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Credit Appraisal and Risk Rating at PNB

Abhay Thakur PGDM (Gen) Roll No. 111

FLOW OF PRESENTATIONCompany Profile Credit Appraisal

Methods of LendingRisk Rating Of Borrower Post Sanction Follow-up Case Study Findings Suggestions Limitations Bibliography

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. Currently, 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 . PNB was ranked as 248th biggest bank in the

world by Bankers Almanac, London.


appraisal means an investigation/assessment done by the bank prior before providing any loans & advances/project finance & also checks the commercial, financial & technical viability of the project proposed.Proper evaluation of the customer is preferred

which measures the financial condition & ability to repay back the loan in future


Age Income Number of dependents Nature of employment Continuity of employment Repayment capacity Previous loans 3 C of credit are must be kept in mind for

lending funds: Collateral



OBJECTIVESTo understand the process of credit appraisal applied by the bank to provide loan to the corporate

To understand various types of risks involved in providing loan

To find out ways to mitigate these risks.

To analyze the credit worthiness of the clients

To understand and carry out ratings provided by bank to rate any corporate

RESEARCH METHODOLOGYPrimary 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

Overview of LoansFUND BASED


Working Capital

Letter of Credit

Term Loan

Bank Guarantee

METHODS OF LENDINGWorking Capital Simplified Method Simplified method based on turnover for assessing working capital finance up to Rs.2 crore (upto Rs. 5 crore in case of SSI units)MPBF System Existing MPBF system with flexible approach

shall be followed for units requiring working capital finance exceeding Rs 2 crore

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.

On Receiving Of ProposalFinancial statements, project report and other important documents are used to evaluate: Maximum permissible bank finance (in case of WC limit) Techno Economic Feasibility Analysis of the project Various risks associated. Various approvals of issues the borrower seeks (reduction of ROI,

processing fee etc) Risk rating of the borrower Reasonableness of estimates/projection in regard to sales, chargeable

current assets, current liabilities (other than bank borrowings) and net working capital Classification of current assets and current liabilities in conformity with

the guidelines issued by the Reserve Bank/HO. Maintenance of minimum current ratio of 1.33:1 . 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

RISK RATING OF THE BORROWERCATEGORY PARAMETERS / INPUTS Capital market perception of the group Management Evaluation Risk bearing capacity Track record in debt repayment Management Setup Integrity, commitment and sincerity Financial flexibility

Range of services Quality of service offered Economies of operation Business Evaluation Ambience of service outlet Effectiveness of distribution channels Quality of infrastructure available

Level of customer satisfaction Advertising / promotional strategies Brand equity Expected market growth Locational advantage Technology adopted in the process

Debt Equity Ratio Financial Evaluation Repayment Period (in yrs) Foreign exchange risk

Internal Rate of Return /TNW Working capital cycle (in months)

Project complexities Project Implementation Risk Evaluation Expected cost overrun Funding risk

Expected time overrun Status of obtaining clearances Service period (in yrs)

ModelsModels Financials Business Managemen and Industry t Conduct of A/c

Large Mid Small NBFC EMBM

40% 40% 40% 40% 25%

25% 25% 20% 25% 35%

25% 20% 20% 25% 40%

10% 15% 20% 10% NA

POST SANCTION FOLLOW UPPREVENTIVE MONITORING SYSTEM (PMS)PMS Index 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. 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.


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.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

Case Study : Rathi Steel and Power LtdNature Fund Based CC(H) Fund Based Ceiling Non Fund Based ILC/FLC ILG/ FLG Non Fund Based Ceiling Term Loan TOTAL COMMITMENT NA 0 15.00 Secured 5.00 Secured 20.00 45.00 95.00 0.00 30.00 30.00 Secured Existing Proposed Secured/Unsecured (as per RBIs guideline)

Background : The Company is a profit making, dividend paying

and listed Company. Company is engaged in the manufacture of bars and wire rods which form part of the longer segment of the steel industry. Company also manufactures stainless steel products having an installed capacity of 40000 TPA. In the year 2007-08 the Company had completed the project for setting up a backward integration plant at Orissa.

For Term Loan :Purpose To Part Finance the Proposed Cost of Project 128.70 cr

Total Debt

93.50 cr

Promoters contribution

35.20 cr

Proposed TL (our share)

45.00 cr


2.66:1 cr

Repayment Period

8 years

Door to door tenor

10 years 6 months

SecurityNature of limits Security Value of block assets as on: 31.03.2012 Value of block assets excluding specific charge if any Extent of first/ second charge holders as on 31.03.2012 Balance/ residual value of charge available to bank/ consortium

Term Loan

First Pari Passu Charge on Fixed Assets of the CompanySecond Pari Passu Charge on Current Assets









Working Capital

First pari passu charge on current assets of the Company





Second Pari Passu charge on Fixed Assets





Justification for working capital sanction: The Company wants to change the product mix.

