How the credit appraisal works, NPA management, health monitoring of accounts, methods for WC calculations

1. CREDIT
APPRAISAL &
NPA
MANAGEMENT
ARKADIP GUPTA
PGDMB14-101

2. CONTENTS:
 INTRODUCTION
 IOB – a general introduction
 CREDIT APPRAISAL – methods used
 NPA MANAGEMENT – provisioning of assets
 CASE STUDY ANALYSIS –
i. ABC TRADERS
ii. ABC GRAPHICS
 CONCLUSION

3. INTRODUCTION

4.  Experience at IOB
 Case study details
 Lessons learnt

5. INDIAN OVERSEAS BANK

6. Recent Achievements
 IOB adjudged Best Public Sector Bank in Priority
Sector Lending by Dun & Bradstreet.
 IOB has bagged Best bank Award from Govt of
Tamil Nadu for its support to Self Help Group
(SHGs) in the State.
 IOB received “Banking Excellence Award “ from
Finance Ministry, GOI
 IOB awarded Customer Focus Award for
constantly delivering industry leading service
standards.
 Commendable IT Achievements (CBS, CTS,
Mobile Banking, Payment gateway, etc)

7. SWOT ANALYSIS

8. Recent performances (financial)in
Crore
SOURCES OF FUNDS :
Capital 1,235.35 924.1 797 618.75 544.8
Reserves Total 14,934.82 12,533.26 11,130.65 8,706.18 6,979.78
Deposits 227,976.09 202,135.35 178,434.18 145,228.75 110,794.71
Borrowings 24,456.04 23,322.86 23,613.85 19,355.40 8,982.20
Other Liabilities &
Provisions
6,302.55 5,740.47 5,661.45 4,875.19 3,790.14
TOTAL LIABILITIES 274,904.85 244,656.04 219,637.13 178,784.27 131,091.63
APPLICATION OF
FUNDS :
Cash & Balances with RBI 11,735.10 9,837.82 10,198.91 10,010.89 7,666.45
Balances with Banks &
money at Call
7,273.68 5,420.60 6,062.19 2,007.76 2,158.19
Investments 70,236.80 61,417.35 55,565.88 48,610.45 37,650.56
Advances 175,887.77 160,364.12 140,724.45 111,832.98 78,999.16
Fixed Assets 2,567.10 1,847.04 1,744.05 1,681.11 1,699.57
Other Assets 7,167.12 5,769.11 5,341.65 4,641.08 2,917.70
Miscellaneous Exp not
written off
0 0 0 0 0
TOTAL ASSETS 274,904.85 244,656.04 219,637.13 178,784.27 131,091.63
Contingent Liability 84,280.17 71,001.21 59,192.54 45,075.89 39,340.52
Bills for collection 14,345.76 12,645.16 8,336.52 4,253.20 3,205.15

9. Trend Analysis
of IOB

10. NAME OF RATIO VALUE FOR IOB (in crore)
Gross NPA ratio. 4.98%
Net NPA ratio 3.19%
Important ratios
in NPA analysis and values

11. CREDIT APPRAISAL

12. 6 C’s of CREDIT
APPRAISAL

13. WORKING CAPITAL
 A measure of both a company's efficiency and its
short-term financial health. The working capital is
calculated as:
 Methods:
I. Turnover Method
II. Max. Permissible Banking Finance
III. Cash Budget Method
CA WCCL

14. Types of Loan
 Fund Based
I. WC loan
II. Term loans
III. Composite loans
 Non-Fund Based
I. Bank Guarantee
II. Letter of Credit

15. The workflow of
CREDIT APPRAISALSTAR
T
Receipt of
documents
from
applicants
Document
verification
Pre sanction visit by
official
Preparation of
financial data
Proposal
Assessment
Proposal
preparation
Proposal
approval
Documentation
mortgaging and
agreements
Disbursement
of loans
Document
verification
Post
sanction
process
STOP

16. NPA MANAGEMENT

17. Importance of NPA
management
 Reasons:
I. Internal factors
II. External factors
 Impacts:
I. Restriction of cash flows
II. Drain of profits
III. Bad effect on equity value
IV. Bad effect on goodwill

18. Asset Categorization
Standard
Asset
• Regular servicing of interest and the principal owed to the bank
• Their arrears normally don’t exceed the timeframe of 90 days
Sub-
Stanard
Asset
• Irregular servicing of interest with period varying from 91days to 1 year
• The level of provisioning varies according to the category
Doubtful
Asset
• Being in the substandard category for over a year reduces the
asset to this category.
• They require heavy provisioning and have very low salvage value
Loss
Asset
• They have very little salvage value to account off.
• Once inspected by auditors they are normally written off
• They require 100% provisioning

19. NPA provisioning

20. SARFAESI ACT,2002
Allows the banks to recover their non-
performing assets without the legal intervention.
The Act provides three alternate measures:
I. Securitization
II. Asset Reconstruction
III. Enforcement of security without legal
powers

