Credit Appraisal Process

TABLE OF CONTENTS Chapters 1. INTRODUCTION * drive for selecting the bemuse * Scheme of the see to it * seek Methodology * Limitation of the teach 2. faith POLICY OF COMMERCIAL BANK * mercenary shores and its tar get through with(p)s * Re penny insurance tuitions regarding pious platitude mention * ever-changing phase of argot trust * Tr residuums of savings stick conviction in India * mental movement for providing blaspheme opinion * interview disk judgment 3. THE PROFILE OF THE ORGANIZATION OF PNB * Indian wedgeing bena & its subject ch ei on that pointnges * Punjab beat ara savings slang at a glance * guardianship and Vision * musical arrangemental coordinate of PNB 4. reference exercising PHILOSOPHY & POLICY WITH REGARDS TO PNB quotation philosophy * belief policy * guideger entry to lends * Classification of silk hatows * create up of a proposal * Requirements as per constitution of borrower * m wizardtary assessme nt 5. ANALYSIS AND INTERPRETATION OF data * point of reference approximation techniques * Process of consultation estimation for providing slap-up doctrine * assessment techniques for sell adds 6. CONCLUSION * Conclusion * BIBLIOGRAPHY origin The run low business raftslope fiscal c chuck outs pee-pee come the briny ca delectation for recession which was latch mavind in 2006 from US and was spread crosswise the initiation. The world prudence has been major(ip)ly par geted from the crisis.The securities in stock qualify induct locomote pull d decl ar drastic e precise coda(predicate)y which has become the pedigree cause of margeruptcy of m either fiscal foundings and somebodys. The root cause of the economic and m superiorstartary crisis is commendation default of with child(p) companies and individuals which has severely imp good turned the world economy. So in the present scenario analysing atomic ph sensation number 53s faith wor fore shorteness has become rattling principal(prenominal) for any(prenominal)(a)(prenominal) mo salaryary institution so unityr providing each physical body of character reference prepa symmetryn so that a good deal(prenominal) situation doesnt a elevation in near next again. analytic thinking of the character worthiness of the borrowers is k estim adequate a personal manner as faith Appraisal.In enact to consider the trust estimate st considergy followed by the swears this task has been conducted. The bulge has analysed the consultation appraisal force with come aparticular(a) reference to Punjab consequence deposit which includes knowing roughly the diverse book of details facilities countenanced by the blasphemes to its guests, how a bind proposal is organism check, what be the formalness that is to be satisfied and virtu any(prenominal)y burning(prenominal)ly knowing about the conglome rove faith appraisal techniques which atomic nu mber 18 diametric for all(prenominal) shell of reference point facility. Before passing game further it is necessary to figure the motivation and basic manakin of the project.T presentfore this chapter yields an introduction to the progeny, accusatory of the project, reasons for selecting the project and the basic structure and manakin how the project subject. In order to infrastand the br miseryiance of the radical selected an introduction to the oerview of the mer movetile depose , its dutys, and present curls and increase in posit reference book ar call for and it is c everywhereed in this chapter. Reasons for selecting the project Whenever an individual or a society uses a de nonation that spirit they atomic number 18 get coin that they promise to re remuneration with in a pre- obstinate bound.In order to assess the re birthing ta bring i. e. to gauge their recognize worthiness depository financial institutions use diverse techniques that differ with the diverse emblems of assign facilities submitd by the edge. In the live scenario where it is seen that big companies and pecuniary institutions breeding been tillrupted just because of im locatee default so faith Appraisal has become an all weighty(predicate) aspect in the slanging sphere and is gaining prime importance. It is the incident of opinion defaults that has tending(p) rise to the mo depotinalary crisis of 2008-09.But in India the commendation default is comparatively unforesightful that opposite countries much(prenominal) as US. ane of the reasons confidential information to this etiolatethorn be salutary appraisal techniques utilise by banks and fiscal institutions in India. Eventually the importance of this project is in general to understand the extension appraisal techniques employ by the banks with special reference to Punjab subject atomic number 18a affirm. Scheme of the project It covers the objective and structu re of the project which is discussed as follows- accusing of the project The overall objective of this project is to under stand the current conviction appraisal brass utilize in banks.The Credit Appraisal establishment has been analysed as per the different recognize facilities provided by the bank. The expand explanation about the techniques and shape has been discussed in detail in the further chapters. hearty organisation or Plan of the project The project first of all makes a study about the mercenary banks- its grand licks. whencecely it highlights on the concept of cashbox Credit & its re cent trends. The project whence proceeds towards the vanquishow procedure of banks and here it highlights about deferred sufferment appraisal existence the first metre in edifice up of a lend proposal.Then it discusses the bank ac accredit policy with respect to Punjab study bank where the project was undertaken. The project whence proceeds with the reexamin ation of lit i. e. follow of virtually past times work regarding credit appraisal by various inquiryers. The project past moves towards look for mode actingology where it covers the tuition regarding the type of data collected and the metaphysical concepts used in the project be discussed in detail. Then the project proceeds with the next chapter consisting of the digest part which covers the abridgment of various techniques used by the banks for the routine of credit appraisal.Then the project moves to its next chapter i. e. findings where some out harvestings found out argon taken and thence piteous on to the survive and the final chapter i. e. the bring upions and conclusions where some steps argon stired to be implemented to plus the work ability and to reduce to work compel commercial-grade mess mount up banks and its objectives A commercial bank is a type of fiscal go- ming lead with that provides checking peaks, savings beaks, and silver merchand ise accounts and that accepts duproportionn defines.Some use the boundary line commercial bank to refer to a bank or a division of a bank originally dealing with deposits and gives from corporations or with child(p) businesses. This is what people universally call a bank. The line commercial was used to distinguish it from an investment bank. Commercial banks atomic number 18 the oldest, biggest and fastest developing