CREDIT ANALYSIS AND RISK RATING FOR MSME

For Vijaya Bank, Coimbatore

A Report on Project Work

In

Masters of Business Administration

By

G Pradeep Kannan

215112073

DEPARTMENT OF MANAGEMENT STUDIES

NATIONAL INSTITUTE OF TECHNOLOGY

TIRUCHIRAPPALLI – 620015

SEPTEMBER 2013

DECLARATION

This is to certify that the Summer Project Report titled “CREDIT ANALYSIS AND RISK

RATING FOR MSME” is a bonafide record of the work

done by,

G Pradeep Kannan

(215112073)

studying Master of Business Administration (MBA) in the Department of Management

Studies, National Institute of Technology, Tiruchirappalli, during the academic year 2012-14.

Dr. Senthil Arasu Dr.N. Thamaraiselvan

Internal Guide Head of the Department

Departmental of Management Studies Departmental of Management

Studies

National Institute of Technology National Institute of Technology

Tiruchirappalli - 15 Tiruchirappalli – 15

Project Viva-Voce held on …………………..

Internal Examiner External Examiner

ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me in

the successful completion of my project.

I would first like to extend my gratitude to Ms. S. Anitha (Relationship Manager),

of Vijaya Bank, who was kind enough to be the guide for my project and was very helpful

and encouraging.

My deepest thanks to Dr. Senthil Arasu, Department of Management Studies,

National Institute of Technology, Trichy for his encouragement and giving his precious time

and support throughout this work without whose help the project would not have been

completed.

I also thank Dr. N. Thamaraiselvan (Head of Department), National Institute of

Technology, Trichy who has been a constant source of motivation and support.

G Pradeep Kannan

Introduction

The financial crises during 2008-09 have become the main cause for recession which was

started in 2006 from US and was spread across the world. The world economy has been

majorly affected from the crisis. The securities in stock exchange have fallen down

drastically which has become the root cause of bankruptcy of many financial institutions and

individuals. The root cause of the economic and financial crisis is credit default of big

companies and individuals which has badly impacted the world economy. So in the present

scenario analyzing one’s credit worthiness has become very important for any financial

institution before providing any form of credit facility so that such situation doesn’t arise in

near future again.

Evaluation of the credit worthiness of the borrowers is known as Credit Analysis or

Appraisal. In order to understand the credit appraisal system followed by the banks this

project has been conducted. The project has analyzed the credit analysis procedure with

special reference to Vijaya Bank which includes knowing about the different credit facilities

provided by the banks to its customers, how a loan proposal is being made, what are the

formalities that is to be satisfied and most importantly knowing about the various credit

appraisal techniques which are different for each type of credit facility.

The Indian Banking System:

Banking in our country is already witnessing the sea changes as the banking sector seeks new

technology and its applications. The best part is that the benefits are beginning to reach the

masses. Earlier this domain was the preserve of very few organizations. Foreign banks with

heavy investments in technology started giving some “Out of the world” customer services.

But, such services were available only to selected few- the very large account holders. Then

came the liberalization and with it a multitude of private banks, a large segment of the urban

population now requires minimal time and space for its banking needs.

Automated teller machines or popularly known as ATM are the three alphabets that have

changed the concept of banking like nothing before. Instead of tellers handling your own

cash, today there are efficient machines that don’t talk but just dispense cash. Under the

Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled

banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act,

1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of

not less than Rs.5 lakhs and which satisfy RBI that their affairs are carried out in the interest

of their depositors. All commercial banks Indian and Foreign, regional rural banks and state

co-operative banks are Scheduled banks. Non Scheduled banks are those, which have not

been included in the Second Schedule of the RBI Act, 1934.

Structure of Indian Banking Industry

The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a

mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private

sector banks are again split into old banks and new banks.

Reserve Bank of India[Central Bank]

Scheduled Banks

Scheduled Co-operative BanksScheduled Commercial

Banks

Public Sector Banks

Nationalized Banks

SBI & its Associates

Private Sector Banks

Old Private Sector Banks

Foreign Banks

Regional

Rural Banks

Scheduled Urban Co-Operative

Banks

Scheduled State Co-Operative Banks

New Private Sector Banks

Commercial banks and its objectives

A Commercial Bank is a financial institution that borrows money from the public and lends

money to the public for productive purposes. The Indian Banking Regulation Act of 1949

defines the term Banking Company as "Any company which transacts banking business in

India" and the term banking as "Accepting for the purpose of lending all investment of

deposits, of money from the public, repayable on demand or otherwise and withdrawal

by cheque, draft or otherwise".

Commercial banks are the oldest, biggest and fastest growing financial intermediaries in

India. They are also the most important depositories of public savings and the most important

disbursers of finance. Commercial banking in India is a unique banking system, the like of

which exists nowhere in the world. The truth of this statement becomes clear as one studies

the philosophy and approaches that have contributed to the evolution of banking policy,

programs and operations in India.

The banking system in India works under constraints that go with social control and public

ownership. The public ownership of banks has been achieved in three stages: 1995, july 1969

and April, 1980. Not only the public sector banks but also the private sector and foreign

banks are required to meet the targets in respect of sectorial deployment of credit, regional

distribution of branches, and regional credit deposit ratios. The operations of banks have been

determined by lead bank scheme, Differential Rate of interest scheme, Credit authorization

scheme, inventory norms and lending systems prescribed by the authorities, the formulation

of credit plans, and service area approach.

Commercial Banks in India have a special role in India. The privileged role of the banks is

the result of their unique features. The liabilities of Bank are money and therefore they are

important part of the payment mechanism of any country. For a financial system to mobilize

and allocate savings of the country successfully and productively and to facilitate day-to-day

transactions there must be a class of financial institutions that the public views are as safe and

convenient outlets for its savings. The structure and working of the banking system are

integral to a country’s financial stability and economic growth. It has been rightly claimed

that the diversification and development of Indian Economy are in no small measure due to

the active role banks have played financing economic activities of different sectors.

Major objectives of commercial banks

Banks play important role in economic development of a country, like:

Banks mobilise the small savings of the people and make them available for productive

purposes.

Promotes the habit of savings among the people thereby offering attractive rates of

interests on their deposits.

