49449249 Report Credit Appraisal PNB

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE

DEGREE IN INTERNATIONAL BUSINESS

CREDIT APPRAISAL AND RISK RATING IN PUNJAB

NATIONAL BANK

SUBMITTED BY:

KRITIKA ARORA

MBA-IB (2009-20011)

Roll No. : A1802009075

INDUSTRY GUIDE FACULTY GUIDE

Mr. ARUN KUMAR NIJHAWAN Mr.AJIT MITTAL

SENIOR MANAGER SENIOR FACULTY

Credit Appraisal and Risk Rating at PNB

AMITY INTERNATIONAL BUSINESS SCHOOL, NOIDA

AMITY UNIVERSITY – UTTAR PRADESH

CREDIT SECTION, CIRCLE OFFICE: DELHI, 4th FLOOR, RAJENDRA BHAWAN, RAJENDRA PLACE, NEW DELHI

TELE; 25744450 Fax: 25731252

------------------------------------------------------------------------------------------------------------------------------------------------------------

TO WHOM IT MAY CONCERN

This is to certify that KRITIKA ARORA, a student of Amity International Business School, Noida, undertook a project on “CREDIT APPRAISAL AND RISK MANAGEMENT” at PUNJAB NATIONAL BANK from 1st

May to 30th June.

Ms.KRITIKA ARORA has successfully completed the project under the guidance of Mr.ARUN KUMAR NIJHAWAN. She is a sincere and hard-working student with pleasant manners.

We wish all success in her future endeavors.

Mr. ARUN KUMAR NIJHAWAN

Amity International Business School,Noida 2


Senior Manager

Circle Office Delhi

Punjab National Bank

CERTIFICATE OF ORIGIN

This is to certify that Ms. KRITIKA ARORA, a student of Post Graduate Degree in MBA in INTERNATIONAL BUSINESS, Amity International Business School, Noida has worked in the Credit Department of Punjab National Bank, Circle Office Delhi and has submitted this project report entitled “Credit Appraisal and Risk Rating” at PUNJAB NATIONAL BANK, under the able guidance and supervision of Mr. ARUN KUMAR NIJHAWAN, SENIOR MANAGER, PUNJAB NATIONAL BANK. The period for which she was on training was for 8 weeks, starting from 1st MAY to 30th June.

This Summer Internship report has the requisite standard for the partial fulfillment the Post Graduate Degree in International Business. To the best of our knowledge no part of this report has been reproduced from any other report and the contents are based on original research.



Dr. Ajit Mittal

Professor

AIBS

Kritika Arora

Student

MBA in International Business

Amity International Business School

ACKNOWLEDGEMENT

Every work involves efforts and inputs of various kinds and people. I am thankful to all those

people who have been helpful enough to me to the extent of their being instrumental in the

completion and accomplishment of the project entitled “Credit Appraisal and Risk Rating at

Punjab National Bank”.

I sincerely acknowledge with deep sense of gratitude to my project guide Mr. A K Nijhawan

Senior Manager, Credit, PNB Circle Office, for enhancing my understanding of the subject and

enabling me to appreciate finer nuances of the subject.

I would also like to express my deepest gratitude to Mr. Rohit Grover (Chief Manager, Credit),

Ms. Trilochan Kaur Anand (Manager, Credit), Mr. Sarkar (Senior Manager, Credit Risk

Management Department) and the entire Credit Department for their help and guidance, without

which the completion of this project would have been extremely difficult.



Lastly, I would like to thank Mr. Nehal Ahad (Chief Manager, HR) as he found me credible

enough to work for PNB and selected me for challenging project.

Kritika Arora

A1802009075

MBA in International Business

Amity International Business School



CHAPTER PLAN

Table of Content

PART - 1

CHAPTER 1 EXECUTIVE SUMMARY……………………………….. 8

CHAPTER 2 INTRODUCTION TO CREDIT APPRAISAL………………… 10

CHAPTER 3 OBJECTIVES…………………………………………... 12

CHAPTER 4 RESEARCH METHODOLOGY……………………………. 13

CHAPTER 5 INDUSTRY PROFILE……………………………………. 14

CHAPTER 6 COMPANY PROFILE……………………………………. 17

CHAPTER 7 REVIEW OF LITERATURE………………………………. 19

7.1 Working Capital Assessment…………………………. 19

7.2 Assessment of Term Loans…………………………… 30

7.3 Basel Accord & Risk Management…………………….. 31

CHAPTER 8 CREDIT APPRAISAL…………………………………… 33

8.1 Introduction………………………………………. 33

8.2 Market Analysis…………………………………… 34

8.3 Technical Analysis…………………………………. 36

8.4 Financial Analysis………………………………….. 38

8.5 Management & Organizational Analysis………………… 45

8.6 Credit Appraisal Checklist…………………………… 46

CHAPTER 9 CREDIT RISK MANAGEMENT…………………………… 49

9.1 Credit Risk………………………………………... 49

9.2 Credit Risk Management System in PNB………………... 49

CHAPTER 10 POST SANCTION FOLLOW UP OF LOANS………………….. 55

CHAPTER 11 ANALYSIS & INTERPRETATION………………………….. 57

11.1 PNB’s Loan Policy…………………………………. 57



11.1.1 Objective…………………………………..... 57

11.1.2 Basic Tenets of the Policy………………………... 57

11.1.3 Methods of Lending……………………………. 58

11.2 Credit Appraisal Process at PNB……………………… 60

11.2.1 Flowchart…………………………………... 60

11.2.2 Brief on the Process……………………………. 60

11.2.3 Risk Rating of the Borrower………………………. 62

11.2.4 Determination of the Applicable Rate of Interest…………. 65

11.2.5 Post Sanction Follow Up………………………… 66

CHAPTER 12 CASE STUDY- ABC PARTS PVT LTD 68

12.1 Borrowers Profile…………………………….... 68

12.2 Credit Appraisal of ABC PARTS Pvt. Ltd……………... 71

I. Management Evaluation……………………II. Business Evaluation………………………III. Technical Evaluation……………………...IV. Legal Evaluation………………………...V. Financial Evaluation……………………...

71

73

75

77

78

12.3 Present Proposal………………………………. 84

12.4 Security …………………………………… 89

12.5 Credit Risk Rating…………………………….. 90

12.6 Recommendations…………………………….. 94

CHAPTER 13 CONCLUSION & RECOMMENDATIONS……...………… 95

Conclusion……………………………………….. 95

Findings…………………………………………. 97

Recommendations………………………………...... 98

Limitations………………………………………... 99

REFERENCES………………………………………………………......... 100

PART –2



CHAPTER 14 CUSTOMER SATISFACTION……………………………. 102

14.1 Customer Satisfaction…………………………….... 102

14.2 Statement of the Problem……………….................... 103

14.3 Need for the Study…………………………………………. 103

14.4 Scope of the Study……………………………………………….. 104

14.5 Objective of the Study……………………………………… 104

14.6 Sample Method……………………………………………... 105

14.7 Method of Data Collection………………………………….. 106

CHAPTER 15 ANALYSIS & INTERPRETATION………………………………. 107

15.1 Share of Different Types of Accounts………………………. 107

15.2 Ratios of the Services Offered by PNB……………………… 109

15.3 Reason for Selecting PNB…………………………………… 111

15.4 Consumers Willingness To Recommend PNB To Others….... 113

15.5 Satisfaction of Respondents With Services Offered by PNB… 115

Branch

CHAPTER 16 BANKING OPERATIONS IN BRANCH OFFICES ………………. 117

16.1 Opening of Saving Account by Individual…………………… 117

16.2 Cash Deposit………………………………………………… 127

16.3 Cash Payment……………………………………………….. 131

16.4 ATM Management & Maintenance Operation……………… 133

16.5 Customer Facilities & Conveniences………………………… 136

CHAPTER 17 CONCLUSION & RECOMMENDATION………………………… 137

17.1 Suggestion & Recommendation…………………………….. 137

17.2 Limitation of the Study………………………………..…….. 139

17.3 Conclusion………………………………………………….. 140



Chapter 1 EXECUTIVE SUMMARY

This project was undertaken at the Punjab National Bank Circle Office Delhi, at the Credit

Department. Financial requirements for Project Finance and Working Capital purposes are taken

care of at the Credit Department. Companies that intend to seek credit facilities approach the

bank. Primarily, credit is required for following purposes:

a. Working capital finance

b. Term loan for mega projects

c. Non Fund Based Limits like Letter of Guarantee, Letter of Credit etc.

Project Financing discipline includes understanding the rationale for project financing, how to

prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In

addition, one must understand some project financing plans have succeeded while others have

failed. A knowledge-base is required regarding the design of contractual arrangements to support

project financing; issues for the host government legislative provisions, public/private

infrastructure partnerships, public/private financing structures; credit requirements of lenders, and

how to determine the project's borrowing capacity; how to analyze cash flow projections and use

them to measure expected rates of return; tax and accounting considerations; and analytical

techniques to validate the project's feasibility

Project finance is different from traditional forms of finance because the credit risk associated

with the borrower is not as important as in an ordinary loan transaction; what is most important is

the identification, analysis, allocation and management of every risk associated with the project.

The purpose of this project is to explain, in a brief and general way, the manner in which risks are

approached by financiers in a project finance transaction. Such risk minimization lies at the heart

of project finance. Efficient management of credit portfolio is of utmost importance as it has a

tremendous impact on the Banks’ assets quality & profitability. The ongoing financial reforms

have no doubt provided unparallel opportunities to banks for growth, but have simultaneously

exposed them to various risks, which need to be effectively managed.



The concept of Credit Management is undergoing radical changes. Credit Risk in all exposures

calls for precise measuring and monitoring for taking considered credit decisions with suitable

risk mitigants, risk premium, etc. Credit portfolio should be well diversified in various promising

sectors with a cautious approach to be adopted in risky segments.

Also, lending continues to be a primary function in banking. In the liberalized Indian economy,

clientele have a wide choice. External Commercial Borrowings and the domestic capital markets

compete with banks. In another dimension, retail lending- both personal advances and SME

advances- competes with corporate lending for funds and for human resources. But lending by

nature cannot be an aggressive selling activity, disregarding the risks involved. Bank has to be

competitive without compromising on the basic integrity of lending. The quality of the Bank’s

credit portfolio has a direct and deep impact on the Bank’s profitability.

The study has been conducted with the purpose of getting in-depth knowledge about the credit

appraisal and credit risk management procedure in the organization for the above said first two

purposes.



Chapter 2 CREDIT APPRAISAL – AN INTRODUCTION

Project / Credit appraisal is a skill which has to be acquired by study and supplemented by

practice. Intuitive guess work has little place in appraising the credit rating or credit needs of a

corporate unit. The credit managers of banks and Non Banking Finance Companies (NBFCs) are

duty bound to accept or reject a proposal on the basis of its viability or non - viability.

Project / Credit appraisal is done by banks or financial institutions by obtaining credit information

of the borrowing company.

Credit information of the borrowing company can be obtained by the following sources:

1. Banks and Financial Institution

2. Bank References

3. Trade References

4. Credit Rating Agencies

5. Published Books: Basic information about a company may be taken from printed sources

like the Stock Exchange Year book, Corporate Path finder’s data base, etc.

6. Company Financial Reports

7. Press Reports

8. Stock Market Opinion

9. Charges Registered: Charges created on the assets of a company have to be registered

with the Registrar of Companies.

10. Personal discussion

11. Factory Visit



12.Study of Financial Statements: Financial analysis determines the significant operating

and financial characteristics of a firm form accounting data and financial statements.

Analysis can be done through:

a. Ratio Analysis

b. Trend analysis: Trend analysis can be through:

i. Intra firm comparison that is review of the trend of the ratios over the years

within the firm and

ii. Inter firm comparison.

c. Reading of notes to accounts and other information: Careful reading and

analysis of the notes on accounts, one can gauge the policies of the management,

performance of the company, and its future planning.

Information required to be submitted by the Company (Borrower) to the Bank

The company should make sure that the following information required for processing credit

requests are collected by the company for submitting it to the bank or financial institution in order

to obtain the required credit facility:

1. Basic background information on the company:

2. Required facility

3. Key industry dynamics:

4. Management:

5. Management information system: Details of the planning, controlling and monitoring systems which have been put in place have to given.

6. Financials

7. Details of the Security to be pledged:

8. Present banking relationship: The bank requires full details of the present credit facilities being enjoyed at the moment.



Chapter 3 OBJECTIVES

• To study broad contours of management of credit, the loan policy, credit appraisal for

business units i.e. for working capital loan or Term Loan

• To understand the basis of credit risk rating and its significance

• To utilize the above learning and appraise the creditworthiness organizations those

approach PUNJAB NATIONAL BANK for credit. This would entail undertaking of the

following procedures:

i. Management Evaluation

ii. Business / Industry Evaluation

iii. Technical Evaluation

iv. Legal Evaluation

v. Financial Evaluation

vi. Credit Risk Rating



Chapter 4 RESEARCH METHODOLOGY

The methodology being used involves two basic sources of information primary sources and

secondary source.

Primary sources of Information

• Meetings and discussion with the Chief Manager and the Senior Manager of both

Credit and Credit Risk Management Department

• Meetings with the clients

Secondary sources of Information

• Loan Policy and Internal Circulars of the bank

• Research papers, power point presentations and PDF files prepared by the bank and

its related officials

• Referring to information provided by CIBIL, Income Tax files, Registrar of

Companies (Ministry of Corporate Affairs), and Auditor reports



Chapter 5INDUSTRY PROFILE

THE INDIAN BANKING INDUSTRY

The last decade has seen many positive developments in the Indian banking sector. The growth in

the Indian Banking Industry has been more qualitative than quantitative and it is expected to

remain the same in the coming years. Based on the projections made in the "India Vision 2020"

prepared by the Planning Commission, the report forecasts that the pace of expansion in the

balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks

by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of

GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to

grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the

growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there

will be large additions to the capital base and reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks.

Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000

branches of Scheduled banks spread across India. As far as the present scenario is concerned the

Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for

more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with

excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On

the other hand the Private Sector Banks are making tremendous progress. They are leaders in

Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned

they are likely to succeed in the Indian Banking Industry.

Currently, banking in India is generally fairly mature in terms of supply, product range and reach-

even though reaching rural India still remains a challenge for the private sector and foreign banks.

In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,

strong and transparent balance sheets relative to other banks in comparable economies in its



region. The Reserve Bank of India is an autonomous body, with minimal pressure from the

government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without

any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy

expected to be strong for quite some time-especially in its services sector-the demand for banking

services, especially retail banking, mortgages and investment services are expected to be strong.

One may also expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak

Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed

to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any

stake exceeding 5% in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with

the Government of India holding a stake), 29 private banks (these do not have government stake;

they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a

combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA

Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the

banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and

related government and financial sector regulatory entities, have made several notable efforts to

improve regulation in the sector. The sector now compares favorably with banking sectors in the

region on metrics like growth, profitability and non-performing assets (NPAs). Indian banks have

compared favorably on growth, asset quality and profitability with other regional banks over the

last few years. The banking index has grown at a compounded annual rate of over 51 per cent

since April 2001 as compared to a 27 per cent growth in the market index for the same period.

The interplay between policy and regulatory interventions and management strategies will

determine the performance of Indian banking over the next few years. Management success will

be determined on three fronts:



i. Fundamentally upgrading organizational capability to stay in tune with the

changing market

ii. Adopting value-creating M&A as an avenue for growth

iii. Continually innovating to develop new business models to access untapped

opportunities

Opportunities and Challenges for the Players

The bar for what it means to be a successful player in the sector has been raised. Four challenges

must be addressed before success can be achieved.

i. The market is seeing discontinuous growth driven by new products and services

that include opportunities in credit cards, consumer finance and wealth management

on the retail side, and in fee-based income and investment banking on the wholesale

banking side. These require new skills in sales & marketing, credit and operations

ii. Banks will no longer enjoy windfall treasury gains that the decade-long secular

decline in interest rates provided

iii. With increased interest in India, competition from foreign banks will only intensify

iv. Given the demographic shifts resulting from changes in age profile and household

income, consumers will increasingly demand enhanced institutional capabilities and

service levels from banks



Chapter 6 COMPANY PROFILE

Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being the

first Indian bank to have been started solely with Indian capital. The bank was nationalized in July

1969 along with 13 other banks. Today, PNB is a professionally managed bank with a successful

track record of over 110 years. The bank has the 2nd largest branch network in India, with 4525

branches including 432 extension counters spread throughout the country. PNB was ranked as

248th biggest bank in the world by Bankers Almanac, London. Punjab National Bank is not only

the first bank to specialize in credit rating models in India but also the first one to launch image

based cheque transaction system for collection of intra bank intercity cheques thereby providing

credits merely in 48 hrs in 13 cities.

CORPORATE VISION

To be a Leading Global Bank with Pan India footprints and become

a household brand in the Indo-Gangetic Plains providing entire

range of financial products and services under one roof

MISSION Banking for the unbanked

With over 56 million satisfied customers and 5002 offices, PNB has continued to retain its

leadership position amongst the nationalized banks. From its modest beginning; the bank has

grown in size and stature to become a front-line banking institution in India at present. Based on

its sound and prudent banking experience and consistent profit performance, PNB looks

confidently to the future………the name you can bank upon………



PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs

4,35,931 crore. Today, with assets of more than Rs 2,96,633 crore, PNB is ranked as the 3rd

largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest network of

branches (5002 offices including 5 overseas branches ). During the FY 2009-10, with 40.85%

share of CASA deposits, the bank achieved a net profit of Rs 3905 crore. Bank has a strong

capital base with capital adequacy ratio of 14.16% as on Mar’10 as per Basel II with Tier I and

Tier II capital ratio at 9.15% and 5.01% respectively. As on March’10, the Bank has the Gross and

Net NPA ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its’ ratio of Priority

Sector Credit to Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank

Credit at 19.7% was also higher than the stipulated requirement of 40% & 18%.

The performance highlights of the bank in terms of business and profit are shown below:

Parameters Mar'08 Mar'09 Mar'10 CAGR(%)

Operating Profit 4006 5744 7326 22.29

Net Profit 2049 3091 3905 23.98

Deposit 166457 209760 249330 14.42

Advance 119502 154703 186601 16.01

Total Business 285959 364463 435931 15.09

(Rs in Crore)

ORGANIZATIONAL STRUCTURE


HEAD OFFICE

CIRCLE OFFICE

BRANCH OFFICE


Chapter 7 REVIEW OF LITERATURE

7.1 WORKING CAPITAL AND ITS ASSESSMENT

The objective of running any industry is earning profits. An industry will require funds to acquire

“fixed assets” like land and building, plant and machinery, equipments, vehicles etc… and also to

run the business i.e. its day to day operations.