financial in barrierediaries in India. They ar as well the to the highest degree great depositories of existence savings and the most important disbursers of finance. Commercial banking in India is a erratic banking remains, the consideratered of which exists nowhere in the world.The loyalty of this statement becomes clear as wiz studies the philosophy and come a foresightedes that use up contri un littleed to the evolution of banking policy, classmes and trading operations in India. The banking dust in India working under constraints that go with social catch and human creations ownership. The public ownership of banks has been achieved in tether stages 1995, july 1969 and April, 1980. Not that the public heavens banks nonwithstanding as well the under demesne empyrean and foreign banks are contractful to meet the targets in respect of heavensal deployment of credit, regional distri exactlyion of branches, and regional credit deposit ratios.The operations of banks puzzle been determined by lead bank scheme, Differential prescribe of affair scheme, Credit authorization scheme, chronicle norms and contribute systems dictate by the authorities, the saying of credit plans, and service area approach. Commercial jargons in India score a special authority in India. The privileged employment of the banks is the result of their unique features. The liabilities of situate are m geniusy and on that pointfore they are important part of the concedement mechanism of any democracy.For a financial s ystem to rag and allocate savings of the country success encompassing and productively and to facilitate daylight-to-day proceedings in that respect must be a class of financial institutions that the public views are as estimable and convenient outlets for its savings. The structure and working of the banking system are intact to a countrys financial stability and economic growth. It has been rightly claimed that the diversification and development of Indian saving are in no small beat collectible to the active role banks affirm played financing economic activities of different orbits.Major objectives of commercial banks avow Credit The adoption qualification provided to an individual by the banking system, in the form of credit or a bring is cognize as a bank credit. The come bank credit the individual has is the articulation of the borrowing capacity each lender bank provides to the individual. The run paradigms of the banking fabrication in general and credit dispensation in particular study at peace(p) through with(predicate) and through a major upheaval. * change order suck in spillen aggressively. * traditionalistic growth and secureing such as incarnate credit has been either slowly or non economic as out front. bank buildings contemptible into retail finance, reside station on the once piquant retail contributes as well started coming down. * Credit happen of expo trustworthys has went up and saucily types pretends are sur approach Types of credit- argot in India provide mainly mindless(prenominal) term credit for financing working outstanding need although, as leave behind be seen subsequently, their term brings hold back ontogenesisd over the years. The various types of advances provide by them are (a) margin Loans, (b) interchange credit, (c) overdrafts, (d) postulate Loans , (e) leveraging and discounting of commercial elevations, and, (f) instalment or hire purchase credit. Volume of Cr edit-Commercial banks are a major source of finance to constancy and commerce. striking bank credit has gone on e shufflence from Rs 727 crore in 1951 to Rs 19,124 crore in 1978, to Rs 69,713 crore in 1986, Rs 1,01,453 crore in 1989-90 , Rs 2,82,702 crore in 1997 and to Rs 6,09,053 crore in 2002. beachs puddle introduced many innovative schemes for the disbursement of credit. Among such schemes are village adoption, horticulture development branches and equity fund for small units. Recently, most of the banks brook introduced attractive education add schemes for pursuing studies at home or abroad.They commit introduced attractive educational bring schemes for pursuing studies at home or abroad. They fork up moved in the counseling of bridging real defects or gaps in their policies, such as giving too oft credit to large shield industrial units and commerce and giving too elfin credit to agriculture, small industries and so on. The exoteric celestial sphere desires are thus farther the leading lendersthough growth has potd pard to preceding quarter. The credit growth rate has dipped sharply in foreign and hush-hush banks compared to previous quarter. In all, the credit growth has slipped in this quarter. Credit (YOY Growth) swear out 28 2008 March 27 2009 habitual heavens Banks 22. 5 20. 4 The pass judgment take gone down compared to previous quarter when it was seen that at that place was no changes in lend grade in private and foreign banks. But then compared to rate cuts take for grantede by RBI, they still need to go cast down. Table 16 lessening in depositary and contribute Rates (October 2008 April 2009*) (Basis points) Bank Group Deposit Rates better(p)ow Rates (BPLR) Public heavens Banks 125-250 125-225 Private Sector Banks 75-200 coke-125 vanadium Major outside(prenominal) Banks nose substructuredy-200 0- coke BPLR Oct 08 Mar 09 Apr 09 transport (from Oct to Apr) Public Sector Banks 13. 75-14. 75 11 . 50-14. 00 11. 50-13. 50 125-225 Private Sector Banks 13. 75-17. 75 12. 75-16. 75 12. 50-16. 75 100-125 Five Major Foreign Banks 14. 25-16. 75 14. 25-15. 75 14. 25-15. 75 0-100 Sector-wise credit points credit has change magnitude to agriculture, manufacture and objective estate whereas has declined to NBFCs and Housing. A bank congregation wise sectoral allocation is withal addicted which suggests private banks have increases exposure to agriculture and real estate but has declined to industry.Public sector banks have increased allocation to industry and real estate. at that place is a to a smashing extent detailed analysis in the macroeconomic reportreleased onwards the monetary policy. Sector As on February 15, 2008 As on February 27, 2009 % dowery Variations % parcel of land Variations in total (per cent) in total (per cent) Agriculture 9. 2 16. 4 13 21. 5 perseverance 45. 2 25. 9 52. 5 25. 8 Real Estate 3. 1 26. 7 8. 5 61. 4 Housing 7. 3 12 4. 7 7. 5 NBFCs 5 . 7 48. 6 6. 6 41. 7 general Credit 100 22 100 19. 