Credit Appraisal Process In Bank Of Maharashtra

This is to certify that the summer internship project submitted by Ms Rachna Singh Chandel, Roll No. KHR2011PGDM21F216 to ITM Business School, Kharghar in the partial fulfillment of the requirement for the award of the Post Graduate Diploma in Business Management is a bonafide piece of work carried out by her under my direct and close supervision and guidance. The contents of this report, in full or in parts have not been submitted in any form to any other institute or university for any other degree or diploma or to any other person.

DECLARATION

I hereby declare that the project report entitled “Credit Appraisal Process in Bank of Maharashtra” which is being submitted in partial fulfillment of requirement for the award of the Post Graduate Diploma in Business Management is my original work and is carried out under the guidance and supervision of Mr. Suhas V. Vaishampayam, Faculty Guide, ITM Business school.

I further declare that I or any other person has not previously submitted this project report to any other institution/ university for any other degree/ diploma or to any other person.

Date:13/07/12

Place: Kharghar, Navi Mumbai

Rachna Singh Chandel
ACKNOWLEDGEMENT

I place on record and warmly acknowledge the timely suggestions and inspired guidance offered by my faculty guide Mr. Suhas V. Vaishampayam, ITM Business School, Kharghar, in bringing this report to a successful completion.

I will remain highly indebted to my Industry guide Mr. Narendra Jain, Chief Manager, Bank of Maharashtra, Katora Talab,Raipur to give me this opportunity to do my summer internship in the company. I owe this wonderful experience of corporate life to him.

I am grateful to Mr. Pradeep Hazari, Deputy Regional Manager, Bank of Maharashtra for all the discussions I had with him which made my mind clear and get my thoughts on the right track. Special thanks to for his continuous encouragement and invaluable supervision of Ms. Laxmi Lakhwani, Credit Manager, Regional Office, Raipur and for correcting me whenever I made mistakes. This project would not have been possible without her. I am grateful to Mr. D V Sonuley, Regional Manager, Bank of Maharashtra for extending all possible help whenever I needed it.

I have to thank Mr. Mehra, Mr. Aseem Baani and Avani Rathod for all the help and to have made my tenure in Bank of Maharashtra a pleasurable experience. Lastly I would like to express my sincere gratitude to all those persons who have directly and indirectly contributed in completion of this project.

Rachna Singh Chandel

EXECUTIVE SUMMARY
It gives me great pleasure to present this project report on “Credit Appraisal Process” at bank of Maharashtra. The project was carried out from 10th May to 10th July 2012.The main objective of the project was to study the process by which banks appraise loans/advances. To know details of the procedure by which banks take the decision of providing a firm with the funded or non funded finance asked by them. Firms need assistance from the bank in form of funded or non funded facilities to meet their long term medium term or short term requirements. Business cannot survive without money and availability of money being limited and wants being unlimited .And procurement of fund is one of the important functions in commercial & non-commercial enterprises. Firms ask for working capital or cash credit for short term needs and term loan for their medium and long term needs. To back them up during a trade they need letter of credit or guarantee from the bank. Though firms depend largely on banks to meet their credit needs, banks need to make sure that these firms are indeed in need of these funds and whether or not they will be able to pay back.

Also is it a profitable investment on part of bank or whether there are chances that this investment may turn into a Non Performing Asset after some time. In this project I have tried to cover all the points that bank takes into consideration while appraising a proposal/project. It includes the methods, process and rules/conditions of appraisal. The theory has been backed up by the case studies which give a proper idea as to what is actually done in the appraisal by looking at the ratios and various projections done by the bank to arrive at a decision. Bank’s work does not end here it keeps on monitoring the account even after providing the advance to look any sort of risk or difficulty that may come in the near future. This whole process is very cumbersome and logical and it takes a lot of hardwork and risk on the part of decision makers i.e. the bank and its various departments that closely work to take the difficult decision i.e.-To give or not to give the loan? “Credit Appraisal is a process of appraising the credit worthiness of loan applicants. The funds of depositor’s i.e. general public are mobilized by means of such advance / investment. Thus it extremely important for the lender bank to assess the risk associated with credit, thereby ensure the security for the funds deposited by the depositors.”

