1. ASSIGNMENT OF
BANKING
Steps in Credit Appraisal and disbursal
Submitted By:
Nitika Sharma
FC11150

2. 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 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 then naturally 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.

3. 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.
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
Brief overview of Loans
Loans can be of two types fund base & non-fund base:

4.  Fund Base includes:
Working Capital
Term Loan
 Non-fund Base includes:
Letter of Credit
Bank Guarantee
Bill Discounting

5. 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
Preparation of financial data
Proposal preparation
Assessment of proposal

6. 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)

7. Loan administration pre- sanction process
Appraisal, Assessment and Sanction functions
1. Appraisal
A. Preliminary appraisal
 Sound credit appraisal involves analysis of the viability of operations of a
business and the capacity of the promoters to run it profitably and repay the
bank the dues as and when they fall
 Towards this end the preliminary appraisal will examine the following aspects
of a proposal.
Bank’s lending policy and other relevant guidelines/RBI guidelines,
Prudential Exposure norms,
Industry Exposure restrictions,
Group Exposure restrictions,
Industry related risk factors,
Credit risk rating,
Profile of the promoters/senior management personnel of the project,
List of defaulters,
Caution lists,
Acceptability of the promoters,
Compliance regarding transfer of borrower accounts from one bank to
another, if applicable;
Government regulations/legislation impacting on the industry; e.g., ban on
financing of industries producing/ consuming Ozone depleting substances;
Applicant’s status vis-à-vis other units in the industry,
Financial status in broad Terms and whether it is acceptable The Company’s
Memorandum and Articles of Association should be scrutinized carefully to
ensure (i) that there are no clauses prejudicial to the Bank’s interests, (ii) no
limitations have been placed on the Company’s borrowing powers and
operations and (iii) the scope of activity of the company.
 Further, if the proposal is to finance a project, the following aspects have to be
examined:
Whether project cost is prima facie acceptable

8. Debt/equity gearing proposed and whether acceptable
Promoters’ ability to access capital market for debt/equity support
Whether critical aspects of project - demand, cost of production,
profitability, etc. are prima facie in order
 Required Documents for Process of Loan
a) Application for requirement of loan
b) Copy of Memorandum & Article of Association
c) Copy of incorporation of business
d) Copy of commencement of business
e) Copy of resolution regarding the requirement of credit facilities
f) Brief history of company, its customers & supplies, previous track records,
orders In hand. Also provide some information about the directors of the
company
g) Financial statements of last 3 years including the provisional financial
statement for the year 2007-08
h) Copy of PAN/TAN number of company
i) Copy of last Electricity bill of company
j) Copy of GST/CST number
k) Copy of Excise number
l) Photo I.D. of all the directors
m) Address proof of all the directors
n) Copies related to the property such as 7/12 & 8A utara, lease/ sales deed, 2R
Permission, Allotment letter, Possession
o) Bio-data form of all the directors duly filled & notarized
p) Financial statements of associate concern for the last 3 years
 After undertaking the above preliminary examination of the proposal, the
branch will arrive at a decision whether to support the request or not. If the
branch (a reference to the branch includes a reference to SECC/CPC etc. as the
case may be) finds the proposal acceptable, it will call for from the applicant(s),
a comprehensive application in the prescribed proforma, along with a copy of
the proposal/project report, covering specific credit requirement of the company
and other essential data/ information. The information, among other things,
should include:
Organizational set up with a list of Board of Directors and indicating the
qualifications, experience and competence of the key personnel in charge of
the main functional areas

