth will also rise.
However, it is actually seen the relation is far from clear. In fact, the financial
indicators hardly help predict any change in business cycle. Most rise in good
times and fall in bad times. Most financial indicators failed to predict this
http://rbi.org.in/scripts/PublicationsView.aspx?id=11347http://rbi.org.in/scripts/PublicationsView.aspx?id=11347 -
8/2/2019 Credit App at Sbi
32/127
global financial crisis and kept rising making everyone all the more
complacent.
Recent policy developments Regarding Bank Credit
Bank lending was done for a long time by assessing the working capital needs
based on the concept of MPBF (maximum permissible bank finance). This
practice has been withdrawn with the effect from April 15 th 1997 in the sense
that the date, banks have been left free to choose their own method ( from the
method such as turnover , cash budget, present MPBF , or any other theory) of
assessing working Capital requirement of the borrowers.
The cash credit system has been the bane, yet it has exhibited a remarkable
strength of survival all these years. In spite of many efforts which were direct in
nature, only a slow progress has been made to reduce its importance and
increase bill financing. Therefore a concrete and direct policy step was taken on
April 21, 1995 which made it mandatory for banks, consortia, syndicates to
restrict cash credit components to the prescribed limit , the balance being given
in the form of a short term loan, which would be a demand loan for a maximum
period of one year, or in case of seasonal industries , for six months. The
interest rates on the cash credit and loan components are to be fixed in
accordance with the prime lending rates fixed by the banks. This loan systemwas first made applicable to the borrowers with an MPBF of Rs 20 crore and
above; and in their case , the ratio of cash credit (loan) to MPBF was
progressively reduced(increased) from 75 (25) per cent in April 1995 , to 60
(40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80)
percent in April 1997. With the withdrawal of instructions about the MPBF in
-
8/2/2019 Credit App at Sbi
33/127
April 1997 , the prescribed cash credit and loan components came to be related
to the working capital limit arrived in banks as per the method of their choice.
With effect from September 3, 1997, the RBI has permitted banks to raise their
existing exposure limit to a business group from 50% to 60%; the additional
10% limit being exclusively meant for investment in infrastructure projects.
The term lending by banks also has subject to the limits fixed by RBI. In 1993,
this limit was raised from Rs 10 crore to Rs 50 crore in case of a loan for a
single project by a single bank, and from Rs 150 crore to Rs 200 crore for a
single project by all the banks. The latter limit was subsequently raised to Rs
500 crore in the case of general projects and Rs 1000 crore for power projects.
From September3, 1997 these caps on term lending by banks were removed
subject to their compliance with the prudential exposure norms.
The banks can invest in and underwrite shares and debentures of corporatebodies. At present, they can invest five percent of their incremental deposits in
equities of companies including other banks. Their investment in shares/ Bonds
of DFHI, Securities trading Corporation of India (STCI), all Indian financial
institutions and bonds (debentures) and preference shares of the companies are
excluded from this ceiling of five per cent with affect from April 1997 . From
the same date banks could extend loans within this ceiling to the corporateagainst shares held by them. They could also offer overdraft facilities to stock
brokers registered with help of SEBI against shares and debentures held by
them for nine months without change of ownership.
-
8/2/2019 Credit App at Sbi
34/127
CHANGING PHASE OF BANK CREDIT-
A study group headed by Shri Prakash Tandon, the then Chairman of Punjab
National Bank, was constituted by the RBI in July 1974 with eminentpersonalities drawn from leading banks, financial institutions and a wide cross-
section of the industry with a view to study the entire gamut of Bank's finance
for working capital and suggest ways for optimum utilization of Bank credit.
This was the first elaborate attempt by the central bank to organize the Bank
credit. Most banks in India even today continue to look at the needs of the
corporate in the light of methodology recommended by the Group. The reportof this group is widely known as Tandon Committee report.
The weaknesses in the Cash Credit system have persisted with the non-
implementation of one of the crucial recommendations of the Committee. In the
background of credit expansion seen in 1977-79 and its ill effects on the
economy, RBI appointed a working group to study and suggest-
i) Modifications in the Cash Credit system to make it amenable to better
management of funds by the Bankers and
ii) Alternate type of credit facilities to ensure better credit discipline and co
relation between credit and production. The Group was headed by Sh. K.B.
Chore of RBI and was named Chore Committee.
Another group headed by Sh. P.R. Nayak ( Nayak Committee ) was entrusted
the job of looking into the difficulties faced by Small Scale Industries due to
the sophisticated nature of Tandon & Chore Committee recommendations. His
report is applicable to units with credit requirements of less than Rs.50 lacs.
The recommendations made by Tandon Committee and reinforced by Chore
Committee were implemented in all Banks and Bank Credit became much
-
8/2/2019 Credit App at Sbi
35/127
more organized. However, the recommendations were perceived as too strict by
the industry and there has been a continuous clamor from the Industry for
movement from mandatory control to a voluntary market related restraint. With
recent liberalization of economy and reforms in the financial sector, RBI has
given the freedom to the Banks to work out their own norms for inventory and
the earlier norms are now to be taken as guidelines and not a mandate. In fact,
beginning with the slack season credit policy of 1997-98, RBI has also given
full freedom to all the Banks to devise their own method of assessing the short
term credit requirements of their clients and grant lines of credit accordingly.