Objectives of the Project

* To study the credit appraisal methods.
* To assess the suitability of the company for disbursement of credit. This would involve the following actions:
* Calculation of credit rating.
* Use of credit rating charts
* Evaluation of management risk
* Evaluation of financial risk
* Evaluation of market-industry risk
* Evaluation of the facility
* Evaluation of compliance of sanction terms
* To understand the commercial, financial & technical viability of the proposal proposed and it’s finding pattern

RESEARCH METHODOLOGY

This is analytical research area where we analyses information with cause and its effects relationship. This analysis leads to the simple conclusions of whether to lend money to the institution for business. Also if the money is lend then there is reality the norms are not always perfect and hence it is essential to priorities stringent parameters and secondary parameters.

Research Type- Analytical

Source of Data- Primary and Secondary

Sample Unit- Industries applying for loan

Sample- Case studies

Sample Technique- Allocation of Case Analysis

Tool used Financial Analysis-

Primary Data:
* Observation, Discussion with the manager.
* The company profile, annual reports have been obtained from BOM

Secondary Data:
* Old sanction proposals
* Reference books
* Websites
* Bank Journals

LIMITATION OF THE STUDY:

* As the credit appraisal is one of the 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.

Bank of Maharashtra
Bank of Maharashtra is a public sector bank in Maharashtra, which offers personal banking, cash management, retail loans and other financial services. Their services include deposits, savings/current bank account, vehicle loans, personal loans, retail trade finance, global banking, lending to priority sector and small scale sector, foreign exchange and export finance, corporate loans and equipment loans. The Bank has one subsidiary, namely The Maharashtra Executor & Trustee Company Pvt Ltd, which undertakes management of public/ private trusts and administration/ execution of Will. They also sponsored three Regional Rural Banks, namely Aurangabad Jalna Gramin Bank, Thane Gramin Bank and Marathwada Gramin Bank with head office at Aurangabad, Thane and Nanded respectively. Bank of Maharashtra was incorporated on September 16, 1935 and started their business on February 8, 1936. In April 10, 1946, The Maharashtra Executor & Trustee Company Pvt Ltd was incorporated as a wholly owned subsidiary of the Bank. In July 1969, Bank of Maharashtra was nationalized along with 13 other banks. After nationalization, the Bank expanded rapidly.

In the year 1998, the Bank attainted the autonomous status, which helped the Bank in providing more and more services with simplified procedures without intervention of Government. In the year 2000, they incorporated Magic eMoney Ltd (MeM) a joint venture of Bank of Maharashtra, Dena Bank, NextStep Infotech P. Ltd. (NSIPL) and Magic Software Enterprises (MSE) Israel continued to undertake departmental projects. The Bank acquired a stake of 9% in Global Trade Finance Pvt Ltd, a non banking finance company promoted by the EXIM Bank. In January 2006, the Bank signed a MoU with Life Insurance Corporation of India, for distribution of their insurance products. Also, they launched a scheme of money transfer service for Non Resident Indians and other foreign account customers, using the Western Union Money Transfer Services provided by Western Union Financial Services Inc. For this regard, the Bank has entered into agreement with Weizmann Forex Ltd, the primary agent of Western Union Financial Services Inc. In May 2006, they entered into tie up with United Insurance Company Ltd for distribution of their non-life insurance products Products and Services|

DEPOSITS:- * Savings Deposits * Term Deposits * Current DepositsLOANS :- * Loans for Agriculturists * Loans for Corporates-Funded and Non Funded Facilities * Loans to Exporters * Loans for Entrepreneurs * Education Loan Scheme * Personal Loans * Vehicle Loan * Consumer Loan * Loan scheme for Individuals * Loan scheme for Professionals and Self EmployedSERVICES:-| * ATM Services|