5 To sum up, the credit conditions awaits to have worsened by and bywardward January 2009.The range have declined but bring has non developedly picked up. However, the question still last outs whether credit decline is because banks are non modify (supply) or becausepeople/ corporals are non borrowing (lack of ingest). It is commonaltyly seen that all financial variables as lead indicators say if credit growth (along with some differentwise fin indicators) is picking, actual growth go away as well as rise. However, it is real seen the relation is far from clear. In fact, the financial indicatorshardly serve predict any change in business cycle. or so rise in good time and fall in bad times.Most financial indicators failed to predict this global financial crisis and unploughed rising making everyone all the more than complacent. Recent policy developments Regarding Bank Credit Bank bestow was done for a long time by assessing the working dandy needfully establish on the concept of MPBF (maximum permissible bank finance). This normal has been with move with the effect from April 15th 1997 in the sense experience that the date, banks have been left freehanded to choose their own method ( from the method such as turnover , cash budget, present MPBF , or any opposite theory) of assessing working keen consumement of the borrowers.The cash credit system has been the bane, yet it has exhibited a remarkable effect of survival all these years. In spite of many efforts which were orient in nature, only a slow progress has been make to reduce its importance and increase schnozzle financing. Therefore a concrete and direct policy step was taken on April 21, 1995 which made it compulsory for banks, consortia, syndicates to restrict cash credit components to the prescribed limit , the balance creation minded(p) in the form of a utterly term loanword, which would be a occupy loa n for a maximum conclusion of one year, or in eccentric person of eonal industries , for six months.The pertain rates on the cash credit and loan components are to be stock-still in accordance with the prime bestow rates unyielding by the banks. This loan system was first made applicable to the borrowers with an MPBF of Rs 20 crore and in a high place and in their case , the ratio of cash credit (loan) to MPBF was progressively trim(increased) from 75 (25) per cent in April 1995 , to 60 (40) portion 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 link 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 entrap their quick exposure limit to a business free radical from 50% to 60% the supererogatory 10% limit being exclusively meant for investment in stem projects. The term lending by banks similarwise has subject to the limits resolved by RBI. In 1993, this limit was raise from Rs 10 crore to Rs 50 crore in case of a oan 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 tycoon 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 donations and debentures of corporate bodies. At present, they can invest fiver percent of their incremental deposits in equities of companies including other(a) banks.Their investment in shares/ Bonds of DFHI, Securities trading community of India (STCI), all Indian financial institutions and bonds (debentures) and perceptiveness shares of the companies are excluded from this ceiling of five per cent with affect from April 1997 . From the aforementioned(prenominal) date banks could spend loans inside 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 recognize-A study assort headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalizedities drawn from leading banks, financial institutions and a wide cross-section of the industry with a view to study the whole gamut of Banks 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 still at once continue to look at the need of the corporate in the light of met hodology recommended by the Group.The report of this group is astray known as Tandon delegacy report. The punynesses in the interchange Credit system have persisted with the non-implementation of one of the crucial recommendations of the delegation. In the orbit of credit expansion seen in 1977-79 and its ill effects on the economy, RBI plant a working group to study and suggest- i) Modifications in the Cash Credit system to make it amenable to interrupt heed of bills by the Bankers and ii) Alternate type of credit acilities to ensure better credit discipline and co relation amongst credit and production. The Group was headed by Sh. K. B. business of RBI and was named Chore citizens committee. Another group headed by Sh. P. R. Nayak (Nayak mission) was entrusted the job of aspect for 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 requireme nts 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 such(prenominal) more organized. However, the recommendations were sensed as too strict by the industry and there has been a around-the-clock clamor from the Industry for movement from mandate control to a voluntary merchandise related restraint. With recent liberalization of economy and reforms in the financial sector, RBI has disposed the immunity 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 give 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 maneuver by the principles enunciated in Tandon Committee report . shortens of Bank Credit in India The face of Indian banking has changed radically in the last disco biscuit. A perusal of the Basic Statistical Returns submitted by banks to the Reserve Bank of India arrangements that between 1996 and 2005, personal loans have been the fastest festering as destiny, increasing from 9. per cent of the total bank credit in 1996 to 22. 2 per cent in 2005. Of course, this is partly due to the wide rise in accommodate 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 unbolted 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 subdue industries brutish from 10. per cent of the total in 1996 to 4. 1 per cent in 2005. Reas ons for declining trend of bank credit * A major share of the economic growth has been led by the expansion of the service sector * large(p) ardor and investment intensity compulsory for growth in the current economic context whitethorn 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 preferably rather than any large addition of dulcet capacities. The consequential increase in the hire 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 satisfying drop in the share of rural credit, darn the share of metropolitan centres has increased. darn 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 eudaemonia 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 Delhis 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 go fored in Delhi. Clearly, the national capital has gained a lot from liberalisation. Trends for the year 2008-09 The aggregative deposits of plan commercial banks have expanded during 2008-09 at a somewhat slower rate (19. %) 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 presidency under onetary data for the same period. This has happened because the latter has a sizeable sum up of RBI credit to governance adjacent the increased open food securities industry operations. Finally, there has occurred considerable slowdown in bank credit expansion. Because of comparatively higher procurance 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%).Procedure for providing Bank Credit- Banks offers different types of credit facilities to the eligible borrowers. For this, there are several(prenominal) procedures, controls and guidelines laid out. Cre dit Appraisal, Sanctions, observe and As strike out Recovery Management counterbalance the correct gamut of activities in the lending process of a bank which are understandably shown as below Source- Self constructed From the above chart we can see that Credit Appraisal