CONTENTS

Page no

List of Tables viii

List of Figures ix

CHAPTER-I

1.1 INTRODUCTION 1

1.2 OBJECTIVES OF THE STUDY 3

1.3 SCOPE OF STUDY 3

1.4 LIMITATIONS OF THE STUDY 5

CHAPTER-II

2.1 REVIEW OF RELATED LITERATURE 6

2.2 COMPANY PROFILE 14

2.3 INDUSTRY PROFILE 18

CHAPTER-III

3.1 RESEARCH DESIGN 23

3.2 SURVEY DETAILS 24

3.3 TOOLS USED FOR ANALYSIS 25

CHAPTER-IV

4.1 DATA ANALYSIS AND INTERPRETATATION 26

4.1.a Case study analysis 32

4.1.b Bank survey details 36

4.1.c Customer survey details 40

1

CHAPTER-V

5.1 FINDINGS 55

5.2 SUGGESTIONS 57

5.3 CONCLUSION 58

5.4 ANNEXURE 59

2

List of tables

S.No Table

No.

Table Name Page

No.

1 4.1 Chart showing The Constitution of Organization of the

respondents

40

2 4.2 The Enjoyment of Working Capital facility in Banks 41

3 4.3 Chart showing the Preferred Bank to avail Credit facility 43

4 4.4 Chart showing Duration of Relationship with the Bank 44

5 4.5 Chart showing Types of credit facilities Customers enjoying with Bank

45

6 4.6 Chart showing Types of Banking facilities Customers enjoy with Bank

46

7 4.7 Chart showing the criteria’s to be considered for sanctioning the credit

47

8 4.8 Chart showing The Time Factor for renewal/limit Enhancement procedure

48

9 4.9 Chart showing The Procedures for renewal/limit Enhancement 49

10 4.10 Chart showing The Documentation requirement for Processing Loan Application

50

11 4.11 Chart showing The interest rate and processing fees Charged 51

12 4.12 Chart showing The Speed of Processing the loan Application 52

13 4.13 Chart showing Level of Satisfaction to Recommend Others 53

14 4.14 Chart showing Customer’s opinion about the Product 54

3

List of Figures

S.No Figure No.

Figure Name Page No.

1 4.1 Chart showing The Constitution of Organization of the respondents

40

2 4.2 The Enjoyment of Working Capital facility in Banks 41

3 4.3 Chart showing the Preferred Bank to avail Credit facility 43

4 4.4 Chart showing Duration of Relationship with the Bank 44

5 4.5 Chart showing Types of credit facilities Customers enjoying with Bank

45

6 4.6 Chart showing Types of Banking facilities Customers enjoy with Bank

46

7 4.7 Chart showing the criteria’s to be considered for sanctioning the credit

47

8 4.8 Chart showing The Time Factor for renewal/limit Enhancement procedure

48

9 4.9 The Procedures for renewal/limit Enhancement 49

10 4.10 Chart showing The Documentation requirement for Processing Loan Application

50

11 4.11 Chart showing The interest rate and processing fees Charged 51

12 4.12 Chart showing The Speed of Processing the loan Application 52

13 4.13 Chart showing Level of Satisfaction to Recommend Others 53

14 4.14 Chart showing Customer’s opinion about the Product 54

4

CHAPTER I

1.1 INTRODUCTION

The title of the project is A Study on effectiveness of credit appraisal

system for working capital loans in ICICI Bank at Chennai. The Company, which is

the market leader in banking sector in India, is engaged in all the banking services. The

project is carried out in the Small & Medium Group (S&MG) division of the bank. The

study was conducted to identify the effectiveness of credit appraisal system of ICICI

Bank Ltd (Small Enterprise Group).For this, a comparative study also done with other

banks appraisal process for product associated with working capital loans.

Here I have started with a case study. In that I selected a small enterprise which

is a borrower to the bank and analyzed its financial statements to get familiar with the

appraisal system followed by the bank. Then I approached five banks, which are the

main competitors for ICICI in the market, with a questionnaire to identify the techniques

followed by them to appraise their borrowers and compared it with that of ICICI.

Customers perception also place an important part in judging the overall effectiveness

of appraisal To find out that I met 50 customers of ICICI bank to find out there level of

satisfaction after subscribing to the loan. The data collected was then analyzed with the

help of statistical tools like Chi-squre and interval estimation. The finding and

suggestions of my study was then forwarded to the concerned department.

Traditionally banking is defined as the process of accepting deposits from surplus

units in the economic system (lenders) with the objective of lending these funds to the

deficit units in the economic system (borrowers).Currently the banks are offering a wide

range of loans such as housing loans, educational loans, vehicle loans, business loans

etc. Now a day’s banks are more concentrating on the segment of business enterprises

and offers working capital loans to SME sector. Before providing the loan the bank will

appraise thoroughly about the credibility of borrower based on both financial and non

financials.

Credit appraisal is a technique by which a banker or for that matter any financial

agency including financial Institutions (FI’s) estimate the soundness of a credit proposal

5

or a project appraisal from the point of view of technical and financial liability or

feasibility.

Commercial Lending is the mainstay of Indian Banking – its bread and butter

activity. Although historically, this activity had been relegated to a secondary position as

banks were driven by the desire to excel themselves in what is known as “priority sector

banking” yet it is this part of their loan portfolio, which has kept them afloat and help

meet the costs. . Today many banks focus on this activity for improving their bottom

lines. Fresh and innovative products are being launched the corporate customer who

forms the core of this business. There is big competition among banks to secure bigger

share of this business.

In the midst of improving their market share in commercial lending segment, banks

should also need to concentrate in controlling and reducing their NPA’s. This highlights

the importance of their risk management systems in commercial lending. Most Indian

banks have recently focused on improving their risk management systems, and a few of

the ‘new’ private sector banks are ahead in terms of technology and skill levels

compared with the public sector and the old private sector banks. A few of the ‘new’

private sector banks are well ahead of others in terms of appropriate risk management

systems. These banks have adapted technology from their inception, and their senior

management typically had prior exposure to global best practices in banking.

The Indian private sector banks have upgraded their corporate credit risk

measurement systems considerably over the last few years. Specialized software has

been installed in the credit departments, and risk-grading scales have been elongated

from the earlier four points to the more sensitive 10 points or higher. The input variables

are now more elaborate than the traditional profitability and debt-equity ratios, and credit

evaluations, though not entirely satisfactory, are more reliable than before.

In this scenario, this project titled “A Study on effectiveness of credit appraisal

system for working capital loans in ICICI Bank at Chennai

” is carried out to study the credit risk measurement system followed in ICICI Bank at

Chennai.

6

1.2 OBJECTIVE OF THE STUDY

To find out the effectiveness of credit appraisal system of ICICI Bank Ltd (Small

Enterprise Group) by comparing it with other banks appraisal process for product

associated with working capital loans.

Carryout customer satisfaction survey to find out the perspective of the customer

towards the appraisal process.

To study procedure adopted in evaluating credit proposal by using case analysis.

1.3 SCOPE OF THE STUDY

The study involves benchmarking the Appraisal process of ICICI with regard to

Small Enterprise Group by analyzing the Appraisal Process followed in other Banks.

This is done by carrying out survey on 5 Banks, 3 Private & 2 Nationalized Banks.

Therefore the scope of the study is limited to the information gathered from these 5

banks. Further the study involves Evaluating Customer Satisfaction Level on the

Appraisal Process with special reference to ICICI Bank at Chennai is done through

questionnaire, interviews.

The study seeks to collect the information from among the existing

customers about their satisfaction level with regards to various aspects of Bank’s

service. The scope is limited to the customer of Chennai Branch. The scope also

includes finding the ways to address the problem of customer of the improving the

satisfaction level.

7

1.4 NEED OF THE STUDY

Credit- The Life Line of the Business

Of all the elements that go into a business, Credit is perhaps the most crucial. The

best of the plans can come to naught if adequate finance is not available at the right

time. Entrepreneurs need credit support not only for running the enterprise &

operational requirements but also for diversification, modernization / up gradation of

facilities, capacity, expansion etc. Banking and financial system should ensure the

supply of timely and adequate amount of credit to the entrepreneurs in order to develop

the economy.

Developments in Banking Systems

Given the robust growth in the economy, banks can expect to see rapid increase

in disbursements, this challenges the credit appraisal systems followed by banks.

Adoption of global best practices under these circumstances will be timely and credit

positive.

