Description
A valuation of property (ie. real estate, a business, an antique) by the estimate of an authorized person. In order to be a valid appraisal, the authorized person will have a designation from a regulatory body governing the jurisdiction the appraiser operates within.
PRESENTATION ON CREDIT APPRAISAL IN BANKING SECTOR
PRESENTED BY KINJAL KATHROTIYA (45) SAGAR KAKKAD (43) MBA II (FINANCE),CPIMR
WHAT IS 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. ? Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future ? Credit appraisal is the process of appraising the credit worthiness of the loan applicant
WHAT IS CREDIT APPRAISAL? (CONT’D)
? Factors like:» Age » Income » Number of dependents » Nature of employment » Continuity of employment » Repayment capacity » Previous loans, etc. are taken into account while appraising the credit worthiness of a person. ? 3 ‘C’ of credit are must be kept in mind for lending funds:» Character » Capacity » Collateral If any one of these are missing in the lending officer must question the viability of credit
RESEARCH METHODOLOGY
PROBLEM STATEMENT:
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Ahmedabad.
OBJECTIVES:
? To study the Credit Appraisal at SBI ? To check the commercial, financial & technical viability of the project proposed & its funding pattern ? To check the primary & collateral security cover available for recovery of such funds
RESEARCH METHOLOGY (CONT’D)
» RESEARCH DESIGN : Analytical in nature » DATA COLLECTION :
Secondary Data:
? E-circulars of SBI ? Books & Journals ? Database at SBI ? Library research ? Websites
RESEARCH METHODOLOGY (CONT’D)
LIMITATION OF THE STUDY: ? Due to the constraint limited study on the project has been done ? Access to data (Credit Appraisal data in detail is not available) ? As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed which may cause destruction to the information
BRIEF OVERVIEW OF LOANS
Loans can be of two types fund based & non-fund based:
» FUND BASED includes: ? Working Capital ? Term Loan
» NON-FUND BASED includes: ? Letter of Credit ? Bank Guarantee
MEASURES Debt Equity Ratio
Concept Proportion of Debt fund of a company in relation to its equity
Debt Service Coverage Ratio
Concept The amount of cash flow available to meet annual interest and principal payments
Formula Net Operating Income Total Debt Service
Formula Long Term Debt Tangible Net worth
Comments This ratio is an indicator of leverage of a company It measures a company’s ability to borrow and repay money
Comments DSCR less than 1 means negative cash flows
CREDIT RISK ASSESSMENT (CRA)
? The CRA models adopted by the Bank take into account all possible factors into appraising the risks, associated with a loan. ? These have been categorized broadly into financial, business, industrial & management risks are rated separately. ? These factors duly weighted are aggregated to arrive at a credit decision whether loan should be given or not Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. which assessed in terms of static ratios, future prospects & risk mitigation .
CREDIT APPRAISAL PROCESS
Receipt of application from applicant | Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents) | 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 |
CREDIT APPRAISAL PROCESS (CONT’D)
Preparation of financial data | Proposal preparation | Assessment 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 STANDARDS
QUALITATIVE:
? The proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower, Group & Industry
? View is taken about bank’s past experience with the promoters, if there is a track record to go by ? Opinion reports from existing bankers & published data if available
CREDIT APPRAISAL STANDARDS (CONT’D)
QUANTITATIVE: (i)Working capital (ii)Term Loan Technical Feasibility Economic Feasibility Financial Feasibility Managerial Competency
Sector/ Parameters Current Ratio (min.) Mfg. 1.33 Others 1.20 (For FBWC limits above Rs. 5cr) 1.00 (For FBWC limits upto Rs. 5cr) 5.00 2:1 1.75:1
TOL/ TNW (max.)
3.00 2:1 1.75:1
DSCR Net (min.) Gross (min.)
Debt/ Equity Ratio (max.) Promoters’ contribution* (min.)
2:1 30% of equity
2:1 20% of equity
RATING SCALES FOR GIVING LOANS
S. No. 1 2 3 4 5 6 Borrower Rating SB1 SB2 SB3 SB4 SB5 SB6 Range of scores 94-100 90-93 86-89 81-85 76-80 70-75 Risk level Virtually Zero risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average risk Acceptable Risk (Risk Tolerance Threshold) Comfort Level Virtually Absolute safety Highest safety Higher safety High safety Adequate safety Moderate Safety Above Safety Threshold Safety Threshold
7
8 9 10
SB7
SB8 SB9 SB10
64-69
57-63 50-56 45-49
RATING SCALES FOR GIVING LOANS
11 12 13 14 15 SB11 SB12 SB13 SB14 SB15 40-44 35-39 30-34 25-29
A valuation of property (ie. real estate, a business, an antique) by the estimate of an authorized person. In order to be a valid appraisal, the authorized person will have a designation from a regulatory body governing the jurisdiction the appraiser operates within.