Most banks, however, continue to be guided by the principles enunciated in
Tandon Committee report.
-
8/2/2019 Credit App at Sbi
36/127
Trends Of Bank Credit In India
The face of Indian banking has changed radically in the last decade. A perusal
of the Basic Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996 and 2005, personal loans have been the fastest
growing asset, increasing from 9.3 per cent of the total bank credit in 1996 to
22.2 per cent in 2005. Of course, this is partly due to the huge rise in housing
loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the
period, but other personal loans comprising loans against fixed deposits,
gold loans and unsecured personal loans also rose from 6.1 per cent to 10.7
per cent. Other categories whose share increased were loans to professionals
and loans to finance companies. In contrast, there has been a sharp decline in
the share of lendings to industry. Credit to small scale industries fell from 10.1
per cent of the total in 1996 to 4.1 per cent in 2005.
Reasons for declining trend of bank credit A major share of the economic growth has been led by the expansion of
the service sector
Capital intensity and investment intensity required for growth in the
current economic context may not be as high as it used to be in the past.
In manufacturing sector more efficient utilization of existing capacities
contributed to the sectoral growth rather rather than any large addition of fresh capacities. The consequential increase in the demand for credit was
also subdued.
Greater and cheaper avenues for credit resulted in a bigger share of
disintermediation being resorted to by large borrowers.
-
8/2/2019 Credit App at Sbi
37/127
The other trend has been the substantial drop in the share of rural credit, while
the share of metropolitan centres has increased. While bankers say that up
gradation of rural centres into semi-urban could be one reason (the share of
semi-urban centres has gone up), it is also true that the reforms have been
urban-centric and have tended to benefit the metros more. The number of rural
bank offices fell from 32,981 in March 1996 to 31,967 by March 2005.
The states have been the main beneficiaries of bank credit are the northern
region as it has increased its share from 18.7 per cent of the total credit in 1996
to 22.2 per cent in 2005. As it was seen that Delhis share went up from 9.5 per
cent to 12.1 per cent over the period. This is not due to food credit, the account
of which is maintained in Delhi. Clearly, the national capital has gained a lot
from liberalisation.
-
8/2/2019 Credit App at Sbi
38/127
Trends for the year 2008-09
The aggregate deposits of scheduled commercial banks have expanded during
2008-09 at a somewhat slower rate (19.8%) than in 2007-08 (22.4%). Withinaggregate deposits demand deposits have shown an absolute fall (-Rs 4,179
crore) in contrast to the sizeable increase (Rs 94,579 crore or by 22%) in 2007-
08,. On the other hand, time deposits have shown an accelerated increase of
22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in the
previous year.
In the investment portfolio of banks, the expansion during 2008- 09 at Rs
194,031crore has been much lower than the expansion of Rs 340,250 crore as
increase in net bank credit to government under monetary data for the same
period. This has happened because the latter has a sizeable amount of RBI
credit to government following the increased open market operations. Finally,
there has occurred considerable slowdown in bank credit expansion. Because of
relatively higher procurement of foodgrains, food credit has expanded by Rs
1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in
2007-08. Non-food credit growth at Rs 406,287 (17.5%) has been slower than
in the previous year at Rs 432,846 (23.0%).
-
8/2/2019 Credit App at Sbi
39/127
Procedure for providing Bank Credit -
Banks offers different types of credit facilities to the eligible borrowers. For
this, there are several procedures, controls and guidelines laid out. Credit
Appraisal, Sanctions, Monitoring and Asset Recovery Management comprise
the entire gamut of activities in the lending process of a bank which are clearly
shown as below:
Source- Self constructed
From the above chart we can see that Credit Appraisal is the core and the basic
function of a bank before providing loan to any person/company, etc. It is the
most important aspect of the lending procedure and therefore it is discussed in
detail as below.
CreditAppraisal
Sanctions
Monitoring & AssetrecoveryManagement
-
8/2/2019 Credit App at Sbi
40/127
CHAPTER 6
INTRODUCTION TO STATE BANK OF INDIA
-
8/2/2019 Credit App at Sbi
41/127
6.1ABOUT SBI
THE PLACE TO SHARE THE NEWS ...
SHARE THE VIEWS
The State Bank of India, the countrys oldest Bank and a premier in terms of
balance sheet size, number of branches, market capitalization and profits is
today going through a momentous phase of Change and Transformation the
two hundred year old Public sector behemoth is today stirring out of its Public
Sector legacy and moving with an agility to give the Private and Foreign Banksa run for their money.
The bank is entering into many new businesses with strategic tie ups Pension
Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking,
Point of Sale Merchant Acquisition, Advisory Services, structured products etc
each one of these initiatives having a huge potential for growth.
