Loan Appraisal Technique
Steps In Loan Appraisal
1] Checking the feasibility of the Project:
Check whether the person applying for the loan is a
a) new person
b) frequent person
and accordingly the procedure is decided
If the applicant is new, then his family background, educational qualification, work experience is checked. When the new person applies it takes more time to complete the formalities.
If the applicant is requiring the loan for expansion, modernization etc.. then his company’s balance sheet of the last 3 years, profit and loss account, cash flows statement etc.. is demanded to see his business trend.
Also, the industry profile, trends in the current industry, upcoming opportunities in the industry, government policies relating to that particular industry are looked into.
2] Checking the credit worthiness of the Borrower:
The bank in many ways check the credit worthiness of the buyer
a) Judging financial Data:
Many ratios are derived from the data submitted and seen to it that it fulfills the minimum requirements.
(i) Current ratio > 1.33
(ii) Debt equity ratio<1
(iii)Debt service coverage ratio >1.75 and audit queries are also solved.
b) Collecting Market information:
The most reliable information is collected from other bankers with whom the borrower has dealt in the past. Information related to, the regularity of repayment done, the relations of the bank with the borrower etc, is collected from other banks. This information is very confidential and the borrower doesn’t know about it.
If the borrower is new in the business the information is gathered from his relatives, the person who gave him the order, his suppliers etc..
According to the scanning process, the borrowers are allotted the marks and grade as follows:
| MARKS | GRADES |
| >90 | A |
| 80-90 | A+ |
| 60-80 | AA |
| 50-60 | AA+ |
| <50 | AAA |
The credit appraisal department consists of expertise from various fields who help the bank to decide whether the project is viable or not…
3] Pre-Sanction inspection of the unit:
Field Visit: Before sanctioning of the project, a field visit takes place. In the field visit, one person from the Credit Enquiry Department accompanies the Branch manager/Zonal manager. The purpose is
Ø to check the address is correct or not
Ø to check the mentioned activity is carried on or not
Ø to check the collateral security mentioned exists or not
Ø to check the market value of the securities is correct or not
In addition to these labour problems are checked into and other issues
4] Post sanction Inspection:
It is done for physical verification. Stock statements are checked. Yearly reviews on performance are done - if sales are not as per the estimation, the verification about the reasons are done. If installments are not paid regularly the branch manager asks for the verification. Also field visits take place annually.
5] Post sanction Supervision:
The bank also supervises to ensure proper utilization of funds and there are no diversions of bank funds for any purpose other than the one mentioned in the application for loan, this helps to reduce NPA’s.
6]Moratorium:
The period between the release of the loan and the first principal installment repayment is known as moratorium. The moratorium is a holiday period given by the bank to the borrower of the units to start repayment of the loan.
7] Disbursement:
Term loan is given in installments and never in lumpsum to prevent its misuse by the borrower. It is normally paid to the suppliers directly.
8] Insurance:
The bank should ensure that the assets or machinery against which the loan has been taken is adequately insured, so that unforeseen losses or calamities are averted and all risks are insured. The insurance policy taken out is a comprehensive policy covering all risks such as fire, theft, earthquakes, civil commotion etc.. and is in the name of the borrower.
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