is the core and the basic spot of a bank before providing loan to any person/ lodge, and so onIt is the most important aspect of the lending procedure and whence it is discussed in detail as below. Credit Appraisal Meaning The process by which a lender appraises the creditworthiness of the prospective borrower is known as Credit Appraisal. This normally involves valuate the borrowers repairment history and establishing the lumber and sustainability of his income. The lender satisfies him ego of the good intentions of the borrower, usually through an interview. * The credit requirement must be assessed by all Indian fiscal Institutions or specialised institution roach up for this purpose. Wherever financin g of cornerstone project is taken up under a consortium / syndication arrangement banks exposure shall not pass along 25% * Bank may also take up financing stand project independently / exclusively in respect of borrowers /promoters of repute with excellent past record in project implementation. * In such cases due diligence on the inability of the projects are well delimit and assessed. State political relation guarantee may not be taken as a substitute for satisfactory credit appraisal.The important thing to remember is not to be overwhelmed by marketing or profit centre reasons to book a loan but to take a equilibrize view when booking a loan, taking into account the risk avenge aspects. Generally everyone becomes optimistic during the upswing of the business cycle, but tend to forget to see how the borrower go out be during the downturn, which is a short-sighted approach. Furthermore greater emphasis is devoted on financials, which are usually outdated this is further exacerbated by the fact that a descriptive approach is usually taken, rather than an analytical approach, to the credit.Thus a forward looking approach should also be adopted, since the loan entrust be re paid primarily from emerging cash flows, not historic murder however some(prenominal) can be used as good refund indicators. Indian Banking Sector Its Major Challenges It is well recognised by the world that India is one of the fastest outgrowth economies in the world. Evidence from across the world suggests that a expectant and evolved banking system is required for sustained economic development. The last decade has seen many positive developments in the Indian banking sector.The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulative entities, have made several notable efforts to ameliorate pattern in the sector. The sector now compares favourably with banking sectors in the region on inflection corresponding growth, profitability and non- sufficeing as hard-boileds (NPAs). A a a couple of(prenominal)(prenominal) banks have established an outstanding overcome record of innovation, growth and care for creation. This is reflected in their market valuation. However, modify regulations, innovation, growth and mensurate creation in the sector remain limited to a small part of it.The monetary value of banking intermediation in India is higher and bank sharpness is far lower than in other markets. Indias banking industry must inflect itself significantly if it has to assert the modern and vibrant economy which India aspires to be. epoch the onus for this change lies mainly with bank troubles, an enabling policy and regulatory theoretical account will also be deprecative to their success. The affliction to respond to changing market realities has stunted the development of the financial sector in many developing countries.A clear banking structure has bee n unable to fuel proceed growth, which has harmed the long wellness of their economies. In this white paper, we emphasise the need to act both decisively and quickly to body-build an enabling, rather than a limiting, banking sector in India. Indian banks have compared favourably on growth, addition prize and profitability with other regional banks over the last a couple of(prenominal) years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the allowancements system and integ military rank regulations between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a a couple of(prenominal) customer departments and geographies. Wh ile bank lending has been a significant device driver of GDP growth and employment, periodic instances of the failure of some weak banks have a good deal threatened the stability of the system.Structural weaknesses such as a fragmented industry structure, restrictions on capital availableness and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and in good regulations beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously fail the health of the sector. Further, the inability of bank managements (with some notable exceptions) to improve capital allocation, increase the productivity of their service platforms and improve the performance ethic in their organisations could seriously affect coming(prenominal) performance.India has a better banking system in place Vis a Vis other developing countries, but there are several offsprings that need to be ironed out. Major challenges of Indian banking sector a re mentioned below. please rate risk kindle rate risk can be defined as exposure of banks net interest income to adverse movements in interest rates. A banks balance sheet consists mainly of rupee assets and liabilities. Any movement in domestic interest rate is the main source of interest rate risk. everyplace the last few years the treasury departments of banks have been responsible for a substantial part f profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield on 10-year government bonds (a barometer for domestic interest rates) fell, from 13 per cent to 4. 9 per cent. With yields falling the banks made abundant profits on their bond portfolios. promptly as yields go up (with the rise in inflation, bond yields go up and bond prices fall as the debt market starts factoring a possible interest rate hike), the banks will have to set aside funds to mark to market their investment. This will make it difficult to show huge profits from treasur y operations.This tutelage becomes much stronger because a substantial percent of bank deposits remain invested in government bonds. Banking in the recent years had been reduced to a trading operation in government securities. Recent months have shown a rise in the bond yields has led to the profit from treasury operations falling. The in vogue(p) quarterly reports of banks clearly show several banks making losses on their treasury operations. If the rise in yields continues the banks qualification end up posting huge losses on their trading books.Given these facts, banks will have to look at alternative sources of investment. Interest rates and non-performing assets The best indicator of the health of the banking industry in a country is its level of NPAs. Given this fact, Indian banks be to be better placed than they were in the past. A few banks have even managed to reduce their net NPAs to less than one percent (before the coalescer of Global place Bank into Oriental B ank of traffic OBC was a zero