There has been a surge in the demand of

Stainless steel products. The future demand for stainless steel is also likely to be determined favorably from all the sectors. Company has been able to improvise the product mix from 10% in the year 2008-09 to 26% in the year 2010-11. Companys aim is to achieve 4045% share of value added products in the overall product mix which will help the company to maintain the desired operating margins in spite of tough market conditions.


31.03.10 Audited

31.03.11 Audited

31.03.12 Estimated 182.52

31.03.13 Projected 235.01

1. Total Current Assets 2. Less Current Liabilities(other than Bank borrowing and installments due within 1 year)







3. Working Capital Gap





4. Actual / Projected bankborrowings 5. Total current liabilities (2+4) 6. NWC (1-5) 7. Minimum stipulated margin 25% of current assets 8. Item 3- Item 7 9. Item 3- item 6 10. MPBF(item 8 or 9, whichever





84.75 32.68 29.36

100.66 43.57 36.06

127.33 55.19 45.63

170.96 64.05 58.75

48.40 45.07 45.07

64.38 56.87 56.87

99.56 90.00 90.00

130.30 125.00 125.00

is lower)

Justification for Non Fund based limitsLetter of credit The Company has informed that they will be procuring MS/SS Scrap and other Ferro alloys on a regular basis for manufacturing of higher grades of steels and accordingly require higher LC Limits(Inland/Foreign) and requested for RS.75.00 Cr limits for the year 2012-13. Bank guarantee Company has informed that one or two regular suppliers (TATA STEEL) who was doing business on cash basis have agreed to extend credit period provided Company will be able to submit Bank Guarantee. Total value of material (Ferro alloys/Billets etc) procured from Tata Steel on monthly basis will be Rs.5.00-10.00 crores.

Management : The Company is promoted by Late Shri Punam

Chand Rathi. Presently managed by Sh Pradeep Rathi having experience of more than 40 years in Steel Melting and Rolling. All the family members are actively involved in running of this Company. Presently has five Directors on it. Shri Pradeep Rathi is Managing Director and other directors are Shri Shree Kumar Daga, Shri Prem Narayan Varshney, Shri Dwarka Das Lakotia and Shri Ranjit Khattar. Both the sons Mr. Udit Rathi and Mr. Srivardhan Rathi are actively involved in the business.

Reconciliation of TNW :2010-11 178.45 Cr 2011-12 188.85 Cr 2012-13(projected) 214.62 Cr

Keeping in view of the past trend of profitability of Group

concerns and financial strength of the promoters of the company, the estimates/projections of TNW can be accepted.

Sales 2010-11845.3 Cr

2011-12 954.6 ,905.9(estimated)

2012-13 1171.53 Cr

The promoters of the company are already in the line of business

and have well established marketing links

Profitability2011-12 12.55 , 11.44 (expected) PBT 2012-13 23.73 PBT 2013-14 32.10

The profit of the company will increase constantly

with the increase in the turnover of the company.

Current ratio2010-11 1.37 2011-12 1.40 2012-13 1.39

Lead banks note current ratio (considering the

installments of TL due within one year as part of Current Liab.) was 1.22 as at 31.03.2010 and 1.24 as on 31.03.2011 and at 1.24 as at 31.03.2012 which is below the benchmark level of 1.33. Current ratio for the financial year 2012-13 & 2013-14 has been estimated at 1.22:1 & 1.25:1.

Long Term Debt Equity Ratio Current DER-1.16

Projected for 2012-13-1.32:1 The debt equity ratio of the company in all the

years under consideration is below the acceptable bench mark of the bank i.e. 2:1 and proves the long term solvency of the company. Keeping in view the industry scenario and financial strength and experience of the promoters of company into consideration estimates/ projections of Debt Equity ratio of the company can be accepted.

Summary of cost of project and means of finance The Company has got the TEV study of the

proposed expansion done by ITCOT Consultancy and Services Limited, an approved agency. The Company has estimated the total capital expenditure for the scheme at Rs. 125.17 crore, which is proposed to be funded by way of long term loan of Rs. 93.50 crores and balance of Rs.31.67 crores by way of internal accruals/promoters contribution.

DSCRParticulars 2012 PAT 8.36 Add Depreciation Add Interest A. Total Cash accrual TL Installments Interest on TL 10.27 B. Total 21.13 DSCR (A/B) 29.21 40.63 35.81 35.25 10.79 20.58 18.01 15.35 7.03 10.27 25.66 10.86 16.07 7.87 10.79 34.73 18.42 23.32 13.27 20.58 57.17 20.05 32.57 13.39 18.01 63.97 17.80 34.70 13.50 15.35 63.56 19.90 2013 Projections 2014 2015 2016

1.21Average DSCR





SummaryStand Alone ProjectDebt-Equity Ratio 2.95 Company as a whole 1.02

Average DSCR



Minimum DSCR


Interest coverage ratio (ISCR)


Internal Rate of Return (Pre Tax) Break Even Point



Strengths Strong Management team with professional

background and rich industrial experience of the promoters. Latest technology based imported as well indigenous machinery. Location on which proposed expansion will be implemented is in an industrial area and by the side of National Highway-24 and all types of Infrastructure facilities are available nearby. The factory premise is within 1KM from Power Grid and presently power in the unit is supplied from an independent feeder and continuous power supply is available. Proximity to market, quick delivery in small lots. The company has adopted internationally proven

Weakness Other big player in the steel industry can give

tough competition. Change in the govt. policy for steel industry may affect the profitability unit. Rolling Mill industry is high turnover and low margins industry. Fluctuating prices of raw materials and finished goods.