* Credit Card|
* DEMAT Services- Bank of Maharashtra is a Depository Participant (DP) of CDSL since 1999.Services rendered are for holding / transferring / pledging of securities such as shares / Debentures / Bonds / Commercial Papers/ UTI units / etc (known as securities) in electronic form (Dematerialized form). | * Bancassurance- With the commitment to customers’ convenience, the Bank has tied up with insurance companies so that customers can avail of insurance service at the branches. We are the corporate agent of the Life Insurance Corporation of India for the distribution of their life insurance products.In non-life sector, our Bank is the corporate agent of United Insurance company for the distribution of their non life insurance products. Both our Insurance partners offer a wide range of insurance products, which are available at our branches as a result of our Banassuanace tie ups.| * Distribution of Mutual Funds- Bank of Maharashtra is always looking to add value to the relationship which customers have with us. For the convenience of our customers, we are trying to provide a host of financial services under one roof. The Bank has tied up with Franklin Templeton mutual fund for distribution of their mutual fund products through our branches. We welcome you to our branch, the financial supermarket which offers banking as well as insurance with investment services at one stop.| * Executors and Trustee Services|

* Mahabill Pay|
* RTGS/NEFT- The RTGS and NEFT facility has been made available for customers to transfer fund from one Bank to another Bank at all Branches of our Bank. The minimum amount for customer transactions through RTGS is Rs.2 Lakhs while there is no amount restriction for NEFT transactions. In RTGS both Customer and Inter-Bank transactions are permitted whereas in NEFT only Customer transactions are permitted.| * Capital Market Application ( ASBA )- ASBA means “Application Supported by Blocked Amount”, enables investors to apply for IPOs / FPOs and rights issues without making a payment. Instead, the amount is blocked in investors’ own account and only an amount proportionate to the shares allotted goes out when allotment is finalized.It is a supplementary process of applying in initial public offers (IPO), right issues and follow on public offers (FPO) made through book building route and co-exists with the current process of using cheque as a mode of payment and submitting applications.

Bank is providing this value added service free of costs for issues with book building at BSE.| * MAHAeTRADE ( On line Share Trading Facility )- Bank of Maharashtra in association with M/s Religare Securities Ltd., M/s Munoth Capital Market Ltd., M/s Enam Securities Direct Pvt Ltd., brings forward a fast, easy, transparent and hassle-free way for investing / trade in shares in secondary capital market through National Stock Exchange and Bombay Stock Exchange. Investment in shares traded on the NSE and BSE can be made without having to visit your share-broker. All other associated hurdles like tracking of settlement cycles, paying and receiving funds in savings account, paying and receiving shares in Demat accounts have been removed. Now from a remote location while on tour, picnic, holiday – through internet an laptop / personal computer – you can also trade in the stock market. You can have access to world class research reports, absolutely free, on trading and investment from the Brokers’ sites| * Mahabank Swasthya Yojna|

* E Payment Taxes|

Credit Deployment

The Bank has put in place a lending policy in conformity with the guidelines issued by RBI and also the priority sector lending norms of the Government of India. It emphasizes on qualitative credit growth and ensures compliance with regulatory requirements as well as the prudential exposure limits.

Several steps have been taken for reduction in the proposal processing time at all levels and for improvement in the quality of credit.Some of them are as follows:

* Improvement in credit appraisal techniques.

* Specifying proposal processing and timing norms.

* Credit marketing at field level and meeting existing and potential clients from Head Office.

* Creating awareness of credit administration and growth.

* 5 Mid-Corporate Branches have been opened to boost mid- corporate credit.

* -Training provided to credit officers to upgrade their credit appraisal & marketing skills

* Customers’ meet & exporters’ meet were organized at various places with participation of senior Executives from Head Office to have direct interaction with the clients.

