A STUDY ON CREDIT APPRAISAL SYSTEM

AT ICICI BANK

ABSTRACT

Credit appraisal is the assessment of the viability of proposed long term investments in
terms of shareholder wealth and the formal analysis of all project costs and benefits which
is used to justify the project proposal. The bank has over the years designed and adopted
the Best Practices Code. This in effect represents the bank's philosophy towards effective
Corporate Governance. The liberalization of the financial sector demands a new
technology to cope with the rising pressures on the profitability of banks and financial
sector institutions. Analyzing lending strategies, credit appraisal, risk analysis and lending
decisions, while keeping in mind the broad framework of corporate banking strategy, this
book emphasizes that lending is no longer an activity restricted to the assets side of the
balance sheet. An invaluable tool for practicing managers and students of business and
financial management, this book demands no prior specialized knowledge of the subject,
taking readers from the rudiments of credit appraisal to advanced levels of decision
making. Numerous examples from the world of business have been provided to facilitate
a better understanding of the vast and significant changes in the financial market. The
objective of credit analysis is to look at both the borrower and the lending facility being
proposed and to assign a risk rating. The risk rating is derived by estimating the
probability of default by the borrower at a given confidence level over the life of the
facility, and by estimating the amount of loss that the lender would suffer in the event of
default.

The bankers should act pro-actively in administering credit approval and appraisal
system. For this Loan Review Mechanism can be used as an effective tool aiming to
cover the entire portfolio of credit and credit cycle starting from the documentation
process, sanctioning of loan, disbursement, grading, monitoring the post sanction of loan
and problem of recovery. Bankers should have through knowledge of prudential norms
and Basel accord guidelines on credit risk in managing and administering of loan review
mechanism. In this process of Loan Review Mechanism identifying and assessing the
credit quality and timely credit grading of loan portfolio forms the basic components in

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effective credit approval and appraisal system. Hence the Loan Review Mechanism can
be termed as a key factor in determining the soundness and financial health of banks. The
present study is based on secondary data gathered and reviewed from previous studies,
guidelines given by RBI, Prudential norms and Basel accord guidelines. It aims at
understanding the concept of credit risk, need of credit approval and appraisal system,
rationale in administering Loan Review Mechanism of commercial banks and to suggest
the measures to be adopted by bankers in mitigating their losses caused due to loan assets.
The Credit Appraisal is a complete exercise which starts from the time a potential
borrower walks into the branch and concludes in credit delivery and monitoring with the
objective of certifying and maintaining the quality of lending and managing credit risk.

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 CONTENTS

CHAPTER NO NAME OF THE CHAPTER PAGE NOS.

CHAPTER-I INTRODUCTION 04
Need Of The Study
Scope Of The Study
Objectives Of The Study
Research Methodology
Limitations Of The Study

CHAPTER -II REVIEW OF LITERATURE 13

CHAPTER -III INDUSTRY & COMPANY PROFILE 24

CHAPTER - IV DATA ANALYSIS AND INTERPRETATION 37

CHAPTER -V CONCLUSION, FINDINGS & 65

SUGGESTIONS

APPENDICES QUESTIONNAIRE, 69
BIBLIOGRAPHY

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 CHAPTER I
INTRODUCTION

INTRODUCTION
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The title of the project is A Study on credit appraisal system for in ICICI BANK at
Hyderabad. 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 (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 BANK in the market, with a questionnaire to identify the
techniques followed by them to appraise their borrowers and compared it with that of
ICICI BANK. 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 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 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

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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 in
ICICI BANK at Hyderabad
” is carried out to study the credit risk measurement system followed in ICICI BANK at
Hyderabad.

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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, Hyderabad.

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SCOPE OF THE STUDY

The study involves benchmarking the Appraisal process of ICICI BANK 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 Hyderabad 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 Hyderabad Branch. The scope also includes finding the ways to
address the problem of customer of the improving the satisfaction level.

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OBJECTIVES OF THE STUDY

 To find out the effectiveness of credit appraisal system of ICICI BANK Ltd 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.

HYPOTHESIS:

H0A: There is no difference in loan service provided by ICICI BANK between

customers.
H1A: There is difference in loan provided by ICICI BANK and other banks.

H0B: There is no difference in satisfaction level of customers in ICICI BANK bank.

H1B: There is difference in satisfaction level of customers in ICICI BANK and another
bank.

H0C: There is no gap in customer’s expectation and services provided by ICICI BANK.
H1C: There is gap in customer’s expectation and services provided by ICICI BANK and
another bank.

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RESEARCH METHODOLOGY

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 collected 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
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

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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.
Research approach
Research approach presents the important features of the research method to be used.

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 Hyderabad.

TOOLS FOR ANALYSIS

The data were analyzed with the help of satisfied statistical tools like percentage analysis,
interval analysis.

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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.
 Banks Surveyed ensured that the name of the Bank kept Secretive.
 This study is limited to advanced lend by 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 14 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.