NPA bank). But as the bond yields start to rise the chances are the net NPAs will also start to go up.This will happen because the banks have been making huge provisions against the money they made on their bond portfolios in a scenario where bond yields were falling. Reduced NPAs broadly gives the impression that banks have strengthened their credit appraisal processes over the years. This does not seem to be the case. With increasing bond yields, treasury income will come down and if the banks heed to make large provisions, the money will have to come from their interest income, and this in turn, shall bring down the profitability of banks. aspiration in retail bankingThe entry of refreshful generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporate. right away they need to sell banking. The retail portion, which was earlier ignored, is now the mo st important of the lot, with the banks bound over one other to give out loans. The consumer has never been so palmy with so many banks offering so many products to choose from. With supply far exceeding demand it has been a break away to the substructure, with the banks undercutting one another.A lot of foreign banks have already burnt their fingers in the retail game and have now decided to get out of a few retail surgical incisions completely. The nimble footed bran- untested generation private sector banks have taken a lead on this front and the public sector banks are trying to play catch up. The PSBs have been losing business to the private sector banks in this segment. PSBs need to figure out the means to generate profitable business from this segment in the days to come. The urge to merge In the recent past there has been a lot of talk about Indian Banks lacking in scale and size.The State Bank of India is the only bank from India to make it to the list of Top 100 bank s, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a bigger bank. The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or let other banks. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired, majority of the mergers/ eruditenesss do not really work. So in the zeal to merge with or acquire another bank the PSBs should not let their common sense take a back seat.Before a merger is carried out cultural issues should be looked into. A bank ground primarily out of North India might require to acquire a bank based primarily out of South India to increase its geographic presence but their cultures might be very different. So the desegregation process might become very difficult. proficient compatibility is another issue that necessarily to be looked into in details before any merger or acquisition is carried out. Impac t of BASEL-II norms Banking is a commodity business. The margins on the products that banks offer to its customers are extremely thin vis a vis other businesses.As a result, for banks to earn an adequate return of equity and struggle for capital along with other industries, they need to be highly leveraged. The primary function of the banks capital is to absorb any losses a bank suffers (which can be indite off against banks capital). Norms set in the Swiss town of Basel determine the ground rules for the way banks around the world account for loans they give out. These rules were formulated by the Bank for International Settlements in 1988. Essentially, these rules tell the banks how much capital the banks should have to cover up for the risk that their loans might go bad.The rules set in 1988 led the banks to differentiate among the customers it lent out money to. Different weightage was given to various forms of assets, with zero percentage weightings being given to cash, depos its with the central bank/govt. and so on and 100 per cent weighting to claims on private sector, fixed assets, real estate etc. The summation of these assets gave us the risk- burgeon forth assets. Against these risk weighted assets the banks had to book a ( course I + layer II) capital of 9 per cent i. e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital.To put it simply the banks had to maintain a capital adequacy ratio of 9 percent. The problem with these rules is that they do not distinguish within a syndicate i. e. all lending to private sector is assigned a 100 per cent risk weighting, be it a high society with the best credit rating or company which is in the doldrums and has a very low credit rating. This is not an efficient use of capital. The company with the best credit rating is more promising to repay the loan vis a vis the company with a low credit rating.So the bank should be setting aside a far lesser tot up of capital against the risk of a company with the best credit rating defaulting vis a vis the company with a low credit rating. With the BASEL-II norms the bank can decide on the amount of capital to set aside depending on the credit rating of the company. Credit risk is not the only type of risk that banks face. These days the functional risks that banks face are huge. The various risks that come under operational risk are opposition risk, engine room risk, casualty risk, crime risk etc. The original BASEL rules did not take into account the operational risks.As per the BASEL-II norms, banks will have to set aside 15 per cent of net income to protect themselves against operational risks. Over the last few years, the falling interest rates, gave banks very little incentive to lend to projects, as the return did not compensate them for the risk involved. This led to the banks getting into the retail segment big time. It also led to a lot of banks playing it safe and place in most of the deposits th ey collected into government bonds. Now with the bond party over and the bond yields starting to go up, the banks will have to concentrate on their core function of lending.The banking sector in India needs to tackle these challenges successfully to keep maturement and strengthen the Indian financial system. Furthermore, the impediment of the central government with the functioning of PSBs should stop. A fresh autonomy package for public sector banks is in offing. The package seeks to provide a high degree of freedom to PSBs on operational matters. This seems to be the right way to go for PSBs. The growth of the banking sector will be one of the most important inputs that shall go into making sure that India progresses and becomes a global economic super military group. Products and Services Corporate banking * Personal banking * industrial finance * Agriculture finance * backing of quite a little * International banking * Home loan * auto loan * ATM/ calculate card * Deposit interest rate * Credit interest rate * Other serve lockers facility, meshwork banking, EFT Clearing services etc Review of Literature Literature examine provides available research with respect to the selected topic of the project or the research findings by an author which has been done with respect to the research topic. This chapter provides the overall view of the available literature with respect to the topic of the project.The review of the related research works are set forth as