The Indian Banking System has seen structural improvements during the last few

years, including improved solvency, better risk management systems and greater

access to capital. However, the greater complexities of the corporate and consumer

lending business, as well as the growing Competition among Indian banks, reinforces

the need for stronger risk assessment systems. A well-developed and implemented

credit appraisal system will result in.

Growth in the volume of credit disbursement.

Reduce the non-performing assets of the bank and improves the quality of asset

portfolio.

Improves the bottom line of the bank and

Ensures timely and adequate supply of credit to the industry.

Hence, this study is carried out to understand the credit appraisal and

Customer Satisfaction Level carried out in ICICI Bank Chennai.

8

1.5 LIMITATIONS OF THE STUDY

This study is limited to business loans alone. Personal loans are not taken in to

the purview of the study.

The information related to credit appraisal system is very confidential so all other

banks are not interested to reveal all their process. So the findings &

Suggestions are based upon the information gathered from the 5 Banks only.

Banks Surveyed ensured that the name of the Bank kept Secretive.

This study is limited to advanced lend by Adyar branch of ICICI bank.

In depth analyses could not be carried out because shorter time duration.

Bank is not interested in providing crucial information about their borrowers and

hence identity of the borrower who are analyzed has been changed

Questionnaire has a set of 15 questions and hence respondents were not very

patient in answering the questions.

Accuracy of the study is limited due to the possible bias of the respondents.

9

CHAPTER II

2.1 REVIEW OF RELATED LITERATURE

The purpose of this study was to find out the effectiveness of credit appraisal

system of ICICI Bank Pvt Ltd, Chennai. This chapter presents the review of related

research of the components credit appraisal.

Banks manage a wide range of assets, liabilities, and equity capital that support

their operations and activities. Proper risk management is therefore a vital and integral

part of effective bank operation. Widely cited risks include credit risk, interest risk,

liquidity risk and operational risk. All these risks are derived from banks’ most

fundamental and traditional roles of lending and borrowing. Among those risks, credit

risk, which is associated with the potential variability of the stream of cash flows from an

asset, is one of the most crucial ones, as it is often appointed as the cause of a bank

failure. To perfect its credit risk assessment, monitoring and management, banks use a

variety of methods and tools. In the past 20 years, banks have been adopting and

improving automatic credit scoring system1 so as to evaluate certain types of loans

more objectively, accurately and efficiently. Recently, the industry has started

implementing credit rating as a mechanism to better manage its credit risk and to

improve its overall portfolio performance.

Credit risk rating is a summary indicator of risk for banks’ individual credit

exposures and is generally assigned at the time of each underwriting or credit approval

and reassessed during the credit review process. It functions as the barometer for the

banks to measure their credit risk exposure to each individual customer, either in

isolation or as part of their loan portfolio. The rating allows banks to measure the

relevant default probabilities at different rating levels more accurately. It helps banks to

reduce their risk exposure and to improve their profitability by reducing the number of

potential default loans as well as minimising the cost associated with bad debt recovery.

10

Although the major objective of credit rating is to determine the ability and willingness of

a borrower to pay at the agreed terms, the rating does a bit more than just classifying

the borrowers into “pass” and “fail” categories. The most important benefits for banks in

using the rating system to assess their loans include:

Identify and decline potential risky applicants

Reduce losses due to defaults

Price the loan properly

Increase liquidity

Maximise the profit

Improve monitoring process

Reduce monitoring cost

Minimise administrative costs with debt collection

Help banks to achieve their objectives

Allow allocation of resources where they are more productive

Avoid loan concentration

Treacy and Carey (2000) suggest that in designing a credit rating system, a bank

should consider numerous factors, including cost, efficiency of information gathering,

consistency of rating produced, staff incentives, nature of a bank’s business, and uses

to be made of the internal ratings. They notice that the proportion of grades used to

distinguish among relatively low-risk credits versus the proportion used to distinguish

among riskier pass credits tend to differ with the business mix of a bank. A rating

system with more rating categories is better than a system with just a few categories.

Finer distinctions of risk, especially among riskier assets, can enhance a bank’s

ability to analyse its portfolio risk exposure. However, an internal rating system with

11

larger number of grades is costly to operate because of the extra work required to

distinguish finer degrees of risk.

When assigning a loan applicant to a particular grade, Crouhy et al. (2001)

suggest that banks should analyse three different categories of variables – quantitative,

qualitative and legal. The quantitative analysis concentrates mainly on financial analysis

and is often based on a firm’s financial reports. The four main quantitative factors used

in the assessment model include net income, total operating income, total equity capital

and total asset values. These factors allow the banks to calculate a variety of ratios

including return on assets (ROA), return on equity (ROE) and assets utilisation (AU),

etc. Once computed, these ratios would be compared with the Internal Credit Risk

Rating System in the Macao Banking Sector industry standard. In addition to the

information disclosed in the financial statements, the rating also includes information

about the quality of collateral and the third party support. For certain type of loans like

overseas loans or loans for customer in import/export business, country risk is also

another important factor to take into account.

As for the qualitative analysis, the principal concern will be the quality of a

borrower’s management. A thorough review of a firm’s competitiveness within its

industry as well as the expected growth of the industry is needed. Finally, legal

analysis refers to the capacity to borrow. This means that a bank must make sure that a

customer requesting a loan has the authority and the legal standing to sign a binding

agreement. For instance, a bank needs to check whether the representative from an

organisation asking for a loan has the power to sign the credit agreement binding the

organisation and whether it gets the first claim on the collateral. In case it is an

individual asking for a loan, a bank needs to know if he can be held legally liable for the

loan he is requesting.

Despite the advances in science and technology that allow the development of

expert system or statistical classification models, human judgment is still an important

ingredient in the credit risk assessment process. According to Treacy and Carey (2000),

12

the rating process almost always involves the exercise of human judgment because

factors to be considered in assigning a rating and the weights given to each factor can

differ significantly among borrowers. Indeed, experienced lenders take credit ratings

and reports as inputs for decision-making process. The key reason for the models to be

tempered with judgment and common sense is because they do not fully explain the

subjective factors involved in the rating. Especially for large exposures, the benefits of

such accuracy may outweigh the higher costs of the judgmental systems. Because of

the high cost involved, in general, banks produce credit ratings for business and

institutional loans only

Credit appraisal in the market

Credit appraisal is a technique by which a banker or for that matter any financial

agency including financial Institutions (FIs) estimate the soundness of a credit proposal

or a project appraisal from the point of view of technical and financial liability or

feasibility.

Credit Appraisal

The decision to sanction or reject the proposal has to based on a careful analysis

of various facts and data presented by the borrower concerning him and the proposal as

assessed by the relationship manager. Such an objective and in-depth study of the

information and data should convince the sanctioning authority that the money lent to

the borrower for the desired purpose will be safe and it will be repaid with interest over

the desired period, if the assumption and terms and conditions on which it is sanctioned,

are fulfilled. Such an in-depth study is called the pre-sanction credit appraisal. It helps

the approver to sanction the proposal.

Credit appraisal focuses on:

a. Borrower / Management appraisal.

b. Technical appraisal of the project.

c. Market appraisal determining the viability of the project.

13

d. Financial Appraisal determining the viability of the cash flows to meet the loan

repayment requirements.

Modern approaches

The modern approaches for credit appraisal are statistical in nature. These

approaches are more objective as they are based on some statistical model. One of the

commonly used approach is credit scoring.

Credit -Scoring

Traditionally banks were using the method of analyzing the financial statement of

the applicants by which the bank was able to evaluate the applicant’s capacity to pay

back the loan. Though the applicant may be financially sound to pay, it was very difficult

to identify whether he or she has the ‘willingness’ to pay the loan.

When the demand for the consumer credits in retail market is fast increasing, banks

must have a system by which they are able to process the credit applicants

professionally and at the same time to identify the potential default risk of the borrower.

Most of banks presently use credit-scoring model to evaluate the loan applications

they receive from consumers. Banks, Credit card providers, Mortgage lenders and other

loan providers develop their own internal credit-scoring models on retail lending and use

these models to evaluate their applicants. With the introduction of credit scoring model

in he banks, often the customer can phone in with a loan request and within the shortest

possible time, bank can convey their decision calling back the customer.