* Opening of Loan Syndication Cell at Mumbai to augment large advances.

As a result of various steps taken by the Bank, yield on advances has improved during the year.

The Mid Corporate vertical which has been created last year has resulted in core credit growth besides dispersion of credit risk.
Bank has been able to garner substantial business under Mid Corporate vertical with relatively high yield. Financing mid-corporate shall continue to be one of the thrust areas of the Bank.

Sectoral Deployment of Credit:-

While financing to various segments of the economy, the Bank has endeavored to maintain a diversified credit portfolio, with a view to ensuring credit dispersion across sectors

Industry wise credit deployment as on 31.03.2012 is as under

The Bank has continued its efforts to support core, manufacturing and priority sectors as well as infrastructure projects, which serve to drive economic growth.
This focus of the Bank will continue in future, in line with the national economic growth priorities.
It has been the constant endeavor of the Bank to facilitate equitable and sustainable economic development by timely and hassle-free availability of credit for productive purposes to Small and Marginal Farmers, Micro & Small Enterprises, Retail Traders, Professional & Self Employed, Women Entrepreneurs and entrepreneurs from economically weaker sections.

INTRODUCTION

The Banking industry in India has a huge canvas of history, which covers the traditional banking practices from the time of Britishers to the reforms period, nationalization to privatisation of banks and now increasing numbers of foreign banks in India. Therefore, Banking in India has been through a long journey. The Banking Industry was once a simple and reliable business that took deposits from investors at a lower interest rate and loaned it out to borrowers at a higher rate. However deregulation and technology led to a revolution in the Banking Industry that saw it transformed. Banks have become global industrial powerhouses that have created ever more complex products that use risk and securitisation in models that is impossible for a regular person to understand. Through technology development, banking services have become available 24 hours a day, 365 days a week, through ATMs, at online bankings, and in electronically enabled exchanges where everything from stocks to currency futures contracts can be traded.

Nevertheless, the fundamental aspects of banking i.e. trust and confidence of the people on the institution remains the same. The majority of the banks are still successful in keeping with the confidence of the shareholders as well as other stakeholders. However, with changing dynamics of banking industry a new kind of risk exposure comes into picture. In recent time, we have witnessed that the world economy is passing through some intricate circumstances as bankruptcy of banking and financial institutions, debt crisis in major economies of the world and euro zone crisis. The scenario has become very uncertain causing recession in major economies like US and Europe. This poses some serious questions about the survival, growth and maintaining sustainable developement. However, amidst all this turmoil India’s Banking Industry has been amongst the few to maintain resilience. The tempo of developement for the banking industry has been remarkable over the past decade. It is evident from the higher pace of credit expansion, expanding profitability and productivity similar to banks in developed markets, lower incidence of non-performing assets and focus on financial inclusion have contributed to making Indian Banking Industry vibrant and strong. Indian Banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling.

CREDIT
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 of equal value) at a later date. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit allows you to buy goods or commodities now, and pay for them later. We use credit to buy things with an agreement to repay the loans over a period of time. The most common way to avail credit is by the use of credit cards. Other credit plans include personal loans, home loans, vehicle loans, student loans, small business loans, trade. In banking terms,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. Bank as a Source of Meeting Credit Requirements:

While bank credit is considered as a major source of meeting the financial needs of the industry, the banks have to consider the following factors before meeting their requirements A. What should be the amount of assistance?

B. What should be the form in which assistance may be extended ? To obtain the bank credit for meeting the working capital requirements, the company will be required to estimate the working capital requirements and will be required to approach the banks along with the necessary supporting data. On the basis of the estimates submitted by the company, the bank may decide the amount of assistance which may be extended, after considering the margin requirements. This margin is to provide the cushion against the reduction in the value of security. If the company fails to fulfill its obligations, the bank may be required to realize the security for recovering the dues.