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 CHAPTER II
LITERATURE REVIEW

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LITERATURE REVIEW

McNaughton (1992) highlighted that, risk taking is part of banking activities and the
success of banks depends on how reasonably they control and manage this risk within
their financial reserves and credit competence. McNaughton further explained that Banks
must re-structure their administrative tendencies to become responsible to the financial
needs of the economy in order to survive the various lending risks and become successful.
Loan applicants get frustrated by these bureaucratic tendencies and are unable to secure
credit facilities at the right time, which may hinder the success of projects leading to the
high rate of loan default.

The credit assessment process is usually guided by the Banks credit policy, procedures
and directives. Character, Capacity, Capital, Collateral and Conditions are the various
principles of lending which banks base their credit appraisal (Matovu and Okumu, 1996).
The principles are designed to ensure that actions that will facilitate repayment and
reduce default rate are taken by lending institutions. Financial institutions take measures
like requesting for collateral, shorter loan repayment period, high interest rates and other
form of payment when the information gathered signals the possibility of the borrower to
default payment.

Edminster (1980) observed that the abandonment of the credit appraisal process often
resulted into several banks using credit card to process and therefore addressed the
importance of credit analysis. The length of time taken to process loan applications, credit
experience, proportion of collateral security to the loan approved and the purpose of the
loan are the variables identified.

Hunte (1996). It was concluded that informed credit decisions made by loan officers are
affected by the long waiting time which reflects a shortage of credible credit information.
This subsequently results in greater risk, more intense credit rationing and low repayment
rates. Loan experience shows the ability to manage the business loans portfolio better
hence good quality borrowers for the business, Hunte (1996).

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A loan applicant with little loan experience is considered to have less ability to manage a
business loan and therefore is not creditworthy (Devaney, 1984;Robinson, 1962; Hunte,
1996). This means that new loan applicants are considered to bear high risk since the loan
officer has no previous records of loan repayment from them.

Within the traditional credit risk management, the main methods include the Expert
System, Internal Ratings Grading Model for Loans, and Z Rating Model. Nevertheless,
the modern development of banking makes those methods obsolete and inaccurate. With
the advance of modern science and technology and with the enhancement of the
management of the market risks plus other risks, modern credit risk management has also
been lifted to the certain level. Therefore there appear some credit risk quantification
management models such as “Credit metrics”, “KMV”, “Credit risk+” models. These
models measuring the credit risk still arouse disputes over their effectiveness and
reliability. Hence, in all respects, it is still lacking an effective calculating measure to
assess the credit risk (Jiang and Lo 2016; Nuno and Manuela 2016; Swami 2016).

According to Dinh and Kleimeier (2007), the determination of loans does not depend on
the borrower’s income or the amount of collateral, but rather on the qualitative analysis
(of, for example, the borrower’s personality, reputation, or social status). Because the
maintenance of social credit relationships is expensive, banks typically adopt the credit
scoring model to quantitatively analyze a borrower’s credit situation to determine loans
and identify whether a borrower can obey the contract. Banks’ credit assessment of
corporate customers is a multiple-criteria decision-making problem in which various
elements are comprehensively assessed.

The construction of an effective credit assessment model requires that credit staff possess
sufficient professional knowledge and practical experience. Previous credit assessment
studies have mostly analyzed the opinion of a group of credit staff by using a single
precise value, which cannot fully describe the actual distribution of credit staff opinions
and tends to diminish minority and peculiar opinions. Therefore, precise values are
inapplicable in actual decision environments and constructed credit assessment models do

15
not possess the features of anti-catastrophism and sensitivity, which are the criteria of a
superior assessment system (Hsieh 2003).

Srinivasan and Kim (1988) stated that credit assessment can be conducted using theory-
based scientific and objective methods. The experience of credit decision managers and
senior credit staff responsible for credit assessment can be applied to credit assessment
models for determining credit categorization and rating weights.

Llewellyn 1992, states that, it is evident that, in many countries, banking is the process of
significant structural change and a limited secular decline. The enormous increase in the
number of banks and other micro finance institutions have principally contributed to a
rise in lending to borrowers. The recent economic situation in Ghana poses a big threat
for lenders to forecast borrowers‟ performance to recessionary conditions.

Phillips, states that loan assessment procedures such as credit scoring which is used to
appraise whether customers should or should not be granted credit, loan screening aids
such as advances in data technology, changes in regulatory environment, the firm’s future
profitability, the amount of the owners‟ equity in the business to preserve but have often
not been fully revealing and are imperfectly correlated across banks.

McNaughton (1992) highlighted that, risk taking is part of banking activities and the
success of banks depends on how reasonably they control and manage this risk within
their financial reserves and credit competence. McNaughton further explained that Banks
must re-structure their administrative tendencies to become responsible to the financial
needs of the economy in order to survive the various lending risks and become successful.
Loan applicants get frustrated by these bureaucratic tendencies and are unable to secure
credit facilities at the right time, which may hinder the success of projects leading to the
high rate of loan default.