Usually the credit scoring system are based on discriminant models or related

techniques in which variables are used jointly to establish a numerical score or ranking

for each credit applicant. If the applicant scare exceeds the prescribed and defined

14

cutoff level, the loan application is likely to be approved for credit. If credit scoring is

below the cutoff level, credit is likely to be denied

Credit evaluation in using a credit scoring model

Basic concept of using such scoring models by the banks are to identify the

financial, economic and motivation factors that separate good loans from bad loans by

observing large group of customers who had borrowers in the past. The same factors

may hold in future also with certain percentage of deviation. The underline assumptions

may go wrong if abruptly there is change in the economic and other enforcing factors.

Because of this reason, credit scoring system are frequently updated with the current

events and retested and revised with the identified current sensitive predictors.

Working capital assessment

Working capital refers to the funds invested in current assets, i.e. investment in

stock, sundry debtors, cash and other current assets. Business concerns will have

some current liabilities like trade creditors, bills payable etc., which could partially

finance the amount, required for current assets. Hence, the difference between the

current assets and current liabilities is the working capital gap, which is to be financed

by bank advances. Commercial banks have been lending short-term advances to

finance the working capital gap.

Working capital assessment is the process by which a banker ascertains the

maximum permissible bank finance for working capital that can be provided to any

customer who requests a working capital advance as per the prescribed norms and

recommendations.

Retail Credit

Retail credit is what is granted to consumers `for the purchase of goods or

services'; retail house is "a brokerage firm that caters to individual customers rather

than large institutions"; retail investors are "small individual investors who commit

capital for their personal account rather than on behalf of another company".

15

Corporate Credit

A contractual agreement in which a corporation receives something of value

now and agrees to repay the lender at some later date. This is almost identical to

personal credit except it is a business entity, instead of an actual person, that receives

corporate credit from vendors.

Business Credit

The Credit Business Fellow (CBF) is a professional designation for a business-

to-business credit manager. The CBF designation and structure is trademarked by the

National Association of Credit Managers. The CBF designation illustrates that achievers

are knowledgeable about and have contributed to the field of business credit by first

having earned the CBA designation as well as having completed additional course

work.

Types of Credit facilities

ICICI bank provides the following types of credit facility to its customers. They

are classified as fund-based advances and non-fund based facilities.

Fund based facilities

Term Loan

Term Loans are the counter parts of Fixed Deposits in the Bank, Banks lend

money in this mode when the repayment is sought to be make in fixed, pre-determined

instalments. This type of loan is normally given to the borrowers for acquiring long-term

assets

Cash credit/Over Draft

This account is the primary method in which Banks lend money against the security

of commodities and debt. In runs like a current account except that the money that can

be withdrawn from this account is not restricted to the amount deposited in the account.

16

Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit

facility” in excess of the amount deposited in the account.

A cash credit is an arrangement by which a banker allows his customer to borrow

money up to a certain limit against a bond of credit by one are more sureties, or certain

other securities.

Discounting of bills

Under the purchase or discounting of bills, a borrower can obtain credit from the

bank against bills. The bank purchase or discounts the borrower’s bills. The amount

provided under this agreement is covered within the overall cash credit or overdraft limit.

Non fund based facilities

Letter of credit

Suppliers particularly the foreign suppliers, insist that his buyer should ensure that

his bank will make the payment if fails to honour its obligation. This is ensured through

a letter of credit arrangement. A bank opens a L/C in favour of a customer to facilitate

his purchase of goods. If the customer does not pay to the supplier within the credit

period, the bank makes the payment under the L/C arrangement.

Bank Guarantee

A bank guarantee limit or one time guarantee facility is extended by commercial

banks on behalf of their customers in favour of third parties who will be the beneficiary

of the guarantees. When a bank guarantee is given, no credit is extended and bank

does not part with any funds. There will be only a guarantee by the bank to the

beneficiary to make payment in the even of the customer on whose behalf of the

guarantee is given, makes a default in his commitment. Until then the bank is not

required to part with any money to the beneficiary.

17

2.2 ICICI Bank Limited

Overview

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is

India's second-largest bank with total assets of about Rs. 2,513.89 bn (US$ 56.3 bn) at

March 31, 2006 and profit after tax of Rs. 25.40 bn (US$ 569 mn) for the year ended

March 31, 2006 (Rs. 20.05 bn (US$ 449 mn) for the year ended March 31, 2005). ICICI

Bank has a network of about 614 branches and extension counters and over 2,200

ATMs. ICICI Bank offers a wide range of banking products and financial services to

corporate and retail customers through a variety of delivery channels and through its

specialized subsidiaries and affiliates in the areas of investment banking, life and non-

life insurance, venture capital and asset management. ICICI Bank set up its

international banking group in fiscal 2002 to cater to the cross border needs of clients

and leverage on its domestic banking strengths to offer products internationally. ICICI

Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches

in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre

and representative offices in the United States, United Arab Emirates, China, South

Africa and Bangladesh. Our UK subsidiary has established a branch in Belgium. ICICI

Bank is the most valuable bank in India in terms of market capitalisation.

ICICI Bank's equity shares are listed in India on the Bombay Stock Exchange and

the National Stock Exchange of India Limited and its American Depositary Receipts

(ADRs) are listed on the New York Stock Exchange (NYSE).

ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors

and employees.

18

At June 5, 2006, ICICI Bank, with free float market capitalization* of about Rs.

480.00 billion (US$ 10.8 billion) ranked third amongst all the companies listed on the

Indian stock exchanges.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial

institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was

reduced to 46% through a public offering of shares in India in fiscal 1998, an equity

offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition

of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary

market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was

formed in 1955 at the initiative of the World Bank, the Government of India and

representatives of Indian industry. The principal objective was to create a development

financial institution for providing medium-term and long-term project financing to Indian

businesses. In the 1990s, ICICI transformed its business from a development financial

institution offering only project finance to a diversified financial services group offering a

wide variety of products and services, both directly and through a number of

subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian

company and the first bank or financial institution from non-Japan Asia to be listed on

the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards

universal banking, the managements of ICICI and ICICI Bank formed the view that the

merger of ICICI with ICICI Bank would be the optimal strategic alternative for both

entities, and would create the optimal legal structure for the ICICI group's universal

banking strategy. The merger would enhance value for ICICI shareholders through the

merged entity's access to low-cost deposits, greater opportunities for earning fee-based

income and the ability to participate in the payments system and provide transaction-

banking services. The merger would enhance value for ICICI Bank shareholders

through a large capital base and scale of operations, seamless access to ICICI's strong

corporate relationships built up over five decades, entry into new business segments,

higher market share in various business segments, particularly fee-based services, and

19

access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards

of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-

owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI

Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of

ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in

March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of

India in April 2002. Consequent to the merger, the ICICI group's financing and banking

operations, both wholesale and retail, have been integrated in a single entity.

Small & Medium Enterprises Group (SMEG)

Small & Medium Enterprises Group (SMEG) caters to the SME segment and offers

banking solutions to sole proprietorship, partnership firms and companies. Their

extensive trade related expertise, widespread local network and global alliances enable

us to provide value-added service. SMEs trust us for information, assistance, advice

and customized banking solutions..

Purpose

To provide Bank credit to SME at concessional Rate of Interest towards working

capital and term loan for acquiring any fixed assets for business development purpose.

Coverage

All Small Enterprises & Medium Enterprises as per the extant definition of Govt. of India.

Definition: a) The term "Small Enterprises" means that of a Small Scale Industrial unit

in which investment in plant & machinery does not exceed Rs.1 Crore except in respect

of certain specified items under Hosiery hand tools, drugs and pharmaceuticals,

stationery items and sports goods where this investment limit has been enhanced to

Rs.5 Crore. b) The term "Medium Enterprises" means that of units with investment in

Plant & Machinery in excess of SSI Limit and up to Rs.10 Crore. ** Note: A

comprehensive legislation which would enable the paradigm shift from Small Scale

20

Industry to Small & Medium Enterprises is under consideration of Parliament. Pending

enactment of the above legislation, the current SSI/Tiny industries may continue.

Eligibility

All SME units run by Individual, Proprietary concerns, Partnership Firm, Limited

Companies.

products & services include:

Business Loans\

-Vendor/Dealer Finance

-Working Capital Finance

-Cash Credit

-Credit Card Securitization

-Merchant Account

Forex

-Fx Remittance

-Derivatives

Trade

-Letter of Credit

-Export Bill Negotiation

-Escrow Account

21

2.3 Banking in India

Banking in India originated in the first decade of 18th century with The General

Bank of India coming into existence in 1786. This was followed by Bank of Hindustan.