The Bank is forging ahead with cutting edge technology and innovative new
banking models, to expand its Rural Banking base, looking at the vast untapped
potential in the hinterland and proposes to cover 100,000 villages in the next
two years.
It is also focusing at the top end of the market, on whole sale banking
capabilities to provide Indias growing mid / large Corporate with a complete
http://upload.wikimedia.org/wikipedia/en/c/cc/SBI-log -
8/2/2019 Credit App at Sbi
42/127
array of products and services. It is consolidating its global treasury operations
and entering into structured products and derivative instruments. Today, the
Bank is the largest provider of infrastructure debt and the largest arranger of
external commercial borrowings in the country. It is the only Indian bank to
feature in the Fortune 500 list.
The Bank is changing outdated front and back end processes to modern
customer friendly processes to help improve the total customer experience.
With about 11448 of its own branches and another 6500+ branches of its
Associate Banks already networked, today it offers the largest banking network
to the Indian customer. Banking behemoth State Bank of India is planning to
set up 15,000 ATMs in the country by March 2010 investing more than Rs
1,000 crore.
The Bank is also in the process of providing complete payment solution to its
clientele with its ATMs, and other electronic channels such as Internet banking,
debit cards, mobile banking, etc.
With four national level Apex Training Colleges and 54 learning Centres
spread all over the country the Bank is continuously engaged in skill
enhancement of its employees. Some of the training programes are attended by
bankers from banks in other countries.
The bank is also looking at opportunities to grow in size in India as well asinternationally. It presently has 82 foreign offices in 32 countries across the
globe. It has also 8 Subsidiaries in India SBI Capital Markets Ltd, SBI
Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI
Cards and Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund
Management Pvt. Ltd, SBI Canada - forming a formidable group in the Indian
Banking scenario. It is in the process of raising capital for its growth and also
consolidating its various holdings.
-
8/2/2019 Credit App at Sbi
43/127
6.2 BACKGROUND
State Bank of India is the largest and one of the oldest commercial bank in
India, in existence for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank
namely Reserve Bank of India (RBI) is the major share holder of the bank with
59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public
holding (other than promoters) at 40.3%.
SBI has the largest branch and ATM network spread across every corner of
India. The bank has a branch network of over 17000 branches (including
subsidiaries). Apart from Indian network it also has a network of 73 overseas
offices in 30 countries in all time zones, correspondent relationship with 520
International banks in 123 countries. In recent past, SBI has acquired banks in
Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as
on 31st March, 2008. Of this, 29.51% are officers, 45.19% clerical staff and the
remaining 25.30% were sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock
Exchange and Ahmadabad Stock Exchange while its GDRs are listed on the
London Stock Exchange.
SBI group accounts for around 25% of the total business of the banking
industry while it accounts for 35% of the total foreign exchange in India. With
this type of strong base, SBI has displayed a continued performance in the last
few years in scaling up its efficiency levels. Net Interest Income of the bank has
witnessed a CAGR of 13.3% during the last five years. During the same period,
net interest margin (NIM) of the bank has gone up from as low as 2.9% in
FY02 to 3.40% in FY06 and currently is at 3.32%.
-
8/2/2019 Credit App at Sbi
44/127
1. KEY AREAS OF OPERATION
The business operations of SBI can be broadly classified into the key incomegenerating areas such as National Banking, International Banking, Corporate
Banking, & Treasury operations. The functioning of some of the key divisions
is enumerated below:
a) Corporate Banking
The corporate banking segment of the bank has total business of around
Rs1,193 bn. SBI has created various Strategic Business Units (SBU) in order to
streamline its operations.
These SBUs are as follows:
i) Corporate Accounts
ii) Leasing
iii) Project Finance
iv) Mid Corporate Group
v) Stressed Assets Management
-
8/2/2019 Credit App at Sbi
45/127
b) National Banking
The national banking group has 14 administrative circles encompassing a vast
network of 9,177 branches, 4 sub-offices, 12 exchange bureaus, 104 satellite
offices and 679 extension counters, to reach out to customers, even in the
remotest corners of the country. Out of the total branches, 809 are specialized
branches. This group consists of four business group which are enumerated
below:
i) Personal Banking SBU
ii) Small & Medium Enterprises
iii) Agricultural Banking
iv) Government Banking
c) International Banking
SBI has a network of 73 overseas offices in 30 countries in all time zones and
correspondent relationship with 520 international banks in 123 countries. The
bank is keen to implement core banking solution to its international branches
also. During FY06, 25 foreign offices were successfully switched over to
Finacle software. SBI has installed ATMs at Male, Muscat and Colombo
Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial
Bank Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank
incorporated a company SBI Botswana Ltd. at Gaborone.
-
8/2/2019 Credit App at Sbi
46/127
d) Treasury
The bank manages an integrated treasury covering both domestic and foreign
exchange markets. In recent years, the treasury operation of the bank has
become more active amidst rising interest rate scenario, robust credit growth
and liquidity constraints. The bank diversified its operations more actively into
alternative assets classes with a view to diversify the portfolio and build
alternative revenue streams in order to offset the losses in fixed income
portfolio. Reorganization of the treasury processes at domestic and global
levels is also being undertaken to leverage on the operational synergy between
business units and network. The reorganization seeks to enhance the
efficiencies in use of manpower resources and increase maneuverability of
banks operations in the markets both domestic as well as international.
e) Associates & Subsidiaries
The State Bank Group with a network of 14,061 branches including 4,755
branches of its seven Associate Banks dominates the banking industry in India.