In the field of credit delivery, Rouse (1989) explained that lenders does not give the
monies they lent away but they „lends‟ them. The assessment of the borrower by the
lender is for him to look into the future and ask, will the borrower repay the loan by the
agreed date? There is the likelihood that customers will not be able to repay the loans they
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take, so the lender needs to demonstrate good skill and judgment in assessing the
borrower, Rouse (1989). The success of banks (in the view of this researcher), centers on
the banks‟ ability to identify the financial services of the public, produce those services
and sell them at a competitive price. Lending involves imagination and creativity it is
therefore perceived as an art, Rouse (1989).The guidelines to be followed are prescribed
by credit management and their religious adherence is also crucial for good credit
management practices.

Jayanth (2000): The correctness of the officer’s judgement depends on his skills,
knowledge and foresight. Knowledge and skills in financial analysis, the performance of
the sector receiving credit, macroeconomic conditions, the psychology in determining the
perceived and indirect motive of the borrower and the anticipated impact of the credit on
the performance of the lending institution. The situation makes lending activity very
involving since a loan default causes detrimental financial losses and threatens the
collapse of the financial institution in question. In this respect, officers devoid of all
egoistic sentiments and with the right qualification and skill are needed to take charge of
the lending activities.

The bank, the depositor, the borrower and the government are four parties identified to
have interest in bank lending activities, Olashore (1988). In as much as the depositor
demands the highest interest on his deposit, the borrower look for the least interest rate on
the amount borrowed. The bank on the other hand wants the highest spread between
deposit and borrowing rates of interest whilst the government’s attention is on the
responsiveness of lending to the needs of all the sectors of the economy. The interest of
the lending bank supersedes that of the other parties involved.

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.
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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 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 Utilization (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.

Kotler: 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), the rating
process almost always involves the exercise of human judgment because factors to be
18
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.

Dayanand (1999): 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

The purpose of this study was to find out the effectiveness of credit appraisal system of
ICICI BANK Ltd, Hyderabad. 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.
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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
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.
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 c. Market appraisal determining the viability of the project.
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 the
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 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
21
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".

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

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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

The 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 installments.
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.
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
23
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 eve 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.

24
 CHAPTER-III
INDUSTRY & COMPANY PROFILE

25
INDUSTRY PROFILE

BANKING IN INDIA

A Bank is a financial institution that serves as a financial intermediary. Banker or Bank is

a financial institution that acts as a payment agent for customers, and borrows and lends
money. Banks act as payment agents by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting cheques
deposited to customers' current accounts. Banks also enable customer payments via other
payment methods such as telegraphic transfer, Electronic Fund Transfer at Point Of Sales,
and automated teller machine (ATM).

BANKING INDUSTRY
The Banking Industry was once a simple and reliable business that took deposits from
investors at a lower interest rate and loaned it out to borrowers at a higher rate. However
deregulation and technology led to a revolution in the Banking Industry that saw it
transformed. Banks have become global industrial powerhouses that have created ever
more complex products that use risk and securitization in models. Through technology
development, banking services have become available 24 hours a day, 365 days a week,
through ATMs, at online banking, and in electronically enabled exchanges where
everything from stocks to currency futures contracts can be traded.
The Banking Industry at its core provides access to credit. In the lenders case, this
includes access to their own savings and investments, and interest payments on those
amounts. In the case of borrowers, it includes access to loans for the creditworthy, at a
competitive interest rate.
Banking services include transactional services, such as verification of account details,
account balance details and the transfer of funds, as well as advisory services that help
individuals and institutions to properly plan and manage their finances. Online banking
channels have become key in the last 10 years. Mortgage banking has been encompassing
for the publicity or promotion of the various mortgage loans to investors as well as
individuals in the mortgage business. Online banking services have developed the
banking practices easier worldwide.

26
The collapse of the Banking Industry in the Financial Crisis, however, means that some of
the more extreme risk-taking and complex securitization activities that banks increasingly
engaged in since 2000 will be limited and carefully watched, to ensure that there is not
another banking system meltdown in the future.

RECENT DEVELOPMENTS IN THE GLOBAL BANKING INDUSTRY

A total asset of global banking industry is about hundred trillion in US $. Banking and
Insurance industry was affected by financial crisis of 2008. The crisis began with the
collapse of Lehman Brothers in the US, which rapidly spread all over the world resulting
to great economic recession after post war era. The credit crunch and liquidity situation
further worsen the market resulting too volatile market condition. Government and central
banks all over the world took necessary steps to save global economy and market
condition.

Global banking and insurance industry is expected to recover rapidly from current
economic recession supported by the growth in emerging market economies. BRIC
nations offer great potential to insurance industry due to their huge population.
Critical to success in the banking and insurance is the knowledge of market trends,
product mix shifts, customer needs and effective market strategies. Our continuous
networking with customers and competitors creates complete visibility thus helping our
customers make confident business decisions. The global financial crisis will bring about
the most significant changes to the American and European banks have seen in decades.
There will be fundamental re-regulation of the industry, ownership structures are shifting
towards heavier state involvement and investor scrutiny is rising strongly. Equity ratios
will be substantially higher. As a result, growth and profitability of the banking sector as
a whole are likely to decline.