PRESENTATION ON CREDIT APPRAISAL IN BANKING SECTOR
PRESENTED BY KINJAL KATHROTIYA (45) SAGAR KAKKAD (43) MBA II (FINANCE),CPIMR
WHAT IS 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. ? Proper evaluation of the customer is preferred which measures the financial condition & ability to repay back the loan in future ? Credit appraisal is the process of appraising the credit worthiness of the loan applicant
WHAT IS CREDIT APPRAISAL? (CONT’D)
? Factors like:» Age » Income » Number of dependents » Nature of employment » Continuity of employment » Repayment capacity » Previous loans, etc. are taken into account while appraising the credit worthiness of a person. ? 3 ‘C’ of credit are must be kept in mind for lending funds:» Character » Capacity » Collateral If any one of these are missing in the lending officer must question the viability of credit
RESEARCH METHODOLOGY
PROBLEM STATEMENT:
To study the Credit Appraisal System in SME sector, at State Bank of India (SBI), Ahmedabad.
OBJECTIVES:
? To study the Credit Appraisal at SBI ? To check the commercial, financial & technical viability of the project proposed & its funding pattern ? To check the primary & collateral security cover available for recovery of such funds
RESEARCH METHOLOGY (CONT’D)
» RESEARCH DESIGN : Analytical in nature » DATA COLLECTION :
Secondary Data:
? E-circulars of SBI ? Books & Journals ? Database at SBI ? Library research ? Websites
RESEARCH METHODOLOGY (CONT’D)
LIMITATION OF THE STUDY: ? Due to the constraint limited study on the project has been done ? Access to data (Credit Appraisal data in detail is not available) ? As the credit appraisal is one of the crucial areas for any bank, some of the technicalities are not revealed which may cause destruction to the information
BRIEF OVERVIEW OF LOANS
Loans can be of two types fund based & non-fund based:
» FUND BASED includes: ? Working Capital ? Term Loan
» NON-FUND BASED includes: ? Letter of Credit ? Bank Guarantee
MEASURES Debt Equity Ratio
Concept Proportion of Debt fund of a company in relation to its equity
Debt Service Coverage Ratio
Concept The amount of cash flow available to meet annual interest and principal payments
Formula Net Operating Income Total Debt Service
Formula Long Term Debt Tangible Net worth
Comments This ratio is an indicator of leverage of a company It measures a company’s ability to borrow and repay money
Comments DSCR less than 1 means negative cash flows
CREDIT RISK ASSESSMENT (CRA)
? The CRA models adopted by the Bank take into account all possible factors into appraising the risks, associated with a loan. ? These have been categorized broadly into financial, business, industrial & management risks are rated separately. ? These factors duly weighted are aggregated to arrive at a credit decision whether loan should be given or not Financial parameters: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators. which assessed in terms of static ratios, future prospects & risk mitigation .
CREDIT APPRAISAL PROCESS
Receipt of application from applicant | Receipt of documents (Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties documents) | 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 |
CREDIT APPRAISAL PROCESS (CONT’D)
Preparation of financial data | Proposal preparation | Assessment 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 STANDARDS
QUALITATIVE:
? The proposition is examined from the angle of viability & also from the Bank’s prudential levels of exposure to the borrower, Group & Industry
? View is taken about bank’s past experience with the promoters, if there is a track record to go by ? Opinion reports from existing bankers & published data if available
CREDIT APPRAISAL STANDARDS (CONT’D)
QUANTITATIVE: (i)Working capital (ii)Term Loan Technical Feasibility Economic Feasibility Financial Feasibility Managerial Competency
Sector/ Parameters Current Ratio (min.) Mfg. 1.33 Others 1.20 (For FBWC limits above Rs. 5cr) 1.00 (For FBWC limits upto Rs. 5cr) 5.00 2:1 1.75:1
TOL/ TNW (max.)
3.00 2:1 1.75:1
DSCR Net (min.) Gross (min.)
Debt/ Equity Ratio (max.) Promoters’ contribution* (min.)
2:1 30% of equity
2:1 20% of equity
RATING SCALES FOR GIVING LOANS
S. No. 1 2 3 4 5 6 Borrower Rating SB1 SB2 SB3 SB4 SB5 SB6 Range of scores 94-100 90-93 86-89 81-85 76-80 70-75 Risk level Virtually Zero risk Lowest Risk Lower Risk Low Risk Moderate Risk with Adequate Cushion Moderate Risk Average risk Acceptable Risk (Risk Tolerance Threshold) Comfort Level Virtually Absolute safety Highest safety Higher safety High safety Adequate safety Moderate Safety Above Safety Threshold Safety Threshold
7
8 9 10
SB7
SB8 SB9 SB10
64-69
57-63 50-56 45-49
RATING SCALES FOR GIVING LOANS
11 12 13 14 15 SB11 SB12 SB13 SB14 SB15 40-44 35-39 30-34 25-29