Both these banks are now defunct. The oldest bank in existence in India is the State

Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A

couple of decades later, foreign banks like Credit Lyonnais started their Calcutta

operations in the 1850s. At that point of time, Calcutta was the most active trading port,

mainly due to the trade of the British Empire, and due to which banking activity took

roots there and prospered. The first fully Indian owned bank was the Allahabad Bank

set up in 1865.

By the 1900s, the market expanded with the establishment of banks like Punjab

National Bank, in 1895 in Lahore; Bank of India, in 1906, in Mumbai - both of which

were founded under private ownership. Indian banking sector was formally regulated by

Reserve Bank of India from 1935. After India's independence in 1947, the Reserve

Bank was nationalized and given broader powers.

The First Provincial Bank of Taiwan in Taipei, Republic of China was formerly the

central bank of the Republic of China and issued the New Taiwan dollar.

A bank [bæŋk] is a business that provides banking services for profit. Traditional

banking services include receiving deposits of money, lending money and processing

transactions. Some banks (called Banks of Issue) issue banknotes as legal tender.

Many banks offer ancillary financial services to make additional profit; for example:

selling insurance products, investment products or stock broking.

22

Currently in most jurisdictions the business of banking is regulated and banks require

permission to trade. Authorization to trade is granted by bank regulatory authorities and

provide rights to conduct the most fundamental banking services such as accepting

deposits and making loans. There are also financial institutions that provide banking

services without meeting the legal definition of a bank (see banking institutions).

Banks have a long history, and have influenced economies and politics for centuries.

Traditionally, a bank generates profits from transaction fees on financial services and

from the interest it charges for lending. In recent history, with historically low interest

rates limiting banks' ability to earn money by lending deposited funds, much of a bank's

income is provided by overdraft fees and riskier investments.

Banks in the economy

Role in the money supply

A bank raises funds by attracting deposits, borrowing money in the inter-bank

market, or issuing financial instruments in the money market or a capital market. The

bank then lends out most of these funds to borrowers.

However, it would not be prudent for a bank to lend out all of its balance sheet. It

must keep a certain proportion of its funds in reserve so that it can repay depositors

who withdraw their deposits. Bank reserves are typically kept in the form of a deposit

with a central bank. This behaviour is called fractional-reserve banking and it is a central

issue of monetary policy. Some governments (or their central banks) restrict the

proportion of a bank's balance sheet that can be lent out, and use this as a tool for

controlling the money supply. Even where the reserve ratio is not controlled by the

government, a minimum figure will still be set by regulatory authorities as part of bank

regulation.

23

Size of global banking industry

Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record

$60.5 trillion. This follows a 19.3% increase in the previous year. EU banks held the

largest share, 50% at the end of 2005, up from 38% a decade earlier. The growth in

Europe’s share was mostly at the expense of Japanese banks whose share more than

halved during this period from 33% to 13%. The share of US banks also rose, from 10%

to 14%. Most of the remainder was from other Asian and European countries.

The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the

world. The large number of banks in the US is an indicator of its geographical dispersity

and regulatory structure resulting in a large number of small to medium sized institutions

in its banking system. Japan had 129 banks and 12,000 branches. In 2004, Germany,

France, and Italy had more than 30,000 branches each—more than double the 15,000

branches in the UK[1].

Bank crises

Banks are susceptible to many forms of risk which have triggered occasional

systemic crises. Risks include liquidity risk (the risk that many depositors will request

withdrawals beyond available funds), credit risk (the risk that those that owe money to

the bank will not repay), and interest rate risk (the risk that the bank will become

unprofitable if rising interest rates force it to pay relatively more on its deposits than it

receives on its loans), among others.

Banking crises have developed many times throughout history when one or more

risks materialize for a banking sector as a whole. Prominent examples include the U.S.

Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during

the 1990s, the bank run that occurred during the Great Depression, and the recent

liquidation by the central Bank of Nigeria, where about 25 banks were liquidated.

24

Regulation

The combination of the instability of banks as well as their important facilitating role

in the economy led to banking being thoroughly regulated. The amount of capital a bank

is required to hold is a function of the amount and quality of its assets. Major banks are

subject to the Basel Capital Accord promulgated by the Bank for International

Settlements. In addition, banks are usually required to purchase deposit insurance to

make sure smaller investors are not wiped out in the event of a bank failure.

Another reason banks are thoroughly regulated is that ultimately, no government

can allow the banking system to fail. There is almost always a lender of last resort—in

the event of a liquidity crisis (where short term obligations exceed short term assets)

some element of government will step in to lend banks enough money to avoid

bankruptcy.

Public perceptions of banks

In United States history, the National Bank was a major political issue during the

presidency of Andrew Jackson. Jackson fought against the bank as a symbol of greed

and profit-mongering, antithetical to the democratic ideals of the United States.

Currently, many people consider that various banking policies take advantage of

customers. Specific concerns are policies that permit banks to hold deposited funds for

several days, to apply withdrawals before deposits or from greatest to least, which is

most likely to cause the greatest overdraft, that allow backdating funds transfers and fee

assessments, and that authorize electronic funds transfers despite an overdraft.

In response to the perceived greed and socially-irresponsible all-for-the-profit

attitude of banks, in the last few decades a new type of banks called ethical banks have

emerged, which only make social-responsible investments (for instance, no investment

in the arms industry) and are transparent in all its operations.

25

In the US, credit unions have also gained popularity as an alternative financial

resource for many consumers. Also, in various European countries, cooperative banks

are regularly gaining market share in retail banking.

Current scenario

Currently (2007), overall, banking in India is considered as fairly mature in terms of

supply, product range and reach-even though reach in rural India still remains a

challenge for the private sector and foreign banks. Even in terms of quality of assets

and capital adequacy, Indian banks are considered to have clean, strong and

transparent balance sheets-as compared to other banks in comparable economies in its

region. The Reserve Bank of India is an autonomous body, with minimal pressure from

the government. The stated policy of the Bank on the Indian Rupee is to manage

volatility-without any stated exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector, the demand for banking services-especially retail

banking, mortgages and investment services are expected to be strong. M&As,

takeovers, asset sales and much more action (as it is unravelling in China) will happen

on this front in India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an

investor has been allowed to hold more than 5% in a private sector bank since the RBI

announced norms in 2005 that any stake exceeding 5% in the private sector banks

would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector

banks (that is with the Government of India holding a stake), 29 private banks (these do

not have government stake; they may be publicly listed and traded on stock exchanges)

and 31 foreign banks. They have a combined network of over 53,000 branches and

17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector

26

banks hold over 75 percent of total assets of the banking industry, with the private and

foreign banks holding 18.2% and 6.5% respectively.

CHAPTER III

RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN

A research design is purely and simply the framework or plan for the study that guides the

collection and analysis of the data it is a blue print that is followed in completing a study.

Research is the plan structure and strategy of investigation conceived to us to

obtain answer to research question and control variance. A research designs the

specified methods and procedure for acquiring the information needed.

It is the overall operational pattern framework of the project that stipulates what

information is to be colleted from which sources by what procedures.

Bernard s Philip has defined research design as: -

“The blue print for the collection, measurement and analysis of data”

Methodology

Basically the study is divided into three methods. They are

27

1. Case Study Analysis

2. Comparison Analysis with other Banks

3. Customer Satisfaction analysis

Methodologies of Research Design

Type design: - Descriptive design by survey method.

Data Sources

Required data has to be carried out in order to study the facts and figure. There

are two types of data

1. Primary data

2. Secondary data.

A combination of both is utilized.

1. Primary data

Primary data was the first hand information collected from five different banks,

which are direct competitors for ICICI Bank in the industry for benchmarking of credit

appraisal by using unstructured questionnaire. To find out the perspective of the

customer towards the appraisal process the data is collected through structural

questionnaire.

2. Secondary data

The secondary data was collected from company records, various books and

internet.

28

Research approach

Research approach presents the important features of the research method to

be used.

3.2 SURVEY METHOD

Survey method was used to collect primary data from different banks and

customers.

Sampling design

The researcher must decide the way of selecting the sample known as the

sample design. The sample size was taken as 50 for customer survey and five banks

for benchmarking of appraisal process.

Sampling technique

Simple random sampling has been adopted to collect the requisites data by

interviewing credit managers from various banks for benchmarking appraisal process

and small enterprisers (customers) in and around Chennai.