INDIAN BANKING INDUSTRY

The Indian banking sector has witnessed wide ranging changes under the influence of the
financial sector reforms initiated during the early 1990s. The approach to such reforms in
India has been one of gradual and non-disruptive progress through a consultative process.
The emphasis has been on deregulation and opening up the banking sector to market
forces. The Reserve Bank has been consistently working towards the establishment of an
27
enabling regulatory framework with prompt and effective supervision as well as the
development of technological and institutional infrastructure. Persistent efforts have been
made towards adoption of international benchmarks as appropriate to Indian conditions.
While certain changes in the legal infrastructure are yet to be effected, the developments
so far have brought the Indian financial system closer to global standards.

Historical Background of Banking in India

From the early Vedic period the giving and taking of credit in one form or the other have
existed in Indian Society.  The bankers are the pillars of the Indian society.  Early days
bankers were called as indigenous bankers.  The development of modern banking has
started in India since the days of East India Company.  These banks mostly had no capital
of their own and depended entirely on deposits in India.
Indian banking comprises of players who include public sector banks, State bank of India
and its associates, private sector banks, scheduled banks, cooperative banks, regional
rural banks, foreign banks etc. The banking industry worldwide is transformed
concomitant with a paradigm shift in the Indian economy from manufacturing sector to
nascent service sector. Indian banking as a whole is undergoing a change.  Indian banks
have always proved beyond doubt their adaptability to mould themselves into agile and
resilient organizations.

HIGHLIGHTS OF THE BANKS PERFORMANCE

The year gone by was an exceptional year for the Bank in terms of most parameters. Net
profit surged by 60% from Rs. 701 crores to Rs. 1333 crores and the global business mix
crossed the milestone mark of Rs. 200,000 crores to touch Rs. 207,000 crores. While
deposits grew by 27.6% to Rs. 139882 crores, the share of low cost deposits hovered at
40% and your bank continues to be one of the few banks with such a large share of low
cost deposits. Credit expansion was a robust 30% touching an aggregate level of
Rs.86791 crores. The growth has been quite broad based encompassing various segments
such as agriculture, industry, SME and retail. Foreign branches accounted for a smart rise
of 34% in advances.
Priority Sector not only constitutes the Bank's social commitment, but is recognized today
as a profitable business opportunity. With almost two third branches in rural and semi
urban areas, the bank has ably risen to the occasion. While agriculture clocked a growth
28
of 25% and constituted 19.5% of net bank credit, priority sector grew by almost 23% and
accounted for 45.5% of net bank credit. The Bank could for the first time record net NPA
below 1%. In fact on the back of robust cash recoveries of Rs. 752 crores and upgradation
of Rs. 152 core, gross NPA slid by Rs. 379 crores to Rs. 2100 crores. Recoveries together
with prudent provisioning saw Net NPA falling sharply to Rs. 632 crores from Rs. 970
crores resulting in a healthy loan loss coverage ratio.

Challenges facing Banking Industry in India

The banking industry in India is undergoing a major transformation due to changes in
economic conditions and continuous deregulation. These multiple changes happening one
after other has a ripple effect on a bank (Refer fig. 2.1) trying to graduate from
completely regulated seller market to completed deregulated customers market.
 Deregulation:
This continuous deregulation has made the Banking market extremely competitive
with greater autonomy, operational flexibility and decontrolled interest rate and
liberalized norms for foreign exchange. The deregulation of the industry coupled
with decontrol in interest rates has led to entry of a number of players in the
banking industry. At the same time reduced corporate credit off take thanks to
sluggish economy has resulted in large number of competitors batting for the same
pie.
 New rules:
As a result, the market place has been redefined with new rules of the game.
Banks are transforming to universal banking, adding new channels with lucrative
pricing and freebees to offer. Natural fall out of this has led to a series of
innovative product offerings catering to various customer segments, specifically
retail credit.
 Efficiency:
This in turn has made it necessary to look for efficiencies in the business. Banks
need to access low cost funds and simultaneously improve the efficiency. The
banks are facing pricing pressure, squeeze on spread and have to give thrust on
retail assets.

29
  Diffused Customer loyalty:
This will definitely impact Customer preferences, as they are bound to react to the
value added offerings. Customers have become demanding and the loyalties are
diffused. There are multiple choices, the wallet share is reduced per bank with
demand on flexibility and customization. Given the relatively low switching costs;
customer retention calls for customized service and hassle free, flawless service
delivery.

 Misaligned mindset:
These changes are creating challenges, as employees are made to adapt to
changing conditions. There is resistance to change from employees and the Seller
market mindset is yet to be changed coupled with Fear of uncertainty and Control
orientation. Acceptance of technology is slowly creeping in but the Utilization is
not maximized.