Working capital is defined, as the funds required for carrying the required levels of current assets

to enable the unit to carry on its operations at the expected levels uninterruptedly. Thus working

capital required (WCR) is dependent on

i. The volume of activity (viz. level of operations i.e. Production and Sales)

ii. The activity carried on viz. manufacturing process, product, production programme, and

the materials and marketing mix.

The purpose of assessing the WC requirement of the industry is to determine how the total

requirements of funds will be met. The two sources for meeting these requirements are the unit’s

long-term sources (like capital and long term borrowings) and the short-term borrowings from

banks. The long-term resources available to the unit are called the liquid surplus or Net Working

Capital (NWC).

It can be explained by visualizing the process of setting up of industry. The unit’s starts with a

certain amount of capital, which will not normally be sufficient, even to meet the cost of fixed

assets. The unit, therefore, arranges for a long-term loan from a financial institution or a bank

towards a part of the cost of fixed assets. From these two sources after meeting the cost of fixed

assets some funds remain to be used for working capital. This amount is the Net Working Capital

or Liquid Surplus and will be one of the sources of meeting the working capital requirements.

The remaining funds for working capital have to be raised from banks; banks normally provide

working capital finance by way of advantage against stocks and sundry debtors. Banks, however,

do not finance the full amount of funds required for carrying inventories and receivables: and



normally insist on the stake of the enterprise at every stage, by way of margins. Bank finance is

normally restricted to the amount of funds locked up less a certain percentage of margins. Margins

are imposed with a view to have adequate stake of the promoter in the business both to ensure his

adequate interest in the business and to act as a protection against any shocks that the business

may sustain. The margins stipulated will depend on various factors like salability, quality,

durability, price fluctuations in the market for the commodity etc. taking into account the total

working capital requirements as assessed earlier, the permissible limit, up to which the bank

finance cab be granted is arrived.

While granting working capital advances to a unit, it will be necessary to ensure that a reasonable

proportion of the working capital is met from the long-term sources viz. liquid surplus. Normally,

liquid surplus or net working capital be at least 25% of the working capital requirement

(corresponding to the benchmark current ratio of 1.33), though this may vary depending on the

nature of industry/ trade and business conditions.

Various methods for assessment of Working Capital are discussed in detail:

Operating cycle method:

Any manufacturing activity is characterized by a cycle of operations consisting of purchase of

raw materials for cash, converting them into finished goods and realizing cash by sale of these

finished goods. The time that lapses between cash outlay and cash realization by sale of finished

goods and realization of sundry debtors is known as length of operating cycle. That is, the

operating cycle consists of:

Time taken to acquire raw materials and average period for which they are in store.

Conversion process time

Average period for which finished goods are in store and

Average collection period of receivables (sundry debtors).



Operating Cycle is also called cash-to-cash and indicates how cash is converted into raw

materials, stocks in process, finished goods, bills (receivables) and finally backs to cash. Working

capital is the total cash that is circulating in this cycle. Therefore, working capital can be turned

over or deployed after completing the cycle. Factors, which influence working capital

requirement, are Level of operating expenses and Length of operating cycle.

Any reduction in either of the both will mean reduction in working capital requirement or indicate

an efficient working capital management.

It can thus be concluded that by improving that by improving the working capital turnover ratio

(i.e. by reducing the length of operating cycle) a better management (utilization) of working

capital results. It is obvious that any reduction in the length of the operating cycle can be achieved

only by better management only by better management of one or more of the individual phases of

the operating cycle period for which raw materials are in store, conversion process time, period

for which finished goods are in store and collection period of receivables. Looking at whole

problem from another angle, we find that we can set up extremely clear guidelines for working

capital management viz. examining the length of each of the phases of the operating cycle to

assess the scope for reduction in one or more of these phases.

The length of the operating cycle is different from industry to industry and from one firm to

another within the same industry. For instance, the operating cycle of a pharmaceutical unit would

be quite different from one engaged in the manufacture of machine tools. The operating cycle

concept enables to assess working capital need of each enterprise keeping in view the peculiarities

of the industry it is engaged in and its scale of operations. Operating cycle is an important

management tool in decision –making.


FUND RM SIP RECEIVABLES FUND


1. Traditional method of assessment of working capital requirement

The operating cycle concept serves to identify the areas requiring improvement for the purpose of

control and performance review. But, as bankers, we require a more detailed analysis to assess the

various components of working capital requirement viz., finance for stocks, bills etc.

Bankers provide working capital finance for holding an acceptable level of current assets viz. raw

materials, stock-in-process, finished goods and sundry debtors for achieving a predetermined level

of production and sales. Quantification of these funds required to be blocked in each of these

items of current assets at any time will, therefore provide a measure of the working capital

requirement of an industry.

Raw material: Any industrial unit has to necessarily stock a minimum quantum of materials used

in its production to ensure uninterrupted production. Factors, which affect or influence the funds

requirement for holding raw material, are:

i. Average consumption of raw materials.

ii. Their availability – locally or form places outside, easy availability / scarcity,

number of sources of supply

iii. Time taken to procure raw materials (procurement time or lead time)

iv. Imported or indigenous.

v. Minimum quantity supplied by the market (Minimum Order Quantity (MOQ)).

vi. Cost of holding stocks (e.g. insurance, storage, interest)

vii. Criticality of the item.

viii. Transport and other charges (Economic Order Quantity (EOQ)).

ix. Availability on credit or against advance payment in cash.

x. Seasonality of the materials.

This raw material requirement is generally expressed as so many months requirement

(consumption).

Stock in process: Barring a few exceptional types of industries, when the raw material get

converted into finished products within few hours, there is normally a time lag or delay or period



of processing only after which the raw materials get converted into finished product. During this

period of processing, the raw materials get converted into finished goods and expenses are being

incurred. The period of processing may vary from a few hours to a number of months and unit

will be blocked working funds in the stock-in-process during this period. Such funds blocked in

SIP depend on:

i.The processing time

ii.Number of products handled at a time in the process

iii.Average quantities of each product, processed at each time (batch quantity)

iv.The process technology

v.Number of shifts.

Finished goods: All products manufactured by an industry are not sold immediately. It will be

necessary to stock certain amount of goods pending sale. This stock depends on:

i. Whether the manufacture is against firm order or against anticipated order

ii. Supply terms

iii. Minimum quantity that can be dispatched

iv. Transport availability and transport cost

v. Pre-dispatch inspection

vi. Seasonality of goods

vii. Variation in demand

viii. Peak level/ low level of operations

ix. Marketing arrangement- e.g. direct sale to consumers or through dealers/

wholesalers.

The requirement of funds against finished goods is expressed so many months’ cost of production.

Sundry debtors (receivables): Sales may be affected under three different methods:

i. Against advance payment

ii. Against cash

iii. On credit



A unit grants trade credit because it expects this investment to be profitable. It would be in the

form of sales expansion and fresh customers or it could be in the form of retention of existing

customers. The extent of credit given by the industry normally depends upon:

i. Trade practices

ii. Market conditions

iii. Whether it is bulky by the buyer

iv. Seasonality

v. Price advantage

Even in cases where no credit is extended to buyers, the transit time for the goods to reach the

buyer may take some time and till the cash is received back, the unit will have to be cut out of

funds. The period from the time of sale to receipt of funds will have to be reckoned for the

purpose of quantifying the funds blocked in sundry debtors. Even though the amount of sundry

debtors according to the unit’s books will be on the basis of Sale Price, the actual amount blocked

will be only the cost of production of the materials against which credit has been extended- the

difference being the unit’s profit margin- (which the unit does not obviously have to spend). The

working capital requirement against Sundry Debtors will therefore be computed on the basis of

cost of production (whereas the permissible bank finance will be computed on basis of sale value

since profit margin varies from product to product and buyer to buyer and cannot be uniformly

segregated from the sale value).

The working capital requirement is expressed as so many months’ cost of production.

Expenses: It is customary in assessing the working capital requirement of industries, to provide

for 1 month’s expenses also. A question might be raised as to why expenses should be taken

separately, whereas at every stage the funds required to be blocked had been taken into account.

This amount is provided merely as a cushion, to take care of temporary bottlenecks and to enable

the unit to meet expenses when they fall due. Normally 1-month total expenses, direct and

indirect, salaries etc. are taken into account.



While computing the working capital requirements of a unit, it will be necessary to take into

account 2 other factors,

i. Is the credit received on purchases- trade credit is a normal practice in trading

circles. The period of such credit received varies from place to place, material to

material and person to person. The amount of credit received on purchases reduces

the working capital funds required by the unit.

ii. Industries often receive advance against orders placed for their products. The

buyers, in certain cases, have to necessarily give advance to producers e.g. custom

made machinery. Such funds are used for the working capital of an industry. It can

be thus summarized as follows:

Raw materials Months requirement Rs. A

Stock-in-process Months (cost of Production) Rs. B

Finished Goods Months cost of Production required to be stocked Rs. C

Sundry Debtors Months cost of Production (o/s credits) Rs. D

Expenses One month(normally) Rs. E

Total Current Assets A+B+C+D+E

Credit received on Purchases (months’ Purchase value)

Rs. F

Advance payment on order received

Rs. G

WORKING CAPITAL REQUIRED (H) = (A+B+C+D+E)- (F+G)



2. Projected Annual Turnover Method for SME units (Nayak Committee)

For SME units, which enjoy fund based working capital limits up to Rs.5 crore, the minimum

working capital limit should be fixed on the basis of projected annual turnover. 25% of the output

or annual turnover value should be computed as the quantum of working capital required by such

unit. The unit should be required to bring in 5% of their annual turnover as margin money and the

Bank shall provide 20% of the turnover as working capital finance. Nayak committee guidelines

correspond to working capital limits as per the operating cycle method where the average

production/ processing cycle is taken to be 3 months.

Example:

Anticipated Annual Output (A) 120

Working Capital Requirement: 25% of A (B) 30

Margin : 5% of A (C) 6

Maximum Permissible Bank Finance (B-C) 24

In Rs lacs

Important clarifications:

i. The assessment of WC limits should be done both as per Projected Turnover Method and

Traditional Method; the higher of the two is to be sanctioned as credit limit. If the

operating cycle is more than 3 months, there is no restriction on extending finance at more

than 20% of the turnover provided that the borrower should bring n proportionally higher

stake in relation to his requirements of bank finance.

ii. While the approach of extending need based credit will be kept in mind, the financial

strengths of the unit is also important, the later aspect assumes greater significance so as to

take care of quality of bank’s assets. The margin requirement, as a general rule, should not

be diluted.



MPBF Method (Tandon and Chore Committee Recommendations)

The Tandon Committee was appointed to suggest a method for assessing the working capital

requirements and the quantum of bank finance. Since at that time, there was scarcity of bank’s

resources, the Committee was also asked to suggest norms for carrying current assets in different

industries so that bank finance was not drawn more than the minimum required level. The

Committee was also asked to devise an information system that would provide, periodically,

operational data, business forecasts, production plan and resultant credit needs of units. Chore

Committee, which was appointed later, further refined the approach to working capital

assessment. The MPBF method is the fall out of the recommendations made by Tandon and Chore

Committee.Regarding approach to lending: the committee suggested three methods for assessment

of working capital requirements.

First Method of lending: According to this method, Banks would finance up to a max. of

75% of the working capital gap (WCG= the total current assets - current liabilities other than bank

borrowing) and the balance 25 % of the WCG considered as margin is to come out of long term

source i.e. owned funds and term borrowings. This will give rise to a minimum current ratio of

1.17:1. The difference of (1.17-1) represents the borrower’s margin which is popularly known as

Net Working Capital (NWC) of the unit

Second Method of lending: As per the 2nd method Bank will finance maximum up to 75%

of total current assets (TCA) & Borrowers has to provide a minimum of 25% of total current

assets as the margin out of long term sources. This will give a minimum current ratio of 1.33:1

Third Method of lending: Same as 2nd method, but excluding core current assets from

total assets and the core current assets is financed out of long term funds. The term ‘core current

assets’ refers to the absolute minimum level of investment in current assets, which is required at

all times to carry out minimum level of business activity. The current ratio is further improved i.e.

1.79: 1



Example:

Current Liabilities Current assets

Creditors for purchase 100 Raw material 200

Other current liability 50 Stock in process 20

Bank borrowings 200 Finished goods 90

Receivables 50

Other current assets 10

Total Current Liabilities 350 Total Current Assets 370

(In Rs lacs)

Calculating NWC

First method of lending Second method of lending Third method of lending

Total CA 370 Total CA 370 Total CA 370

Less: CL – Bank Borrowing

150 Less: 25% of CA 92Less: core CA from LT

95

275

Working Capital Gap 220Less: CL - Bank Borrowing

150Less: 25% from LTS

69

25% of WCG from long term sources

55Less: CL – Bank Borrowing

150

MPBF 165 MPBF 128 MPBF 56

Current ratio 1.17: 1 Current ratio 1.33: 1 Current ratio 1.79: 1

The above example shows that the contribution of margin by the borrower increases when

financing is shifted from First method to Second method which is known to be stringent from

borrower point of view (Third method was not accepted by RBI).



3. Projected Balance Sheet Method (PBS)

The PBS method of assessment will be applicable to all borrowers who are engaged in

manufacturing, services and trading activities who require fund based working capital finance of

Rs. 25 lacs and above. In case of SSI borrowers, who require working capital credit limit up to Rs.

5 cr, the limit shall be computed on the basis of Nayak Committee formula as well as that based

on production and operating cycle of the unit and the higher of the two may be sanctioned.. The

assessment will be based on the borrower’s projected balance sheet, the funds flow planned for

current/ next year and examination of the profitability, financial parameters etc. unlike the MPBF

method, it will not be necessary in this method to fix or compute the working capital finance on

the basis of a stipulated minimum level of liquidity (Current Ratio). The working capital

requirement worked out is based on the following:

i. CMA assessment method is continued with certain modifications.

ii. Analysis of the Profit and Loss account, Balance Sheet, Funds flow etc. for the past

periods is done to examine the profitability, financial position, and financial

management etc of the business.

iii. Scrutiny and validation of the projected income and expenses in the business and

projected changes in the financial position (sources and uses of funds). This is carried

out to examine whether these parameters are acceptable from the angle of liquidity,

overall gearing, efficiency of operations etc.

In the PBS method, the borrower’s total business operations, financial position, management

capabilities etc. are analysed in detail to assess the working capital finance required and to

evaluate the overall risk. The assessment procedure is as follows:

i. Collection of financial information from the borrower

ii. Classification of current assets / current liabilities

iii. Verification of projected levels of inventory/ receivables/ sundry creditors

iv. Evaluation of liquidity in the business operation

v. Validation of bank finance sought



7.2 ASSESSMENT OF TERM LOANS

Term Loans are generally granted to finance capital expenditure, i.e. for acquisition of land,

building and plant and machinery, required for setting up a new industrial undertaking or

expansion/diversification of an existing one and also for acquisition of movable fixed assets.

Term Loans are also given for modernization, renovation, etc. to improve the product quality or

increase the productivity and profitability.

The basic difference between short-term facilities and term loans is that short-term facilities are

granted to meet the gap in the working capital and are intended to be liquidated by realization of

assets, whereas term loans are given for acquisition of fixed assets and have to be liquidated from

the surplus cash generated out of earnings. They are not intended to be paid out of the sale of the

fixed assets given as security for the loan. This makes it necessary to adopt a different approach

in examining the application of the borrowers for term credits.

For the assessment to Term Loan Techno Economic Feasibility Study is done. The success of a

feasibility study is based on the careful identification and assessment of all of the important issues

for business success. A detailed Project Report is submitted by an entrepreneur, prepared by a

approved agency or a consultancy organization. Such report provides in-depth details of the

project requesting finance. It includes the technical aspects, Managerial Aspect, the Market

Condition and Projected performance of the company. It is necessary for the appraising officer to

cross check the information provided in the report for determining the worthiness of the project.

The feasibility study is a part of Credit Appraisal process and the same is discussed in the

following chapter.



7.3 BASEL ACCORD & RISK MANAGEMENT

The Basel accord/accords refer to the banking supervision accords namely Basel I and Basel II

issued by the Basel Committee on Banking Supervision (BCBS).

BASEL I ACCORD

The 1988 Basel Accord primarily addressed banking in the sense of deposit taking and lending.

The main focus was Credit Risk. It described the strength of the Bank as measured by the Capital

employed. Accordingly it put a minimum level of capital adequacy (Capital to Credit Risk

Weighted Assets ratio) at 8%. Basel I allocated 4 risk weights i.e. 0%, 20, 50% and 100% to

different exposure types, based on the risk perceived on the exposure types under the credit

portfolio. Basel I provided a set norm for capital allocation which helped many banks to allocate

capital to counter the risks faced by them.

CRAR = Capital

Risk Weighted Assets (Credit Risk+ Market Risk +Operational Risk)

CAPITAL

Tier I

Capital

Paid Up Equity Capital + Statutory Reserves + Other disclosed free

reserves + Capital Reserves representing surplus arising out of sale

proceeds of Assets + Innovative Perpetual Debt instruments

Tier II

Capital

Revaluation Reserves (at a discount of 55%) + General Provisions and

Loss Reserves + Subordinated Debt + Hybrid Debt Capital

Instruments

Risk Weighted Assets

Basel I introduced the concept of Risk Weighted Assets (RWA). All the assets of a bank

(advances, investments, fixed assets etc.) carry certain amount of risk. In proportion to the

quantum of this risk, bank must maintain capital. Quantification of risk is done in percentage (0%,

20%, 50% etc.). Exposure when multiplied with these percentages gives risk based value of

assets. These assets are also called Risk Weighted Assets (RWA).



BASEL II ACCORD

Banking has changed dramatically since the Basel I document of 1988. Advances in risk

management and the increasing complexity of financial activities / instruments prompted

international supervisors to review the appropriateness of regulatory capital standards under Basel

I. To meet this requirement, the Basel I accord was amended and refined which came out as the

Basel II document. The Basel II document is structured into three parts. Each part is called as a

pillar. Thus these three parts constitute three pillars of Basel II.

PILLAR IThis pillar is compatible with the credit risk, market risk and operational

risk. The regulatory capital will be focused on these three risks

PILLAR II

This pillar gives the bank responsibility to exercise the best ways to manage

the risk specific to that bank. It also casts responsibility on the supervisors to

review and validate banks’ risk measurement models.