Provides safety and security to the surplus money of the depositors and as well provides a

convenient and economical method of payment.

Banks provide convenient means of transfer of fund from one place to another.

Helps the movement of capital from regions where it is not very useful to regions where it

can be more useful.

Banks advances exposure in trade and commerce, industry and agriculture by knowing

their financial requirements and prospects.

Bank acts as an intermediary between the depositors and the investors. Bank also acts as

mediator between exporter and importer who does foreign trades.

Thus Indian banking has come from a long way from being a sleepy business

institution to a highly pro-active and dynamic entity. This transformation has been largely

brought about by the large dose of liberalization and economic reforms that allowed banks to

explore new business opportunities rather than generating revenues from conventional

streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30

banking units contributing to almost 50% of deposits and 60% of advances.

Importance of banking sector in a growing economy

In the recent times when the service industry is attaining greater importance compared to

manufacturing industry, banking has evolved as a prime sector providing financial services to

growing needs of the economy.

Banking industry has undergone a paradigm shift from providing ordinary banking services

in the past to providing such complicated and crucial services like, merchant banking,

housing finance, bill discounting etc. This sector has become more active with the entry of

new players like private and foreign banks. It has also evolved as a prime builder of the

economy by understanding the needs of the same and encouraging the development by way

of giving loans, providing infrastructure facilities and financing activities for the promotion

of entrepreneurs and other business establishments.

For a fast developing economy like ours, presence of a sound financial system to mobilize

and allocate savings of the public towards productive activities is necessary. Commercial

banks play a crucial role in this regard.

The Banking sector in recent years has incorporated new products in their businesses, which

are helpful for growth. The banks have started to provide fee-based services like, treasury

operations, managing derivatives, options and futures, acting as bankers to the industry

during the public offering, providing consultancy services, acting as an intermediary between

two-business entities etc. At the same time, the banks are reaching out to other end of

customer requirements like, insurance premium payment, tax payment etc. It has changed

itself from transaction type of banking into relationship banking, where you find friendly and

quick service suited to your needs. This is possible with understanding the customer needs

their value to the bank, etc. This is possible with the help of well-organized staff, computer

based network for speedy transactions, products like credit card, debit card, health card, ATM

etc. These are the present trend of services. The customers at present ask for convenience of

banking transactions, like 24 hours banking, where they want to utilize the services whenever

there is a need. The relationship banking plays a major and important role in growth, because

the customers now have enough number of opportunities, and they choose according to their

satisfaction of responses and recognition they get. So the banks have to play cautiously, else

they may lose out the place in the market due to competition, where slightest of opportunities

are captured fast.

Another major role played by banks is in transnational business, transactions and networking.

Many leading Indian banks have spread out their network to other countries, which help in

currency transfer and earn exchange over it.

These banks play a major role in commercial import and export business, between parties of

two countries. This foreign presence also helps in bringing in the international standards of

operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to

enter the Indian market and establish their business. This has helped large amount of foreign

capital inflow & increase our Foreign exchange reserve.

Another emerging change happening all over the banking industry is consolidation through

mergers and acquisitions. This helps the banks in strengthening their empire and expanding

their network of business in terms of volume and effectiveness.

Emerging scenario in the banking sector

The Indian banking system has passed through three distinct phases from the time of

inception. The first was being the era of character banking, where you were recognized as a

credible depositor or borrower of the system. This era come to an end in the sixties. The

second phase was the social banking. Nowhere in the democratic developed world, was

banking or the service industry nationalized. But this was practiced in India. Those were the

days when bankers has no clue whatsoever as to how to determine the scale of finance to

industry. The third era of banking which is in existence today is called the era of Prudential

Banking. The main focus of this phase is on prudential norms accepted internationally.

Nationalisation-

The next significant milestone in Indian Banking happened in late 1960s when the then Indira

Gandhi government nationalized on 19 th July 1949, 14 major commercial Indian banks

followed by nationalisation of 6 more commercial Indian banks in 1980.

The stated reason for the nationalisation was more control of credit delivery. After this, until

1990s, the nationalised banks grew at a leisurely pace of around 4% also called as the Hindu

growth of the Indian economy.After the amalgamation of New Bank of India with Punjab

National Bank, currently there are 19 nationalised banks in India.

Liberalization-

In the early 1990’s the then Narasimha rao government embarked a policy of

liberalization and gave licenses to a small number of private banks, which came to be known

as New generation tech-savvy banks, which included banks like ICICI and HDFC. This move

along with the rapid growth of the economy of India, kick started the banking sector in India,

which has seen rapid growth with strong contribution from all the sectors of banks, namely

Government banks, Private Banks and Foreign banks. However there had been a few hiccups

for these new banks with many either being taken over like Global Trust Bank while others

like Centurion Bank have found the going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given

voting rights which could exceed the present cap of 10%, at present it has gone up to 49%

with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were

used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new

wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.

All this led to the retail boom in India. People not just demanded more from their banks but

also received more.

Current scenario-

Currently (2013), overall, banking in India is considered as fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a challenge for the

private sector and foreign banks. Even in terms of quality of assets and capital adequacy,

Indian banks are considered to have clean, strong and transparent balance sheets-as compared

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-without any stated 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. M&As, takeovers,

asset sales and much more action (as it is unravelling in China) will happen on this front in

India.

Procedure for providing Bank Credit

Banks offers different types of credit facilities to the eligible borrowers. For this, there are

several procedures, controls and guidelines laid out. Credit Analysis, Sanctions & Approvals,

Monitoring and Asset Recovery Management comprise the entire gamut of activities in the

lending process of a bank which are clearly shown as below:

From the above chart we can see that Credit Analysis is the core and the basic function of a

bank before providing loan to any person/company, etc. It is the most important aspect of the

lending procedure and therefore it is discussed in detail as below.

Monitoring & Asset Recovery Management

Sanctions & Approvals

Credit Analysis

Recent policy developments regarding Bank Credit

Bank lending was done for a long time by assessing the working capital needs based on the

concept of MPBF (maximum permissible bank finance). This practice has been withdrawn

with the effect from April 15th 1997 in the sense that the date, banks have been left free to

choose their own method (from the method such as turnover, cash budget, present MPBF, or

any other theory) of assessing working Capital requirement of the borrowers.