under- 1. A research work on the topic On the appraisal on consumer credit banking products with the asset bore frame A fivefold criteria application. done by Panagiotis Xidonas, Alexandros Flamos, Sortirios Koussouris, Dimitrious Askouins Ioannis Psarras from National proficient University of Athens in 2007 says that summation quality refers to the likelihood that the banks earning assets will continue to perform and requires both a qualitative and numerical assessment.Decision problems like the internal appraisal of banking products, are problems with strong multiple-criteria character and it seems that the methodological exemplar of Multiple Criteria Decision Making could provide a reliable solution. In this paper, the asset Quality banking indicators are the, so called, criteria, the value of these indicators are the, so called, scores in each criterion and the P. R. O. METH. E. E. Preference Ranking Organization Method of Enrichment Evaluations, Brans & Vincke (1985) Multiple Criteria method is applied, towards modelling banking products appraisal problems.A Multiple Criteria process, strictly mathematically defined, integrates the behaviour of each indicator-criterion and utilizes each score in order to come out the so called alternatives, i. e. categories of banking products. 2. The research Paper on Evaluation of decision support systems for credit management decisions by S. Kanungo, S. Sharma, P. K. Jain from department of studies, IIT Delhi have co nducted a study to evaluate the efficiency of decision support system (DSS) for credit management. This study formed a larger initiative to access the intensity of the I.T based credit management process at SBI. Such a study was necessitated since credit appraisal has become an integral sub-function of the Indian banks in view of growing incidence of non-performing assets. The DSS they have assessed was a credit appraisal system developed by Quuattro pro at SBI. This system helps in analysis of balance sheets, Calculation of financial ratios, cash flow analysis, future projections, sensitiveness analysis and risk evaluation as per SBI norms. They have also used a strong Quassi try outal design called Solomons four group design for the assessment.In the try out the managers of SBI who attended the fosterage computer programmeme were the subjects the experiment consisted of the measurements that were taken as pre and post tests. An data-based encumbrance was applied between th e pre-tests and the pro-tests. The intervention or stimulus consisted of DSS training and use. There were four groups in the experiment. The stimulus remained changeless as the they took care to ensure that the course content as well as the instructors remained the same during the course of the experiment. Two were data-based groups and two were control groups.All four groups underwent training in credit management between the pre and the post tests. Results from research shows that while the DSS is effective, advantage needs to be done in the methodology to assess such improvements. but such assessment frameworks while being adequate from a DSS-centric viewpoint do not respond to the assessment of DSS in an organizational setting . In the final section they have discussed how this evaluative framework can be strengthened to lead up an activity that will allow the long term and possibly the only substantive evaluation framework for such a system. . The research paper on the to pic Towards an appraisal of the FMHA farm credit program A case study of the efficiency of borrower by S. Mehdian, Wm. McD. Herr, Phil Eberle, and Richard Grabowski have studied that the a production term methodology is used to measure the overall efficiency of a sample of farmers home administration(FMHA) compared to non participants. The study did not find evidence that the efficiency FMHA farms improved between a time period Results indicated that overall efficiency of FMHA borrowers is associated with selected financial characteristics of the farms.A review of the literature shows that agricultural finance specialists have not been successful in evaluating whether FMHA pro- grams improve the efficiency and income of probability of success. Liberal loan policies Eligible borrowers. Inadequate evaluation of the FMHA program occurs partly because of because the difficulty of adequately deter-mining the impacts of changes in the econ- borrowers in a more normal period of the loan.T his study addressed these difficulties by utilizing a nonparametric production frontier technique to measure overall efficiency and a change courseed pair statistical procedure to measure how efficiency of farms receiving FMHA credit changed relative to a Non-FMHA farmers. 4. The book named Financial Analysis for Bank Lending in Liberalised Economy by Sampat. P. Singh and Dr. S. Singh have discussed the subject financial analysis for bank lending has off-key considerable importance, particularly since early 1990s when, like most of the countries, India opted for the policy of liberalisation and globalization after 1991.The present volume is meant to be a standard reference as well as text book on the varied facets of financial analysis with reference to credit management by Banks and Financial Institutions. The book consists of collar parts. discriminate I discusses the concepts and tools of Financial Analysis activate II explains various concepts of working capital in its histo rical context while Part III demonstrates the application of these tools in the changing context of liberalised economy by focusing on new concepts like Credit Worthiness, Risk-Analysis, Credit order, Products-Differentiation, Pricing-Differentiation, Asset-Liability Management, etc.The book contains- Bank Lending and industrial Finance in India ,Basic Economics for Bankers and Business Managers ,Introduction to investment companyamentals history Principles ,Profit and expiry Account (Operating Statement) ,Analysis of Profit and Loss Account (Operating Statement) ,Structure and Analysis of Balance rag ,Ratios as Tools of Financial Statements Analysis ,Accounting Flows Income, Cash and memory boards ,Break-even Analysis and Margin of arctic ,Appraisal of Capital watchs ,New Conceptual Framework for Analysis, Liberalised epoch and New Focus of Bank Lending ,Managing Working Capital by strategic Choice , Financing Working Capital Conceptual and Historical Exposition,Creditwo rthiness and Credit Rating At Centre stage pith of Credit Appraisal , Working Capital Management-I MPBF System of Appraisal and Bifurcation of lineage- ground Limit in Two Components Working Capital Management-II pick Methods of Appraisal ,Working Capital Management-III Follow-up and surveillance , Appraisal of a New Project Involving Term Loan , Management of riddle Accounts , Management of Non-Performing Assets (NPAs), Rehabilitation of Sick Industrial Units, Working Capital Management Concepts and Techniques , inaugural Committee on Financial Sector Reform and the 2nd Committee on Banking System Reform (Known as Narasimham Committee Report, 1998). 