In addition to banking, the Group, through its various subsidiaries, provides a
whole range of financial services which includes Life Insurance, Merchant
Banking, Mutual Funds, Credit Card, and Factoring, Security trading and
primary dealership in the Money Market.
-
8/2/2019 Credit App at Sbi
47/127
i) Associates Banks:
SBI has six associate banks namely
State Bank of Indore
State Bank of Travancore
State Bank of Bikaner and Jaipur
State Bank of Mysore
State Bank of Patiala
State Bank of Hyderabad
ii) Non-Banking Subsidiaries/Joint Ventures
SBI Capital Markets Ltd,
SBI Mutual Funds, SBI factor and commercial services Ltd, SBI DFHI Ltd, SBI Cards and Payment Services Ltd, SBI Life Insurance Company Ltd, SBI Fund Management Pvt. Ltd, SBI
-
8/2/2019 Credit App at Sbi
48/127
CHAPTER 7
INDUSTRY ANALYSIS
-
8/2/2019 Credit App at Sbi
49/127
7.1 COMPETITIVE FORCES MODEL IN THE BANKING INDUSTRY
(PORTERS FIVE -FORCE MODEL)
Prof. Michael Porters competitive forces Model applies to each and every
company as well as industry. This model with regards to the Banking Industry
is presented below.
(2)
Potential Entrants is high asdevelopment financialinstitutions as well as privateand foreign banks haveentered in a big way.
(5)
Organizing power of thesupplier is high. With thenew financial instrumentsthey are asking higherreturn on the investments.
(1)
Rivalry among existing firms has increased withliberalization. New productsand improved customerservices is the focus.
(4)
Bargaining power of buyers is high as corporate can raisefunds easily due to highcompetition.
(3)
Threat from substitute is highdue to competition from
NBFCs and insurancecompanies as they offer a highrate of interest than banks.
-
8/2/2019 Credit App at Sbi
50/127
1. Rivalry among existing firms
With the process of liberalization, competition among the existing banks has
increased. Each bank is coming up with new products to attract the customers
and tailor made loans are provided. The quality of services provided by banks
has improved drastically.
2. Potential Entrants
Previously the Development Financial Institutions mainly provided project
finance and development activities. But they now entered into retail banking
which has resulted into stiff competition among the exiting players.
3. Threats from Substitutes
Banks face threats from Non-Banking Financial Companies. NBFCs offer a
higher rate of interest.
4. Bargaining Power of Buyers
Corporate can raise their funds through primary market or by issue of GDRs,
FCCBs. As a result they have a higher bargaining power. Even in the case of
personal finance, the buyers have a high bargaining power. This is mainlybecause of competition.
5. Bargaining Power of Suppliers
With the advent of new financial instruments providing a higher rate of returns
to the investors, the investments in deposits is not growing in a phased manner.
The suppliers demand a higher return for the investments.
-
8/2/2019 Credit App at Sbi
51/127
6. Overall Analysis
The key issue is how banks can leverage their strengths to have a better future.
Since the availability of funds is more and deployment of funds is less, banks
should evolve new products and services to the customers. There should be a
rational thinking in sanctioning loans, which will bring down the NPAs. As
there is a expected revival in the Indian economy Banks have a major role to
play. Funding corporate at a low cost of capital is a special requisite.
-
8/2/2019 Credit App at Sbi
52/127
7.2 SWOT ANALYSIS
The banking sector is also taken as a proxy for the economy as a whole. The
performance of bank should therefore, reflect Trends in the Indian Economy.Due to the reforms in the financial sector, banking industry has changed
drastically
with the opportunities to the work with, new accounting standards new entrants
and information technology. The deregulation of the interest rate, participation
of banks in project financing has changed in the environment of banks.
The performance of banking industry is done through SWOT Analysis. It
mainly helps to know the strengths and Weakness of the industry and to
improve will be known through converting the opportunities into strengths. It
also helps for the competitive environment among the banks.
-
8/2/2019 Credit App at Sbi
53/127
a) STRENGTHS
1. Availability of Funds:
There are seven lakh crore wroth of deposits available in the banking system.
Because of the recession in the economy and volatility in capital markets,
consumers prefer to deposit their money in banks. This is mainly because of
liquidity for investors.
2. Banking network:After nationalization, banks have expanded their branches in the country, which
has helped banks build large networks in the rural and urban areas. Private
Banks allowed operating but they mainly concentrate in metropolis.
3. Large Customer Base:
This is mainly attributed to the large network of the banking sector. Depositors
in rural areas prefer banks because of the failure of the NBFCs.
4. Low Cost of Capital:
Corporate prefers borrowing money from banks because of low cost of capital.