The cash credit system has been the bane, yet it has exhibited a remarkable strength of

survival all these years. In spite of many efforts which were direct in nature, only a slow

progress has been made to reduce its importance and increase bill financing. Therefore a

concrete and direct policy step was taken on April 21, 1995 which made it mandatory for

banks, consortia, syndicates to restrict cash credit components to the prescribed limit, the

balance being given in the form of a short term loan, which would be a demand loan for a

maximum period of one year, or in case of seasonal industries, for six months. The interest

rates on the cash credit and loan components are to be fixed in accordance with the prime

lending rates fixed by the banks. This “loan system” was first made applicable to the

borrowers with an MPBF of Rs 20 crore and above; and in their case, the ratio of cash credit

(loan) to MPBF was progressively reduced(increased) from 75 (25) per cent in April 1995 , to

60 (40) percent in September 1995, 40 (60) per cent in April 1996 , and 20 (80) percent in

April 1997. With the withdrawal of instructions about the MPBF in April 1997 , the

prescribed cash credit and loan components came to be related to the working capital limit

arrived in banks as per the method of their choice.

With effect from September 3, 1997, the RBI has permitted banks to raise their existing

exposure limit to a business group from 50% to 60%; the additional 10% limit being

exclusively meant for investment in infrastructure projects.

The term lending by banks also has subject to the limits fixed by RBI. In 1993, this limit was

raised from Rs 10 crore to Rs 50 crore in case of a loan for a single project by a single bank,

and from Rs 150 crore to Rs 200 crore for a single project by all the banks. The latter limit

was subsequently raised to Rs 500 crore in the case of general projects and Rs 1000 crore for

power projects. From September3, 1997 these caps on term lending by banks were removed

subject to their compliance with the prudential exposure norms.

The banks can invest in and underwrite shares and debentures of corporate bodies. At present,

they can invest five percent of their incremental deposits in equities of companies including

other banks. Their investment in shares/ Bonds of DFHI, Securities trading Corporation of

India (STCI), all Indian financial institutions and bonds (debentures) and preference shares of

the companies are excluded from this ceiling of five per cent with affect from April 1997 .

From the same date banks could extend loans within this ceiling to the corporate against

shares held by them. They could also offer overdraft facilities to stock brokers registered with

help of SEBI against shares and debentures held by them for nine months without change of

ownership.

Changing phase of bank credit-

A study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank,

was constituted by the RBI in July 1974 with eminent personalities drawn from leading

banks, financial institutions and a wide cross-section of the industry with a view to study the

entire gamut of Bank's finance for working capital and suggest ways for optimum utilization

of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank

credit. Most banks in India even today continue to look at the needs of the corporate in the

light of methodology recommended by the Group. The report of this group is widely known

as Tandon Committee report.

The weaknesses in the Cash Credit system have persisted with the non-implementation of one

of the crucial recommendations of the Committee. In the background of credit expansion seen

in 1977-79 and its ill effects on the economy, RBI appointed a working group to study and

suggest-

i) Modifications in the Cash Credit system to make it amenable to better management of

funds by the Bankers and

ii) Alternate type of credit facilities to ensure better credit discipline and co relation between

credit and production. The Group was headed by Sh. K.B. Chore of RBI and was named

Chore Committee.

Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted the job of

looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of

Tandon & Chore Committee recommendations. His report is applicable to units with credit

requirements of less than Rs.50 lacs.

The recommendations made by Tandon Committee and reinforced by Chore Committee

were implemented in all Banks and Bank Credit became much more organized. However, the

recommendations were perceived as too strict by the industry and there has been a continuous

clamor from the Industry for movement from mandatory control to a voluntary market related

restraint. With recent liberalization of economy and reforms in the financial sector, RBI has

given the freedom to the Banks to work out their own norms for inventory and the earlier

norms are now to be taken as guidelines and not a mandate. In fact, beginning with the slack

season credit policy of 1997-98, RBI has also given full freedom to all the Banks to devise

their own method of assessing the short term credit requirements of their clients and grant

lines of credit accordingly. Most banks, however, continue to be guided by the principles

enunciated in Tandon Committee report.

Trends of Bank Credit in India

The face of Indian banking has changed radically in the last decade. A perusal of the Basic

Statistical Returns submitted by banks to the Reserve Bank of India shows that between 1996

and 2005, personal loans have been the fastest growing asset, increasing from 9.3 per cent of

the total bank credit in 1996 to 22.2 per cent in 2005. Of course, this is partly due to the huge

rise in housing loans, which rose from 2.8 per cent of the bank credit to 11 per cent over the

period, but ‘other personal loans’ — comprising loans against fixed deposits, gold loans and

unsecured personal loans — also rose from 6.1 per cent to 10.7 per cent. Other categories

whose share increased were loans to professionals and loans to finance companies. In

contrast, there has been a sharp decline in the share of lendings to industry. Credit to small

scale industries fell from 10.1 per cent of the total in 1996 to 4.1 per cent in 2005.

Reasons for declining trend of bank credit

A major share of the economic growth has been led by the expansion of the service

sector

Capital intensity and investment intensity required for growth in the current economic

context may not be as high as it used to be in the past.

In manufacturing sector more efficient utilization of existing capacities contributed to

the sectoral growth rather rather than any large addition of fresh capacities. The

consequential increase in the demand for credit was also subdued.

Greater and cheaper avenues for credit resulted in a bigger share of disintermediation

being resorted to by large borrowers.

The other trend has been the substantial drop in the share of rural credit, while the share of

metropolitan centres has increased. While bankers say that up gradation of rural centres into

semi-urban could be one reason (the share of semi-urban centres has gone up), it is also true

that the reforms have been urban-centric and have tended to benefit the metros more. The

number of rural bank offices fell from 32,981 in March 1996 to 31,967 by March 2005.

The states have been the main beneficiaries of bank credit are the northern region as it has

increased its share from 18.7 per cent of the total credit in 1996 to 22.2 per cent in 2005. As

it was seen that Delhi’s share went up from 9.5 per cent to 12.1 per cent over the period. This

is not due to food credit, the account of which is maintained in Delhi. Clearly, the national

capital has gained a lot from liberalisation.

