Credit Appraisal & Assessment from Banker's Point of View in India

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The area of credit appraisal and assessment is very vast and each new account poses new challenges and tests our skill. Whenever a proposal is received, what does a banker looks for in it? Answer to this question is not only very detailed but also very complex. Earlier speakers might have already covered the finer aspects of the project/credit appraisal i.e. from the selection of the project to preparation of projected financials and evaluation of the project from the angle of acceptability, more importantly the following points : 1.Commercial , financial, technical viability of the project proposed, 2.Compliance with the laws of the land, guidelines of the various regulatory authorities 3.Funding pattern.

4.Primary and Collateral security cover available, etc. analysis and vetting of the proposal

I would therefore not go in to same details of the project appraisal. However, when a project/proposal is submitted to the banker, he reevaluates the proposal/project to satisfy himself about the correctness of the various facts and calculations and acceptability of the various assumptions/projections. The angle of a banker while evaluating a proposal /project report is to ascertain the viability of a project with a view to ensuring the repayment of the borrower’s obligation under the bank’s term assistance. Therefore it is not so much the quantum of the proposed term assistance as the prospects of its repayment that should be considered while appraising a project/proposal. This can be done by evaluating the project/proposal on the following broad parameters before undertaking detailed appraisal:

1.Man behind the project: A Banker enquires in to the academic background, antecedents of the promoters their background, experience as entrepreneurs, their market and social standing integrity etc. from various sources. Their conduct of the account with the existing banker and if dealing with the other banks, reasons for switching over / giving the new business to him. Details of associate concerns of the promoters and study of their financial standings, performance and market standing. The company or its promoters/ directors/partners should not be in the defaulters list of the RBI.

2.Viability: Project status may be enquired into. What is the proposed project? Is the project technically and commercially viable. Has the promoter taken the assistance of any marketing consultants help to assess the commercial viability of the project. What is the standing and reliability of the said consultant? The technical viability study can be conducted by the bank’s own technical cell or by any reputed consultant SBI Caps, GITCO, FI’s and a first class bank.

3.While net profit is the ultimate yard stick, profit before depreciation and taxes conveys more meaningful and comparable picture as the changes in the taxes rate effect the net profit more. Non operating profit and extra ordinary items on the earning side is excluded to arrive at the correct picture of the profitability.

4.Compliance with the law of the land and the guidelines of the regulatory authority like RBI in this regard. For example, as per the RBI guidelines, banks can not finance for the take over of the controlling stake in another company.If the proposal is for financing the take over of the controlling interest in another company the same can not be considered.

5.Whether the proposal /project complies with the policies of the bank i.e. the loan policy, industry specific loan policies and various norms like takeover norms, exposure norms, risk management policies of the bank like credit risk assessment etc. Generally every bank prescribes exposure norms prescribing separate exposure ceilings for the Individual, non corporate and the corporate borrowers and the bank can not take exposure of more than the prescribed ceiling. The ceilings prescribed by the banks have to be within the exposure ceilings prescribed by the RBI. RBI has...
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