PILLAR IIIThis pillar is on market discipline is used to leverage the influence that other

market players can bring

DIFFERENCE BETWEEN

BASEL I BASEL II

1 Limited role of collateral as risk mitigant 1Recognizes wide range of Collateral & Guarantees as risk mitigant

2 Not recognizing Operational Risk 2Recognizes Operational Risk and prescribes explicit capital charge for

3Risk weights assignment on transaction basis

3 Risk weight assignment on risk rating basis

4Not recognizing tenure or remaining time to maturity of exposures in risk assessment

4Recognizes the tenure or remaining time to maturity of exposures in risk assessment

5Provisions are through Asset Classification. 5

Provisions are through Expected Loss Estimation

Chapter 8 CREDIT APPRAISAL



8.1 INTRODUCTION

Effectiveness of Credit Management in the bank is highlighted by the quality of its loan portfolio.

Every Bank is striving hard to ensure that its credit portfolio is healthy and that Non Performing

Assets are kept at lowest possible level, as both of these factors have direct impact on its

profitability. In the present scenario efficient project appraisal has assumed a great importance as

it can check and prevent induction of weak accounts to our loan portfolio. All possible steps need

to be taken to strengthen pre sanction appraisal as always “Prevention is better than Cure”. With

the opening up of the economy rapid changes are taking place in the technology and financial

sector exposing banks to greater risks, which can be broadly classified as under:

Industry RisksGovernment regulations and policies, availability of infrastructure facilities, Industry Rating, Industry Scenario & Outlook, Technology Up gradation, availability of inputs, product obsolescence, etc.

Business RisksOperating efficiency, competition faced from the units engaged in similar products, demand and supply position, cost of labor, cost of raw material and other inputs, pricing of product, surplus available, marketing, etc.

Management Risks

Background, integrity and market standing/ reputation of promoters, organizational set up and management hierarchy, expertise/competence of persons holding key position in the organization, delegation and decentralization of authority, achievement of targets, track record in execution of project, debt repayment, industry relations etc.

Financial Risks

Financial strength/standing of the promoters, reliability and reasonableness of projections, past financial performance, reliability of operational data and financial ratios, adequacy of provisioning for bad debts, qualifying remarks of auditors/inspectors etc.

In light of the foregoing risks, the banks appraisal methodology should keep pace with ever

changing economic environment. The appraisal system aims to determine the credit

needs/requirements of the borrower taking into account the financial resources of the client. The



end objective of the appraisal system is to ensure that there is no under - financing or over -

financing. Following are the aspects, which need to be scrutinized and analyzed while appraising:

8.2 MARKET ANALYSIS

(Demand & Potential)



The market demand and potential is to be examined for each product item and its

variants/substitutes by taking into account the selling price of the products to be marketed vis-a-

vis prices of the competing products/substitutes, discount structure, arrangement made for after

sale service, competitors' status and their level of operation with regard to production and products

and distribution channels being used etc. Critical analysis is required regarding size of the market

for the product(s) both local and export, based on the present and expected future demand in

relation to supply position of similar products and availability of the other substitutes as also

consumer preferences, practices, attitudes, requirements etc. Further, the buy-back arrangements

under the foreign collaboration, if any, and influence of Government policies also needs to be

considered for projecting the demand. Competition from imported goods, Government Import

Policy and Import duty structure also need to be evaluated.

8.3 TECHNICAL ANALYSIS



In a dynamic market, the product, its variants and the product-mix proposed to be manufactured in

terms of its quality, quantity, value, application and current taste/trend requires thorough

investigation.

Location and Site

Based on the assessment of factors of production, markets, Govt. policies and other factors,

Location (which means the broad area) and Site (which signifies specific plot of land) selected for

the Unit with its advantages and disadvantages, if any, should be such that overall cost is

minimized. It is to be seen that site selected has adequate availability of infrastructure facilities

viz. Power, Water, Transport, Communication, state of information technology etc. and is in

agreement with the Govt. policies. The adequacy of size of land and building for carrying out its

present/proposed activity with enough scope for accommodating future expansion needs to be

judged.

Raw Material

The cost of essential/major raw materials and consumables required their past and future price

trends, quality/properties, their availability on a regular basis, transportation charges, Govt.

policies regarding regulation of supplies and prices require to be examined in detail. Further, cost

of indigenous and imported raw material, firm arrangements for procurement of the same etc.

need to be assessed.

Plant & Machinery, Plant Capacity and Manufacturing Process

The selection of Plant and Machinery proposed to be acquired whether indigenous or imported

has to be in agreement with required plant capacity, principal inputs, investment outlay and

production cost as also with the machinery and equipment already installed in an existing unit,

while for the new unit it is to be examined whether these are of proven technology as to its

performance. The technology used should be latest and cost effective enabling the unit to compete

in the market. Purchase of reconditioned/old machinery is to be dealt in terms of laid down

guidelines. Compatibility of plant and machinery, particularly, in respect of imported technology

with quality of raw material is to be kept in view. Also plant and machinery and other equipments



needed for various utility services, their supply position, specification, price and performance as

also suppliers' credentials, and in case of collaboration, collaborators' present and future support

requires critical analysis. Plant capacity and the concept of economic size has a major bearing on

the present and future plans of the entrepreneur(s) and should be related to the availability of raw

material, product demand, product price and technology.

The selected process of manufacturing indicating the adequacy, availability and suitability of

technology to be used along with plant capacity, manufacturing process needs to studied in detail

with capacities at various stages of production being such that it facilitates optimum utilization

and ensures future expansion/ debottlenecking, as and when required. It is also to be ensured that

arrangements are made for inspection at intermediate/final stages of production for ensuring

quality of goods on successful commencement of production and completion, wherever required.



8.4 FINANCIAL ANALYSIS

The aspects which need to be analyzed under this head should include cost of project, means of

financing, cost of production, break-even analysis, financial statements as also profitability/funds

flow projections, financial ratios, sensitivity analysis which are discussed as under:

Cost of Project & Means of Financing

a. The major cost components of any project are land and building including transfer,

registration and development charges as also plant and machinery, equipment for auxiliary

services, including transportation, insurance, duty, clearing, loading and unloading charges

etc. It also involves consultancy and know-how expenses which are payable to foreign

collaborators or consultants who are imparting the technical know-how. Recurring annual

royalty payment is not reflected under this head but is accounted for under the profitability

statements. Further, preliminary expenses, such as, cost of incorporation of the Company, its

registration, preparation of feasibility report, market surveys, pre-operative expenses like

salary, travelling, start up expenses, mortgage expenses incurred before commencement of

commercial production also form part of cost of project. Also included in it are capital issue

expenses which can be in the form of brokerage, commission, advertisement, printing,

stationery etc. Finally, provisions for contingencies to meet any unforeseen expenses, such

as, price escalation or any other expense which have been inadvertently omitted like margin

for working capital requirements required to complete the production cycle, interest during

construction period, etc. are also part of capital cost of project. It is to be ensured while

appraising the project that cost and various estimates given are realistic and there is no

under/over estimation. Further, these cost components should be supported by proper

quotations, specifications and justifications of land, machinery and know-how expenses etc.

ii. Besides Bank’s loan, the project cost is normally financed by bringing capital by the

promoters and shareholders in the form of equity, debentures, unsecured long term loans and

deposits raised from friends and relatives which are not repayable till repayment of Bank's

loan. Resources are raised for financing project by raising term loans from Institutions/Banks



which are repayable over a period of time, deferred term credits secured from suppliers of

machinery which are repayable in installments over a period of time. The above is an

illustrative list, as the promoters have now started raising funds through Euro-issues, Foreign

Currency loans, premium on capital issues, etc. which are sometimes comparatively cheap

means of finance. Subsidies and development loans provided by the Central/State

Government in notified backward districts to attract entrepreneurs are also means of financing

a project. It is to be ascertained that requirement of finance has been properly tied-up for

unhindered implementation of a project. The financing structure accepted must be in

consonance with generally accepted levels along with adequate Promoters' stake. The

resourcefulness, willingness and capacity of promoter to contribute the same have also to be

investigated.

In case of project finance, the promoter/borrower may bring in upfront his contribution (other

than funds to be provided through internal generation) and the branches should commence its

disbursement after the stipulated funds are brought in by the promoter/borrower. A condition

to this effect should be stipulated by the sanctioning authority in case of project finance, on

case to case basis depending upon the resourcefulness and capacity of the promoter to

contribute the same. It should be ensured that at any point of time, the promoter’s

contribution should not be less than the proportionate share.

Profitability Statement

The profitability statement which is also known as `Income and Expenditure Statement' is

prepared after considering the net sales figure and details of direct costs/expenses relating to raw

material, wages, power, fuel, consumable stores/spares and other manufacturing expenses to

arrive at a figure of gross profit. Thereafter, all other expenses like salaries, office expenses,

packing, selling/distribution, interest, depreciation and any other overhead expenses and taxes are

taken into account to arrive at the figure of net profit. The projections of profit/loss are prepared

for a period covering the repayment of term loans. The economic appraisal includes scrutinizing

all the items of cost, and examining the assumptions, if any, to ensure that these are realistic and



achievable. There should not be any optimism or pessimism in working out profitability

projections since even a little change in the product-mix from non-remunerative to remunerative

or vice-versa can distort the picture. While preparing profitability projections, the past trends of

performance in an industry and other environmental factors influencing the cost and revenue items

should also be considered objectively.

Generally speaking, a unit may be considered as financially viable, progressive and efficient if it

is able to earn enough profits not only to service its debts timely but also for future

development/growth.

Break-Even Analysis

Analysis of break-even point of a business enterprise would help in knowing the level of output

and sales at which the business enterprise just breaks even i.e. there is neither profit nor loss. A

business earns profit if it operates at a level higher than the break-even level or break-even point.

If, on the other hand, production is below this level, the business would incur loss. The break-

even point in an algebraic equation can be put as under:

The fixed costs include all those costs which tend to remain the same up to a certain level of

production while variable costs are those costs which tend to change in proportion with the

volume of production. As regards unit sales price, it is generally the same for all levels of output.

The break-even analysis can help in making vital decisions relating to fixation of selling price

make or buy decision, maximizing production of the item giving higher contribution etc. Further,

the break-even analysis can help in understanding the impact of important cost factors, such as,

power, raw material, labor, etc. and optimizing product-mix to improve project profitability.


Break-even point

(Volume or Units)

Total Fixed Cost / (Sales price per unit - Variable Cost per unit)

Break-even point

(Sales in rupees)

(Total Fixed Cost x Sales) / (Sales - Variable Costs)


Fund-Flow Statement

A fund-flow statement is often described as a ‘Statement of Movement of Funds’ or ‘where got:

where gone statement’. It is derived by comparing the successive balance sheets on two specified

dates and finding out the net changes in the various items appearing in the balance sheets.

A critical analysis of the statement shows the various changes in sources and applications (uses)

of funds to ultimately give the position of net funds available with the business for repayment of

the loans. A projected Fund Flow Statement helps in answering the under mentioned points.

• How much funds will be generated by internal operations/external sources?

• How the funds during the period are proposed to be deployed?

• Is the business likely to face liquidity problems?

Balance Sheet Projections

The financial appraisal also includes study of projected balance sheet which gives the position of

assets and liabilities of a unit at a particular future date. In other words, the statement helps to

analyze as to what an enterprise owns and what it owes at a particular point of time.

An appraisal of the projected balance sheet data of the unit would be concerned with whether the

projections are realistic looking to various aspects relating to the same industry.

Financial Ratios

While analyzing the financial aspects of project, it would be advisable to analyze the important

financial ratios over a period of time as it may tell us a lot about a unit's liquidity position,

managements' stake in the business, capacity to service the debts etc. The financial ratios which

are considered important are discussed as under:



Ratio Formula Remarks

1Debt-Equity

RatioDebt (Term Liabilities)

Equity

(Where, Equity = Share capital,

free reserves, premium on shares,

, etc. after adjusting loss balance)

There cannot be a rigid rule to a satisfactory debt-

equity ratio, lower the ratio higher is the degree of

protection enjoyed by the creditors. These days the

debt equity ratio of 1.5:1 is considered reasonable.

It, however, is higher in respect of capital intensive

projects. But it is always desirable that owners

have a substantial stake in the project. Other

features like quality of management should be kept

in view while agreeing to a less favorable ratio.

In financing highly capital intensive projects like

infrastructure, cement, etc. the ratio could be

considered at a higher level.

2

Debt-

Service

Coverage

Ratio

Debt + Depreciation +

Net Profit (After Taxes)

+ Annual interest on long

term debt

Annual interest on long

term debt + Repayment

of debt

This ratio of 1.5 to 2 is considered reasonable. A

very high ratio may indicate the need for lower

moratorium period/repayment of loan in a shorter

schedule. This ratio provides a measure of the

ability of an enterprise to service its debts i.e.

`interest' and `principal repayment' besides

indicating the margin of safety. The ratio may vary

from industry to industry but has to be viewed with

circumspection when it is less than 1.5.

3TOL / TNW

Ratio

Tangible Net Worth

(Paid up Capital +

Reserves and Surplus -

Intangible Assets)

Total outside Liabilities

(Total Liability - Net

Worth)

This ratio gives a view of borrower's capital

structure. If the ratio shows a decreasing trend, it

indicates that the borrower is relying more on his

own funds and less on outside funds and vice versa

4 Profit-Sales Operating Profit (Before This ratio gives the margin available after meeting



Ratio

Taxes excluding Income

from other Sources)

Sales

cost of manufacturing. It provides a yardstick to

measure the efficiency of production and margin

on sales price i.e. the pricing structure

5

Sales-

Tangible

Assets Ratio

Sales

Total Assets - Intangible

Assets

This ratio is of a primary importance to see how

best the assets are used. A rising trend of the ratio

reveals that borrower has been making efficient

utilization of his assets. However, caution needs to

be exercised when fixed assets are old and

depreciated, as in such cases the ratio tends to be

high because the value of the denominator of the

ratio is very low.

6Current

RatioCurrent Assets

Current Liabilities

Higher the ratio greater the short term liquidity.

This ratio is indicative of short term financial

position of a business enterprise. It provides margin

as well as it is measure of the business enterprise to

pay-off the current liabilities as they mature and its

capacity to withstand sudden reverses by the

strength of its liquid position. Ratio analysis gives

indications; to be made with reference to overall

tendencies and parameters in relation to the project.

7

Output

Investment

Ratio

Sales

Total capital employed

(in fixed & current

assets)

This ratio is indicative of the efficiency with which

the total capital is turned over as compared to other

units in similar lines.



Internal Rate of Return

The discount rate often used in capital budgeting that makes the net present value of all cash flows

from a particular project equal to zero. Higher a project's IRR the more desirable it is to undertake

the project. IRR should be higher than the Cost of the project (interest rate in case of project

financing)

Sensitivity Analysis

While preparing and appraising projects certain assumptions are made in respect of certain

critical/sensitive variables like selling price/cost price per unit of production, product-mix, plant

capacity utilization, sales etc. which are assigned a `VALUE' after estimating the range of

variation of such variables. The `VALUE' so assumed and taken into consideration for arriving at

the profitability projections is the `MOST LIKELY VALUE'. Sensitivity Analysis is a systematic

approach to reduce the uncertainties caused by such assumptions made. The Sensitivity Analysis

helps in arriving at profitability of the project wherein critical or sensitive elements are identified

which are assigned different values and the values assigned are both optimistic and pessimistic

such as increasing or reducing the sale price/sale volume, increasing or reducing the cost of inputs

etc. and then the project viability is ascertained. The critical variables can then be thoroughly

examined by generally selecting the pessimistic options so as to make possible improvements in

the project and make it operational on viable lines even in the adverse circumstances.



8.5 MANAGEMENT & ORGANIZATION ANALYSIS

Appraisal of project would not be complete till it throws enough light on the person(s) behind the

project i.e. management and organization of the unit. It is seen that some projects may fail not

because these are not viable but because of the ineffectiveness of the management and the

organization in controlling various functions like production, marketing, finance, personnel, etc.

The appraisal report should highlight the strengths and weaknesses of the management by

commenting on the background, qualifications, experience, and capability of the promoter, key

management personnel, and effectiveness of the internal control systems, relation with labor,

working conditions, wage structure, and the other assigned essential functions. In case the

promoter(s) have interest, in other concerns as Proprietor or Partner or Director, the appraisal

report should also comment on their performance in such concerns.

A business is more vulnerable if decision making in all the functional areas rests with a particular

person, in other words, `one man show'. Further, the management and the organization should be

conducive to the size and type of business. In case it is not so, it should be ensured that

professional managers are inducted to strengthen the organization.



8.6 APPRAISAL OF PROJECT - A CHECK LIST

An indicative list of issues which need to be looked into while appraising a project is given below:

MARKETING

1. Reasonable demand projections keeping in view the size of the

market, consumption level, supply position, export potential, import

substitute, etc.

2. Competitors' status and their level of operation with regard to

production and sales.

3. Technology advancement/Foreign Collaborator's Status/Buy-back

arrangements etc.

4. Marketing policies in practice, for promotion of product(s) and

distribution channels being used. Expenses on marketing are done

so as to popularize the product.

5. Local/foreign consumer preferences, practices adopted, attitudes,

requirements etc.

6. Influence of Govt. policies, imports and exports in terms of quantity

and value.

7. Marketing professionals employed their competence, knowledge

and experience.



TECHNICAL

1. Product and its life cycle, product-mix and their application.

2. Location, its advantages/disadvantages, availability of

infrastructural facilities, Govt. concessions, if any, available there.

3. Plant and machinery with suppliers' credentials and capacity

attainable under normal working condition.

4. Process of manufacturing indicating the choice of technology,

position with regard to its commercialization and availability.

5. Plant and machinery - its availability, specification, price,

performance.

6. Govt. clearance/ license, if any, required.

7. Labor/ Manpower, type of skills required and its availability

position in the area.

FINANCIAL

1. Total project cost and how it is being funded/financed.

2. Contingencies and inflation duly factored in project cost.

3. Profitability projections based on realistic capacity utilization

and sales forecast with proper justification. Unrealistic/ambitious

sales projections without reference to past performance and

justification to be avoided.

4. Break-even analysis, fund flow and cash flow projections.

5. Balance sheet projections should be realistic and based on latest

available data. The components of financial ratios should be

subjected to close scrutiny.

6. Aspect of support of parent company, wherever applicable, may

be taken into account.



MANAGERIAL

1. Financial standing and resourcefulness of the

management.

2. Qualifications and experience of the promoters

and key management personnel.

3. Understanding of the project in all of its aspects -

financing pattern, technical knowledge and marketing programme

etc.

4. Internal control systems, delegation of adequate

powers and entrusting responsibility at various levels.

5. Other enterprises, if any, wherein the promoters

have the interest and how these are functioning.

ECONOMIC

1. Impact on increase in level of savings and income distribution in

society and standard of living.

2.Project contribution towards creation and rate of increase of

employment opportunity, achieving self sufficiency etc.

3.Project contribution to the development of the region, its impact

on environment and pollution control

To judge whether the project is viable, i.e. it can generate adequate surplus for servicing its debts

within a reasonable period of time and still left with some funds for future development. This

involves taking an over-all view to analyse the strengths and weaknesses of the project. It should

also be analysed to see whether the management and organisation can prove effective for

successful implementation of the project.



Chapter 9 CREDIT RISK MANAGEMENT

9.1 CREDIT RISK

Credit risk means the possibility of loss associated with diminution in the credit quality of

borrowers. In a bank’s portfolio, losses stem from outright default due to inability or

unwillingness of a customer or counter party to meet, commitments in relation to lending, trading,

settlement and other financial transactions.

9.2 CREDIT RISK MANAGEMENT SYSTEM IN PNB

A comprehensive credit risk management system, which is in place in the bank, encompasses the

following processes:

• Identification of Credit Risk

• Measurement of Credit Risk

• Grading of Credit Risk

• Reporting and analysis of rating related data

• Control of Credit Risk

CREDIT RISK IDENTIFICATION

In order to take informed credit decisions, it is necessary to identify the areas of credit risk in each

borrower as well as each industry. Risk Management Division HO, in coordination with other HO

divisions involved in disbursal of credit and also the risk management departments of various

zonal offices identifies these risks areas and develops necessary tools and processes to measure

and monitor the risk.



CREDIT RISK MEASUREMENT

In order to measure the credit risk in banks’ portfolio, the bank has developed the following

models:

Credit Risk Rating Model Total limits Applicable from the Bank

Small 2 Loans Above Rs. 20 lacs and up to Rs. 50lacs

Small Loans Above Rs. 50 lacs and up to Rs. 5crores

Mid Corporate Above Rs.5 crores and up to Rs. 15crores

Large Corporate Above Rs. 15 crores

Non Banking Financial Corporation Model (irrespective of any limit)

New Business Model Below Rs. 5 crores

New Project Model Above Rs. 5 crores

The credit risk rating models have been developed with a view to provide a standard system for

assigning a credit risk rating to all the borrowers on the basis of the overall credit risk involved in

them. Inputs to the models are the financial, management, business and conduct of account,

industry information. The evaluation of a borrower is done by assessment on various

objective/subjective parameters. The model evaluates the credit risk rating of a borrower on a

scale of AAA to D with AAA indicating minimum risk and D indicating maximum risk.

The credit risk-rating models incorporate therein all possible risk factors, which are important for

determining the credit quality/ rating of a borrower. These risks could be:

• Internal and specific to the company,

• Associated with the industry in which the company is operating or

• Associated with the entire economy and can influence the repayment capacity and/

or willingness of the company.



Evaluation methodology under rating models

• The scores are assigned to each of the parameters on a scale of 0 to 4 with 0 being very

poor and 4 being excellent. The scoring of some of these parameters is subjective while for some

others it is done on the basis of pre-defined objective criteria.

• The scores given to the individual parameters multiplied by allocated weights are then

aggregated and a composite score for the company is arrived at, in percentage terms. Higher the

score obtained by a company, the better is its credit rating. Weights have been assigned to

different parameters based on their importance. Weights assigned to different parameters have

been loaded in the software. After allocating/evaluating scores to all the parameters, the

aggregate score is calculated and displayed by the software.

• The overall percentage score obtained is then translated into a rating on a scale from AAA

to D according to a pre-defined range of scores.

• Wherever a particular parameter is not applicable, no score should be given and the

parameter should be made ‘Not Applicable’.

• For multi-divisional companies, which are involved in more than one industrial activity,

evaluation should be done separately for each business. However, the management evaluation,

conduct of account and financial evaluation will be done on a common basis. In such cases, for

the business section, each business should be evaluated and scored separately, taking into account

the different industrial activity involved.



GRADING OF BORROWERS UNDER THE RATING SYSTEM

In order to provide a standard definition and benchmarks under the credit risk rating system,

following matrix has been adopted in all the risk rating models.

Rating category

Description Score (%) obtainedGrade within the rating Category

PNB –AAA Minimum Risk Above 80.00 PNB- AAA

PNB-AA

Marginal Risk Above 77.50 up to 80.00 PNB- AA +

Above 72.50 up to 77.50 PNB- AA

Above 70.00 up to 72.50 PNB- AA -

PNB-A

Modest Risk Above 67.50 up to 70.00 PNB- A +

Above 62.50 up to 67.50 PNB- A

Above 60.00 up to 62.50 PNB- A -

PNB-BB

Average Risk Above 57.50 up to 60.00 PNB- BB +

Above 52.50 up to 57.50 PNB- BB

Above 50.00 up to 52.50 PNB- BB -

PNB-B

Marginally

Acceptable RiskAbove 47.50 up to 50.00 PNB- B +

Above 42.50 up to 47.50 PNB- B

Above 40.00 up to 42.50 PNB- B -

PNB-C High Risk Above 30.00 up to 40.00 PNB- C

PNB-D Caution Risk 30.00 and below PNB – D



SYSTEM FOR ASSIGNMENT & APPRAISAL OF RATING

The process of rating and vetting is as under:

Loan Sanctioning

AuthorityCredit Risk Rating Authority

Vetting/Confirming

Authority

Head Office

i. Zonal CRMD in consultation

with branches

ii. Large Corporate Branches

GM (RMD), HO

Zonal / Circle

Office

i. In case of Large Corporate

Model, ELB/VLB

ii. In case of other Models, branches

to rate the accounts

Zonal CRMD

Branch Office Officer/Manager, Credit Section

An official designated by the

Incumbent not connected

with Processing/

recommending/rating of the

concerned loan proposal

In order to adopt internal rating based approaches (IRB) for credit risk, Basel II has placed certain

minimum requirements which inter-alia require, validation of rating system, process and

estimation of all relevant risk components. Banks must regularly compare realized default rates

with estimated probability of default (PD) of each grade and able to demonstrate to its supervisor

(RBI), that the internal validation process enable it to assess the performance of internal rating

and risk estimation system consistently and meaningfully. In view of above fact, not only rating

but consistent practices in evaluation of credit risk rating as well as evolving and updating robust

data on various risk components is must for adopting IRB approaches.

CONTROLS



The Credit Risk Management process in the bank encompasses the following management

Control techniques which help in mitigating the adverse impacts of credit risk in its credit

portfolio.

i. Credit Approving Authority

a. Credit Committee

b. Linkage of loaning powers with risk rating categories

ii.Prudential Exposure limits

iii.Risk Based Pricing

iv.Portfolio Management

v.Loan Review Mechanism

vi.Legal documentation

vii.Preventive Monitoring System

viii.Others

a. Use of CIBIL data and RBI defaulters list

b. Diversification of Risks

Chapter 10 POST SANCTION FOLLOW UP OF LOANS



Supervision and Follow-up of bank credit has assumed considerable significance particularly after

introduction of new norms of assets classification, provisioning and derecognition of interest

income on NPAs, affecting profitability. System of supervision and follow up can be defined as

the systematic evaluation of the performance of a borrowal account to ensure that it operates at

viable level and, if problems arise, to suggest practical solutions. It helps in keeping a watch on

the conduct and operational/financial performance of the borrowal accounts. Further, it also helps

in detecting signals/symptoms of sickness and deteriorations, if any, taking place in the conduct of

the account for initiating timely corrective actions to check slippage of accounts to NPA category.

The goals and objectives of monitoring may be classified into fundamental and supplementary

goals. Fundamental goals help a bank to ensure safety of funds lent to an enterprise while,

supplementary goals are directed towards keeping abreast of problems arising out of changes in

both the internal and the external environment for initiating timely corrective actions. Some of

the important goals of monitoring are listed as under:

i. To keep a watch on the project during implementation stage so that there are no time &

cost overruns.

ii. To ensure that the funds released are utilized for the purpose for which these have been

provided and there is no diversion of such funds.

iii. To evaluate operational and financial results, such as production, sales, profit/loss, flow

of funds, etc. and comparing these with the projections/estimates given by the borrower

at the time of sanction of credit facilities.

iv. To ensure that the terms and conditions as stipulated in the sanction have been complied

with.

v. To monitor operations in the account particularly cash credit facilities which indicate

health of the account.

vi. To obtain market report on the borrower, to gather information like reputation/financial

standing etc.



vii. To detect signals and symptoms of sickness or deterioration taking place in

conduct/performance of the account.

viii. To ensure that the unit's management and organizational set-up is effective.

ix. To keep a check on aspects like accumulation of statutory liabilities, creditors, debtors,

raw-material, stocks-in-process, finished goods, etc.

x. To ensure charging of applicable rate of interest/penal interest/ commitment charges as

per bank's guidelines.

System of supervision & monitoring of credit as laid down by the Bank needs to be meticulously

followed by the branches/controlling offices which, inter alia, covers the following:

i. Conveying the sanction

ii. Maintenance of Loan Document File

iii. Quarterly Review Sheet

iv. Preventive Monitoring System

v. Quarterly Monitoring System

vi. Inspection and Physical Verification of stocks – Stock Audit

Chapter 11 ANALYSIS & INTERPRETATION



11.1 PNB’s LOAN POLICY

11.1.1 OBJECTIVE

The Credit Management & Risk Policy of the bank at the macro level is an embodiment of the

Bank’s approach to understand, measure and manage the credit risk and aims at ensuring

sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. This

would entail reducing exposures in high risk areas, emphasizing more on the promising

industries / productive sectors/ segments of the economy, optimizing the return by striking

balance between the risk and the return on assets and striving towards maintaining/improving

market share.

11.1.2 BASIC TENETS OF THE POLICY

• All loan facilities considered only after obtaining loan application from the borrower and

compilation of Confidential Report on them and the guarantor. The borrowers should

have the desired background, experience/expertise to run their business successfully

• Project for which the finance is granted should be technically feasible and

economically/commercially viable i.e. it should be able to generate enough surplus so as to

service the debts within a reasonable period of time.

• Cost of the project and means of financing the same should be properly assessed and tied

up. Both, under-financing and over- financing can have an adverse impact on the

successful implementation of the project.

• Borrowers should be financially sound, enjoy good market reputation and must have their

stake in the business i.e. they should possess adequate liquid resources to contribute to the

margin requirements.



• Loans should be sanctioned by the competent sanctioning authority as per the delegated

loaning powers and should be disbursed only after execution of all the required

documents.

• Projects financed must be closely monitored during implementation stage to avoid time

and cost overruns and thereafter till the adjustment of the bank's loan.

• The policy sets out minimum or benchmark lending rate, BPLR = 11 %

• The policy lays down norms for takeover of advances from other banks/ financial

institutions

• As a matter of policy the bank does not take over any Non-performing Asset (NPA) from

other banks

11.1.3 METHODS OF LENDING

1. For Working Capital

i. Simplified method linked with turnover

Simplified method based on turnover for assessing working capital finance up to

Rs.2 crore (upto Rs. 5 crore in case of SSI units)

ii. MPBF System

Existing MPBF system with flexible approach shall be followed for units

requiring working capital finance exceeding the above-mentioned amount

iii.Cash Budget System

Cash Budget System shall be followed in Sugar, Tea, Service Sector and Film

Production accounts. It will be our endeavor to introduce the same selectively in

other areas also



2. Term Loan

In case of infrastructure/mega projects, proper appraisal will be made by utilizing the

services of specialized / Technical officers.

The term loans with remaining maturity period of above 5 years shall not exceed 50% of

the term deposits with remaining maturity period of above 5 years after taking into account

the renewal of term deposits as per the past trend.



11.2 CREDIT APPRAISAL PROCESS AT PNB

11.2.1 FLOWCHART:


Not feasible

No Queries

Queries

Feasible

Submission of Project Report along with the Request Letter

Carrying out Due Diligence on the Client

Submission of Proposal to designated Authority (Circle office)

Re-verification and analysis of the Proposal

Submission of Proposal to designated Authority

Preparing Credit Report / Feasibility Report and Risk Rating

Determining of Interest Rate and Preparation of Proposal

Meeting with the client to clarify the queries

Vetting of Credit Risk Rating ReportApproval of request made by the client

like Reduction of Interest Rates etc

Sanction of Proposal on various Terms & Conditions

Acknowledgement of Sanction Terms & Condition by the client

Application to comply with Sanction T&C. Execution of Loan Documents

Disbursement of Sanctioned Amount from the branch office

Procedures at Branch Office Level Procedures at Circle Office Level


11.2.2 BRIEF ON THE PROCESS

At Punjab National Bank, proposal for financing working capital limits and term loans can relate

to any of the following:

1. New proposal

2. Renewal of existing limits

3. Enhancement of existing limits

Once a proposal is received, financial statements, project report and other important documents

are used to evaluate:

1. Maximum permissible bank finance (in case of WC limit)

2. Techno Economic Feasibility Analysis of the project (includes all the 5 evaluation)

3. Various risks associated, if any

4. Various approvals of issues the borrower seeks (reduction of ROI, processing fee etc)

5. Risk rating of the borrower

6. Reasonableness of estimates/projection in regard to sales, chargeable current assets,

current liabilities (other than bank borrowings) and net working capital

7. Classification of current assets and current liabilities in conformity with the guidelines

issued by the Reserve Bank/HO.

8. Maintenance of minimum current ratio of 1.33:1 (Except where a relaxation is permitted

as in the case of sick/weak units, diamond exporters, etc.).

9. An undertaking by the borrower to submit his annual accounts promptly. Further annual

review is carried out regularly by the bank even where enhancement in credit limits is not

involved



10. Provisions of Foreign Exchange Management Act, 2000 (FEMA), wherever applicable are

complied with

11. In respect of industries where norms relating to inventory and receivables have been laid

down by Reserve Bank/HO, credit limits should be determined in accordance with such

norms and in other cases in tune with past trends.

12. In cases where deviations from norms/past trends are warranted, it should be ensured that

these are justified and specific comments in this behalf are incorporated in the notes placed

before the competent authority for sanction.

13. Specific guidelines issued by RBI/HO for sanctioning credit limits for financing certain

specific activities such as diamond exports, leasing and hire-purchase, tea, sugar and

computer software industries will continue to be in force.

11.2.3 RISK RATING OF THE BORROWER

Punjab National Bank uses a system of internal ratings for the assessment of the credit quality and

risk profile of its borrowers. An internal rating refers to a summary indicator of the risk inherent

in an individual credit quality in an individual credit. Ratings typically embody an assessment of

the risk of loss due to failure by a given borrower to pay as promised, based on consideration of

relevant counterparty and facility characteristics. A rating system includes the conceptual

methodology, management process, and systems that play a role in the assignment of a rating.

Credit risk rating tools at Punjab national bank

With respect to Punjab National Bank, credit risk rating has been developed with a view to

provide a standard system for assigning a credit rating to the borrowers of the bank according to

their risk profile. The management of credit risk at PNB includes a continuing review of credit

limits, policies and procedures; the approval of specific exposures and workout situations; the

constant re-evaluation of the loan portfolio and the sufficiency of provisions thereof. PNB was



also one of the first banks to develop their own credit models to ease up their way to risk

management, PNB Trac -- for its entire category of lending. The loans with exposure of above Rs

20 lacs have been rated individually, while loans with exposure under Rs 20 lakh have been rated

segment-wise on portfolio basis as per the terms of Basel II accord. This means that the bank

would be able to do credit ratings on its own for its lending’s.

Inputs (parameters) to PNB Trac

The rating tool is designed to cater all the industry. The difference between ratings of two

borrowers lie in the limits he/she is seeking from the bank and the industry of the same. There are

broad categories defined in every model that require different parameters or inputs (both

quantitative and subjective) depending on the industry the borrower serves.

To explain the above statement an example of the inputs is described below.

Rating Model New Project Model Industry ABC Sector

Facilities Required Term Loan Limits Rs. 1200 lacs

Inputs to the Model for the above mentioned loan will be:

CATEGORY PARAMETERS / INPUTS

Management Evaluation

Capital market perception of the group Management Setup

Risk bearing capacity Integrity, commitment and sincerity

Track record in debt repayment Financial flexibility

Business Evaluation

Range of services Level of customer satisfaction

Quality of service offered Advertising / promotional strategies



Economies of operation Brand equity

Ambience of service outlet Expected market growth

Effectiveness of distribution channels Locational advantage

Quality of infrastructure available Technology adopted in the process

Financial Evaluation

Debt – Equity Ratio Internal Rate of Return

Repayment Period (in yrs) TOL / TNW

Foreign exchange risk Working capital cycle (in months)

Project Implementation Risk Evaluation

Project complexities Expected time overrun

Expected cost overrun Status of obtaining clearances

Funding risk Service period (in yrs)

How the Rating is done

1. The scores are assigned to each of the parameters of each of the broad category in the different

sections on a scale of 0 to 4 up to two decimal points with 0 being very poor and 4 being

excellent. The scoring of some of these parameters is subjective while for some others it is

done on the basis of pre-defined objective criteria.

2. The scores given to the individual parameters multiply by allocated weights are aggregated

and a composite score for the company is arrived at in percentage terms. Higher the score

obtained by a company, better is its credit rating. Weights have been assigned to different

parameters based on their importance.

Example:

Factor % score obtained Weight Weighted Score

Financial Evaluation 55.00 40.00% 22.00

Business & Industry Evaluation 50.00 25.00% 12.50

Management Evaluation 80.00 20.00% 16.00

Conduct of Account 75.00 15.00% 11.25



AGGREGATE SCORE 61.75

The Aggregate Score of 61.75 refers to PNB- A-

THIS MEANS THE RATING OF THE BORROWER IS PNB A-

11.2.4 DETERMINATION OF THE APPLICABLE RATE OF INTEREST

Benchmark Prime Lending Rate (BPLR)

Bank has determined Benchmark PLR (BPLR) after taking into account actual cost of funds,

operating expenses and a minimum margin to cover regulatory requirement of provisioning /

capital charge and profit margin. At present, BPLR has been fixed at 11%. BPLR is the reference

rate for determination of rate of interest for the borrower’s accounts.

Sub-BPLR Lending

In order to remain competitive in the market, sub-BPLR lending is also permitted. The sub-BPLR

lending lies in the vested powers of CMD/ED/GMs (Head Office)/Circle Heads. These powers are

defined in the Internal Circular of the bank, which eventually depends on the rank of the officer

and the credit risk rating of the borrower.

For instance:

i. Sub-BPLR Lending permitted by CMD: up to 5.50% below BPLR

ii. Sub-BPLR Lending permitted by ED: up to 3.00% below BPLR

iii. Sub-BPLR Lending permitted by Circle Heads: up to 1.00% below BPLR

Applicable Rate of Interest (ROI)

The BPLR attracts further a term premia of 0.50% for term loans having a repayment reschedule

over 3 years. Also the applicable ROI depends upon the credit risk rating and the Industry of the

borrower. RBI also grants certain rebates or lower ROI for lending to few sectors, like

Agriculture, SME etc. to boost the sector and encouraging more participation.