Trends for the year 2008-09

The aggregate deposits of scheduled commercial banks have expanded during 2008-09 at a

somewhat slower rate (19.8%) than in 2007-08 (22.4%). Within aggregate deposits demand

deposits have shown an absolute fall (-Rs 4,179 crore) in contrast to the sizeable increase (Rs

94,579 crore or by 22%) in 2007-08,. On the other hand, time deposits have shown an

accelerated increase of 22.6% (or Rs 647,806 crore) as against 21.8% (Rs 512,844 crore) in

the previous year.

In the investment portfolio of banks, the expansion during 2008- 09 at Rs 194,031crore has

been much lower than the expansion of Rs 340,250 crore as increase in net bank credit to

government under monetary data for the same period. This has happened because the latter

has a sizeable amount of RBI credit to government following the increased open market

operations. Finally, there has occurred considerable slowdown in bank credit expansion.

Because of relatively higher procurement of foodgrains, food credit has expanded by Rs

1,812 crore during 2008-09 as against an absolute fall of Rs 2,121 crore in 2007-08. Non-

food credit growth at Rs 406,287 (17.5%) has been slower than in the previous year at Rs

432,846 (23.0%).

About Vijaya Bank

Vijaya Bank is a medium sized nationalized Bank with presence across India. Vijaya

Bank was established by Shri. Attavara Balakrishna Shetty at Bunts Hostel in Mangalore on

October 23, 1931.The objective was to promote banking habits, thrift and entrepreneurship

among the farming community of Dakshina Kannada district in Karnataka State. The bank

became a scheduled bank in 1958. Vijaya Bank steadily grew into a large All India bank,

with nine smaller banks merging with it during 1963-68. The bank was nationalized on April

15, 1980.

Currently, Vijaya Bank employs 12,500 people. The Bank has recently recruited

young workforce to cope up with the changing banking scenario & to compete with the

growing private sector & foreign banks functioning in the country.

The bank has built a network of 1360 branches, 864 centers, 48 Extension Counters

and 866 ATMs as on 31.03.2013, that span all 28 states and 4 union territories in the country.

All branches are functioning on the CBS (Centralized Banking Solution) platform, covering

100% of the Bank's business.

The Bank has chosen Finacle from Infosys as its Centralized Banking Solution (CBS).

In line with prevailing trends, the bank has been focusing on technological upgrades to

operations. It now offers services such as credit cards, merchant banking, hire purchase and

leasing, and electronic remittance services. Vijaya Bank is one among the few banks in the

country to take up principal membership of VISA International and MasterCard International

Credit Analysis means an investigation/assessment done by the financial institutions before

providing any loans & advances/project finance. It checks the commercial, financial &

technical viability of the project proposed its funding pattern & further checks the primary &

collateral security cover available for recovery of such funds.

MSME

Micro, Small and medium-sized enterprises (MSMEs) are the backbone of all

economies and are a key source of economic growth, dynamism and flexibility in advanced

industrialized countries, as well as in emerging and developing economies. MSMEs

constitute the dominant form of business organization, accounting for over 95% and up to

99% of enterprises depending on the country. They are responsible for between 60-70% net

job creations in Developing countries. Small businesses are particularly important for

bringing innovative products or techniques to the market. Credit facility is necessary to help

them set up and expand their operations, develop new products, and invest in new staff or

production facilities. Many small businesses start out as an idea from one or two people, who

invest their own money and probably turn to family and friends for financial help in return for

a share in the business. But if they are successful, there comes a time for all developing

MSMEs when they need new investment to expand or innovate further. That is where they

often run into problems, because they find it much harder than larger businesses to obtain

financing from banks, capital markets or other suppliers of credit.

In India, the enterprises have been classified broadly into two categories:

(i) Manufacturing; and

(ii) Those engaged in providing/rendering of services.

Both categories of enterprises have been further classified into micro, small and medium

enterprises based on their investment in plant and machinery (for manufacturing enterprises)

or on equipment (in case of enterprises providing or rendering services). The present ceiling

on investment to be classified as micro, small or medium enterprises is as under:

Classification Investment Ceiling

Manufacturing Enterprise Service Enterprise

Micro Up to `25 lakh Up to `10 lakh

Small Above `25 lakh and up to `5 crore Above `10 lakh up to `2 crore

Medium Above `5 crore up to `10 crore Above `2 crore up to `5 crore

Brief overview of Credit:

Credit is the provision of resources (such as granting a loan) by one party to another party

where that second party does not reimburse the first party immediately, thereby generating a

debt, and instead arranges either to repay or return those resources (or material(s) of equal

value) at a later date. The first party is called a creditor, also known as a lender, while the

second party is called a debtor, also known as a borrower. A credit is a legal contract where

one party receives resource or wealth from another party and promises to repay him on a

future date along with interest. In simple terms, a credit is an agreement of postponed

payments of goods bought or loan. With the issuance of a credit, a debt is formed.

Credit Analysis/Appraisal is a process to ascertain the risks associated with the extension of

the credit facility. It is generally carried by the financial institutions which are involved in

providing financial funding to its customers. Credit risk is a risk related to non-repayment of

the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility

of the customer in order to mitigate the credit risk. Proper evaluation of the customer is

performed which measures the financial condition and the ability of the customer to repay

back the loan in future. Generally the credit facilities are extended against the security know

as collateral. But even though the loans are backed by the collateral, banks are normally

interested in the actual loan amount to be repaid along with the interest. Thus, the customer's

cash flows are ascertained to ensure the timely payment of principal and the interest.

However the 3 ‘C’ of credit are crucial & relevant to all borrowers/ lending which must be

kept in mind at all times.

Character

Capacity

Collateral

If any one of these are missing in the equation then the lending officer must question the

viability of credit.

There is no guarantee to ensure a loan does not run into problems; however if proper credit

evaluation techniques and monitoring are implemented then naturally the loan loss

probability / problems will be minimized, which should be the objective of every lending

officer.