Middle income people who want money for personal financing can look to
banks as they offer at very low rates of interests. Consumer credit forms the
major source of financing by banks.
-
8/2/2019 Credit App at Sbi
54/127
b) WEAKNESS
1. Loan Deployment:
Because of the recession in the economy the banks have idle resources to the
tune of 3.3 lakh crores. Corporate lending has reduced drastically
2. Powerful Unions:
Nationalization of banks had a positive outcome in helping the Indian Economy
as a whole. But this had also proved detrimental in the form of strong unions,which have a major influence in decision-making. They are against automation.
3. Priority Sector Lending:
To uplift the society, priority sector lending was brought in during
nationalization. This is good for the economy but banks have failed to manage
the asset quality and their intensions were more towards fulfilling government
norms. As a result lending was done for non-productive purposes.
4. High Non-Performing Assets:
Non-Performing Assets (NPAs) have become a matter of concern in the
banking industry. This is because of change in the total outstanding advances,
which has to be reduced to meet the international standards.
-
8/2/2019 Credit App at Sbi
55/127
c) OPPORTUNITIES
1. Universal Banking:
Banks have moved along the valve chain to provide their customers more
products and services. For example: - SBI is into SBI home finance, SBI
Capital Markets, SBI Bonds etc.
2. Differential Interest Rates:
As RBI control over bank reduces, they will have greater flexibility to fix theirown interest rates which depends on the profitability of the banks.
3. High Household Savings:
Household savings has been increasing drastically. Investment in financial
assets has also increased. Banks should use this opportunity for raising funds.
4. Overseas Markets:
Banks should tape the overseas market, as the cost of capital is very low.
5. Interest Banking:
The advance in information technology has made banking easier. Business can
effectively carried out through internet banking.
-
8/2/2019 Credit App at Sbi
56/127
d) THREATS
1. NBFCs, Capital Markets and Mutual funds:
There is a huge investment of household savings. The investments in NBFCs
deposits, Capital Market Instruments and Mutual Funds are increasing.
Normally these instruments offer better return to investors.
2. Change in the Government Policy:
The change in the government policy has proved to be a threat to the bankingsector.
3. Inflation:
The interest rates go down with a fall in inflation. Thus, the investors will shift
his investments to the other profitable sectors.
4. Recession:
Due to the recession in the business cycle the economy functions poorly and
this has proved to be a threat to the banking sector. The market oriented
economy and globalization has resulted into competition for market share. The
spread in the banking sector is very narrow. To meet the competition the banks
has to grow at a faster rates and reduce the overheads. They can introduce the
new products and develop the existing services.
-
8/2/2019 Credit App at Sbi
57/127
CHAPTER 8
OVERVIEW OF CREDIT APPRAISAL
-
8/2/2019 Credit App at Sbi
58/127
8.1 CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans & advances/project finance & also checks thecommercial, financial & technical viability of the project proposed its funding
pattern & further checks the primary & collateral security cover available for
recovery of such funds.
Brief overview of credit:
Credit Appraisal is a process to ascertain the risks associated with the extension
of the credit facility. It is generally carried by the financial institutions which
are involved in providing financial funding to its customers. Credit risk is a risk
related to non repayment of the credit obtained by the customer of a bank. Thus
it is necessary to appraise the credibility of the customer in order to mitigate the
credit risk. Proper evaluation of the customer is performed which measures the
financial condition and the ability of the customer to repay back the loan in
future? Generally the credit facilities are extended against the security know as
collateral. But even though the loans are backed by the collateral, banks are
normally interested in the actual loan amount to be repaid along with the
interest. Thus, the customer's cash flows are ascertained to ensure the timely
payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors
like age, income, number of dependents, nature of employment, continuity of
employment, repayment capacity, previous loans, credit cards, etc. are taken
into account while appraising the credit worthiness of a person. Every bank or
lending institution has its own panel of officials for this purpose.
-
8/2/2019 Credit App at Sbi
59/127
However the 3 C of credit are crucial & relevant to all borrowers/ lending
which must be kept in mind at all times.
Character Capacity Collateral
If any one of these are missing in the equation then the lending officer must
question the viability of credit.
There is no guarantee to ensure a loan does not run into problems; however if
proper credit evaluation techniques and monitoring are implemented thennaturally the loan loss probability / problems will be minimized, which should
be the objective of every lending officer.
Credit is the provision of resources (such as granting a loan) by one party to
another party where that second party does not reimburse the first party
immediately, thereby generating a debt, and instead arranges either to repay or
return those resources (or material(s) of equal value) at a later date. The first
party is called a creditor, also known as a lender, while the second party is
called a debtor, also known as a borrower.
Credit allows you to buy goods or commodities now, and pay for them later.
We use credit to buy things with an agreement to repay the loans over a period
of time. The most common way to avail credit is by the use of credit cards.
Other credit plans include personal loans, home loans, vehicle loans, student
loans, small business loans, trade.
