DECLARATION

I, Arpan Bhowmick, a PGDM student at IMIS, Bhubaneswar bearing roll no. 13DM068,
hereby declare that this report on Summer Internship Project titled Credit Appraisal at Bank
of India is solely my work and is prepared by me only.
I also declare that I have not revealed any sort of critical information of the bank as
per the secrecy bond I have signed with BOI before undertaking this project in their esteemed
organization.
I also declare that all the information collected from various secondary sources has
been duly acknowledged in this project report.

Place:
Date:

(Arpan Bhowmick)

ACKNOWLEDGEMENT
I would like to extend my heartfelt gratitude towards the Management of Bank of India for
providing me an opportunity to undergo my Summer Internship Project in their esteemed organization.
I am extremely grateful to my external guide Mr. xxxxxxxxx (Manager-Credit), CIC Branch,
Bhubaneswar for his guidance and cooperative nature that helped me in completing this project report.
I have learned many new things about the bank credit system while working at BOI.
I would also like to thank Mr. xxxxxxxxxxx, Senior Manager who permitted me to work on my
project in his branch and for his timely support and advice that helped me in preparation of this report.
I express my sincere gratitude towards my internal guide xxxxxxxxxxxxx at IMIS,
Bhubaneswar for his time to time guidance and encouragement to take up this interesting topic.
Last but not the least I would like to thank the Training & Placement Cell at IMIS for placing
me at a prestigious organization like Bank of India for my Summer Internship Project.

(Arpan Bhowmick)

ABSTRACT
The project is on credit appraisal process of 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. In the beginning the report talks about Bank of Indias history, its overall financial
status and its decision making process.
After that this report talks about bank lending. It starts with principles of lending then through
role of RBI and then types of lending i.e. Fund based lending and Non-fund based lending along with
brief explanations and examples as well.
In the following chapter Credit appraisal is briefly overviewed before talking about the credit
appraisal process in general and then the process undertaken by BOI. It also covers the various types of
appraisals done such as commercial appraisal, technical appraisal and financial appraisal.
Credit report and credit rating is discussed thereafter. The need of corporate credit rating is
explained in detail followed by the rating scales used by BOI.
The last but one chapter gives a screenshot of a few cases that I could fully cover during my
tenure at the CIC Branch of BOI at Rasulgarh. This includes the appraisal procedure the bank took for a
personal loan case, an automobile loan case, an education loan and an SME loan.
In the end, I speak about my findings, conclusion and recommendations.

TABLE OF CONTENTS
SL.
NO.
1

PARTICULARS

PAGE.
NO.

CHAPTER ONE

Objectives

Research Methodology

Limitations of the study

CHAPTER TWO

An introduction to Bank of India

Performance of the bank

Decision making process of Credit Department

10

An overview of bank lending

11

Role of RBI

13

Types of lending

15

Overview of credit appraisal

20

Credit appraisal process

21

Credit appraisal at BOI

23

Credit report and credit rating

30

CHAPTER THREE

30

Case-I: Personal loan

30

Case-II: Automobile loan

33

Case-III: Education loan

37

Case-IV: SME Loan

39

CHAPTER FOUR

41

Findings

41

Conclusions

41

Recommendations

42

Bibliography

43

CHAPTER ONE
OBJECTIVES:
-

To study the credit appraisal methods.

To understand the internal steps taken by the bank for scrutinizing the customers details

and credentials.
To understand the commercial, financial & technical viability of the proposal proposed and
its finding pattern.

RESEARCH METHODOLOGY:
Introduction:
Credit appraisal means investigation/assessment done by the bank before providing any loans
and advances/project finance and also checks the commercial, financial &industrial viability of
the project proposed its funding pattern and further checks the primary & collateral security
cover available for recovery of such funds.

Problem statement:
To study the credit appraisal system in Bank of India

Data collection:
i.

Primary data:
Informal interview with manager at Bank of India
ii.
Secondary data:
- Books

Websites
Customer files at BOI
Circulars of BOI

Beneficiaries:
-

Researchers: This report will help researchers improving knowledge about the credit
appraisal system and to have practical exposure of the credit appraisal system at Bank of
India.

Management students: The project will help the management student to know the patterns
of credit appraisal in Bank of India.

LIMITATIONS OF THE STUDY:

-

As the credit appraisal is one of the most crucial areas for any bank, some of the

technicalities are not revealed.

Credit appraisal system includes various types of detail studies for different areas of

analysis, but due to time constraint, our analysis was of limited areas only.
The study was only on desk jobs related to credit. I was not exposed to the field survey and

valuation part.
As per the banks terms and conditions related to internship, approaching customers was not

allowed.
Actual balance sheets, ratios, financial statements of the customers were not shared with me
for my records and thus my study lacks certain details.

CHAPTER TWO
AN INTRODUCTION TO BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai.
The Bank was under private ownership and control till July 1969 when it was nationalized along with
13

other

banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank
has made a rapid growth over the years and blossomed into a mighty institution with a strong national
presence and sizable international operations. In business volume, the Bank occupies a premier position
among

the

nationalized

banks.

The Bank has 4545 branches in India spread over all states/ union territories including specialized
branches. These branches are controlled through 50 Zonal Offices. There are 54 branches/ offices and 5
Subsidiaries

and

joint

venture

abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement
in

February

2008.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of
introducing various innovative services and systems. Business has been conducted with the successful

blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first
among the nationalized banks to establish a fully computerized branch and ATM facility at the
Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in
India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit
portfolio.
Presently Bank has overseas presence in 20 foreign countries spread over 5 continents with 53 offices
including 4 Subsidiaries, 4 Representative Offices and 1 Joint Venture, at key banking and financial
centres viz., Tokyo, Singapore, Hong Kong, London, Jersey, Paris and New York.
Contribution of foreign branches in the global business of the Bank as at 31.03.2014 is as under:

Deposits

22.98%

Advances

30.36%

Business Mix

26.19%

Performance as on 31.03.2014 (Rs. In Crores, Except %):

Deposits

476974

Operating Profit

8423

Growth

24.91%

Net Profit

2729

Advances

376228

Gross NPA Ratio

3.15%

Growth

28.42%

Net NPA Ratio

2.00%

Business Mix

853202

Provision Coverage

58.68%

Growth

26.44%

Earnings Per Share (Rs.)

44.74

Growth Return on Equity

11.73%

Book value per Share (Rs)

387.53

Capital

Adequacy

(Basel-II)

Ratio 10.76%

Capital

Adequacy

Ratio 9.97%

(Basel-III)

Decision making process of Credit Department at BOI

The proposals for all types of loans are handled by the credit department at BOI. A credit appraisal
goes through different level of sanctioning to enforce internal controls and other practices to ensure that
exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of
management for action.

