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STUDY OF CREDIT APPRAISAL IN IDBI

Guided by: Presented by:Suryanaryana S Sravya Kamma

ITM Business School

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Agenda:

Company Profile Objective Methodology Case Study Findings Limitations Suggestions Conclusion

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Company Profile:

On Oct 1,2004 IDBI converted into Banking Company. Merger of IDBI bank with its parent company IDBI Ltd

on April 2, 2005 . Merger of United western Ltd with IDBI Bank on Oct

3,2006.

Vision:

“To be trusted partner in progress by leveraging quality human capital and selling global standards of excellence to build the most valued financial conglomerate”

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Product Profile:

Preferred banking Deposits Loans Cards 24 Hours banking Corporate banking Investment Advisory SME finance Agri Finance NRI Services Lockers Institutional banking Services

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Objective:

To understand the existing credit appraisal techniques in IDBI.

To understand the various valuations that happen in credit appraisal

To understand the risk management that exists in credit appraisal.

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Methodology:

Study

Study of Credit Risk Rating Study of the

procedure involved in

Credit Appraisal

Case Study

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Study of Credit Risk Rating:

Internal rating Models

Risk Assessment

Module

Andersen Module

Enhanced SME Rating Model

Scoring sheets/Models

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Procedure in Credit Appraisal:

Request from the corporate for

creditBusiness

screening by Regional Managers

Financial Analysis by Regional

Officers

Credit Rating by Mumbai Head

Quarters

Final Approval by Branch

Head

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Case Study of ABC Ltd:

Introduction: ABC Ltd is a agro based company. Data Sources: Secondary data collected from Company

Records, Books and Internet. Proposal : Request for credit extension from existing 25

crores to 75 crores. The credentials of the firm for credit extension have been

evaluated on not just financial grounds but overall performance of the company in every aspect possible has been evaluated.

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Tools for Analysis:

Tools for analysis

Background information

Market Analysis

Financial Indicators

Industry Analysis

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Background Information:

Background Information

Business Activities

Product Profile

Awards and

Rewards

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Industry Analysis:

Deals with status of industry, growth rate, drawbacks and other technical factors.

Status of the industry: Eighth largest commercial seed market with an estimated size of INR 49 billion.

STRENGTH WEAKNESS

OPPURTUNITIES THREATS

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Market Analysis:

Market Analysis

Market Position

Level of Competition

Threats

Processing capacity and arrival of foreign

seeds

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Financial Indicators:

Tangible Net Worth Sales

Year 1

Year 2

Year 3

Year 4

0

100

200

300

400

500

600

700

800

Total AssetsTotal Out-side Liabili-tiesTangible Networth Ye

ar 1

Year

2

Year

3

Year

40

100

200

300

400

500

SalesPBDITNet Prof-its

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Financial Indicators:

Year 1

Year 2

Year 3

Year 4

0102030405060708090

Net Working Capital

Net Work-ing Capital

Year

1

Year

2

Year

3

Year

40

20406080

100120

Current Assets/Net Sales(%)

Current Assets/Net Sales(%)

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Liquidity Ratios:

Year 1 Year 2 Year 3 Year 40

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Current RatioQuick Ratio

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Profitability Ratios

Year 1 year 2 Year 3 Year 40

5

10

15

20

25

30

35

PBDIT/Net Sales (%)OPBT/Net Sales(%)Net Profit/Net Sales(%)

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Growth ratios

Year 2 Year 3 Year 4

-50

0

50

100

150

200

Net Sales Growth(%)Net profit Growth(%)Net Worth Growth(%)

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Findings in the case:

Sales and profit after tax are showing rapid growth Debt Equity Ratio is favourable.The value is showing a decrease. Current Ratio is favorable. The current assets are being properly

utilized to deal with current liabilities. An appropriate current ratio is an indication of the stability of the

sister firms too if they has being any diversion of firms. The other current assets declared are of current nature only. The bank borrowings declared are within the limits permitted by us. The director’s report provided vital information on trading conditions,

plans for future, labor relations, impact of government policies, changes in management.

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Findings in the case:

All profitability ratios namely operating profit/sales etc indicate good performance and financial health of the firm.

The turnover ratios of the firm are fair enough A critical examination of the cash flow statement tells us that funds have been

effectively and efficiently used. There has been never undue building of fixed assets and also there has being

increase in sales without increase in fixed assets. The proportion of increase in owned funds and borrowed funds to the

proportion of increase in working capital is high. The firm has being fair enough in the apportionment of profits and payment of

dividends. The credit rating as given by crisil is fair enough. The pre sanction inspection has been satisfactory and has helped in the

validation of market information, correctness of particulars given in the credit application form so on and so forth.

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Other factors…..

Marketing prowess Research and Development Infrastructure Technology Operational performance achieved 450-460 crores INR against the projected 500 crores

42% increase in turnover with respect to the previous year.

increase of 79% in cotton seeds

launched 11 number of varieties

Crisil rating

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Result….

A blend of the characteristics defined above make the firm a reliable client.

In view of above analysis, it is recommended that credit could be provided to the borrower. Borrower request for enhancement of credit from 25 crores to 75 crores can be sanctioned. Borrower should be continuously monitored and steps should be taken to improve their financial position

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Limitations:

Study limited to business loans. Findings and suggestions were based on secondary data Study is limited to Hyderabad branch The findings can’t be generalized for the varied range of

industries of borrowers

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Learnings:

Financial Analysis is not the only requirement-overall analysis is must.

Updation on technology and tools is a must be it a individual or organization.

Understanding the nature of business and the market conditions is crucial for effective credit appraisal

Real time communication with clients helped me enhance my communication skills.

Decent understanding of the credit appraisal techniques.

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Suggestions:

Current Appraisal System is good. Direct Interaction with the clients should be improved. The loan processing time should be reduced. The documents required for processing the loan should be reduced. The bank should focus more on advertising to increase awareness

among the public about the services that it offers. The bank should completely eliminate the file system and go

computerization at every stage as this removes paper work and creates transparency in the system.

The bank should work on standardizing the processes and systems their follow.

Care must be taken to ensure that the judgment in appraisal process does not depend on one single person and a single factor.

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Suggestions:

Need for improvised methods that are on par with international standards.

Revising the factors on which appraisal is done to face the ever increasing violatility.

Need for improvement in Risk Management system.

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Conclusion:

The company is doing well in credit appraisal. Scale of funding is high compared to private banks. The system in IDBI is risk-averse. Decreasing effect of the recession and ever increasing

start ups the bank can see a lot of business on its way. Need for upgradation-Increasing violatile markets and the

upgradation of the financial techniques all around the globe.

Need for revising the parameters on which the valuations are done.

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THANK YOU !!!