A credit is a legal contract where one party receives resource or wealth from
another party and promises to repay him on a future date along with interest. In
simple terms, a credit is an agreement of postponed payments of goods bought
or loan. With the issuance of a credit, a debt is formed.
-
8/2/2019 Credit App at Sbi
60/127
Basic types of credit:
There are four basic types of credit. By understanding how each works, you
will be able to get the most for your money and avoid paying unnecessarycharges.
Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. You often have to pay a deposit, and you may pay a late
charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for afew days or several years. Money can be repaid in one lump sum or in several
regular payments until the amount you borrowed and the finance charges are
paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the
store or the easy payment plan. The borrower takes the goods home in
exchange for a promise to pay later. Cars, major appliances, and furniture are
often purchased this way. You usually sign a contract, make a down payment,
and agree to pay the balance with a specified number of equal payments called
installments. The finance charges are included in the payments. The item you
purchase may be used as security for the loan.
Credit cards are issued by individual retail stores, banks, or businesses. Usinga credit card can be the equivalent of an interest-free loan--if you pay for the
use of it in full at the end of each month.
-
8/2/2019 Credit App at Sbi
61/127
8.2SBI NORMS FOR CREDIT APPRAISAL
Credit appraisal means an investigation/assessment done by the bank prior
before providing any loans & advances/project finance & also checks the
commercial, financial & technical viability of the project proposed its funding
pattern & further checks the primary & collateral security cover available for
recovery of such funds.
1. Loan policy An Introduction
State Bank of Indias (SBI) Loan Policy is aimed at accomplishing its
mission of retaining the banks position as a Premier Financial Services
Group, with World class standards & significant global business,
committed to excellence in customer, shareholder & employee
satisfaction & to play a leading role in the expanding & diversifying
financial services sector, while continuing emphasis on its Development
Banking role. The Loan Policy of the any bank has successfully withstood the test of
time and with inbuilt flexibilities, has been able to meet the challenges in
the market place. The policy exits & operates at both formal & informal
levels. The formal policy is well documented in the form of circular
instructions, periodic guidelines & codified instructions, apart from the
Book of Instructions, where procedural aspects are highlighted. The policy, at the holistic level, is an embodiment of the Banks
approach to sanctioning, managing & monitoring credit risk & aims at
making the systems & controls effective.
The Loan Policy also aims at striking a balance between underwriting
assets of high quality, and customer oriented selling. The objective is to
maintain Banks undisputed leadership in the Indian Banking scene.
-
8/2/2019 Credit App at Sbi
62/127
The Policy aims at continued growth of assets while endeavoring to
ensure that these remain performing & standard. To this end, as a matter
of policy the Bank does not take over any Non-Performing Asset (NPA)
from other banks.
The Central Board of the Bank is the apex authority in formulating all
matters of policy in the bank. The Board has permitted setting up of the
Credit Policy & Procedures Committee (CPPC) at the Corporate Centre
of the Bank of which the Top Management are members, to deal with
issues relating to credit policy & procedures on a Bank-wide basis. The
CPPC sets broad policies for managing credit risk including industrial
rehabilitation, sets parameters for credit portfolio in terms of exposure
limits, reviews credit appraisal systems, approves policies for
compromises, write offs, etc. & general management of NPAs besides
dealing with the issues relating to Delegation of Powers.
-
8/2/2019 Credit App at Sbi
63/127
Based on the present indications, following exposure levels are prescribed
Term Loans (loans with residual maturity of over 3 years) should not in
the aggregate exceed 35% of the total advances of SBI. The Bank shall endeavour to restrict fund based exposure to a particular
industry to 15% of the Banks total fund based exposure.
The Bank shall restrict the term loan exposure to infrastructure projects
to 10% of Banks total advances.
The Bank shall endeavour to restrict exposure to sensitive sectors (i.e. to
capital market, real estate, and sensitive commodities listed by RBI) to10% of Banks total advances.
The Banks aggregate exposure to the capital markets shall not exceed
5% of the total outstanding advances (including commercial paper) as on
March 31 of the previous year.
Individuals as borrowers Maximum aggregate credit facilities of
Rs. 20 crores
( Fund based & non-fund based )
Non-corporates
(e.g.Partnerships,JHF, Associations )
Maximum aggregate credit facilities of
Rs. 80 crores
( Fund based & non-fund based )
Corporates Maximum aggregate credit facilities as
per prudential norms of RBI on exposures
-
8/2/2019 Credit App at Sbi
64/127
8.3 Credit Appraisal Standards
(A) Qualitative:
At the outset, the proposition is examined from the angle of viability & also
from the Banks prudential levels of exposure to the borrower, Group &
Industry. Thereafter, a view is taken about our past experience with the
promoters, if there is a track record to go by. Where it is a new connection for
the bank but the entrepreneurs are already in business, opinion reports from
existing bankers & published data if available are carefully pursued. In case of
a maiden venture, in addition to the drill mentioned heretofore, an element of
subjectively has to be perforce introduced as scant historical data weightage to
be placed on impressions gained out of the serious dialogues with the promoter
& his business contacts.
