The document provides an overview of credit appraisal, detailing its definition, significance, and the evolution from conventional to modern appraisal methods. It highlights the importance of evaluating various income sources and personal discussions in assessing a borrower's repayment capacity while emphasizing the role of chartered accountants in external credit appraisal for unbiased evaluations. Additionally, it examines financial statement analysis, banking habits, and key principles such as character, capital, capacity, cycle, and collateral that influence credit risk assessment.

1. Credit Appraisal – An Overview
CA. E Guru Prasad

2. Presentation Schema
What is credit
appraisal?
Why credit
appraisal is
required?
Conventional Vs
Modern Methods
Conventional
Methods of
Appraisal
Modern Methods
of Appraisal
Considering other
incomes
Personal Discussion
in Appraisal
Financial statement
analysis
Banking statement
analysis
Banker’s preference
for external credit
appraisal
Key Points of Credit
appraisal
Role of CA in
external appraisal
Professional
advantages for CA
taking up appraisal
assignments
The potential in
lending market

3. What is Credit Appraisal?
Credit appraisal of a loan
denotes evaluating the
proposal of the loan to
find out repayment
capacity of the borrower.
The primary objective is
to ensure the safety of
the money of the bank
and its customers.
The process involves an
appraisal of market,
management, technical,
and financial.

4. Why
Credit
Appraisal
is
required?
“Appraisal” being an synonym for assessment, evaluation, review and
judgement – the term ‘Credit Appraisal’ self explains as to why it is
required.
The critical evaluation of the borrower is required for ensuring the safety
and liquidity of the funds lent and also profitability from the credit facility
extended.
Credit appraisal measures the inherent risk in the proposal and arriving at
a judgement as to whether sanction or reject the loan based on the
information accumulated about the applicant and the nature of business
activity/ income source.
The credit worthiness being the ability of a customer’s past and future
ability and willingness to repay the debts in full and on time. A thorough
appraisal of the proposal ensures in ascertaining the same to a very large
extent.

5. Conventional Vs Modern methods
Credit appraisal methods and techniques have undergone vast changes from the past to the
present.
Traditional method of credit appraisal was done by the lending institution internally.
However, these days appraisal includes personal discussion with the borrower and even involves
outsourced appraisal by professionals like Chartered accounts who specialise in this.

6. An Insight into Conventional was Modern Methods of
Appraisal

7. Conventional method of Appraisal
Traditionally a huge
emphasis was laid on
the income of the
business.
For the purpose of
arriving at income
eligibility, the income
declared in the income
tax returns were used.
Consistency in financial
ratios over a period.
Income from other
sources were not given
importance.

8. Modern methods of Appraisal
A detailed discussion with the borrower ensures the factual knowledge on the business/ source of
income and their cash flow positions.
Going beyond the declared financials of the business, the strengths, weakness and caveats are
considered in the proposal. The strengths add advantage to the proposal and steps to mitigate the
weakness and caveats are considered.
Income from other sources, which was not considered in the conventional methods are taken for
consideration.
External credit appraisal is done along with the conventional internal appraisal, thus ensuring
fairness/differential views in appraisal.

9. Importance of considering other income in
credit appraisal
Under other
income, income
other than business
income and income
from business
activity which could
not considered for
appraisal should be
taken into
consideration.
Other incomes/
cash flows to
support the regular
business incomes
can provide an
additional cushion
for arriving at the
eligibility for an
loan proposal.
Some examples are
Commissions,
Incentives, Trade
Discounts, Gifts in
kind (gold jewelry,
etc.), offers.
Businesses where
Other Income play
a deciding factors
are Rice mill, Petol
bunks, Vehicle
dealerships,
distributors/
wholesale traders
of goods, etc.

10. Personal Discussion (PD) in an appraisal
Takes the customer into
confidence and get him
in comfort zone
Analyze the customer
and his business
operations in detail
Having an informal chat
about the business and
market conditions
Assess the level of stock
& business activity.
Verify some
documentary evidence
to substantiate the
turnover.
Understanding the
process flow of the
business.
Anything unusual
should be questioned
and never take anything
for granted.
Find out the sources of
income and list it out.
Discuss about each
income source
separately
Get to know the
strengths and weakness
in a proposal.

11. Importance of Analysing Financial statements:
What Constitutes Financials Statements?
ITR V – Acknowledgement Computation Sheet
Tax paid challans & Form 26AS
Profit and Loss Account (with Schedules)
Balance Sheet (with Schedules)
Cash Flow Statement, in case of companies
Audit Report – Form 3CB / 3CA / 3CD – wherever applicable

12. Contd..
Points to be
checked/
verified in
Acknowledgement
Original or revised
return
Date of Filing
Acknowledgement
number/ Bar code
Current Year Loss
Tax Payment
Details
Digital Signature
wherever
applicable

13. Contd..
Points to be
verified in
Computation
Sheet
Categorization of
income under various
heads
Whether the
deductions claimed
are in line with the
Prevailing limits
Income from Other
sources,
speculations, capital
gains are usually not
considered for
appraisal.
Disallowances
TDS Deducted and
Tax paid details
Brought forward loss
and unabsorbed
depreciations

14. Contd..
Points to be
verified in
P&L Account
Direct
Incomes
Indirect
Incomes
Depreciations
Opening &
Closing stocks
Gross profit &
Net profits
Ratios
Consistency in
Turnovers and
profitability
figures

15. Contd..
Points to be
verified in
Balance
Sheet
Share
Capital,
Reserves and
surplus
Secured &
Unsecured
loans
Creditors/
Debtors
Other
Liabilities
Bank
accounts
P & L Debit
balance

16. Importance of Banking Analysis
Cheque bounces, nature of such bounces whether due to technical reasons or for insufficient funds.
EMIs being serviced, regularity of such payments
Internal transfers, Loan Disbursement credits, etc. can be identified
Gives an hint on the customers/ suppliers of the business being appraised
Whether the transactions are business or personal in nature
Understanding the transactions in the statement and Average banking balance being maintained.

17. Character:
Reputation of business, its willingness to repay as well as
repayment history should be thoroughly assessed.
Capital:
Leverage ratios such as owner’s contribution to equity, equity
to debt ratio of
the company should be assessed
Capacity:
This is mainly the ability of the borrower to repay and the
reflective of the
borrower’s volatility of earnings.
Cycle:
This generally refers to economic conditions. The state of the
business cycle is an important element in determining credit risk
exposure especially for cycle dependent industries.
Collateral:
In the event of default, the lender has claims on the collateral
pledged by the borrower. The greater the priority of this claim and
the market value of the underlying collateral, the lower the exposure
risk of the loan.
Key points considered for appraisal

18. Why Bank’s prefer an external credit
appraisal?
RBI’s guidance note on Credit risk management
suggests the following:
Banks should have a
system of checks and
balances in place for
extension of credit.
Multiple credit approvers
making financial sanction
subject to approvals at
various stages.
Having an independent
audit and risk review
function.
In order to ensure
transparency of risks
taken, it is the
responsibility of banks to
accurately, completely
and in a timely fashion,
report and record/report
the comprehensive set of
credit risk data.

19. External credit appraisal can provide an unbiased
opinion.
To adhere to these points of RBI’s guidance notes on credit
risk management, it is important to have an expert/
professional external appraisal to have an unbiased/ fair
appraisal on the loan proposal without any prejudice.
And therefore, the lending institution outsource
this function to external agency mostly Chartered
accountants to have a professional insight into
appraisal and weigh the risks associated and steps
to mitigate the same based on other strengths.

20. Why Bankers prefer CA for credit appraisal
Chartered Accountants
possess a deep subject
knowledge on the financial
analysis and also to
understand the business
models and risks associated
in the operations of the
business.
Also being a professional,
CA’s are updated in the
current happenings in the
areas of taxations (direct &
indirect) and other
statutory regulations and
limitations in place.
Helps in providing a fair and
unbiased opinions and
appraisal of the risks and
weightage of the proposal.

21. Advantages to professional practise of the
CA’s
Audits
Direct taxation
Indirect taxation areas such as
GST
Opinions & Due Diligence
Mergers & Acquisitions
Others areas where the CA’s can get
value additions to their professional
practise by undertaking credit appraisal
includes but not restricted to

22. The size of lending Market for the important lending
category for Q2-ending 2019
• 2.07 Million accounts
• Rs. 4,307 Billion as outstanding balance
Loan against properties
• 14.15 million accounts
• Rs. 19,028 Billion as outstanding balance.
Home Loans

23. Thank You
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
Copyrights © 2019 DVS Advisors LLP
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