 Competency Gap:
Placing the right skill at the right place will determine success. The competency
gap needs to be addressed simultaneously otherwise there will be missed
opportunities. The focus of people will be on doing work but not providing
solAxisons, on escalating problems rather than solving them and on disposing
customers instead of using the opportunity to cross sell.

Strategic options with banks to cope with the challenges

Leading players in the industry have embarked on a series of strategic and tactical
initiatives to sustain leadership. The major initiatives include:
 Investing in state of the art technology as the back bone to ensure reliable service
delivery
 Leveraging the branch network and sales structure to mobilize low cost current
and savings deposits
 Making aggressive forays in the retail advances segment of home and personal
loans

30
  Implementing organization wide initiatives involving people, process and
technology to reduce the fixed costs and cost per transaction
 Focusing on fee based income to compensate for squeezed spread, (e.g. CMS,
trade services)
 Innovating Products to capture customer ‘mind share’ to begin with and later the
wallet share
 Improving the asset quality as per Base II norms
In this era of increasing competition, banks will have to benchmark themselves against
the best in the world. For a resilient and strong banking and financial system, the banks
need to tackle issues like increase in profitability, efficiency, and productivity while
achieving economies of scale through consolidation and exploring available cost-effective
solutions.

Major Players in the Indian Banking Industry:

Indian banking has grown much stronger than its Asian counterparts in recent years, in
terms of both performance indices and product range. The continued deregulation of
deposits and interest on loans has led to a greater understanding of capital structure,
increased competition and autonomy, as well as technological upgradation.
56 of India’s domestic banks account for 95% of assets. In terms of net profit, the State
Bank of India is the main bank followed by PNB bank, ICICI BANK and Canara Bank.

31
COMPANY PROFILE

ICICI Bank is India's second-largest bank with total assets of Rs. 3,446.58 billion (US$ 79
billion) at March 31, 2007 and profit after tax of Rs. 31.10 billion for fiscal 2007. ICICI Bank
is the most valuable bank in India in terms of market capitalization and is ranked third amongst
all the companies listed on the Indian stock exchanges in terms of free float market
capitalization..

The Bank has a network of about 950 branches and 3,300 ATMs in India and presence in 17
countries. 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.

The 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,
Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in
Belgium.

ICICI Bank's equity shares are listed in India on 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).

HISTORY
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.

32
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 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

33
group's financing and banking operations, both wholesale and retail, have been integrated in a
single entity.

ORGANIZATIZATION’S STRUCTURE

BOARD MEMBERS

Mr. N. Vaghul, Chairman

Mr. Sridar Iyengar

Mr. Lakshmi N. Mittal

Mr. Narendra Murkumbi

Mr. Anupam Puri

Mr. Vinod Rai

Mr. M.K. Sharma

Mr. P.M. Sinha

Prof. Marti G. Subrahmanyam

Mr. T.S. Vijayan

Mr. V. Prem Watsa

Mr. K.V. Kamath, Managing Director & CEO

Ms. Madhabi Puri-Buch, Executive Director

Mr. Sonjoy Chatterjee, Executive Director

Mr. V. Vaidyanathan, Executive Director

ATM
ICICI Bank's 24 Hour ATM network is one of the largest and most widespread ATM Network
in India. Our ATMs are located in commercial areas, residential localities, major petrol pumps,
airports, near railway stations and other places which are conveniently accessible to our
customers. ICICI Bank ATMs features user-friendly graphic screens with easy to follow
instructions. We have introduced ATMs which interact with customers in their local language
for increased convenience
34
MISSION
Bringing prosperity into rural families of India through co-operative efforts and providing
customers with hygienic, affordable and convenient supply of its products.
VISION
To be a progressive billion dollar organization with a pan India foot print by 2012.To
achieve this by delighting customers with its products, those are a benchmark for quality
in the industry.
VALUES
We are committed to enhanced prosperity and the empowerment of the farming
community through our unique "Relationship Banking" Model.
To be a preferred employer by nurturing entrepreneurship, managing career aspirations
and providing innovative avenues for enhanced employee prosperity.
ICICI Slogan
 When you are healthy, we are healthy
 When you are happy, we are happy
 We live for your "WEALTH & HAPPINESS"

PRODUCTS & SERVICES INCLUDE

 Business Loans\
-Vendor/Dealer Finance
-Working Capital Finance
-Cash Credit
-Credit Card Securitization
-Merchant Account
 Forex
-Forex Remittance
-Derivatives
 Trade
-Letter of Credit

35
-Export Bill Negotiation
-Escrow Account

36
 CHAPTER IV
DATA ANALYSIS & INTERPRETATION

DATA ANALYSIS AND INTERPRETATION

Credit appraisal system followed in ICICI BANK

37
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 are 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.
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

