“CREDIT APPRAISAL SYSTEM FOR SME SECTOR”BY – RISHAV SARKAR

Banking Industry in India

a) STRENGTHS

1. Greater securities of Funds

2. Banking network

3. Large Customer Base

4. Low Cost of Capital

b) WEAKNESS

1.Basel Committee

2. Powerful Unions

3. Priority Sector Lending

4. High Non-Performing Assets

c) OPPORTUNITIES

1. Universal Banking

2. Differential Interest Rates

3. High Household Savings

4. Untapped Foreign Markets

5. Internet Banking

d) THREATS

1. NBFCs, Capital Markets and Mutual funds

2. Changes in the Government Policy

3. Inflation

4. Recession

Facts :

Regulatory Board – RBI

Largest market share –State Bank of India

Booming Sector – Retail Banking

RBI

Development Financial

institutions

IFCI SIDBI NABARD IRBI NHB EXIM Bank ICICI IDBI

Banks

Commercial Banks

private Sector Banks

Nationalized Banks

SBI Groups

Public Sector Banks

Foreign BanksIndian Banks

Land Development

Banks

Cooperative Banks

Rural Banks

CLASSIFICATION OF BANKING INDUSTRY IN INDIA

CREDIT APPRAISAL

Character (integrity/

willingness)

Capacity (ability/ financial

soundness)

Collateral (backing/ fall back/ security)

Capital (strength/funds

availability)

Conditions (environment/

framework)“an investigation/assessment done by the banks 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”

5C’s

Receipt of application from applicant

Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no.)

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC,

Title clearance reports of the properties to be obtained

Valuation reports of properties to be obtained from empanelled valuer

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc. (On regular basis)

CREDIT

APPRAISAL

PROCESS

Company Profile

Industry Banking, Financial services

Founded 6 January 1943

Headquarters Kolkata, West Bengal, India

Area served Worldwide

Key people Arun Kaul(Chairman and Managing Director)

Products Consumer banking, corporate banking, finance and

insurance, investment banking, mortgage loans, private banking,

wealth management

SME PRODUCTS OFFERED BY UCO

Laghu Udyami

Credit Card

Artisan Credit Card

Prime Minister

Employment Generation Programme

(PMEGP)

Swarozgar Credit Card

Scheme

UCO Mahila Pragati Dhara

Scheme for financing

Handloom Weavers

Group (HWG)

Scheme for providing finance to the Rice Shellers

UCO Commercial

VehicleUCO Trader

UCO Udyog Mitra

UCO Doctor

OBJECTIVE OF THE STUDY

To study the basic fundamentals of banking industry.

To study entire loan system for SME sector in India

To study credit appraisal methods.

To understand the commercial, financial and technical viability of the proposed proposal and its funding pattern.

To know on what criteria the bank appraise the loan to the business.

To understand the different financial tools required for credit appraisal

“statements describing what the project is trying to achieve & the effect or change that the project is supposed to cause.”

RESEARCH METHODOLOGY

PROBLEM STATEMENT

• To study the Credit Appraisal System in SME sector at UCO Bank.

• To understand on what criteria, the bank approves a loan

RESEARCH DESIGN

• The research is analytical in nature

DATA COLLECTION

• Secondary Data

SAMPLE

• Case study

SAMPLING METHOD

• Convenient Sampling

SAMPLE SIZE

• Case Studies (2)

“procedure for collecting data to be analyzed”

FINANCIAL TOOLS ON WHICH DATA ANALYSIS IS CONDUCTED

CAPITAL BUDGETING TECHNIQUES

Internal rate of return.

Profitability index

Net present

value

Average rate of return

Payback period

method

RATIO ANALYSIS

Net profit ratio

Operating profit ratio

Gross profit ratio

Debt equity ratio

Proprietary ratio

Quick ratio Current ratio

WORKING CAPITAL

ANALYSIS.

Working Capital

Assessment.

RISK ANALYSIS

Promoters risk

Operational risk

Market risk

OTHER PARAMETERS

SalesNet

Operating Cash Flow

TOL / TNWNet Profit

margin

“techniques used to decipher information”

FINDINGS

CASE STUDY – 1The financial tools shows a positive sign on the financial position of the company and the company is expected to continue the same in the future. Hence it is suggested to accept the Proposal

CASE STUDY – 2The overall projected performance and financial position of the unit are satisfactory and the project can be accepted

SUGGESTIONS AND RECOMMENDATIONS

ADOPTING 4C APPROACH

IMPROVING RATING MECHANISMS

IMPROVING PERSONNEL SKILLS

DEVELOPING RELATIONSHIPS

DATA AUTHENTICATION

CUSTOMIZING PRODUCTS INNOVATING DELIVERY PLATFORMS

REVISING CREDIT POLICY PERIODICALLY

MODERATE RATE OF INTEREST

SPECIAL MEASURES FOR AGRICULTURAL SECTOR

CONCLUSIONS

Usually, it is seen that credit appraisal is basically done on the basis of fundamental soundness. But, after different types of case studies, it can be concluded that credit appraisal system is not only looking for financial wealth. Other strong parameters also play an important role in analyzing credit worthiness of the firm/company.

In all, the viability of the project from every aspect is analyzed, as well as type of business, industry, promoters, past records, experience, projected data and estimates, goals, long term plans also plays crucial role in increasing chances of getting project approved for loan.

Credit Appraisal should be based upon

Financial performance

Business performance

Industry outlook

Quality of management

Conduct of account