Proposal reaches the branch which is scrutinized by the credit

department

Then it reaches the Zonal Office for further checking

It is further sent to the Head Office (AGM/DGM)

Subsequently the proposal is sent to G.M

From G.M. it goes to E.D

Next it reaches C.M.D

The proposal is finally sent to MC/BOD for further clearance if needed

AN OVERVIEW OF BANK LENDINGS

A developed country like U.S.A. sees its major lending activities done by Capital & Money market,
where banks provide services for merger & acquisition and other merchant banking activities. In India
lending is predominantly done by Banks. Capital Market & Money Market are not as strong and
dependable entities as yet as banks in a developing country as India and Indian Economy. Banks have
different ways of extending credit to different types of borrowers for a wide variety of purposes.

Principles of Lending and Loan Policy:

Principles of Lending
Banks lend from the funds mobilized as deposits from public. A bank acts in the capacity of
a custodian of these funds and is responsible for its safety, security but at the same time is
also required to deliver justified and assured returns over these borrowings. A bank looks
into following aspects before lending:
Safety: the first rule of lending is to ascertain the safety of the advances made. This means
assessment of the repaying capacity of the borrower and purpose of borrowing. It also
includes assessment of contingencies and a fallback plan for the same. This is ensured by
taking adequate security (readily marketable and free of encumbrances) by way of
guarantee, collateral, charges on property, etc.
Liquidity: The second rule of lending is to ascertain how and when the repayment of the
advances made would happen and that the repayment is timely. This is to ascertain
availability of funds in future and make sure that the funds are not locked up for a long
period. This helps in maintaining balance between deposits and advances and to meet
depositors obligation.
Profitability: The third rule of lending is to lend at higher rate of interest than borrowing
rate. This is called as interest spread / margin. One has to strike a balance between
profitability and safety of funds. Interest rates must be charged competitively but at the
same time spread should be adequate.
Risk diversion: An old saying says never put all your eggs in one basket. A lender
must lend to a diversified customer base. Diversification must be made in terms of
geographical locations, borrowers, industry, sector etc. It is done so as to mitigate adverse
financial effects of a business cycle, catastrophe, chain effect etc.
Loan Policy: Banks are basically a lending institution. Its major chunk of revenue is earned
from interest on advances. Each bank has its own credit policy, based on the principles of
lending, which outlines lending guidelines and establishes operating procedures in all
aspects of credit management. The policy is drafted by the Credit Policy Committee and is
approved by the banks board of directors.

The credit policy sets standards for presentation of credit proposals, financial covenants,
rating standards and benchmarks, delegation of credit approving powers, prudential limits
on large credit exposures, asset concentrations, portfolio management, loan review
mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts,
regulatory/ legal compliance etc. The lending guidelines reflect the specific bank's lending
strategy (both at the macro level and individual borrower level) and have to be in
conformity with RBI guidelines. The loan policy typically lays down lending guidelines in
the following areas:
Credit-deposit ratio: Banks are under an obligation to maintain certain statutory reserves
like cash reserve ratio (CRR to be kept as cash or cash equivalents), statutory liquidity
ratio (SLR to be kept in cash or cash equivalents and prescribed securities), etc. These
reserves are maintained for asset liability management (ALM) and are calculated on the
basis of demand and time liabilities (DTL). Banks may further invest in non prescribed
securities for the matter of risk diversion. Funds left after providing for these reserves are
available for lending. The CPC decides upon the quantum of credit that can be granted by
the bank as a percentage of deposits.
Targeted portfolio mix: CPC has to strike balance between risk and return. It sets the
guiding principles in choosing preferred areas of lending and sectors to avoid. It also takes
into account government policies of lending to preferred / avoidable sectors. The bank
assesses sectors for future growth and profitability and accordingly decides its exposure
limits.
Loan pricing: Risk-return trade-off is a fundamental aspect of risk management. Borrowers
with weak financial position and, hence, placed in higher risk category are provided credit
facilities at a higher price (that is, at higher interest). The higher the credit risk of a borrower
the higher would be his cost of borrowing. To price credit risks, bank devises appropriate
systems, which usually allow flexibility for revising the price (risk premium) due to changes
in rating. In other words, if the risk rating of a borrower deteriorates, his cost of borrowing
should rise and vice versa.
At the macro level, loan pricing for a bank is dependent upon a number of its cost factors
such as cost of raising resources, cost of administration and overheads, cost of reserve assets

like CRR and SLR, cost of maintaining capital, percentage of bad debt, etc. Loan pricing is
also dependent upon competition
Collateral security: As part of a prudent lending policy, bank usually advances loans
against some security. The loan policy provides guidelines for this. In the case of term loans
and working capital assets, bank takes as 'primary security' the property or goods against
which loans are granted. In addition to this, banks often ask for additional security or
'collateral security' in the form of both physical and financial assets to further bind the
borrower. This reduces the risk for the bank. Sometimes, loans are extended as 'clean loans'
for which only personal guarantee of the borrower is taken
Role of RBI:
The credit policy of a bank should be conformant with RBI guidelines; some of the important
guidelines of the RBI relating to bank credit are discussed below.
-

Directed credit stipulations: The RBI lays down guidelines regarding minimum advances
to be made for priority sector advances, export credit finance, etc. These guidelines need to

be kept in mind while formulating credit policies for the Bank.

Capital adequacy: If a bank creates assets-loans or investment-they are required to be
backed up by bank capital; the amount of capital they have to be backed up by depends on
the risk of individual assets that the bank acquires. The riskier the asset, the larger would be
the capital it has to be backed up by. This is so, because bank capital provides a cushion
against unexpected losses of banks and riskier assets would require larger amounts of

capital to act as cushion.

Credit Exposure Limits: As a prudential measure aimed at better risk management and
avoidance of concentration of credit risks, the Reserve Bank has fixed limits on bank
exposure to the capital market as well as to individual and group borrowers with reference
to a bank's capital. Limits on inter-bank exposures have also been placed. Banks are further
encouraged to place internal caps on their sector exposures, their exposure to commercial
real estate and to unsecured exposures.

Table 1: Exposure norms for Commercial

Banks in India Exposure to

Limit

1. Single Borrower

15% of capital fund (Additional 5% on

infrastructure exposure)

2. Group Borrower

40% of capital fund (Additional 10% on

infrastructure exposure)

3. NBFC

10% of capital fund

4. NBFC AFC

15% of capital fund

5. Indian Joint Venture/ Wholly owned 20% of capital fund

subsidiaries abroad/ Overseas step down
subsidiaries of Indian corporate
6. Capital Market Exposure
(a) Banks holding of shares in any company

The lesser of 30% of paid-up share capital

of the company or 30% of the paid-up
(b) Banks aggregate exposure to capital market capital of the banks
(solo basis)
40% of its net worth
(c) Banks aggregate exposure to capital market
(group basis)
40% of its consolidated net worth
(d) Banks direct exposure to capital market
(solo basis)
20% of its net worth
(e) Banks direct exposure to capital market
(group basis)
20% of its consolidated net worth
7. Gross holding of capital among banks/ FIs

10% of capital fund

TYPES OF LENDING
Lending can be for long term tenure or short term tenure. Lending is broadly classified into two broad
categories:

fund

based

lending

and

non-fund

based

lending.