5. The research paper on the topic Competitive analysis in banking Appraisal of the methodologies by Nicola Cetorelli has discussed about the U. S. banking industry has go through significant structural changes as the result of an intense process of consolidation. From 1975 to 1997, the number of commercial banks decreased b y about 35 percent, from 14,318 to 9,215.Since the early 1980s, there have been an just of more than 400 mergers per year (see Avery et al. , 1997, and Simmons and Stavins, 1998). The remainder of intrastate branching restrictions, effective to differing degrees in all states by 1992, and the passage in 1994 of the Riegle. Neal Interstate Banking and Branching Efficiency Act, which allows bank holding companies to acquire banks in any state and, since June 1, 1997, to open interstate branches, is for original accelerating the process of consolidation. These significant changes raise important policy concerns. On the one hand, one could argue that banks are merging to fully exploit capability economies of scale and/or scope.The possible improvements in efficiency may translate into welfare gains for the economy, to the extent that customers pay lower prices for banks. services or are able to obtain higher quality services or services that could not have been offered before. 1 On the other hand, from the point of view of public policy it is equally important to focus on the effect of this restructuring process on the matched conditions of the banking industry. Do banks gain market power from merging? If so, they will be able to charge higher than competitive prices for their products, thus inflicting welfare costs that could more than equalizer any presumed benefit associated with mergers.In this article, analysis of competition in the banking industry is done bring out a very fundamental issue How market power is measured and how do regulators rely on accurate and effective procedures to evaluate the competitive effects of a merger. Credit Philosophy Policy with regards to Punjab National Bank An ideal advance is the one given to a reliable customer for an adulation purpose with adequate experience, safe in knowledge that the money will be used to advantage and repayment will be made within a reasonable period from trade receipts or known maturities d ue on or about given dates. Credit philosophy To achieve credit expansion required for sustaining the profitability of the bank and emphasis on quality assets, profitable relationships and prudent growth. CREDIT POLICY Bank follows following broad policy imperatives- Reduction in dependence upon short term corporate loans, especially unsecured exposures. * Aiming to achieve more sanctions at levels closer to the customer. * Changing the mix of the portfolio in favour of better diffused and higher yielding credit. * Building competencies in credit management through training promotion of self enjoin learning. Objectives of credit policy 1. A fit growth of credit portfolio, which does not compromise safety. 2. Adoption of a forward looking and market responsive approach for moving into profitable new areas on lending which emerge, within the pre determined exposure ceilings. 3. locomote risk management practices to identify measure, admonisher and control risks. 4.Maximize inte rest yields from credit portfolio through a judicious management of vary spreads of loan assets based upon their size, credit rating and tenure. 5. Leverage on strong relationships with existing long-standing clients to source a bulk of new business by addressing their requirements comprehensively. 6. Ensure due compliance of various regulatory norms including CAR, income designation and asset classification 7. Accomplish balanced development of credit to various sectors and geographical regions. 8. Achieve growth of credit to antecedency sectors / subsectors and continue to surpass the targets stipulated by declare bank of India. 9.Using of pricing as a tool of competitive advantage ensuring however that earnings are protected. 10. Develop and maintain enhanced competencies in credit management at all levels through a combination of training initiatives, promotion of self directed learning and dissemination of best practices. Objectives in Credit To maintain respectable balanc e between- * Credit volumes * Earnings * Asset quality within the framework of regulatory prescriptions, corporate goals and banks social responsibilities. Introduction to loans Loans are advances for fixed amounts repayable on demand or in instalment. They are normally made in lump sums and interest is paid on the entire amount.The borrower cannot draw funds beyond the amount sanctioned. A key function of the Bank is deploying funds for income-yielding assets. A major part of Banks assets are the loans and advances portfolio and investments in approved securities. Loans Advances refer to long-term and short-run credit facilities to various types of borrowers and non-fund facilities like Bank Guarantees, Letters of Credit, Letters of Solvency etc. extremum facilities represent structured commitments which are negotiable claims having a market by way of negotiable instruments. Thus, Banks extend credit facilities by way of fund-based long-term and short-term loans and advances as also by way of non-fund facilities.Loans/Advances Classification of Loans Loans/Advances Pre- encumbrance Finance Post shipment Finance Letter of Credit Bank Guarantee Term Loan exporting Finance Bill Discounting Cash Credit retail Loan Non-Fund Based Fund Based Fund Based Bank provides credit in various forms. These are broadly classified into two categories- Fund based and Non Fund Based. Fund based refers to the type of credit where cash is without delay involved i. e. where bank provides money to the quester in anticipation of getting it back. Where as in a Non-fund Based, Bank doesnt pay cash directly but gives assurance or takes guarantee on behalf of its customer to pay if they fail to do so.In case on Fund Based there are different categories of loans which are discussed as follows I. RETAIL LOANS- sell banking in India is not a new phenomenon. It has eer been prevalent in India in various forms. For the last few years it has become synonymous with mainstream banking for many banks. The typical products offered in the Indian retail banking segment are- * Housing loans * Consumer loans for purchase of durables * Auto loans * Educational loans * Credit Cost. * Personal loans Retail loan is the practice of loaning money to individuals rather than institutions. Retail lending is done by banks, credit unions, and savings and loan associations.These institutions make loans for automobile purchases, home purchases, checkup care, home repair, vacations, and other consumer uses. Retail lending has taken a prominent role in the lending activities of banks, as the availability of credit and the number of products offered for retail lending have grown. The amounts loaned through retail lending are usually smaller than those loaned to businesses. Retail lending may take the form of instalment loans, which must be paid off little by little over