9. e.g., purchase, production, marketing and finance; in other words a brief on
the managerial resources and whether these are compatible with the size and
scope of the proposed activity.
Demand and supply projections based on the overall market prospects
together with a copy of the market survey report. The report may comment
on the geographic spread of the market where the unit proposes to operate,
demand and supply gap, the competitors’ share, competitive advantage of
the applicant, proposed marketing arrangement, etc.
Current practices for the particular product/service especially relating to
Terms of credit sales, probability of bad debts, etc.
Estimates of sales cost of production and profitability.
Projected profit and loss account and balance sheet for the operating years
during the
Currency of the Bank assistance.
If request includes financing of project(s), branch should obtain
additionally
a) Appraisal report from any other bank/financial institution in case appraisal
has been done by them.
b) ‘No Objection Certificate’ from Term lenders if already financed by them
and
c) Report from Merchant bankers in case the company plans to access capital
market, wherever necessary.
 In respect of existing concerns, in addition to the above, particulars regarding
the history of the concern, its past performance, present financial position, etc.
should also be called for. This data/information should be supplemented by the
supporting statements
Such as:
a) Audited profit loss account and balance sheet for the past three years (if the
latest audited balance sheet is more than 6 months old, a pro-forma balance
sheet as on a recent date should be obtained and analysed). For non-
corporate borrowers, irrespective of market segment, enjoying credit limits
of Rs.10 lacs and above from the banking system, audited balance sheet in
the IBA approved formats should be submitted by the borrowers.
b) Details of existing borrowing arrangements, if any,
c) Credit information reports from the existing bankers on the applicant
Company, and

10. d) Financial statements and borrowing relationship of Associate firms/Group
Companies.
B. Detailed Appraisal
 The viability of a project is examined to ascertain that the company would
have the ability to service its Loan and interest obligations out of cash
accruals from the business. While appraising a project or a Loan proposal,
all the data/information furnished by the borrower should be counter
checked and, wherever possible, inter-firm and inter-industry comparisons
should be made to establish their veracity.
 The financial analysis carried out on the basis of the company’s audited
balance sheets and profit and loss accounts for the last three years should
help to establish the current viability.
 In addition to the financials, the following aspects should also be examined:
The method of depreciation followed by the company-whether the company
is following straight line method or written down value method and
whether the company has changed the method of depreciation in the past
and, if so, the reason therefore;
Whether the company has revalued any of its fixed assets any time in the
past and the present status of the revaluation reserve, if any created for the
purpose;
Record of major defaults, if any, in repayment in the past and history of past
sickness,
If any;
The position regarding the company’s tax assessment - whether the
provisions made in the balance sheets are adequate to take care of the
company’s tax liabilities;
The nature and purpose of the contingent liabilities, together with comments
thereon;
Pending suits by or against the company and their financial implications
(e.g. cases relating to customs and excise, sales tax, etc.);
Qualifications/adverse remarks, if any, made by the statutory auditors on the
company’s accounts;
Dividend policy;
Apart from financial ratios, other ratios relevant to the project;
Trends in sales and profitability, past deviations in sales and profit
projections, and estimates/projections of sales values;

11. Production capacity & use: past and projected;
o Estimated requirement of working capital finance with reference to
acceptable build up of inventory/ receivables/ other current assets;
Projected levels: whether acceptable; and
Compliance with lending norms and other mandatory guidelines as
applicable
 Project financing:
If the proposal involves financing a new project, the commercial, economic and
Financial viability and other aspects are to be examined as indicated below:
Statutory clearances from various Government Depts. / Agencies
Licenses/permits/approvals/clearances/NOCs/Collaboration agreements, as
applicable
Details of sourcing of energy requirements, power, fuel etc.
Pollution control clearance
Cost of project and source of finance
Build-up of fixed assets (requirement of funds for investments in fixed assets
to be critically examined with regard to production factors, improvement in
quality of products, economies of scale etc.)
Arrangements proposed for raising debt and equity
Capital structure (position of Authorized, Issued/ Paid-up Capital,
Redeemable
Preference Shares, etc.)
Debt component i.e., debentures, Term Loans, deferred payment facilities,
unsecured Loans/ deposits. All unsecured Loans/ deposits raised by the
company for financing a project should be subordinate to the Term Loans of
the banks/ financial institutions and should be permitted to be repaid only
with the prior approval of all the banks and the financial institutions
concerned. Where central or state sales tax Loan or developmental Loan is
taken as source of financing the project, furnish details of the Terms and
conditions governing the Loan like the rate of interest (if applicable), the
manner of repayment, etc.
Feasibility of arrangements to access capital market
Feasibility of the projections/ estimates of sales, cost of production and
profits covering the period of repayment