Brief overview of loans

Credit can be of two types fund base & non-fund base:

FUND based includes:

Working Capital

Term Loan

NON-FUND based includes:

Letter of Credit

Bank Guarantee

This Internship projects deals with the FUND based loans provided by Vijaya Bank and how

the credit analysis process was done for evaluating the customer.

FUND BASED:-

WORKING CAPITAL:-

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

acquire

“Fixed assets” like land, building, plant, machinery, equipment, vehicles, tools etc., & also to

run the business i.e. its day to day operations. Funds required for day to-day working will be

to finance production & sales. For production, funds are needed for purchase of raw

materials/ stores/ fuel, for employment of labour, for power charges etc., for storing finishing

goods till they are sold out & for financing the sales by way of sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital &

working capital. Working capital in this context is the excess of current assets over current

liabilities. The excess of current assets over current liabilities is treated as net working capital

or liquid surplus & represents that portion of the working capital which has been provided

from the long term source. Working capital is defined as the funds required to carry the

required levels of current assets to enable the unit to carry on its operations at the expected

levels uninterruptedly. Working capital requirement of a company can be estimated by

understanding the operating cycle of the company.

Operating cycle/Working Capital Cycle is the average period of time required for a

business to make an initial outlay of cash to produce goods, sell the goods, and receive cash

from customers in exchange for the goods. Any business activity is characterized by a cycle

of operations consisting of purchase of raw materials for cash, converting these into finished

goods & realizing cash by sale of these finished goods. The time that lapses between cash

outlay & cash realization by sale of finished goods & realization of sundry debtors is known

as the length of the operating cycle.

That is, the operating cycle consists of:

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

Conversion process time

Average period for which finished goods are in store &

Average collection period of receivables (Sundry Debtors)

Operating cycle is also called the cash-to-cash cycle & indicates how cash is converted into

raw material, stocks in process, finished goods, bills (receivables) & finally back to cash.

Working capital is the total cash that is circulating in this cycle. Therefore, working capital

can be turned over or redeployed after completing the cycle.

TERM LOAN

1. A term loan is granted for a fixed term of not less than 3 years intended normally for

financing fixed assets acquired with a repayment schedule normally not exceeding 8

years.

2. A term loan is a loan granted for the purpose of capital assets, such as purchase of

land, construction of, buildings, purchase of machinery, modernization, renovation or

rationalization of plant, & repayable from out of the future earning of the enterprise,

in installments, as per a prearranged schedule.

From the above definition, the following differences between a term loan & the

working capital credit afforded by the Bank are apparent:

The purpose of the term loan is for acquisition of capital assets.

The term loan is an advance not repayable on demand but only in installments

ranging over a period of years.

The repayment of term loan is not out of sale proceeds of the goods &

commodities per se, whether given as security or not. The repayment should

come out of the future cash accruals from the activity of the unit.

The security is not the readily saleable goods & commodities but the fixed assets

of the units.

3. It may thus be observed that the scope & operation of the term loans are entirely

different from those of the conventional working capital advances. The Bank’s

commitment is for a long period & the risk involved is greater. An element of risk is

inherent in any type of loan because of the uncertainty of the repayment. Longer the

duration of the credit, greater is the attendant uncertainty of repayment &

consequently the risk involved also becomes greater.

4. However, it may be observed that term loans are not so lacking in liquidity as they

appear to be. These loans are subject to a definite repayment programme unlike short

term loans for working capital (especially the cash credits) which are being renewed

year after year. Term loans would be repaid in a regular way from the anticipated

income of the industry/ trade.

5. These distinctive characteristics of term loans distinguish them from the short term

credit granted by the banks & it becomes necessary therefore, to adopt a different

approach in examining the applications of borrowers for such credit & for appraising

such proposals.

6. The repayment of a term loan depends on the future income of the borrowing unit.

Hence, the primary task of the bank before granting term loans is to assure itself that

the anticipated income from the unit would provide the necessary amount for the

repayment of the loan. This will involve a detailed scrutiny of the scheme, its

financial aspects, economic aspects, technical aspects, a projection of future trends of

outputs & sales & estimates of cost, returns, flow of funds & profits.

7. Appraisal of Term Loans

Appraisal of term loan for, say, an industrial unit is a process comprising several

steps.

There are four broad aspects of appraisal, namely

Technical Feasibility - To determine the suitability of the technology selected

& the adequacy of the technical investigation & design;

Economic Feasibility - To ascertain the extent of profitability of the project &

its sufficiency in relation to the repayment obligations pertaining to term

assistance;

Financial Feasibility - To determine the accuracy of cost estimates, suitability

of the envisaged pattern of financing & general soundness of the capital

structure; &

Managerial Competency – To ascertain that competent men are behind the

project to ensure its successful implementation & efficient management after

commencement of commercial production.

7.1 Technical Feasibility

The examination of this item consists of an assessment of the various requirement of the

actual production process. It is in short a study of the availability, costs, quality &

accessibility of all the goods & services needed.

a) The location of the project is highly relevant to its technical feasibility & hence

special attention will have to be paid to this feature. Projects whose technical

requirements could have been taken care of in one location sometimes fail because

they are established in another place where conditions are less favorable. One

project was located near a river to facilitate easy transportation by barge but lower

water level in certain seasons made essential transportation almost impossible.

Too many projects have become uneconomical because sufficient care has not

been taken in the location of the project, e.g. a woolen scouring & spinning mill

needed large quantities of good water but was located in a place which lacked

ordinary supply of water & the limited water supply available also required

efficient softening treatment. The accessibility to the various resources has

meaning only with reference to location. Inadequate transport facilities or lack of

sufficient power or water for instance, can adversely affect an otherwise sound

industrial project.

b) Size of the plant – One of the most important considerations affecting the

feasibility of a new industrial enterprise is the right size of the plant. The size of

the plant will be such that it will give an economic product which will be

competitive when compared to the alternative product available in the market. A

smaller plant than the optimum size may result in increased production costs &

may not be able to sell its products at competitive prices.

c) Type of technology – An important feature of the feasibility relates to the type of

technology to be adopted for a project. A new technology will have to be fully

examined & tired before it is adopted. It is equally important to avoid adopting

equipment or processes which are absolute or likely to become outdated soon. The

principle underlying the technological selection is that “a developing country

cannot afford to be the first to adopt the new nor yet the last to cast the old aside”.

d) Labour – The labour requirements of a project, need to be assessed with special

care. Though labour in terms of unemployed persons is abundant in the country,

there is shortage of trained personnel. The quality of labour required & the

training facilities made available to the unit will have to be taken into account

e) Technical Report – A technical report using the Bank’s Consultancy Cell, external

consultants, etc., should be obtained with specific comments on the feasibility of

scheme, its profitability, whether machinery proposed to be acquired by the unit

under the scheme will be sufficient for all stages of production, the extent of

competition prevailing, marketability of the products etc., wherever necessary.