Example: for Advances to NBFCs above Rs. 20 lacs



CREDIT RISK RATING APPLICABLE ROI

AAA BPLR + 1.50 %

A BPLR + 3.00 %

BB BPLR + 3.50 %(The Base Rate system will replace the BPLR system with effect from July 1, 2010)

11.2.5 POST SANCTION FOLLOW UP

If the proposal is considered viable and accepted by the bank then proper account in name of the

borrower is created. The account is reviewed from time to time in order to know whether the

company has met with all the terms & conditions or not, whether the interest is being paid on time

or not, whether there is overdraft in accounts or the funds are not utilized by the company at all,

whether the bank’s interest income is increasing or not. Two of the most used methods for post

sanction follow up are:

1. PREVENTIVE MONITORING SYSTEM (PMS)

Objectives of PMS

The objective of PMS is to track & evaluate the health of borrower’s account on a continuous

basis and detect:

• Unsatisfactory/adverse signals/indicators at an early stage in a comprehensive manner.

• Thorough probe into reasons behind observed signals and analysis thereof.

• Speedy corrective/remedial actions/steps to prevent the account from becoming NPA as

well as to minimize the loan losses.

Preventive Monitoring System consists of two parts:

i. PMS Index and Rank

PMS Index is a numerical index consisting of 29 indicators Parameters grouped into 6

sections. Penalty rates (weights) in the form of numerical values have been assigned to



each indicator (parameter) depending upon their degree of impact on health of an account.

The score assigned to any parameter is stored for last one year at any point of time, which

is known as Cumulative score. The section-wise maximum of cumulative scores is to be

summed up to arrive at PMS Index Score. Based on PMS Index Scores a scale of 1 to 10

has been devised, which is known as PMS Ranking Scale. The PMS Rank indicates the

state of health of an account. The lower the PMS Rank, better the health of account and

vice-versa.

ii. PMS Report

PMS Report, which has eight parts, describes brief profile of the borrower, position of

accounts, details of signals contributing to PMS Index Score, reasons behind adverse

signals and proposes corrective/ remedial steps with time frame.

2. QUARTERLY MONITORING SYSTEM (QMS)

Bank has prescribed the QMS system for monitoring performance of big borrower accounts

enjoying working capital facilities of Rs. 1crore & above from the banking system. QMS includes

the submission of data on the prescribed formats depending upon the economic activity of the

borrower. Under this system financial and operational information/ data is required to be

submitted in two different sets of formats

i. QMS I

This form is required to be submitted within six weeks from the close of the quarter to

which it relates. It gives information about the operations of the unit and its performance

for the quarter, also giving reasons for non-achievement of sales/production targets.

ii. QMS II

This form is required to be submitted within two months from the close of the half-year to

which it relates. In addition to providing comparative position of the actuals vis-a-vis the

projections accepted at the time of sanction relating to the operations of the unit, this form

also indicates the `SOURCES' and `USES' of the funds generated by the unit, during the



half year. Critical analysis of this form can reveal the diversion of short-term funds for

long term uses.

Chapter 12 CASE STUDY – ABC PARTS PVT. LTD

12.1BORROWER’S PROFILE

Group Name ABC Parts Private Limited

Address of Regd./Corporate Office 41, DLF, Industrial Area, New Delhi-110015

Constitution Private Limited

Date of incorporation 18/08/1960

Dealing with PNB sinceMaintaining current account with PNB, New Delhi for the last 8 years.

Industry/Sector Manufacturing of Auto & Tractor Parts (Large Scale)

Business Activity (Product)Engaged in Designing, Engineering and Manufacturing of Auto and Tractor components.

BACKGROUND

The Company ABC Parts Pvt. Ltd. was incorporated in 1960. The borrower has setup

manufacturing units at 4 locations for manufacturing of Automotive Parts. This company is an

ISO-9001 – 2000 Certified Company and working speedily on achieving the TQ 14000. The

Management of the company is experienced and working in the line since long and the party is



having the regular orders for marketing of products and as well as contracts with corporate

manufacturing units of Vehicles/Auto Mobiles. Because of their standing the company is getting

repeated orders. The Company is supplying its product to manufacture of Automobile/Vehicles

Manufacturer unit as Original Equipment Manufacturers. The company has set up in- house R&D

facility in their unit, sophisticated instrumentation laboratory, testing laboratory etc., which

reflects the broad vision of the company to withstand the changing environment.

SHAREHOLDING

Major Share holders No. of shares Amt. in Rs. Lacs % Holding

Promoters Holding 100000 100.00 100%

FIs/ Mutual Funds/UTI/Banks/FIIs NIL NIL NIL

NRI’s/OCBs NIL NIL NIL

Public NIL NIL NIL

Total 100000 100.00 100%

FACILITIES REQUIRED

Nature Proposed Secured/Unsecured (As per

RBI’s guidelines)

Fund Based

CC(H) 900.00 Secured

Fund Based Ceiling 900.00

Non Fund Based

ILC/FLC NIL



ILG/ FLG NIL

Non Fund Based Ceiling NIL

Term Loan 1600.00 Secured

TOTAL COMMITMENT 2500.00 Secured

Rs. In Lacs



12.2 CREDIT APPRAISAL FOR ABC PARTS PVT. LTD

I. MANAGERIAL EVALUATION

1. Market reputation on the promoter / management of the company: Satisfactory

2. Brief Profile of Directors

• Shri Mahender Kumar Bhunsali, aged 80 years, promoted the business of auto

ancillaries after completing his education. He has been founder of the company and

is presently the chairman of the company. Looking at his rich experience along

with his forward looking capabilities, excellent work and ability to progress as per

the changing industry scenario, he was honored by Udyog Patra Award

• Shri Munish Kumar Bhunsali, aged 46 years, son of Shri Mahendra Kumar

Bhunsali joined his father’s business after completing his Graduation. He has now

been associated with this business for twenty-four years and is presently Managing

Director of the company

• Smt. Meenal Bhunsali¸ W/o of Shri Munish Kumar Bhunsali aged 44 years, is also

a graduate. She has also been associated with the business for last eight years and

presently Director in the company

3. Quality of Management (Including Corporate Governance): Management of the

company is well experienced and have more than 40 year experience in the auto parts line.

4. Succession Planning: Is been taken care of

5. Confidential Reports: Satisfactory



6. Marketing: The endless pursuit for quality excellence for over four decades has earned

ABC the unswerving confidence of leading automotive and tractor manufactures, that's

why its components are used as Original Equipment in vehicles manufactured. The

company supplies its products to various ORIGINAL VEHICLE MANUFACTURERS

like:

• Escorts Tractors Limited,

• Tractors and Farm Equipment Limited (Massey Ferguson U.K)

• Carraro India Ltd., (Carraro Spa, Italy)

• Samey Deutz Fahr India Ltd.,(Samey, Italy)

• Eicher Tractors (Valtra, Brazil)

• Ford New Holland (CNH, Italy)

• "Sonalika" International Tractors Ltd (Renault, France)

• International Auto Ltd. etc.

On the other hand company have well experienced management, good marketing team and

vide market network of customers of its products.

7. Borrowers' diversification, expansion, modernization program: The company is

setting up a new manufacturing facility, as a part of company’s overall

expansion/integration plant for its production activities. For the above purpose, a plot of

land measuring about 11,190 sq. meters has been allotted to the company by New Okhala

Industrial Development Association, near New-Delhi. The Company Intend to set up new

machinery there for setting up a new plant to cater growing demands of its customers, who

have already placed orders to increase supply.



II. BUSINESS EVALUATION

Comments on industry scenario and industry outlook:

The past few years have witnessed a continuous influx of global auto majors in India.

Many auto majors have established facilities, which have also been aided by the liberal

government policy. India crossed million-mark last fiscal, which has set the domestic auto

ancillary industry on a roll. Auto MNC’s are also launching their latest models in India.

The domestic auto industry has also come up with new and quality models. Consequently,

the importance for precision auto components has been growing. The increase in demand

for auto components in India has also resulted in an increase in revenues and exports.

Exports of auto components from India have witnessed a CAGR of over 19% over the last

six years.

The auto component sector is on a growth trajectory as is evident by the fact that an auto

component has been designated as a “Thrust Sector” by the Government of India under the

EXIM Policy.

Also, the problems of high rejection rates which plagued the domestic auto ancillary

industry has been overcome which is exhibited in number of overseas deals concluded by

the domestic industry amidst stiff competition from other Asian countries. The

Government has extended various fiscal incentives and policy measures which have helped

the industry.

Critically, outsourcing of automobile components that have relatively high engineering and

design content from suppliers in low cost countries like India, is gaining momentum fast. It

is estimated that in the next 10 years the auto components industry will reach USD 33-40

billion.

Going by the current trends in the domestic automotive industry and as stated above, it is

expected that the indigenous demand for auto components will also reach USD 13-15

billion in the next 10 years and about USD 20-25 billion would be exported. To meet the

combined demand from domestic and international customers the industry will have to



make significant incremental investment Hence, the Indian auto component industry (and

by sequel the forging industry) is poised to achieve a position in the top slot in the world

and will be in all probability a major driver of growth and employment in the domestic

economy.

The fortunes of the auto ancillary sector are closely linked to those of the auto sector.

Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an

impact on auto ancillary demand. Demand is derived from original equipment

manufacturers (OEM) as well as the replacement market. Replacement demand accounts

for close to 57% of total demand, while OEMs account for 27%, with exports accounting

for the balance 16%.

The Indian auto component industry had an estimated 480 companies operating in this area

in FY05, employing more than 250,000 people and the industry exported goods worth

estimated at US$ 1.4 bn. Share of exports to output is estimated to have increased from

15% in FY04 to 16% in FY05.

One area where domestic units compare favorably with their international peers is it terms

of costs. Lower labour costs give Indian auto ancillary companies an absolute cost

advantage. India's strength in exports lies in forgings, castings and plastics historically. But

this is changing with more component manufactures investing in upgradation of

technology in recent years



III. TECHNICAL EVALUATION

1. Land & Building - The Party has proposed to setup the designing , engineering and

manufacturing unit at Noida –II having the area of 11,190 sq Mts The Party has already

constructed approx 45000 sq feet Industrial Shed. The building area is sufficient for the

installation of the plant and machinery and for smooth working of the unit.

2. Plant and Machinery: It is reported by the party that they are one of the largest integrated

plant of its kind for manufacturing Auto and Tractor Component in North India spread

over sprawling area of 57,340 sq feet at different locations in Delhi, Faridabad and Noida.

There are different types of shops i.e grinding shop, Turning centers, Machine Shops,

ensuring high productivity and better quality to keep pace with the ever rising quality

standards. The party is also having HEAT TREATMENT SHOP with hardening,

annealing, carbonizing, tampering furnaces which make the component to withstand

strength in operating conditions of the parts.. The party has submitted the quotations from

the suppliers/manufacturers with the term and conditions for supply. The credential of the

suppliers is verified for the supply of the machinery as per bank guidelines.

3. Raw Materials: The basic raw material required for the unit is forging of auto parts ,

stainless steel, welding rods and store items etc. The material is available through local

suppliers/ units and most of the raw material is purchased from Delhi & NCR.

4. Manufacturing Process: The auto parts being manufactured under strict quality control

by using latest CNC Machines of improved technology, modern process control devices

monitored by microprocessors and backed by a competent team of technical personnel to

ensure strict quality norms as laid down by the OEM units/ Manufacturer of Tractors and

other Vehicles.



5. Production Capacity: The stated projections are accepted by the bank as they both match

and are in sync the installed capacity and the market demand. The new plant will become

operational in the mid of the financial year 2010-11 and production capacity of the

company will increased.

6. Quality Control: The party has proposed to set up in- house R&D facility comprising of

pilot plant facility, sophisticated instrumentation laboratory, testing laboratory etc. for Raw

Material and finished goods etc. Quality control test are being undertaken for raw material

and other products at stages of production. The product shall meet all the specification

requirement of their client.

7. Staff and Labor: As the machines are semi automatic and the unit is located at the Nodia,

which is the approved industrial area. So, there is no problem of skilled and unskilled labor

and it will be easily available as per the requirement of the party as and when required for

the proposed unit at Noida.

8. Power: The party has taken the temporary power load connection of 20KW for

completion of construction at Noida unit.

9. Other Infrastructure: The unit of the party is situated at Noida, it is a developed

industrial area and is connected to other parts of the country by roads and rails routes. All

types of facilities like postal, telecommunication, transportation etc. are easily/already

available.



IV. LEGAL EVALUATION

Status of various statutory approvals and clearances:

For the Noida Unit Company has already obtained the Various approvals such as sanction of

building plan, Electricity/Power Load Connection, Water Connection, Pollution Control

Clearance. The other units of the Company are already working at different locations in

Faridabad and Delhi. The Director of the company has reported that they have obtained the all

approvals required for the units for manufacturing of auto parts i.e, registration of the units

with the concerned departments i.e. SSI registration, Income tax, Sales Tax, authorization

from Pollution control board.



V. FINANCIAL EVALUATION

Financial Statements of the company are as follows

PROFIT AND LOSS ACCOUNT: ABC PARTS PVT. LTD

(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011Audited Audited Audited Provisional Projection

Sales Turnover 1995.39 2047.12 2584.65 2379.88 4840.00% rise or fall in sales 2.59 26.26 -7.92 103.37Cost of sales 1868.41 1954.42 2502.28 2270.66 4405.56Operating Profit 126.98 92.70 82.37 109.22 434.44Other Income 17.40 7.44 17.84 12.39 20.00Profit Before Tax 144.38 100.14 100.21 121.61 454.44Provision for taxes 40.00 40.00 69.74 3.67 113.59Profit After Tax 104.38 60.14 30.47 117.94 340.85Depreciation 41.97 52.91 74.08 84.98 344.00Cash Profit 146.35 113.05 104.55 202.92 684.85

BALANCE SHEET: ABC PARTS PVT. LTD(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Share capital 100.00 100.00 100.00 100.00 175.00

Reserves and Surplus 482.55 542.69 573.16 691.10 1064.68

Share App. Money 0.00 0.00 0.00 75.00 0.00

Quasi Capital 17.45 32.79 45.84 60.88 75.00

Def. Tax liability/ Loss 0.00 0.00 32.81 32.81 0.00

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net Worth 600.00 675.48 751.81 959.79 1314.68

Secured Loans 496.55 685.86 981.12 1119.01 1819.54

Unsecured Loans 0.00 0.00 0.00 0.00 0.00

Term Liabilities 496.55 685.86 981.12 1119.01 1819.54

Working Capital Advances 0.00 461.01 482.21 442.79 900.00



Sundry Creditors 496.60 400.67 694.94 633.65 100.00

Statutory Liabilities 0.00 0.00 0.00 0.00 0.00

Adv from Customers 0.00 0.00 0.00 0.00 0.00

Other current Liabilities 707.92 187.91 105.32 85.00 138.59

Current Liabilities 1204.52 1049.59 1282.47 1161.44 1138.59

Total Outside Liabilities 1701.07 1735.45 2263.59 2280.45 2958.13

Total Liabilities 2301.07 2410.93 3015.40 3240.24 4272.81

Fixed Assets 1640.29 1830.50 2372.27 2590.20 3998.99

Depreciation 792.19 845.10 919.18 1004.16 1398.16

Lease Asset 0.00 0.00 0.00 0.00 0.00

Net Block 848.10 985.40 1453.09 1586.04 2600.83

Inventories 426.89 602.67 796.42 932.02 979.28

Sundry Debtors 735.23 353.35 473.80 326.43 403.33

Cash & bank balance 13.38 68.33 3.72 37.19 19.30

Advances to suppliers 0.00 64.57 38.14 44.23 0.00

Loans & advances 0.00 0.00 0.00 0.00 0.00

Advance Tax 0.00 0.00 0.00 0.00 113.59

Other Current Assets 277.47 330.22 243.75 307.85 150.00

Current Assets 1452.97 1419.14 1555.83 1647.72 1665.50

Investments 0.00 6.39 6.48 6.48 6.48

Security Deposits 0.00 0.00 0.00 0.00 0.00

Margin Money 0.00 0.00 0.00 0.00 0.00

Exp. Not WO 0.00 0.00 0.00 0.00 0.00

Non-current Assets 0.00 6.39 6.48 6.48 6.48

Total Assets 2301.07 2410.93 3015.40 3240.24 4272.81

BUILD UP OF NWC: ABC PARTS PVT. LTD

(In Rs. Lacs)


Long Term ApproachNet Worth 600.00 675.48 751.81 959.79 1314.68Term Loans 496.55 685.86 981.12 1119.01 1819.54Total Long Term Sources 1096.55 1361.34 1732.93 2078.80 3134.22



Net Fixed Assets 848.10 985.40 1453.09 1586.04 2600.83Other Non Current Asset 0.00 6.39 6.48 6.48 6.48Total Long Term Uses 848.10 991.79 1459.57 1592.52 2607.31Surplus / Deficit 248.45 369.55 273.36 486.28 526.91

Short Term ApproachCurrent Liabilities (Sources) 1204.52 1049.59 1282.47 1161.44 1138.59Current Assets (Uses) 1452.97 1419.14 1555.83 1647.72 1665.50Surplus / Deficit -248.45 -369.55 -273.36 -486.28 -526.91

FINANCIAL INDICATORS: ABC PARTS PVT. LTD

(In Rs. Lacs)


Intangible Assets 0.00 0.00 0.00 0.00 0.00TNW 600.00 675.48 751.81 959.79 1314.68Investments in allied co. 0.00 0.00 0.00 0.00 0.00Adjusted TNW 600.00 675.48 751.81 959.79 1314.68Current Ratio 1.21 1.35 1.21 1.42 1.46Debt/Equity 0.83 1.02 1.31 1.17 1.38NWC 248.45 369.55 273.36 486.28 526.91TOL/TNW 2.84 2.57 3.01 2.38 2.25TOL/ Adjusted TNW 2.84 2.57 3.01 2.38 2.25Operating Profit / Sales (%) 6.36 4.53 3.19 4.59 8.98PAT / Sales (%) 5.23 2.94 1.18 4.96 7.04FACR 1.71 1.44 1.48 1.42 1.43

Brief discussion on Financial Indicators

1. Paid up capital / TNW

a. Authorized capital of the company is Rs.100 Lacs comprising of 1 Lac-equity

shares of Rs. 100/- each. Paid up capital are Rs. 100 Lacs comprising of 1 Lac-

equity shares of Rs 100/- each. It has been projected at the level of Rs 175.00 Lacs

during current year. The company already inducted Rs. 75.00 Lacs as Share

application money, which will be converted in to Paid up share Capital before

disbursement of limits by the bank. The Company will increase the Authorized



Capital Limit after the Sanction of the Proposal but before the disbursement of the

loan.

b. TNW of the company is steadily increasing with full retention of profits. It was

Rs. 582.55 Lacs as on 31.03.2007 and increased to Rs. 675.48 Lacs as on

31.03.2008 and further increased to Rs. 751.81 Lacs as on 31.03.2009. It has been

estimated / projected at Rs. 959.79 Lacs and Rs.1314.68 Lacs respectively as at

31.03.2010 and 31.03.2011 due to retention of estimated/projected internal accruals

and proposed induction of capital in the business. Keeping in view of the past trend

of profitability, estimates/projections of TNW can be accepted.