21. Other preventive measures
 DRT
 LOAN RESTRUCTURING
 COMPROMISE / SETTLEMENT SCHEMES
 BIFR
 SALE OF NPAs TO OTHER BANKS

22. CASE STUDY ANALYSIS
1. ABC TRADERS (extension of WC loan)
2. ABC GRAPHICS ( extension of WC loan, failure of
interest payment and subsequent sub standard
account)

23. ABC TRADERS 
WORKING CAPITAL RENEWAL
LOAN
 The company primarily was distributor of
imported papers and boards
 The method followed for renewal of the WC
loan was “Nayak Committee Method”
 Owing to their foreign transactions, they were
also given a LG of 1 CR.
 The interest rate was 4.50% over BPLR.
 The collateral was worth of 2.26Cr.
 It was private limited company with presence in
Tamil Nadu and parts of Karnataka

24. ABC TRADERS 
BALANCE SHEETParticulars AUDITED AUDITED AUDITED ESTIMATED
31.03.2011 31.03.2012 31.03.2013 31.03.2014
1. NET SALES
i. Receipts 1463.8748 1612.72553 965.46 1062
ii. Export Receipts 0 0 0 0
TOTAL 1463.8748 1612.72553 965.46 1062
2. COST OF SALES
i. Opening Stock 0 0 223.38 241.36
ii. ADD : Payments 1368.52558 1509.0158 927.76 1025.54
Trading Expenses 0 0 4.57 5.02
iii. LESS Closing Stock 0 0 241.36 265.5
SUB TOTAL 1368.52558 1509.0158 914.35 1006.42
3. Gross Profit (+) / Loss (-) {1 - 2} 95.34922 103.70973 51.11 55.58
4. Selling & Administrative Expenses 57.65416 60.08418 19.88 21.86
5. Interest & Financial Charges 26.12761 29.35476 24.5 24.5
6. Depreciation on Other Assets 5.92431 5.01462 1.12 0.96
SUB TOTAL 89.70608 94.45356 45.5 47.32
7. Operating Profit / Loss (3-4+5+6) 5.64314 9.25617 5.61 8.26
8. Other Income / Expenses
i. Other Income 2.12239 4.75393
ii. LESS Other Expenses 1.47576 0
SUB TOTAL 0.64663 4.75393 0 0
9. PROFIT / LOSS BEFORE TAX 6.28977 14.0101 5.61 8.26
10. Income Tax Paid 0 47.01781 1.12 1.65
11. Net Profit / Loss after Tax 6.28977 -33.00771 4.49 6.61
12. Dividend
13. Retained Profit 6.28977 -33.00771 4.49 6.61
14. Cash Accrual 12.21408 -27.99309 5.61 7.57

25. Calculation:
1. NAYAK Committee method
AUDITED AUDITED AUDITED ESTIMATED
AS PER NAYAK COMMITTEE 31.03.2011 31.03.2012 31.03.2013 31.03.2014
Net Sales 1463.8748 1612.72553 965.46 1062
Reqd Working Capital 25% of sales (A) 365.9687 403.181383 241.365 265.5
Promoter's Contribution : 5 % ( B ) 73.19374 80.6362765 48.273 53.1
Available N.W.C. ( C ) 21.57332 -24.15776 76.75 83.73
MinimumPermissible Bank Finance
( A ) - ( B ) 292.77496 322.545106 193.092 212.4
( A ) - ( C ) 344.39538 427.339143 164.615 181.77
WHICHEVER IS LESS 292.77496 322.545106 164.615 181.77

26. 2. TANDON Committee method (II method)
AS PER TANDON COMMITTEE AUDITED AUDITED AUDITED ESTIMATED
31.03.2011 31.03.2012 31.03.2013 31.03.2014
Net Sales 1463.8748 1612.72553 965.46 1062
Current Assets:
i. Stock in Trade 0 0 241.36 265.5
ii. Sundry Debtors 288.79913 202.39395 185.05 199.13
iii. Other Current Assets 1.09836 1.06036 62.75 55.08
TOTAL CURRENT ASSETS (A) 289.89749 203.45431 489.16 519.71
Current Liabilities other than Bank Borrowings
i. Creditors for Purchases 80.94977 25.92937 231.94 256.38
ii. Other Current Liabilities 0 0 5.47 4.6
TOTAL CURRENT LIABILITIES (B) 80.94977 25.92937 237.41 260.98
WORKING CAPITAL GAP ( C ) 208.94772 177.52494 251.75 258.73
UNDER SECOND METHOD
N W C Required (25 % of TCA) ( D ) 72.4743725 50.8635775 122.29 129.9275
Net Working Capital Available ( E ) 21.57332 -24.15776 76.75 83.73
Maximum Permissible Bank Finance
( C ) - ( D ) 136.473348 126.661363 129.46 128.8025
( C ) - ( E ) 187.3744 201.6827 175 175
WHICHEVER IS LESS 136.473348 126.661363 129.46 128.8025

27. ABC GRAPHICS 
WORKING CAPITAL LOAN
 The proprietorial company dealt mainly with
printing of cards and minor animation projects
 The method followed for renewal of the WC
loan was “ Tandon Committee Method”
 The interest rate was the standard BPLR.
 The collateral was worth of 10L.
 Its interest servicing was poor and it was
reduced to sub-standard account.

