Chapter 2 – Credit Policy

Bank’s board is generally the apex authority in formatting credit policy of a bank

Appraisal Standards

Qualitative

Qualitative study taken about bank’s past experience with the industry if any, and experience with the promoters, if there is a track record to go by. Where it is a new connection for the bank but entrepreneurs are already in business, confidential opinion reports from existing bankers and published data if available are carefully perused.  

Quantitative

1. 1. Working Capital

      1. Liquidity
         • Current Ratio – 1.33 will generally considered as benchmark level of liquidity.
      2. Net Working Capital
         • Carefully study that working capital not use for long term uses purpose.
      3. Financial Soundness
         • Total outside liability/Adjusted tangible net worth ratio 3.0 is reasonable but deviation in selective case for understandable reasons may be accept by the sanctioning authority
      4. Turnover
         • Study the trend in quality and value wise tern-over
      5. Profit
         • Non-operating income are excluded as there are usually one time or extraordinary income
      6. Credit Rating
         • Apart from the bank’s internal credit risk assessment , whether the company has been rated by RBI approved external credit rating agency.
      7. Capital Market
         • Company’s share are listed on stock exchanges, the movement of the price of its share, the market value of shares, response of public issue etc indicate the corporate image

2. Term Loan

1. 1. Technical Feasibility
      • For technical feasibility credit officer take opinion from the bank’s technical consultancy cell or from the consultants of the bank
   2. Promoters’ Contribution
      • Promoter’s contribution of at least 20% is normally expected by the lending bank
   3. Debt Service Coverage Ratios
      • Net DSCR not go below 2 and Gross DSCR not go below 1.75
   4. Margin on Security
      • Margin on security depend on Debt : Equity gearing for the project.
   5. Other Parameters
      • Other parameters like End use of fund, Interest rate slab, Credit rating etc.