7.2 Economic Feasibility

An economic feasibility appraisal has reference to the earning capacity of the project. Since

earnings depend on the volume of sales, it is necessary to determine how much output or the

additional production from an established unit the market is likely to absorb at given prices.

a) A thorough market analysis is one of the most essential parts of project investigation.

This involves getting answers to three questions.

a) How big is the market?

b) How much it is likely to grow?

c) How much of it can the project capture?

The first step in this direction is to consider the current situation, taking account of the total

output of the product concerned & the existing demand for it with a view to establishing

whether there is unsatisfied demand for the product. Care should be taken to see that there is

no idle capacity in the existing industries.

ii) Future – possible future changes in the volume & patterns of supply & demand will have

to be estimated in order to assess the long term prospects of the industry. Forecasting of

demand is a complicated matter but one of the vital importance. It is complicated because a

variety of factors affect the demand for product e.g. technological advances could bring

substitutes into market while changes in tastes & consumer preference might cause sizable

shifts in demand.

iii) Intermediate product – The demand for “Intermediate product” will depend upon the

demand & supply of the ultimate product (e.g. jute bags, paper for printing, parts for

machines, tyres for automobiles). The market analysis in this case should cover the market

for the ultimate product.

7.3 Financial Feasibility

The basis data required for the financial feasibility appraisal can be broadly grouped under

the following heads

i) Cost of the project including working capital

ii) Cost of production & estimates of profitability

iii) Cash flow estimates & sources of finance.

The cash flow estimates will help to decide the disbursal of the term loan. The estimate of

profitability & the breakeven point will enable the banker to draw up the repayment

programme, start-up time etc. The profitability estimates will also give the estimate of the

Debt Service Coverage which is the most important single factor in all the term credit

analysis.

A study of the projected balance sheet of the concern is essential as it is necessary for the

appraisal of a term loan to ensure that the implementation of the proposed scheme.

Break-even point:

In a manufacturing unit, if at a particular level of production, the total manufacturing cost

equals the sales revenue, this point of no profit/ no loss is known as the break-even point.

Break-even point is expressed as a percentage of full capacity. A good project will have

reasonably low break-even point which not be encountered in the projections of future

profitability of the unit.

Debt/ Service Coverage:

The debt service coverage ratio serves as a guide to determining the period of repayment of a

loan. This is calculated by dividing cash accruals in a year by amount of annual obligations

towards term debt. The cash accruals for this purpose should comprise net profit after taxes

with interest, depreciation provision & other non cash expenses added back to it.

Debt Service = Cash accruals

Coverage Ratio Maturing annual obligations

This ratio is valuable, in that it serves as a measure of the repayment capacity of the project/

unit & is, therefore, appropriately included in the cash flow statements. The ratio may vary

from industry to industry but one has to view it with circumspection when it is lower than the

benchmark of 1.75. The repayment programme should be so stipulated that the ratio is

comfortable.

7.4 Managerial Competence

In a dynamic environment, the capacity of an enterprise to forge ahead of its competitors

depends to a large extent, on the relative strength of its management. Hence, an appraisal of

management is the touchstone of term credit analysis.

If there is a change in the administration & managerial set up, the success of the project may

be put to test. The integrity & credit worthiness of the personnel in charge of the management

of the industry as well as their experience in management of industrial concerns should be

examined. In high cost schemes, an idea of the unit’s key personnel may also be necessary.

CREDIT ANALYSIS PROCESS

Receipt of application from applicant

|

Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties

documents)

|

Pre-sanction visit by bank officers

|

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc.

|

Title clearance reports of the properties to be obtained from empanelled advocates

|

Valuation reports of the properties to be obtained from empanelled valuer/engineers

|

Preparation of financial data

|

Proposal preparation

|

Assessment of proposal

|

Sanction/approval of proposal by appropriate sanctioning authority

|

Documentations, agreements, mortgages

|

Disbursement of loan

|

Post sanction activities such as receiving stock statements, review of accounts, renew of

accounts, etc

(on regular basis)

Building up of a proposal

An analysis of a proposal begins with the gathering of adequate background

knowledge about borrower’s character and credit worthiness. In the concept of analysis,

much reliance is placed on the credentials of the borrower. Therefore, there is a necessity for

evaluation of the borrower in regard to his standing in the business, means and respectability.

The result of the elaborate scrutiny concerning all these aspects is required to be put into a

precise credit report which helps in taking decision on a credit proposal. Each individual case

has to be examined in the light of its own circumstances and judgment exercised on issues

enumerated above and a final decision has to be arrived at on the basis of scrutiny of all the

issues.

Information regarding character, honesty, and financial position has to be discreetly gathered

from following sources:

a. The borrower: the bank should develop as much credit information as possible during

the initial interview with the borrower/partners of firm/ directors of company/ proposed

guarantor /co-obligator and principal officials of firms/company, nature of its business,

past and expected profitability, the degree of competition that the firm/company faces

and whether or not it has had or anticipated any difficulty etc.Information regarding its

principal officers should be collected during such interview.

b. Borrower’s financial statements: for lending decisions, financial information is a

significant part of the total information system. It is derived basically from borrowers:

Trading and profit and loss statement

Balance sheet

Cash and fund flow statements

c. Banks own records: If he is an existing borrower, bank’s own records are a rich

source of additional information. Operations in the borrower’s account and other

dealings at the bank level in regard to collections, discounting/retirement of bills etc.

often useful clues to borrower’s operating and financial transactions. A review of the

previous year’s operations in the account and assessments of borrowers’ financial

statements relating to that period will provide a rich source of information about the

borrower.