28. Particulars AUDITED ESTIMATED AUDITED
31.03.2011 31.03.2012 31.03.2012
1. NET SALES
i. Receipts 30.14 38.73 23.53
ii. Export Receipts 0 0 0
TOTAL 30.14 38.73 23.53
2. COST OF SALES
i. Opening Stock 0 4.34 4.25
ii. ADD : Payments 26.8 28.77 20.87
Trading Expenses 3.24 3.87 4.73
iii. LESS Closing Stock 4.34 3.64 7.74
SUB TOTAL 25.7 33.34 22.11
3. Gross Profit (+) / Loss (-) {1 - 2} 4.44 5.39 1.42
4. Selling & Administrative Expenses 1.17 1.87 2.25
5. Interest & Financial Charges 0.68 0.84 0.84
6. Depreciation on Other Assets 0.64 1.12 0.86
SUB TOTAL 2.49 3.83 3.95
7. Operating Profit / Loss (3-4+5+6) 1.95 1.56 -2.53
8. Other Income / Expenses
i. Other Income 0.22 0.29
ii. LESS Other Expenses 0 0.3 0.48
SUB TOTAL 0.22 -0.3 -0.19
9. PROFIT / LOSS BEFORE TAX 2.17 1.26 -2.72
10. Income Tax Paid 0.1 0 0
11. Net Profit / Loss after Tax 2.07 1.26 -2.72
12. Dividend
13. Retained Profit 2.07 1.26 -2.72
14. Cash Accrual 2.71 2.38 -1.86
ABC GRAPHICS 
BALANCE SHEET

29. 1. TANDON Committee method (II method)
AS PER TANDON COMMITTEE AUDITED AUDITED ESTIMATED
31.03.2011 31.03.2012 31.03.2012
Net Sales 30.14 23.53 38.73
Current Assets:
i. Stock in Trade 12.65 7.74 14.28
ii. Sundry Debtors 1.47 2.84 1.5
iii. Other Current Assets 0.8 0.7 1.2
TOTAL CURRENT ASSETS (A) 14.92 11.28 16.98
Current Liabilities other than Bank Borrowings
i. Creditors for Purchases 0.73 1.85 0.86
ii. Other Current Liabilities 0.07 0.78 0.2
TOTAL CURRENT LIABILITIES (B) 0.8 2.63 1.06
WORKING CAPITAL GAP ( C ) 14.12 8.65 15.92
UNDER SECOND METHOD
N W C Required (25 % of TCA) ( D ) 3.73 2.82 4.245
Net Working Capital Available ( E ) 7.98 3.36 10.52
Maximum Permissible Bank Finance
( C ) - ( D ) 10.39 5.83 11.675
( C ) - ( E ) 6.14 5.29 5.4
WHICHEVER IS LESS 6.14 5.29 5.4

30. Notional Dues Calculation
a) Outstanding as on the date upto which interest was last
debited
528980
Date of interest last debited/Date of NPA
whichever is earlier
08/06/201
ADD:
b) Simple interest to be added from the date of interest last
debited or date of NPA whichever is earlier till date of sub-
mission of compromise Proposal at the Bank’s base rate
prevailing on the date of submitting the proposal / contract
rate / decreed rate of interest which ever is less.
13.25% pa
c) Debits such as Bills returned unpaid, DPGs invocation of
Guarantees or any other business debits made after the
date mentioned in col.(a) above
d) Interest on the (c ) above at the rate mentioned in col.(b) 70090
e) Other Expenses viz. ECGC/DICGC premium, Godown rent,
Insurance premium paid, charges paid to Security agencies/
Personnel etc., subsequent to the date of NPA.
f) Legal and Other Expenses incurred subsequent to date
mentioned in col. (a) above
15,009
SUBTOTAL: A 614079
LESS:
a) Recoveries made after the date mentioned in col. (a) and
Countervailing Interest :
Date Amount CV Interest Total
X
b) CV Interest on ECGC / CGTMSE claim received amount.
CV Interest Y
Sub Total Z=X+Y
NOTIONAL AMOUNT DUE FROM THE PARTY (A - Z )

31. ABC GRAPHICS
 Proprietary company
 They were new in the area
of business
 The projected sales on the
basis of which loan was
approved was too
ambitious
 Their risk assessment
was poor
ABC TRADERS
 Private limited company
 The proprietors were
highly experienced in the
paper industries
 Its sales prediction were
much accurate than the
former
 They had excellent history
of borrowings with IOB
COMPARATIVE STUDY
between the 2 cases

32. LESSONS LEARNT

33. Lessons learnt
 Proper evaluation of risk while providing of
loans
 The recovery workflows used by IOB in case of
an account turning NPA
 The general banking operations especially the
instrument clearing cycle.