2. Sales: Gross Sales of the company is showing increasing trend. Sales have increased from

Rs. 20.47 crores in 2007-08 to Rs. 25.85 crores in 2008-2009. Thus the company has

registered a growth of more than 26% over the last year. But sale during the financial year

2009-10 did not register any growth, due to fluctuation in the foreign market export sale of

the company decreased from the last financial year. The company has achieved net sales of

Rs 22.30 crore during the financial year 2009-10. The company is estimating the sale on

the basis of order in hand. In view of the recovery of economy since Oct. 2009, Company

is expecting the good growth rate in sale in coming financial years, Another reason of the

healthy estimates are good government policies for export out of India and recovery of

overall global market from the financial crunch. The new plant of the company will

become function in the mid of the financial year 2010-11, which will increase the

production capacity of the company. The company has good demand of its product in the

market. Increase in the production capacity of the company will increase the turnover of

the company. Based on its existing clientele and the demand in the market of the products

of the company, the company is estimating its Gross turnover for the financial year 2010-

11 at Rs.48.40 Crore. Keeping in view the overall growth in the automobile and auto part

manufacturing market, the estimated turnover of the company can be accepted.



3. Other income: The other income of the company includes interest on FDR, Rebate and

Discounts received, Foreign Exchange Benefit etc. The other incomes for the year end

31.03.2008 were Rs. 7.44 Lacs and for the year ending 31.03.2009 were Rs. 17.84 Lacs.

The other incomes of the company as per the provisional balance sheet for the financial

year 2009-10 have Rs. 12.39 Lacs. The company is estimating other income at Rs. 20.00

for the financial year 2010-11.The Company estimated these income by taking care of

interest receivable on FDR and current discounts /rebate policies of the suppliers. Keeping

in view the past records of the company, Estimates/Projections of Other Incomes can be

accepted.

4. Profitability: PAT / Sale of the company for the financial year 2007-08 was 3% and for

the financial year 2008-09 was 1% . The PAT of the company for the financial year 2008-

09 was decreased because of increase in the depreciation and Interest expenditure of the

company. Due to expansion and installation of new equipments during the financial year,

depreciation and financial expenses of the company increased disproportionately as

compared to the increase in gross sale of the company. These expenses were 10.68% of

turnover for the financial year 2008-09 in comparison to 8.59% for the financial year

2007-08. As per the provisional balance sheet for the financial year 2009-10 the company

achieved profitability @ 4.96% (PAT/Sale) upto 31.03.2010. The company is estimating

the profitability for the financial year 2010-11 at 7.04%. Increase in the production

capacity of the company will reduce the operation cost of the company and the

profitability of the company will increase. Keeping in view the industry scenario and past

trends of the company projections/estimates of the profitability of the company can be

accepted.

5. Investments: The Company has made investments in Fixed Deposits. The value of Fixed

Deposits at the end of the financial year 2008-09 is Rs. 6.48 Lacs.



6. Current ratio: Current ratio of the company for the financial year ending 31.03.2007 &

31.03.2008 was 1.21:1 & 1.35:1 .But current ratio for the financial year 2008-09 was

1.22:1 which is little lower than the bench mark of the bank i.e, 1.33:1 which was due to

expansion plan of the company and formation of long term assets of the company during

the financial year 2008-09 to increase the overall profitability of the company. The

company used its internal accrual for purchase of capital assets of the company. In spite of

using its short term funds for the purchase of the capital assets the NWC of the company is

positive. The expansion in the capital assets has increased the size of the plant and

profitability of the company which also improve the short term liquidity of the company.

As per the provisional balance sheet for the financial year 2009-10 the current ratio of the

company is 1.42, which is above the bench mark of the bank. Keeping in view the past

records/trends of the company estimated level current ratio can be accepted.

7. Debt Equity Ratio: Debt Equity Ratio of the company for the financial year 2007-08 was

1.02:1 and for the financial year 2008-09 was 1.31:1. As per provisional Balance sheet of

the company the debt equity ratio for the financial year 2009-10 is 1.17. The Company has

estimated it debt equity ratio for current financial year at 1.38:1. The debt equity ratio of

the company is below the acceptable bench mark of the bank i.e. 3:1 and proves the long

term solvency of the company. Hence keeping in view the past trends of the company

estimates/ projections of Debt Equity ratio of the company can be accepted.



12.3 PRESENT PROPOSAL

The Borrower, ABC PARTS Pvt. Ltd. approached to the Bank for the Sanction of following

facilities:-

• For Sanction of Working Capital Limit of Rs. 900.00 Lacs

• And, for Sanction of Term Loan of Rs.1600.00 Lacs (by way of takeover of Term Loan of Rs. 612.00 Lacs from SBBJ, Barakhamba Road, New Delhi and sanction of Fresh Term Loan of Rs. 988.00 Lacs for New Plant & Machinery at Noida Unit)

1. JUSTIFICATION FOR WORKING CAPITAL SANCTION

MAXIMUM PERMISSIBLE BANK FINANCE: ABC PARTS PVT. LTD(In Rs. Lacs)

31.03.2007 31.03.2008 31.03.2009 31.03.2010 31.03.2011

Audited Audited Audited Provisional Projection

Inventories 426.89 602.67 796.42 932.02 979.28

Sundry Debtors 735.23 353.35 473.80 326.43 403.33

Chargeable Current Assets 1162.12 956.02 1270.22 1258.45 1382.61

Other Current Assets 290.85 463.12 285.61 389.27 282.89

Total Current Assets 1452.97 1419.14 1555.83 1647.72 1665.50

Other Current Liabilities 1204.52 588.58 800.26 718.65 238.59

Working Capital Gap (A) 248.45 830.56 755.57 929.07 1426.91

Minimum Stipulated Working Capital -25% of TCA (B)

363.24 354.79 388.96 411.93 416.38

Actual / Projected NWC (C)

248.45 369.55 273.36 486.28 526.91

PBF 1 ( A - B ) -114.79 475.78 366.61 517.14 1010.54

PBF 2 ( A - C ) 0.00 461.01 482.21 442.79 900.00

MPBF -114.79 461.01 366.61 442.79 900.00



2. JUSTIFICATION FOR TERM LOAN

a. Purpose: Sanction of Fresh Term Loan of Rs. 988.00 Lacs for purchase of New

Plant & Machinery at new unit at New Okhla Industrial Area, Noida.

b. Summary of Cost of Project and Means of Finance

Cost of Project Amount

Cost of Machinery 1313.79

Electricity and Water Connection 20.00

Total 1333.79

Means of Finance Amount

Term Loan 988.00

Unsecured Loans 75.00

Share Capital & internal accruals 270.79

Total 1333.79(In Rs. Lacs)

c. Sources of Promoters’ Contribution and the time schedule as to when the

funds will be brought.

Promoters of the company have already contributed Rs. 75.00 Lacs by way of

share application money and Rs. 60.88 Lacs as unsecured loan up to 31.03.2010 as

unsecured loans. Promoters will introduce remaining amount of unsecured loans

Rs.14.12 Lacs during the current financial year. The balance amount of promoters

contribution & internal accrual will be arranged by 100% retention of profits for

the financial year 2009-10 and 2010-11.



d. Projections for the profitability of the project

PROJECTIONS - ABC PARTS PVT. LTD.

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

Net sales4251.3

3

4677.4

6

5145.2

1

5648.7

36202.6

6811.8

6

7482.0

5

7850.6

58237.69

Profit after

Tax256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83 606.02

Depriciatio

n224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02 126.67

Cash Profit 481.64 582.47 577.08 592.91 590.71 654.46 691.57 719.85 732.69(In Rs. Lacs)

e. DSCR calculation

DEBT SERVICING COVERAGE RATIO - ABC PARTS PVT. LTD.

2010-

11

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

2017-

18

2018-

19

PAT 256.83 316.38 350.91 385.66 414.55 489.72 551.54 570.83 606.02

Depreciation 224.81 266.09 226.17 207.25 176.16 164.74 140.03 149.02 126.67

Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15 130.27

Sub Total 702.26 822.7 790.97 781.11 755.98 805.87 835.37 856 862.96

Loan Instalment 228.29 207.94 197.44 197.7 155.02 58.34 58.66 58.98 31.5

Interest 220.62 240.23 213.89 188.2 165.27 151.41 143.8 136.15 130.27

Sub Total 448.91 448.17 411.33 385.9 320.29 209.75 202.46 195.13 161.77

DSCR 1.56 1.84 1.92 2.02 2.36 3.84 4.13 4.39 5.33

Average DSCR 2.59

Imp: Detailed projected financial statements are not shown in the report due to confidentiality of the data



f. Detailed Sensitivity Analysis on DSCR

Variation Average DSCR Minimum DSCR

Impact of Reduction of Selling price by 5% 1.95:1 1.21:1

Impact of Increase in Cost of Goods sold by 5% 2.08:1 1.28:1

Impact of Increase in Rate of Interest by 1% 1.89:1 1.17:1

g. Present physical & financial status of project, if any

Basement of the factory building is already constructed. Present Financial Status of

the project is

PARTICULARS Cost Incurred Cost to be Incurred Total Cost

Cost of Construction NIL 1313.79 1313.79

Cost of Electricity and Water Connection

1.65 18.35 20.00

Total 1.65 1332.14 1333.79

(In Rs lacs)

h. Implementation Schedule

Activity Start Date Completion Date

Land Acquisition Already Done

Building and Civil Construction AlreadyJune 2010 ( Shed Measuring 45000 Sq Ft is already Constructed)

Delivery of Equipment at site March ,2010 June,10

Installation of Equipments June, 2010 July,10

Commissioning of plant August,2010 Sept,10

i. Proposed Repayment Schedule



Scheduled date of Completion of Project Sept 2010

Commercial Operations Date (COD Oct 2010

Implementation period (in months) 6 Months

Moratorium (in months) 12 Months

Repayment period in months/quarters/ Half year 84 Months

No. of installment 84

Starting Date Oct 2011

End Date (Last installment) Sept 2018

Door to door tenor 102 months



12.4 SECURITY

1. Primary

i) For working capital limits: Hypothecation of Company’s present and future raw

material, Stock in process, finished goods, stores and spares and other current assets and Book

Debts

ii) For Term Loan:

• First charges on plant and machinery purchased from fresh term loan of Rs.

988.00 Lacs. Security Cover Available

Description of Security Book Value Market Value

Land Situated at, Nodia, U.P. 365.68 1100.00

Building and Sheds 519.55 519.55

Plant & Machinery* 1671.87 1671.87

Other Fixed Assets** 56.21 56.21

Total 2613.31 3347.63

(In Rs lacs)

iii) Personal /Corporate Guarantee:

Name of Guarantor PositionNet Worth As on

31.03.10Immovable property

As on 31.03.10

Mr. M K Bhunsali Chairman 394.95 261.00

Mr. Munish Kumar Bhunsali MD 389.45 261.00

Mrs. Kumad Bhunsali Director 124.56 40.50

(In Rs lacs)



12.5 CREDIT RISK RATING – ABC PARTS PVT LTD.

The account was rated under the Large Corporate Model. The following rating have been

obtained by both: branch office and zone office

1. FINANCIAL EVALUATION

i. Past Financials

Category ParameterCO

Value

Benchmark Values Rate

0 1 2 3 4

Past Financials Absolute

Comparison

TOL/TNW 2.38 >5.00 5.00-4.00 4.00-2.50 2.50-1.00 <1.00 3.08

Current Ratio

1.42 <1.00 1.00-1.25 1.25-1.50 1.50-2.00 >2.00 2.68

DSCR 1.56 <1.00 1.00-1.25 1.25-1.75 1.75-2.50 >2.50 2.62

ROCE 12.29 <8% 8-12% 12-15% 15-25% >25% 2.10

(Inv + Rec) / Net sales

0.53 >6.00 6.00-5.00 5.00-4.00 4.00-3.00 <3.00 4.00

ii. Future risk and subjective assessment

Category Parameter Comments Rate

Future risk

Impact of contingent liability

There is no other contingent liability 4.00

Impact of Expansion It will lead to more sales. 3.00

Subjective Assessment

of Financials

Transparency in accounting

The financial statements are prepared in accordance with generally accepted accounting principles

2.00

Quality of inventoryThe expected variance in the value may be less than 5%

3.00

Reliability of Debtors There is no disclosure of debtors 2.00



2. BUSINESS EVALUATION

A. Market position evaluation

Parameter Comments Rate

Competitive position 3.00

Expected sales growth The firm has achieved a sales growth of around 48% during the years 2007 – 08. It is expected that company will be in a position to achieve a sales growth of around 10 – 25% in the current year

3.00

Input related risk 3.00

Availability of raw material and other critical inputs

Raw material is easily available from nearby states

3.00

Proximity to skilled Labor The firm is located in industrial in NOIDA inputs are available easily

3.00

Production related risk 4.00

State of technology used The firm has adopted proven technology better than its peers

4.00

Product related risk 3.00

Product range Firm is mainly engaged in the processing of OEM

3.00

Product quality Quality of product is reported to be better than the peers

3.00

Marketing 3.00

Distribution network Firm has a well developed distribution network 3.00

Geographical diversity of the market

Firm is selling its product directly to the vehicle manufacturers

3.00



B. Industry risk evaluation

Industry risk evaluation for auto ancillary industry 75%

3. MANAGEMENT EVALUATION

A. Objective

ParameterCo

Value0 1 2 3 4 Rate

Actual gross sales

2379.88

<75% 75% - 79% 80% - 89% 90% - 95% >95% 4.00Targeted sales 2208.91

Actual PBT 144.38

<75% 75% - 79% 80% - 89% 90% - 95% >95% 4.00Targeted PBT 137.57

(in Rs lacs)

B. Subjective

S. No. Parameter Comments Rate

1 Management set up The firm is in operation since 1960 3.00

2 Commitment and sincerityThe management is reported to be reliable and sincere

3.00

3 Track record in debt payment The account is running satisfactorily with us 2.00

4 Financial strength/ flexibilityManagement is capable of arranging funds but with a time lag

2.00



4. CONDUCT OF ACCOUNT EVALUATION

Parameter Comments Rate

Status of account No irregularity is observed with our bank in last 2 yrs 3.00

Operations in account Operations in account are healthy 3.00

Submission of financial data Timely submission of data 3.00

TOTAL SCORE

Factor % score obtained Weight Weighted Score

Financial Evaluation 75.00 40.00% 30.00

Business & Industry

Evaluation

60.00 25.00% 15.00

Management Evaluation 75.00 20.00% 15.00

Conduct of Account 75.00 15.00% 11.25

AGGREGATE SCORE 71.25

(The Aggregate Score of 71.25 refers to PNB- AA-)

THIS MEANS THE RATING OF THE BORROWER IS PNB AA-

DETERMINATION OF ROI

From the internal circular of the bank on ROI the corresponding ROI for auto ancillary firm

having a credit risk rating of AA- are:

• BPLR + 1.50% for Working Capital limit, and

• BPLR + 1.50% + 0.50% for Term loan

Imp: The rating as shown in the above section is not a replication of the original model in any form,

And the values and calculation of scores is for the purpose of understanding the process



12.6 RECOMMENDATIONS:

On examining the request of the Company, the following were observed:

• The Management of the company is well experienced.

• The Company has been in operation for past 40 years and has been earning profits continuously.

• The company has good track record in dealing with Banks.

• The overall financial position of the company is satisfactory.

Keeping in view the increasing profitability and financial position of the company, the following are recommended

i For Sanction Term Loan of Rs. 1600.00 Lacs ( including Takeover of Term Loan of Rs. 612 Lacs from State Bank of Bikaner and Jaipur) for purchase of new plant and machinery .

ii For Sanction Working Capital limit of Rs. 900.00 Lacs

The facilities desired by the borrowers are subject to the given ROI and Terms and Conditions.

Nature Applicable ROI Limits Sanctioned

Fund Based BPLR + 1.50% 900.00

Term Loan BPLR + 1.50% + 0.50% 1600.00

TOTAL COMMITMENT 2500.00

(In Rs lacs)



Chapter 13 CONCLUSION& RECOMMENDATIONS

CONCLUSION

The study at PNB gave a vast learning experience to me and has helped to enhance my

knowledge. During the study I learnt how the theoretical financial analysis aspects are used in

practice during the working capital finance and term loan assessment. I have realized during my

project that a credit analyst must own multi-disciplinary talents like financial, technical as well as

legal know-how.

The credit appraisal for business loans has been devised in a systematic way. It is a process of

appraising the credit worthiness of loan applicants. 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. There are clear guidelines on how the credit analyst or lending officer has to

analyze a loan proposal. It includes phase-wise analysis which consists of 6 phases:

1. Financial statement analysis

2. Working capital and its assessment techniques

3. Techno Economic Feasibility Analysis

4. Credit risk assessment

5. Documentation

6. Loan administration

Punjab National Bank’s adoptions of the Projected Balance Sheet method (CMA) of assessment

procedures are based on sound principles of lending. This method of assessment has certain

flexibility required to avoid any rigid approach to fixing quantum of finance. The PBS method

have been rationalized and simplified to facilitate complete flexibility in decision-making.



To ensure asset quality, proper risk assessment right at the beginning, is extremely important. That

is why Credit Risk Management system is an essential ingredient of the Credit Appraisal exercise.

PNB has formulated a Credit Risk Rating model, PNB Trac. It considers important parameters

like profitability, repayment capacity, efficiency of the unit, historical / industry comparisons

etc… depending on the industry. PNB Trac is one of the best rating models present till date.



FINDINGS

After completing the entire project at Punjab National Bank the following key findings as mentioned below

were observed.

1. At Punjab National Bank, Circle Office the priority to appraise a proposal was given to

new or fresh clients over the existing clients presenting proposals for renewal

2. Ratings, as being performed at PNB, are done once a year. Therefore, the ratings do not

take into account short term drastic changes like price level changes (which are an issue

with any method based on accounting statements, since annual reports are based on

historical cost basis of accounting and other changes like sudden mishap/ of the

counterparty are not readily accounted for by the rating system due to long lag between

repeat ratings on the same account.