LNCBTOFWS eueo haov o r tn ons emtr gdhrke-r tFdi ir n nu r og gn f d

GCBTLa e of ar u t nrea sp am udne i r t ri ad ta e n l t e e
Fund Based Lending:
This is a direct form of lending in which a loan with an actual cash outflow is given to the borrower by
the Bank. In most cases, such a loan is backed by primary and/or collateral security. The loan can be to
provide for financing capital goods and/or working capital requirements.
Loan: -In this case, the entire amount of assistance is disbursed at one time only, either in cash
or by transfer to the companys account. It is a single advance. The loan may be repaid in
installments, the interests will be charged on outstanding balance.
Overdraft: - In this case, the company is allowed to withdraw in excess of the balance
standing in its Bank account. However, a fixed limit is stipulated by the Bank beyond which
the company will not be able to overdraw the account. Legally, overdraft is a demand
assistance given by the bank i.e. bank can ask for the repayment at any point of time. However
in practice, it is in the form of continuous types of assistance due to annual renewal of the
limit. Interest is payable on the actual amount drawn and is calculated on daily product basis.

Cash Credit: - In practice, the operations in cash credit facility are similar to those of
overdraft facility except the fact that the company need not have a formal current account.
Here also a fixed limit is stipulated beyond which the company is not able to withdraw the
amount. Legally, cash credit is a demand facility, but in practice, it is on continuous basis. The
interests is payable on actual amount drawn and is calculated on daily product basis. Concept
of margin also plays a vital role unlike overdraft.
Working Capital Term Loans: - To meet the working capital needs of the company, banks
may grant the working capital term loans for a period of 3 to 7 years, payable in yearly or half
yearly installments.
Packing Credit: - This type of assistance may be considered by the bank to take care of
specific needs of the company when it receives some export order. Packing credit is a facility
given by the bank to enable the company to buy the goods to be exported. If the company
holds a confirmed export order placed by the overseas buyer or a letter of credit in its favor, it
can approach the bank for packing credit facility.

Non-fund Based Lending:

In this type of facility, the Bank makes no funds outlay. However, such arrangements may be converted
to fund-based advances if the client fails to fulfill the terms of his contract with the counterparty. Such
facilities are known as contingent liabilities of the bank. Facilities such as 'letters of credit' and
'guarantees' fall under the category of non-fund based credit.
The non-fund based lending in the form of letter of credit is very regularly found in the international
trade. In case the exporter and the importer are unknown to each other. Under these circumstances,
exporter is worried about getting the payment from the importer and importer is worried as to whether
he will get the goods or not. In this case, the importer applies to his bank in his country to open a letter
of credit in favor of the exporter whereby the importers bank undertakes to pay the exporter or accept
the bills or drafts drawn by the exporter on the exporter fulfilling the terms and conditions specified in
the letter of credit.

Letter of Credit: Letter of credit (LC) is a method of settlement of payment of a trade

transaction and is widely used to finance purchase of raw material, machinery etc. It contains a
written undertaking by the bank on behalf of the purchaser to the seller to make payment of a
stated amount on presentation of stipulated documents and fulfillment of all the terms and
conditions incorporated therein. Letters of credit thus offers both parties to a trade transaction a
degree of security. The seller can look forward to the issuing bank for payment instead of
relying on the ability and willingness of the buyer to pay.
Parties to a Letter of Credit:
1. Applicant/Opener: It is generally the buyer of the goods who gets the letter of credit issued by
his banker in favor of the seller. The person on whose behalf and under whose instructions the
letter of credit is issued is known as applicant/ opener of the credit.
2. Opening bank/issuing bank: The bank issuing the letter of credit.
3. Beneficiary: The seller of goods in whose favor the letter of credit is issued.
4. Advising Bank: Notification regarding issuing of letter of credit may be directly sent to the
beneficiary by the opening bank. It is, however, customary to advise the letter of credit through
sane other bank operating at the place/country of seller. The bank which advises the letter of
credit to the beneficiary is known as advising bank.
5. Confirming Bank: A letter of credit substitutes the credit worthiness of the buyer with that of
the issuing bank. It may sometimes happen especially in import trade that the issuing bank itself
is not widely known in the exporter's country and exporter is not prepared to rely on the L/C
opened by that bank. In such cases the opening bank may request other bank usually in the
country of exporter to add its confirmation which amounts to an additional undertaking being
given by that bank to the beneficiary. The bank adding its confirmation is known as confirming
bank. The confirming bank has the same liabilities towards the beneficiary as that of opening
bank.
6. Negotiating Bank: The bank that negotiates the documents drawn under letter of credit and
makes payment to beneficiary. The function of advising bank, confirming bank and negotiating
bank may be undertaken by a single bank only.

Letter of Credit Mechanism

Any business/industrial venture will involve purchase transactions relating to machine/other
capital goods and raw material etc., and also sale transactions relating to its products. The
customer may be an applicant for a letter of credit for his purchases while be the beneficiary
under other letter of credit for his sale transaction.
The complete mechanism of a letter of credit may be divided in three parts as under:
1. Issuing of Credit: Letter of credit is always issued by the buyer's bank (issuing bank) at the
request and on behalf and in accordance with the instructions of the applicant. The letter of
credit may either be advised directly or through some other bank. The advising bank is
responsible for transmission of credit and verifying the authenticity of signature of issuing bank
and is under no commitment to pay the seller. The advising bank may also be required to add
confirmation and in that case will assume all the liabilities of issuing bank in relation to the
beneficiary as stated already.
2. Negotiation of Documents by beneficiary: On receipt of letter of credit, the beneficiary
shall arrange to supply the goods as per the terms of L/C and draw necessary documents as
required under L/C. The documents will then be presented to the negotiating bank for
payment/acceptance as the case may be. The negotiating bank will make the payment to the
beneficiary and obtain reimbursement from the opening bank in terms of credit.
3. Settlement of Bills Drawn under Letter of Credit by the opener: The last step involved in
letter of credit mechanism is retirement of documents received under L/C by the opener. On
receipt of documents drawn under L/C, the opening bank is required to closely examine the
documents to ensure compliance of the terms and conditions of credit and present the same to
the opener for his scrutiny. The opener should then make payment to the opening bank and take
delivery of documents so that delivery of goods can be obtained by him.
Types of Letter of Credit
Letter of credit may be divided in two broad categories as under:
(i)

Revocable letter of credit: This may be amended or cancelled without prior warning or
notification to the beneficiary. Such letter of credit will not offer any protection and
should not be accepted as beneficiary of credit.

(ii)

Irrevocable letter of credit: This cannot be amended or cancelled without the

agreement of all parties thereto. This type of letter of credit is mainly in use and offers
complete protection to the seller against subsequent development against his interest.

Bank Guarantee: A contract of guarantee can be defined as a contract to perform the promise,
or discharge the liability of a third person in case of his default. The contract of guarantee has
three principal parties as under:
-

Principal debtor: The person who has to perform or discharge the liability and for whose
default the guarantee is given.

