APJEM Arth Prabhand: A Journal of Economics and Management Vol. 2 Issue 1, January 2013, ISSN 2278? 0629 CREDIT APPRAISAL PROCESS OF SBI: A CASE STUDY OF BRANCH OF SBI IN HISAR NANCY ARORA*; DR. ARTI GAUR**; MS. BABITA*** *Student, Department of Business Administration, CDLU, Sirsa. **Assistant Professor, Department of Business Administration, CDLU, Sirsa. **Teaching Associate, Department of Business Administration, CDLU, Sirsa. ABSTRACT Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk.
Proper evaluation of the customer is performed this measures the financial condition and the ability of the customer to repay back the loan in future. Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. In this paper, we study the Credit Risk Assessment Model of SBI Bank and to check the commercial, financial & technical viability of the project proposed & its funding pattern.
Also to observe the movements to reduce various risk parameters which are broadly categorized into financial risk, business risk, industrial risk and management risk. The scope of the paper is restricted to branch of SBI in Hisar. Pinnacle Research Journals 10 http://www. pinnaclejournals. com KEYWORDS: Credit Risk Assessment Model, Credit Appraisal, Technical Viability. _____________________________________________________________________________ INTRODUCTION Credit 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 its funding pattern & further checks the primary & collateral security cover available for recovery of such funds. Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers.
BASIC TYPES OF CREDIT There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges. APJEM Arth Prabhand: A Journal of Economics and Management Vol. 2 Issue 1, January 2013, ISSN 2278? 0629 1. Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time. 2. Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years.
Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured. 3. Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments.
The item you purchase may be used as security for the loan. 4. Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan–if you pay for the use of it in full at the end of each month. CREDIT APPRAISAL PROCESS Receipt of application from applicant | Receipt of documents (Balance sheet, KYC papers, Different govt. registration no. , MOA, AOA, and Properties documents) | Pre-sanction visit by bank officers | Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc. Title clearance reports of the properties to be obtained from empanelled advocates | Valuation reports of the properties to be obtained from empanelled valuer/engineers | Preparation of financial data | Proposal preparation | Assessment of proposal | Sanction/approval of proposal by appropriate sanctioning authority | Documentations, agreements, mortgages | Disbursement of loan Pinnacle Research Journals 11 http://www. pinnaclejournals. com APJEM Arth Prabhand: A Journal of Economics and Management Vol. 2 Issue 1, January 2013, ISSN 2278? 0629 Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (On regular basis) REVIEW OF LITERATURE Uwe (2005)13 analysed and further development of the building blocks of modern credit risk management: Definitions of default; Estimation of default probabilities; Exposures; Recovery Rates; Pricing; Concepts of portfolio dependence; Time horizons for risk calculations; Quantification of portfolio risk; Estimation of risk measures; Portfolio analysis and portfolio improvement; Evaluation and comparison of credit risk models; Analytic portfolio loss distributions.
Christian (2006)15 focused on the changing intensity of three policies that are commonly associated with financial repression, namely interest rate controls, statutory preemption and directed credit as well as the effects these policies had. The main findings are that the degree of financial repression has steadily increased between 1960 and 1980, and then declined somewhat before rising to a new peak at the end of the 1980s. Since the start of the overall economic reforms in 1991, the level of financial repression has steadily declined.
Despite the high degree of financial repression, no statistically significant negative effects on savings, capital formation and financial development could be established which is contrary to the predictions of the financial liberalization hypothesis. Arnoud and Anjan (2007)17 study appear as the lead chapter in a readings book on corporate finance, financial intermediation and market micro structure. The unifying theme in the book is optimal design, and various chapters deal with the design of contracts, securities, institutions, market mechanisms, and regulation from an information-theoretic perspective.
Each chapter in the book is an original review article that seeks to synthesize the literature in a given area. Six topics are covered: design of contracts and securities; market microstructure; credit market implications of bank size, scope and structure; bank regulation; and finally the interaction between interbank competition, regulation and banking stability. Gary (2009)28 examined that the ‘shadow banking system’ at the heart of the current credit crisis is, in fact, a real banking system – and is vulnerable to a banking panic.
Indeed, the events starting in August 2007 are a banking panic. A banking panic is a systemic event because the banking system cannot honor its obligations and is insolvent. Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent.
