This document discusses credit appraisal systems used by banks. It begins with background on how high levels of non-performing assets (NPAs) can hamper bank operations. It then discusses the differences between credit appraisal and project appraisal, with credit appraisal focusing on a borrower's creditworthiness rather than alternative projects. The document outlines the four pillars of credit assessment as repayment, remuneration, relationship, and reputation. It also discusses the financial and non-financial aspects evaluated in credit appraisal systems as well as features and functionalities of credit appraisal software solutions.

1. Banking Technology
Credit Appraisal System

2. Banking Technology – M.Tech (IT)
Agenda
• Background
• Credit Appraisal Vs. Project Appraisal
• The Four Pillars of Credit Assessment
• Financial & Non-Financial Aspects
• Features & Functionalities of Credit Appraisal
solutions

3. Banking Technology – M.Tech (IT)
Background
• The High levels of NPAs hamper a bank’s
operations and the trust and confidence of
customers
– Are banks following the right approach?
– Are they lending to credit worthy customers?
• Management of credit worthiness ensures that a
bank is not too much at risk of exposure to bad
loans
• Ultimately, the banks must be able to earn at least
a minimum level of returns to repay its depositors
with the accepted level of interest

4. Banking Technology – M.Tech (IT)
Credit Appraisal
• Credit appraisal is critical for bankers
as it attempts to resolve the perennial
risk-return conflict.
• Refers to “a set of tools and decisions
undertaken by the banker to determine
the credit worthiness of the customer
and structure a credit proposal”

5. Banking Technology – M.Tech (IT)
Credit Vs. Project Appraisal
• Project Appraisal
– Premise - present several alternatives to the management,
then select the feasible one.
– Project selection is all about striking a balance between high
profit and high risk and arrive at a project which offers
maximum returns at the lowest risk level.
• Credit Appraisal
– Appraiser does not give alternatives.
– The task is to assess “creditability” and “bankability”.
A project can be viable financially, but the borrower may
not be credit worthy. This is the major reason why
appraisers pay attention to the borrower’s net working
capital (for projects) and income (for personal loans).

6. Banking Technology – M.Tech (IT)
Repayment
The loan will
be repaid when
due and
instalments will
be promptly
paid
Remuneration
The bank will
earn reasonable
return on the
loan given the
assumed risk
and efforts
expended
Relationship
Customer
relationship will
be strengthen,
generating
revenue
prospects for
bank
Reputation
Bank’s
reputation will
grow and
opportunities
for lending to
other customers
will arise
through the loan
The Four Pillars of
Credit Assessment

7. Banking Technology – M.Tech (IT)
The 5 C’s to Build Credit
Appraisal Process
• Character – indicates a “good citizen” or a “good
corporate”
• Capacity – refers to the cash flow
• Capital – refers to the assets or wealth
• Collateral – security
• Conditions – mostly the economic
The banker attempts to quantify these Cs so that a
constructive decision can be taken. The entire
process is termed “Credit Analysis”

8. Banking Technology – M.Tech (IT)
Aspects of Credit Appraisal
Non-Financial
– management skills, aptitude and style and if it’s a
personal/housing loan could involve the
individual’s education, reputation and job position
as also credit history.
• Key Parameters
– Technical Feasibility
– Structural & Infrastructural Feasibility
– Managerial Competency

9. Banking Technology – M.Tech (IT)
Aspects of Credit Appraisal
• Financial
– Key Parameters - Profitability , Cash flows Capital
and Liquidity.
– Company & Industry Analyses
Rather than the absolute figures, a relationship
among these parameters would give a more
relevant picture to the analysts. In this regard,
ratio analysis is a useful tool.

10. Banking Technology – M.Tech (IT)
The Negatives to Watch Out For
• High management turnover
• Low investment levels indicating a
stagnating environment
• An aging management team with no
defined succession policy
• Indications of undue risk taken (for eg.,
impractical diversifications, debt-
oriented financing policy, large projects
out of sync with the company’s size)
• Management style that may restrain
innovation

11. Banking Technology – M.Tech (IT)
Credit Appraisal Solutions
• A credit appraisal solution automates a bank’s credit
processes thereby raising the efficiency.
• These solutions can also be integrated with other risk
management tools
• They have the ability to generate reports facilitating
decision making and corrective steps.
• Several other benefits:
– Speeding up the department processes
– Better productivity
– Increased availability and range of reports
– Ease of use and administration.

