Credit Appraisal means an investigation/assessment done by the banks 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.
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.
Objective of the Research
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI)
• To study the Credit Appraisal Methods.
• To understand the commercial, financial & technical viability of the project proposed & it's funding pattern.
• To understand the pattern for primary & collateral security cover available for recovery of such funds.
This report will help researcher in improving knowledge about the credit appraisal system and to have practical exposure of the credit appraisal scenario in SBI .
• Management Students:
The project will help the management student to know the patterns of credit appraisal in SBI bank.
The project will help bank in reducing the credit risk parameters and to improve its efficiencies. It will also help to reduce risk associated in providing any loans & advances or project finance in future and to overcome the loopholes
Limitations of the Study
As the credit rating is one of the crucial areas for any bank, some of the technicalities are not revealed which may have cause destruction to the information and our exploration of the problem.
As some of the information is not revealed, whatever suggestions generated, are based on certain assumptions.
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
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 unnecessary charges.
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 a few 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. Using a credit card can be the equivalent of an interest-free Loan- end of each month.-if you pay for the use of it in full at the
Credit Appraisal Standards
At the outset, the proposition is examined from the angle of viability & also from the Bank's 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.
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.
• 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-à-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.
• Financial Soundness:
This will be dependent upon the owner's 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.
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.
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 the intervening 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.
• 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.