12. Break Even Point in Terms of sales value and percentage of installed
capacity under a
Normal production year
Cash flows and fund flows
Proposed amortization schedule
Whether profitability is adequate to meet stipulated repayments with
reference to Debt Service Coverage Ratio, Return on Investment
Industry profile & prospects
Critical factors of the industry and whether the assessment of these and
management plans in this regard are acceptable
Technical feasibility with reference to report of technical consultants, if
available
Management quality, competence, track record
Company’s structure & systems
Applicant’s strength on inter-firm comparisons
For the purpose of inter-firm comparison and other information, where necessary,
source data from Stock Exchange Directory, financial journals/ publications,
professional entities like CRIS-INFAC, CMIE, etc. with emphasis on following
aspects:
o Market share of the units under comparison
o Unique features
o Profitability factors
o Financing pattern of the business
o Inventory/Receivable levels
o Capacity utilization
o Production efficiency and costs
o Bank borrowings patterns
o Financial ratios & other relevant ratios
o Capital Market Perceptions
o Current price
o 52week high and low of the share price
o P/E ratio or P/E Multiple
o Yield (%)- half yearly and yearly
Also examine and comment on the status of approvals from other Term lenders,
market view (if anything adverse), and project implementation schedule. A pre-

13. sanction inspection of the project site or the factory should be carried out in the
case of existing units. To ensure a higher degree of commitment from the
promoters, the portion of the equity / Loans which is proposed to be brought in by
the promoters, their family members, friends and relatives will have to be brought
upfront. However, relaxation in this regard may be considered on a case to case
basis for genuine and acceptable reasons. Under such circumstances, the promoter
should furnish a definite plan indicating clearly the sources for meeting his
contribution. The balance amount proposed to be raised from other sources, viz.,
debentures, public equity etc., should also be fully tied up.
C. Present relationship with Bank:
Compile for existing customers, profile of present exposures:
Credit facilities now granted
Conduct of the existing account
Utilization of limits - FB & NFB
Occurrence of irregularities, if any
Frequency of irregularity i.e., number of times and total number of days the
account was irregular during the last twelve months
Repayment of Term commitments
Compliance with requirements regarding submission of stock statements,
Financial
Follow-up Reports, renewal data, etc.
Stock turnover, realization of book debts
Value of account with break-up of income earned
Pro-rata share of non-fund and foreign exchange business
Concessions extended and value thereof
Compliance with other Terms and conditions
Action taken on Comments/observations contained in RBI Inspection
Reports: CO Inspection & Audit Reports
D. Credit risk rating: Draw up rating for (i) Working Capital and (ii) Term
Finance.
E. Opinion Reports: Compile opinion reports on the company, partners/
promoters and the proposed guarantors.
F. Existing charges on assets of the unit: If a company, report on search of
charges with ROC.

14. G. Structure of facilities and Terms of Sanction:
Fix Terms and conditions for exposures proposed - facility wise and overall:
Limit for each facility – sub-limits
Security - Primary & Collateral, Guarantee
Margins - For each facility as applicable
Rate of interest
Rate of commission/exchange/other fees
Concessional facilities and value thereof
Repayment Terms, where applicable
ECGC cover where applicable
Other standard covenants
H. Review of the proposal:
Review of the proposal should be done covering (i) strengths and weaknesses of
the exposure proposed (ii) risk factors and steps proposed to mitigate them
(ii) Deviations, if any, proposed from usual norms of the Bank and the reasons
therefore
I. Proposal for sanction:
Prepare a draft proposal in prescribed format with required backup details and with
recommendations for sanction
J. Assistance to Assessment:
Interact with the assessor, provide additional inputs arising from the assessment,
incorporate these and required modifications in the draft proposal and generate an
integrated final proposal for sanction.
2. Assessment:
Indicative List of Activities Involved in Assessment Function is given below:
Review the draft proposal together with the back-up details/notes, and the
borrower’s application, financial statements and other reports/documents
examined by the appraiser.
Interact with the borrower and the appraiser.
Carry out pre-sanction visit to the applicant company and their
project/factory site.

15. Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio
Analysis/
Fund Flow Statement/ Working Capital assessment/Project cost & sources/
Break Even analysis/Debt Service/Security Cover, etc.) to see if this is prima
facie in order. If any deficiencies are seen, arrange with the appraiser for the
analysis on the correct lines.
Examine critically the following aspects of the proposed exposure.
o Bank’s lending policy and other guidelines issued by the Bank from time to
time
o RBI guidelines
o Background of promoters/ senior management
o Inter-firm comparison
o Technology in use in the company
o Market conditions
o Projected performance of the borrower vis-à-vis past estimates and
performance
o Viability of the project
o Strengths and Weaknesses of the borrower entity.
o Proposed structure of facilities.
o Adequacy/ correctness of limits/ sub limits, margins, moratorium and
repayment schedule
o Adequacy of proposed security cover o Credit risk rating
o Pricing and other charges and concessions, if any, proposed for the facilities
o Risk factors of the proposal and steps proposed to mitigate the risk
o Deviations proposed from the norms of the Bank and justifications therefore
To the extent the inputs/comments are inadequate or require modification,
arrange for additional inputs/ modifications to be incorporated in the
proposal, with any required modification to the initial recommendation by
the Appraiser
Arrange with the Appraiser to draw up the proposal in the final form.
Recommendation for sanction: Recapitulate briefly the conclusions of the
appraisal and state whether the proposal is economically viable. Recount
briefly the value of the company’s (and the Group’s) connections. State
whether, all considered, the proposal is a fair banking risk. Finally, give
recommendations for grant of the requisite fund-based and non-fund based
credit facilities.

16. 3. Sanction:
Indicative list of activities involved in the sanction function is given below:
 Peruse the proposal to see if the report prima facie presents the proposal in a
comprehensive manner as required. If any critical information is not
provided in the proposal, remit it back to the Assessor for supply of the
required data/clarifications.
 Examine critically the following aspects of the proposed exposure in the
light of corresponding instructions in force:
Bank’s lending policy and other relevant guidelines
RBI guidelines
Borrower’s status in the industry
Industry prospects
Experience of the Bank with other units in similar industry
Overall strength of the borrower
Projected level of operations
Risk factors critical to the exposure and adequacy of safeguards proposed
There against
Value of the existing connection with the borrower
Credit risk rating
Security, pricing, charges and concessions proposed for the exposure and
covenants
o Stipulated vis-à-vis the risk perception.
 Accord sanction of the proposal on the Terms proposed or by stipulating
modified or additional conditions/ safeguards, or Defer decision on the
proposal and return it for additional data/clarifications, or Reject the
proposal, if it is not acceptable, setting out the reasons.
Loan administration - Post sanction Credit process
.
Need
Lending decisions are made on sound appraisal and assessment of credit
worthiness. Past record of satisfactory performance and integrity are no
guarantee for future though they serve as a useful guide to project the trend
in performance. Credit assessment is made based on promises and

17. projections. A loan granted on the basis of sound appraisal may go bad
because the borrower did not carry out his promises regarding performance.
It is for this reason that proper follow up and supervision is essential. A
banker cannot take solace in sufficiency of security for his loans. He has to -
a) Make a proper selection of borrower
b) Ensure compliance with terms and conditions
c) Monitor performance to check continued viability of operations
d) Ensure end use of funds.
e) Ultimately ensure safety of funds lent.
Stages of post sanction process
The post-sanction credit process can be broadly classified into three stages viz.,
follow-up, supervision and monitoring, which together facilitate efficient and
effective credit management and maintaining high level of standard assets. The
objectives of the three stages of post sanction process are detailed below.
Types of Lending Arrangements
Introduction
Business entities can have various types of borrowing arrangements. They are
 One Borrower – One Bank
 One Borrower – Several Banks (with consortium arrangement)
 One Borrower – Several Banks (without consortium arrangements –
Multiple
 Banking
 One Borrower – Several Banks (Loan Syndication)
 One Bank
The most familiar amongst the above for smaller loans is the One Borrower-One
Bank arrangement where the borrower confines all his financial dealings with only
one bank.