Principal creditor: The person to whom the guarantee for due fulfillment of contract by
principal debtor. Principal creditor is also sometimes referred to as beneficiary.

Guarantor or Surety: The person who gives the guarantee.

Bank provides guarantee facilities to its customers who may require these facilities for various
purposes. The guarantees may broadly be divided in two categories as under:
-

Financial guarantees: Guarantees to discharge financial obligations to the customers.

Performance guarantees: Guarantees for due performance of a contract by customers.

Let us explain with an example how guarantees work. A company takes a term loan from Bank
A and obtains a guarantee from Bank B for its loan from Bank A, for which he pays a fee. By
issuing a bank guarantee, the guarantor bank (Bank B) undertakes to repay Bank A, if the
company fails to meet its primary responsibility of repaying Bank A.
Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are
established in accordance with the process approved by the board of directors. The limits on
working capital facilities are primarily secured by inventories and receivables (chargeable
current assets).

OVERVIEW OF CREDIT APPRAISAL

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 this measures the financial condition and the ability of
the customer to repay back the Loan in future. Generally the credits 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.
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 is 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 then naturally the Loan loss probability /
problems will be minimized, which should be the objective of every lending Officer.

CREDIT APPRAISAL PROCESS

Receipt of application from applicant

Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA etc.

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list
etc

Title clearance reports of the properties to be obtained from empanelled

Advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Preparation of financial data

Assessment
Proposal preparation
of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew
of accounts, etc
(On regular basis)

CREDIT APPRAISAL AT BOI

Credit Appraisal Initial due diligence & financial analysis
The process of credit appraisal would begin with the selection of the borrower. The process would
broadly cover:
(i)

Appraising the borrower/business

(ii)

Appraising/assessing the credit requirement and structuring the credit delivery, security,
covenants etc. Appraisal of the borrower would include background check and assessment
of

managerial,

commercial,

technical

and

financial

capability/strength,

project

execution/management ability, success in joint venture for technology/ market, retention of

professional talent at various levels, management control, promoters shareholding etc.
Both the above aspects need to be appraised/ examined at the time of the initial entry of a customer to
the Bank as also at the time of subsequent periodic reviews. Naturally, the appraisal would be different
in respect of:
-

Retail segment like personal loans for consumer durables, house etc

Small business like loans to business enterprises

Farming sector/agriculturists

MSME sector

Corporates in manufacturing, infrastructure, services, wholesale trade and other sectors.

Background of the borrower/management

Background of the borrower needs to be done through scrutiny of antecedents, experience in the line of
business, managerial, marketing, technical competence, organizational strength, integrity etc. Track
record with us, status report from the other banks, reports in the sector from our borrowers in similar
business, RBI/CIBIL reports on defaulters/willful defaulters/SAL of ECGC, Corporate action taken by
SEBI/NSE/BSE, reports from their vendors/dealers who may be our customers, reasonability of CMA
projections, actual performance vs estimates, frequent overdrawing, history of restructuring/OTS etc.
In case of adverse report in any of the above areas, there could be justifications/mitigations which
should be looked into. If need be the appraising officer may personally visit the other bank for personal
discussions. The gist of such oral discussion may be recorded in the file of the borrower and brought

out in the proposal. KYC guidelines as framed by RBI and adopted by Bank are to be followed by the
branches.
Commercial appraisal
The nature of the product, demand for the same, the existing and perceived competition in the segment,
ability of the proponents to withstand the same, government policies governing the industry, etc. need
to be taken into consideration. The trade practices in respect of the product should be thoroughly
understood. Branches should use the reports from ICRA/CRISIL & Capitaline available on Stardesk.
Technical appraisal
Technical appraisal of the project needs to be carried out for industrial activity1 proposals beyond the
cut-off limits prescribed from time to time. Such appraisal may be carried out in-house by Technical
Officers working in Technical Appraisal Department/ Technical Appraisal Cells or officers having
technical expertise for the same or by an outside agency as determined by the appropriate authority.
Where technical appraisal is carried out by All India Financial Institutions, PSU Banks/other leading
banks having expertise in the area, their report may be accepted for appraisal purposes.
Financial appraisal
Analysis of financial parameters/ratios should be done. Aspects like
i.

Balance sheet strength

ii.

Growth in TNW, sales, PAT etc

iii.

Borrowers ability to service the principal and interest, meet the cash flow requirement in

respect of payments under LC opened, absorb additional burden due to escalation of raw material cost
etc
iv.

Position of receivables/inventory etc should be looked into.

The following parameters ratios should be computed:

i.
ii.
iii.
iv.
v.

TNW with reconciliation of change in TNW

Current Ratio
Total outside liabilities/equity (DER)
Profit before interest, depreciation, taxes, appropriation (PBIDTA/EBIDTA)
Profit After Tax/Net sales

vi.

viii.
ix.
x.
xi.

Inventory + receivables/Sales ratio

vii.
DSCR if the borrower enjoys any term loan with any bank/FI even if no TL is being
considered by our bank.
Capital Employed
PAT/Capital employed
Investments
Segmental Revenue if applicable

CHECK POINTS FOR DUE DILIGENCE/ASSESSMENT IN CREDIT PROPOSAL

1. Articles of Incorporation - A corporate registration is the cornerstone and basis for legitimacy,
as it requires the business to rely upon its corporate name, image and reputation.
2. Status Reports - This is useful to show that the company continues to exist and operate as a
legal entity, and has not been dissolved and/or reincorporated under another name. Most
companies that actively engage in business with serious clients will have one that is relatively
recent. Whenever new proposals are put up for approval, status reports of the company / group
needs to be obtained from their existing bankers. Obtaining status reports is an essential step in
due diligence process, in all advance accounts.
3. Market enquiries - This serves as an important tool. Verification of the antecedents of the
borrower through discrete market enquiries could amply reveal inherent deficiencies. Cross
verification with our existing customers in the line and other players in the line, would serve as
first hand information.
4. Licenses / Certifications - Ask for a copy of licenses, permits, registrations or certifications if
they are directly related to and required for the specific work the company must perform. If
copies are not available, request the number and issuing authority of each document.
5. Web Site Addresses - All Companies have their websites. Companies that say they do not have
a website or do not need one have to be treated with caution. Good companies always make
efforts to allow clients or partners to keep in touch with them, receive notice of changes of
office address, e-mail addresses or phone numbers, reminders of services offered or updates on
new services.
6. Resume of Managers or Key Employees - Ask for resume (also called "professional bio") of
managers / key employees of the company. This will give you some additional leads and