The current panic involved financial firms ‘running’ on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin (‘haircut’), forcing massive leveraging, and resulting in the banking system being insolvent. RESEARCH METHODOLOGY The present paper is a case study which is restricted to branch of SBI in Hisar. The objective of research paper is to study the Credit Risk Assessment Model of SBI Bank and to check the commercial, financial & technical viability of the project proposed & its funding pattern. To observe the movements to reduce various risk parameters which are broadly categorized into
Pinnacle Research Journals 12 http://www. pinnaclejournals. com APJEM Arth Prabhand: A Journal of Economics and Management Vol. 2 Issue 1, January 2013, ISSN 2278? 0629 financial risk, business risk, industrial risk & management risk. For the purpose, the secondary data is collected through the Books & magazines, Database at SBI, Websites, E-circulars of SBI. DATA ANALYSIS A) CREDIT RISK ASSESSMENT & APPRAISAL PROCESS OF SBI CREDIT RISK ASSESSMENT RISK: Risk is inability or unwillingness of borrower-customer or counter-party to meet their repayment obligations/ honor their commitments, as per the stipulated terms.
LENDER’ TASK • • Identify the risk factors, and Mitigate the risk RISK ARISE IN CREDIT: In the business world, Risk arises out of • • • • Deficiencies / lapses on the part of the management (Internal factor) Uncertainties in the business environment (External factor) Uncertainties in the industrial environment (External factor) Weakness in the financial position (Internal factor) TO PUT IN ANOTHER WAY, SUCCESS FACTORS BEHIND A BUSINESS ARE Pinnacle Research Journals 13 http://www. pinnaclejournals. om • • • • Managerial ability Favorable business environment Favorable industrial environment Adequate financial strength CREDIT & RISK • • • Go hand in hand. They are like twin brothers. They can be compared to two sides of the same coin. APJEM Arth Prabhand: A Journal of Economics and Management Vol. 2 Issue 1, January 2013, ISSN 2278? 0629 • All credit proposals have some inherent risks, excepting the almost negligible volume of lending against liquid collaterals with adequate margin.
LENDING DESPITE RISKS • • • • So, risk should not deter a Banker from lending. A banker’s task is to identify/ assess the risk factors/ parameters & manage / mitigate them on a continuous basis. But it’s always prudent to have some idea about the degree of risk associated with any credit proposal. The banker has to take a calculated risk, based on risk-absorption/ risk-hedging capacity & risk-mitigation techniques of the Bank. CREDIT RISK ASSESSMENT (CRA) – MINIMUM SCORES / HURDLE RATES 1.
The CRA models adopted by the Bank take into account all possible factors which go into appraising the risks associated with a loan. These have been categorized broadly into financial, business, industrial & management risks and are rated separately. To arrive at the overall risk rating, the factors duly weighted are aggregated & calibrated to arrive at a single point indicator of risk associated with the credit decision. 2. FINANCIAL PARAMETERS: The assessment of financial risk involves appraisal of the financial strength of the borrower based on performance & financial indicators.
The overall financial risk is assessed in terms of static ratios, future prospects & risk mitigation (collateral security / financial standing). Pinnacle Research Journals 14 http://www. pinnaclejournals. com 3. INDUSTRY PARAMETERS: The following characteristics of an industry which pose varying degrees of risk are built into Bank’s CRA model: • • • • Competition Industry outlook Regulatory risk Contemporary issues like WTO etc. 4. MANAGEMENT PARAMETERS: The management of an enterprise / group is rated on the following parameters: • Integrity (corporate governance) • Track record
APJEM Arth Prabhand: A Journal of Economics and Management Vol. 2 Issue 1, January 2013, ISSN 2278? 0629 • Managerial competence / commitment • Expertise • Structure & systems • Experience in the industry • Credibility : ability to meet sales projections • Credibility : ability to meet profit (PAT) projections • Payment record • Strategic initiatives • Length of relationship with the Bank 5. The risk parameters as mentioned above are individually scored to arrive at an aggregate score of 100 (subject to qualitative factors – negative parameters).
The overall score thus obtained (out of a max. of 100) is rated on a 8 point scale from SB1/SBTL1 to SB 8 /SBTL8. SALIENT FEATURES OF CRA MODELS (A) TYPE OF MODELS S. No. (i) (ii) Exposure Level (FB + NFB Limits ) Over Rs. 5. 00 crore Rs 0. 25 crore to Rs. 5. 00 crore Non – Trading Sector (C&I , SSI , AGL) Regular Model Simplified Model Trading Sector ( Trade & Services) Regular Model Simplified Model Pinnacle Research Journals 15 http://www. pinnaclejournals. com
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