18. Sometimes, units would prefer to have banking arrangements with more than one
bank on account of the large financial requirement or the resource constraint of his
own banker or due to varying terms & conditions offered by different banks or for
sheer administrative convenience. The advantages to the bank in a multiple
banking arrangement/ consortium arrangement are that the exposure to an
individual customer is limited & risk is proportionate. The bank is also able to
spread its portfolio. In the case of borrowing business entity, it is able to meet its
funds requirement without being constrained by the limited resource of its own
banker. Besides this, consortium arrangement enables participating banks to save
manpower & resources through common appraisal & inspection & sharing credit
information.
The various arrangements under borrowings from more than one bank will differ
on account of terms & conditions, method of appraisal, coordination,
documentation & supervision & control.
 Consortium Lending
When one borrower avails loans from several banks under an arrangement among
all the lending bankers, this leads to a consortium lending arrangements. In
consortium lending, several banks pool banking recourses & expertise in credit
management together & finance a single borrower with a common appraisal,
common documentation & joint supervision & follow up. The borrower enjoys the
advantage similar to single window availing of credit facilities from several banks.
The arrangement continues until any one of the bank moves out of the consortium.
The bank taking the highest share of the credit will usually be the leader of
consortium. There is no ceiling on the number of banks in a consortium.
 Multiple Banking Arrangement
Multiple Banking Arrangement is one where the rules of consortium do not apply
& no inter se agreement among banks exists. The borrower avails credit facility
from various banks providing separate securities on different terms & conditions.
There is no such arrangement called ‘Multiple Banking Arrangement’ & the term
is used only to denote the existence of banking arrangement with more than one
bank. Banking Arrangement has come to stay as it has some advantages for the
borrower & the banks have the freedom to price their credit products & non-fund
based facility according to their commercial judgment. Consortium arrangement
occasioned delays in credit decisions & the borrower has found his way around this
difficulty by the multiple banking arrangement. Additionally, when units were not
doing well, consensus was rarely prevalent among the consortium members. If one
bank wanted to call up the advance & protect the security, another bank was
interested in continuing the facility on account of group considerations.

19. Points to be noted in case of multiple banking arrangements
Though no formal arrangement exists among the financing banks, it is
preferable to have informal exchange of information to ensure financial
discipline
Charges on the security given to the bank should be created with utmost care
to guard against dilution in our security offered & to avoid double financing
Certificates on the outstanding with the other banks should be obtained on
the periodical basis & also verified from the Balance sheet of the unit to
avoid excess financing
 Credit Syndication
A syndicated credit is an agreement between two or more lending institutions to
provide a borrower a credit facility using common loan documentation. It is a
convenient mode of raising long-term funds.
The borrower mandates a lead manager of his choice to arrange a loan for him. The
mandate spells out the terms of the loan & the mandated bank’s rights &
responsibilities.
The mandated banker – the lead manger – prepares an information memorandum
& Circulates among prospective lender banks soliciting their participation in the
loan. On the basis of the memorandum & on their own independent economic &
financial evolution the leading banks take a view on the proposal. The mandated
bank convenes the meeting to discuss the syndication strategy relating to
coordination, communication & control within the syndication process & finalizes
deal timing, management fees, cost of credit etc. The loan agreement is signed by
all the participating banks. The borrower is required to give prior notice to the lead
manger about loan withdrawls to enable him to tie up disbursements with the other
lending banks.
Features of syndicated loans
Arranger brings together group of banks
Borrower is not required to have interface with participating banks, thus
easy & hassle fee
Large loans can be raised through syndication by accessing global markets
For the borrower, the competition among the lenders leads to finer terms
Risk is shared
Small banks can also have access to large ticket loans & top class credit
appraisal

20. & management
Advantages
Strict, time-bound delivery schedule & withdrawals
Streamlined process of documentation with clearly laid down roles &
responsibilities
Market driven pricing linked to the risk perception
Competitive pricing but scope for fee-based income is also available
Syndicated portions can be sold to another bank, if required
Fixed repayment schedule & strict monitoring of default by markets which
punish indiscipline