3. Some of the parameters in Business and industry evaluation are based on the information

provided by company, which in some cases may not be sufficient. No specific guidelines

are followed in such cases. Also, some of the parameters here may be rendered redundant

in some cases and may push up/ push down the rating needlessly in these cases.

4. The present risk rating model does not have any mechanism to prioritize certain sectors of

the economy. There are certain sector in the economy where risk spread is low and certain

sectors where spread of risk is high like real estate. Also, there are certain infrastructural

projects which need to be prioritized. The risk rating model is not flexible to incorporate

all these issues.

5. The BPLR system will soon be replaced by Base Rate system. Banks may choose any

benchmark to arrive at the Base Rate for a specific tenor that may be disclosed

transparently.

6. With the deregulation of the financial sector, the ability of the banks to service the credit

requirements of the SME sector depends on the underlying transaction costs, efficient

recovery processes and available security. There is an immediate need for the banking

sector to focus on credit and finance requirements of SMEs.



RECOMMENDATIONS

The Credit Department at PNB Circle Office Delhi, works at its full potential and the staff is

highly experienced and has a very strong intuitive sense. So, there is no such recommendation on

the entire process. However to make the process more flexible and efficient, an electronic

database should be designed carrying all the available and important information related to the

proposals accepted, and it should be easily accessible to the Credit Department. This will help

reduce paperwork and loss of information.



LIMITATIONS

Like any other study this study too is not free from limitations. The major limitations of the study

are listed below:

1. The major limitation of this study shall be data availability as the data is proprietary and

not readily shared for dissemination.

2. Also the geographical scope of the project was limited to PNB Circle Office and the loans

studied were of solely of businesses established majorly in NCR

3. The credit appraisal decision are more of intuition and experience and since the time

period was limited, hence best efforts were made to grasp the process as much as possible

4. Due to ever changing environment, many risks are unexpected and the remedial measures

available are based on general experience from the past. Therefore risks can only be

minimized cannot be erased completely. Hence, out of the various ways in which risks can

be managed, none of the methods is perfect and may be very diverse even for the work in a

similar situation in the future



REFERNCES

Mckinsey & Company. “India Banking 2010 - Towards a High-performing Sector”

Ben McClure. Working Capital Works. Investopedia. From

http://www.investopedia.com/articles/fundamental/03/061803.asp

Richard Loth. The Working Capital Position. Investopedia. From

http://www.investopedia.com/articles/basics/06/workingcapital.asp

Naila Iqbal. Paradigms of Working Capital Management. From http://ezinearticles.com/?

Paradigms-of-Working-Capital-Management&id=1251489

Jagdish Capoor. Risk Management in Financial Institutions. From

http://www.coolavenues.com/know/fin/jagdish_capoor_a.php3

Principles for the Management of Credit Risk, from http://www.bis.org/publ/bcbsc125.pdf

M.Y.Khan & P.K.Jain, Financial Management, Seventh Edition

PNB Journals (For internal circulation only)

Credit Management & Risk Policy for the year 2008-09

Book of Instructions on Loans, March 2005

Loans & Advances Circulars on

• BPLR

• Project Finance

• Industry Rating

• Loaning Powers and Guidelines for exercising such powers

RBI Circulars and Guidelines



Guidelines on Credit Appraisal

Basel II Accord

Base Rate

PART -2



Chapter 14 CUSTOMER SATISFACTION

14.1CUSTOMER SATISFACTIONCustomer satisfaction refers to the extent to which customers are happy with the products and

services provided by a business. Customer satisfaction levels can be measured using survey

techniques and questionnaires.

DEFINITIONS:

Definition 1: Customer satisfaction is equivalent to making sure that product and service

performance meets customer expectations.

Definition 2: Customer satisfaction is the perception of the customer that the outcome of a

business transaction is equal to or greater than his/her expectation.



Definition 3: Customer satisfaction occurs when acquisition of products and/or services provides

a minimum negative departure from expectations when compared with other acquisitions.

Gaining high levels of customer satisfaction is very important to a business because satisfaction

customers are most likely to be loyal and to make repeat orders and to use a wide range of

services offered by a business.

There are many factors which lead in high levels of customer satisfaction including, products and

services which are customer focused and hence provide high levels of value for money.

What is clear about customer satisfaction is that customers are most likely to appreciate the goods

and services that they buy if they are made to feel special. This occurs when they feel that the

products and services that they buy have been specially produced for them or for people like them.

14.2 STATEMENT OF THE PROBLEM

This Study will help us to understand the consumer’s satisfaction about banking services and

products. This study will help banks to understand, how a consumer selects, organizes and

interprets the Quality of service and product offered by banks.

The market is more aware and realistic about investment and returns from financial products. In

this background this study tries to analyze the customer satisfaction towards banking services in

general and PNB in particular.

14.3NEED FOR THE STUDY

The deeper the company understands of consumer’s needs and satisfaction, the earlier the

product or service is introduced ahead of competition, the greater the expected

contribution margin. Hence the study is very important.



This study will help companies to customize the service and product, according to the

consumer’s need.

This study will also help the companies to understand the experience and expectations of

the existing customers.

14.4SCOPE OF THE STUDY

This study is limited to the consumers with in New Delhi city. The study will be able to reveal the

preferences, needs, satisfaction of the customers regarding the banking services, it also help banks

to know whether the existing products or services are offering are really satisfying the customers’

needs.

14.5OBJECTIVE OF THE STUDY

To have an insight into the attitudes and behaviours of customers.

To find out the differences among perceived service and expected service.



To produce an executive service report to upgrade service characteristics.

To understand consumer’s preferences.

To access the degree of satisfaction of the consumers.

14.6SAMPLE METHOD

Convenience sampling method is used for the survey of this project. It is a non-probability

sample. This is the least reliable design but normally the cheapest and easiest to conduct .In this

method Researcher have the freedom to choose whomever they find, thus the name convenience.

SAMPLE SIZE

Sample size denotes the number of elements selected for the study. For the present study, 100

respondents were selected at random. All the 100 respondents were the customers of different

branches of PNB.

SAMPLING METHOD



A sample is a representative part of the population. In sampling technique, information is

collected only from a representative part of the universe and the conclusions are drawn on that

basis for the entire universe.

A convenience sampling technique was used to collect data from the respondents.

14.7METHOD OF DATA COLLECTION

To know the response, the questionnaire method is used. It has been designed as a primary

research instrument.

Questionnaires were distributed to respondents and they were asked to answer the questions given

in the questionnaire. The questionnaires were used as an instrumentation technique, because it is

an important method of data collection.

PRIMARY DATA

A well-structured questionnaire was personally administrated to the selected sample to collect the

primary data.

SECONDARY DATA



Two types of secondary data were collected for the preparation of the project work:

Internal Data was generated from company’s brochures, manuals and annual reports.

External Data, on the other hand, was generated from magazines, research books, intranet and

internet (websites).

Chapter 15 ANALYSIS AND INTERPRETATION

15.1 SHARE OF DIFFERENT TYPES OF ACCOUNTS

TABLE 15.1

SHARE OF DIFFERENT TYPES OF ACCOUNTS

SL. No. NATURE OF

ACCOUNTS

NUMBER OF

RESPONDENTS

PERCENTAGE OF

RESPONDENTS

1 . Saving A/Cs 77 77%



2 Current A/Cs 12 12%

3 Fixed Deposits 5 5%

4 Loans 4 4%

5 Others 2 2%

Total 100 100%

Graph - 15.1

Classification based on nature of A/Cs

Figure 1



Analysis: Above table shows that 77% respondents have Saving A/Cs, and 12% have Current

A/Cs and rest of the respondents have 11% share of other A/Cs in total (which includes fixed

deposits, loans, and other products).

Interpretation: This means most of the respondents are having Saving A/Cs which means the

bank deposits are enriching as Saving A/Cs share is most.

15.2 R ATINGS OF THE SERVICES OFFERED BY PNB

TABLE 15.2

RATINGS OF THE SERVRICES OFFERED BY PNB

SL. No. RATINGS Account

Opening

Bank's staff

availability and

behavior

Miscellaneous

1 EXCELLENT 35 15 5

2 VERY GOOD 22 33 46

3 GOOD 28 34 12

4 AVERAGE 4 12 30

5 POOR 11 6 7

TOTAL 100 100 100



Graph - 15.2

Classification based on Rating of the service offered by PNB branches

Analysis: From this table it could be inferred that 41% of the consumers have rated service

offered like account opening as ‘excellent’, 22% of them have rated them as ‘very good’, and 04%

of them have rated as average’ while only 8% have rated as ‘poor’.



Interpretation: Service offered by the bank is improving day by day. Returns consumers are

getting are also attractive. Majority of the customers rates good, very good and excellent because

of the customer service offered by the bank.

The miscellaneous column includes the infrastructure, facilities to the customers, queuing system,

etc. As per my observation during the internship and from statistics the overall condition of the

bank is not satisfactory. There is a lot of customer to this branch as this is the main branch in Patel

Nagar but the services offered by this branch is not satisfactory. The Customer Care Officer Mrs.

Poonam Grover is very calmly and patiently managing the customers and their problems.

15.3 REASON FOR SELECTING PNB

TABLE 15.3

TABLE SHOWING REASON FOR SELECTING PNB

SL.NO ATTRIBUTE SCORE RANK

1 Brand name 49 1

2 Customer service 32 2

3 Interest 16 3

4 Others 3 4

Total 100

Graph - 15.3

Reason behind the Selecting of PNB



Analysis: This table show the strengths and weaknesses of the brand, and what are the important

criteria or factors on which decision-making are done. From this table we can infer that consumers

give more importance for ‘Brand name’, secondly they prefer ‘satisfaction’, and then ‘returns on

investment’.

Interpretation: This purely shows that people are now looking forward for better customer

service in addition to the brand name in which they are investing and the returns they are getting



15.4 CONSUMERS WILLINGNESS TO RECOMMEND PNB TO

OTHERS

TABLE 15.4

CONSUMERS WILLINGNESS TO RECOMMEND PNB TO OTHERS

SL. No. RESPONSES NUMBER OF

RESPONDENTS

PERCENTAGE OF

RESPONDENTS

1 Recommended 93 93%

2 Not recommended 07 07%

Total 100 100

Graph - 15.4

Classification based on the willingness to recommend PNB branch services to other banks



Analysis: From this table it can be noted that the majority of consumers (93%) would like to

recommend their bank services to others and only 07% of consumers would not like to

recommend it to others.

Interpretation: Since the competition has increased in the field of benefits and service of

banking. So customers are getting good service, so that they are willing to recommend their bank

services to others.



15.5 SATISFACTION OF RESPONDENTS WITH SERVICES OFFERED

BY PNB BRANCH

TABLE 15.5

SATISFACTION OF RESPONDENTS WITH SERVICES OFFERED BY PNB

BRANCH

SL. No. RESPONSE NUMBER OF

RESPONDENTS

PERCENTAGE OF

RESPONDENTS

1 Satisfied 88 88%

2 Not Satisfied 12 12%



Total 100 100%

Graph - 15.5

Classification based on satisfaction level of respondents

Analysis: From the above table it could be inferred that 88% of the consumers are satisfied with

the service and quality of products of their bank. Only 12% of consumers are not satisfied.

Interpretation: Most of the respondents are satisfied with the service offered by PNB. Presently

the bank offers varieties of services and the customers are getting a good rate of return from their

deposits. Customers are getting good service from the bank.



Chapter 16 BANKING OPERATIONS IN BRANCH OFFICES

16.1 OPENING OF SAVING ACCOUNT BY INDIVIDUAL

Types of Deposit Accounts:

While various deposit products offered by the Bank are assigned different names. The deposit

products can be categorized broadly into the following types. Definition of major deposits

schemes are as under: -

i) “Demand deposits” means a deposit received by the Bank which is withdraw able on demand;

ii) “Savings deposits” means a form of demand deposit which is subject to restrictions as to the



number of withdrawals as also the amounts of withdrawals permitted by the Bank during any

specified period;

iii) “Term deposit” means a deposit received by the Bank for a fixed period withdraw able only

after the expiry of the fixed period and include deposits such as Recurring / Double Benefit

Deposits / Short Deposits / Fixed Deposits /Monthly Income Certificate /Quarterly Income

Certificate etc.

iv) Notice Deposit means term deposit for specific period but withdraw able on giving at least

one complete banking day’s notice;

v) “Current Account” means a form of demand deposit wherefrom withdrawals are allowed any

number of times depending upon the balance in the account or up to a particular agreed amount

and will also include other deposit accounts which are neither Savings Deposit nor Term Deposit;

Account Opening and Operation

A) The Bank before opening any deposit account will carry out due diligence as required under

“Know Your Customer” (KYC) guidelines issued by RBI and or such other norms or procedures

adopted by the Bank. If the decision to open an account of a prospective depositor requires

clearance at a higher level, reasons for any delay in opening of the account will be informed to

him and the final decision of the Bank will be conveyed at the earliest to him.

B) The account opening forms and other material would be provided to the prospective depositor

by the Bank. The same will contain details of information to be furnished and documents to be

produced for verification and or for record, it is expected of the Bank official opening the account,

to explain the procedural formalities and provide necessary clarifications sought by the

prospective depositor when he approaches for opening a deposit account.



C) For deposit products like Savings Bank Account and Current Deposit Account, the Bank will

normally stipulate certain minimum balances to be maintained as part of terms and conditions

governing operation of such accounts. Failure to maintain minimum balance in the account will

attract levy of charges as specified by the Bank from time to time. For Saving Bank Account the

Bank may also place restrictions on number of transactions, cash withdrawals, etc., for given

period. Similarly, the Bank may specify charges for issue of cheques books, additional statement

of accounts, duplicate pass book, folio charges, etc. All such details, regarding terms and

conditions for operation of the accounts and schedule of charges for various services provided will

be communicated to the prospective depositor while opening the account.

D) Savings Bank Accounts can be opened for eligible person / persons and certain organizations /

agencies (as advised by Reserve Bank of India (RBI) from time to time)



Procedural Chart for new account opening:-



Types of Saving A/C

• General saving a/c

• NRE/ NRO a/c

• Pension a/c

• Salary a/c

• Total freedom salary a/c

• Mitra a/c

• Student a/c

Account Opening Form

To simplify the existing procedure and to eliminate multiplicity of filling up of various AOFs for

Savings Fund, Current Account & Term Deposit accounts and to adhere to the instructions of the

Reserve Bank of India on due diligence in implementation of KYC policy and customer

identification norms, a common Account Opening Form for resident individual (Single & Joint)

Account-PNB-1057 for branches other than CBB has been prescribed.

For Centralized Banking Branches (CBB) separate form PNB-1084 has been prescribed in place

of PNB-1057. All CB branches shall use this form for opening new accounts. The new form

(PNB-1084) also contains provisions for ‘Personal Information’ of the account-holder to establish

his/her identity and monitor transactions in the account.

While feeding data of new accounts, the CTO should enter all the information mentioned in the

AOF and the particulars for generating customer ID.



The authorized officer/Supervisor will verify the same. The authorized official should ensure

completeness of personal information about the account holder and should ensure that all columns

of AOF are filled in properly. A print out of this data should be taken out and preserved after

verification and authentication by the officer.

ACCOUNT OPENING IN CBB ENVIRONMENT

The various controls required in the centralized banking branches (CBB) environment are as

under:

1) CUSTOMER ID NUMBER

All the customers shall be identified by a unique customer ID number under the CBB

environment. In Finacle, when a new account for customer is opened, the system gives a

Customer ID. This ID shall be utilized for opening other accounts of the same customer in the

same branch or other CBB branches

Required information about the customer is captured as a part of customer ID creation. The

customer detail is used for MIS purpose.

Branch should ensure that only one “customer ID” is assigned to a customer for all his accounts.

This reduces the repetitive entry of information to be entered while opening multiple accounts for

the same customer.

2) OBTENTION OF PHOTOGRAPHS



In all new deposit accounts, two recent photographs of the applicant are to be obtained and affixed

on the relative A.O.F. and Specimen Signature Slip (SSS). The photographs so affixed should also

be attested by the account opening authority under his/her full signature. In all subsequent deposit

accounts opened by the depositor, no fresh photograph is to be obtained and a reference of the

existing account (wherein the photographs are available) is only to be made in the new AOF.

Further, while attesting the photographs as above, the concerned officer should ensure

that;

i) Both the photographs submitted by the prospective customer are identical.

ii) The prospective customer also puts his/her signature/thumb impression on the

photographs in such a way that it partly lies on the photograph and partly on the

AOF / SSS.

iii) The photographs must be attested by the Incumbent In charge or other officer of

the branch, authorized to open the accounts, by using a sign-pen/gel-pen. The

signature of the attesting official should appear partly on the photograph and partly

on the AOF / SSS, mentioning his/her GBPA number and date and rubber stamp

bearing the branch name be affixed below the signature.

3) SPECIMEN SIGNATURES

AOF shall be verified & preserved manually.

4) SIGNATURE SCANNING, STORAGE & RETRIEVAL SYSTEM

i) Scanning should be done on daily basis for new accounts

ii) The authorized officer will verify the signatures on line and ensure scanning of

signatures of all accounts. Every deletion and modification should be verified by

authorized officer.

iii) Signature should be scanned as per Customer ID



iv) Scanning of signatures should be restricted to System Administrator/ authorized

officer. The scanned signatures should also be authorized in the system by an

authorized officer other than System Administrator.

v) More than one signature of the customer should be captured from the four

specimen signatures given on the signature slip.

vi) Scanned signatures should be very clear.

vii) Description for the signature field should be used for noting down any specific

instructions, e.g. “these signatures are valid for amount below ten lacs”, joint

signatures or any two etc.

viii) Irrelevant areas should not be scanned.

ix) Inoperative account signatures shall be classified separately and access to such

signatures would be controlled. The general user will not be able to see the

signatures of inoperative accounts. The right to view signature of inoperative

account is restricted to authorized officer. The transactions relating to inoperative

accounts should be in accordance with existing guidelines of the bank.

5) VIEWING OF SIGNATURE

The signatures scanned as per Customer ID can be viewed from any account opened under any

scheme for that particular Customer ID by entering the account number.

6) INTRODUCTION TO A/C

Accounts are normally not to be opened without obtaining proper introduction of an existing

account holder of the Bank or a respectable member of local community known to the

Bank. It is to be ensured that the account of the introducer is at least one year old and

conduct thereof has been satisfactory.

Introduction is a mandatory requirement. It should be treated as a substantive requirement having

real significance and not merely a formality. If the customer who wants to open suppose a fixed



deposit account, is already having an account viz. SF, CA, C/C, OD then this fact must be noted in

the AOF with details of the said account and as he/she has already been introduced while opening

the earlier account, fresh introduction is not required.