information to verify the company's ability to perform the work promised and general
capabilities.
7. Corporate Brochure or Company Overview - Every company should have a professional and
well-developed presentation of their business concept or services. This evidences the level of
preparation of the company, and demonstrates whether they have sufficiently developed their
capabilities. Project Reports / Information Memoranda, are not to be taken for face value. They
need to be critically examined vis--vis other sources like similar businesses.
8. It should be ensured that too much dependence on consultant driven business, is avoided by the
Company. Even when consultants refer business, discussions should be held with the
promoters/CFOs.
9. ROC search ROC search, as applicable, at the time of considering fresh advances, needs to
be done, to assess existing charge/s on companys assets.
10. Each proposal should bear reference related to RBI/CIBIL/ECGC/ List of Defaulters / willful
Defaulter List, etc. As per existing guidelines, Branch / Zonal Office must bring out this aspect
in the proposal.
11. Pre-Sanction Inspection Branches should note to conduct pre-sanction inspections before
submitting new proposals. Inspection reports should be prepared strictly as per the format.
Findings of the inspection should be brought out in the proposal. It should invariably include
the place of work of the entity in addition to visiting the corporate office, meeting promoters &
employees etc.
12. Critical information as envisaged in Credit policies / Circulars, are to be obtained and
scrutinized.
13. Scrutiny of statements of accounts with previous / existing bankers, to be done, to ascertain
their conduct. This is more so necessary while takeover of the facilities is involved.
14. Risk Mitigation - Proper coverage of risk and mitigation in the proposal reflects good
understanding of the business. As per existing guidelines, Branch / Zonal Office must bring out
these aspects in the proposal.
15. Status of Litigation If the company is involved in any litigation/disputes/ arbitration, Zone /
Branch should give details in the proposal.
16. Assessment of Limits Financial parameters like DER, Current Ratio for W/C & DSCR, DER,
FACR, BEP, IRR, sensitivity analysis for Term Loan are to be properly captured in the

proposals. Proposals should not be considered without these parameters being adequately
brought out.
17. Assessment about promoter/s ability to bring in the funds envisaged, to be properly done.
18. Risk Rating - Risk Rating Exercise for Credit Rating & Pricing has to be done as per different
Risk Scoring Modules.
19. The security which is obtained by the Bank (either as principal or as collateral) shall be verified
as to its title clearance as well as value by independent Panel Advocates/ Valuers and periodical
Encumbrance Certificate shall be obtained. In this regard, extant guidelines, is enumerated in
Branch Circular from time to time are to be meticulously observed.

Check points for Pre and Post Monitoring Norms:

PRE DISBURSEMENT:
i. Suitable monitoring of various acts by the customer/Branch officials/out-side agencies should be
done at the pre-disbursement stage. Depending upon the terms of sanction in each case, the following
actions/steps, wherever applicable, may be taken prior to disbursement:ii. Obtention of satisfactory credit reports from existing lenders and other service providers such as
D&B, CIBIL etc. if stipulated. Branch staff, which is processing the applications for credit requests of
new customers, should personally call on the Bank/FI with whom the incumbent is presently enjoying
facilities and discreetly enquire about the conduct and general aspects of the account. This is in addition
to obtaining status reports. The personal visit to the operating staff of that Bank/FI may reveal more
about the proposed borrower which may not have been incorporated in the report. Wherever it is not
desirable to obtain Status Report for the fear of putting our competitor on guard, decision may be taken
on the basis of scrutiny of proponents statement of account for the last one year with the existing
Banker and the fact that the Sanctioning Authority has satisfied itself about the credit worthiness of the
proponents on the strength of statement of account for the last one year and that status report is not
being obtained for the fear of putting the existing banker on guard should be recorded in the proposal.

However, in case Branch desires not to obtain Status Report from other Bankers/Service providers
prior to disbursement then specific approval of the higher authority viz GM NBG and/or GM Head
Office should be obtained
In such cases the Branch should obtain status report subsequently and the staff should visit the Bank/FI
immediately after disbursement to discreetly enquire about the conduct and general aspects of the
account.
iii. Adhering to Head Office guidelines for Credit Rating exercise pertaining to entry level for new
accounts.
iv. Post-sanction inspection of the unit prior to disbursement. Needless to add, pre-sanction inspection
report cannot substitute the need of pre-disbursement inspection
vi. Issuance of sanction letter and acceptance of terms, conditions and stipulations of sanctions by the
borrowers.
vii. Execution of all relevant documents, including creation of collateral security / mortgage etc. as per
terms of sanction
ix. Furnishing of Letters of guarantee by guarantors.
x. Disbursement of amounts by other participating financial agencies / Banks / Financial Institutions
etc.
Clarity in regard to draw down of amounts such as first date of disbursal and last date of disbursal, the
stages in which the monies are required to be drawn, its acceptance and evaluation at Branch level (If
these are already included in the credit proposal, the same must be adhered to).
xii. Vetting of documents
xiii. Credit Process Audit compliance
xiv. Post Sanction Pre Disbursement approval wherever branch level sanction
xv. Keeping the duly completed/signed check list on record along with other security documents
DURING DISBURSEMENT:
Credit delivery in loan accounts is distinct from running accounts such as Cash Credit. All
disbursements whether in loan account or in running accounts, will be related to actual / acceptable
performance of the business unit and should never lose sight of basic objective of safety of Bank's
exposure in the credit assets. The disbursements should commensurate with the progress of the project /

business activity, also taking into account the extent of margin brought in by the promoters up to the
given point of time.
The sanction of the limit is not a commitment in isolation to extend funds to the borrower under all
circumstances. It is only a financial contract to make available funds for due performance of various
business objectives and goals set out in his proposal. Bank's disbursements depend upon due
performance /compliance of/with borrower's own commitments. Therefore, the credit delivery has to be
used as an effective monitoring tool to ensure that there are only normal and acceptable credit risks.
The following aspects wherever applicable, may be considered for monitoring:
(a) LOAN ACCOUNTS :
i. Actual Implementation vis-a-vis Project schedule.
ii. Possibility of time or cost overrun.
iii. Adequacy of arrangements to meet cost overruns.
iv. Impact of time overrun on timely cash generations of the project.
v. Verification of end-use of funds with reference to verifiable records such as invoices, account books,
registers, records, inspection of the unit etc.
vi. Certificate from Companys Statutory Auditors on the extent of cost incurred on the project at any
given point of time, implementation progress certificate from approved architect/contractor etc.,
wherever applicable.
vii. Disbursements to be made, to the extent possible, directly to the suppliers / service providers and
the element of cash withdrawals to be kept minimum.
Status report on the suppliers of machinery as per the guidelines which ensures genuineness of
supplier/transaction must be obtained.
Even while making direct payments, whenever doubt arises about the genuine nature of the transaction,
due care is to be exercised.
(b) CASH CREDIT ACCOUNTS:
i. Compliance of sanction terms / stipulations (any exception requires approval of appropriate
authority)

ii. Verification of completion of the implementation of the project/business activity and readiness to
commence commercial production.
iii. Disbursements to be made, to the extent possible, directly to the suppliers/service providers and the
element of cash withdrawals to be kept minimum.
iv. Even while making direct payments, whenever doubt arises about the genuine nature of the
transaction, due care is to be exercised.
v. Stock inspection data regarding regular movement of goods, actual sales keeping pace with
projections, not having unacceptable quality rejections in sales, not accumulating slow/ obsolete
inventory, elongation of debtors beyond acceptable levels, change in credit periods from suppliers etc.
vi. Meaningful on site/off site verification of Stock/Book Debt statements to ensure adequacy of
Drawing Power/Drawing Limit

POST DISBURSEMENT:
i.