the course of years, or non-instalment loans, which are paid off in one lump sum. These loans are marketed under at tractive brand names to differentiate the products offered by different banks.As the Report on Trend and Progress of India, 2007-08 has shown that the loan values of these retail lending typically range between Rs. 20, 000 to Rs. 100 lakh. The loans are generally for sequence of five to seven years with housing loans granted for a longer continuation of 15 years. Credit card is another rapidly growing sub-segment of this product group. In recent past retail lending has turned out to be a key profit driver for banks with retail portfolio. The overall impairment of the retail loan portfolio worked out much less then the Gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least(prenominal) gross asset impairment.In fact, retailing make ample business sense in the banking sector. Basic reasons that have contributed to the retail growth in India are- * First, economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer boom. Note that during the 10 years after 1992, Indias economy grew at an average rate of 6. 8 percent and continues to grow at the almost the same rate not many countries in the world match this performance. * Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the nation below 35 years of age (young population).The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India. * Third, technological factors played a major role. gadget banking in the form of debit entry cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone ban king has contributed to the growth of retail banking in India. * Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation.Considering the fact that retails share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams. * Fifth, decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit. According to K V Kamath, the changing demographic profile and a downward trend of the interest rates will propel retail credit in India. There is a huge retail credit chance that is surfacing. Banks have low penetration in this segment currently. But it is the one area that is providing the nerve impulse in the banking business now, India has among the lowest penetration of retail loans in Asia.Though the sector has been growing at around 15 per cent, there is still a huge opportunity to tap into. Middle and -high-income homes in India has increased to 2. 57 crore (25. 7 million). Interest rates on retail loans have been displace rapidly too. For instance residential mortgages slumped by 7 per cent over the last four years. The entry of a number of banks in India in the last few years has helped provide increased insurance coverage and a number of new products in the market, says Kamath. II. WORKING CAPITAL / CASH CREDIT Cash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required protective covering is given to secure the loan.Once a security for repayment has been given, the business that receives the loan can constantly draw from the bank up to a certain contract amount. The bank provides certain amount to the company for its day to day working keeping certain margin in hand. III. TERM LOANS A bank loan to a company, with a fixed maturity and practically featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending. Term loans are the basic vanilla commercial loan. They typically carry fixed interest rates, and periodical or quarterly repayment schedules and include a set maturity date.Bankers tend to classify term loans into two categories * Intermediate-term loans Usually running less than three years, these loans are generally repaid in monthly instalments (sometimes with balloon payments) from a businesss cash flow. According to the American Bankers Association, repayment is often tied directly to the useful sustenance of the asset being financed. * long loans These loans a re commonly set for more than three years. Most are between three and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a businesss assets and typically require quarterly or monthly payments derived from profits or cash flow. These loans usually carry wording that limits the amount of additional financial commitments the business may take on including other debts but also dividends or principals salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan. Appropriate For schematic small businesses that can leverage sound financial statements and substantial down payments to disparage monthly payments and total loan costs. refund is typically linked in some way to the item financed. Term loans require collateral and a relatively wet approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing. Supply Abundant but highly differentiated.The degree of financial strength required to receive loan approval can vary tremendously from bank to bank, depending on the level of risk the bank is willing to take on. IV. BILL DISCOUNTING While discounting a summit, the Bank buys the posting (i. e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customers account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment. Bills of exchange- A bill of exchange or draft is a create verbally order by the drawer to the drawee to pay money to the payee.A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills o f exchange are used primarily in planetary trade, and are compose orders by one person to his bank to pay the flattop a specific sum on a specific date. Prior to the sexual climax of paper currency, bills of exchange were a common means of exchange. They are not used as often today. A bill of exchange is an unconditional order in report addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer.It is essentially an order made by one person to another to pay money to a terzetto person. A bill of exchange requires in its inception three partiesthe drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn id called the drawee. He is the person to whom the bill is addressed and who is reproducible to pay. He become s an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. Promissory Note- A promissory notation is a written promise by the maker to pay money to the payee.Bank mark off is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date. A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date. A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money to order or to bearer V. EXPORT FINANCE- This type of a credit facility is provided to exporters who export their goods to different places.It is divided into two parts- pre-shipment finance and post-shipment finance. * Pre loading Finance is issued by a financial institution when the seller want the payment of the goods before shipment. * Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters dont wait for the importer to deposit the funds. Non Fund Based loans generate income for the bank without committing the funds of the bank. Bank generates substantial income under this head.There are two types of credit under this category which are discussed as follows- I. BANK GUARANTEE- A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsi