credit appraisal system of commercial vehicle loans

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INDEX 1. Introduction. Executive Summary. Credit Appraisal. Importance of Credit Appraisal System. Objectives of the Research. Significance / Scope of the study. Limitations of the Research. 2. Theoretical Background Commercial Vehicle Industry Overview. Non-Banking Financial Companies (NBFCs). Role of NBFC’S in Commercial Vehicle Financing. Financing procedure of Commercial Vehicle. 3. Company Profile. o Supreme Financial Services ltd. Introduction. Vision and Mission. Branches. 4. Research Methodology of the Project. Means of research. Primary Data. Secondary Data. 5. Data Analysis. Loan Appliers to Defaulters. Parameter used for credit appraisal. 5 C’s of Credit 6. Findings. 7. Suggestions.

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This project gives the idea about appraisal techniques used in commercial vehicle loans.

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Page 1: Credit Appraisal System of Commercial Vehicle Loans

INDEX

1. Introduction.

Executive Summary.

Credit Appraisal.

Importance of Credit Appraisal System.

Objectives of the Research.

Significance / Scope of the study.

Limitations of the Research.

2. Theoretical Background

Commercial Vehicle Industry Overview.

Non-Banking Financial Companies (NBFCs).

Role of NBFC’S in Commercial Vehicle Financing.

Financing procedure of Commercial Vehicle.

3. Company Profile.

o Supreme Financial Services ltd.

Introduction.

Vision and Mission.

Branches.

4. Research Methodology of the Project.

Means of research.

Primary Data.

Secondary Data.

5. Data Analysis.

Loan Appliers to Defaulters.

Parameter used for credit appraisal.

5 C’s of Credit

6. Findings.

7. Suggestions.

Page 2: Credit Appraisal System of Commercial Vehicle Loans

8. Conclusion.

9. Bibliography.

Page 3: Credit Appraisal System of Commercial Vehicle Loans

Executive Summary

Page 4: Credit Appraisal System of Commercial Vehicle Loans

Credit Appraisal

The process by which a lender appraises the creditworthiness of the

prospective borrower. This normally involves appraising the borrower’s

payment history and establishing the quality and sustainability of his income.

The lender satisfies himself of the good intentions of the borrower, usually

through an interview.

IMPORTANCE OF CREDIT APPRAISAL SYSTEM

Financial institutions and banks are intermediate between lenders and

borrowers. These financial intermediaries collect deposit and disburse it as loan

and advance to the individual people, business, commercial, industrial entity.

The loan and advance should be given to them who have the certain and

predicted cash flow to repay the credit. If the manager fails to analyze the

client’s viability of repaying the loan, possibility of default may arise due to the

fact.

So the importance of APPRAISAL, in sanctioning the loan, is the key to

identify the borrower’s ability, expertise, efficiency, industrial analysis &

business performance.

Page 5: Credit Appraisal System of Commercial Vehicle Loans

RECOVERY OF CREDIT: -

Appraisal is done to ensure the recovery of the credit along with the good

supervision, monitoring and the relationship. In other words, the purpose of

appraisal is to be sure that the proposed advance will be safe, liquid, and

profitable and for acceptable purpose covered by adequate security.

SAFETY: -

The most important measure of appraising a loan proposal is safety.

Safety means the assurance of repayment of distributed loans. Company is in

business to make money but safety should never be sacrificed for profitability.

To ensure the safety of loan, the borrower should be chosen carefully. He

should be a person of good character & capacity.

LIQUIDITY: -

The banker must ensure that the borrower is able to repay the loan on

demand or within a short period. This depends upon the nature of assets

owned by the borrower & pledged to the company. E.g. goods & commodities

are easily marketable while fixed assets like land & buildings can be liquidated

after a time interval. Thus, the company regards liquidity as important as safety

of the funds & grants loans on the security of assets which are easily marketable

without much loss.

Page 6: Credit Appraisal System of Commercial Vehicle Loans

PROFIT:-

‘Profit’ is the blood for any commercial institution. Before approval of

any loan project, the company authority has to be sure that the proposed project

will be a profitable venture.

DIVERSIFICATION OF RISK:-

During sanctioning any loan, company has to be attentive about

diversification of risk. All money must not be disbursed amongst a small

number of people.

NATIONAL INTEREST & GROWTH: -

The company would lend if the purpose of the advances can contribute

more to the overall economic development of the country.

Page 7: Credit Appraisal System of Commercial Vehicle Loans

Objective of Study

To study the credit appraisal system of commercial vehicle

finance.

To study the documentation required for credit appraisal.

To know the terms and conditions used in commercial vehicles

financing.

To identify & suggest the scope for improvement in Credit

Appraisal System.

Page 8: Credit Appraisal System of Commercial Vehicle Loans

Significance / Scope of the study

The Credit Appraisal is a holistic exercise which starts from the time a

prospective borrower walks into the branch and culminates in credit delivery

and monitoring with the objective of ensuring and maintaining the quality of

lending and managing credit risk. The process of Credit Appraisal is

multidimensional and includes,

Management Appraisal.

Technical Appraisal.

Commercial Appraisal.

Financial Appraisal.

Economic Appraisal.

Management Appraisal has received lot of attention these days as it is one

of the long term factors affecting the business of the concern. Technical

Appraisal emphasizes on the technical feasibility of the venture and also finds

out the possible economic life period of the present technology. Commercial

Appraisal focuses on the commercial viability of the project .It tries to find

matters regarding demand in market, the acceptance of product in market. It

also focuses on the presence of other substitutes of the product in the market.

Page 9: Credit Appraisal System of Commercial Vehicle Loans

It also focuses on the multiple scope of the product. Financial Appraisal

is done to find out whether the promoter is having the capacity to raise finance

both own equity and debt? What are the sources of margin?

The scope of credit structure is incomplete without examination of

credit proposal. Credit proposal has to be examined from the point of 5 C’s viz.

Character.

Capacity.

Capital.

Condition.

Collateral.

The Credit Policy of Supreme Financial Services has undergone changes to

cope with the environmental changes, tap the available opportunities, achieve

their commercial objective, fulfil social obligations and adhere to mandatory

directed lending norms.

The credit policy is studied under Coverage, Clientele, Marketing. The

Supreme Financial Services has over the years designed and adopted the Best

Practices Code. This in effect represents the Supreme Financial Service’s

philosophy towards effective Corporate Governance. Supreme Financial

Services has specialised type of lending known as Segmented Lending in which

Supreme Financial Services has set within it specialised branches for focused

lending to various segments.

Page 10: Credit Appraisal System of Commercial Vehicle Loans

This segmented approach is expected to provide both market and

customer focus for ensuring better business development, better development

of expertise and better customer satisfaction. Supreme Financial Services has

also set exposure norms which corresponds to the quantum of finance been

credited. These exposure norms are as per the RBI norms and also the bank’s

specific norms.

One of the important monitoring aspects in the credit portfolio is the

periodic review of advance accounts. The vital decision to deploy the Supreme

Financial Service’s resources should necessarily be based upon the thorough

assessment and Evaluation of the needs of the borrower. For this, a proper

periodical review of any account is inevitable.

Page 11: Credit Appraisal System of Commercial Vehicle Loans

Limitations of the study

Difficulty in collection:

It is difficult to collect more important and confidential personal

documents. They are rarely recorded and more seldom preserved. They

are generally destroyed after a short time.

Limitations of time:

There are limitations of time so we can’t measure the trends which are

very slow. Due to lack time we can’t have that much quality data.

Inadequacy of sufficient material:

There is great dearth of journals and magazines in different areas in India

to publish data concerning various aspects of problem. Even the data is

collected; it is seldom published in time. Thus we can’t use it for our purpose of

research.

Page 12: Credit Appraisal System of Commercial Vehicle Loans

2. Theoretical Background

NON-BANKING FINANCIAL COMPANIES

(NBFC’s)

Definition under the RBI Act:

Section 45I of the Reserve Bank of India Act, 1934 defines ‘‘non-

banking financial company’’ As-

(i) A financial institution which is a company;

(ii) A non-banking institution which is a company and which has as its principal

business the receiving of deposits, under any scheme or arrangement or in any

other manner, or lending in any manner;

(iii) Such other non-banking institution or class of such institutions, as the Bank

may, with the previous approval of the Central Government and by notification

in the Official Gazette, specify;

A company is, therefore, considered to be an NBFC if it carries on any of the

financial activities listed under clause (i) to (vi) of section 45 I (c) of the Act.

A financial system, which gives access to affordable credit to an

extensive section of society, is imperative for sustainable economic growth

for any country. In India, NBFC’s typically function in unorganized and

under-serviced segments of the economy, establishing a forte in those areas.

Page 13: Credit Appraisal System of Commercial Vehicle Loans

The NBFC business model is highly customer centric with a deep perception

of customer needs. With a wider and specialized branch network, they are

able to develop very close customer interaction and relationships, presenting

unique last mile credit delivery. The vast and diverse character of India itself

has inevitably assured a gap in the dispensation of credit and mobilization of

savings. NBFCs have demonstrated that they can play a definite long –term

role in the financial inclusion strategy of the country. They have succeeded in

the mobilization of inactive assets and users of credit because of their innate

capability to provide customized services according to the needs of the client.

It is reflected by the steady increase in the levels of credit penetration that

they are bringing about. The rigidity of the banking system’s policies for

lending, especially in the automobile and transport sector, is consequently

giving NBFCs an opportunity to meet this unmet demand through their

perceptive lending.

Classification of Non-Banking Financial Companies (NBFCs)

Equipment Leasing Company.

Hire Purchase Finance Company.

Housing Finance Company.

Investment Company.

Loan Company.

Residuary Non-Banking Company.

Miscellaneous Finance Company.

Page 14: Credit Appraisal System of Commercial Vehicle Loans

Commercial Vehicle Industry Overview:

The total commercial vehicle (CV) segment accounts for about only 5

percent of total automobile sales in India. The Indian Commercial Vehicle (CV)

Industry is the lifeline of the economy. Approximately 66 percent of the goods

and 87 percent of the passenger traffic in the country moves via road. The

trends have clearly indicated that the CV demand is closely correlated with

GDP growth rate (more strongly with the Index of Industrial Production, IIP) of

the country and therefore, it is believed that a growth or slowdown in CV

demand is a harbinger of an upturn or down turn in the economy respectively.

The CVs can be classified on the basis of their Gross Vehicular Weight

(GVW) as Light Commercial Vehicles (LCV) or Medium & Heavy

Commercial Vehicles (M&HCV), with M&HCVs accounting for

approximately 58 percent of the total domestic CV sales. The CV industry has

evolved tremendously over the years.

From the days of traditional all purpose 9 tonner trucks, the industry has moved

towards more usage specific vehicles. The developing road infrastructure is

giving a push to a modern Hub & Spoke model of distribution of goods, which

in turn is changing the kind of vehicles being deployed for goods transportation.

The Industry is now witnessing a clear segmentation in demand, with vehicles

more than 16.2 tonnes (M&HCVs & Multi Axle vehicles) being used for

Page 15: Credit Appraisal System of Commercial Vehicle Loans

transportation on the highways and less than 3.5 tonnes being used for intra-city

or last mile transport.

Similarly in case of passenger vehicles there is an increasing demand for luxury

buses from the private players unlike earlier when the demand used to be

largely driven by the State Transport Undertakings. The CV industry draws its

demand from the economy and hence is prone to cyclicality. However, due to

Greater versatility of usage, the LCV demand is less cyclical than the M&HCV

demand. The growth in volume sales of Commercial vehicle in India has been

strong, averaging 11 percent in real terms in the five years ended 2009-10. This

compares with 13 percent in the five years ended 2004-05and -3 percent in the

five years ended 1999-2000. We expect India’s demand for commercial

vehicles to remain strong. India’s stock of commercial vehicles is currently low

at six vehicles per thousand people versus 11 for China and 48 for other

Asian peers. The gap is expected to narrow down in the coming years in wake

of GDP growth and increase in infrastructure spending.

Page 16: Credit Appraisal System of Commercial Vehicle Loans
Page 17: Credit Appraisal System of Commercial Vehicle Loans

Role of NBFC’S in Commercial Vehicle Financing

The NBFC sector has been playing an important role in

development of the Road Transport sector. The Banks have not been in a

position to deploy more than 3 to 4 per cent of their funds to this sector.

Therefore, disbursals to SRTOs (small road transport operators) have not

been significant enough to support the Road Transport operators. Bank

funding as a percentage of total funding in the commercial vehicle market

has therefore not exceeded 25 to 30 per cent in the past.

Recoveries have also not matched expectations.

Funding SRTOs requires specialised customer evaluation skills and

infrastructure that is different from the requirements of typical bank

borrowers. The operators are unable to provide necessary documentation

and securities required for processing of the disbursal. The purpose of

special schemes for SRTOs has been defeated by this inability to conduct

business in this segment. Further, recovery management in this also

requires special skills and infrastructure.

The NBFC sector has grown to fill this void. It has developed necessary

focus and the infrastructure to operate successfully in this sector. The

high share of funding to this sector reflects this fact. The NBFC sector

therefore is in an excellent position to develop this role in the Industry.

Page 18: Credit Appraisal System of Commercial Vehicle Loans

Existence of recovery management systems and infrastructure to

ensure high collection efficiency.

Retail network geared to handle the funding requirements of

commercial vehicle operators due to exclusive focus on this

segment.

Flexibility to design customized funding options to suit the needs

of individual operators.

NBFC’s jointly participate with manufacturers to provide higher

levels of customer service. They are in a position to offer vehicle

service packages in addition to funding. This is done jointly with

manufactures and dealers.

Capability to induct new participants into commercial vehicle

operating business by effective utilization of existing database

infrastructure.

Better capability to manage risk due to focussed infrastructure and

activity.

Page 19: Credit Appraisal System of Commercial Vehicle Loans

Financing procedure of vehicles:

According to Palish “In modern money using economy, finance may be

defined as the provision of money at the time it is wanted”

According to Bonneville and Dewey “Financing consist of the raising,

providing connection with business”

Here we are concerned with assets based financing. There are three most

popular asset based financing.

1) Hire purchase financing

2) Lease financing

3) Loan

Hire purchase financing:

Hire purchase finance is a popular financing mechanism especially in

certain sectors of Indian business such as the automobile sector. In this, there

are 3 parties the manufacture, the Borrower & Guarantor. The borrower may be

the manufacturer or a finance company. The manufacturer sells assets to the

borrower who sells it to the guarantor in exchange for the payment to be made

over a specified period of time.

MANUFACTURER BORROWER GUARANTOR

Page 20: Credit Appraisal System of Commercial Vehicle Loans

Hire purchases agreement is the agreement between the customer

(borrower) & the finance company, which is the owner. The title of the vehicle

passes on to the customer when the last due sum & one rupee. Till the last

rupee, the right, title & interest in the vehicle along with any additions and

improvements to the vehicles remain the absolute property of owner

When a payment is more than 14 days late it is considered a default. Date of

receipt is considered. Payment by post is considered the risk of the hirer.

Increases in 0.85% bank interest rate results in a potent increase in

finance charges. But in this regime of falling interest rates NBFC’S also pull

down rates accordingly.

Supplier or dealer delivers the vehicle on behalf of owner but risk is not

that of the owner. Increase the damage or non-delivery suffered by borrower

and borrower charges commence as if vehicle were delivered terms of

agreement remain.

Borrower takes the insurance in the name of the owner. Owner may

renew and recover from hirer. The policy taken and the insurance company

have to be approved by the owner. Borrower obtains necessary license.

Registration of the vehicle is in the joint name of owner and guarantor and copy

of RC submitted to owner. Borrower pays sells tax.

Page 21: Credit Appraisal System of Commercial Vehicle Loans

Borrower indemnifies the owner against any claims demands, loss and

damage from a cause even beyond the control of the guarantor. Borrower

cannot sublet or sell the vehicle during the term of the agreement. Expenses of

reposition to be paid by the borrower.

Delivery of vehicles concludes that hirer accepts it as it is. Guarantees or

warrantees are given by the supplier/dealer/manufacturer not the owner.

Increase the damage insurance claim negotiations steeled after consent of the

owner. Any damage to vehicle not covered by insurance is born by borrower.

The vehicle cannot be hypothecated or mortgaged to any other organization.

The asset that is the vehicle is shown in the balance sheet of the hirer.

Accordingly the guarantor can claim depreciation.

Interest component of the instalment is a tax-deductible expense. Guarantor

enjoys salvage value.

There is a 5% service charge & 0.2% resale tax. Resale because the Hire

Purchase agreements involves three parties and two transactions. Dealer or

manufacturer, owner (finance) company and customer.

Page 22: Credit Appraisal System of Commercial Vehicle Loans

There are following three conditions.

1. The owner of the asset gives the possession of the asset to the hirer

with an understanding that the hirer will pay agreed instalment over a

specified period of time.

2. The ownership of the asset will transfer to the hirer to the on the

payment of all instalments.

3. They will have the option of the terminating the agreement any time

before the transfer of ownership of the asset.

Thus for the hirer the hire purchase agreement is like a cancellable lease

with a right to buy the asset.

The hirer is required to show the hired asset on his balance sheet and is entitled

to claim depreciation, although he does not own the asset until full payment has

been made. The payment made by the hirer is divided in to two parts; interest

charges and repayment of the principal. The hirer thus gates tax relief on

interest paid and not the entire payment.

Mobilisation of funds:

In case of Hire purchase agreement the finance company can present the

proposal to the bank and mobilized funds against it. These can be done, since

the finance company is the owner of the vehicle till the complete payment is

model thus the bank can hold the vehicle as security.

Page 23: Credit Appraisal System of Commercial Vehicle Loans

Lease financing:

Leasing is widely used in Western countries to finance investment in

USA, which has the largest leasing industry in the world.

Lease is contract between a lessor, and the owner gives the right to use

the asset to the user over an agreed period of time for a consideration called the

lease rental. The lessee pays the rental to the lessor as regular fixed payments

over a period of time at the beginning or at the end of the month, quarter, half-

year, or year. Although generally fixed, the amount and the timing of payment

of Lease can be tailored to the lessee’s profits or cash flows. In up-fronted

Leases, more rentals are charged in the initial years and less in the later years of

the contract. The opposite happens in back-ended Lease. At the end of the

contract, the asset reverts to the lessor. Who is the legal owner of the asset. As

legal owner, it is lessor not lessee, who is entitled to claim depreciation on the

leased asset. In long term lease contract, lessee is generally given an option to

buy or renew the Lease. Sometimes it is divided into two types- primary lease

and secondary lease for the purpose of lease rentals. Primary lease provides for

the recovery of the cost of the asset and profit through lease rentals during a

period of about 4-5 years. It may be followed by a perpetual, secondary lease on

nominal lease rentals.

Page 24: Credit Appraisal System of Commercial Vehicle Loans

Loan Procedure

Marketing Executive

File

Checking Documents

Coordinator

Initiating Verification

Central Processing Agency

Credit Department

Approval / Decline

Post Approval Documents

Disbursement

Page 25: Credit Appraisal System of Commercial Vehicle Loans

Auto Loan:

Most of the banks and financial institution are providing today finances

for most of the automobiles. The most important automobile today being cars,

two wheelers, commercial vehicles. These loans are given on various models at

very competitive rates. If a person has the required eligibility and documents.

He can avail the loans for any vehicle and any model of his choice.

There are two important segments in the auto loan market.

New Vehicle loan

Used vehicle loan.

The loan is given to the person on the basis of the value of the vehicle. Usually

90% of the loan amount of the value of the vehicle is given in case of new one

and in the case of old one. It is up to 80% of the value of the vehicle.

Auto loan is a secured loan. As there are some physical assets involved in it and

it can be hypothecated. Then it is called as hypothecated vehicle, which means

that the motor vehicle is to be owned and acquired by the borrower in respect of

which the loan is to be made by the financial institute.

Page 26: Credit Appraisal System of Commercial Vehicle Loans

2) Company Profile

Supreme Finance Services ltd

The Supreme Finance Services LTD. A NBFC leading Auto Finance

company. The Group is one of the largest and well respected financial services

conglomerates in India. The Groups main line of activates in financial services

include chit fund use vehicle finance, three wheeler finance, auto dealership.

The group has a customer base of 5000.thorough network of 14 offices all over

Maharashtra. The Group has the largest force in the private sector. The Supreme

Finance Services LTD Incorporated in 2010. In the State of Maharashtra, Pune

Page 27: Credit Appraisal System of Commercial Vehicle Loans

Vision

To be the most profitable global player with quality and technology

leadership in the vehicle finance. Offering the finance solutions to satisfy

ultimate customer needs.

Mission

To become a market leader in light transport vehicle finance segment, and

achieve the status of world Class Company with finance and markets a wide

range of financial products to the total satisfaction of customers in the state.

I) Highly returns.

II) Business ethics.

III) Thorough continuous improvement of

I) Total quality service

II) 100% collection

III) Resource productivity

IV) Cost effectivene

Page 28: Credit Appraisal System of Commercial Vehicle Loans

Branches & Offices

PUNE COOPRATE OFFICE: SUPREME FINANCE SERVICES LTD.

Gate No.9, Market Yard, Office No.313, 3rd floor, Mahalaxmi Market,

Near Panan Mahamandal building, Pune 411037

Solapur:

Vaibahvshali Chambers, Ground Floor, 1/5,Morji Peth, Old Pune Naka,

Near Janata Bank, Solapur 413009

Tembhrni:

Oswal Tawar Third Floor, Kurudwadi Road, Tembhurni, Tal. Madha

Dist. Solapur.

Latur:

Ajinkya Arked Opp. Guru Hotel, Near Rajiv Gandhi Chowk, Ring Road,

Latur 413512.

Aurangabad:

First Floor, Tulshi Chambers’, Opp. Sun franchiesco School, Near

Shriram General Ins. Co. Office, Akashwani, Jalna Road, Aurangabad 431005.

Nagpur:

Office No.6, A, 4th

Floor, Mangalwadi Complex, J.B.Wing Sadar, Nagpur

Beed:

Sangale Building Navjivan Shikshak Colony, Near Samant Hospital,

Behind S.T. Stand, Beed.

Nanded:

Shop No. 8, Kothari Complex, Shivaji Nagar Nanded 431605.

Page 29: Credit Appraisal System of Commercial Vehicle Loans

3) Research Methodology

Methodology is the important part of research study, which enables the

researcher to form blue print of the research undertake. Research methodology

involves the systematic procedure by which the research starts from the time of

initial identification of the problem to the final conclusions.

This chapter deals with different steps which are undertaken by the

investigator for gathering and organizing the data. It includes the description of

research approach, research design, setting of the study, population, sampling

techniques, criteria for selection of the samples size, limitation, method of data

collection, development and description of the tools.

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Means of research

The research is based upon various types of information, which give

knowledge concerning the problem. Now in order to carry on research

successfully, information should be gathered from proper source. The more

valid is the source of information, the more reliable will be the information

received, which in turn, will lead to correct, and reliable conclusion.

Kinds of Data:

Primary Data:

Primary data are the actual information, which are received by the

researcher for study from the actual field of research. These data are obtained by

means of questionnaires and schedules. The primary data are the facts there are

many more methods of collecting the primary data. Such data are known as

primary because the researcher attains them from the field of research directly

and for the first time. For this study I had asked queries to the seniors, also

gathered information by direct interacting with customers.

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Sources of Primary Data:

The sources of such information are the individuals and the incidents around

them generally, primary source information is gathered through direct

observation and interview methods.

1) Direct observation:

The primary source of information is direct observation. The method

requires that the researcher should personally and directly observes the

conditions of his field study. It is the most reliable method for gathering

information. I observed many things and got the lots of information.

2) Interview:

In an interview, the researcher meets people and discusses the problems

with them. During the course of this discussion, he gathers facts. Schedule

includes a predetermined form of questions but the interview has not any

definite form or order of questions. I have used this method, and discussed

many things with the branch manager.

Secondary Data:

Secondary data are the information, which is attained indirectly. The

researcher does not attain them himself or directly. Such data are attained

generally from published and unpublished material. It provides information of

past which is not possible from any other source? To facilitate the study,

Page 32: Credit Appraisal System of Commercial Vehicle Loans

secondary data is important to know historical background of the concerning

problem.

Sources of Secondary Data:

1) Records:

Records occupy the most important place among public documents. Most

of companies preserve so many types of a record of important information. I

used much information from the records.

2) Published data:

Published documents include data published by institutions from time to

time. I used this data which company published for their customers.

3) Journals and Magazines:

Journals and Magazines are important public documents including a

variety of information, which can be usefully utilized in research. Most of this

information is very much reliable. Letters to the editors published in various

magazines and journals are an important source of information.

Page 33: Credit Appraisal System of Commercial Vehicle Loans

4) Other documents:

Other document mainly include newspapers publish news, discussions on

important issues, meetings and conferences. The reliability of this source is very

high. Besides it, television public speeches are other important source of

information

5) Internet:

In today’s world of information technology internet is the biggest source of the

secondary data, I used internet for finding many data.

Page 34: Credit Appraisal System of Commercial Vehicle Loans

DATA ANALYSIS

Loan Appliers to Defaulters

The following is data of loan appliers and defaulters. The 90% of the

customers are able to repay the loans but 10% failed to repay.

Year 2008 2009 2010

Loans Sanctioned 1236 2150 1614

Defaulters 123 215 161

0

500

1000

1500

2000

2500

1 2 3

Loans Sanctioned

Defaultres

Page 35: Credit Appraisal System of Commercial Vehicle Loans

Parameter used for credit appraisal

Parameter DOCUMENTS

Technical feasibility Field Investigation, Market value of asset

Economic viability LTV(Loan to Value), IIR

Bankability Past month bank statements, Asset and liabilities of the

applicant

Credit Apprasial

Bankability

Economic Viability

Technical feasibility

Page 36: Credit Appraisal System of Commercial Vehicle Loans

1) Technical feasibility:

Technical Feasibility What company is looking for

Living standard Decent living standard with some tangibles like T.V. & fridge

will provide assurance to bank regarding your residential

status.

Locality Presence of some undesirable elements like local goons or

controversial areas adversely affects your loan appraisal

process.

Telephonic

Verification

At least one response is need from person to establish the

identity of the person from contact point of view.

Educational

Qualification

Not an essential barrier but essential to understand the

complex terms & conditions of bank loan.

Political Influence An interesting reference point in the sense that they are one

of major category of loan defaulters.

References To establish the residential identity of person from human

contact point of view & cross check of their loans.