3.3 TOOLS FOR ANALYSIS

The data were analyzed with the help of satisfied statistical tools like

percentage analysis, interval analysis .

29

CHAPTER IV

DATA ANALYSIS AND INTERPRETATION

Credit appraisal system followed in ICICI Bank:

The clients are targeted based on clear norms, which seek to filter the undesirables

at the entry level. The credit exposures are taken after subjecting the proposal to

various risk factors such as financial risk, industry risk, management risk etc. Periodical

review is conducted to ascertain the conduct of the accounts. The details of credit

appraisal is as follows.

Procedure:

Proposal under credit facilities are received by the advance department directly

from the customers.

These proposals are put forward to the credit officer and senior manager who

will analyse the proposal.

Then they will submit a report in the form of office note to the chief manager.

For advance up to Rs.1crore, the chief manager will sanction the loan. And for

advance above Rs. One crore the regional office will sanction the loan.

30

Thus after going through the office note and on the basis of Pros and Cons In the

proposal the chief manager /Regional office will take decision on sanctioning the loan.

The underlying theme for sanction of proposal is a conservative approach.

Analysis by Credit Official

The credit official on receiving a request makes a detailed credit analysis.

The appraisal fundamentally focuses on the aspects of short term and long term liquidity

and profitability. After a detailed analysis, an office note is prepared by the credit official

along with the recommendations of the Chief Manager and submitted to the regional

office for consideration.

The note generally encompasses the following:

1. The nature and constitution of the borrower, profile of the

Proprietors/Partners/Promoters/ Directors/Management and pattern of share holding.

2. Credit report cum opinion sheet, containing the details about the credit worthiness of

the borrower and opinions, collected from various sources.

3. Banks past experience with the borrower (for existing customers) or the experience of

borrowers past bankers (for new customers). This will include annual turnover (Sum of

credit entries in account), number of cheques returned, details about repayment of

existing and old loans etc.

4. Banks present exposure to the company/group and borrowers present request.

5. Purpose for which the Loan is required.

6. Details about sister concerns, their credit worthiness, relation with the borrower etc.

7. Compliance with central Government, State Government and other competent

authorities and socio economic feasibility of the project.

8. Nature of the industry, new developments in the industry and cycle of the industry.

31

9. Market feasibility analysis of the borrower, existing business relationship, existing

current and future demand etc.

10. Technical feasibility of the project, location of the factory and environmental and

pollution clearance etc.

11. Analysis of Managerial competence by studying the educational qualification,

experience, knowledge and capacity of the management and its work force.

12. The appraisal of the financial figures, qualifications in the auditors report, accounting

practices, and director’s report.

13. Analysis of financial statement by using various tools such as ratios analysis, cash

flow analysis and fund flow analysis. Analysis of income generating capability.

14. Details about prime and collateral security. This include details about creation of

EM, availability of insurance, legal opinion of the property, encumbrance certificate for

the property, engineers valuation for the asset, Managers desktop valuation and field

visit details etc.

15. Details about the guarantor, their net worth, credibility etc.

16. Terms and conditions to be fulfilled for sanctioning the loan.

Beyond these, ICICI also does credit checks on the borrower to actually

determine a borrower’s ability to pay and willingness to pay.

10. Credit appraisal tools

The following methods and techniques are used to analyze the proposals

Background Information:

It consists of client company’s business activities, product profile, awards and

certification, mission etc.

Industry analysis:

32

It details with the status of the industry, its growth rate, drawbacks, and other

technical factors.

Market analysis:

This analysis is made of determine the market position, level of competition,

profitability position, threats in the market etc.

Financial indicators

Key financial indicators which are used by the Bank to determine the financial

soundness of the clients are found out and they are analyzed for the selected cases.

Those indicators are as follows:

(1) Tangible net worth:

The owner’s interest or proprietor’s stake is called as Tangible net worth (TNW).

Tangible net worth is the excess of total amount of assets (excluding miscellaneous

expense) over total amount of outside liability. It is give by

TNW = Share capital + Reserves and surplus - Fictitious assets

(2) Debt Equity Ratio:

The Debt Equity Ratio (DER) is one of the two basic financial ratios which a banker will

always look into, the other ratio being Current Ratio. Debt equity ratio is calculated to

measure the relative claims of outsiders and owners against the firm’s assets. This

ratio is also called as TOL/TNW ratio. This ratio indicates the relationship between the

33

external equities or the outsider’s fund and the internal equities or the shareholders

fund.

Debt equity ratio= Outsider’s funds / Shareholder’s funds

= Total outside liability / Tangible net worth

(3) Current ratio:

The ratio of current assets to current assets is called “current ratio”. In order to

measure the short-term liquidity or solvency of a concern, comparison of current assets

and current liabilities is inevitable. Current ratio indicates the ability of a concern to

meet its current obligations as and when they are due for the payment.

Current ratio = Current assets / Current liability

(4) Net Working Capital:

Net working capital refers to the different between current assets and current

liabilities. Net working capital can be positive or negative. A positive net working capital

will arise when current assets exceeds current liabilities. A negative net working capital

occurs when current liabilities are in excess of current assets.

New Working Capital = Current Assets – Current Liabilities

(5) Sales:

It is the readily available and most important financial indicator to judge whether the

business will survive are not. Here sales refer to net sales.

Sales = Gross sales – (sales return + sales tax + excise duty)

34

(6) Depreciation:

Depreciation is a provision made in the Profit and Loss a/c. to replace the assets

when they are due for replacement. It is non-cash expenditure. Amount of depreciation

is readily available in the Profit and Loss a/c.

(7) Profit After Tax:

All firms exist to earn profit. Proprietors will invest more in the business if only it

provides good return to them. Hence, Profit is the single most judging factor to

determine the viability of the business.

PAT = Net profit after interest and depreciation – Provision for tax

(8) Cash generation:

Business should generate sufficient cash flows to satisfy its day-today cash needs.

When it is unable to meet its daily cash needs it will leads to a situation of cash crunch.

Cash flow during the year is determined by adding depreciation (which is non-cash

expenditure) and PAT.

Cash generation = PAT + Depreciation

(9) PAT/Sales:

This ratio is designed to focus attention on the net profit margin arising from

business operations. This ratio is expressed as a percentage. This ratio is of primary

importance since profits accrue on sales. This ratio indicates the profitability of

business for each Rs.100 of sales.

PAT/Sales = (Profit after interest, depreciation and tax / Net Sales) x 100

35

(10) PBIT/Sales:

This ratio measures the relationship between the profit before interest and tax and

net sales. This ratio is also expressed as a percentage.

PBIT/Sales = (Profit before interest and tax / Net sales) x 100

4.1.1 CASE STUDY ANALYSIS

One proposals were selected from different borrower, in order to apply credit appraisal

and working capital assessment procedures to the company.

Methods of data collection

Secondary data:

The data which is collected from the already existing files, journals, published

financial statements and documents are called as secondary data. The secondary

which are collected has been taken from the loan application forms, annual reports

of the borrowers and other documents and handouts given by the borrower.

Tools of analysis

The following methods and techniques have been used to analyse the cases:

1. Background Information

It consists of client company’s business activities, product profile, awards and

certifications, mission etc.

36

2. Industry analysis

It deals with the status of the industry, its growth rate, drawbacks, and other

technical factors.

3. Market analysis

This analysis is made to determine the market position, level of competition,

profitability position, threats in the market etc.

4. Financial indicators

Key financial indicators which are used by the Bank to determine the financial

soundness of the clients are found out and they are analysed for the selected

cases.

CASE ANALYSIS

Financial Performance of GLANCE Pvt (Ltd)

5 YEARS PERFORMANCE AT A GLANCE - FINANCIAL (RS.in Mn)

 Projected

2008Projected

20072005-2006 2005-2004 2004-2003

INCOME STATEMENT

Sales 3001.94 2806.09 2681.48 2236.95 2440.04*

Other Income 664.87 642.39 461.47 195.21 172.43

TOTAL INCOME. 3666.81 3448.48 3142.95 2432.16 2612.47

Earning Before Tax & Depreciation

2346.01 1972.51 1957.42 1445.70 1305.48

Depreciation 516.30 499.78 259.85 260.93 271.26

Interest 66.09 69.01 3.92 3.77 5.77

37

Profit  1763.62 1403.72 1693.65 1181.00 1028.43

Prior Period Adjustments(Net)

-9.06 9.36 2.67 17.53 -3.24

Extraordinary Item 2.12 0.00 -8.48 0.00 0.00

Profit before Tax. 1756.68 1413.08 1687.83 1198.53 1025.19

Provision for Tax 541.68 269.57 539.43 379.33 299.27

Net Profit/(Loss)PAT.

