Credit Appraisal
Relevent for JAIIB PPB | CAIIB ABM | CCP Module A
Why It Matters in Branch:
Credit appraisal is the structured process of evaluating a loan proposal before sanction. A thorough appraisal is your only defence against future NPA.
SHORT NOTES ON CREDIT APPRAISAL:
Credit Appraisal is the comprehensive evaluation of a loan proposal covering all dimensions of risk before a lending decision is made.
DIMENSIONS OF CREDIT APPRAISAL:
1. Technical Appraisal
- Is the technology used proven and commercially viable?
- Location, infrastructure, manpower availability
- Capacity utilisation assumptions realistic?
2. Commercial / Market Appraisal
- Is there demand for the product/service?
- Who are competitors? What is the market share assumption?
- Is the pricing and margin structure sustainable?
3. Financial Appraisal
- Analysis of past 3-year financials (audited)
- Ratio analysis — liquidity, leverage, profitability
- Projected financials — are assumptions realistic?
- DSCR calculation for term loans
- Working capital assessment for CC limits
4. Managerial Appraisal
- Experience and track record of promoters
- Management depth and succession
- Industry expertise
5. Economic Appraisal (for large projects)
- Socio-economic benefits, employment generation
- ERR (Economic Rate of Return) for infrastructure projects
6. Environmental Appraisal
- Environmental clearances obtained?
- Pollution norms complied?
- Green ratings for large industrial projects
VALIDATION OF PROPOSAL:
- Verify all documents — ITRs, financials, ownership documents
- Market enquiry — visit the unit, verify stocks, talk to customers/suppliers
- CIBIL check mandatory
- Legal opinion on security documents
KEY RATIOS in Credit Appraisal:
- Current Ratio: Current Assets / Current Liabilities (Min 1.33 per Tandon norms)
- Debt-Equity Ratio: Total Debt / Tangible Net Worth (Max 3:1 generally)
- DSCR: (Net Profit + Depreciation + Interest) / (Interest + Repayment) (Min 1.5)
- TOL/TNW: Total Outside Liabilities / Tangible Net Worth
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BRANCH CONTEXT
✦ The most important step in credit appraisal that gets skipped under pressure is the unit visit. Financial statements can be manipulated — a visit to the factory tells you whether the stocks are real, the machinery is working, and the business is actually operating as claimed. This is non-negotiable for any loan above Rs.10 lakh..
