Introduction
to Credit Appraisal:
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.
Problem Statement:
To study the Credit Appraisal System in SME sector, at State
Bank of India (SBI), Uttarsanda.
Objectives:
ü To study the Credit Appraisal
Methods.
ü To understand the commercial,
financial & technical viability of the project proposed & it’s funding
pattern.
ü To
understand the pattern for primary & collateral security cover available
for recovery of such funds.
Research Design:
Analytical in nature
Data Collection:
Primary
Data:
·
Informal interviews with Branch Manager and other staff
members at SBI bank.
·
E-circulars of SBI
Secondary
Data:
·
Books and magazines
·
Database at SBI
·
Internal reports of the banks
·
Library research
·
Websites
Expected
contribution of the study:
This study will help in
understanding the credit appraisal system at SBI & to understand how to
reduce various risk parameters, which are broadly categorized into financial
risk, business risk, industrial risk & management risk associated in
providing any loans or advances or project finance.
Beneficiaries:
Researcher:
This report will help researcher in
improving knowledge about the credit appraisal system and to have practical
exposure of the credit appraisal scenario in SBI.
Management student:
The project will help the management student to know the
patterns of credit appraisal in SBI bank.
SBI Bank:
The project will help bank in reducing the credit risk
parameters and to improve its efficiencies. It will also help to reduce risk
associated in providing any loans & advances or project finance in future
and to overcome the loopholes.
Short write-up on the researcher and reason for
taking up the project:
·
The researcher are MBA 2nd year students,
studying in N.R.INSTITUTE OF BUSINESS MANAGEMENT(GLS),AHMEDABAD.
- The reason for taking up the
project is to know and understand the credit appraisal system in banking
sector.
- Credit appraisal is the major
focus of banking industries these days, so the project will help in
understanding and analyzing the situation prevailing currently.
Limitations of the study:
- As
the credit rating is one of the crucial areas for any bank, some of the
technicalities are not revealed which may have cause destruction to the
information and our exploration of the problem.
- As
some of the information is not revealed, whatever suggestions generated,
are based on certain assumptions.
·
Credit appraisal system includes
various types of detail studies for different areas of analysis, but due to
time constraint, our analysis was of limited areas only.
INTRODUCTION TO BANKING
SECTOR AND SBI
A snapshot of the
banking industry:
The
Reserve Bank of India (RBI), as the central bank of the country, closely
monitors developments in the whole financial sector.
The banking sector is dominated
by Scheduled Commercial Banks (SBCs). As at end-March 2002, there were 296
Commercial banks operating in India. This included 27 Public Sector Banks
(PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were
67 scheduled co-operative banks consisting of 51 scheduled urban co-operative
banks and 16 scheduled state co-operative banks.
Scheduled commercial banks
touched, on the deposit front, a growth of 14% as against 18% registered in the
previous year. And on advances, the growth was 14.5% against 17.3% of the
earlier year.
Higher provisioning norms,
tighter asset classification norms, dispensing with the concept of ‘past due’
for recognition of NPAs, lowering of ceiling on exposure to a single borrower
and group exposure etc., are among the measures in order to improve the banking
sector.
A minimum stipulated Capital
Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to
absorb losses and the ratio has subsequently been raised from 8% to 9%. It is
proposed to hike the CAR to 12% by 2004 based on the Basle Committee
recommendations.
Retail Banking is the new mantra
in the banking sector. The home loans alone account for nearly two-third of the
total retail portfolio of the bank. According to one estimate, the retail
segment is expected to grow at 30-40% in the coming years.
Net banking, phone banking,
mobile banking, ATMs and bill payments are the new buzz words that banks are
using to lure customers.
With a view to provide an
institutional mechanism for sharing of information on borrowers / potential
borrowers by banks and Financial Institutions, the Credit Information Bureau
(India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework
for collecting, processing and sharing credit information on borrowers of
credit institutions. SBI and HDFC are the promoters of the CIBIL.
The RBI is now planning to
transfer of its stakes in the SBI, NHB and National bank for Agricultural and
Rural Development to the private players. Also, the Government has sought to
lower its holding in PSBs to a minimum of 33% of total capital by allowing them
to raise capital from the market.
Banks are free to acquire shares,
convertible debentures of corporate and units of equity-oriented mutual funds,
subject to a ceiling of 5% of the total outstanding advances (including
commercial paper) as on March 31 of the previous year.
The finance ministry spelt out
structure of the government-sponsored ARC called the Asset Reconstruction
Company (India) Limited (ARCIL), this pilot project of the ministry would pave
way for smoother functioning of the credit market in the country. The
government will hold 49% stake and private players will hold the rest 51%- the
majority being held by ICICI Bank (24.5%).
Reforms
in the banking sector:
The first phase of financial
reforms resulted in the nationalization of 14 major banks in 1969 and resulted
in a shift from Class banking to Mass banking. This in turn resulted in a
significant growth in the geographical coverage of banks. Every bank has to
earmark a minimum percentage of their loan portfolio to sectors identified as
“priority sectors”. The manufacturing sector also grew during the 1970s in
protected environs and the banking sector was a critical source. The next wave
of reforms saw the nationalization of 6
more commercial banks in 1980. Since then the number scheduled commercial banks
increased four-fold and the number of banks branches increased eight-fold.
After the second phase of
financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to
complete with the new private sector banks and the foreign banks. The new
private sector banks first made their appearance after the guidelines
permitting them were issued in January 1993. Eight new private sector banks are
presently in operation. This banks due to their late start have access to
state-of-the-art technology, which in turn helps them to save on manpower costs
and provide better services.
During the year 2000, the State
Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits
and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the
deposits and 47.5% of credit during the same period. The share of foreign banks
( numbering 42 ), regional rural banks and other scheduled commercial banks
accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14%
and 12.85% respectively in credit during the year 2000.
Classification of banks:
The Indian banking industry,
which is governed by the Banking Regulation Act of India, 1949 can be broadly
classified into two major categories, non-scheduled banks and scheduled banks.
Scheduled banks comprise commercial banks and the co-operative banks. In terms
of ownership, commercial banks can be
further grouped into nationalized banks, the State Bank of India and its group
banks, regional rural banks and private sector banks (the old / new domestic
and foreign). These banks have over 67,000 branches spread across the country.
The Indian banking industry is a mix of the public sector, private sector and
foreign banks. The private sector banks are again spilt into old banks and new
banks.
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