1215.00 1143.51 1148.40 819.20 725.92

Dividend 335.54 234.88 234.88 226.49 172.89

Dividend Tax 46.70 30.09 30.09 --- 17.64

BALANCE SHEET

Equity Capital 1677.71 1677.71 1677.71 1677.71 1677.71

Reserves & Surplus 6001.47 5168.85 4290.46 3407.18 3292.35

Tangible Net worth 7673.05 6824.25 5947.55 5061.98 4959.51

Loans Outstanding 1229.69 1295.70 1386.78 1266.31 1272.85

Net Fixed Assets 4269.06 4542.63 4129.79 2585.15 2610.62

Investments 2590.77 2590.77 595.00 498.00 595.00

Net Current Assets 2617.16 1549.24 2407.99 1793.49 1507.25

Capital Employed 9476.99 8682.64 7132.78 4876.64 4712.87

RATIOS

Operating Margin (OPM) (%)

56.00 47.40 55.79 55.90 46.44

38

Return on Capital Employed (ROCE) (%)

12.82 13.17 16.10 16.80 15.40

Return on Networth (RONW) (%)

15.83 16.76 19.31 16.18 14.64

Debt Equity (%) 16.03 18.99 23.32 25.02 25.66

Current Ratio 3.89 2.43 3.47 3.21 2.27

Quick Ratio 3.50 2.15 3.11 2.72 1.86

VALUE ADDED PER EMPLOYEE (in Rs.)

1348250 1253704 1156768 952534 849201

BOOK VALUE PER SHARE (in Rs.)

45.74 40.68 35.45 30.17 29.56

EARNING PER SHARE (in Rs.)

7.64 6.52 6.83 4.78 4.35

Dividend (%) 20.00 14.00 14.00 13.50 10.00

Total Operating Income

The Operating Income of the Company has Increase for Every Year .It Indicated that

the company has huge sales in the Every Year. This income shows that the part of the

sale is card sales.

Debt Equity Ratio

The Debt Equity ratio is neutral .This Ratio is Fluctuate for Every Year.

Current Ratio

The current ratio is an indication of a firm's market liquidity and ability to meet short-term

debt obligations.

39

The organisation current ratio is not between the margin level it has fluctuating for every

year .It indicates the organisation is not properly utilizing the current asset. In Projected

year it may utilize for business purpose.

Findings of the Case

Sales and Profit after tax are showing Rapid Growth.

Debt equity ratio is not favourable Level of risk is very high at a DER of

23.32.It may decrease in Future.

Current Ratio is Not Satisfactory Position. The organisation is not utilizing the

current assets

“C” score is below the discriminating level and it is very low. The card sale are

margin level.

Recommendation

In view of the above analysis, it is recommended that credit could be provided to the

borrower. But, the bank should take a higher level of risk. Borrower request for renewing

the Demand loan for Rs 20 Mn as (or) 30Mn for fresh Term loan has be

sanctioned .Borrower should be continuously monitored and steps should be taken to

improve their financial position

4.1.2 FINDINGS OF BANK SURVEY

Some of the Key Common parameters which form the base of the Scoring model of the

Banks Surveyed, for their Appraisal processes are:

Collaterals

Current Ratio

Sales Trend

EBIDTA Trend

40

Profitability(PAT/N.S)

Sales turn. to Curr.Ass

Bank Fin. to Curr.Ass

Sales turnover to Bank Finance

Business Vintage

Personal Net worth of Promoters

Inward Cheque Returns

Credit Summation %

Cust. Concentration

Supp. Concentration

Product Demand & Risk

PBT

TNW

Working Capital

NP Ratio

Creditors & Debtors Turnover Ratio

DSCR

Min. Avg Swipes

Some of the minor differences which distinguish the scoring models from bank to bank,

is a combination of the way one uses some parameters in their scoring and certain

other parameters which one may or may not use.

Some of the findings of such exclusive usage were:

Interest Coverage Ratio

Leverage

Total Debt: Net Cash Accruals

Business Commitment

Succession Risk

Avg. Balance in 6m

No. of credits in 6m period

Turnover Limit for Manufacturers & Non-Manufacturers

41

Relationship with Bank

Tax Payment Record

Market Reports from acquiring Team

Seasonality of Card rec. bet Peak/non-peak

Property Profile

These parameters may or may not form part of the Scoring Model of every Bank. Even

if they form part there is a particular Range/ usage which is followed by each Bank. This

form key to their Appraisal process and are exclusive to them. They try to safeguard it

as much as possible so that their model does not get copied. This exclusive models

may be formed by banks based on their Mission & Ideologies.

As evident from the survey, when the different Appraisal models were compared with

that of ICICI’s, the inferences which came out were:-

ICICI used maximum parameters in its Scoring compared with other Banks.

Some of the parameters were very exclusive. Eg.

1. For manufacturers & Non- Manufacturers.

2. Criteria for Cheque Returns

3. Criteria for Holding Period

4. CCS/Installment

5. Criteria for Property Appraisal

6. Relationship with Bank

7. Transaction History

It had most Thorough & Complete Scoring system which took into consideration

almost all aspects of the Client.

The Processing time was the highest – 10 - 15 days

Equal wieghtage is given to all aspects involved in the scoring process.

Percetage of NPA for the Financial year 2005 was 1.4 % which was the lowest.

Interest charge of 12 to 15 % is reasonable by RBI norms.

Processing fees of 1% is quite the same as with other Banks.

Form of Funding is the same as other Banks.

42

Criteria for funding is regularized by the RBI standards, which is almost the same

in all Banks which is

1. 4 times of ATNW

or [ Which ever is lower]

2. (Current Year Sales)*125 %*( 20%).

That’s the reason why there is a difference factor very sharply visible between

Private & Nationalized Banks. Private Banks are more professional in their Approach as

Compared to their Nationalized Counterparts.

Some of the findings which came about while surveying the nationalized Banks are:

They still follow 5 C’s Traditional Approach.

They have a mix of Modern as well as Traditional Approach.

They do not have a standardized Scoring Pattern.

The Appraisal process depends solely upon the Personal Judgement carried out

by the Credit Manager.

The Mission and Vision Statement generally bear Big influence on the

Sanctioning of Loan.

The range of people to whom loan if offered is nowhere matched by the Private

Banks. It goes from small petty shop owner to Multinationals.

Their Scale of Funding is also very high compared with Private Banks.

They give more weightage to Financials of their Clients when compared with

Private Banks as theirs is fairly simple & lenient procedure, and as their risk is

higher.

Important Financials taken by them are:

- Solvency Ratio

- Security Coverage Ratio

- Current Ratio

There is no restriction on Maximum Limit

They follow some methods such as

43

1. Turnover Method

2. Eligible Working Capital Methord

3. Cash Budget

4. Simple Holistic Borrowing

4.1.3 Customer Survey Details

Chart showing The Constitution of Organization of the respondents

44

Table 4.1

The above table indicate the constitution of the organisation, here 28% of the

organisation is constituted as proprietorship concern. 24% of the enterprisers are

constituted as partnership entity.48% of the organisation is constituted as a limited

company

INFERENCE

It has been inferred that most of the organisation is constituted as limited

company.

Figure 4.1

Chart showing the Enjoyment of Working Capital facility in Banks

Responses Number of

respondents

Percentage

Proprietorship

Partnership

Company

14

12

24

28

24

48

Total 50 100

45

Table 4.2

From the above table shows that 84% of respondents are already taken the working

capital loan from various banks like ICICI Bank, HDFC Bank, UTI Bank etc. But here

16% of the organisation not taken working capital loan from any bank.

Figure 4.2

APPLYING INTERVAL ESTIMATION

Responses Number of

respondents

Percentage

Yes

No

42

8

84

16

Total 50 100

46

n=Sample size = 50

96.12

at 95% confidence level.

Standard error

Interval estimation

CONCLUSION

Therefore we conclude that, the favourable event lies between [0.84; 0.99] at

95% confident level and the Customer portion lies between 84% and 99%.

INFERENCES

Here we can interpret that 84% of the organisation are already taken the loan from any one of the bank.