12. Banking Technology – M.Tech (IT)
Dominant Features
• Modular approach allowing seamless integration of the various
modules and functionalities.
• Complete functionality covering not only credit appraisal, but
also credit policy, credit monitoring, and MIS.
• Ability to support fund-based as well as non-fund-based
products.
• Inclusion of benchmarks, guidelines and norms that are useful
for devising credit policy
• Availability of decision support tools useful for ratio analysis,
credit rating, risk exposures, and break-even analysis.
• Provision of relevant document checklists, details of previous
sanctions and other pertinent information
• Facilitates online approval of appraisals
• Enables tracking of irregularities, clarifications and review
comments on the basis of monitoring reports.

13. Banking Technology – M.Tech (IT)
Credit Appraisal – Core Functionality
The solution enables the following:
– Credit assessment and follow-up activities
– Proposal handling and sanctioning of working capital and
term loans
– Assessments based on various techniques
– Generation of appraisal notes and electronic approvals
– Administrative activities like in-principle approvals, validity
extensions, amendment of sanctions, etc
– Decision making through support via ratio analysis, break-
even analysis, sensitivity analysis, and calculation of
investment parameters such as NPV, IRR and payback period
– Generation of sanction and rejection letters, as well as
reminders

14. Banking Technology – M.Tech (IT)
Optional functionalities
• Credit monitoring module –
– allows the bank to monitor and track its credit accounts.
– facilitates generation of relevant reports and letters
– records any irregularities for follow up purposes.
• System administration facility
– maintenance of user information
– database administration
– backup and recovery
– security management
• Policy functionality
– maintains the database for bank’s appraisal policy
– covers the relevant norms, guidelines and benchmarks

15. Banking Technology – M.Tech (IT)
Appraisal Tools
• Sensitivity analysis & projections for Working capital
and Term loans
• Industry and peer group comparisons
• Linkage to financial database of service providers such
as CRISIL, CMIE
• Credit risk rating incorporation
• Term loans - Interest workouts, Moratoriums,
Repayment schedules, Sensitivity
• Computation of limits
The Credit Appraisal solution also supports recovery procedures
and NPA management through actions such as Compromise
Proposal, BIFR requirements, Legal Actions, and Write-offs.

16. Banking Technology – M.Tech (IT)
Other Tools in an Appraisal Solution
• For the post appraisal stage:
– Checks that the sanctions are in line with the credit
policy
– Checks that documents and securities are in order
– Auto generation of sanction letter
• For effective monitoring:
– Timely and standard review of credit extended
– Terms and conditions compliance
– Security Documents compliance
– Securities charging compliance
– Review Proposals
– Audit Queries
– Stock Statements

17. Banking Technology – M.Tech (IT)
Principles of Credit Appraisal
1. Pay attention to quality of credit, rather than quantity
2. Every loan must have a 3-way exist route to meet all eventualities
3. Focus on the character and antecedents and decedents of the
borrower
4. Do not lend to a business you don’t understand
5. Lend only when feel comfortable about doing so
6. Know all the facts
7. Be conscious of the business cycles and their impact
8. Understand the management and its style of operation
9. Collateral is desirable, but it never is a replacement for repayment
10. Size does matter
11. Pay attention to even small details
12. Stay away from borrowers who can’t get loans from local banks
13. Don’t be rushed
14. Concentrate on where is the loan money is going?
15. Bank comes first – never make a loan to some one you personally
won’t give a loan!

18. Banking Technology – M.Tech (IT)
Loan Arithmetic
Little Johnny was being questioned by the teacher
during an arithmetic lesson. 'If you had ten dollars,'
said the teacher, 'and I asked you for a loan of eight
dollars, how much would you have left?'
'Ten,' said Little Johnny firmly.
'Ten?' the teacher said 'How do you make it ten?'
'Well,' replied Little Johnny 'You may ask for a loan of
eight dollars, but that doesn't mean you'll get it!'

19. Banking Technology – M.Tech (IT)