As far as possible, introducer should personally come and introduce the account and in cases

where it is not possible, the branch should send a letter of thanks (as per annexure-I) by

Registered Post to the introducer immediately along with self addressed stamped envelope and

obtain his confirmation in writing. Implication of introduction should be fully explained to the

introducer.

However, if the prospective account holder is not in a position to offer introduction of an existing

account holder / respectable member of local community known to the Bank, his

personal documents, such as Passport, Postal identification, Pay Books, Identification

Cards of Armed Forces, Police and Government may be accepted for the purpose of

introduction in all deposit accounts provided the account opening authority is fully

satisfied about the genuineness of such document.

7) VERIFICATION OF ADDRESS

Independent verification of address in all the accounts is an integral part of the procedure for

opening an account and this is required as an additional precaution and not as a substitute of

introduction. The independent verification of Address may be done from ANY ONE of the

following documents and keeping a copy of the document so verified, duly attested by the officer

opening the account, along with the AOF: -

i. Ration Card

ii. Passport



iii. Photo Identity Cards issued by the Election Commission

iv. Driving License

v. Identity Cards issued by Armed Forces, Police Department, Government Department

and any other institute of repute

vi. Copy of the electricity bill or telephone bill showing residential address

vii. Any document or communication issued by an authority of Central Govt., State Govt.

or Local Bodies showing residential address

viii. Any other documentary evidence in support of the address given in the declaration.

A letter (as per annexure-I) is to be sent by registered post at the cost of the customer, both to the

customer and the introducer (if the latter has not come personally to the branch for giving

introduction) to seek their confirmation for having opened the account with the bank and given

introduction respectively. This is also to be recorded in the account opening form. Cheque Book is

to be issued only after receipt of such confirmation from the depositor and / or introducer, as the

case may be. A letter of authority (as per annexure-II), for debiting postage expenses, in this

connection, should also be obtained from the customer.

In case of accounts to be opened in the name of firms, if possible enquiry on telephone is made by

a reference to the telephone directory so as to ensure that the persons representing the firms are

genuine. To the extent possible, the AOFs etc. should be completed and signed by all concerned,

including introducer, in the Bank premises. The Communication confirming any change in

address of the depositor should be sent both to his old as well as to his new address by registered

post. Cheque Book is to be issued only after receipt of such confirmation from the depositor and /

or introducer, as the case may be.

Pan / Gir Number or Form 60 / 61

The prospective account holder is required to mention his / her PAN / GIR no. in the Account

Opening Form. The officer opening the account should verify the same from the original and put

his signature having verified the original. In case the customer is not having the same, Form No.

60 / 61, as applicable, is required to be obtained.



After the saving a/c is opened successfully the pass book is issued next day.

The whole process of opening a new account takes 15-20 minutes if all the details are filled

properly and the documents required are provided.

THE NUMBER OF A/C OPENED IN THE LAST 3 MONTHS ARE (01 MAY 2010 – 30 JUNE 2010)

General a/c – 142

Mitra a/c – 60

Student a/c – 81

NRO a/c – 2

Salary a/c – 92

Total a/c opened = 377



16.2 CASH DEPOSITWhile receiving cash for credit to customers’ accounts, the staff concerned will ensure that the

required particulars (e.g. the nature and number of the accounts and the names and addresses of

the account holders etc.), are duly mentioned in the relative pay-in-slips, which should be signed

by the depositor. In case of doubt the slip should be sent to the CTO for verification and utmost

care should be taken to ensure that the customer is not unduly inconvenienced.

If deposits are tendered by a person other than the account holder, he must, in addition to signing

the pay-in-slip, give his full address. This applies equally to casual customers tendering moneys

for issuance of drafts and/or remittances etc.

Where cash remittances are received by post or otherwise under cover of a letter from a customer,

the official receiving the cash will ensure that the cash is deposited in the appropriate account and

that the authority is recorded on the voucher and authenticated by him.

After the cash has been counted and verified, the receiving cashier will (i) sign in full under the

cash receipt stamp affixed on both parts of the pay-in-slip, (ii) write the amount received by him

on both parts of the relative pay-in-slip in such a way as to prevent subsequent additions and

alterations therein and (iii) after entering the amount received in respect of each pay-in-slip

separately in his long book, will pass on the pay-in-slip/voucher to the CTO/clerk concerned for

entry in the cash book/ computer.

Counterfoils and voucher portions of pay-in-slips of receipts in respect of cash must be signed in

full by receiving cashier before these are released from the cash book. The counterfoils will,

thereafter, be delivered to the depositors, if the amount of deposits is up to and including Rs.10,

000/-, whilst the voucher portion will be passed on to the respective sections for necessary action.



It is important that no receipt or counterfoil relating to cash should be released until it has been

signed in full by a checking official except that counterfoils/receipts for cash deposits up to and

including Rs.10000/- will be delivered to depositors direct, duly signed by the receiving cashier

only. Both the receiving cashier and a checking official should sign cash receipts above

Rs.10000/-.

The user shall enter the voucher to credit the customer account and the system shall generate a

transaction ID (tran-id). The user shall note down the tran-id on the credit voucher and pass on

the voucher to authorized official for passing verification.

The verifying official shall enter the tran-id noted on the credit voucher at the relevant menu and

authenticate the transaction after verifying the correctness of the particulars of the transaction.

CASH BOOK

All cash transactions must be entered in the cash book (Form No.PNB-72) after the cash has been

received or paid by the cashier. The amount of each transaction and the name of the account to

which it relates will be entered in the appropriate columns of the cash book, in which each entry

will be checked and initialed by a checking official.

In no circumstances should any action be taken on a cash receipt voucher unless it has been signed

by a checking official in token of having checked the entry in the cashbook or cash book-cum-

realization long book.

To facilitate expeditious retirement of inward bills and demand drafts and the issue of drafts etc.,

cash receipt vouchers pertaining thereto may be sent by the cashier direct to the clerk concerned,

who will record them in 'cash book-cum-realization long book' (Form No.PNB-190) maintained

for the purpose. Entries made in these long books and their totals will be checked by the officials



in charge of the respective sections. At the close of business each day, the total of cash entries

recorded in the aforesaid long books along with the number of vouchers will be carried over to

the main cash book by the cash book writer, under authentication of in charge of cash book.

The CTO/ cashier, before making payment, will satisfy him from the chart of powers provided to

him, that the cheque, draft or debit voucher, etc. has been passed for payment by a duly authorized

official. As a measure of safety, the paying cashier should also enquire the name of the person

receiving payment and the amount of the cheque, draft or cash order etc. and if found in order,

obtain the latter's signatures on the back of the document.

The CTOs use tokens for payments made by him within the prescribed limits.

All tokens will be engraved with the name of the bank’s office and entered in the tokens in use

register (Form No.PNB-135), missing tokens being recorded in red ink. Each morning the cashier

will distribute the tokens to the staff concerned against their receipt according to the lots

determined by the incumbent in charge (or officer in charge of cash). In the evening, all tokens

will be collected by the cashier and checked by the incumbent in charge or the officer in charge of

cash under his initials in the relative register and will be kept with the cash in hand. Any token

which is found missing must be reported, as soon as the loss is discovered, to the incumbent in

charge who will (i) take steps to guard against its misuse, (ii) ensure that the necessary entry is

made in the tokens in use register and (iii) will institute enquiries with a view to its recovery.

Each paying cashier and CTO will keep a list of the numbers of the missing tokens to guard

against their misuse.

At the end of the day, the CTO concerned will tally both sides of the cashbook and add the

opening and closing cash balances through the system to the receipt and payment sides

respectively ensuring that the grand total on the receipt side agree with the grand total on the

payment side. The total number of vouchers will be tallied entered on either side of the cashbook

and the balance in hand will be expressed both in words and figures. The officer in charge of

cash, while signing the cash book, will ensure that the closing balance of cash shown in the cash

book agree with the balance shown by the cashier in the daily cash balance book (Form No.PNB-

107). The cash book will be signed by the Head cashier/Cash Officer, Cashier, official in charge



of cash book, Sr.Manager/ Manager and the officer in charge of cash. Cash payment vouchers

will, thereafter, be handed over to the official in charge of daybook section against his receipt in

the cashbook.

The numbers of receipt per day are around 200.



16.3 CASH PAYMENT

The CTO shall receive the payment instrument, verify it and post the transaction in the relevant

menu option. He shall note down the Tran-id on the debit instrument and pass the instrument on

to the authorized official for passing the entry. The authorized official shall verify the instrument,

pass it and then verify the transaction in the system.

Long Book/Transaction Log

The teller will generate the Cash payment long book having record of all payments made by him

during the day. The concerned authorized officer shall compare entries in the long book with the

payment vouchers and confirm (by putting his initials against individual entry that all payments

made by the teller have been recorded properly. At the end of the day, the teller shall tally his

cash balance in hand, prepare denomination wise summary of currency notes on the long book

and hand over the cash to the cashier/head cashier against his receipt on the long book.

TRANSFER JOURNAL

All transfer vouchers will be recorded in the transfer journal (Form No.PNB-70), where it is not

generated on computers, with the object of exercising control on such vouchers and balancing of

transfer transactions every day. This will be ensured by the concerned section in charge, which

will also satisfy him that transfer vouchers are branded with the rubber stamp of the section.

Entries made in a transfer journal will be serially numbered generated by the system and the

number indicated on the relative voucher. The contra entry number(s) will be indicated in the

cage provided for on the voucher for the purpose. The checking official, while releasing vouchers

from the transfer journal, will initial in the appropriate column on the voucher in token of having

verified that the entries are correctly recorded and that the necessary formalities have been

observed. He will also initial in the cage bearing contra entry number.



The official signing the debit voucher shall also sign on the corresponding credit vouchers at the

space earmarked for the purpose, that is to say, under the column "Debit Voucher Passed” in

token of his having passed the corresponding debits. While doing so, the official concerned will

satisfy himself that the vouchers are initialed as having been entered in and released from the

transfer journal.

All day end reports including Cash Book/Long Book /Transfer journals/Day Book /Exception

Report etc. have been generated on day to day basis during implementation phase and checked.

At the close of the day, all columns of the transfer journal will be totaled, ruled off, tallied and the

totals being checked and signed by the officials’ in charge of the respective section.

At the end of the day the totals of all the transfer journals together with the total number of

vouchers will be carried into the transfer analysis register (which will be balanced by adding, in

the appropriate columns, total of the cash book clearing sheets and opening and closing cash

balances. This will be checked and signed by a checking official.

WITHDRAWAL

There is no restriction on number of withdrawals. For cheques drawn for a sum of less than Rs.

50/-, prescribed charges (presently Rs. 10/- per such cheque) would be recovered from the

customers.

In the Patel Nagar Branch, the windows differ by the amount of cash payment is to be done. For

the amount less than Rs. 20,000 different counter was there. This window was taken care by the

assistant. For the amount higher than Rs. 20,000, i.e. large payments are handled by the head

cashier.

Regarding the queue management a proper token system was there and the numbers were

displayed on the electronic screen. The number of transactions in a day was around 100.



16.4 ATM MANAGEMENT & MAINTENANCE OPERATION

A Debit Card provides access to ATMs for cash withdrawals, balance enquiries and mini

statement, on-line electronic payment for purchases from your savings / current (individual)

accounts. You can also transfer funds through ATM to your own / other PNB accounts and also

transfer / receive funds to / from any MasterCard or Maestro card holder (Debit or Credit card) of

other selected banks.

At present following types of Debit card Bank is issuing:

i. PIN based Debit Card (Maestro card)

ii. Signature based Classic Debit card (Master card)

iii. Signature based Gold Debit card with photo (Master card)

PIN is a unique 4 digit number that allows you to access your account through Debit Card at

ATMs.

Debit card can be obtained from any CBS branch of PNB (irrespective of your account

maintaining branch) by filling a Debit Card application form. In case of Non-Personalized card

(without name) the card would be issued instantly. In case of personalized card (with name) the

card would be issued in 7-8 working days. You can also get a Debit Card through PNB 24 Hour

Call Centre by making a call at 1800 180 2222 (Toll free) and 0124-2340000 (accessible from

mobile also), in which case the deactivated card would be delivered at your address directly

within 7-10 working days. However you can send the duly filled application from along with

proof of identity to HO for activation of the card.

If one do not received personalized card even after 10 days of giving the request at the branch /

call centre you should contact the Branch / call centre to enquire about the status of your request.

In case you do not get a satisfactory reply, please contact Debit Card Cell at 011 – 23710021 or

through email at [email protected]

If PIN is not legible you should contact the card issuing branch and request for a duplicate PIN.

You can collect the Duplicate PIN from the branch after 7 working days.



Validity of PNB Debit Card: PIN based Maestro Debit card has no expiry date. However

Signature based Debit Card is valid for 7 years from the date of issue.

For PIN Based Maestro Debit card and Signature Based classic Debit card the daily cash

withdrawal limit at ATM and shopping limit at merchant establishments are Rs. 25,000 each.

However per transaction limit at ATM is Rs. 15,000 only.

For Signature Based Gold Debit Card, the daily cash withdrawal limit at ATM and shopping limit

at merchant establishments are Rs. 40,000 and Rs. 60,000/- respectively. However per transaction

limit at ATM is Rs. 15,000 only.

If Debit card is lost or misplaced: You should immediately contact our below given no. of call

centre to get the card hot listed / blocked. 1800 180 2222 (Toll Free) Contact Numbers 0124 –

2340000 (Accessible from Mobile also.In case you do not get the Call Centre no, contact our

helpdesk no of ATM Switch at 011 -23765143, 011 - 23323672.

Fee for the issuance of Debit card: PNB Debit Card is issued free of cost. However a nominal

fee of Rs. 100 per Year will be levied after one year of Card issuance every year.

ELIGIBILITY

Eligible for PNB Debit card

•All existing Account holder who are maintaining minimum balance and who regularly operate

their account are eligible for the issuance of Debit Card.

• New customers, who open their accounts after introduction, are also eligible for the issue of

Debit Cards at the time of opening the account itself.

• Debit Card facility shall be extended to the individual customers only, having Savings Bank

Account and Current Account.



• Debit cards shall also be issued to individual customers having overdraft facility, which is in the

nature of a personal loan. This shall mean and include personal loans extended to individual

customers in the form of a regular overdraft limit such as clean overdraft facility or overdraft

facility against FD/NSCs/LICs etc. where operations through cheques are permitted.

• Debit Card can be issued in Joint Accounts with “Either or Survivor”/”Former or Survivor”

mandate. In “Either or Survivor” accounts, cards can be issued to both the account holders

whereas in “Former or Survivor” accounts card can be issued only to the Former. In joint

Accounts where account has to be jointly operated Debit Card shall not be issued unless mandate

for operation of account is changed to “Either or Survivor” or “Former or Survivor” basis.

ATM Maintenance: Now for the ATM maintenance a single channel is made. The complaints

can now be lodged or resolution can be done by ‘SPARSH’ call centre. Branches if approached by

customers, in addition to using call centre service, have also been given the option to use the

centralized mail- id, to lodge the complaint & to get the docket-id from ‘SPARSH’.

Now reconciliation & complaint resolution system has been put into place. Complaints resolution

status updated on ‘SPARSH’ is now being done on day to day basis, besides sending SMS to

customer’s mobile number if available.



16.5 CUSTOMER FACILITIES AND CONVENIENCES

Physical facilities:

A proper sitting place was not available. There were hardly one or two seats for the customers.

They need to work on the seating arrangements for the customers. For the disposal of the cheques

the forms were kept properly on the table and proper instructions were written as to how to

proceed. Both the cheque box and the electronic machine were present. There were no proper

instructions and the sign boards present on the different counters.

Punctuality & staff cordiality:

The staff members were highly motivated toward the work. They strictly followed the time line.

They are very helpful and gave all kinds of assistance to the customers. They were punctual and

most of the time busy doing the work. The functions in the branch start well in time. The lunch

hours were not too long and they come back to their seat on time.

Routine banking operation:

The indicators were bilingual. They were written both in Hindi and English. The most of the staff

members was not wearing any name plates. But after the notice came for wearing the name plates

everyone was made sure that they wear the name plates. The queue management system was

missing in this branch. But due to large number of people it gets break more often. The pass book

printer was in the working condition and was performing nicely



Chapter 17 CONCLUSIONS AND RECOMMENDATIONS

17.1SUGGESTIONS & RECOMMENDATIONS

With regard to banking products and services, consumers respond at different rates,

depending on the consumer’s characteristics. Hence PNB should try to bring their new

product and services to the attention of potential early adopters.

Due to the intense competition in the financial market, PNB should adopt better strategies

to attract more customers.

Return on investment company reputation and premium outflow are most preferred

attributes that are expected by the respondents. Hence greater focus should be given to

these attributes.

PNB should adopt effective promotional strategies to increase the awareness level among

the consumers.

PNB should ask for their consumer feedback to know whether the consumers are really

satisfied or dissatisfied with the service and product of the bank. If they are dissatisfied,

then the reasons for dissatisfaction should be found out and should be corrected in future.

The PNB brand name has earned a lot of goodwill and enjoys high brand equity. As there

is intense competition, PNB should work hard to maintain its position and offer better

service and products to consumers.



The bank should try to increase the Brand image through performance and service then,

only the customers will be satisfied.

Majority of the people find banking important in their life, so PNB should employ the

strategies to convert the want in to need which will enrich their business.



17.2LIMITATIONS OF THE STUDY

Although the study was carried out with extreme enthusiasm and careful planning there are

several limitations, which handicapped the research viz,

1. Time Constraints:

The time stipulated for the project to be completed is less and thus there are chances that some

information might have been left out, however due care is taken to include all the relevant

information needed.

2. Sample size:

Due to time constraints the sample size was relatively small and would definitely have been more

representative if I had collected information from more respondents.

3. Accuracy:

It is difficult to know if all the respondents gave accurate information; some respondents tend to

give misleading information.

4. It was difficult to find respondents as they were busy in their schedule, and collection of data

was very difficult. Therefore, the study had to be carried out based on the availability of

respondents.



17.3CONCLUSION:

Since the opening up of the banking sector, private banks are in the fray each one trying to cover

more market share than the other.

Yet, PNB is far behind SBI. PNB must also be alert what with Private Banks (ICICI, HDFC)

breathing down its neck.

I am sure the bank will find my findings relevant and I sincerely hope it uses my suggestions

enlisted, which I hope will take them miles ahead of competition.

In short, I would like to say that the very act of the concerned management at PNB in giving me

the job of critically examining consumer satisfaction towards financial products and services of

the company is a step in their continual mission of making all round improvements as a means of

progress.

I am sure the bank has a very bright future to look forward to and will be a trailblazer in its own

right


49449249 Report Credit Appraisal PNB

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