38
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.
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.
13. Analysis of Managerial competence by studying the educational qualification,
experience, knowledge and capacity of the management and its work force.
144. The appraisal of the financial figures, qualifications in the auditor’s report,
accounting practices, and director’s report.
15. Analysis of financial statement by using various tools such as ratios analysis, cash
flow analysis, fund flow analysis and analysis of income generating capability.
16. 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.
17. Details about the guarantor, their net worth, credibility etc.
18. Terms and conditions to be fulfilled for sanctioning the loan.
Beyond these, ICICI BANK 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:

39
It consists of client company’s business activities, product profile, awards and
certification, mission etc.

Industry analysis:
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 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:

40
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)
(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:
41
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
(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

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.
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
42
 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 ICICI BANK
5 YEARS PERFORMANCE AT A GLANCE - FINANCIAL (RS.in Mn)
2021-2022 2020-2021 2019-2020 2018-2019 2017-2018
INCOME STATEMENT
Sales 3001.94 2806.09 2681.48 2236.95 2440.04*
Other Income 664.87 642.39 461.47 205.21 192.43
TOTAL INCOME. 3666.81 3448.48 3162.95 2432.18 26144.47
Earnings Before Tax
2346.01 2072.51 2057.42 1645.70 1505.48
& Depreciation
Depreciation 518.30 499.78 259.85 260.93 271.26
Interest 66.09 69.01 3.92 3.77 5.77
Profit 1963.62 1603.72 1893.65 1381.00 1028.43
Prior Period -9.06 9.36 2.67 19.53 -3.24
Adjustments(Net)
Extraordinary Item 2.144 0.00 -8.48 0.00 0.00
Profit before Tax. 1956.68 1615.08 1887.83 1398.53 1025.20
Provision for Tax 541.68 269.57 539.43 379.33 299.27
Net Profit/(Loss)PAT. 14417.00 1353.51 1358.40 820.20 725.92
Dividend 335.54 234.88 234.88 226.49 192.89
Dividend Tax 46.70 30.09 30.09 --- 19.64
BALANCE SHEET
Equity Capital 1877.71 1877.71 1877.71 1877.71 1877.71
Reserves & Surplus 6001.47 5188.85 4290.46 3407.19 3292.35

Tangible Net worth 7673.05 6824.25 5947.55 5061.98 4959.51

Loans Outstanding 14429.69 14495.70 1586.78 14466.31 14472.85

Net Fixed Assets 4269.06 4542.63 41449.79 2585.17 2610.62

43
 Investments 2590.77 2590.77 595.00 498.00 595.00
Net Current Assets 2619.18 1749.24 2407.99 1993.49 1707.25
Capital Employed 9476.99 8682.64 7152.78 4876.64 47144.87
RATIOS
Operating Margin 56.00 47.40 55.79 55.90 46.44
(OPM) (%)
Return on Capital 144.82 15.19 18.10 18.80 17.40
Employed (ROCE)
(%)
Return on Networth 17.83 18.76 20.31 18.19 16.64
(RONW) (%)
Debt Equity (%) 18.03 19.99 23.32 25.02 25.66
Current Ratio 3.89 2.43 3.47 3.21 2.27
Quick Ratio 3.50 2.17 3.13 2.72 1.86
VALUE ADDED 1548250 14453704 1366768 952534 849201
PER EMPLOYEE (in
Rs.)
BOOK VALUE PER 45.74 40.68 35.45 30.19 29.56
SHARE (in Rs.)
EARNING PER 7.64 6.52 6.83 4.78 4.35
SHARE (in Rs.)
Dividend (%) 20.00 16.00 16.00 15.50 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.

44
Current Ratio
The current ratio is an indication of a firm's market liquidity and ability to meet short-
term debt obligations.
The organization current ratio is not between the margin level it has fluctuating for every
year .It indicates the organization 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 organization 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

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
 Profitability(PAT/N.S)
 Sales turn. to Curr.Ass
 Bank Fin. to Curr.Ass
 Sales turnover to Bank Finance
45
  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
 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
46
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 model 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 BANK’s, the inferences which came out were:-
 ICICI BANK 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 - 17 days
 Equal wieghtage is given to all aspects involved in the scoring process.
 Percetage of NPA for the financial year 2019 was 1.4 % which was the lowest.
 Interest charge of 12 to 17 % 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.
 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 [Whichever is lower]
2. (Current Year Sales)*1445 %*( 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.
47
  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
1. Turnover Method
2. Eligible Working Capital Methord
3. Cash Budget
4. Simple Holistic Borrowing

CUSTOMER SURVEY DETAILS

48
CHART SHOWING THE CONSTITAXISON OF ORGANIZATION
OF THE RESPONDENTS
Table 4.1

Responses Number of respondents Percentage

Proprietorship 14 28
Partnership 12 24
Company 24 48

Total 50 100
FINDINGS
The above table indicates the Axis of the respondents here 28% of the respondents is
constituted as proprietorship concern. 24% of the enterprisers are constituted as
partnership entity.48% of the respondents constituted as a limited company.

INFERENCE
It has been inferred that most of the respondents are constituted as limited company.

Figure 4.1

49
CHART SHOWING THE ENJOYMENT OF WORKING CAPITAL
FACILITY IN BANKS

Table 4.2

Responses Number of respondents Percentage

Yes 42 84
No 8 16 FINDINGS
From the above
Total 50 100 table shows that
84% of respondents are already taken the working capital loan from various banks like
ICICI BANK, HDFC Bank, Axis Bank etc. But here 16% of the respondents not taken
working capital loan from any bank.
Figure 4.2

50
APPLYING INTERVAL ESTIMATION

n=Sample size = 50

   1.96
at 95% confidence level.
2

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 respondents are already taken the loan from any
one of the ban

51
CHART SHOWING THE PREFERRED BANK TO AVAIL CREDIT
FACILITY

Table4.3
Responses Number of respondents Percentage
ICICI BANK 30 60
HDFC Bank 8 18
Axis Bank 7 16
HSBC 5 10
Total 50 100

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, 18% of
the customer will prefer HDFC Bank, 16% will prefer Axis 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.

52
 10%
14%

16% 60%

PNB HDFC UTI HSBC

Figure 4.3

CHART SHOWING DURATION OF RELATIONSHIP WITH THE

BANK

Table4.4

Responses Number of respondents Percentage

Less Than 5 Years 11 22
5 to10 Yrs 7 14
13 to 20Yrs 5 10
21 to 30 Yrs 9 18
More than 31 years 18 36
Total 50 100

FINDINGS
From the about table it is evident that 22% of the respondents are having Relationship
with ICICI BANK Less than 5Years, 16% of the respondents are having Relationship
with ICICI BANK 5 to 10Years, 10% of the respondents are having Relationship with
ICICI BANK 13 to 20Years, 19% of the respondents are having Relationship with ICICI
BANK 21 to 30Years, 36% of the respondents are having Relationship with ICICI BANK
More than 31 Years.

53
INFERENCE
It is been inferred that most of the respondents are having Long Relationship with ICICI
BANK

22%
Less than 5Yrs
36%
5 to 10 Yrs
11to 20Yrs
14% 21 to 30 Yrs
More than 31 Yrs
18% 10%

Figure 4.4

CHART SHOWING TYPES OF CREDIT FACILITIES CUSTOMERS

ENJOYING WITH BANK

Table4.5
Responses Number of respondents Percentage

Term Loan 6 12
Credit Card/Over Draft 17 34
Demand Loan 16 32
Letter of credit 6 12
Others 5 10
54
Total 50 100
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, 144% of the
respondents are having Letter of Credit in ICICI BANK, 10% of the respondents are
having Other funding Like., BG, TC in PNB

INFERENCE
It is been inferred that most of the respondents are Preferring for Cash Credit & Over
Draft in ICICI BANK

Term Loan
10% 12%
Credit Card/Over
12%
Draft
Demand Loan
34%
Letter of credit
32%
Others

Figure 4.5

CHART SHOWING TYPES OF BANKING FACILITIES CUSTOMERS ENJOY

WITH BANK

Table4.6
Responses Number of respondents Percentage
Saving Bank Account 18 36
Current Account 22 44
Fixed Deposit 7 14
Recurring Deposit 3 6
Total 50 100
55
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, 16% of the respondents are having Fixed Deposit Account in ICICI BANK, 6%
of the respondents are having Recurring Deposit Account in ICICI BANK.

INFERENCE
It can be inferred that more than half of the respondents are enjoying Current Account
facility.

Saving Bank
6% Account
0%
14% Current Account
36%
Fixed Deposit

Recurring Deposit

44%
Others

Figure 4.6

56
CHART SHOWING THE CRITERIA’S TO BE CONSIDERED FOR
SANCTIONING THE CREDIT

Responses respondents Percentage

Very stringent and cumbersome 2 4
Stringent and cumbersome 15 30
Normal and appropriate 6 12
Easy 22 44
Very Easy 5 10
Total 50 100
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
It can be inferred that most of the respondent feel that the Loan is Easily Sanctioning.

57
 Very stringent and
10% 4% cumbersome
Stringent and
30% cumbersome
Normal and
appropriate
44% Easy

12%
Very Easy

Figure 4.7

CHART SHOWING THE TIME FACTOR FOR RENEWAL/LIMIT

ENHANCEMENT PROCEDURE

Table4.8
Responses Number of respondents Percentage
More Time Consuming 14 28
Normal Time Consuming 20 40
Less Time Consuming 16 32

Total 50 100

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
It can be inferred that the respondents are accept there is Normal Time Consuming for
Loan Renewal.