Monitoring of the actual performance of the borrowers on monthly basis by calling for
MSOD statements and comparing the same with the projected performance figures
appearing in the customers own CMA data submitted to Bank, sanctioned proposal / QIS
returns etc. Any substantial deviation will have to be probed into, not waiting for submission
of audited financials.

ii.

Obtention of Stock/Book debts statements as per stipulation and scrutiny thereof

iii.

Periodical inspections by our staff (comprehensive guidelines issued vide BC 98/16 dated
19.04.2004 and 102/96 dated 09.08.2008)

iv.

Stock Audit by approved C.As as per extant policy. (Comprehensive guidelines issued
vide BC 98/61 dated 05.07.2004)

v.

Timely obtention and analysis of Audited statements of Accounts.

vi.

Timely review of account

vii.

Conducting periodical consortium meet/ JLA meet and sharing the information with
member of consortium /JLA.

viii.

Obtaining LIE report periodically and verifying the progress, wherever applicable.
Following it up & complying post disbursement conditions.

ix.

Timely identification of accounts showing symptoms of strain and, wherever considered fit,
resort to prompt restructuring of the account, so that the rehabilitation process is
meaningful.

Monitoring of an account is not confined to any single office (Branches including Large Corporate/Mid
Corporate branches/Zonal Office /NBG office/Divisional Office/Head Office) and concerted efforts
will have to be made at all levels with whatever information available at each level, to prevent any
deterioration in asset quality. Under-lending or delay in lending can be equally painful to the
wellbeing/viability of the borrowers unit and this itself can lead to asset becoming non-performing.

CREDIT REPORT AND CREDIT RATING

The credit report is an important determinant of an individual's financial credibility. They are used by
lenders to judge a person's creditworthiness. They also help the person concerned to narrow down on
the financial problem areas.
Credit report is a document, which comprises detailed information about the credit payment history of
an applicant. It is mostly used by the lenders to determine the credit worthiness of an applicant. The
business credit reports provide information on the background of a company. This assists one to take
crucial business related decisions. People can also assess the amount of business risk associated with a
company and then decide whether they would be comfortable in providing them with credit facilities.
The degree of interest that would be shown by investors in their company can also be gauged from the
business credit reports as they can get an idea of the conception of their customers regarding
themselves. Since these records are updated at regular intervals of time they enable people to identify
the risk levels associated with a business as well as its future. These reports also allow businesses to get
detailed information about the financial status of business partners and suppliers.
What Is A Corporate Credit Rating?
Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans,
preferred stock and insurance companies. Long-term credit ratings tend to be more indicative of a
country's investment surroundings and/or a company's ability to honor its debt responsibilities. . The
ratings therefore assess an entity's ability to pay debts.

There are various organizations that perform credit rating for various business organizations.
Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the
applicant. The credit rating model of BOI assesses various aspects of the projects and assigns scores
against them thereby determining the risk level involved with the project.
It is divided in five sections:
1.
2.
3.
4.
5.

Rating of the borrower

Financial risk
Management risk
Market condition/ Demand situation
Rating of the facility
Business consideration
Cash flow related parameters

1) Rating of the borrower: This part of credit rating model deals with assessing the financial and
managerial ability of the borrower. The financial ability of the firm is derived by calculating ratios that
determine the short term and long term financial position of the firm
Short term ratios include Current Ratio, determines the liquidity position of the company over a
period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet
creditor's demands. It is excess of current assets over current liability. If current liabilities exceed
current assets (the current ratio is below 1), then the company may have problems meeting its shortterm obligations. If the current ratio is too high, then the company may not be efficiently using its
current assets.
According to the guidelines given to BOI the ideal level is at 1.33:1 however the acceptable level is at
1.17:1.
However at times current ratio may not be a true indicator, the current ratio for road projects is very
high but this does not indicate that the company is not using its assets well but the ratio is high because
the activity involves more in dealing with current assets. Hence it is important for the evaluator to
understand the nature of the industry.
Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion of
equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or

Leverage. A high debt equity ratio is not preferable by an investor as the company already has acquired
high amount of funds from market thereby reducing the investor share over the securities available,
increasing the risk.
It is also important for the lender bank to assess the firms debt paying capacity over a period. Such
capacity is derived by calculating ratio like Debt Service Coverage Ratio minimum acceptable level is
1.50.
It is also necessary for the lender to determine the ability of the firm to achieve the projected growth by
evaluating the projected sales with actual. However such parameter remains non applicable if the
business is new.
Financial risk evaluation is only one of the parameter and not the only parameter for determining the
risk level. It is important to evaluate the Management Risk also while evaluating the risk relating to
borrower.
It is the management of the company that acts as guiding force for the firm. The key managerial
personnel should bear the capacity to bail out the company from crisis situation. In order to remain
competitive it is essential to take initiatives. Such skills are developed over years of experience, thus
for better performance it is required to have a team of well qualified and experienced personnel.

2) Market potential / Demand Situation

A Company does not operate in isolation there are various market forces that acts in either favorable or
unfavorable manner towards its performance. Thus the rating would not give true picture if does take
market or demand situation in consideration.
The demand supply situation / market Potential plays an important role in determining the growth level
of the company like
1. Level of competition: Monopoly, Favorable, Unfavorable
2. Seasonality in demand: affected by short term seasonality, long term seasonality or may not be
affected by seasonality in demand.

3. Raw material availability

4. Location issues like proximity to market, inputs, infrastructure: Favorable, neutral, unfavorable
5. Technology i.e. proven technology: Not to be changed in immediate future, technology
undergoes change, outdated technology.
6. Capacity utilization
3) Rating of the Facility:
The company can start functioning only after completing statutory obligations laid down by the
governing authority. Such statutory obligation involves obtaining licenses, permits for ensuring smooth
operations. Preparation and Submission of Financial Statements, Stock statements in the standard
format within the given time schedule.
4) Business Consideration:
The length of relationship with the bank enables the lender to assess the previous performance of the
account holder. A good track record acts in the favor of the applicant, however an under-performance
make the lender more vigilant.
The income value to the bank is also given due consideration.
Thus Credit Rating of the Business takes into consideration various aspects that have direct or indirect
effect on the performance of the business.
After evaluating the risk level involved the lender bank decides on lending interest rate.

In BOI they are categorized in 9 segments:

1. Lowest Risk CR-1
2. Low Risk CR-2
3. Medium Risk CR- 3
4. Moderate/ Satisfactory Risk CR- 4
5. Fair Risk CR- 5
6. High Risk CR- 6
7. Higher Risk CR- 7

8. Highest risk CR- 8

9. NPA

CR- 9

In BOI, a business receiving Credit Rating above level 6 are not considered good from point of
investment and thus are avoided.