d. Opinions: Bank should compile opinions on their borrowers. They should contain full

and reliable records of the character, estimated means and business activities of all

firms and individuals who are under any form of liability to the bank, whether as direct

borrowers or as co-obligators. Full particulars of parties immovable properties where

they are situated, whether they are free from encumbrance and in the case of land,

acreage should be recorded together with fair estimates of their value. As far as

possible written statements of their properties should be taken in evaluating properties

owned by parties jointly with others and as a rule such properties should be disregarded

in arriving at the net means.

e. From other banks: in respect of fresh proposals, enquiries with local banks should be

made before entertaining the proposal to avoid multiple financing without our full

knowledge. In case of new customer having dealings with other banks, confidential

opinion of his banker has to be obtained.

f. Income tax assessment order- Income tax assessment orders agricultural income tax

assessment orders give an insight into the borrower’s account and the extent to which it

is profitable. Comments thereon by the income tax office shall indicate the

shortcomings (lacunae) in the business. In the case of estate owners agricultural tax

assessment orders to be obtained to arrive at parties credit worthiness.

g. Sales tax assessment orders: Sales tax assessment orders will reveal the turnover in

business and when read with trading/ manufacturing and profit & loss account, it may

be possible to have a fair assessment of tendencies in trade i.e., whether over-trading or

carefully trading within recourses at command or trading entirely on the borrowed

funds.

h. Wealth tax assessment orders: wealth tax assessment order will indicate the net worth

of individuals and reveals the liquid source available to bring the required margin

money for the venture.

i. Market sources: Constant touch with the market will help to have first hand

information about the gains or losses in particular business transactions of the

borrowers.

j. Property statements: The property statement of borrower will give an idea of his

worth, liabilities and his income from real estate’s (immovable properties).

k. Municipal property registers: reference to municipal property registers will give an

idea of building owned within the municipality, Rental Values and house tax payable.

It may be noted that the said registers are open for reference to all persons.

l. Other external sources: other external sources, if any, like stock exchange directory,

business periodicals/magazines/journals etc.

A proposal document will have the following details

1. MSME Background

Name of the Borrower

Date of Establishment

Line of Activity

Name of the Proprietor/Director/Partner

Share Holding Pattern

Existing Credit Facilities with the bank

Compliance to Sanction norms

Major Inspection/Audit Results

Key financial indicators

Capacity Details

Sales

Sectorial Exposure

2. Terms of Proposal

Primary Securities

Collateral Securities

Security Coverage

Purpose of Credit

Concessions

3. Additional Information

Associate Concerns

Account Review

Credit Assessment

Bank Guarantee Limit

4. Project Profile

Project Outlay

Promoter Capability

Technical Viability

Economic Viability

Financial Viability

Project Implementation Schedule

SCOT Analysis

Risk Rating and Pricing

Recommendations

Methodolgy

Projected Balance Sheet/Turnover Method

Projected Turnover Method for SSI Units up to WC limits of 5.00 crore / Others up to 2.00 Crores:

Sl No.

Particulars/ year Year1 (Audited)

Year2 (Provis)

Year3 (Estim.)

Year4 (Proj.)

1 Actual / Estimated Sales 0.00 0.00 0.00 0.002 Accepted Sales for Credit Assessment 0.00 0.00 0.00 0.00

325% of accepted level of Sales reckoned for Working Capital requirement

0.00 0.00 0.00 0.00

4 Less: 5% of (3) as Promoter’s Contribution 0.00 0.00 0.00 0.005 Actual Net working Capital 0.00 0.00 0.00 0.006 Highest of (4) and (5) 0.00 0.00 0.00 0.007 Eligible Bank Finance (3-6) 0.00 0.00 0.00 0.00

Projected Balance Sheet Method for SSI Units for WC limits of more than 5.00 crore / Others more than 2.00 Crores:

Sl No.

Particulars/ Year Year1(Audited)

Year2 (Provis)

Year3 (Estim.)

Year4 (Proj.)

1 Total Current Assets (TCA) 0.00 0.00 0.00 0.00

2Other Current Liabilities (OCL - Excluding Short Term Bank Borrowings)

0.00 0.00 0.00 0.00

3 Working Capital Gap (WCG) (1-2) 0.00 0.00 0.00 0.004 Net Working Capital (NWC) 0.00 0.00 0.00 0.005 Eligible Bank Finance (EBF) (3-4) 0.00 0.00 0.00 0.006 % of NWC to TCA 0% 0% 0% 0%7 % of OCL to TCA 0% 0% 0% 0%8 % of EBF to TCA 0% 0% 0% 0%9 Credit Limit sought 0.00 0.00 0.00 0.0010 Credit Limit proposed 0.00 0.00 0.00 0.00

Profitability Analysis and Computation of DSCR

Profitability Analysis and Computation of DSCR

M/s. ABC

Particulars/ Years

31.03.11

(Audited)

31.03.12

(Audited)

31.03.13

(Provis)

31.03.14

(Estim.)

31.03.15

(Proj.)

31.03.16

(Proj.)

Profit After Tax 0.00 0.00 0.00 0.00 0.00 0.00Depreciation 0.00 0.00 0.00 0.00 0.00 0.00Term Loan interest 0.00 0.00 0.00 0.00 0.00 0.00

Inflow- A 0.00 0.00 0.00 0.00 0.00 0.00Repayment towards Term Loan

           

Proposed loan            Term Loan Principle Repayment

0.00 0.00 0.00 0.00 0.00 0.00

Interest on TL 0.00 0.00 0.00 0.00 0.00 0.00Total Out flow-B 0.00 0.00 0.00 0.00 0.00 0.00DSCR (A/B) 0.00 0.00 0.00 0.00 0.00 0.00Average DSCR #DIV/0!          Minimum DSCR 0.00          

Interest Coverage Ratio

Interest Coverage Ratio31.03.11 (Audited)

31.03.12 (Audited)

31.03.13 (Provis)

31.03.14 (Estim.)

31.03.15 (Proj.)