-
8/2/2019 Credit App at Sbi
65/127
(B) Quantitative:
(a) Working capital:
The basis quantitative parameters underpinning the Banks credit appraisal
are as follows:-
Sector/ Parameters Mfg Others
Liquidity
Current Ratio (min.)
1.33 1.20(For FBWC limits above Rs. 5 cr.)
1.00(For FBWC limits upto Rs. 5 cr.)
Financial Soundness
TOL/TNW (max.)
3.00 5.00
DSCR Net (min.)
Gros (min.)
2:1
1.75:1
2:1
1.75:1
Gearing
D/E (max.)
2:1 2:1
Promoters contribution (min.) 30% of equity 20% of equity
-
8/2/2019 Credit App at Sbi
66/127
(i) Liquidity:
Current Ratio (CR) of 1.33 will generally be considered as a benchmark level
of liquidity. However the approach has to be flexible. CR of 1.33 is only
indicative & may not be deemed mandatory. In cases where the CR is projected
at a lower than the benchmark or a slippage in the CR is proposed, it alone will
not be a reason for rejection for the loan proposal or for the sanction of the loan
at a lower level. In such cases, the reason for low CR or slippage should be
carefully examined & in deserving cases the CR as projected may be accepted.
In cases where projected CR is found acceptable, working capital finance as
requested may be sanctioned. In specific cases where warranted, such sanction
can be with the condition that the borrower should bring in additional long-term
funds to a specific extent by a given future date. Where it is felt that the
projected CR is not acceptable but the borrower deserves assistance subject to
certain conditions, suitable written commitment should be obtained from the
borrower to the effect that he would be bringing in required amounts within a
mutually agreed time frame.
(ii) Net Working Capital:
Although this is a corollary of current ratio, the movements in Net Working
Capital are watched to ascertain whether there is a mismatch of long term
sources vis--vis long term uses for purposes which may not be readily
acceptable to the Bank so that corrective measures can be suggested.
-
8/2/2019 Credit App at Sbi
67/127
(iii) Financial Soundness:
This will be dependent upon the owners stake or the leverage. Here again the
benchmark will be different for manufacturing, trading, hire-purchase & leasing
concerns. For industrial ventures a Total Outside Liability/ Tangible Net worth
ratio of 3.0 is reasonable but deviations in selective cases for understandable
reasons may be accepted by the sanctioning authority.
(iv) Turn-Over:
The trend in turnover is carefully gone into both in terms of quantity & valve as
also market share wherever such data are available. What is more important to
establish a steady output if not a rising trend in quantitative terms because sales
realization may be varying on account of price fluctuations.
(v) Profits:
While net profit is ultimate yardstick, cash accruals, i.e., profit before
depreciation & taxation conveys the more comparable picture in view of
changes in rate of depreciation & taxation, which have taken place in theintervening years. However, for the sake of proper assessment, the non-
operating income is excluded, as these are usually one time or extraordinary
income. Companies incurring net losses consistently over 2 or more years will
be given special attention, their accounts closely monitored, and if necessary,
exit options explored.
(vi) Credit Rating:
Wherever the company has been rated by a Credit Rating Agency for any
instrument such as CP / FD this will be taken into account while arriving at the
final decision. However as the credit rating involves additional expenditure, we
would not normally insist on this and only use this tool if such an agency had
already looked into the company finances.
-
8/2/2019 Credit App at Sbi
68/127
(b) Term Loan
(i) In case of term loan & deferred payment guarantees, the project report is
obtained from the customer,
(ii) Which may be compiled either in-house or by a firm of consultants/
merchant bankers? The technical feasibility & economic viability is
vetted by the bank & wherever it is felt necessary, the Credit Officer
would seek the benefit of a second opinion either from the Banks
Technical Consultancy cell or from the consultants of the Bank/ SBI
Capital Markets Ltd.
(iii)Promoters contribution of at least 20% in the total equity is what we
normally expect. But promoters contribution may vary largely in mega
projects. Therefore there cannot be a definite benchmark. The
sanctioning authority will have the necessary discretion to permit
deviations.
(iv) The other basic parameter would be the net debt service coverage ratio
i.e. exclusive of interest payable, which should normally not go below 2.
On a gross basis DSCR should not be below 1.75. These ratios are
indicative & the sanctioning authority may permit deviations selectively.
(v) As regards margin on security, this will depend on Debt: Equity gearing
for the project, which should preferably be near about 1.5: 1 & should
not in any case be above 2:1, i.e., Debt should not be more than 2 times
the Equity contribution. The sanctioning authority in exceptional cases
may permit deviations from the norm very selectively.
(vi) Other parameters governing working capital facilities would also govern
Term Credit facilities to the extent applicable.