CHAPTER THREE
CASE STUDIES

(Note: The name and details of the persons in the cases herein are changed to comply with the banks
rules and regulations for non-disclosure of internal information.)

CASE I
The case is about personal loan product from BOI. Ajit Sahoo needed a loan of Rs.75, 000 for his
fathers emergency surgery and thus he approached the BOIs CIC branch in Rasulgarh.
ABOUT THE PRODUCT:
Product: BOI Star Suvidha (Personal Loan Scheme)
Eligibility: Salaried employees, professionals, individuals with high net worth
Type of advance: Demand/Term loan/Overdraft
Name of the applicant: Mr. Ajit Sahoo
Occupation: Maintenance Engineer
Salary: Rs. 1, 20, 000 per annum
Loan applied: Rs. 75, 000
Purpose: Fathers surgery
Tenure: 24 months
Rate of interest: 15.20%

PRE-SANCTION ACTIVITIES:
1.
2.
3.
4.

Meeting the client and discuss his/her requirements

Collect application form and KYC documents
Meeting the guarantor and collect details about income proof and net value assessment
Initial De-dupe check is done to check the credit reporting of the client whether he holds any over-

dues etc. The bank also checks the client in RBI defaulter list.
5. Internal verification is done by the bank which enables it to make sure that the client is not forging
with the financials of the company.

ASSESSMENTS FOR SANCTION:

ASSESSMENT I:
Net monthly income: Rs. 10,000
10 times of Net monthly income: Rs 1, 00, 000
Eligible amount under (I): Rs. 1, 00, 000 [A]
ASSESSMENT II:
Cost of project: Rs. 75, 000
Less margin: Nil
Eligible amount (II): Rs. 75, 000 [B]
ASSESSMENT III:
Gross monthly income: Rs. 10, 000
Statutory deductions: Rs. 1, 200
Net monthly income: Rs. 8, 800
Proposed loan amount: Rs. 75, 000
EMI: 3, 643.63
% of Net take home to GMI: 58.59% (satisfies bank regulations)
Loan amount requested: Rs. 75, 000 [C]
ASSESSMENT IV:
Maximum loan amount permissible under the scheme: Rs. 1, 00, 000 [D]

After all the assessments, the least amount among A, B, C and D is recommended by the
appraisal committee for sanctioning.
In this case Rs. 75, 000 is the least among all the assessments. Thus, Mr. Sahoos request for a loan of
Rs. 75, 000 was sanctioned.
POST-SANCTION ACTIVITIES:
1. Bank acquired documentary proof and declaration by the customer to ensure genuine utilization
of the funds.
2. In case of clean advances, documentary proof might not be required but purpose-wise break-up
of the fund utilization must be collected.
3. To ensure timely repayment of the EMI post-dated cheques or ECS mandate should be acquired
from the customer.
DOCUMENTS PROVIDED BY THE APPLICANT:
1. KYC related documents
2. Residential proof documents such as Ration card, telephone bill, electricity bill, rent receipt,
certificate from employer with signature verification
3. Passport size photographs of both applicant and guarantor to be collected and verified by bank
officials
4. Customer identification can be done through PAN card, Driving license, Photo identity proof
issued by employer
5. Identity needs to be verified by visiting the applicants residence and workplace

CASE II
The following case is about BOIs automobile loan. My guide handed me the file of a fresh case of the
same. Mrs. Kavita Sharma (name changed), who owns a petrol pump in Bhubaneswar applied for a
loan of Rs. 4, 60, 000 for purchasing a new car.
ABOUT THE PRODUCT
Product: Star Vehicle Loan
Eligibility: Salaried employees, Professionals & self employed businessmen, HNI, NRI with Indian
joint borrowers, Senior citizens, Pensioners, Farmers, Companies, Partnership firms and other
corporate bodies
Age: Not to exceed 65 years at the time of availing the loan
Type: Demand loan/Term loan
Quantum of advance: For individuals: Rs. 25 lakhs for Indian make vehicles
Rs. 75 lakhs for imported vehicles
For NRI: Rs. 25 lakhs for any make
For companies/corporate entities: Rs. 100 lakhs
Name of the applicant: Mrs. Kavita Sharma
Occupation: Business
Nature of business: Petrol pump
Gross income: Rs. 14, 00, 000 per annum
Loan applied: Rs. 4, 60, 000

Tenure: 3 years
Rate of interest: 12% per annum

PRE-SANCTION ACTIVITIES:
1.
2.
3.
4.
5.

Meeting the client and discuss his/her requirements

Collect application form and KYC documents
Collect installment letter.
Income tax returns/salary particulars/balance sheets to be collected
Initial De-dupe check is done to check the credit reporting of the client whether he holds any over-

dues etc. The bank also checks the client in RBI defaulter list.
6. Internal verification is done by the bank which enables it to make sure that the client is not forging
with the financials of the company.
7. Deviation check: The bank after checking the financial soundness of the company goes for the
verification of the deviation check of policy compliance, if any in case of major deviations the
case is presented in front of the zonal credit committee, their decision stands the final verdict on
the approval f the case.
8. The bank undertakes a complete check of financials as mentioned in the requirements, these
audited financials are put in Finacle software of the bank and then projections are made on the
basis of financials and then various profitability ratios are analyzed and the financial soundness of
the company is analyzed. The financial viability of the company is checked on various parameters
as mentioned.
9. Hypothecation of assets purchased with bank finance & charge to be registered with the RTO and
registered as personal vehicles.
10. Comprehensive insurance of the vehicle with Bank clause.

ASSESSMENTS FOR SANCTION:

ASSESSMENT I:
Gross average annual income: Rs. 14, 00, 000
2 times of gross average annual income: Rs. 28, 00, 000
Eligible amount under (I): Rs. 28, 00, 000 [A]

ASSESSMENT II:
Cost of the vehicle: Rs. 5, 32, 630
Less margin (10%): Rs. 53, 263
Eligible amount: Rs. 4, 79, 367 [B]
ASSESSMENT III:
Gross monthly income: Rs. 1, 16, 667
Statutory deductions: Rs. 12, 890
Net monthly income: Rs.1, 03, 777
% of Net take home to Gross income: 89.4% (satisfied)
Loan amount requested: Rs. 4, 60, 000 [C]
ASSESSMENT IV:
Maximum loan amount under the scheme: Rs. 25, 00, 000 [D]

Least amount among A, B, C and D is then recommended by the CAC.

In this case, Mrs. Sharma was sanctioned a loan of Rs. 4, 60, 000 after all assessments.

POST-SANCTION ACTIVITIES:
1. Check the actual purchase of the automobile
2. Collection of hypothecation documents from the customer along with insurance papers
3. In case of clean advances, documentary proof might not be required but purpose-wise break-up
of the fund utilization must be collected.
4. To ensure timely repayment of the EMI post-dated cheques or ECS mandate should be acquired
from the customer.
5. To prevent frauds, disbursement to the funds should be done to the vendor/auto dealer through
NEFT/RTGS to ensure that the account genuinely belongs to the dealer.
6. Annual review of accounts to be done by the bank

DOCUMENTATION:
1.
2.
3.
4.
5.
6.