Profit Before Tax 0.00 0.00 0.00 0.00 0.00Term Loan Interest 0.00 0.00 0.00 0.00 0.00Inflow - A 0.00 0.00 0.00 0.00 0.00Interest on Term Loan - B 0.00 0.00 0.00 0.00 0.00ICR (A/B) 0.00 0.00 0.00 0.00 0.00Avg ICR 0.00        Minimum ICR 0.00        

Sensitivity Analysis

Sensitivity Analysis- Scenario I 5% decrease in

sales

31.03.11 (Audited)

31.03.12 (Audited)

31.03.13 (Provis)

31.03.14 (Estim.)

31.03.15 (Proj.)

Net sales 0.00 0.00 0.00 0.00 0.00Decrease in sales by 5% 0.00 0.00 0.00 0.00 0.00Difference in Revenue 0.00 0.00 0.00 0.00 0.00Normal inflow 0.00 0.00 0.00 0.00 0.00Adjusted inflow 0.00 0.00 0.00 0.00 0.00Total outflow 0.00 0.00 0.00 0.00 0.00DSCR 0.00 0.00 0.00 0.00 0.00Average DSCR 0.00        Minimum DSCR 0.00        

Sensitivity Analysis- Scenario II 5% increase in

RM cost

31.03.11 (Audited)

31.03.12 (Audited)

31.03.13 (Provis)

31.03.14 (Estim.)

31.03.15 (Proj.)

Net sales 0.00 0.00 0.00 0.00 0.00Raw Material Cost 0.00 0.00 0.00 0.00 0.00RM increased by 5% 0.00 0.00 0.00 0.00 0.00Difference in cost 0.00 0.00 0.00 0.00 0.00Normal Inflow 0.00 0.00 0.00 0.00 0.00Adjusted inflow 0.00 0.00 0.00 0.00 0.00Total outflow 0.00 0.00 0.00 0.00 0.00DSCR 0.00 0.00 0.00 0.00 0.00Average DSCR 0.00        Minimum DSCR 0.00        

Scenario III- Simultaneous occurance of both

31.03.11 (Audited)

31.03.12 (Audited)

31.03.13 (Provis)

31.03.14 (Estim.)

31.03.15 (Proj.)

Difference in revenue in 5% decrease in sales

0.00 0.00 0.00 0.00 0.00

Difference in cost Scenario II 0.00 0.00 0.00 0.00 0.00Total difference 0.00 0.00 0.00 0.00 0.00Normal Inflow 0.00 0.00 0.00 0.00 0.00Adjusted inflow 0.00 0.00 0.00 0.00 0.00Total outflow 0.00 0.00 0.00 0.00 0.00DSCR 0.00 0.00 0.00 0.00 0.00Average DSCR 0.00        Minimum DSCR 0.00        

Risk Rating

A projected Balance Sheet is received from the borrower for next 6 to 8 years. All the

key financial ratios are calculated for the projected balance sheet. Key financial ratio also

referred as Risk Rating Parameters includes Current ratio (Ideally 1.25: 1), Debt-Equity Ratio

(Total Outstanding Liability/Tangible Net worth – Ideally 3:1), Net Working Capital, Debt-

Service Coverage Ratio(DSCR), Current Asset Turnover ratio, Fixed asset turnover ratio,

Liquidity ratio, Net sales and profit, operating profit margin, PBDIT, Return on capital

employed, Security Coverage Ratio, Interest Coverage ratio. Eligible bank credit is calculated

using Projected Turnover method.

These risk rating parameters are fed as input for a CRISIL Rating Module. Along with

the above mentioned parameters, information regarding Industry and business risk,

Regulatory aspects & Government policy, Industry Trend, Infra Facilities, Demand &

Supply, Input Availability, Financial Risk, Management Risk, Management competency and

industry exposure, Market reputation, A/C connection, Promoters net worth are fed as input

in terms of Score out of 10(1 being the worst and 10 being the best). With this information

CRISIL rating module comes up with a single rating value for the Proposal. The output varies

from VB3 to VB10.

VB3 – Investment Grade – High Safety

VB4 – Investment Grade – Adequate Safety

VB5/VB6 – Investment Grade – Moderate Safety

VB7 – Investment Grade – Minimum Safety

VB8 – Sub Investment Grade – Inadequate Safety

VB9 – Sub Investment Grade – High Risk

VB10 – Default

Based on the output score, the VB rating are being determined and the lending

decisions depends on this rating score. Vijaya Bank provides loan only for the customers

having rating on or below VB7. By this way bank ensures only prominent customers are

being entertained for loans.

CONCLUSION

Credit analysis is a process of analyzing the credit worthiness of loan applicants. The fund of

depositor’s i.e. general public are mobilized by means of such advances / investments. Thus it

is extremely important for lender bank to assess the risk associated with credit, thereby

ensure the security for fund deposited by depositors. Credit analysis procedure of Vijaya

Bank is as follows:-

In case of MSME lending bank strictly follow it’s circular and fulfils all requirement

of necessary documents required for different types of loan so that bank do not suffer

any types of loss.

Bank is very much particular about CIBIL report of borrowers in case of each type of

lending.

Bank lending process in case of MSME loan is very much fast after compiling with

all the criteria of bank.

In case of project financing bank follow lengthy norms to check the feasibility of the

project such as:-

Firstly personal appraisal of promoter is done by the bank to ensure that

promoters are experienced in the line of business and capable to implement

and run the project efficiently.

Secondly detail study about the technical aspect is done to find the technical

soundness of project such as proper scrutiny of financial report is done,

valuation of property by government approved valuer is done and view

regarding each and every area of project is done under technical analysis.

A detail study relating financial viability of project is done by detail study of

cash flow, fund flow statements and by calculating import ratio which is very

much necessary for project appraisal such as DSCR, DER etc. the main

purpose of financial appraisal is insure that project will ensure sufficient

surplus to repay the installment and interest.

Risk analysis is done by bank to determine the risk associated with the

project. This is mainly done by sensitivity analysis and by Vijaya bank credit

rating or scoring. With sensitive analysis feasibility of project is determined

under worsened condition. Credit rating or VB scoring is done of various

parameters such as personal, management, financial etc , thereby determine

credit worthiness of customer.

It is on basis of credit risk level, a collateral security to be given by borrower

is determined.

This shows that Vijaya Bank has sound credit appraisal system.