58
 28% More Time
32% Consuming
Normal Time
Consuming
Less Time
Consuming
40%

Figure 4.8

CHART SHOWING THE PROCEDURES FOR RENEWAL/LIMIT

ENHANCEMENT

Responses Number of respondents Percentage

Very stringent and cumbersome 4 8
Stringent and cumbersome 15 30
Normal and appropriate 8 16
Easy 18 36
Very Easy 5 10
Total 50 100
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, 18% of the
respondents are Normal and appropriate to renewal the Loan from ICICI BANK, 36% of
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
59
It is been inferred that most of the respondents are choosing that Renewal is easy.

Very stringent and

10% 8% cumbersome
Stringent and
cumbersome
30% Normal and
36% appropriate
Easy

16% Very Easy

Figure 4.9

CHART SHOWING THE DOCUMENTATION REQUIREMENT FOR

PROCESSING LOAN APPLICATION

Table4.10

Responses Number ofrespondents Percentage

Heavy 20 40
Normal 14 28
Less 12 24
Very Less 4 8
Total 50 100

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
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

60
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

Responses Number of respondents Percentage

Heavy 6 12
Normal 27 54
Less 12 24
Very Less 5 10
Total 50 100

FINDINGS
From the above table it is evident that 144% 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

61
It is been inferred that most of the respondents are feeling that interest rate and processing
fees Charged Working Capital Loan is Normal.

10% 12%
Heavy
24%
Normal
Less
Very Less
54%

Figure 4.11

CHART SHOWING THE SPEED OF PROCESSING THE LOAN APPLICATION

Table 4.12

Responses Number of respondents Percentage

Very Fast 4 8
Fast 6 12
Normal 15 30
Slow 20 40
Very Slow 5 10
Total 50 100

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,
144% 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.
62
Figure 4.12

CHART SHOWING LEVEL OF SATISFACTION TO RECOMMEND OTHERS

Table4.13

Responses Number of respondents Percentage

Yes 40 80
No 10 20
Total 50 100

FINDINGS
Here the researcher is trying to find out the mind set of customer towards, will they
recommend other organization to avail the credit facility from the bank. Here 80% of the
customers indicated that they will recommend other customers also, but the 20% of the
customers will not recommend other organizations 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.

63
Figure 4.13

CHART SHOWING CUSTOMER’S OPINION ABOUT THE PRODUCT

Table 4.14

Responses Number of respondents Percentage

Excellent 16 32
Good 33 66
Average 1 2 FINDINGS
Poor/Bad 0 0 From the above table it
Total 50 100 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.

64
 2%
0%

32% Excellent
Good
Average
Poor/Bad
66%

Figure 4.14

CHAPTER V
FINDINGS
SUGGESTIONS
CONCLUSION

65
FINDINGS

1. Here we can interpret that 84% of the organization are already taken the working
capital loan from any one of the bank.
2. Here we can understand that majority of the customers will prefer ICICI BANK to
avail the credit facility (60%).
3. It is been inferred that most of the respondents are having Long Relationship with
ICICI BANK (36%).
4. It is been inferred that most of the respondents are Preferring for Cash Credit &
Over Draft in ICICI BANK (34%).
5. It can be inferred that more than half of the respondents are enjoying Current
Account facility (44%).
6. It can be inferred that most of the respondent feel that the Loan is Easily
Sanctioning.
7. It can be inferred that the respondents are accept there is Normal Time Consuming
for Loan Renewal (40%)
8. It is been inferred that most of the respondents are choosing that Renewal of Loan
is Easy (36%).

66
 9. It can be inferred that more than half of the respondents saying that Document
required for Processing the Loan is Heavy (40%).
10. It is been inferred that most of the respondents are feeling that interest rate and
processing fees Charged Working Capital Loan is Normal (54%).

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.

67
CONCLUSION

The study has concentrated A Study on effectiveness of credit appraisal system for
working capital loans in ICICI BANK at Hyderabad.. 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 Hyderabad.
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.

68
BIBLIOGRAPHY

69
BOOKS

 KOTHARI C.R. 2ND EDITION (2010) “RESEARCH METHODOLOGY”

GUPTA K.K, PP 68. 138. 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,. 2079.
 PANDY I M: ‘FINANCIAL MANAGEMENT; 8TH EDITION, 2003,
VIKAS PUBLISHING HOUSE PRIVATE LIMITED.
 LAWRENCE J. GILMA: PRINCIPLE OF MANAGERIAL FINANCE,
ADDISA WERLY.
 DIVIDEND AND DUVDEND POLICY – KENT BAKER
 DIVIDEN POLICY – STERN
 DIVIDEND AND DIVIEN DECISIONS – GOOGLE BOOKS

WEB SITES

 www.rbi.org
70
  www.icici bank.com
 www.thehidubusinessline.com
JOURNALS

 International Journal of Economics and Financial Issues | Vol 5 • Issue 2 • 2018.

574

 International Journal of Emerging Markets. ISSN: 1946-8809

 The Risk Management Association. ISSN: 1088-7261
 IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933
 International Journal of Business and Social Research (IJBSR), Volume -2
International Journal of Emerging Markets

71