Form of Assistance:
After deciding the amount of overall assistance to be extended to the company, the bank can disburse the amount in any of the following forms Non-Fund Based Lending
Fund Based Lending

Non-Fund Based Lending
In case of Non-Fund Based Lending, the lending bank does not commit any physical outflow of funds. As such, the funds position of the lending bank remains intact. The Non-Fund Based Lending can be made by the banks in two forms-

Bank guarantee :Borrowing and lending of money had become a part and parcel of commercial transactions. The lender naturally desires to safeguard his own position and wants to ensure that the money lent was received back without fail. As a means of such safeguard he seeks from the loanee the guarantee of another person (who was considered good for the amount in question) for the prompt repayment of the debt in case the loanee fails to repay.

Letter of 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 favour of the exporter whereby the importer’s 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.

Fund Based Lending
In case of Fund Based Lending, the lending bank commits the physical outflow of funds. As such, the funds position of the lending bank gets affected. The Fund Based Lending can be made by the banks in the following forms- Loan:-In this case, the entire amount of assistance is disbursed at one time only, either in cash or by transfer to the company’s 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.

Bills purchased or discounted:-This form of assistance is comparatively of recent origin. This facility enables the company to get the immediate payment against the credit bills raised by the company. The bank holds the bill as a security till the payment is made by the customer. The entire amount of bill is not paid to the company. The Company gets only the present worth of the amount of bill, the difference between the face value of the bill and the amount of assistance being in the form of discount charges. On maturity, bank collects the full amount of bill from the customer. While granting this facility to the company, the bank inevitably satisfies itself about the credit worthiness of the customer. A fixed limit is stipulated in case of the company, beyond which the bills are not purchased or discounted by the bank.

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 favour, it can approach the bank for packing credit facility.

LENDING POLICY
The Lending Policy of the bank aims at providing broad guidelines for handling new credit proposals as well as credit portfolio,to evaluate the risk profile of the credit portfolio so as to mitigate the risk, effective and efficient management of the credit portfolio of the bank so as to ensure reasonable return on advances with adequate safety of the funds. OBJECTIVES –

The main objectives of lending policy are as follows-
* Due compliance of all regulatory requirements such as exposure norms, prudential norms, asset-liability management guidelines ,regulatory and other statutory restrictions, other related directeves/instructions issued by Government of India, RBI, bank’s board of directors and the top of management. * To ensure planned lending and healthy growth of loan portfolio and achieve lending targets as per the corporate plans, an optimal CD ratio after meeting statutory pre-emption and preventing asset liability mismatches while keeping the NPA level to the minimum and improving the yield on advances, which is the main driver of profit. * To induce improvement of systems and procedures and decentralize decision making ensuring expenditious decision-making and have in built flexibility in operations. * To have a well balanced and diversified loan portfolio with proper pricing policies, dispersed credit risks covering various sectors of the economy and different industries/sectors vis-à-vis market forces and competition.

* Special emphasis on flow of credit towards segments of priority sector i.e. Agriculture, MSME, Retail trade, Export, Housing Finance to individuals and other allied sectors. * To enlarge client base through aggressive credit marketing and meet the diverse needs of customers through product mix/development and innovation. * To improve the non fund business with a view to increase fee based income. * To ensure that aggregate risk in loan assets is not allowed to increase by stabilizing and percolating credit risk management system. * Timely and adequate flow of credit to meet the genuine needs of existing and prospective borrower,to fulfill socio-economic obligations and also to meet the genuine credit needs of the clients by ensuring quicker and prompt credit decision. * Comprehend the importance of financial sector reforms and resultant rapid changes in the economy. 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. 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. This normally involves appraising the borrower’s payment history and establishing the quality and sustainability of his income. Generally the credit facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer’s cash flows are ascertained to ensure the timely payment of principal and the interest. Every bank or lending institution has its own panel of officials for this purpose.