Chart showing the Preferred Bank to avail Credit facility

47

Table4.3

FINDINGS

The given data will show about small entrepreneur’s preference to approach the credit

facility. Here 60% of the customers indicated as they will approach ICICI Bank, 16% of

the customer will prefer HDFC Bank, 14% will prefer UTI Bank and 5% preferring HSBC

Bank.

INFERENCES

Here we can understand that majority of the customers will prefer ICICI Bank to avail

the credit facility.

Figure 4.3

Chart showing Duration of Relationship with the Bank

Responses Number of

respondents

Percentage

ICICI Bank

HDFC Bank

UTI Bank

HSBC

30

8

7

5

60

16

14

10

Total 50 100

48

Table4.4

FINDINGS

From the about table it is evident that 22% of the respondents are having Relationship

with ICICbank Less than 5Years, 14% of the respondents are having Relationship with

ICICbank 5 to 10Years, 10% of the respondents are having Relationship with ICICbank

11 to 20Years, 18% of the respondents are having Relationship with ICICbank 21 to

30Years, 36% of the respondents are having Relationship with ICICI bank More than 31

Years.

INFERENCE

It is been inferred that most of the respondents are having Long Relationship with

ICICI Bank.

Responses Number of

respondents

Percentage

Less Than 5 Years

5 to10 Yrs

11 to 20Yrs

21 to 30 Yrs

More than 31 years

11

7

5

9

18

22

14

10

18

36

Total 50 100

49

22%

14%

10%18%

36%Less than 5Yrs

5 to 10 Yrs

11to 20Yrs

21 to 30 Yrs

More than 31 Yrs

Figure 4.4

Chart showing Types of credit facilities Customers enjoying with Bank

Table4.5

FINDINGS

From the about table it is evident that 12% of the respondents are having Term Loan in

ICICI Bank, 34% of the respondents are having Cash Credit/ Over Draft in ICICI Bank,

32% of the respondents are having Demand Loan in ICICI bank, 12% of the

respondents are having Letter of Credit in ICICI Bank, 10% of the respondents are

having Other funding Like., BG,TC in ICICI Bank.

INFERENCE

Responses Number of

respondents

Percentage

Term Loan

Credit Card/Over Draft

Demand Loan

Letter of credit

Others

6

17

16

6

5

12

34

32

12

10

Total 50 100

50

It is been inferred that most of the respondents are Preferring for Cash Credit &

Over Draft in ICICI Bank.

12%

34%

32%

12%

10%

Term Loan

Credit Card/OverDraft

Demand Loan

Letter of credit

Others

Figure 4.5

Chart showing Types of Banking facilities Customers enjoy with Bank

Table4.6

FINDINGS

From the above table it is evident that 36% of the respondents are having Current

Account in ICICI Bank, 44% of the respondents are having Current Account in ICICI

Bank, 14% of the respondents are having Fixed Deposit Account in ICICbank, 6% of the

respondents are having Recurring Deposit Account in ICIC Bank.

INFERENCE

It can be inferred that more than half of the respondents are enjoying Current

Account facility.

Responses Number of

respondents

Percentage

Saving Bank Account

Current Account

Fixed Deposit

Recurring Deposit

18

22

7

3

36

44

14

6

Total 50 100

51

36%

44%

14%

6%0%

Saving BankAccount

Current Account

Fixed Deposit

Recurring Deposit

Others

Figure 4.6

Chart showing the criteria’s to be considered for sanctioning the credit

Table 4.7

FINDINGS

From the about table it is evident that 4% of the respondents are Very stringent and

cumbersome to get the Loan from ICICI Bank, 30% of the respondents are Stringent and

cumbersome to get the Loan from ICICI Bank, 12% of the respondents are Normal and

appropriate to get the Loan from ICICI Bank, 44% of the respondents are Easy to get the Loan

from ICICI Bank, 10% of the respondents are Very Easy to get the Loan from ICICI Bank.

INFERENCE

Responses Number of

respondents

Percentage

Very stringent and cumbersome

Stringent and cumbersome

Normal and appropriate

Easy

Very Easy

2

15

6

22

5

4

30

12

44

10

Total 50 100

52

It can be inferred that most of the respondent feel that the Loan is Easily Sanctioning.

4%

30%

12%

44%

10%

Very stringent andcumbersome

Stringent andcumbersome

Normal andappropriate

Easy

Very Easy

Figure 4.7

Chart showing The Time Factor for renewal/limit Enhancement procedure

Table4.8

FINDINGS

From the about table it is evident that 28% of the respondents are Saying that More

Time Consuming for Renewal the Loan in ICICI Bank, 40% of the respondents are

Saying that Normal Time Consuming for Renewal the Loan in ICICI Bank, 32% of the

respondents are Saying that Less Time Consuming for Renewal the Loan in ICICI Bank.

INFERENCE

Responses Number of

respondents

Percentage

More Time Consuming

Normal Time Consuming

Less Time Consuming

14

20

16

28

40

32

Total 50 100

53

It can be inferred that the respondents are accept there is Normal Time

Consuming for Loan Renewal.

Figure 4.8

Chart showing The Procedures for renewal/limit Enhancement

Table 4.9

FINDINGS

From the above table it is evident that 8% of the respondents are Very stringent and

cumbersome to renewal the Loan from ICICI Bank, 30% of the respondents are

Stringent and cumbersome to renewal the Loan from ICICI Bank, 16% of the

respondents are Normal and appropriate to renewal the Loan from ICICI Bank, 36% of

28%

40%

32%More Time

Consuming

Normal TimeConsuming

Less TimeConsuming

Responses Number of

respondents

Percentage

Very stringent and cumbersome

Stringent and cumbersome

Normal and appropriate

Easy

Very Easy

4

15

8

18

5

8

30

16

36

10

Total 50 100

54

the respondents are Easy to renewal the Loan from ICICI Bank, 10% of the respondents

are Very Easy to renewal the Loan from ICICI Bank.

INFERENCE

It is been inferred that most of the respondents are choosing that Renewal

Is easy.

8%

30%

16%

36%

10%

Very stringent andcumbersome

Stringent andcumbersome

Normal andappropriate

Easy

Very Easy

Figure 4.9

Chart showing The Documentation requirement for Processing Loan Application

Table4.10

FINDINGS

From the above table it is evident that 40% of the respondents are saying that Providing

Documents for Loan are Heavy in ICICI Bank, 28% of the respondents are saying that

Providing Documents for Loan are Normal in ICICI Bank, 24% of the respondents are

Responses Number of

respondents

Percentage

Heavy

Normal

Less

Very Less

20

14

12

4

40

28

24

8

Total 50 100

55

saying that Providing Documents for Loan are Less in ICICI Bank, 8% of the

respondents are saying that Providing Documents for Loan are Very Less in ICICI Bank.

INFERENCE

It can be inferred that more than half of the respondents saying that Document

required for Processing the Loan is heavy.

Heavy

Normal

Less

Very Less

Figure 4.10

Chart showing The interest rate and processing fees Charged

Table4.11

FINDINGS

Responses Number of

respondentsPercentag

e

Heavy

Normal

Less

Very Less

6

27

12

5

12

54

24

10

Total 50 100

56

From the above table it is evident that 12% of the respondents are feeling that interest

rate and processing fees Charged for Working Capital Loan are Heavy in ICICI Bank,

54% of the respondents are feeling that interest rate and processing fees Charged for

Working Capital Loan are Normal in ICICI Bank, 24% of the respondents are feeling that

interest rate and processing fees Charged for Working Capital Loan are Less in ICICI

Bank, 10% of the respondents are feeling that interest rate and processing fees

Charged for Working Capital Loan are Very Less in ICICI Bank.

INFERENCE

It is been inferred that most of the respondents are feeling that interest rate and

processing fees Charged Working Capital Loan is Normal.

Figure 4.11

Chart showing The Speed of Processing the loan Application

57

12%

54%

24%

10%Heavy

Normal

Less

Very Less

Table 4.12

Findings

From the above table it is evident that 8% of the respondents are feeling that Speed of

Processing the loan Application for Working Capital Loan are very fast in ICICI Bank,

12% of the respondents are feeling that Speed of Processing the loan Application for

Working Capital Loan are fast in ICICI Bank, 30% of the respondents are feeling that

Speed of Processing the loan Application for Working Capital Loan are normal in ICICI

Bank, 40% of the respondents are feeling that Speed of Processing the loan Application

for Working Capital Loan are slow in ICICI Bank, 10% of the respondents are feeling

that Speed of Processing the loan Application for Working Capital Loan are Very slow in

ICICI Bank.