-
8/2/2019 Credit App at Sbi
69/127
(C) Lending to Non-Banking Financial Companies (NBFCs)
(D) Financing of infrastructure projects
(E) Lease Finance
(F) Letter of Credit, Guarantees & bills discounting
(G) Fair Practices for lenders
-
8/2/2019 Credit App at Sbi
70/127
8.4 Documentation standards
a. The systems and procedures for documentation have been laid down keepingin view the ultimate objective of documentation which is to serve as primary
evidence in any dispute between the Bank and the borrower and for enforcing
the Bank's right to recover the loan amount together with interest thereon
(through a court of law as a final resort), in the event of all other recourses
proving to be of no avail. In order that this objective is achieved, our
documentation process attempts to ensure that:
The owing of the debt to the Bank by the borrower is clearly established
by the documents.
The charge created on the borrower's assets as security for the debt is
maintained and enforceable
The Bank's right to enforce the recovery of the debt through court of law
is not allowed to become time-barred under the Law of Limitation.
b. Documentation is not confined to mere obtention of security documents at the
outset. It is a continuous and ongoing process covering the entire duration of
an advance comprising the following stages:
Pre-execution formalities:
These cover mainly searches at the Office of Registrar of Companies and
search of the Register of Charges (applicable to corporate borrowers), also
capacity of borrowers to borrow and the formalities to be completed by the
borrowers, searches at the office of the sub-Registrar of Assurances or Land
Registry to check the existence or otherwise of prior charge over the
-
8/2/2019 Credit App at Sbi
71/127
immovable property offered as security, besides taking other precautions before
creating equitable / registered mortgage.
Execution of Documents
This covers obtention of proper documents, appropriate stamping and correct
execution thereof as per terms of the sanction of the advance and the internal
directives of a corporate borrower such as Memorandum and Articles of
Association, etc.
Post-execution formalities:
This phase covers the completion of formalities in respect of mortgages, if any,
registration with the Registrar of Assurances, wherever applicable, and the
registration of charges with the Registrar of Companies within the stipulated
period, etc.
Protection from Limitation / Safeguarding Securities:
These measures aim at saving the documents from getting time-barred by
limitation and protecting the securities charged to the Bank from being diluted
by any charge that might be created by the borrower to secure his other debts, if
any. These objectives are sought to be achieved by:
(a) Obtention of revival letter within the stipulated period
(b) Obtention of Balance Confirmation from the borrower at least at annualintervals
(c) Making periodical searches at the Office of the Registrar of Companies.
(d) Insurance of Assets charged - (unless specifically waived) to insure the
Bank against the risk of fire, other hazards, etc..
-
8/2/2019 Credit App at Sbi
72/127
c. Keeping the above broad objectives and the documentation process in view,
the Bank has devised standard documents in most cases for various types of
loans given to the borrowers. Wherever standard specimens have not been
evolved, these are suitably drafted on a case-by-case basis with the help of in-
house legal department and, on occasions, with the help of reputed outside
solicitors. Furthermore, changes in the documentation procedures and the
implications involved are circularized from time to time to all the
branches/offices so that those who are responsible for obtaining and
safeguarding the documents are made fully conversant with them. This is
further strengthened through on-the-job training at the branches as well as at
the Bank's training colleges / centers, where the officials are briefed on the
documentation procedures so that the Bank's interest is protected in this crucial
area.
d . In respect of consortium advances, the documents are generally executed in
consultation with the other member banks in accordance with the guidelines
laid down by RBI /IBA in the matter. Similarly, where advances are extended
jointly with the financial institutions, documents are specially drafted in
consultation with the solicitors / in-house legal experts to ensure pari passu
charge and / or second charge, whichever is applicable, of the movable /
immovable assets of the borrower to protect the Bank's interests.
e. While it is the Bank's endeavor to standardize documents for all types of
facilities, in cases where documents have to be specially drafted, the Local
Head Offices are empowered to vet and approve such documents for facilities
which are sanctioned at their level. For facilities requiring sanction of COCC /
ECCB, such specially drafted documents are cleared by the Corporate Centre.
-
8/2/2019 Credit App at Sbi
73/127
8.5 Requirement Of Documents For Process Of Loan
Application for requirement of loan Copy of Memorandum & Article of Association Copy of incorporation of business Copy of commencement of business Copy of resolution regarding the requirement of credit facilities Brief history of company, its customers & supplies, previous track
records, orders in hand. Also provide some information about the
directors of the company
Financial statements of last 3 years including the provisional financial
statement for the year 2011-12
Copy of PAN/TAN number of company Copy of last Electricity bill of company Copy of GST/CST number Copy of Excise number Photo I.D. of all the directors Address proof of all the directors Copies related to the property such as 7/12 & 8A utara, lease/ sales deed,
2R permission, Allotment letter, Possession
Bio-data form of all the directors duly filled & notarized Financial statements of associate concern for the last 3 years
-
8/2/2019 Credit App at Sbi
74/127
8.6 Delegation of powers
a. A scheme of Delegation exercise by the various functional Powers
comprehensively documented in 1985 and amended from time to time is inoperation in the Bank in respect of financial and administrative matters for rise.
This is based on the premise that an executive is required to exercise only those
powers which are related to the responsibilities and duties entrusted to him/her.
In exercising the powers, the authorities concerned are required to ensure
compliance also with the relevant provisions of the State Bank of India Act and
the State Bank of India General Regulations and any rules, r