Application-cum-proposal
Composite hypothecation agreement for charge on the asset
DP note and installment letter
Declaration and composite agreement
Statement of assets and liabilities of the borrower
Banks charge to be registered with RTO and a copy of the RC Book with Banks charge noted

thereon to be kept with documents

7. Creation of charge on collateral security if proposed/stipulated
8. IT returns/salary particulars/Balance sheets etc
9. Sanction letter duly acknowledged

CASE-III
The following case is an education loan case of Mr. Subhasis Mohanty S/O Mr. Sukanta Mohanty who
wishes to avail a loan of Rs. 3, 00, 000 from the bank for admission into an Engineering course.
ABOUT THE PRODUCT:
Product: BOI Star Education Loan Scheme
Eligibility: Graduation courses by recognized universities; PG courses approved by AICTE or
affiliated by UGC; Courses by national institutes like IIT, IIM, NIFT etc.
Parties: Joint borrower should normally be parents/guardian; Husband in case of married
Name of the applicants: Mr. Subhasis Mohanty/Mr. Sukanta Mohanty
Occupation of joint borrower: Auto rickshaw driver
Loan applied: Rs. 3, 00, 000

PRE-SANCTION ACTIVITIES:
1.
2.
3.
4.

KYC formalities should be completed

Checking of students academic documents
Verification of RBI defaulters list (joint borrower)
Verification of PAN

5. Admission letter from the institute

6. Evaluation of future income prospect of the student along with parents repayment capacity.
ASSESSMENT:
1.
2.
3.
4.
5.
6.

Total course fee quoted by the institute: Rs. 4, 60, 000

Loan applied: Rs. 3, 00, 000
Balance amount to be borne by the joint borrower.
Joint borrowers income: Rs. 1, 80, 000 per annum
Net worth: Rs. 8, 00, 000 (Jewelry & Land)
As the loan applied is below Rs. 4, 00, 000 thus no margin requirement is needed

POST-SANCTION ACTIVITIES:
1. Communication with the institute regarding the applicants selection and course fee structure
2. Communicate with the institute and request for any kind of information related to cancellation
of admission.
3. No application for educational loan should be rejected without concurrence of the next higher
authority.
4. Loan must be disbursed in stages as per the requirement/demand directly to the institution to the
extent possible.

CASE-IV
Mr. Jagdish Chandra Barik is a customer of the bank who holds a current account with the branch. He
owns a cement store nearby and approached the bank for a loan of Rs. 4, 00, 000 as he wanted to
expand his business.
PRE-SANCTION ACTIVITIES:
1.
2.
3.
4.
5.

KYC formalities
Scrutiny of bank accounts
Family background, social reputation, duration in the business
Checking RBIs willful defaulters list, Special Approval List (SAL) of ECGC, CIBIL report.
The acceptability of the product, its market demand/supply position, market competition,

market arrangement etc. has to be checked

6. Techno-economic appraisal of the unit to be carried out as per the guidelines by Technical
Appraisal Department (TAD) of BOI.
7. Visit to the store and residence of the applicant
8. Checking store rent agreement, residence proof etc.
9. Checking of documents
ASSESSMENTS:
1. Working capital assessment:
As this units WC requirement is below Rs.5 crores, the bank adopts Turnover method for
assessment as per Nayak Committee Recommendations. Under this method the WC is
arrived @ 20% of the projected turnover based on the assumption of a three month
operating cycle.

2. Financial ratios:
- Debt equity ratio: Mr. Bariks business D/E ratio stood at 1.7:1 which was considered as a
-

very strong one by the bank.

Current ratio: His current ration was 1.5:1 as he does business on a credit basis more often

and received the money once in a month from the customer.

Debt Service Coverage Ratio: He had a fair DSCR ratio of 1.65:1 which implied that he
generated enough Net operating income to pay off his debts.

As all factors were satisfactory, Mr. Bariks application was passed.

POST-SANCTION ACTIVITIES:
1.
2.
3.
4.
5.
6.
7.

Monitoring the accounts on a regular basis

Visit to the store for checking of stock
Acquire monthly stock statement as well as receivables account
Balance sheet evaluation
Collection of repayment should be maintained
Prevent account form being sub-standard
Ensure utilization of funds for genuine purpose

CHAPTER FOUR
FINDINGS
-

Credit appraisal is done to check the commercial, financial & technical viability of the project
proposed and its funding pattern & further checks the primary or collateral security cover
available for the recovery of such funds.

Credit is core activity of the banks and important source of their earnings which go to pay
interest to depositors, salaries to employees and dividend to shareholders.

Credit and risk go hand in hand.

In the business world risk arises out of:-

Deficiencies /lapses on the part of the management

Uncertainties in the business environment
Uncertainties in the industrial environment
Weakness in the financial position
The loan policy of BOI contains various norms for sanction of different types of loans.
For each type of loan, there are different norms as per the guidelines of RBI.

The assessment of financial risk involves appraisal of the financial strength of the borrower
based on performance & financial indicators

After studying a few cases, I found that in some cases, loan is sanctioned due to strong financial
parameters

CONCLUSIONS:
-

The requirement of credit is ever increasing.

In most of the cases, hypothecation and/or mortgage are used to create securities for the banks.
Every bank has its own internal credit rating procedure to rate the clients (Borrowers).
After doing the assessment of the financial indicators it is up to the judgment of the top
management of the bank to sanction such loan. The very decision could be against the

assessment result.
If the company is with bank from inception stage then they are given preference, as credible and
loyal party over their financial indicators.

RECOMMENDATIONS:
-

Closely monitoring and inspecting the activities and stocks of the borrowers from time to time
can avoid the misuse of advances.

The bank must further secure itself by holding a second charge on all the fixed assets of the

borrower.
The time period taken by the banks to sanction the limits should be significantly reduced to
allow the borrowers to make use of the credit when the need is most felt.

There should be a standard rating process to remove the subjectivity and different perceptions
of the rater (person who does credit rating process for a borrower company). It will remove the
human biasness in the process.

Personal guarantee does not give any physical asset to the bank. It is for the moral binding on
the part of the borrower. Hence, bank should prefer to use this type of guarantee as this will
reduce the default rate on the part of borrower.

Faster dispersion of credit is of paramount importance. A proposal has to pass through different
channels which lead to delay in the dispersal of credit. There is a need of drastic reduction in
these channels for faster decision making. This will curtail avoidable delays, improved
efficiency besides reducing appraisal time as well as cost.

BIBLIOGRAPHY:
Websites:
www.rbi.org.in
www.wikipedia.com
www.investopedia.com
www.bankofindia.co.in
www.indianbankassociation.com
Books referred:
-

I.M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd.

M.Y. Khan and P.K. Jain - Financial Management - Vikas Publishing house ltd.

Credit and Banking - K. C. Nanda (e-Book)

Bank of India journals:

-

BOI Credit Policy-2014 (Revised) e-book

BOI individual loan policy documents
Customer loan files from banks records