Figure 4.12

Responses Number of

respondentsPercentag

e

Very Fast

Fast

Normal

Slow

Very Slow

4

6

15

20

5

8

12

30

40

10

Total 50 100

58

Chart showing Level of Satisfaction to Recommend Others

Table4.13

FINDINGS

Here the researcher is trying to find out the mind set of customer towards, will they

recommend other organisation to avail the credit facility from the bank. Here 80% of the

customers indicated that they will recommend other customers also, but the 10% of the

customers will not recommend other organisations to avail the facility.

INFERENCES

The table shows that majority of the customers will recommend others to avail facility,

but few will not do like that.

Figure 4.13

Responses Number of

respondents

Percentage

Yes

No

40

10

80

20

Total 50 100

59

Chart showing Customer’s opinion about the Product

Table4.14

FINDINGS

From the above table it is evident that 32% of the respondents feel that product is

Excellent, 66% of the respondents feel that the product is good and 2% of the

respondents feel that the product is Average.

INFERENCE

It can be inferred that nearly half the respondents feel that the product is good.

Responses Number of

respondents

Percentage

Excellent

Good

Average

Poor/Bad

16

33

1

0

32

66

2

0

Total 50 100

60

32%

66%

2%0%

Excellent

Good

Average

Poor/Bad

Figure 4.14

CHAPTER V

5.1 FINDINGS OF CUSTOMER SATISFACTION SURVEY

1. It has been inferred that most of the organization is constituted as limited

company (48%).

2. Here we can interpret that 84% of the organization are already taken the working

capital loan from any one of the bank.

3. Here we can understand that majority of the customers will prefer ICICI Bank to

avail the credit facility (60%).

4. It is been inferred that most of the respondents are having Long Relationship with

ICICI Bank (36%).

5. It is been inferred that most of the respondents are Preferring for Cash Credit &

Over Draft in ICICI Bank (34%).

6. It can be inferred that more than half of the respondents are enjoying Current

Account facility (44%).

7. It can be inferred that most of the respondent feel that the Loan is Easily

Sanctioning.

61

8. It can be inferred that the respondents are accept there is Normal Time

Consuming for Loan Renewal.(40%)

9. It is been inferred that most of the respondents are choosing that Renewal of

Loan is Easy (36%).

10. It can be inferred that more than half of the respondents saying that Document

required for Processing the Loan is Heavy (40%).

11. It is been inferred that most of the respondents are feeling that interest rate and

processing fees Charged Working Capital Loan is Normal (54%).

12. It can be inferred that Most of the respondents are agreeing that the speed of

processing loan is very slow (40%).

13.The table shows that majority of the customers (80%) will recommend others to

avail facility, but few will not do like that.

14. It can be inferred that nearly half (66%) the respondents feel that the product is

good.

62

5.2 SUGGESTIONS

The current appraisal process for loan is good, so there is no need to change this

Process.

Direct interaction with the customer should be improved

The loan processing time should be reduced to 4-5 days.

Document required for processing the loan should be reduced.

The bank should concentrate more on its advertisements to increase the

awareness among the people.

63

5.3 CONCLUSION

The study has concentrated A Study on effectiveness of credit appraisal system

for working capital loans in ICICI Bank at Chennai.. The study has been

conducted only for the Existing Customer and the comparative study is

conducted five different banks which are direct competitors for ICICI Bank, is

confined only to the Chennai.

To conclude that this study was made with much care and sincere

attempt was made in this study to make this project report successful.

Banking Sector in India had grown at a faster rate. The study was done using

percentage analysis, interval analysis and Chi-Square Test. By analysis the data

findings are arrived at ICICI Bank are satisfactory. There is no need to change

the Appraisal Process as is evident from the percentage of NPA. The customers

are also satisfied with the Appraisal Process being carried out at ICICI Bank.

64

ANNEXURE

Questionnaire for Customer Survey

Name of Business/ :

Company

1) Constitution of the Organization? Proprietorship Partnership Company

2) Has the Organization availed Loan for Working Capital Previously? Yes, Where?

No, Why

3) Which is your preferred Bank for Availing Loan for Working Capital? Why? ICICI Bank HDFC Bank

UTI Bank HSBC

4) How long does the organization have relationship with this Bank? Less Than 5 Years 5 to10 Yrs

11 to 20Yrs 21 to 30 Yrs

More than 31 years

5) What are the Credit Facilities you enjoy with this Bank? Term Loan Credit Card/Over Draft

Demand Loan Letter of credit

Others

65

6) What are the other facilities you are enjoying with this Bank? Saving Bank Account Current Account

Fixed Deposit Recurring Deposit

Others (Please Specify) _______________________

7) What did you feel about the Criteria set for Sanctioning Credit? Very Stringent & Cumbersome Stringent & Cumbersome

Normal & Appropriate Easy

Very Easy

8) What did you feel about the time involved Credit Renewal/Limit Enhancement Procedure?

More time consuming

Normal time consuming

Less time consuming

9) What did you feel about the Criteria’s set for Credit Renewal/Limit Enhancement Procedure?

Very Stringent & Cumbersome Stringent & Cumbersome

Normal & Appropriate Easy

Very Easy

10) What did you feel about the documentation Requirement for processing loan application?

Very Heavy Normal

Less Very Less

11) What did you feel about the Interest rate & Processing fees charged?

Heavy High

Normal Low

Very Low

12) What did you feel about the Speed of Processing the loan Application?

66

Very Fast Fast

Normal Slow

Very Slow

13) Will you recommend any other organization to avail credit facility from this Bank?

Yes

No

14) How do you feel about the Product?

Excellent Good

Average Poor/Bad

If Bad/Poor (Please Specify) _______________________

15) If any suggestions

……………………………………………………..

Questionnaire for Bank Survey

Bank Name:

1. What are the Products your Bank offers

2. Do you follow ‘Traditional Approach or Modern Approach of Scoring’ in the

Appraisal Process.

3. What features of the client/ company you take into consideration for the Appraisal

Process?(eg. Financial, Transaction, Product profile,etc..)

4. What is the form in which you provide funding? (for both products)

5. How do you decide the funding limit?

6. What are the certain Basic Parameters which you strictly consider in order to

provide funding/Appraising?

7. How do you appraise the Borrower/Management?

8. How do you appraise the Technical aspects?

9. How do you appraise the Market viability of the Product?

67

10.How do you appraise the Project in Financial terms? What parameters do you

take into account?

11.Do you give equal weight age to all aspects involved in the appraisal? How? ( %

of each aspect in the final Scoring)

12.What was your Percentage of NPA in the Previous Year?

13.What is the Average Processing time of a particular Case?

14.How about the Interest & Processing Fees you charge?

15.What can be the reasons for rejecting the Claim of Funding?

Questionnaire for Working Capital Loan

Probable Parameters for Survey:

Funding Limit: Form of Funding: Name Usage( Yes/ No ) Range

Business Profile:Sales TurnoverStatus of the BorrowerProduct ProfileBorrowers Customer Profile

Others:

Promoter Profile:ConstitutionVintageLength of association with the Bank

68

Individual Networth of Propri../Par/..TNW of the FirmTax Payment RecordMarket Reports from acquiring Team

Others:

TransactionalSeasonality of Card rec. bet Peak/non-peakAvg Ratio of Card Receivables/ TurnoverOthers:

Property Profile:Center locationLocation of PropertyApproachPremises LocationCarpet Area of PremisesAmenitiesNature of BuildingOthers:

Financial RatiosLeverage(TOL/TNW)Profitability(PAT/N.S)Sales turnover to Bank FinanceSales turn. to Curr.AssBank Fin. to Curr.AssOthers:

69

General RequirementCCS/InstallmentMin. Avg SwipesPBT & Personal NetworthCurr. Working Cap & Curr RatioHolding period of :InventoryDebtorsCreditorsTOL/TNWVintage RequirementCheque Returns

Bibliography

Kothari C.R. 2nd Edition (2003) “Research Methodology” Gupta K.K, pp 68. 117. 277.

Machirju HR, 2nd Edition “Indian Financial System” Vikas House (p) Ltd.

Tannan B.R and Ranadive M.R “Banking law and practices in India”, Thacker & Co Ltd,. 1979.

Web Sites

www.icicibank.com

www.rbi.org

www.wikipedia.org

www.thehidubusinessline.com

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