2) Economic Feasibility:

Economic viability

Installment to income ratio -IIR for salaried cases would be capped at 60% of

Net income in general

-Pension Income cases IIR to be restricted to 40%a

Fixed obligation to income

ratio

FIOR kept at 55%

Loan to cost ratio LTV amount to 80%

Page 37: Credit Appraisal System of Commercial Vehicle Loans

3) Bankability:

Parameter Norms Checkpoints

Bank Statements 6 months bank statements need

to be furnished.

To check the average

amount client is

maintaining in the account

is sufficient to pay the

installment amount or not.

Business continuity

proof

Two year IT returns made

compulsory.

To enquire primary source

of income.

Credit interview For the big loan amount credit

interview is necessary.

To check the general

attitude of customer along

with efforts are put in to

understand their needs

better.

Profile of customer Salaried professionals get an

edge over business income

people.

Secured source of income

give them a edge.

Security Asset of value equal to or more

than loan amount taken has to

be put as pledge or collateral.

To safeguard bank interest

against any future default.

Ownership

title

To be on the name or blood

relative of applicant.

To establish the ownership

claim of the loan applicant.

Page 38: Credit Appraisal System of Commercial Vehicle Loans

5 C’s of Credit:

1) Character:

It refers to the honesty and integrity of the person. Borrowers are not

necessarily reliable or honest and the lender must look for evidence of good

Credit Apprasial

Character

Capacity

Capital Collateral

Conditions

Page 39: Credit Appraisal System of Commercial Vehicle Loans

character, if it exists. Frequently, this can be ascertained during an interview.

The lender must, however, be sure to make his own assessment and not rely on

the decision of an existing lender, or similarly on a key individual in the

company – so called name lending.

2) Capacity:

It refers to the actual ability of the borrower to enter into a contract with

the lender. It relates to the technical, managerial and financial means. It also

refers to how the company monitors and manages its risks and the suitability of

the assets in the company to generate sufficient levels of cash to repay the loan.

3) Capital:

Capital refers to the investment or the stake that the borrower has in the

firm. This is important to understand the capability of the individual. It is

important for analysis as it determines how well the firm is capitalized and does

the borrower has reasonable stake or he is willing to let it go down the tubes and

walk away from the obligations.

4) Collateral:

It analysis other potential sources of repayment of the obligations if these

are supported by collateral security. Typically the amount of security required

will depend on the type of business enterprise and the circumstances.

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5) Conditions:

It discusses the competitive environment of the firm and how well the

firm fits in. It also considers any economic event that will affect the repayment

ability of the firm and also the purpose for which the loan is required.

Findings

1) Supreme finance Services Limited is one of the trusted financial

institutions in NBFC, with 5000 satisfied customers.

2) Credit Appraisal plays the most significant role in funding the right and

eligible person.

3) From the responses of the customer, the staff of Supreme Finance is

cooperative.

4) Supreme finance provides refinance facility if the customer shows a good

Repayment Track Record (RTR).

5) From the information customers are satisfied with Supreme Finance, 35%

customers are old customer.

6) From the data the loan procedure of company is easy as compared to

others.

7) In the company the recovery rate is 90%.

8) Credit & risk go hand in hand.

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SUGGESTIONS

1) The company should try for reducing the documentation required for

loan.

2) Company should appoint customer relationship manager for better

customer relations.

3) The company should provide door step service to the potential customer.

4) Company should provide special offerings to old customer.

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CONCLUSIONS

The credit appraisal of Supreme Finance is simple to understand and easy

to calculate Which helped me to understand the credit appraisal system.

Sometimes credit goes to wrong person then also it will not affect the

performance of the company because company gives loan against hypothecation

(HP) of vehicle. The loan systems starts from verifying and checking the

necessary documents, collection the actual cost in terms of monthly instalment

and end’s with No Objection Certificate (NOC).

In the company the credit manager is the only person who takes care of

proposals. The credit manager should consult the recovery manager that a

person is not a default gist. If the customer taking loan twice then credit

manager should check his previous record.

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