Opportunities The unit is already set in 1971 and has a strong

network of dealers. The Rathi brand is an established brand for the last more than 50 years. The unit after expansion will not face any problem in marketing its products.

The focus of the Central government on road projects

and the emphasis of the government on irrigation and water supply projects are expected to give fillip to the construction industry. Combining the investments in the key sectors , the

industrial investments are expected to increase by 70% over the next 5 years.

Threats Frequent fluctuation in prices of Steel which may

affect the profitability of the Projects. Big Players like SAIL and Jindals are ramping up the Capacity of SS Products. The Fortunes of the Steel Industry are closely linked to that of the economy in general and infrastructure in particular. Industry is highly cyclic in nature with high mortality rates. Change in the government policies related to the construction/infrastructure industry will have direct impact on Companys performance.

Risk RatingBenchmark Values Category Parameter CO Value 0 1 2 3 4 Rate

Growth Rate


6 mnths old are rs 4.41 cr which 5.22% of total receivables



Reliability of Debtors


Market position evaluationParameter Competitive position Expected sales growth The firm has achieved a sales growth of around 8.6% during FY 2010 11. & expected to be in position growth Comments Rate 2.00 2.00

Input related risk


Availability of raw material and other India is endowed with large reserves of iron critical inputs oreProximity to raw material Company is not in advantageous position due to location of plant Proposed to setup backward integration plant at Orissa



Backward Integration Production related risk

2.00 3.00

State of technology used

The firm has adopted Thermax technology





Product related risk


Product range

Firm is mainly engaged in the manufacturing of MS bars and Wire rods Quality of product is reported to be better than the peers


Product quality




Distribution network

Firm has800 dealer network spread over north India.

2 .00

Price Competitiveness

Prices are at par with the peers


Industry risk evaluation for Iron and Steel Products industry


Management EvaluationS. No. 1 Parameter Management set up Comments Listed Company managed by experienced and professional promoters and directors The management is reported to be reliable and sincere Existing Plant at Ghaziabad and Orissa are running satisfactory The account is running satisfactorily with us Management is capable of arranging funds but with a time lag Rate 3.00


Commitment and sincerity Track Record in execution of projects Track record in debt payment





Financial strength/ flexibility



Capital Market Perception

The share is trading at a lower value .


TOTAL SCOREFactor Financial Evaluation Business & Industry % score obtained 53.95 54.75 Weight 40.00% 25.00% Weighted Score 21.58 13.69

EvaluationManagement Evaluation 48.75 25.00% 12.19

Conduct of Account AGGREGATE SCORE



NA 52.73



DETERMINATION OF ROIFacility Rate of interest CC PC TL Processing Fee NA BR+2.25%+TP As per Banks clause BR+4.50+0.50 As per Banks clause BR+2.5%+TP As per Banks clause Existing NA Proposed BR+3.25% Derived rate BR+4.50% Applicable Rate BR+3.5%

Upfront Fee




Lead Bank Fee




Commission NFB Other charges, if any

on LC/BG


In line with Lead Bank**




Findings Risk is the center most part of the analysis and

basis for the decision of the bank. All the analysis is being done to generate a grade, which represents the intensity of risk, that helps in determining the condition of the corporate applying for loan. The whole process of credit appraisal helps in providing a suitable measure to minimize the risk due to non repayment of loan to the bank.

SUGGESTIONS In the rating model there are constant parameters

with constant weightages irrespective of the company and the industry in which it operates. Weightage should be assigned to parameters according to the industry in which the company operates. Rating should be performed when calculating the worthiness of the client since the previous rating does not take into account the short term drastic changes such as price level changes etc. The rating model should have some sort of mechanism to prioritize sectors according to their risk content. The bank should be dependent on its own and not go by lead bank suggestions. Since it is a very tedious task to maintain so much documents and files of the clients, an electronic database can be designed to manage the files in

Limitations Data availability as the data is proprietary and not readily

shared for dissemination. Geographical scope of the project was limited to PNB

Circle Office and the loans studied were of solely of businesses established majorly in NCR 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. 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.

BibliographyBooks Circulars and manuals from bank. PNBOA manual for Banks and RBIs policies on lending. Credit appraisal, risk analysis and decision making by DD Mukherjee. Annual reports of the company. Internet